SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
X ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
or
TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-11345
FANATICS ONLY, INC.
(Name of small business issuer in its charter)
COLORADO 84-0904681
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
Number)
7500 WEST MISSISSIPPI AVENUE, SUITE E-122
LAKEWOOD, COLORADO 80226
(Address of principal executive offices) (Zip code)
(303) 768-9980
(Issuer's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
(None)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, without par value
-------------------------------
Title of Class
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ] No [x]
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form and no disclosure will be continued,
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 the Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year were $468,882
As of November 30, 1997 Registrant had 4,863,176 shares of its no par value
Common Stock outstanding. The aggregate market value of the common stock held
by non-affiliates as of such date is incalculable in view of the lack of a
current market for the Company.
<PAGE>
TABLE OF CONTENTS AND CROSS REFERENCE SHEET
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PART I
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Item 1 Description of Business
Item 2 Description of Property
Item 3 Legal Proceedings
Item 4 Submission of Matters to a Vote of Security Holders
PART II
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Item 5 Market for Common Equity and Related Stockholder
Matters
Item 6 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 7 Financial Statements
Item 8 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
PART III
- ---------
Item 9 Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the
Exchange Act.
Item 10 Executive Compensation.
Item 11 Security Ownership of Certain Beneficial Owners and
Management.
Item 12 Certain Relationships and Related Transactions.
Item 13 Exhibits and Reports on Form 8-K
<PAGE>
PART I
ITEM 1 - BUSINESS
- --------------------
Fanatics Only, Inc., a Colorado corporation (the "Company") was
originally formed to provide interactive fantasy sports games ("Fantasy
Games") to sports fans who would pay $99.95, per sport season, to compete as
owners of their own assembled sports franchises. The Company designed,
developed and operated these pay-to-play Fantasy Games in which the
participants select or "draft" a team of players from the active rosters of
professional teams in a particular sport. Participants score points as the
players they have selected (assembled) perform certain feats in real life
professional games during the sport's season. These Fantasy Games are
operated as sweepstakes, with prizes awarded periodically throughout the
sport's season based on a participant's team's performance relative to the
performance of other participant's teams. The Company plans to continue to
operate Fantasy Games and sell related merchandise, but no longer markets the
Fantasy Games to the public on a pay to pay basis.
After reviewing its first twelve months of operations and assessing
market surveys and marketing miscalculations, the Company, after consulting
with industry experts, such as Integrated Sports International (see ISI
description), revised its business plan and shifted its focus to that of third
party game operation contracts and sports marketing. The Company will utilize
its Fantasy Game concept and game operation expertise to provide turn-key game
operation contracts for third parties as well as sweepstakes and promotions
for large corporate sponsors, professional sports teams and other third party
entities, while attempting to build a large, and demographically specific,
database to which the Company may market a variety of related products and
services.
The Company expects to generate revenue through three main revenue
centers:
1. Game operations contracts to run third party Fantasy Games
2. Mass-market, free entry, sponsor-driven Fantasy Games
3. Retail clothing/licensed apparel sales
Game operations contracts to run third party Fantasy Games:
The Company, through its strategic partnership with MCI, has developed a
state-of-the-art, fully automated game operating system, utilizing proprietary
technology, which is accessible via touch tone phone or via the Internet. The
Company believes this system to be the premier, industry-leading, game
operations system in the Fantasy Game market. As a result, the Company has
been selected by The Sporting News, a division of Times Mirror and Times
Mirror Magazines and the largest marketer of pay-to-play fantasy games in the
country, to provide turn-key game operations for all of their "The Sporting
News Fantasy Challenges." The Company will provide turn-key Fantasy Game
operations including game design, development, operation and support,
including live operator customer support 24 hours a day, 7 days a week, for
The Sporting News.
The Company has received requests for bids to provide turn-key game
operations from several other groups including professional sports
leagues/associations, large publishing (magazine and newspaper) companies,
current Fantasy Game providers and a group interested in marketing Fantasy
Games in Indian Casinos across the United States. Some of these potential
contracts, and particularly the agreement with The Sporting News, call for
multi-million dollar annual operation fees to the Company which could provide
significant profit potential.
To better service the Sporting News Contract, and to help attract other
potential third party service contracts, the Company has improved, refined and
technologically updated its proprietary automated VRU phone system which it
co-designed and developed with MCI. This system, called C.O.A.C.H. (Computer
Operated Automated Caller Hotline), is a state-of-the-art system for
interactive, telephone accessed, game play and transactions. In addition, the
Company has acquired, equipped and is currently staffing a 24 hour a day,
seven day a week call center which will have sixty "sports commissioners".
Along with servicing the Sporting News, the call center will allow the Company
to attract other third party contracts to run sports-related sweepstakes and
promotions as well as to handle contracts for inbound and outbound
telemarketing for sports-related products and services.
<PAGE>
Mass-market, Free-entry, Sponsor-driven games:
The Company has developed a unique mass-market, free-entry, ballot-driven
version of traditional Fantasy Games which the company will market in two ways
(see Fantasy Games description for details). The first is as a turn-key
retail sweepstakes or promotion for large corporate sponsors whereby consumers
can visit grocery stores, liquor stores, bars, fast-food restaurants, etcand
sign up for the "some sponsor" Fantasy Sports Challenge. While no major
sponsors have yet been signed by the Company, Management has made
presentations to several large potential corporate sponsors and is currently
in negotiations with several of these sponsors, including a major beer
company. The second method of distribution and marketing of these free-entry
games, which was developed through a joint venture with American Sports
Concepts (see Win America Promotions description), is "at-venue" or
"at-stadium" games. In these games, fans receive a free-entry ballot upon
paid admission to the ballpark, stadium or race track and compete in a weekly
game for a chance at cash or merchandise prizes. To date, the Company,
through its WIN America Promotions ("WIN") joint venture, has signed
contracts with the San Francisco Giants (Major League Baseball) and ran these
"at-venue" games for eight Giants home games during the 1997 season, and with
several horse racing courses, including Calder, Belmont, Saratoga, Hollywood
Park and Golden Gate Field (Horse Racing) to run these games at the track
during 1998. Though no other team, sport or tracks have signed contracts with
WIN, Management of WIN has made several presentations and received a great
deal of interest from a number of other professional sports franchises and
horse racing venues. WIN has signed, however, one sponsor, a high-profile
national fitness chain, for its free-entry Fantasy Baseball as well as with
three additional sponsors, and appears close to signing several additional
sponsors.
These mass-market, free-entry games whether run by the Company for large
corporate sponsors or by WIN for at venue promotions, will generate revenue
from two sources. The first is through management or game operation fees paid
to the Company and/or WIN by the sponsor or team, usually on a per-ballot
(participation) basis, whereby the Company and/or WIN would receive $1.00 -
$1.50 for each ballot submitted in the contest as well as a substantial fixed
fee for general game operation and management. The second, and what both the
Company and WIN believe will be far more significant source, is through
marketing of a variety of products and services, via the Company and WIN's
"bounce-back" mailers (see Fantasy Games for description), to the resulting
database that is generated from these games. The Company and/or Win may offer
up-sells to pay-to-play Fantasy Games, collectors calling cards, licensed
apparel, collectibles and memorabilia, newsletters and other sports related
products and services, all in the direct mail "bounce-back" envelope sent to
all free-entry game participants. Both the Company and WIN believe that the
broad nature and mass market appeal of the free-entry, sponsor-driven Fantasy
Game concept should lead to wide-spread national participation which could
result in a database of millions of sports-minded participants. Effective
marketing of related products and services to a database of that size could
lead to the long-term success of the Company and WIN.
Retail Clothing/Licensed Apparel sales:
The Company plans to launch a direct mail catalog business which would
sell licensed sports apparel at discount prices through its "bounce-back"
mailers discussed in the mass-market, free-entry games referenced above. As
presently contemplated, this direct mail catalog business would sell licensed
sports apparel from the NFL, MLB, NHL, NBA, Golf and NASCAR, as well as from
one hundred of the top universities in the U.S. and a limited line under the
"Fanatics Only" brand name and logo, all at 20% - 70% off of standard retail
pricing.
The three revenue centers outlined above would, if successfully
implemented, provide the Company with a diversified product mix and multiple
sources of revenue, while maintaining a consistent, inter-related and focused
business strategy.
Business Strategy:
The Company's focus in its revised business plan includes the following
strategies:
Become the dominant and most recognized player in Fantasy Game
operations and management through our relationships with corporate sponsors
and strategic business partners (e.g. MCI, ISI, STATS, Inc., etc.)
Become the dominant and premier operator of Fantasy Games, providing
contract game operations for large, high-profile third party entities,
including professional sports leagues, major media companies and for corporate
sponsors
Develop, market and operate a unique mass-market, free-entry,
sponsorship-driven version of Fantasy Games which will be made available
through retail and/or on-premise promotions run by the Company as well as
through "at-venue" or "at-stadium" promotions which will be operated by WIN.
