FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999.
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _________ .
Commission file number 1-14589
FORTUNE ENTERTAINMENT CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 88-0405437
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
144 Elm Street
2nd Floor, Suite 16
Biddeford, Maine 04005
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (207) 282-0878
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of Class)
Check whether the registrant (1) has filed all reports to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No ___
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is not contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
[X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the common stock on March 31,
2000, was approximately $15,727,000. Shares of common stock held by each
officer, director and principal shareholder have been excluded in that such
persons may be deemed to be affiliates of the registrant.
The registrant's revenues for the year ending December 31, 1999 were $0.00.
Documents Incorporated by Reference: None
As of March 31, 2000, the Registrant had 19,682,358 issued and outstanding
shares of common stock.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
The Company was incorporated in Delaware on August 25, 1997 to engage in
the acquisition, design and development of select gaming products which the
Company intends sell to United States and international gaming markets.
In September 1997 FET, Inc. (a Colorado Corporation) was merged into the
Company. In connection with this merger, the Company issued 2,175,456 shares of
its common stock to the former shareholders of FET, Inc. At the time of this
merger FET was not conducting any business.
In October 1997 the Company acquired all of the issued and outstanding
shares of Fortune Entertainment Corporation, a corporation organized under the
laws of the Bahamas ("Fortune/Bahamas") for 1,090,464 shares of common stock,
1,090,464 shares of Series A Preferred Stock, 1,090,464 shares of Series B
Preferred Stock, 1,090,464 shares of Series C Preferred Stock. Each share of the
Company's Preferred Stock is, at the option of the holder, convertible into one
share of the Company's common stock on and after the following dates: Series A
Preferred Stock - May 20, 1998, Series B Preferred Stock-August 20, 1998, Series
C Preferred Stock - November 20, 1998.
Fortune/Bahamas was incorporated in the Bahamas on April 2, 1996. At the
time of its acquisition by the Company, Fortune/Bahamas had certain agreements
with Professional Video Association, Inc. ("PVA") relating to the acquisition of
the Company's Fortune Poker game and an electronic bingo game.
Unless otherwise indicated, all references to the Company include FET,
Inc. and Fortune/Bahamas.
The Company is in the early stages of marketing its products and has not
earned any revenues.
Fortune Poker
In 1998 the Company acquired from Video Lottery Consultants and William M.
Danton (the "Danton Group") all of the capital stock of PVA. The Fortune Poker
game is based upon technology covered by United States Patent No. 4,648,604
expiring in 2004 (the "Patent"), copyrighted game rules, and proprietary
software. As part of the agreement relating to the acquisition of PVA the Danton
Group assigned to the Company all of the Danton Group's rights and obligations
pursuant to a Manufacturing Agreement and a related Software Release Agreement.
<PAGE>
The Fortune Poker system is an interactive, progressive, tournament video
terminal poker game which allows the player to play against a single machine or
against other players on similar terminals at the same location or remote
locations.
The progressive configuration generally links separate games through a
computer network which allows players to share a common jackpot which is usually
much larger than the jackpot that a single, unlinked machine could support.
Progressive jackpots can reach several million dollars. Progressive games may be
linked locally within a bank of a few machines, across an entire casino, or
across an entire state.
By allowing progressive play against many other players the Fortune Poker
system offers the opportunity for very high payoffs. In addition, the element of
choice involved in selecting cards to throw away within the time limits imposed
by the game also increases player excitement which can enhance casino profits.
The Company intends, initially, to lease its Fortune Poker system to the
Indian Gaming segment of the market under revenue sharing arrangements with the
operators of gaming establishments. Under the Company's leasing plan, the cost
to the operator will be based on a daily lease rate per unit, which reduces the
initial capital outlay to the operator. In addition, the systems are modular so
that if their popularity builds, the operator can add units to the system
without abandoning its investment in existing units.
In consideration of the transfer of the stock in PVA and the assignment of
the Manufacturing Agreement and the Software Release Agreement, the Company
issued 1,647,500 shares of common stock to the Danton Group and paid the Danton
Group $1,006,986 in cash. The Company also issued 200,000 shares of common stock
to an unrelated third party as a finder's fee in connection with the
transaction.
In connection with this transaction, the Company agreed to issue
additional shares to the Danton Group, or make payments to the Danton Group, if
during the 60 day period ending on July 23, 1999 the shares of the Company's
common stock did not have a closing bid price at least $2.00 per share. If the
Company's stock price did not meet this requirement the Company was required to
pay the Danton Group (for each share of the Company's common stock still held by
the Danton Group), the difference between (i) $2.00 and (ii) the greater of
$0.50 or the average closing bid price of the shares of the Company's common
stock for the ten days preceding August 7, 1999 (the "Average Price"). The
Company could pay this difference in cash or, at the Company's option, in shares
of the Company's common stock. Since the bid price of the Company's common stock
was less than $2.00 per share during the period prior to August 7, 1999, and in
accordance with the formula specified above, the Company is required to issue
4,500,000 shares of common stock to the Danton Group. The Company plans to issue
these additional shares to the Danton Group prior to June 30, 2000.
A. Pay the Danton Group an additional $405,000 in cash by April 30,
2000;
B. issue an additional 200,000 shares of common stock to the Danton
Group;
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C. pay the Danton Group 20% of all up-front licensing fees paid
or payable to the Company with respect to the Fortune Poker game;
D. until the expiration of the Patent, or any renewals or extensions of
the Patent, issue additional shares of its common stock to the
Danton Group in an amount determined by the following formula:
Net earnings x Percentage
Average Share Price
Percentage is 4% in 2000, 5% in 2001 and 10% in 2002 and thereafter
provided that the Percentage will automatically increase to 10% if
Net Earnings are at least $10,000,000.
Net Earnings means the Company's earnings during each twelve month
period ending December 31 from the revenues derived from the Fortune
Poker game before income tax, depreciation and amortization.
Average Share Price means the average trading price of the Company's
common stock for the last 30 trading days of the Company's fiscal
year.
The Company agreed to register for public sale the shares of its common
stock issued to the Danton Group.
Each Fortune Poker video terminal includes the software necessary for it's
internal operation. A separate software system (the "Central System Software")
allows the terminals to interact through telephone lines and permits a player at
a PVA terminal to play poker with players at other terminals.
The Manufacturing Agreement provides Amusement World, Inc. with the
exclusive right to manufacture Fortune Poker terminals for the Company until
April 23, 2007. The cost to the Company for each terminal will range from $2,700
to $3,600 depending upon the type of terminal ordered by the Company. The cost
of the terminals will increase based upon increases in the Consumer Price Index.
Although the Manufacturing Agreement provides that a minimum of 333 terminals
are required to be purchased from Amusement World during each of the twelve
month periods ending April 23, 1998, 1999 and 2000, as of April 23, 2000 less
than twenty terminals have been purchased.
Electronic Bingo
The Company has developed a interactive, progressive, tournament style
Electronic Bingo game which allows the player to play against a single machine
or against other players on similar terminals at the same location or remote
locations.
As with the Company's Fortune Poker game, the Company's Electronic Bingo
game allows for a progressive configuration thereby allowing players to share a
common jackpot which is usually much larger than the jackpot capable of being
supported by a single machine.
<PAGE>
Rainbow 21 Blackjack Game
In 1998 the Company acquired from Team Rainbow Inc. ("TRI") the rights a
computer-based blackjack game known as Rainbow 21. The Rainbow 21 game is based
upon technology covered by copyrighted game rules, proprietary software and
United States Patent No. 5,390,934 expiring April 11, 2003, and United States
Patent No. 5,494,296 expiring February 5, 2015 (the "Patents").
Rainbow 21 is a simple variation to the conventional game of Blackjack or
21. Rainbow 21 is played in the same was as the game of Blackjack and on a
standard blackjack table but with a modified felt layout that permits each of
the six players to wager not only on their own hands but also on any of the
other five hands at once, thus allowing for up to thirty-six decisions per hand.
As a result, the game provides for a possible thirty-six decisions per round
versus the standard seven decisions per round (each of the six players can make
up to six wagers, i.e. one wager on their hand and one wager on each of the
other five players' hand).
The Company believes the additional wagering decisions allowed by the game
generate player involvement and excitement while requiring only a minimal
additional capital outlay by gaming operators who wish to install the system.
Rainbow 21 has been approved for casino play in Nevada by the Nevada
Gaming Control Board, in Mississippi by the Mississippi Gaming Commission and in
New Jersey by the New Jersey Gaming Commission. The Company has been advised by
the Nevada Gaming Control Board that the Company can sell or lease the Rainbow
21 game to licensed operators in Nevada without obtaining its own operator's
license provided the Company does not share in a percentage of the gaming
revenues.
In consideration for the transfer of the assets relating to the Rainbow 21
Game the Company paid TRI $102,500 and issued TRI 750,000 shares of its common
stock. The Company's agreement with TRI provides that, if during the last five
trading days in August 2000, the simple average closing price for the Company's
common stock ("Market Price") does not equal or exceed $2.00 per share, the
Company would be required to:
1. pay TRI the difference between (i) $1,000,000 and (ii) 500,000
multiplied by the Market Price (the "Difference"); or
2. deliver to TRI additional shares of common stock in an amount
determined by dividing the Difference by the Market Price.
Sega Gaming Technology Inc.
As of December 31, 1999 the Company owned 188,886 shares of the common
stock of Sega Gaming Technology, Inc. (SGTI), a Nevada Corporation. These shares
<PAGE>
were acquired for $1,090,000 in cash for 375,887 shares of the Company's common
stock. SGTI was incorporated in 1995 and through a licensing agreement with SEGA
of Japan (SEGA), has the exclusive rights to market certain multi-player gaming
machines of SOJ in various areas of the world.
In April 2000 the Company plans to sell its interest in SGTI to Sega
Enterprises, Ltd. for $1,511,088.
Government Regulation
The Company's proposed operations are subject to state and local gaming
laws as well as various federal laws and regulations governing business
activities with Native American tribes. The state and local laws in the United
States which govern the lease and use of gaming products are widely disparate
and continually changing due to legislative and administrative actions and
judicial interpretations. If any changes occur in gaming laws through statutory
enactment or amendment, judicial decision or administrative action restricting
the manufacture, distribution or use of some or all of the Company's products,
the Company's present and proposed business could be adversely affected.
Notwithstanding the above, the Company's initial focus will be on Indian Tribal
Casinos which are regulated under the Indian Gaming Regulatory Act of 1988
("IGRA").
The IGRA separates all gaming activities on Indian reservations into three
classes, each of which is subject to differing degrees and mixes of tribal,
state and federal jurisdiction and regulations:
(i) CLASS I gaming includes traditional Native American social and ceremonial
games and is regulated only by the tribes.