Obtain substantial, nationally-known and recognized sponsors for its
mass market games
Create a substantial database (from the potential millions of
sports-minded fans who the Company hopes will participate in its free-entry
games) to which the Company will market sports related merchandise and other
related products and services
Obtain revenues from third parties for mailers, inserts, coupons and
other offers placed in our "bounce-back" mailers to Fantasy Game participants
Develop and grow catalog business of licensed apparel, collectibles,
etc. mailed to all game participants
Engage in the structured distribution of the Company's database of
participants (i.e. "database leasing")
Pursue expansion opportunities such as the Company's proposed Indian
Casino Fantasy Games.
The Company maintains its corporate offices at 7500 West Mississippi
Avenue, Suite E-122, Lakewood, Colorado 80226 and has a west coast office at
4400 MacArthur Blvd., Suite 500, Newport Beach, CA 92660.
FANTASY GAMES
The Company develops and operates fantasy sports games and related
merchandise, and as part of the marketing strategy of these games, the Company
promotes and operates national and regional interactive fantasy sports games
("Fantasy Games"). The Company has initially focused its efforts on Baseball
and Football games, but will additionally include Basketball, Hockey, Golf and
NASCAR Fantasy Games. In a Fantasy Game, the participants select or "draft" a
team of players from the active rosters of major league teams in a particular
sport. Participants score points when the players they have selected perform
certain feats in real life games during the sport's season. To better service
the Sporting News Contract, and to help attract other potential third party
service contracts, the Company has improved, refined and technologically
updated its proprietary automated VRU phone system which it co-designed and
developed with MCI. This system, called C.O.A.C.H. (Computer Operated
Automated Caller Hotline), is a state-of-the-art system for interactive,
telephone accessed, game play and transactions. In addition, the Company has
acquired, equipped and is currently staffing a 24 hour a day, seven day a week
call center which will have sixty "sports commissioners". Along with
servicing the Sporting News, the call center will allow the Company to attract
other third party contracts to run sports-related sweepstakes and promotions
as well as to handle contracts for inbound and outbound telemarketing for
sports-related products and services.
While the Company's primary business focus will be to run full-service,
transactional Fantasy Games on a contract basis for The Sporting News and
other companies, the Company will also focus on the development and marketing
of sponsorship-driven, mass market games which will be run in conjunction with
large national corporate sponsorship. As currently proposed, for each of
these games the sponsor would provide all media/advertising cost and efforts,
as well as a majority of the prize pool. The sponsor would also pay Fanatics
Only a management fee (with a moderate built in profit) to run the games.
Corporate America knows the value of marketing through sports. Millions
of dollars a year are spent on sports related marketing, event sponsorship and
athlete endorsements. The Company has entered into a strategic relationship
with Integrated Sports International ("ISI"), a marketing, consulting and
athlete management firm. ISI believes that Fanatics Only Fantasy Games
provide a vehicle to match Americans' interest in sports, games and sports
personalities with corporate America's desire to attract these potential
customers. With the assistance of ISI, the Company has retooled its business
plan to capitalize on this opportunity.
Through its relationship with ISI, the Company has focused its direction
on mass market, sponsorship-driven Fantasy Games run in conjunction with large
national corporate sponsors. In substance, the Company's primary focus, with
the assistance of ISI, will be to adapt the Fantasy Games to allow the sports
fans to play for free with corporate America paying the cost of distribution
and using the advertising venue presented thereby for three of the most sought
after advertising presentations in one promotional stratagem: (i) professional
sports association, (ii) celebrity marketing and (iii) an interactive game.
While no major sponsors have yet been signed by the Company, ISI and
Management of the Company have made presentations to several large potential
corporate sponsors, and are currently in negotiations with several of these
sponsors, including a major beer company. As of the date hereof, the Company,
through its WIN joint venture, has only signed contracts for at venue games
with the San Francisco Giants and at the Calder, Belmont, Saratoga, Hollywood
Park and Golden Gate Field race courses, as well as with a few sponsors for
the Giants baseball game.
The Company's shift in focus to the free-entry, mass market games
represents a further shift in its overall business strategy. In essence, the
focus of the free-entry, mass market games is database acquisition and then
the effective management and marketing of products and services to that
database. The Company believes that the broad nature and mass market appeal
of the free-entry, sponsor-driven fantasy game concept should lead to
wide-spread national participation which could result in a database of
millions of sports-minded participants. Effective marketing of related
products and services to a database of that size could lead to the long-term
success of the Company.
Management intends for these games to be marketed through point of sale
retail promotion, through national advertising (newspapers, magazines,
television, etc.) or in conjunction with the various professional sports
leagues as provided for by the sponsors. A principal component of the
advertising would be the utilization of a major sports celebrity in each sport
provided at the sponsor's expense to create greater appeal. The Company's
relationship with ISI will be critical in obtaining appropriate sports
personalities. Participants will earn free entry into the games through
national "proof of purchase" promotions or possibly through signing up at
retail displays, set up in conjunction with promotion of the sponsor's
products. WIN is also pursuing "at venue" promotions whereby participants
receive free entry by attending a horse race or by going to a Major League
Baseball game or other sports event. Each of these marketing and promotion
concepts is designed to remove any cost "barrier to entry" and attract as many
participants as possible into the games. The Company's primary goal is to
build a database of customers to market both the Company's and potentially
other companies' products and services once the participants have entered the
free entry games.
In substance, the new Fantasy Games are intended to work as follows: A
sponsor runs a media campaign promoting in-store retail promotion (i.e., "Sign
up where XYZ Company products are sold"). Customers fill out ballots at
retail displays and either deposit the ballot into the ballot box on-site or
they mail it in at a later time. Ballots are collected by sponsor
representatives or Company contract personnel and they are shipped to a
central processing facility in Massachusetts. At the processing facility, the
ballots are run through a scanner which records the name, address and
telephone number of each participant as well as the roster (team) which such
participant has selected, and prints a "bounce-back" card listing this
information. All data collected will be transmitted via computer to the
Company's central computer system, also in Massachusetts, where rosters are
downloaded into the patented game system. The "bounce-back" card is sent to
the Company's central fulfillment center to be included in a mailer which is
sent to all participants. The "bounce-back" mailer will include the card with
the participants team, rules of the game with a description of prizes
available, as well as (i) coupons or other promotional material from the
sponsor (ii) coupons or other promotional material from other advertisers with
complementary products, (iii) an up-sell attempt to get free entry players to
consider an intermediate game for $19.95 (with limited transactions) or the
advanced game for $99.95 (the current Sporting News Fantasy Challenge games);
and (iv) sales literature featuring game related services (such as fantasy
game kit, fax service), collector's MCI phone cards, licensed apparel and/or
other related products or services. Participants would also get a second
"bounce-back" mailer at the end of the season which would include game results
and information similar to the first mailer.
Results would be posted weekly at the sponsor's retail store displays, at
bars, in the Company's internet site, and on the NTN network which is
broadcast to more than 3,000 bars nationwide, in national print publications
and possibly on television ads. Each game would include substantial prizes,
including "fantasy trips" (e.g., to the Superbowl), apparel, collectibles,
memorabilia, and possibly a cash grand prize. These prizes would be provided
for by the sponsor.
<PAGE>
The intention of the sponsor-driven, mass market games is to try to
obtain participants to play the Company's Sporting News Fantasy Challenge
games (i.e. Football, Baseball, NASCAR, Hockey, Basketball and Golf). In
addition to the direct revenues from the marketing of such games, the Company
may also earn revenues through marketing its additional products and services,
discussed in more detail below, to these free-entry game participants as well
as through the leasing of the evolving customer list. This customer list
could become a valuable database for potential advertisers because of the
demographics of the type of person likely to participate in the Company's
Fantasy Games and because the list would be relatively current as opposed to
other potentially available databases of that type. This strategy would also
allow the Company to educate the mass market about Fantasy Games in general,
and increase the potential size of the customer base for the Company's Fantasy
Game upgrades. Much of the marketing activity would be at the cost of the
sponsors and not of the Company, avoiding expensive advertising and marketing
campaigns.
The Fantasy Games are operated as sweepstakes, with prizes awarded
periodically throughout the sport's season based on a participant's team's
performance relative to other participants' teams. The Company introduced its
first Fantasy Game in February 1996, the 1996 Fantasy Baseball Challenge
("Baseball 1996"), and introduced the 1996 Fantasy Football Challenge
("Football 1996") in the Summer of 1996. These games were $99.95
full-service, transactional games, which permitted unlimited trades and other
changes throughout the season, with substantial prizes for the top
participants. Sweepstakes prizes for Baseball 1996 and Football 1996 included
automobiles, tickets to sporting events, merchandise, televisions, and
satellite dishes. The Company is obligated to provide all services and prizes
for these previous full-service, transactional games.
The Company held an exclusive license (which has presently reverted to a
non-exclusive license) in the United States for interactive process patents
issued by the United States Patent and Trademark Office in 1991 and 1993
("Patents"). The Patents claim to cover any fantasy game with a central
computer system, involving teams made up of players or athletes, which are
selected by the game participants, where different game participants can have
the same player or athlete on different teams. Nevertheless, due to the ease
of entry into the market, the Company believes that enforcing the patent is
difficult and consequently numerous competitors exist that management believes
may be infringing upon the patents. Management has presently determined not
to litigate to support the patents due to the lack of sufficient financial
resources. Additionally, the Company does not believe that they are dependent
on the patents for its success and has found, to date, that they provide
little if any competitive advantage for the Company. The Company has filed
trademarks and service marks for "Fanatics Only" and related marks.