(ii) CLASS II gaming includes specific games of chance listed in the statute,
and games of skill, but subject to well-defined strictures set forth in the
Act. This class of gaming includes Bingo, pull-tabs, lotto, punch boards,
instant Bingo, and certain card games played under limited circumstances,
and other games similar to Bingo, if those games are played at the same
location where Bingo is played. In addition, the statute specifically
excludes from Class II (i) banked card games including Baccarat, Chemin de
fer, Blackjack, and certain categories of non-banked card games and (ii)
electronic facsimiles of games of chance or slot machines. Generally, Class
II gaming may be conducted on Native Indian lands if the state in which the
Native American reservation is located permits such gaming for any purpose,
by any person.
(iii)CLASS III gaming consists of all forms of gaming that are not in Class I
or Class II, such as video casino games, slot machines and most table games
such as Blackjack, Craps and Keno. Class III gaming may only be conducted
pursuant to a compact reached between the Native American tribe and the
state in which the tribe is located. More than two dozen states permit
various forms of Class III gaming pursuant to compacts with Native American
tribes.
<PAGE>
The National Indian Gaming Commission has declined to issue to the Company
an advisory opinion that its Fortune Poker system gaming machine should be
classified as a Class II activity. Although prior approval is not required under
IGRA for Class II gaming, most Tribes, as a practical matter, are reluctant to
make the investment in a Class II game without an advisory opinion.
Although Class III gaming is highly regulated, the scheme of regulation is
well-defined and tends to involve similar standards from state to state. As a
result, the Company plans to market its Fortune Poker and electronic Bingo games
to Indian Tribal Casinos having Class III gaming licenses.
All states which permit Class III gaming in Indian Tribal casinos require
mechanical or electronic games to be tested prior to their use. Testing is
required to insure that the game will comply with state regulations. Gaming
commissions in Nevada, New Jersey and several other states have their own
testing laboratories which test mechanical and electronic games. Other states
require these games to be tested by independent laboratories, one of the largest
of which is Gaming Laboratories International ("GLI"). GLI is presently testing
the Company's Fortune Poker game and an electronic Bingo game which was
developed by the Company.
Plan of Operations
During the period ending December 31, 2000 the Company plans to market its
Fortune Poker and electronic Bingo games to Indian Tribes holding Class III
casino licenses in Minnesota. During the year 2000 the Company plans to license
the rights to its Rainbow 21 game to third parties who will then attempt to
market the Rainbow 21 game to casino operators.
In order to market its Fortune 21 and electronic Bingo games, the
Gaming Laboratories International will need to complete its testing of the
Fortune Poker game. The Company expects this testing will be completed by
May 2000.
Following the competition of the testing of the Company's Fortune Poker
and electronic Bingo games the Company will apply for a gaming license from
Minnesota. While the Company's application is being reviewed, the Company will
begin negotiations with Indian Tribal Casinos in Minnesota with a view to the
Tribal Casino's purchase or lease of the Company's Fortune Poker and/or
electronic Bingo games. It will be the Company's objective to conclude an
arrangement whereby the Company will receive a percentage of the net revenues
derived from the operation of the games. The percentage which the Company
expects to receive will vary (typically between 9% and 23%) depending upon
whether the games are purchased or leased from the Company and whether the
Company or the particular Tribal Casino operates the games.
The Company does not anticipate any difficulties in obtaining a gaming
license from Minnesota. Contingent with the ability of the Company to conclude
satisfactory agreements with one or more Tribal Casinos in Minnesota, the
Company expects that its first Fortune Poker game and/or electronic Bingo game
will be installed and operational in a Minnesota Indian Tribal Casino by
September 2000.
<PAGE>
If the Company is successful in obtaining a gaming license in Minnesota, the
Company plans to apply for gaming licenses in other states (with the exception
of Nevada and states that do not have Class III Indian Tribal casinos) which
have tribal casinos with Class III gaming licenses. However, before applying for
a gaming license in any of these states, the Company must first obtain the
sponsorship of an Indian tribe which operates a casino in the state.
No assurances, however, can be given that the Company will be successful
in obtaining any required licenses, permits or approvals, or in obtaining the
sponsorship of any Indian tribe operating casinos in states other than
Minnesota.
Competition
In order to achieve commercial sales of its gaming products, the Company
must compete with many well-established U.S. and foreign manufacturers in the
gaming machine market. The primary competitors in the gaming machine industry
are Bally Gaming, Inc., a subsidiary of Alliance Gaming Corporation,
International Game Technology and Sigma Game, Inc. Somewhat smaller but
nevertheless well-established gaming machine manufacturers include Anchor,
Aristocrat, Casino Data Systems, Silicon Gaming, Inc., Video Lottery
Consultants, Inc., a subsidiary of Video Lottery Technologies, Inc., and WMS
Industries, Inc. All of these companies have developed gaming products and are
either authorized to sell products or are in the licensing process in many U.S.
gaming jurisdictions. All of the Company's principal competitors are
significantly larger, well established in the gaming industry and are better
capitalized than the Company, all of which factors could adversely affect the
Company's ability to compete.
The most significant competitive factor influencing the purchase of gaming
machines is player appeal followed by a mix of elements including service,
price, reliability, technical capability and the financial condition and
reputation of the manufacturer. Player appeal is key because it combines the
machine design, hardware, software and play features that ultimately improve the
earning power of gaming machines and the customer's return on investment.
Employees
As of March 31, 2000, the Company had three full-time employees and four
part-time employees. The Company's employees are not represented by a labor
union. Three employees serve in management or administrative capacities, two
employees are principally engaged in soliciting sales of the Company's games to
Native American Tribes and the remainder are hourly workers in the Company's
operations. The Company has never experienced an organized work stoppage, strike
or labor dispute. Management considers the Company's relations with its
employees to be good.
ITEM 2. PROPERTIES
The Company's executive offices are located at 144 Elm Street, Biddeford,
Maine and consist of 1,114 square feet of space which is rented for $1,000 per
month.
<PAGE>
The Company also leases office space at 2700 East Sunset Road, Suite 39,
Las Vegas, Nevada at a monthly rental of $1,921. The lease on this space expires
in 2000.
ITEM 3. LEGAL PROCEEDINGS
The Company's subsidiary, Fortune Entertainment Corporation of British
Columbia, Canada, commenced an action in the Vancouver Registry of the Supreme
Court of British Columbia on May 6, 1998 against Advanced Gaming Technology,
Inc. to recover $990,000 as a debt owed by defendant to plaintiff pursuant the
defendant's written agreement made March 30, 1998 to pay plaintiff $990,000 to
repurchase from plaintiff the plaintiff's right to participate in defendant's
interest in a United Kingdom bingo project. The Plaintiff intends to make an
application to the Supreme Court of British Columbia for a summary trial of the
action.
In addition, the Company is engaged in routine litigation incident to its
business which would not, in the opinion of the Company, individually or in the
aggregate, have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS.
The Common Stock is quoted on the Over the Counter Bulletin Board under the
symbol "FETG". The following table presents the high and low closing bid
quotations for the Common Stock as reported by the National Quotation Bureau for
each quarter beginning May 8, 1998 when the stock was first quoted. Such prices
reflect inter-dealer quotations without adjustments for retail mark-up, markdown
or commissions, and do not necessarily represent actual transactions.
Closing Bid
Quarter ending Low High
June 30, 1998 $ 0.53 $ 2.00
September 30, 1998 $ 0.88 $ 1.97
December 31, 1998 $ 0.41 $ 0.78
March 31, 1999 $ 0.47 $ 1.15
June 30, 1999 $ 0.41 $ 0.94
September 30, 1999 $ 0.45 $ 0.80
December 31, 1999 $ 0.29 $ 0.75
The Company has approximately 350 record holders of its Common Stock.
<PAGE>
The Company has never declared or paid any cash dividends. It is the
present policy of the Company to retain earnings to finance the growth and
development of the business and, therefore, the Company does not anticipate
paying dividends on its common stock in the foreseeable future.
During the quarter ended December 31, 1999 the Company:
(i) sold 522,082 shares of common stock for cash to nine investors in private
offerings;
(ii) issued 164,550 shares of common stock to two persons for consulting
services provided to the Company;
(iii)issued 500,000 shares of common stock to Team Rainbow, Inc. as partial
consideration for the rights to the Rainbow 21 game; and
(iv) issued 375,887 shares of common stock in exchange for 57,636 shares of SGTI
stock.
The shares of common stock issued or sold during the quarter were issued
or sold in reliance upon the exemption provided by Section 4(2) of the Act. The
persons who acquired these shares were either accredited or sophisticated
investors. The shares of common stock were acquired for investment purposes only
and without a view to distribution. The persons who acquired these shares were
fully informed and advised about matters concerning the Company, including the
Company's business, financial affairs and other matters. The acquired these
shares for their own accounts. The certificates representing the shares of
common stock bear legends stating that the shares may not be offered, sold or
transferred other than pursuant to an effective registration statement under the
Securities Act of 1933, or pursuant to an applicable exemption from
registration. The shares are "restricted" securities as defined in Rule 144 of
the Securities and Exchange Commission.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following sets forth certain financial data with respect to the Company
and is qualified in its entirety by reference to the more detailed financial
statements and notes included elsewhere in this report.
Statement of Operations Data:
Year Ended Year Ended
December 31, 1998 December 31, 1999
------------------ ------------------
Revenues $ -- $ --
General and Administrative
Expenses (3,308,209) (1,994,641)
Other Income (Expense) -- 1,314
-------- --------
Net (Loss) $(3,308,209) $(1,993,327)
============ ============
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Balance Sheet Data:
December 31, 1998 December 31, 1999
Current Assets $384,564 $25,032
Total Assets 7,755,797 6,876,140
Current Liabilities 2,594,434 2,232,625
Total Liabilities 2,825,684 2,232,625
Working Capital (Deficit) (2,209,870) (2,207,593)
Shareholders' Equity (Deficit) 4,930,113 4,643,515
The Company's products are in the early stage of commercialization and
regulatory approval. The Company has not, to date, generated any revenues from
its operations. Accordingly, the Company has since inception funded its
operations and capital expenditures primarily through private placements of debt
and equity securities. The Company is required to obtain additional financing on
an ongoing basis to execute its business plan. There can be no assurance that
such financing will continue to be available at all, or on terms acceptable to
the Company.
The ability of the Company to generate revenues and positive cash flow
will depend on several factors, including the timing and costs in obtaining
gaming licenses and concluding agreements with Indian Tribal Casinos with
respect to the Company's gaming products.
ITEM 7. FINANCIAL STATEMENTS
See the Financial Statements included with this Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following sets forth certain information concerning the management of
the Company:
Name Age Position
William M. Danton 45 President, Chief Executive Officer and
a Director
Roland M. Thomas 49 Chief Operating Officer
Robert V. Eberle 46 Chief Financial Officer
Theodore Silvester, Jr. 53 Vice President and a Director
Dick Anagnost 43 Director
Each director holds office until his successor is duly elected by the
stockholders. Executive officers serve at the pleasure of the Board of
Directors.