Additional marks will be filed from time to time, including a trademark for
its Computer Operated Automated Caller Hotline (C.O.A.C.H.).
By shifting its focus to sponsor-driven, mass market games the Company
creates a new Fantasy Games concept which obtains revenues through marketing
the database obtained thereby, directly assisting the growth of the Company's
original $99.95 full-service game concept. Most importantly, however, the
focus of the Company allows it to build a large and demographically specific
customer database, at a rapid pace, and then capitalize on this growth by
marketing a multitude of products and services to that database.
INTEGRATED SPORTS INTERNATIONAL
Integrated Sports International ("ISI") is a sports marketing firm
engaged in player representation, corporate sponsorship and event planning.
ISI's client list includes Troy Aikman, Steve Young, Jim Kelly, Disney
Company, Junior Seau, Hakeem Olajuwon, Oscar De La Hoya, the San Francisco
49ers, Burger King, Cadillac and many others. ISI is a marketing partner for
its clients providing creative input and skilled assistance depending on the
particular needs and objectives. ISI specializes in designing and developing
sports related promotions, advertising and marketing for corporations, often
utilizing recognizable sports personalities. The principals of ISI are Frank
J. Vuono, Fred Fried and Steve Rosner. Mr. Vuono is formerly head of NFL
Properties. Mr. Rosner is a long-time nationally-recognized agent who
represents players such as Lawrence Taylor, Carl Banks and Howie Long and is
active in matching athletes with corporate events and media opportunities.
Mr. Fried is the former head of marketing for ProServ, Inc., a large athlete
representation company with such prestigious clients as Michael Jordan and
Raghib "Rocket" Ismail.
ISI's principal office is in East Rutherford, NJ. In addition, ISI
maintains an office in Newport Beach, California, a strategic location that
makes it easier for ISI to work with the Company and a number of
California-based sports agents.
On March 27, 1996, the Company entered into an agreement with ISI
pursuant to which it was to pay a monthly retainer of $15,000 to ISI to market
and sell corporate sponsorship of the Company's games, develop marketing
strategy and brand identification, and to assist in contracting of sports
spokespersons. To date, ISI has introduced the Company to several large
corporate sponsors with whom the Company is negotiating for sponsorship
opportunities for its 1998 proposed games. While there can be no assurance
that the Company will successfully enter into sponsorship relations with these
companies, the relationship with ISI materially improves the Company's chance
for success. Each proposal is tailored to the particular corporation's
industry and marketing and advertising strategies.
The Company is presently negotiating with a major beer manufacturer to
provide funding for an exclusive sponsorship for the 1998 football season. As
of the date hereof, the potential sponsor has not made any commitment for the
sponsorship and there is no assurance any commitment will be received.
The agreement between the Company and ISI is for two years expiring March
31, 1998 and is extendable upon mutual agreement. ISI has agreed to forego a
$15,000 retainer provided for in such agreement until such time as a large
national sponsor is signed. The Company will pay ISI a sales commission of
15% of the gross revenues to the Company for Company programs arranged through
sponsors obtained by the efforts of ISI. ISI is also paid a small commission
for sales of Fantasy Game upgrades and is reimbursed for reasonable third
party expenses.
Through its relationship with ISI, the Company believes it is well
positioned to attract quality corporate sponsors for its games and to obtain
nationally-recognized sports celebrity spokespersons for its advertising
campaigns.
FANATICS ONLY RETAIL OPERATIONS
The Company plans to launch a direct mail catalog business which would
sell licensed sports apparel at discount prices through its "bounce-back"
mailers discussed in the mass-market, free-entry games referenced above. As
presently contemplated, this direct mail catalog business would sell licensed
sports apparel from the NFL, MLB, NHL, NBA, Golf and NASCAR, as well as from
one hundred of the top universities in the U.S. and a limited line under the
"Fanatics Only" brand name and logo, all at 20% - 70% off of standard retail
pricing.
WIN AMERICA PROMOTIONS, "AT VENUE" JOINT VENTURE
In November 1996 the Company entered into a 50/50 joint venture with
American Sports Concepts to develop, market and operate a free-entry,
mass-market Fantasy Games "at-venue" or "at-stadium", under the name WIN
American Promotions. These "at-venue" games could potentially be run at
baseball, football, basketball, hockey and horse and auto racing stadiums,
with event attendees receiving a free-entry Fantasy Game ballot upon paid
admission to the stadium.
Through the WIN America joint venture, the Company hosted a Fantasy Horse
Racing Game during the 1997, 172 day, race season at Calder Race Track in Ft.
Lauderdale, Florida ("Calder") which commenced in June 1997. The Company
entered into a similar arrangement with Belmont Race Course in 1997, and has
agreements in place to undertake similar ventures with Saratoga, Hollywood
Park and Golden Gate Field race courses in 1998.
Each of these race tracks have or will distribute a brochure containing a
"free entry ballot" to all patrons upon paid admission to the track. Calder
estimated this was for approximately 1,000,000 patrons at the race track
facility. The brochure explains the rules of the game, basic prize structure
and generally promotes the contest. The ballot permits each patron to select
their "stable" (consisting of horses and jockeys) which they hope will perform
well during the week after entry. Ballot boxes are placed prominently
throughout the track and promotional advertising accompanies the ballot boxes
and promotes the racing game. Track personnel gather the ballots and forward
them to WIN for processing. WIN's process includes a "bounce-back" mailer
with coupons and/or inserts as set forth above, as well as horse racing
related materials such as a "How to Handicap" brochure and game upgrades to
$9.95, $19.95 and $99.95 full-service transactional games.
As contemplated, each of the race courses and/or their sponsors would pay
for the production of the ballots and would compensate WIN an estimated $1.00
for each entry in the contest. WIN has agreed to pay the venues 70% of all
Gross Profits generated from revenue derived from game activity, and the sale
of the products and services offered in the "bounce-back" mailer, until such
time that such venue has received an amount equivalent to the $1.00 per entry
and cost of the ballots. Subsequent to such repayment, profits would be
distributed 65% to WIN and 35% to the venue.
The Company believes that the Horse Racing Fantasy Game has and will
continue to provide a valuable promotional platform for existing race course
sponsors and will entice additional sponsors. The Company also believes it
has and will continue to encourage attendance at the track. The attendant
database created is also valuable to both the specific race course and the
Company creating substantial marketing opportunities.
In April 1997 the Company, through the WIN America joint venture, signed
an agreement with the San Francisco Giants (Major League Baseball Club) to run
an "at-venue" Fantasy Baseball contest during eight Giants home games in the
1997 season. These games ran in a similar fashion to the Horse Racing game
mentioned above. The joint venture signed several sponsors for the Giants
Fantasy Baseball program. Although there can be no assurance that any other
teams will sign up for these "at-venue" games, the joint venture has already
received serious interest from at least eight other professional sports teams
for programs in 1998.
MCI TELECOMMUNICATIONS CORPORATION
In February 1996 the Company entered into a one year service contract
with MCI Telecommunications Corporation ("MCI") primarily to provide live
operator services at pre-established rates. Concurrently, the Company entered
into a 30 month agreement with MCI to establish, maintain and update
participant files and to provide participant support. Under the Agreement,
the Company must meet certain performance criteria as follows: During each
year generate $1,800,000 of revenues from participants for the corporation
including at least $1,200,000 from the use of an 800 number service. If
during any year after the 1996 ramp up period, the revenues to MCI do not meet
the $1,200,000, the Company is required to pay an under-utilization charge
equal to 100% of the difference between the discount rate applied and MCI's
standard rates. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 10 to the Financial Statements
for additional information.
The Company is currently negotiating new contracts with MCI as part of
the venture agreement with The Sporting News.
HISTORICAL OPERATIONS OF THE COMPANY
Original Reorganization. The Company (formerly named "Cashbuilder,
Inc.", a Colorado corporation organized on October 15, 1982) did not conduct
any active business operations or receive significant revenues prior to 1984,
and since 1984 had sought to acquire a suitable private business opportunity.
On December 18, 1995 the Company entered into a reorganization agreement with
Fanatics Only LLC, to acquire all the assets of Fanatics Only LLC, a Colorado
limited liability company, subject to all liabilities, in exchange for
restricted shares of the Company's common stock. On February 28, 1996 the
Company changed its name to "Fanatics Only, Inc." As a result of the
reorganization agreement, the former members of Fanatics Only LLC own a
substantial number of the Company's voting securities, and three of the former
six managers became directors of the Company.
Initial Business Plan. The Company's initial business plan provided for
the development, marketing and sale of Fantasy Game kits comprised of a
$99.95 full-service game, with extensive ability to trade players and check
results, with substantial prizes for winners. The initial game was the
Company's Baseball 1996 Fantasy Game which was marketed extensively with Bob
Uecker as a celebrity spokesperson. Baseball 1996 was followed with Football
1996. This business plan resulted in sales which were only a fraction of
those projected by previous Management. The Company had a total of
approximately 4,000 participants for its Baseball 1996 Game and approximately
1,500 participants for its Football 1996 game. Management believes that this
lack of performance in its Baseball 1996 game was due to a number of factors
including, but not limited to: (i) no national sponsor; (ii) the Baseball 1996
game was apparently too complex a game for the occasional fan, with every
player needing to be counted at each position on a daily basis, consequently
becoming too time consuming; (iii) a different media strategy involving
gradual advertising buildup and focus may have been more successful than the
advertising strategies employed; (iv) startup problems with the inbound order
taking process and fulfillment of those orders stemming from inexperienced
employees may have resulted in lost sales and refunds; and (v) outside of
specific venues, baseball has declined nationally in favor as a spectator
sport with revenues and attendance down nationwide. The Company believes its
Football 1996 game was not successful due primarily to the Company's
insufficient financial resources to advertise, market and operate the game.
Management had previously anticipated that Baseball 1996 would provide
sufficient revenue to fund operations for Football 1996.
Capital Structure Reorganization. In connection with a private offering
of securities, certain holders of shares of Common Stock exchanged 4,062,500
shares of Common Stock for 1,892,000 shares of Series B Preferred Stock. Such
shares of Common Stock were canceled and returned to the status of authorized
and unissued shares. The Preferred Stock is convertible into shares of Common
Stock, on a 1 for 1 basis, only if the Company earns certain minimum amounts
per share.
In addition, certain shareholders canceled a total of 2,851,876 shares of
Common Stock, which were returned to the treasury and canceled.
The $3,075,000 face value Revenue Participation Contracts ("RPC's") were
converted to 768,750 shares of Series A Preferred Stock and 153,750 common
stock purchase warrants. These RPC's were initially sold by the Company for
the initial funding of the Company. Each $100,000 face amount of RPC was
entitled to a royalty of $.50 per game based on the original $99.95 game,
resulting in potential substantial royalty payments. These royalties will not
apply to the Company's new business strategy.
CORPORATE OFFICES
Offices for the Company are maintained in Colorado at 7500 West
Mississippi Avenue, Suite E-122, Lakewood, Colorado 80226; telephone (303)
768-9980 and also in California at 4400 MacArthur Boulevard, Suite 500,
Newport Beach, California 92660, telephone (714) 955-4962. The Company
presently employs 5 full-time and 3 contract personnel.
ITEM 2 - PROPERTIES
- ----------------------
Effective November 1, 1997, the Company began leasing new office space in
Lakewood, Colorado. The Company is leasing approximately 7,500 square feet at
a monthly rental rate of approximately $6,300. The lease expires through
September 2000 with options to extend for an additional three years.
Approximately 3,000 square feet of the new leased space was a pre-existing
call center that will be utilized as a call center by the Company to serve the
The Sporting News Contract.
ITEM 3 - LEGAL PROCEEDINGS
- ------------------------------
The Company is presently, has been, and may from time to time be involved in
various claims, lawsuits, disputes with third parties, actions involving
allegations of discrimination, or breach of contract incidental to the
operation of its business. The Company is not currently involved in any such
litigation which it believes could have a materially adverse effect on its
financial condition or results of operations.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------------------
No matter was submitted to a vote of the Company's Security holders during the
fiscal year ended December 31, 1996.
PART II
--------
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------------------------------
MARKET INFORMATION - During the fiscal year ended December 31, 1996, the
Company's Common Stock was quoted without price (name only) under the symbol
"FONL" on the Nasdaq Electronic Bulletin Board; however, few transactions took
place during that fiscal year. Currently, there is no established market for
the Company's Common Stock.
STOCKHOLDERS - As of November 30, 1997, the Company had 461 holders of
record of the Company's Common Stock, 42 holders of record of the Company's
Series A Preferred Stock and 22 holders of record of the Company's Series B
Preferred Stock. There are also presently 128 holders of the Company's
private warrants. This does not include the holders that have their shares
held in a depository trust in "street" name.
DIVIDENDS - The Company has not paid cash dividends on its Common Stock in
the past and does not anticipate doing so in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
In connection with a private offering of securities which was made by the
Company in December 1995 (the "1995 Private Offering"), the Company sold an
aggregate of 855,476 shares of Common Stock and 427,738 Private Warrants to
accredited investors for aggregate net proceeds of $2,974,185, after deduction
of offering costs of $20,000. The Company utilized the proceeds of the
Private Offering to meet working capital requirements. The Company agreed to
provide piggyback registration rights for resale the shares of Common Stock
and Private Warrants sold in the 1995 Private Offering. The 1995 Private
Offering was made in accordance with Section 4(2) and Rule 506 promulgated
under Regulation D of the Securities Act of 1933, as amended.
During 1997 the Company has raised approximately $1,100,000 of gross
proceeds through the sale of its common stock, Series B Preferred Stock and
warrants. The sales were made through private placement offerings to
accredited investors. In connection with the private placement offerings, the
Company will issue approximately 309,000 shares of its common stock,
approximately 77,000 shares of its Series B Preferred Stock and warrants to
purchase approximately 154,000 shares of its common stock. The warrants to
purchase common stock are exercisable at $5.00 per share and expire through
November 2,000. The Private Offerings used to raise these funds were all made
in accordance with Section 4(2) and Rule 506 promulgated under Regulation D of
the Securities Act of 1933, as amended.
In May and June, 1996, the Company borrowed $350,000, with loan
origination fees of $24,500 to the lenders thereof, from three persons not
affiliated with the Company for working capital purposes. The loans became
due in July 1996, and $195,000 has been repaid to the lenders. As additional
consideration for these loans, the Company issued a total of 35,000 warrants
to the lenders. The Company also borrowed $55,000 from another unaffiliated
person for sponsorship of a race car in the Indy 500 race in 1996, and issued
the lender 5,000 warrants. The $55,000 loan became due August 22, 1996. This
loan is expected to be converted to equity.
In October and November 1996 the Company borrowed an aggregate of
$200,000 (with loan origination fees of $20,000 paid to the lenders thereof).
These loans consisted of $200,000 in unsecured promissory notes and warrants
to purchase an aggregate of 20,000 shares of Common Stock at $5.00 per share.
This entire $200,000 has been converted to equity.
<PAGE>
In November 1997 four members of the Company's board of directors loaned
the Company $500,000. The unsecured loans are non interest bearing and mature
November 2000. Three of the four board members will each receive 60,000
shares of the Company's common stock, 150,000 shares of Series B Preferred
Stock, 37,500 common stock purchase warrants and 11,250 options to purchase
shares of common stock. The fourth board member, who is also the Company's
President, will receive 20,000 shares of the Company's common stock, 50,000
shares of Series B Preferred Stock, 12,500 common stock purchase warrants and
3,750 options to purchase shares of common stock. The warrants are exercisable
at $3.50 per share and expire in three years. The options are exercisable at
$3.50 per share and are also exercisable for three years. The Company has used
the funds from the loan to make the payments required under the MCI
settlement, to continue the development of a call center for The Sporting News
contract and for certain other obligations.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- -----------------------
The foregoing and subsequent discussion contains certain forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934, which are
intended to be covered by the safe harbors created thereby. These forward-
looking statements include the plans and objectives of management for
future operations, including plans and objectives relating to game
operations contracts to run third party Fantasy Games, mass-market, free entry,
sponsor-drive Fantasy Games or retail clothing/licensed agreement sales.
The forward-looking statements included herein are based on current
expectations that involve numerous risks and uncertainties. Assumptions
relating to the foregoing involve judgments with respect to, among other
things, future economic, competitive and market conditions and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company.
Although the Company believes that the assumptions underlying
the forward-looking statements are reasonable, any of the assumptions could be
inaccurate and, therefore, there can be no assurance that the forward-looking
statements included in this Form 10-KSB will prove to be accurate. In light
of the significant uncertainties inherent in the forward-looking statements
included herein, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives and
plans of the Company will be achieved.
OVERVIEW
Fanatics Only, Inc. ("Fanatics" or the "Company"), a Colorado
corporation, was formed on October 10, 1995. The Company's original business
plan was to market and operate its own pay-to-play interactive fantasy sports
games and to sell related merchandise. The Company developed and operated
baseball and football fantasy games during 1996. However, due to the
significant competition in the fantasy sports game market and certain other
factors, Fanatics was unsuccessful in operating these two games and incurred
significant losses.
The Company's initial business plan provided for the development,
marketing and sale of Fantasy Game kits comprised of a $99.95 full-service
game, with extensive ability to trade players and check results, with
substantial prizes for winners. The initial game was the Company's Baseball
1996 Fantasy Game which was marketed extensively with Bob Uecker as a
celebrity spokesperson. Baseball 1996 was followed with Football 1996. This
business plan resulted in sales which were only a fraction of those projected
by previous Management. The Company had a total of approximately 4,000
participants for its Baseball 1996 Game and approximately 1,500 participants
for its Football 1996 game. Management believes that this lack of performance
in its Baseball 1996 game was due to a number of factors including, but not
limited to: (i) no national sponsor; (ii) the Baseball 1996 game was
apparently too complex a game for the occasional fan, with every player
needing to be counted at each position on a daily basis, consequently becoming
too time consuming; (iii) a different media strategy involving gradual
advertising buildup and focus may have been more successful than the
advertising strategies employed; (iv) startup problems with the inbound order
taking process and fulfillment of those orders stemming from inexperienced
employees may have resulted in lost sales and refunds; and (v) outside of
specific venues, baseball has declined nationally in favor as a spectator
sport with revenues and attendance down nationwide. The Company believes its
Football 1996 game was not successful due primarily to the Company's
insufficient financial resources to advertise, market and operate the game.