<PAGE>
The following sets forth certain information concerning the past and present
principal occupations of the Company's officers, directors and the nominee to
the Board of Directors.
William M. Danton has been the Company's President, Chief Executive
Officer and a Director since December 11, 1998. Between January 1, 1998 and
December 11, 1998 Mr. Danton was a consultant to the Company. Mr. Danton was the
previous owner of the Fortune Poker system technology which the Company acquired
from Video Lottery Consultants, Inc. in 1997. Since July 1995 Mr. Danton has
also been the Chief Executive Officer of Old Orchard Beach Associates, a large
hospitality organization in southern Maine.
Roland M. Thomas has been the Company's Chief Operating Officer since
December 1998. Mr. Thomas has been involved in the management of product
development, software, systems, technology project management and
international corporate development for over 20 years. Between February
1996 and September 1998 Mr. Thomas was the Chief Executive Officer of
Casino Software Corporation. Since August 1993 Mr. Thomas has also been the
President of ERT Technology Corp.
Robert V. Eberle has been the Company's Chief Financial Officer since July
1999. For the past 17 years Mr. Eberle has also been an attorney in private
practice.
Theodore Silvester, Jr. has been the Company's Vice President and a
Director since July 1999. Between March 1994 and September 1997 Mr.
Silvester was the director of sales and marketing for Professional Video
Association, Inc., a corporation which was acquired by the Company in
September 1997.
Dick Anagnost has been a director of the Company since February 2000.
Mr. Anagnost has been involved in all aspects of real estate development,
management and finance since 1979.
William Danton, Roland Thomas, and Theodore Silvester, Jr. devote
substantially all of their time on the Company's business. Robert Eberle devotes
approximately 50% of his time to the Company's affairs Dick Anagnost, as a
director, devotes only a minimal amount of time to the Company.
Change in Management
Beginning in December 1998 the management of the Company changed. The
following provides certain information concerning the dates of service of the
former and present management of the Company.
Periods of
Name Position Service
David B. Jackson President and a Director 8/97 to 12/98
D. Bruce Horton Chief Financial Officer, 8/97 to 7/99
Secretary and Director
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William M. Danton President and a Director Since 12/98
Roland M. Thomas Chief Operating Officer Since 12/98
Robert V. Eberle Chief Financial Officer Since 7/99
Theodore Silvester, Jr. Vice President and a Director Since 7/99
Dick Anagnost Director Since 2/2000
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth in summary form the compensation received
by (i) the Chief Executive Officer of the Company and (ii) by each other
executive officer of the Company who received in excess of $100,000 during the
fiscal year ended December 31, 1999.
Other
Annual Restricted Options
Name and Fiscal Salary Bonus Compen- Stock Granted
Principal Position Year (1) (2) sation (3) Awards (4) (5)
- ----------------- ----- ------ ------ --------- ---------- -----
William M. Danton, 1999 -- -- -- -- --
President and Chief 1998 $125,000 -- -- -- 250,000
Executive Officer since1997 -- -- -- -- --
December 1998
(1) The dollar value of base salary (cash and non-cash) received.
(2) The dollar value of bonus (cash and non-cash) received.
(3) Any other annual compensation not properly categorized as salary or bonus,
including perquisites and other personal benefits, securities or property.
(4)Amounts reflect the value of the shares of the Company's common stock issued
as compensation for services.
The table below shows the number of shares of the Company's common stock
beneficially owned by the officers listed in the table and the value of such
shares as of December 31, 1999. The closing bid price of the Company's common
stock on December 31, 1999 was $0.52.
Name Shares Value
William M. Danton 995,000 $517,400
<PAGE>
(5) The shares of common stock to be received upon the exercise of all stock
options granted during the fiscal years shown in the table.
The following shows the amounts which the Company expects to pay to its
officers during the year ending December 31, 2000 and the time which the
Company's officers plan to devote to the Company's business. The Company does
not have employment agreements with any of its officers.
Proposed Time to be Devoted
Name Compensation To Company's Business
William M. Danton $125,000 100%
Roland M. Thomas $ 90,000 100%
Robert V. Eberle $ 45,000 50%
Theodore Silvester, Jr. $ 90,000 100%
Long Term Incentive Plans - Awards in Last Fiscal Year
None.
Employee Pension, Profit Sharing or Other Retirement Plans
Except as provided in the Company's employment agreements with its
executive officers, the Company does not have a defined benefit, pension plan,
profit sharing or other retirement plan, although the Company may adopt one or
more of such plans in the future.
Compensation of Directors
Standard Arrangements. At present the Company does not pay its directors
for attending meetings of the Board of Directors, although the Company expects
to adopt a director compensation policy in the future. The Company has no
standard arrangement pursuant to which directors of the Company are compensated
for any services provided as a director or for committee participation or
special assignments.
During the year ended December 31, 1999 the Company issued 150,000 shares
of its common stock to Dick Anagnost, a director of the Company, for services
rendered.
With the exception of the foregoing, and except as disclosed elsewhere in
this report, no director of the Company received any form of compensation from
the Company during the year ended December 31, 1999.
Employment Contracts
The Company does not have any employment contracts with any of its
executive officers.
<PAGE>
Compensation Committee Interlocks and Insider Participation
The Company does not have an Audit Committee or a compensation committee.
Stock Options
The Company did not issue any options to any officer or director in 1999.
Option Exercises in Last Fiscal Year and Option Values
<TABLE>
<S> <C> <C> <C> <C>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
December 31, December 31,
Shares Acquired Value 1999 Exercisable/ 1999 Exercisable/
Name on Exercise (1) Realized (2) Unexercisable (3) Unexercisable (4)
- ----------------- ----------------- ------------ ----------------- -----------------
William M. Danton -- -- 250,000/-- -/-
Roland M. Thomas -- -- 200,000/-- -/-
</TABLE>
(1) The number of shares received upon exercise of options during the fiscal
year ended December 31, 1999.
(2) With respect to options exercised during the Company's fiscal year December
31, 1999, the dollar value of the difference between the option exercise
price and the market value of the option shares purchased on the date of the
exercise of the options.
(3) The total number of unexercised options held as of December 31, 1999,
separated between those options that were exercisable and those options that
were not exercisable. All options held at December 31, 1999 are presently
exercisable.
(4) For all unexercised options held as of December 31, 1999, the excess of the
market value of the stock underlying those options (as of December 31, 1999)
and the exercise price of the option. All options held at are presently
exercisable.
Stock Option and Bonus Plans
The Company has an Incentive Stock Option Plan, a Non-Qualified Stock
Option Plan and Stock Bonus Plan. A summary description of each Plan follows. In
some cases these three Plans are collectively referred to as the "Plans".
<PAGE>
Incentive Stock Option Plan.
The Incentive Stock Option Plan authorizes the issuance of options to
purchase up to 2,000,000 shares of the Company's Common Stock. Only officers and
employees of the Company may be granted options pursuant to the Incentive Stock
Option Plan.
In order to qualify for incentive stock option treatment under the
Internal Revenue Code, the following requirements must be complied with:
1. Options granted pursuant to the Plan must be exercised no later than:
(a) The expiration of thirty (30) days after the date on which an option
holder's employment by the Company is terminated.
(b) The expiration of one year after the date on which an option
holder's employment by the Company is terminated, if such
termination is due to the Employee's disability or death.
2. In the event of an option holder's death while in the employ of the
Company, his legatees or distributees may exercise (prior to the option's
expiration) the option as to any of the shares not previously exercised.
3. The total fair market value of the shares of Common Stock (determined
at the time of the grant of the option) for which any employee may be granted
options which are first exercisable in any calendar year may not exceed
$100,000.
4. Options may not be exercised until one year following the date of
grant. Options granted to an employee then owning more than 10% of the Common
Stock of the Company may not be exercisable by its terms after five years from
the date of grant.
5. The purchase price per share of Common Stock purchasable under an
option is determined by the Committee but cannot be less than the fair market
value of the Common Stock on the date of the grant of the option (or 110% of the
fair market value in the case of a person owning the Company's stock which
represents more than 10% of the total combined voting power of all classes of
stock).
Non-Qualified Stock Option Plan.
The Non-Qualified Stock Option Plans authorize the issuance of options to
purchase up to 5,000,000 shares of the Company's Common Stock. The Company's
employees, directors, officers, consultants and advisors are eligible to be
granted options pursuant to the Plan, provided however that bona fide services
must be rendered by such consultants or advisors and such services must not be
in connection with the offer or sale of securities in a capital-raising
transaction. The option exercise price is determined by the Committee but cannot
be less than the market price of the Company's Common Stock on the date the
option is granted.
<PAGE>
Stock Bonus Plan.
Up to 500,000 shares of Common Stock may be granted under the Stock Bonus
Plans. Such shares may consist, in whole or in part, of authorized but unissued
shares, or treasury shares. Under the Stock Bonus Plan, the Company's employees,
directors, officers, consultants and advisors are eligible to receive a grant of
the Company's shares; provided, however, that bona fide services must be
rendered by consultants or advisors and such services must not be in connection
with the offer or sale of securities in a capital-raising transaction.
Other Information Regarding the Plans.
The Plans are administered by the Company's Board of Directors. The Board
of Directors has the authority to interpret the provisions of the Plans and
supervise the administration of the Plans. In addition, the Board of Directors
is empowered to select those persons to whom shares or options are to be
granted, to determine the number of shares subject to each grant of a stock
bonus or an option and to determine when, and upon what conditions, shares or
options granted under the Plans will vest or otherwise be subject to forfeiture
and cancellation.
In the discretion of the Board of Directors, any option granted pursuant
to the Plans may include installment exercise terms such that the option becomes
fully exercisable in a series of cumulating portions. The Board of Directors may
also accelerate the date upon which any option (or any part of any options) is
first exercisable. Any shares issued pursuant to the Stock Bonus Plan and any
options granted pursuant to the Incentive Stock Option Plan or the Non-Qualified
Stock Option Plan will be forfeited if the "vesting" schedule established by the
Board of Directors at the time of the grant is not met. For this purpose,
vesting means the period during which the employee must remain an employee of
the Company or the period of time a non-employee must provide services to the
Company. At the time an employee ceases working for the Company (or at the time
a non-employee ceases to perform services for the Company), any shares or
options not fully vested will be forfeited and cancelled. In the discretion of
the Board of Directors payment for the shares of Common Stock underlying options
may be paid through the delivery of shares of the Company's Common Stock having
an aggregate fair market value equal to the option price, provided such shares
have been owned by the option holder for at least one year prior to such
exercise. A combination of cash and shares of Common Stock may also be permitted
at the discretion of the Board of Directors.