Management had previously anticipated that Baseball 1996 would provide
sufficient revenue to fund operations for Football 1996.
As a result of the poor performance of its first two games, Fanatics
chose not to develop or operate any additional games during 1996 or 1997. In
April 1997 the board of directors was reassembled and a new business strategy
was implemented whereby Fanatics would pursue operating and administering
fantasy sports games for other entities. This strategy has resulted in a
Venture Agreement with The Sporting News ("TSN"), a division of Times Mirror
Magazines, Inc., to provide turn-key fantasy game operations for all of TSN's
"The Sporting News Fantasy Challenges" (see below). The Company's revised
business plan also includes sweepstakes and promotions for corporate sponsors,
professional sports teams and other third parties, while attempting to build a
large, and demographically specific, database to which the Company may market
a variety of related products and services.
During 1996 the Company concentrated its efforts on developing and
operating its baseball and football 1996 fantasy sports games. Since that
time the Company's activities have consisted primarily of developing and
pursuing its new business strategy and raising capital through private equity
offerings.
<PAGE>
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO INCEPTION (OCTOBER 10, 1995) TO
DECEMBER 31, 1995
The Company had a net loss of $7,786,550 for the year ended December 31,
1996 and incurred losses of $1,859,716 during the period from inception to
December 31, 1995.
Total revenues were $468,882 for the year ended December 31, 1996 and $0
for the period from inception to December 31, 1995. Revenues were generated
by the Company's baseball and football 1996 fantasy games. Game sales revenue
consists primarily of the entry fees paid by the baseball and football 1996
fantasy games' participants. The entry fee to participate was $99.95 per
game. Revenues from merchandise sales relate primarily to the sale of excess
inventory of T-shirts, hats, coolers and other merchandise that were to be
distributed to fantasy game participants.
The Company's total costs and expenses were $8,242,796 for the year ended
December 31, 1996 and $1,859,716 during the period from inception to December
31, 1995.
The general and administrative expenses for the period from inception to
December 31, 1995 reflect the costs incurred to establish the Company, to
complete the reverse acquisition with Cashbuilders, Inc. (see note 7 to the
financial statements) and other startup activities. The general and
administrative costs for the year ended December 31, 1996 consist primarily of
the salaries of the Company's employees, the costs of consultants and contract
labor, legal and professional services and the expenses related to certain
licenses, office rent, insurance and depreciation and amortization.
Advertising and promotional expenses for the year December 31, 1996 were
$3,761,461 and $989,869 during the period from inception to December 31, 1995.
The prior management of the Company utilized an advertising and marketing plan
that was unsuccessful. The marketing efforts included radio and
television commercials, magazines, newspapers, brochures, etc. that required
expensive design, production and printing services. Also included in
advertising and promotional expenses for the year ended December 31, 1996 are
approximately $560,000 of telecommunications services charges.
The cost of the participants kits and merchandise was $1,679,363 for the
year ended December 31, 1996 and $0 during the period from inception to
December 31, 1995. Because the previous management of the Company projected
participation significantly in excess of the actual participation, the Company
had printed large quantities of game kits that went unused. In addition,
Fanatics also ordered large quantities of T-shirts, hats, coolers, etc. that
were provided to the game participants as part of their entry fee. As a
result, the Company had significant excess inventory of these items that were
sold significantly below their cost to the Company. Also included in the cost
of game kits and merchandise is approximately $500,000 of prizes that were
awarded to the winners of the baseball and football fantasy games. The
Company did not operate games during the period from inception to December 31,
1995 and therefore had no costs of participant kits and merchandise.
As of December 31, 1996 the Company wrote off the net book value of
$455,709 of goodwill and licensing rights (see Note 2 to the financial
statements). The Company wrote off the licensing rights because it was unable
to meet certain required minimum payments and therefore forfeited its
exclusive licensing rights to certain patents for technology related to the
development, production and sale of fantasy games. Management of the Company
does not believe that the Company is dependent upon the patents for its
success, and to date, has found that the patents provide little, if any,
competitive advantage. The net book value of $252,083 of goodwill related to
common stock purchased in the corporation which previously owned the patents.
Due to the writeoff of the patents and the Company's significant operating
losses, the Company determined the goodwill had been impaired and wrote off
its remaining net book value.
During 1996 the Company entered into a joint venture agreement with a
retail sports apparel company. The joint venture was formed to sell sports
apparel and the Company's games and merchandise primarily through factory
outlet centers. In October 1997, the sports apparel company notified the
Company, that it was liquidating all of the assets of the joint venture and
closing the retail stores. Therefore, the joint venture is being dissolved
and the Company's investment in the joint venture is fully impaired. The
Company has written off its investment of $177,216 in this joint venture as of
December 31, 1996. In addition, as a part of this joint venture, the Company
signed three retail space leases which were set to expire through 2006. As of
November 1997, the Company was negotiating settlements on these three leases
for approximately $100,000. The $100,000 related to these leases is included
in the write off of investment in joint venture and accrued expenses in the
accompanying 1996 financial statements. Although the Company is now currently
out of retail operations, it expects to use the database it accumulates to
provide discounted merchandise and licensed apparel through a direct mail
catalog and the Internet.
In November 1996, the Company entered into a letter of intent with an
unrelated company ( the "Partner") to form a joint venture. The joint
venture, WinAmerica Promotions ("WIN"), is owned 50% by the Company and 50%
by the Partner. The joint venture was formed to develop, market and operate
mass-market, free entry, sponsor driven fantasy sports games. As of December
31, 1996, the Company had not made any contributions to WIN and therefore no
investment is reflected in the accompanying balance sheet. In addition, WIN
had minimal activity for the period from inception through December 31, 1996
and therefore the Company did not record any equity in the income or loss from
this joint venture. During 1997 the Company has contributed $140,000 in cash
to WIN and WIN has operated a fantasy baseball game for the San Francisco
Giants and fantasy horse racing games for certain horse tracks around the
country including a game for the Breeder's Cup. However, the Company and the
Partner are currently negotiating the additional contributions the Company
will be required to make in order to maintain its 50% ownership in WIN. Based
on the Company's working capital position as of November 1997 there can be no
assurance that the Company will be able to meet the additional capital
requirements and its ownership interest in WIN may be reduced. Therefore,
there can be no assurance what portion of the Company's investment in WIN it
may realize.
The net losses for the year ended December 31, 1996 and inception to
December 31, 1995 reflected in the accompanying financial statements and the
discussion of the results of operations above depict the results of Fanatics
under its original business plan to develop, market and operate its own
fantasy sports games. While there can be no assurance that the new business
strategy will be successful, Fanatics' current management and board of
directors believes that the inception to December 31, 1996 results are not
indicative of the Company's future operations and do not accurately reflect
the current business philosophy and direction of the Company.
The new business plan of the Company is concentrated on the
administration and operation of fantasy sports games and promotions for other
entities. As a result of this new business strategy, effective July 31, 1997,
Fanatics has entered into a Venture Agreement with TSN under which the Company
will provide fantasy sports gaming expertise and related operations and TSN
will allow the use of its trademark and provide certain marketing and
advertising services for the promotion of a series fantasy sports leagues in
various sports through the publication of The Sporting News and other Times
Mirror publications. The Sporting News had approximately 55,000 participants
in its fantasy games during the last year. The Company will be the exclusive
North America supplier of fantasy games in all sports and any related
activities, merchandise and services offered by TSN. The Venture Agreement
expires at the end of the 2001/2002 National Hockey League and National
Basketball Association seasons. The term of the Venture Agreement will be
extended for an additional two years if certain criteria as set forth therein
are met.
Revenues from the TSN Venture Agreement will begin to be recognized in
January 1998. All revenues from the operation of "The Sporting News Fantasy
Challenges" and related service and merchandise will be collected and
recognized by Fanatics. The Company will then pay to TSN the greater of 50%
of the annual gross profit or 20% of annual gross revenue, both as defined in
the Venture Agreement. In addition, if TSN delivers 30,000 paying
participants per year to the fantasy games, the Company has guaranteed that
the minimum annual payment to TSN will be $1.3 million. Historical results
from "The Sporting News Fanatasy Challenges" indicate annual revenues could
exceed $10 million, although there can be no assurance that future revenues
will meet or exceed prior results.
In connection with the TSN Venture Agreement and effective November 1,
1997 the Company began leasing new office space in Lakewood, Colorado. The
Company is leasing approximately 7,500 square feet of space. Approximately
3,000 square feet of the new leased space was a pre-existing call center that
will be utilized as a call center by the Company to service the TSN Venture
Agreement.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Because the Company is implementing a new business strategy that requires
the establishment of certain infrastructure and because only insignificant
revenues have been generated from inception through November 1997 the Company
has had to rely on cash from Revenue Participation Contracts ("RPCs"),
private equity offerings and debt financing to satisfy its working capital
deficits and to fund its operations.
During the year ended December 31, 1996 and for the period from inception
to December 31, 1995 the Company used $4,785,130 and $1,894,533, respectively,
of cash in operating activities. The cash used in operating activities
reflects the unsuccessful operation of the Company's 1996 baseball and
football fantasy games.
For the year ended December 31, 1996 and inception to December 31, 1995
the Company had cash flows from financing activities of $3,893,470 and
$3,502,099, respectively. During 1995 the Company issued $3,025,000 of RPCs
for cash. During 1996 the holders of all of the RPCs exchanged their RPCs for
a total of 768,750 shares of Series A Preferred Stock and 153,750 common stock
purchase warrants exercisable at $5.00 per share through December 31, 1998.
During 1996 the Company raised net proceeds of $2,974,185 through the
issuance of 855,476 shares of its common stock at $3.50 per share in
connection with a private equity offering . In addition, the Company received
proceeds from notes payable of approximately $794,500 during 1996. Subsequent
to year end $389,500 of these notes were converted into shares of the
Company's common and Series B Preferred Stock and warrants to purchase shares
of common stock as part of a private equity offering. The Company is
attempting to convert additional notes to stock, but no assurance can be made
that it will be successful in converting other notes.
Subsequent to year end and through November 1997 the Company has raised
approximately $1,100,000 of gross proceeds through private equity offerings.
In connection with these private equity offerings, the Company will issue
approximately 309,000 shares of its common stock, approximately 77,000 shares
of its Series B Preferred Stock and warrants to purchase approximately 154,000
shares of its common stock. The warrants to purchase common stock are
exercisable at $5.00 per share and expire through November 2000.
The Company has developed a state-of-the-art automated game operating
system, called C.O.A.C.H. (Computer Operated Automated Caller Hotline) through
its strategic partnership with MCI Telecommunications Corporation ("MCI").
The Company entered into service contracts with MCI in connection with the
development of the game operating system and for providing other
telecommunications services. The Company is currently renegotiating the
contracts with MCI as part of the Venture Agreement with The Sporting News
(see Note 8 to the Financial Statements).
However, because the number of participants playing the two fantasy games
(baseball and football) the Company operated during 1996 did not meet
expectations, the Company was unable to meet the minimum revenue requirements
outlined in the agreements with MCI and incurred significant operating losses.
As a result, in November 1996, the Company executed a promissory note with MCI
for all amounts it owed to MCI. The $605,491 promissory note required an
initial payment of $50,000 and twelve equal monthly principal and interest
payments of $48,547 each. The unsecured note was to mature November 20, 1997
and had an interest rate of 9% per annum. The Company made the first six
payments under the note, but due to cash restrictions was unable to make the
six additional payments.
During October 1997 the Company negotiated a new settlement with MCI for
all amounts the Company had due to MCI. As of October 20, 1997 the Company
was indebted to MCI in the amount of $393,293. The settlement required the
Company to pay $147,000 of the total amount due prior to October 25,1997. The
Company made this payment with funds received from a loan from its board of
directors. The remaining balance due of $246,293 was rolled into a new
promissory note. The new promissory note between MCI and the Company was
executed effective October 20, 1997. The new promissory note requires twelve
equal monthly principal and interest installments of $21,596 each. This
unsecured note matures September 20, 1998 and bears interest at 9.5%. The
Company has paid the October and November loan payments.
In March 1997 the Company obtained a $1 million line of credit from a
bank. The line of credit bears interest at The Wall Street Journal published
prime rate and matures in March 1998. Interest is payable monthly. Five
members of the Company's board of directors have guaranteed the line of
credit. In exchange for the guarantee of the line of credit, each of the five
board members will receive 80,000 shares of the Company's common stock,
200,000 shares of Series B Preferred Stock, 50,000 common stock purchase
warrants and 15,000 options to purchase shares of common stock. The warrants
are exercisable at $5.00 per share and expire in three years. The options are
exercisable at $3.50 per share and are also exercisable for three years. As
of October 31, 1997 the outstanding balance on this line of credit was
approximately $950,000.
In November 1997 four members of the Company's board of directors loaned
the Company $500,000. The unsecured loans are non interest bearing and mature
November 2000. Three of the four board members will each receive 60,000
shares of the Company's common stock, 150,000 shares of Series B Preferred
Stock, 37,500 common stock purchase warrants and 11,250 options to purchase
shares of common stock. The fourth board member, who is also the Company's
President, will receive 20,000 shares of the Company's common stock, 50,000
shares of Series B Preferred Stock, 12,500 common stock purchase warrants and
3,750 options to purchase shares of common stock. The warrants are exercisable
at $3.50 per share and expire in three years. The options are exercisable at
$3.50 per share and are also exercisable for three years. The Company has used
the funds from the loan to make the payments required under the MCI
settlement, to continue the development of a call center for The Sporting News
contract and for certain other obligations.
During November 1997, the Company engaged Joseph Charles & Associates,
Inc. ("JCA"), an investment banking firm, to assist the Company in performing
an additional private offering of its stock. This private placement offering
is for up to $1.519 million in gross proceeds and consists of 62 Units at
$24,500 each. Each Unit consists of 7,000 shares of Common Stock, 1,750
shares of Series B Preferred Stock and 3,500 Common Stock Purchase Warrants.
The Company has also executed a Letter of Intent with JCA for a public
offering of its common stock. The letter of intent for the public offering
proposes issuing up to 2,850,000 shares of the Company's common stock for
gross proceeds of up to $8 million. While there can be no assurances that the
Company will be able to successfully complete the public offering, the
proposed public offering is expected to occur during 1998.
In connection with the private placement and public offerings, JCA is to
receive a underwriting commission of 10% and an unaccountable expense
allowance of 3% of the gross proceeds. In addition, JCA is to receive
warrants to purchase up to an equivalent of 10% of the Units sold.
There can be no assurance that the Company will be successful in raising
any funds under the private placement or that it will be able to successfully
complete a public offering of its stock.
Management of the Company believes that the funds made available to it
through the lines of credit and the additional funds expected to be raised
through the JAC private placement will allow it to fund its operations and
establish the necessary infrastructure and hire employees until sufficient
revenues are generated from TSN Venture Agreement to sustain the Company's
operations. However, there can be no assurance that the Company will be
successful in raising additional capital or obtaining additional financing or
that it will be successful in its new planned operations.
ITEM 7. FINANCIAL STATEMENTS
- -----------------------------------
The Financial Statements that constitute Item 7 are included at the end
of this report beginning on Page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- ---------------------
There were no changes in accountants or disagreements of the type
required to be reported under this item between the Company and its
independent auditors during the fiscal year ended December 31, 1996.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
- ------------------------------------------------------------------------------
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
- --------------------------------------------------------
The following table sets forth the names and ages of the current
directors and executive officers of the Company, the principal offices and
positions with the Company held by each person and the date such person became
a director or executive officer of the Company. The executive officers of the
Company are elected annually by the Board of Directors. The directors serve
one year terms and until their successors are elected. The executive officers
serve terms of one year or until their death, resignation or removal by the
Board of Directors. There are no family relationships between any of the
directors and executive officers. In addition, there was no arrangement or
understanding between any executive officer and any other person pursuant to
which any person was selected as an executive officer.
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Positions
- ---- --- ---------
<S> <C> <C>
Bruce Deifik 42 Chairman of the Board (1997)
Jeff P. Gehl 30 President, Chief Executive Officer and
Director (1996)
Doug Moreland 49 Director (1997)
Neil Mulholland 38 Director (1997)
Daniel Rudden 49 Secretary, Director (1996)
Gordon Price 53 Director (1996)
</TABLE>
JEFF P. GEHL has been President of of the Company since 1996. Mr. Gehl
is a Graduate of the University of Southern California with a degree in
Business Administration. In 1989, Mr. Gehl founded and served as President of
MMI, Inc., a technical search and recruiting firm which specializes in
temporary, temporary-to-hire and permanent placement of technical
professionals. MMI served the staffing needs of manufacturing companies
throughout the State of California. As President of Fanatics Only, Mr. Gehl
is a hands-on, service oriented manager who has guided the Company's
reorganization, restructured the business plan and implemented the new
business strategy. Mr. Gehl's strengths are in sales, marketing and strategic
planning.
BRUCE W. DEIFIK joined the Company as a Director and Chairman of the
Board in 1997. Upon graduation from Texas A&M University in 1977, Mr. Deifik
founded Sheepskin Products Incorporated in Greeley, Colorado. By 1986,
Sheepskin Products was grossing $35 million per year and accounted for 52% of
the raw sheepskin products sold in the United States. In 1987, Mr. Deifik
sold Sheepskin products to ConAgra, where he served as a Vice President in
charge of the sheep and land divisions for two and one-half years. In 1989,
Mr. Deifik founded Integrated Properties, a multi-disciplined commercial real
estate investment firm. He grew Integrated's holdings to 3200 apartment units
and 3.5 million square feet of office space located in Colorado, Texas and
Arizona. Mr. Deifik currently owns one-third interest in the Hyatt Grand
Champions Hotel in Indian Wells, California which is host to the Bob Hope
Desert Classic and Newsweek Tennis Tournament. Mr. Deifik also owns one-third
interest in the Hilltop Steakhouse in Boston, Massachusetts. The Hilltop has
gross sales in excess of $55 million per year. Mr. Deifik is an owner and
serves on the Board of Directors of First Choice Bank, a $200 million bank
located in Greeley, Colorado. Mr. Deifik also serves on the Board of
Directors of the National Jewish Hospital and HealthNet.