Options are generally non-transferable except upon death of the option
holder. Shares issued pursuant to the Stock Bonus Plan will generally not be
transferable until the person receiving the shares satisfies the vesting
requirements imposed by the Board of Directors when the shares were issued.
The Board of Directors of the Company may at any time, and from time to
time, amend, terminate, or suspend one or more of the Plans in any manner it
deems appropriate, provided that such amendment, termination or suspension
cannot adversely affect rights or obligations with respect to shares or options
<PAGE>
previously granted. The Board of Directors may not, without shareholder
approval: make any amendment which would materially modify the eligibility
requirements for the Plans; increase or decrease the total number of shares of
Common Stock which may be issued pursuant to the Plans except in the case of a
reclassification of the Company's capital stock or a consolidation or merger of
the Company; reduce the minimum option price per share; extend the period for
granting options; or materially increase in any other way the benefits accruing
to employees who are eligible to participate in the Plans.
The Plans are not qualified under Section 401(a) of the Internal Revenue
Code, nor are they subject to any provisions of the Employee Retirement Income
Security Act of 1974.
Summary.
The following sets forth certain information as of December 31, 1999,
concerning the stock options and stock bonuses granted by the Company pursuant
to its Plans. Each option represents the right to purchase one share of the
Company's Common Stock.
Total Shares Shares Reserved Shares Remaining
Reserved for Outstanding Issued As Options/Shares
Name of Plan Under Plan Options Stock Bonus Under Plan
- ----------- ---------- --------------- ----------- -------------
Incentive Stock Option
Plan 2,000,000 -- N/A 2,000,000
Non-Qualified Stock
Option Plan 5,000,000 950,000 N/A 4,050,000
Stock Bonus Plan 500,000 N/A -- 500,000
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 31, 2000, information with
respect to the only persons owning beneficially 5% or more of the outstanding
Common Stock and the number and percentage of outstanding shares owned by each
director and officer and by the Company's officers and directors as a group.
Unless otherwise indicated, each owner has sole voting and investment powers
over his shares of Common Stock.
Number of Percent of
Name and Address Shares (1) Class
William M. Danton 995,000 (2) 5.1%
144 Elm Street, 2nd floor
Suite 16
Biddeford, ME 04005
Roland M. Thomas -- --
2700 East Sunset Road
Suite #39
Las Vegas, NV 89120
<PAGE>
Number of Percent of
Name and Address Shares (1) Class
Robert V. Eberle -- --
200 Walnut Street
Suite G
Saugus, MA 01906
Theodore Silvester, Jr. 35,000 (3) 0.2%
144 Elm Street, 2nd floor
Suite 16
Biddeford, ME 04005
Dick Anagnost 150,000 0.7%
730 Pine Street
Manchester, NH 03104-3108
Officers and Directors as a 1,180,000 6.0%
Group (5 persons)
(1) Excludes shares issuable prior to March 31, 2000 upon the exercises of
options granted to the following persons:
Shares Issuable
Upon Exercise Option Expiration
Name of Option Exercise Price Date of Option
William M. Danton 250,000 $0.90 5/22/03
Roland M. Thomas 200,000 $0.90 5/22/03
Robert Eberle -- -- --
Theodore Silvester, Jr. 125,000 $0.90 5/22/03
Dick Anagnost -- -- --
(2) Shares are registered in the name of WWT&T Ltd. Mr. Danton may be considered
the beneficial owner of these shares.
(3) Excludes 870,000 shares held by Team Rainbow, Inc., a corporation in which
Mr. Sylvester owns a 20% interest.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Item 1 of this report for information concerning the Company's
acquisition of Professional Video Association, Inc. ("PVA"). William Danton, an
officer and director of the Company, was a controlling shareholder of PVA.
<PAGE>
See Item 1 of this report for information concerning the Company's
acquisition of the Rainbow 21 game from Rainbow, Inc. Theodore Silvester, Jr.,
an officer and director of the Company, owns 20% of Team Rainbow, Inc.
<PAGE>
CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
<PAGE>
Independent Auditors' Report
To the Shareholders of
Fortune Entertainment Corporation
We have audited the accompanying consolidated balance sheet of Fortune
Entertainment Corporation (a development stage enterprise) as of December 31,
1999 and the related consolidated statements of operations, stockholders' equity
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit. The financial
statements of Fortune Entertainment Corporation as of December 31, 1998, were
audited by other auditors whose report dated February 12, 1999, on those
statements included an explanatory paragraph that described the development
stage of the enterprise as discussed in Note 1 to the financial statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1999 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Fortune
Entertainment Corporation as of December 31, 1999, and the consolidated results
of its operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company is in the development stage, has no
established source of revenue and is dependent on its ability to raise capital
from its shareholders or other sources to sustain operations. These factors,
along with other matters as set forth in Note 1, raise substantial doubt that
the Company will be able to continue as a going concern. Management's plans
regarding those matters are also described in Note 1. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
North Andover, MA
April 12, 2000
GORDON, HARRINGTON & OSBORN, PC
Certified Public Accounts
<PAGE>
The accompanying notes are an integral part of the
financial statements.
3
FORTUNE ENTERTAINMENT CORPORATION
(A development stage enterprise)
CONSOLIDATED BALANCE SHEET (See Basis of
Presentation - Note 1)
December 31, 1999 and 1998
ASSETS 1999 1998
---- ----
Current:
Cash $ 22,397 $ 353,543
Accounts receivable 2,635 22,423
Prepaid expenses and other current assets 8,598
---------------- ------------
-
Total current assets
Deposits 9,879 9,879
Investments 1,356,658 1,183,751
Property and equipment, net of accumulated 73,146 90,978
depreciation of $39,973 and $22,141,
respectively.
Goodwill, net of accumulated amortization of
$135,824, and $74,624, respectively. 477,636 538,836
Intellectual property, net of accumulated
amortization of $1,208,198 and $594,198,
respectively 4,933,789 5,547,789
----------- ---------
Total assets $ 6,876,140 $7,755,797
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current:
Accounts payable and accrued liabilities $ 385,134 $ 604,704
Due to related parties 1,072,491 595,980
Loans payable 370,000 470,000
Purchase consideration payable 405,000 923,750
------------ ----------
Total current liabilities
Purchase consideration payable - 231,250
--------------- ----------
Total liabilities 2,232,625 2,825,684
--------- ---------
Commitments and contingencies
Stockholders' Equity:
Share stock
Common stock, $0.0001 par value,
30,000,000 authorized, 18,093,615 and
13,925,256 respectively issued and
outstanding 1,810 1,393
Preferred stock, $0.0001 par value,
convertible
Class A, B and C Preferred stock:
5,000,000 authorized, 32,864; 32,864;
36,864 (1998 - 130,864; 231,864;
488,578) issued and outstanding,
respectively 10 85
Additional paid in capital 10,795,642 9,017,958
Share stock to be issued 138,703 210,000
Stock based compensation 465,000 465,000
Accumulated deficit (6,757,650) (4,764,323)
----------- ---------
Total stockholders' equity 4,643,515 4,930,113
----------- ---------
Total liabilities and stockholders' $ 6,876,140 $7,755,797
equity =========== =========
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
(A development stage enterprise)
CONSOLIDATED STATEMENT OF OPERATIONS
December 31, 1999 and 1998
Period from
August 25,
1997
(inception)
Year Ended Year Ended to December
December 31, December 31, 31,
1999 1998 1999
---- ---- ----
Expenses:
Amortization of intangible $ 675,200 $ 655,543 $
assets
Bank charges and interest 107,618 106,138
Depreciation 17,832 18,163 40,305
Foreign exchange (gain) loss (6,124) (2,795) (4,238)
General and administration 182,856 115,908
Legal and accounting 485,075 308,622
Management fees 255,000 319,103
Office and miscellaneous 25,656 376,822 420,612
Consulting fees 159,771 709,850
Rent 51,277 63,003
Salaries and wages - 66,834
Stock based compensation - 465,000
Travel, promotion and
entertainment 40,480 106,018
----------- ----------
1,994,641 3,308,209 5,724,951
--------- --------- ---------
Loss before the following: (1,994,641) (3,308,209) (5,724,971)
Investment valuation reserve - - (1,034,013)
Interest income 1,314
------------ --------------
-
Loss for period (1,993,327) (3,308,209) (6,757,650)
Deficit, beginning of period (4,764,323) (1,456,114)
-
Deficit, end of period $(6,757,650) $(4,764,323) $(6,757,650)
========= ========= =========
Basic and diluted loss per share (0.12) (0.36)
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
(A development stage enterprise)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
December 31, 1999 and 1998
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Common Stock Preferred Stock
-------------------- --------------------
Common
Number of Number Paid in Accumulated Stock Based Shares to
Shares Amount of Shares Amount Capital Deficit Compensatio be Issued Total
Balance, December 31, 4,265,920 $ 427 3,271,392 $327 $1,547,188 $(1,456,114) $ -- $1,675,000 $1,766,828
1997 -
Issuance of common stock 7,239,250 724 7,470,770 (1,675,000) 5,796,494
Conversion of preferred
stock 2,420,086 242 (2,420,086) (242) --
Common stock to be
issued 210,000 210,000
Stock based compensation 465,000 465,000
Loss for the period -- -- -- -- -- (3,308,209) -- -- (3,308,209)
-------- ------ --------- ----- --------- ---------- -------- -------- ---------
Balance, December 31, 13,925,256 1,393 851,306 85 9,017,958 (4,764,323) 465,000 210,000 4,930,113
1998
Issuance of common stock 3,419,645 342 1,777,684 (150,000) 1,628,026
Conversion of preferred 748,714 75 (748,714) (75) --
stock
Common stock to be 78,703 78,703
issued
Loss for the period -- -- -- -- -- (1,993,327) -- -- (1,993,327)
----------------------------------------------------------------------------------------------------------
Balance, December 31, 18,093,615 $1,810 102,592 $ 10 $10,795,642 $6,757,650) $465,000 $138,703 $4,643,515
1999 ========== ===== ======= ==== ========== ========= ======= ======== =========
</TABLE>
The accompanying notes are an integral
part of the financial statements
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
(A development stage enterprise)
CONSOLIDATED STATEMENT OF CASH FLOWS
For the years ended December 31, 1999 and 1998
Period from
August 25,
1997
Year Ended Year Ended (inception)
December 31, December 31, to December
1999 1998 31, 1999
---- ---- --------
Operating activities:
Net loss for period $(1,993,327) $(3,308,209) $(6,757,650)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Amortization of intangible
assets 675,200 655,543 1,344,021
Depreciation 17,832 18,163 40,305
Investment valuation reserve - - 1,034,013
Stock based compensation - 465,000 465,000
Shares issued, or to be
issued for services 113,793 210,020 323,813
Changes in operating assets
and liabilities:
Accounts receivable 19,788 5,760 2,635
Prepaid expenses, deposits
and other current assets 8,598 4,019 (9,879)
Accounts payable and accrued
liabilities (219,570) 857,914 712,775
--------- ---------- ----------
Net cash used in operating
activities (1,377,686) (1,091,790) (2,844,967)
--------- --------- ---------
Investing activities:
Acquisition of property and
equipment - (41,334) (47,351)
Acquisition of investments (172,907) (1,071,250) (1,288,171)
Purchase price consideration
payments (380,000) (350,000) (730,000)
Business acquisitions, net of
cash required - (12,500) (31,350)
------- ----------- -----------
Net cash used in investing
activities (552,907) (1,475,084) (2,096,872)
--------- --------- ---------
Financing activities:
Proceeds from capital
contributions 1,089,326 2,147,900 3,657,510
Share subscriptions received 133,610 150,000 133,610
Borrowings under loans payable - 262,403 347,074
Advances from related parties 476,511 318,224 926,042
Payment of loans (100,000) - (100,000)
---------- -------- ----------
Net cash provided by financing
activities 1,599,447 2,878,527 4,964,236
---------- --------- ---------
Net increase (decrease) in cash
during the period (331,146) 311,653 22,397
Cash at beginning of period
353,543 41,890 -
---------- ----------- --------
Cash at end of period $ 22,397 $ 353,543 $ 22,397
========== ========== =========
he accompanying notes are an integral
part of the financial statements
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
(A development stage enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE 1 - NATURE OF BUSINESS AND LIQUIDITY
Fortune Entertainment Corporation, a Delaware corporation (the "Company"), was
incorporated on August 25, 1997. On September 16, 1997, the Company acquired all
of the issued and outstanding share stock of FET, Inc. (a Colorado Corporation
incorporated on August 19, 1997) for consideration of 2,175,456 common shares of
the Company. As a result of this acquisition, the previous shareholders of FET,
Inc., as a group, owned more than 50% of the issued and outstanding voting
shares of the Company. Consequently, this business combination has been
accounted for a reverse acquisition whereby FET, Inc. is deemed to have acquired
the Company. Accordingly, the consolidated balance sheets of the Company are
based upon the accounts of FET, Inc. at their historic net book value and the
accounts of the Company at their estimated fair value at the time of the
transaction. The estimated fair value of the Company at the time of the
transaction was based upon an ascribed value of $0.10 per share for the 100
common shares of the Company that were outstanding prior to the transaction with
FET, Inc.
The deemed acquisition of the Company by FET, Inc., based upon the Company's
financial statements of the date of its incorporation on August 25, 1997 was as
follows:
Net assets acquired
Cash $10
Deemed consideration
100 shares of the Company
outstanding prior to acquisition
by FET, Inc. $10
The Company is the surviving corporation and is committed to developing gaming
and entertainment products for both the North American and International
markets.
The Company's financial statements for the years ended December 31, 1999 and
1998 have been prepared on a going concern basis which contemplates the
realization of assets and the settlement of liabilities and commitments in the
normal course of business for the foreseeable future. The company incurred a
loss of $1,993,327 and $3,308,209 for the years ended December 31, 1999 and
1998, and as of December 31, 1999 and 1998 had a working capital deficiency of
$2,207,593 and $2,209,870, respectively. The Company is still a development
stage enterprise and is expected to incur substantial losses and expenditures
prior to the commencement of full-scale operations in future years. The
Company's working capital at December 31, 1999 will not be sufficient to meet
such commitments. Management recognizes that the Company must obtain additional
financial resources or consider a reduction in operating costs to enable it to
continue operations with available resources and to commercialize its
investments in the intellectual properties and patents relating to its two major
assets - Rainbow 21 and Fortune Poker. The Company is pursuing licensing
approvals for its technologies in various US states. In addition to the
development of its current technologies, the Company is evaluating opportunities
that would generate immediate cash flow for the Company.
<PAGE>
NOTE 1 - NATURE OF BUSINESS AND LIQUIDITY (continued)
Management expects that these efforts will result in the introduction of other
parties with interests and resources. However, no assurances can be given that
the Company will be successful in raising additional capital. Further, there can
be no assurance, assuming the Company successfully raises additional funds or
enters into a business alliance, that the Company will achieve positive cash
flow. If the Company is unable to obtain adequate additional financing or enter
into such business alliance, management will be required to sharply curtail the
Company's operating expenses. Accordingly, the Company's continuation as a going
concern is in substantial doubt.
These financial statements do not include any adjustments to the carrying values
and classification of assets and liabilities which may be necessary if the
company is unable to continue its operations.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Fortune Entertainment Corporation (Bahamas),
Fortune Entertainment Corporation (British Columbia, Canada), and Fortune Poker,
Inc. (Delaware) (formerly known as Professional Video Association, Inc.)
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual result could differ from these estimates.
Financial Instruments
Amounts reported for cash, accounts receivable, accounts payable and accrued
liabilities, due to related parties, loans payable and purchase consideration
payable are considered to approximate fair value primarily due to their short
maturities. The investment in Sega Gaming Technology, Inc., (SGTI) a Private
company, is recorded at cost.
As of April 3, 2000, SGTI and SEGA Enterprises have agreed; along with SGTI
shareholders (of which the Company is one), to sell the SGTI stock to SEGA
Enterprises for $8.00 per share.
Property and Equipment
Property and equipment are stated at cost and are being depreciated on a
straight-line basis over the estimated useful lives of the related assets (2 - 5
years). Leasehold improvements are amortized on a straight-line basis over the
shorter of the remaining lease term or the estimated lives.
<PAGE>
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes
The Company uses the liability method of accounting for income taxes, Under this
method, deferred tax assets and liabilities are determined based on the
difference between financial statement and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that are expected to be in
effect when the differences are expected to reverse. Recognition of deferred tax
assets is limited to amounts considered by management to be more likely than not
of realization in future periods.
Advertising costs
Advertising costs are expensed as incurred.
Investments and Accounting for Impairment of Long-Lived Assets
Investments are recorded at the lesser of historical cost or net recoverable
value. The Company continually evaluates whether events and circumstances have
occurred indicating the remaining estimated useful life of long-lived assets may
warrant revision, or long-lived asset balances may not be recoverable. If
factors indicate long-lived assets have been impaired, the Company uses an
estimate of the remaining value of the long-lived assets in measuring
recoverability. Unrecoverable amounts are charged to operations in the
applicable period.
Goodwill and Intellectual Property
Goodwill is being amortized on a straight-line basis over ten years.
Intellectual Property, consisting of Fortune Poker and Rainbow 21, is amortized
on a straight-line basis over ten years.
Stock-Based Compensation
The Company accounts for stock-based compensation based on the provisions Of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation". This statement establishes financial accounting and
reporting standards for stock-based employee compensation plans and allows
companies to choose either: 1) a fair value method of valuing stock-based
compensation which will effect reported net income; or 2) to follow the existing
accounting rules for stock-based compensation but disclose what the impact would
have been had the fair value method been adopted. The Company elected the
disclosure option (see Note 9).
Computation of Loss per Common Share
Basic loss per share is computed by dividing the net loss attributable to common
stockholders by the weighted average number of common shares outstanding for
that period. Diluted loss per share is computed giving effect to all dilutive
potential common shares that were outstanding during the period. As of December
31, 1999 and 1998, the diluted loss per share will be equivalent to the basic
loss per share since the company is in a loss position.
<PAGE>
NOTE 3 - BUSINESS ACQUISITIONS
Fortune Entertainment Corporation (Bahamas)
On October 14, 1997 the Company acquired all of the issued and outstanding share
stock of Fortune Entertainment Corporation (Bahamas), ("FECB"), for the
following Consideration:
# of shares
Purchase price $1,542,657
Consideration given:
Common Stock 1,094,464 385,665
Series A Preferred Stock 1,094,464 385,664
Series B Preferred Stock 1,094,464 385,664
Series C Preferred Stock 1,094,464 385,664
----------
$1,542,657
All of the Preferred Stock is convertible at specific dates as described in Note
9. The value ascribed to the shares as shown above represents the value of the
issued and outstanding share stock of FECB immediately prior to the transaction.
The purchase price has been allocated according to the estimated fair values of
the assets and liabilities of FECB as follows:
Cash $ 26,150
Accounts receivable 17,268
Prepaid expenses 10,123
Property and equipment 66,100
Investment in Advanced Gaming Technology,
Inc. (note 5) 990,000
Fortune Poker (notes 3 and 4) 321,986
Accounts payable (23,480)
Loan payable (250,000)
Due to related parties (228,950)
Goodwill on acquisition 613,460
----------
$1,542,657
Fortune Poker, Inc. (formerly known as Professional Video Association, Inc.)
Pursuant to a Purchase and Sale Agreement (the "Agreement") dated September 5,
1997 with William Danton and Video Lottery Consultants, Inc. (the "Danton
Group"), the Company acquired all of the remaining issued share stock of Fortune
Poker, Inc. (Fortune Poker), formerly known as Professional Video Association,
Inc. ("PVA"). Fortune Poker was originally formed to capitalize on the patented
software invention ("Intellectual Property") of a skill poker software game
known as PVA Electronic Tournament Poker. The entire purchase price has been
allocated to Intellectual Property (see Note 4).
<PAGE>
NOTE 3 - BUSINESS ACQUISITIONS (continued)
Details of this acquisition are as follows:
# of shares
Purchase Price $5,106,986
Consideration:
Investment in Fortune Poker acquired in the
FECB acquisition 321,986
Cash paid to December 31, 1997 pursuant to
the agreement 35,000
-----------
Sub-total
Cash payments due 3,340,000
Common shares to be issued 705,000 1,410,000
---------
$5,106,986
All of the common shares have, and are, to be issued at an ascribed value of
$2.00 per share, that being the guaranteed amount pursuant to the
"top-up-Provision" and accounted for pursuant to Emerging Issues Task Force
Abstract 97-15.
The Agreement contains a "top-up provision" which provides that if during the
period commencing on the date that all of the stock issued to the Danton Group
becomes fully registered under the Securities Act of 1933 as amended (the
"Trading Date"), and ending on a date 60 days after the Trading Date, the shares
of the Company trading on the OTC Bulletin Board (the "Board") have not for 45
days had a closing bid price per share of at least $2.00, then, to the extent
that the Danton Group stock is held on the 60th day, the Company must pay the
Danton Group the difference between $2.00 per share and the greater of $0.50 per
share and the average bid closing price of shares of the Company's stock trading
on the Board for the 10 days preceding August 7, 1999. This difference was to be
paid on or before August 15, 1999 in cash or stock. Any further stock issued
pursuant to this top-UP provision will be recorded at no value since the shares
issued have already been valued at their maximum amount of $2.00 per share.