DOUG MORELAND joined the Company as a Director in 1997. Mr. Moreland
began his career in the automotive industry in 1969 at Reno Dodge, where he
began as a salesman and worked his way to general manager of the dealership.
In 1980, Mr. Moreland became the owner and manager of Cherry Creek Dodge. Mr.
Moreland presently owns and operates 13 new car franchise dealerships and 4
used car and truck facilities. Mr. Moreland also is involved with J.D.
Byrider used vehicle facilities with an associated finance company, CNAC, as
well as Brandon Financial, which is also an automotive finance company. Mr.
Moreland attended Brigham Young University and the University of Nevada.
NEIL MULHOLLAND joined the Company as a Director in 1997. Mr. Mulholland
is a Senior Vice President with Los Angeles, California based Cushman Realty
Corporation. In his capacity with Cushman Realty, Mr. Mulholland focuses
solely on the sale of investment-grade office buildings throughout the United
States. Mr. Mulholland has sold in excess of $166 million during 1996 and
over $800 million in office buildings during the past five years. Mr.
Mulholland also overseas Cushman Realty's Capital Markets Group, a network of
brokers from each Cushman office whose primary focus is on the sale of
investment-grade office buildings. Mr. Mulholland has a Bachelor's degree in
Business Administration/Construction Engineering from Iowa State University.
He is a licensed real estate broker in the State of Colorado and was
recognized as the top investment broker for 1995 by the Denver Chapter of the
National Association of Industrial and Office Properties. Mr. Mulholland
serves on the Board of Directors of the 1445 Market Street Corporation, the
Colorado Chapter of The Starlight Children's Foundation and The Uptown Stamp
Company.
DANIEL RUDDEN, a marketing consultant to the Company, has been the
principal shareholder and president of Colortyme, Inc. for more than the past
10 years. Colortyme, Inc. is a vendor and lessor of consumer and office
furniture, appliances and home and office electronic equipment, based in
Denver, Colorado. Mr. Rudden received a B.A. in Business from St. Mary's
College, Kansas, in 1969.
GORDON PRICE joined the Company as a director in 1997. Mr. Price
attended the University of Colorado on a basketball scholarship where he was a
history major. While working for the University as a freshman basketball
coach, Mr. Price co-founded Realty Executives, a rental management company
serving the Boulder/Denver area and managing over 200 rentals. Eighteen
months later, Mr. Price started G.M. Price & Company, a development and
building company specializing in income property. Between 1967 and 1975,
approximately 2,157 units were built. The Company gradually expanded into
custom family homes and was reestablished as the Flagstaff Corporation. This
company, to date, has built and sold over 20 custom homes with an average
price of $500,000 per home. In 1985, Mr. Price founded Education
Opportunities Unlimited, a company that made free college academic recruiting
tapes accessible to all high school students. During the summer of 1989, Mr.
Price started two separate companies, Premier Entrepreneurial Programs and
Entrepreneurial Opportunities Unlimited. PEP is a publisher of business
textbooks used by colleges and universities to teach entrepreneurship. EOU is
a public relations and marketing firm specializing in entrepreneurial training
and education. To date, both companies are viable entities with gross
revenues exceeding two million annually. Mr. Price is a member of the Board
of Entrepreneurial Educational Foundation, a non-profit institution with the
objective to further entrepreneurial education worldwide.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of the
Company's Common Stock, to file reports of ownership and changes in ownership
with the Securities and Exchange Commission ("SEC"). Officers, directors and
greater than ten percent stockholders are required by SEC regulations to
furnish the Company with copies of all Section 16(a) forms they file.
The following disclosure is based solely upon a review of the Forms 3 and 4
and any amendments thereto furnished to the Company during the Company's
fiscal year ended December 31, 1996, and Forms 5 and amendments thereto
furnished to the Company with respect to such fiscal year, or written
representations that no Forms 5 were required to be filed by such persons.
Based on this review, no persons who were directors, officers and beneficial
owners of more than 10% of the Company's outstanding Common Stock during such
fiscal year filed late reports on Forms 3 and 4.
ITEM 10-EXECUTIVE COMPENSATION
- --------------------------------
Mr. Gehl is paid a salary of $10,500 a month. Mr. Rudden was issued an
Revenue Participation Contract with a face amount of $50,000 in partial
payment for future consulting services. That Revenue Participation Contract
was converted to Series A Preferred Stock during 1996. No other officer or
director receives or has received any compensation from the Company, other
than reimbursement for direct out-of-pocket expenses in connection with
attendance at meetings of the Board of Directors.
SUMMARY COMPENSATION TABLE
The Summary Compensation Table shows certain compensation information for
services rendered in all capacities during each of the fiscal years that the
Company was in operation by the Jeff Gehl, the Company's President and Chief
Executive Officer. Other than Mr. Gehl, no executive officer's salary and
bonus exceeded $100,000 in 1996. The following information for Mr. Gehl
includes the dollar value of base salaries, bonus awards, the number of stock
options granted and certain other compensation, if any, whether paid or
deferred.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-term
Annual Compensation Compensation Awards
--------------------------------- ------------------------------
Number of Number of
Name and Restricted Principal Warrants
Position at Other Annual Stock Options Granted
12/31/96 Year Salary Bonus Compensation Awards Granted Compensation
- ---------- ---- ------ ----- ------------ ------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Jeff Gehl 1996 $90,000 None None 50,000 250,000 150,000
President
and Chief 1995 $15,000 None None None None None
Executive
Officer (1)
____________
</TABLE>
(1) No bonuses have been paid to Mr. Gehl. In addition, no amounts have
been shown as Other Annual Compensation because the aggregate incremental cost
to the Company of personal benefits provided to Mr. Gehl did not exceed the
lesser of $50,000 or 10% of his annual salary in any given year.
COMPENSATION OF DIRECTORS
Directors do not receive compensation for service as directors.
<PAGE>
ITEM 11- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The following table sets forth, as of October 31, 1997, certain
information with respect to the Company's equity securities owned of record or
beneficially by (i) each director of the Company; (ii) each person who owns
beneficially more than 5% of each class of the Company's outstanding equity
securities; and (iii) all directors and executive officers as a group. The
chart set forth below reflects the conversion of 4,062,500 shares of Common
Stock previously held in part by such persons into 1,892,000 shares of Series
B Preferred Stock, which is reconvertible back to Common Stock only when the
Company meets certain earnings goals (and is consequently not included in
common stock below).
<TABLE>
<CAPTION>
Name and Address of Series A Series B
Beneficial Owner Common Stock Preferred Stock Preferred Stock
- ------------------ ------------ --------------- ---------------
<S> <C> <C> <C>
Daniel Rudden (1) 157,500 62,500 200,000
7340 East Caley Ave.,
Suite 215
Greenwood Village, CO 80111
Bruce Deifik (2) 150,000 25,000 200,000
c/o Fanatics Only, Inc.
8204 East Park Meadows Drive
Littleton, CO 80124
Doug Moreland (3) 165,000 25,000 200,000
c/o Fanatics Only, Inc.
8204 East Park Meadows Drive
Littleton, CO 80124
Neil Mulholland (4) 165,000 25,000 200,000
c/o Fanatics Only, Inc.
8204 East Park Meadows Drive
Littleton, CO 80124
Jeff Gehl (5) 0 0 542,000
440 MacArthur Blvd., Suite 500
Newport Beach, CA 92660
Gordon Price (6) 202,858 25,000 282,143
c/o Fanatics Only, Inc.
8204 East Park Meadows Drive
Littleton, CO 80124
Ralph H. Grills, Jr. (4) 271,500 0 100,000
7025 E. First Avenue
Denver, CO 80220
George Koustas (1) 20,000 25,000 350,000
2696 South Colorado Blvd.
Denver, CO 80222
All directors and officers
as a group
(6 persons) 1,090,358 162,500 1,432,143
========= ======= ==========
</TABLE>
____________
(1) Includes 52,500 shares of common stock issuable upon the exercise of
presently exercisable warrants and 15,000 shares of common stock issuable upon
the exercise of presently exercisable options. Also includes 10,000 shares of
common stock issuable upon the exercise of presently exercisable warrants and
50,000 shares of Series A Preferred Stock owned by Triple Bogeys LLC, a
company which is beneficially owned 50% by Mr. Rudden.
(2) Includes 55,000 shares of common stock issuable upon the exercise of
presently exercisable warrants and 15,000 shares of common stock issuable upon
the exercise of presently exercisable options.