During the year ended December 31, 1998, the Company elected to settle a portion
of the cash payments due by issuing 1,142,500 shares valued at $2.00 per share
in addition to the 705,000 shares issued pursuant to the original purchase
agreement. Of the remaining balance due, $705,000 is outstanding at December 31,
1998. The company amended the Agreement and has paid an additional $146,000 fee,
and agreed to issue 100,000 common shares of the Company for, this amendment.
These amounts, aggregating $200,000, have been expensed and are included in
office and miscellaneous at December 31, 1998.
During the year ended December 31, 1999, the agreement was further amended as
follows:
The Company issued no shares of commons stock to the Danton Group in 1999 and
paid the Danton Group $300,000 in 1999.
<PAGE>
NOTE 3 - BUSINESS ACQUISITIONS (continued)
The agreement with the Danton Group further requires the Company to pay the
Danton Group the balance of $405,000 by April 30, 2000, pay the Danton Group 20%
of all up-front licensing fees paid or payable to the Company with respect to
the Fortune Poker game, and until the expiration of the Patent, or any renewals
or extensions of the Patent, issue additional shares of its common stock to the
Danton Group in an amount determined by the following formula:
Net earnings x Percentage
-------------------------
Average Share Price
Percentage is 4% in 2000, 5% in 2001 and 10% in 2002 and thereafter
provided that the percentage will automatically increase to 10% if Net
Earnings are at least $10,000,000.
Net earnings means the Company's earnings during each twelve month
period ending December 31 from the revenues derived from the Fortune
Poker game before income tax, depreciation and amortization.
Average Share Price means the average trading price of the Company's
common stock for the last 30 trading days of the Company's fiscal year.
The Company has agreed to register for public sale the shares of its common
stock issued pursuant to this within 180 days of their issuance.
The acquisition of Fortune Poker included the assumption of a Manufacturing
Agreement. As amended April 24, 1998, the Manufacturing Agreement provides
Amusement World, Inc. with the exclusive right to manufacture Fortune Poker
terminals for the Company until April 23, 2008. The cost to the Company for each
terminal will range from $2,700 to $3,600 depending upon the type of teminal
ordered by the Company. The cost of the terminals will increase based upon
increases in the Consumer Price Index. Although the Manufacturing Agreement
provides that a minimum of 333 terminals are required to be purchased from
Amusement World during each of the twelve month periods ending April 23, 1999,
2000 and 2001 and as of December 31, 1999, no terminals have been purchased. The
agreement relates to class II devices which are not yet approved.
<PAGE>
NOTE 3 - BUSINESS ACQUISITIONS (continued)
Team Rainbow, Inc.
Pursuant to an Asset Acquisition Agreement (the "Agreement") effective July 31,
1998, with Team Rainbow Inc. ("TRI"), the Company purchased all of the rights,
assets and business of TRI for the following consideration:
# of Shares
Purchase price
$1,035,000
Consideration given
Cash $ 22,500
Cash consideration due:
by July 31, 1999 50,000
by July 31, 2000 150,000
by July 31, 2002 250,000
Common shares issued by July 31, 1998 250,000 562,500
----------
$1,035,000
The Company paid $22,500 in cash and agreed to pay a total of $250,000 in equal
quarterly installments over the four-year period ending July 31, 2002. In
addition, as noted in Note 4, a further minimum amount of $200,000 is required
to be paid by July 31, 2000.
TRI holds a patent on a multi-positional blackjack game known as "Rainbow 21".
All of the common shares were issued at an ascribed value of $2.25 per share
being the guaranteed amount pursuant to Note 4 and accounted for pursuant to
Emerging Issues Task Force Abstract 97-15. Of the cash balance due, $450,000 was
outstanding at December 31, 1998. The entire purchase price has been allocated
to the Intellectual Property (see Note 4).
During 1999, in completion of the transfer of the assets relating to Rainbow 21
Game, the Company paid TRI $80,000 and issued TRI 500,000 shares of its common
stock.
The Company's agreement with TRI was amended on October 13, 1999 in which
500,000 shares would be issued to TRI with no further payments of any kind to be
due to TRI. The only existing agreement with TRI, as outlined in the October 13,
1999 amendment, states that the Company guarantees the FEC shares will have a
value of $2.00 per share by August 1, 2000 or the Company will issue cash or
shares of the equivalent value for the deficit.
<PAGE>
NOTE 4 - INTELLECTUAL PROPERTY
Intellectual property consists of the patented software inventions discussed in
Note 3 known respectively as Fortune Poker and Rainbow 21.
Fortune Poker
To the extent that the Company sub-licenses rights derived from Fortune Poker,
the Company must pay the Danton Group 20% of all up-front licensing fees paid or
payable to the Company. Also commencing April 2, 1998 (the "Trigger Date"), and
continuing on the annual anniversary date of the Trigger Date and every year
during either the life of the patent, which forms part of the Intellectual
Property, and any extension of the patent, the Company must issue common stock
to Mr. Danton equivalent to the Predetermined Percentages times Net Earnings
divided by the Average Share Price.
The Agreement provides the following definitions for this formula:
o Predetermined Percentages are 2% in year one, 3% in year two, 4% in year
three, 5% in year four and 10% in year 5 and thereafter, provided that the
percentage will automatically increase to 10% once Net Earnings are at
least $10,000,000.
o Net Earnings represents earnings from the revenues derived from the
Intellectual Property before income tax, depreciation and amortization.
o Average Share Price refers to the average trading price of the Company's
common stock on the NASD OTC Bulletin Board for the last 30 trading days
of the fiscal year.
Any payments made to pursuant to the above will be recorded as additional
consideration.
Until the Company meets all of the above obligations in a timely manner, the
Fortune Poker stock (see Note 3) is subject to a Stock Pledge Agreement whereby
Mr. Danton has been granted a security interest in 60% of the issued and
outstanding Fortune Poker stock which provides for the right of Mr. Danton to
obtain ownership and control of the pledged stock if the Company defaults under
this Agreement While the Stock Pledge Agreement is in place, the Company is not
permitted to change, amend or modify its bylaws and certificate of
Incorporation; sell, convey or transfer any of the assets associated with this
Agreement; or incur any debt, liability or other obligation or responsibility
outside the ordinary course of business without the prior written consent of the
Danton Group. Additionally, Mr. Danton has been granted an option to purchase
the other 40% of the issued and outstanding Fortune Poker stock upon default of
this Agreement by the Company at a price equivalent to that paid by the Company.
<PAGE>
NOTE 4 - INTELLECTUAL PROPERTY (continued)
Rainbow 21
Pursuant to the TRI acquisition as discussed in Note 3, the Company has the
following obligations:
1. If during the last five trading days in the twelfth month after the option
exercise date, the simple average closing price for the shares traded on
the public market ("Market price") does not equal or exceed $2.25 per
share, the Company must either.
a. pay TRI the difference between $562,500 less 250,000 multiplied by
the Market Price (the "Difference"); or
b. deliver to TRI additional shares of the same class as the shares having
a value equal to the Difference, with such additional shares being
valued at the Market Price.
2. To pay TRI in quarterly installments, the greater of $50,000 or 10% of the
net revenues from Rainbow 21 for the twelve months ended July 31, 1999.
3. To pay TRI in quarterly installments, the greater of $150,000 or 10% of
the net revenues from Rainbow 21 for the twelve month period ended July
31, 2000.
4. Commencing July 31, 2001, the Company must pay additional consideration of
5% of the net revenues from Rainbow 21 for the preceding twelve month
period.
Any further stock issued pursuant to [1] above will be recorded at no value
since the shares issued have already been valued at their maximum amount of
$2.25 per share. The minimum payments under [2] to [4] above have been recorded
as consideration payable. Any further payments will be recorded as additional
consideration. The entire purchase price has been allocated to Intellectual
Property.
NOTE 5 - INVESTMENTS
Investments consist of the following:
1999 1998
---- ----
Sega Gaming Technology, Inc. $1,356,658 $1,183,750
Advanced Gaming Technology, Inc. 1,034,013 1,034,014
Less valuation reserve (1,034,012) (1,034,013)
--------- ---------
$1,356,659 $1,183,751
Sega Gaming Technology, Inc. ("SGT"') was a subsidiary of the parent Sega
(Japan) which subsequently underwent a management buyout The investment in SGT
is the company's first initiative to form a joint venture company with SGT in
the future, whereby the Company will market its technology under SEGA's brand
name.
In 1999, the Company acquired 57,636 shares of the common stock of SEGA Gaming
Technology, Inc. (SGTI), a Nevada Corporation for $172,907. The 188,886 shares
which the Company presently owns in SGTI represent 17% of SGTI's issued and
outstanding common stock. SGTI was incorporated in 1995 and through a licensing
agreement with SEGA of Japan (SEGA), has the exclusive rights to market certain
multi-player gaming machines of SOJ in various areas of the world.
<PAGE>
NOTE 5 - INVESTMENTS (continued)
In April 2000 the Company plans to sell its interest in SGTI to SEGA
Enterprises, LTD for $8.00 per share under a proposal from the Company for a
total of $1,511,188.
Advanced Gaming Technology, Inc. ("AGT") was engaged in the business of
designing and developing electronic bingo products. During the 1997 year, AGT
filed for chapter 11 bankruptcy protection in the state of Nevada.
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following of:
December 31, 1999
----------------------------
Accumulated
Cost depreciation
Furniture and equipment $ 94,487 $26,647
Computer equipment and software 12,381 10,200
Leasehold improvements 6,251 3,126
--------- -------
$ 113,119 $ 39,973
Net property and equipment $73,146
December 31, 1998
-------------------------
Accumulated
Cost depreciation
Furniture and equipment $94,487 $14,765
Computer equipment and software 12,381 5,638
Leasehold improvements 6,251 1,738
--------- -----
$ 113,119 $22,141
Net property and equipment $90,978
NOTE 7 - RELATED PARTIES TRANSACTIONS
For the years ended December 31, 1999 and 1998 management fees of $255,000 and
$319,103, respectively and rent, utilities, and office and miscellaneous costs
of $37,656 and $57,007; respectively, were charged by companies controlled by
the directors.
The amounts due to related parties consist of advances from, and unpaid
management fees and other costs (as above) charged by, companies controlled by
directors. These amounts incur interest at 10% and do not have stated terms of
repayment. Interest expense for 1999 was $63,552.
The Company rents its office space in Biddleford, ME from an officer of the
corporation. Monthly rent expense is $1,000. They are a tenant-at-will. Rent
expense for 1999 is accrued for $12,000.
<PAGE>
NOTE 8 - LOANS PAYABLE
Loans payable consist of the following as of December 31:
1999 1998
---- ----
B. Benedet Holdings, Inc., due on April 15,
2000 $320,000 $320,000
Caulfield Management Ltd., due June 30, 1999,
with interest at 12%. 50,000 150,000
-------- -------
$370,000 $470,000
Interest accrued during the years ended December 31, 1999 and 1998 amounted to
$20,219 and $32,540, respectively.
As collateral for the Caulfield Management Ltd., loan, the Company has assigned
a portion of the shares of Sega Gaming Technology, Inc.
NOTE 9 - CAPITAL STOCK
Authorized
Holders of the Common Stock are entitled to one vote per share equally in any
dividends declared and in distributions in liquidations.
The preference Stock is non-cumulative, non-voting and convertible into Common
Stock at the option of the holder of the Preference Stock at the rate of one
Preferred Share to one Common Share for no additional consideration. The holders
of the different classes of Preference Stock were entitled to commence
conversion of their shares as follows:
Class A: May 20, 1998;
Class B: August 20, 1998; and
Class C: November 30, 1998
<PAGE>
NOTE 9 - CAPITAL STOCK (continued)
Issued
Number of Shares
Common Stock:
Balance at January 1, 1998 $ 4,265,920 $ 390,950
Issued for cash
Pursuant to private placement 179,000 309,400
Pursuant to unit offering 2,923,333 2,017,500
Pursuant to exercise of stock options
and warrants 200,000 150,000
Conversion of Series A Preferred Shares 959,600 339,381
Conversion of Series B Preferred Shares 858,600 303,661
Conversion of Series C Preferred Shares 601,886 212,869
Issued pursuant to exercise of stock
options and warrants for settlement of
dept 955,000 286,500
Issued as partial consideration for TRI 250,000 562,500
Issued related to Fortune Poker acquisition 1,847,500 3,695,000
Issued as partial consideration for SGT
investment 150,000 112,500
Shares issued as signing bonus 200,000 150,020
Shares issued for settlement of accounts
payable 87,500 125,000
Shares issued for settlement of load 446,917 127,074
Commissions on share issuance -- (64,000)
-------- --------
Balance, December 31, 1998 13,925,256 8,718,355
Common Stock:
Pursuant to unit offering 2,687,695 1,294,233
Conversion of Series A Preferred Shares 98,000 34,660
Conversion of Series B Preferred Shares 199,000 70,380
Conversion of Series C Preferred Shares 451,714 159,757
Shares issued for settlement of accounts
payable and expenses 231,950 113,793
Shares issued for settlement of loan 500,000 370,000
------------- ------------
Balance, December 31, 1999 18,093,615 $10,761,178
========== ==========
<PAGE>
NOTE 9 - CAPITAL STOCK (continued)
Number of Shares
Class A Preferred stock:
Balance, December 31, 1997 1,090,464 $385,664
--------- -------
Shares converted to common stock (959,600) (339,381)
---------- -------
Balance, December 31, 1998 130,864 46,283
---------- --------
Class B Preferred stock
Balance, December 31, 1997 1,090,464 385,664
--------- -------
Shares converted to common stock (858,600) (303,661)
---------- -------
Balance, December 31, 1998 231,864 82,003
---------- --------
Class C Preferred stock
Balance, December 31, 1997 1,090,464 385,664
--------- -------
Shares converted to common stock (601,886) (212,869)
--------- -------
Balance, December 31, 1998 488,578 172,795
---------- -------
Total preferred stock, December 31,
1998 851,306 $301,081
========== =======
Class A Preferred stock:
Balance, December 31, 1998 130,864 $ 46,283
Shares converted to common stock (98,000) (34,660)
------------ --------
Balance, December 31, 1999 32,864 11,623
----------- --------
Class B Preferred stock
Balance, December 31, 1998 231,864 82,003
Shares converted to common stock (199,000) (70,380)
---------- --------
Balance, December 31, 1999 32,864 11,623
----------- --------
Class C Preferred stock
Balance, December 31, 1998 488,578 172,795
Shares converted to common stock (451,714) (159,757)
---------- -------
Balance, December 31, 1999 36,864 13,038
----------- --------
Total preferred stock, December 31,
1999 102,592 $ 36,284
========== ========
As of December 31, 1998, the Company had received cash in the amount of $150,000
representing subscriptions received for the issue of 300,000 common shares and
300,000 common share purchase warrants. In addition, pursuant to the amended
agreement referred to in Note 3, the Company is required to issue 100,000 common
shares at a value of $60,000.
<PAGE>
As of December 31, 1999, the Company had received cash in the amount of $73,610
for the issuance of 155,653 shares of common stock. There are 14,550 shares to
be issued for an expense of $5,093.
NOTE 9 - CAPITAL STOCK (continued)
Stock option transactions for the respective periods and the number of stock
options outstanding are summarized as follows:
No. of common
shares issuable
Balance, December 31, 1997 1,050,000
Options granted *3,755,000
Options exercised (815,000)
Options expired (100,000)
----------
Balance, December 31, 1998 3,890,000
Options cancelled (900,000)
Options expired (1,030,000)
---------
Balance, December 31, 1999 1,960,000
=========
*All options issued are subject to shareholder approval at the Company's annual
general meeting.
At December 31, 1998, the following options were outstanding:
No. of common
shares issuable Exercise price Date of expiry
435,000 $0.30 October 14, 2002
1,425,000 0.90 May 22, 2003
335,000 1.00 June 3, 1999
50,000 0.80 June 1, 1999
** 200,000 1.50 May 14, 2000
** 200,000 2.00 May 14, 2000
** 200,000 2.50 November 14, 1999
** 200,000 3.00 May 14, 1999
600,000 0.75 Option in full force until termination of
consulting agreement
145,000 1.15 June 5, 1999- July 19, 2000
50,000 1.25 March 12, 1999
50,000 1.50 June 12, 1999
-----------
Stock options become exercisable at dates determined by the Board of Directors
at the time of the granting of the option. At December 31, 1998, 2,920,000
options were exercisable.
<PAGE>
NOTE 9 - CAPITAL STOCK (continued)
At December 31, 1999, the following options were outstanding:
No. of common
shares issuable Exercise price Date of expiry
435,000 $0.30 October 14, 2002
525,000 0.90 May 22, 2003
** 200,000 1.50 May 14,2000
** 200,000 2.00 May 14, 2000
600,000 0.75 Option if full force until termination of
---------- consulting agreement
**These options are only exercisable if, on the date of exercise, the share
price is at least twice the exercise price.
At December 31, 1998 common share purchase warrants outstanding were as follows:
No. of common
shares issuable Exercise price Date of expiry
400,000 0.35 April 1, 2003
160,000 0.30 December 31, 2000
1,123,333 0.75 March 31, 1999 - August 2, 2000
100,000 0.75 - 0.90 May 20,1999 - May 20, 2000
300,000 0.75 - 0.85 June 11, 1999 - June 11, 2000
700,000 0.75 - 0.85 July 7, 1999 - July 7, 2000
700,000 0.50 - 0.60 November 18, 1999 - December 18, 2000
At December 31, 1999 common share purchase warrants outstanding were as follows:
No. of common
shares issuable Exercise price Date of expiry
2,825,000 0.50 March 30, 2003
200,000 0.50-0.60 April 8, 2000 - July 16, 2001
433,333 0.75 August 20, 2000 - August 20, 2001
300,000 0.75 July 17, 2000
1,270,000 0.60 November 18, 2000 - December 15, 2000
During the period, 1,940,000 warrants were issued and none were exercised. The
expiration date of 2,825,000 warrants was extended until March 30, 2003. These
warrants have an exercise price of $0.50 per share.
<PAGE>
NOTE 9 - CAPITAL STOCK (continued)
As explained in Note 2, the Company elected to apply the disclosure option
contained in SFAS No. 123 and accordingly no compensation cost has been
recognized for stock options issued to employees. Had compensation cost been
determined based on the fair value at the grant dates for those options and
warrants issued to employees and consultants, consistent with the method
described in SFAS No. 123, the Company's net loss and loss per share would have
been increased to the pro forma amounts indicated below:
1999 1998
---- ----
Loss As reported (1,993,327) (3,308,209)
Pro forma (1,993,327) (4,568,709)
Basic and diluted loss per share As reported (0.12) (0.36)
Pro forma (0.12) (0.49)
The fair value for 1998 options and grants were estimated at the date of grant
using a Black-Scholes pricing model with the following weighted average
assumptions: risk free interest rates of 5.05%; dividend yields of 0%;
volatility factors of the expected market price of the company's common stock of
1.234 and a weighted average expected life of the option of 2.6 years.
The Black Scholes options valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
option, the existing models do not necessarily provide a reliable single measure
of the fair value of its employee stock options.
The weighted-average fair value of options granted during the year 1998, where
the stock price is equal to the exercise price of the options was $0.60; when
the stock price is greater than the exercise price of the options, the weighted
- -average fair value is $0.63. Accordingly, the respective weighted average
exercise price of options granted during the year was $0.92 and $0.60.
<PAGE>
NOTE 9 - CAPITAL STOCK (continued)
The basic and diluted loss per share for the period ended December 31 is based
on the following:
December 31, December 31,
1999 1998
Net loss for the period $(1,993,327) $(3,308,209)
Weighted average number of common shares used
in computation 16,486,385 9,241,847
Basic and diluted loss per share (0.12) (0.36)
During the year ended December 31, 1998 the Company issued 2,923,333 warrants
for $2,017,500. Each unit comprised one common share and one share purchase
warrant entitling the holder to acquire one common share for $0.50 to $0.90 per
common share of various dates to December 18, 2000.
During the year ended December 31, 1998 the Company settled management and
consulting fees payable of $286,500 by offsetting the $0.30 exercise price per
option on 955,000 options against the related payables; similarly, the company
issued 150,000 shares valued at $0.75 in partial payment for its investment in
SGT, 200,000 shares valued at $0.75 each were issued as a signing bonus, and
87,500 and 446,917 shares were issued to settle accounts and loans payable
respectively.
During the year ended December 31, 1999 the Company issued 1,940,000 warrants
for $967,000. Each unit comprised one common share and one share purchase
warrant entitling the holder to acquire one common share for $0.50 to $0.60 per
common share of various dates to March 31, 2003.
During the year ended December 31, 1999, the Company settled legal and
consulting fees and miscellaneous payables of $113,793 by issuing 231,950 shares
of common stock valued from $0.35 - $0.50 per share without warrants; similarly
the Company issued 500,000 shares valued at $0.74 per share in payment of its
note due to Team Rainbow of $370,000, also without warrant.
NOTE 10 - INCOME TAXES
At December 31, 1999 the Company has a U.S. tax net operating loss approximating
$4,735,000, which will begin to expire in 2012 if not utilized. The Company may
have incurred "ownership changes" pursuant to applicable Regulations in effect
under Section 382 Internal Revenue Code of 1986, as amended. Therefore, the
Company's use of losses incurred through the date of these ownership changes may
be limited during the carryforward period.
The Company has non-U.S. tax net operating losses approximately $569,000
resulting from operations in Canada. Of these losses, $130,000 will expire in
2004 and $439,000 in 2005.
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. The Company has recognized a
valuation allowance equal to the deferred tax assets due to the uncertainty of
realizing the benefits of the assets.
<PAGE>
NOTE 10 - INCOME TAXES (continued)
Significant components of the Company's deferred tax assets and liabilities as
of December 31 are as follows:
1999 1998
---- ----
Deferred tax assets:
Net operating loss carryforwards $1,808,000 $1,233,000
Depreciation/amortization 32,000 16,000
Other 105,000 21,000
---------- -----------
Total deferred tax assets
Valuation allowance (1,945,000) (1,270,000)
--------- ---------
Net deferred taxes $ -- $ --
============ ===========
The change in valuation allowance for December 31, 1999 and 1998 was $675,000
and $1,270,000, respectively.
NOTE 11 - STOCK BASED COMPENSATION
During the year ended December 31, 1998, the Company recorded stock based
compensation expense of $465,000 relating to investor relations and other
activities provided by consultants.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Commitments
The company leases office space at 2700 East Sunset Road, Suite 39, Las Vegas,
Nevada at a monthly rental of approximately $1,921.
The company has the following future minimum lease commitments for premises and
equipment:
1999
2000 23,520
2001 24,696
2002 25,932
------
$74,148
Contingencies
Through the normal course of operations, the Company is party to litigation,
claims and contingencies. Accruals are made in instances where it is probable
that liabilities will be incurred and where such liabilities can be reasonably
estimated. Although it is possible that liabilities may be incurred in instances
for which no accruals have been made, the Company has no reason to believe that
the ultimate outcome of these matters will have a material impact on its
financial position.
<PAGE>
NOTE 13 - SUPPLEMENTAL CASH FLOW INFORMATION
During 1999, the Company issued stock for payment of debt in the amount of
$370,000.
Interest paid $ 28,932
===========
Income taxes paid $ --
============
NOTE 14 - STOCK OPTION AND BONUS PLANS
A summary description of each Plan follows: in some cases these three Plans are
collectively referred to as the "Plans". This plan was adopted during 1998.
Incentive Stock Option Plan
The Incentive Stock Option Plan authorizes the issuance of options to purchase
up to 2,000,000 shares of the Company's Common Stock. Only officers and
employees of the Company may be granted options pursuant to the Incentive Stock
Option Plan.
In order to qualify for incentive stock option treatment under the Internal
Revenue Code, the following requirements must be complied with:
1. Options granted pursuant to the Plan must be exercised no later than:
a. The expiration of thirty (30) days after the date on which an option
holder's employment by the Company is terminated.
b. The expiration of one year after the date on which an option holder's
employment by the Company is terminated, if such termination is due to
the Employee's disability or death.
2. In the event of an option holder's death while in the employ of the
Company, his legatees or distributees may exercise (prior to the option's
expiration) the option as to any of the shares not previously exercised.
3. The total fair market value of the shares of Common Stock (determined at
the time of the grant of the option) for which any employee may be granted
options which are first exercisable in any calendar year may not exceed
$100,000.
4. Options may not be exercised until one year following the date of grant.
Options granted to an employee then owning more than 10% of the Common
Stock of the Company may not be exercisable by its terms after five years
from the date of grant.
5. The purchase price per share of Common Stock purchasable under an option
is determined by the Committee but cannot be less than the fair market
value of the Common Stock on the date of the grant of the option (or 110%
of the fair market value in the case of a person owning the Company's
stock which represents more than 10% of the total combined voting power of
all classes of stock).
<PAGE>
NOTE 14 - STOCK OPTION AND BONUS PLANS (continued)
Non-Qualified Stock Option Plan
The Non-Qualified Stock Option Plans authorize the issuance of options to
purchase up to 5,000,000 shares of the Company's Common Stock. The Company's
employees, directors, officers, consultants and advisors are eligible to be
granted options pursuant to the Plan, provided, however, that bona fide services
must be rendered by such consultants or advisors and such services must not be
in connection with the offer or sale of securities in a capital-raising
transaction. The option exercise price is determined by the Committee but cannot
be less than the market price of the Company's Common Stock on the date the
option is granted.
Stock Bonus Plan
Up to 500,000 shares of Common Stock may be granted under the Stock Bonus Plans.
Such shares may consist in whole or in part of authorized but unissued shares,
or treasury shares. Under the Stock Bonus Plan, the Company's employees,
directors, officers, consultants and advisors are eligible to receive a grant of
the Company's shares, provided, however, that bona fide services must be
rendered by such consultants or advisors and such services must not be in
connection with the offer or sale of securities in a capital-raising
transaction.
Other information regarding the Plans
The Plans are administered by the Board of Directors. The Board of Directors has
the authority to interpret the provisions of the Plans and supervise the
administration of the Plans. In addition, the Board of Directors is empowered to
select those persons to whom shares or options are to be granted to determine
the number of shares subject to each grant of a stock bonus or an option and to
determine when and upon what conditions shares or options granted under the
Plans will vest or otherwise be subject to forfeiture and cancellation.
In the discretion of the Board of Directors, any option granted pursuant to the
Plans may include installment exercise terms such that the option becomes fully
exercisable in a series of cumulating portions. The Board of Directors may also
accelerate that date upon which any option (or any part of any options) is first
exercisable. Any shares issued pursuant to the Stock Bonus Plan and any options
granted pursuant to the Incentive Stock Option Plan or the Non-Qualified Stock
Option Plan will be forfeited in the "vesting: schedule established by the Board
of Directors at the time of the grant is not met. For this purpose, vesting
means the period during which the employee must remain an employee of the
Company or the period of time a non-employee must provide services to the
Company. At the time an employee ceases working for the Company (or at the time
a non-employee ceased to perform services for the Company), any shares or
options not fully vested will be forfeited and cancelled. In the discretion of
the Board of Directors payment of the shares of Common Stock underlying options
may be paid through the delivery of shares of the Company's Common Stock having
an aggregate fair market value equal to the option price provided such shares
have been owned by the option holder for at least one year prior to such
exercise. A combination of cash and shares of Common Stock may also be permitted
at the discretion of the Board of Directors.
<PAGE>
NOTE 14 - STOCK OPTION AND BONUS PLANS (continued)
Options are generally non-transferable except upon death of the option holder.
Shares issued pursuant to the Stock Bonus Plan will generally not be
transferable until the person receiving the shares satisfies the vesting
requirements imposed by the Board of Directors when the shares were issued.
The Board of Directors of the Company may at any time, and from time to time,
amend, terminate or suspend one or more of the Plans in any manner it deems
appropriate provided that such amendment, termination or suspension cannot
adversely affect rights or obligations with respect to shares or options
previously granted. The Board of Directors may not, without shareholder
approval, make any amendment which would materially modify the eligibility
requirements of the Plans, increase of decrease the total number of shares of
Common Stock which may be issued pursuant to the Plans except in the case of a
reclassification of the Company's capital stock or a consolidation or merger of
the Company, reduce the minimum option price per share, extend the period for
granting options or materially increase in any other way the benefits accruing
to employees who are eligible to participate in the Plans.
The Plans are not qualified under Section 401(a) of the Internal Revenue Code,
nor are they subject to any provision of the Employee Retirement Income Security
Act of 1974.
The following sets forth certain information as of December 31, 1999 and 1998
concerning the stock options and stock bonuses granted by the Company pursuant
to its Plans. Each option represents the right to purchase one share of the
Company's Common Stock.
Shares
Total Shares Reserved for Shares Remaining
Reserved Outstanding Issues as Options/Shares
Name of Plan Under Plan Options Stock Bonus Under Plan
Incentive Stock
Option Plan 2,000,000 - N/A 2,000,000
Non-Qualified Stock
Option Plan 5,000,000 1,000,000 N/A 4,000,000
Stock Bonus Plan 500,000 N/A - 500,000
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Number Exhibit Page Number
3.1 Certificate of Incorporation (1)
3.2 Bylaws (1)
3.3 Certificate of Designation, preferences and
rights of Series A preferred Stock (1)
3.4 Certificate of Designation, preferences and
rights of Series B preferred Stock (1)
3.5 Certificate of Designation, preferences and
rights of Series C preferred Stock (1)
10.1 Purchase & Sale Agreement between
the Company and Video Lottery
Consultants, Inc. for Professional
Video Associates, Inc. dated September
5, 1997, as amended (2)
10.2 Amendment Agreement dated March 9, 1999
to Purchase Sale Agreement dated
September 5, 1997 (2)
10.3 Manufacturing Agreement dated as of
April 24, 1997, between Amusement
World, Inc. and VLC, Inc. (2)
10.4 Assignment of Manufacturing Agreement dated
July 14, 1998 between Video Lottery
Consultants, Inc. & Fortune Entertainment
Corporation (Bahamas) (2)
10.5 Amendments dated September 10, 1998 and
March 4, 1999, to Manufacturing Agreement
Dated as of April 24, 1997 (2)
10.6 Assignment of Software Release Agreement
between William M. Danton & Fortune
Entertainment Corporation (Bahamas) (2)
<PAGE>
10.7 Letter Agreement between Team Rainbow,
Inc. and the Company dated November
19, 1997, as amended (2)
10.8 Plan of Share Exchange between Fortune
Entertainment Corporation, a Delaware
corporation and Fortune Entertainment
Corporation, a Bahama corporation, agreed
and accepted the 14th day of October 1997 (2)
10.17 1998 Incentive Stock Option Plan (2)
10.18 1998 Stock Bonus Plan (2)
27. Financial Data Schedule ____________
(1) Incorporated by reference from the Registrant's Registration Statement on
Form 10-SB (File No. 0-23859) effective on December 30, 1998.
(2) Incorporated by reference, and from the same exhibit number, from the
exhibits filed with the Company's annual report on Form 10-KSB for the year
ending December 31, 1998.
The Company did not file any reports on Form 8-K during the quarter ending
December 31, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
FORTUNE ENTERTAINMENT CORPORATION
By: /s/ William Danton
William Danton, Chief Executive Officer
By: /s/ Robert Eberle
Robert Eberle, Principal Financial Officer
and Chief Accounting Officer
Pursuant to the requirements of the Securities Act of l933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/ William Danton
William Danton Director April 14, 2000
/s/ Theodore Silvester
Theodore Silvester, Jr. Director April 14, 2000
/s/ Dick Anagnost
Dick Anagnost Director April 14, 2000
<PAGE>
FORTUNE ENTERTAINMENT CORPORATION
FORM 10-KSB
FISCAL YEAR ENDING DECEMBER 31, 1999
EXHIBITS
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