[continued next page]
<PAGE>
(3) Includes 60,000 shares of common stock issuable upon the exercise of
presently exercisable warrants and 15,000 shares of common stock issuable upon
the exercise of presently exercisable options. Also includes 5,000 shares of
common stock issuable upon the exercise of presently exercisable warrants and
25,000 shares of Series A Preferred Stock owned by Diamond Financial Group,
Inc., a company which is beneficially owned 30% by Mr. Moreland.
(4) Includes 60,000 shares of common stock issuable upon the exercise of
presently exercisable warrants and 15,000 shares of common stock issuable upon
the exercise of presently exercisable options.
(5) Includes 250,000 shares of common stock issuable upon the exercise of
presently exercisable incentive stock options.
(6) Includes 79,286 shares of common stock issuable upon the exercise of
presently exercisable warrants and 15,000 shares of common stock issuable upon
the exercise of presently exercisable options.
(7) Includes 10,000 shares of common stock issuable upon the exercise of
presently exercisable warrants.
(8) Includes 10,000 shares of common stock issuable upon the exercise of
presently exercisable warrants.
The Company believes that the beneficial owners of securities listed
above, based on information furnished by such owners, have sole investment and
voting power with respect to such shares, subject to community property laws
where applicable. Beneficial ownership is determined in accordance with the
rules of the Commission and generally includes voting or investment power with
respect to securities. Share of Stock subject to options or warrants
currently exercisable, or exercisable within 60 days, are deemed outstanding
for purposes of computing the percentage of the person holding such options or
warrants, but are not deemed outstanding for purposes of computing the
percentage of any other person.
ITEM 12-CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- -------------------------------------------------------
In March 1997 the Company obtained a $1 million line of credit from a
bank. The line of credit bears interest at The Wall Street Journal published
prime rate and matures in March 1998. Interest is payable monthly. Five
members of the Company's board of directors have guaranteed the line of
credit. In exchange for the guarantee of the line of credit, each of the five
board members will receive 80,000 shares of the Company's common stock,
200,000 shares of Series B Preferred Stock, 50,000 common stock purchase
warrants and 15,000 options to purchase shares of common stock. The warrants
are exercisable at $5.00 per share and expire in three years. The options are
exercisable at $3.50 per share and are also exercisable for three years. As
of October 31, 1997 the outstanding balance on this line of credit was
approximately $950,000.
In November 1997 four members of the Company's board of directors loaned
the Company $500,000. The unsecured loans are non interest bearing and mature
November 2000. Three of the four board members will each receive 60,000
shares of the Company's common stock, 150,000 shares of Series B Preferred
Stock, 37,500 common stock purchase warrants and 11,250 options to purchase
shares of common stock. The fourth board member, who is also the Company's
President, will receive 20,000 shares of the Company's common stock, 50,000
shares of Series B Preferred Stock, 12,500 common stock purchase warrants and
3,750 options to purchase shares of common stock. The warrants are exercisable
at $3.50 per share and expire in three years. The options are exercisable at
$3.50 per share and are also exercisable for three years. The Company has used
the funds from the loan to make the payments required under the MCI
settlement, to continue the development of a call center for The Sporting News
contract and for certain other obligations.
<PAGE>
PART IV
-------
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
EXHIBIT NO. DESCRIPTION AND METHOD OF FILING
- ----------- --------------------------------
(2.0) Reorganization and Asset Purchase Agreement (1)
(3.1) Articles of Incorporation (as amended) (1)
(3.2) Bylaws (1)
(4.1) Amendment to Articles for Designation of Series A Preferred
Stock and Series B Preferred Stock
(4.2) Restated Amendment to Articles for Designation of Series A
Preferred Stock and Series B Preferred Stock
(4.3) Subscription Agreement for Bridge Loans from October 1996 to
April 1997 (form 1 and 2)
(4.4) Form of Bridge Note (form 1)
(4.5) Form of Bridge Warrant (form 1)
(4.6) Form of Bridge Note (form 2)
(4.7) Form of Bridge Warrant (form 3)
(4.8) Subscription Agreement for Bridge Loans in April 1997 (form 3)
(4.9) Form of Bridge Note (form 3)
(4.10) Form of Bridge Warrant (form 3)
(4.11) Subscription Agreement for Bridge Loans in April 1997 (form 4)
(4.12) Form of Bridge Note (form 4)
(4.13) Form of Bridge Warrant (form 4)
(4.14) Subscription Agreement for Bridge Loan in October 1997 (form 5)
(4.15) Form of Bridge Note (form 5)
(10.1) Patent License Agreement (2)
(10.2) MCI SCA Agreement (2)
(10.3) MCI Development Agreement (2)
(10.4) STATS, Inc. letter agreement of November 29, 1995 (2)
(10.5) STATS, Inc. License Agreement (2)
(10.6) Form of Revenue Participation Contract (2)
(10.7) Incentive Stock Option Plan (2)
(10.8) Addendum to Patent License Agreement dated October 19, 1996
(10.9) Broker/Dealer Agreement with Centex Securities dated May 1997
(10.10) Broker/Dealer Agreement with Baron Chase Securities dated
September 1997
(10.11) Note from the Company to MCI dated October 20, 1997
(10.12) Joint Venture Agreement between the Company and American
Sports Concepts for the WIN America Promotion dated November 1996
(10.13) Agreement between Integrated Sports International and the
Company dated as of March 27, 1996
(10.14) Agreement between Calder Race Course and the Company dated
October 10, 1996
(10.15) Broker/Dealer Agreement with Alpine Securities dated October
1997
(10.16) Agreement between the WIN America Joint Venture and the San
Francisco Giants dated April 1997
(10.17) Office Lease for Company's office space dated November 1,
1997
(10.18) Loan Agreements between the Company and certain Directors
dated November 10, 1997
(10.19) Venture Agreement between the Company and The Sporting News
dated July 31, 1997
(10.20) Line of Credit documents for $1,000,000 line of credit from
1st Choice Bank of Greeley dated March 18, 1997
(10.21) Guarantees from directors for Line of Credit dated March 1997
(10.22) Engagement Letter between the Company and Joseph Charles &
Associates, Inc. for private placement dated October 27, 1997
(10.23) Letter of Intent between the Company and Joseph Charles &
Associates, Inc. for proposed public offering dated October 27,
1997
(27) Financial Data Schedule
Footnotes:
(1) Incorporated by reference from exhibits filed with Form 8-K, filed on
January 5, 1996.
(2) Incorporated by reference to the Company's 1995 Annual Report on Form
10-KSB.
The Company filed no reports on Form 8-K for the fiscal year ended December
31, 1996.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15 (d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
FANATICS ONLY, INC.
Date: December 12, 1997 By:/s/ Jeff Gehl
----------------
Jeff Gehl
President and Chief Executive
Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Date: December 8, 1997 By:/s/ Jeff Gehl
----------------
Jeff Gehl, President,
Chief Executive Officer and Director (also Chief Financial and
Accounting Officer)
Date: December 12, 1997 By:/s/ Bruce Deifik
-------------------
Bruce Deifik, Chairman of the Board
Date: December 12, 1997 By:/s/ Doug Moreland
--------------------
Doug Moreland, Director
Date: December 12, 1997 By:/s/ Neil Mulholland
----------------------
Neil Mulholland, Director
Date: December 12, 1997 By:/s/ Daniel Rudden
--------------------
Daniel Rudden, Director
Date: December 12, 1997 By:/s/ Gordon Price
-------------------
Gordon Price, Director
<PAGE>
FANATICS ONLY, INC.
FINANCIAL STATEMENTS AND
INDEPENDENT AUDITORS' REPORT
DECEMBER 31, 1996 AND 1995
<PAGE>
FANATICS ONLY, INC.
(A DEVELOPMENT STAGE COMPANY)
TABLE OF CONTENTS
-----------------
Page
----
Independent Auditors' Report F-2
Financial Statements
Balance Sheet F-3
Statements of Operations F-4
Statement of Changes in Stockholders' Deficit F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Fanatics Only, Inc.
Denver, Colorado
We have audited the accompanying balance sheet of Fanatics Only, Inc., (a
development stage company) as of December 31, 1996, and the related statements
of operations, changes in stockholders' deficit, and cash flows for the year
ended December 31, 1996 and for the period from inception (October 10, 1995)
to December 31, 1995 and 1996. These financial statements are the
responsibility of the management of Fanatics Only, Inc. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits 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 audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Fanatics Only, Inc. (a
development stage company) as of December 31, 1996, and the results of its
operations and its cash flows for the year ended December 31, 1996 and the
period from inception (October 10, 1995) to December 31, 1995 and 1996, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has incurred losses
from operations, is yet to generate significant revenues from its planned
principal operations and has been unable to meet its obligations related to
games run to date that raise substantial doubt about its ability to continue
as a going concern. Management's plans in regard to these matters are
discussed in Note 8 to the financial statements. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/Ehrhardt Keefe Steiner & Hottman PC
Ehrhardt Keefe Steiner & Hottman PC
October 23, 1997
Denver, Colorado
<PAGE>
FANATICS ONLY, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
DECEMBER 31, 1996
ASSETS
<TABLE>
<CAPTION>
<S> <C>
Current assets
Cash $ 136
Accounts receivable 10,000
Prepaid expenses 3,434
-------
Total current assets 13,570
-------
Property and equipment, at cost,
net of accumulated depreciation of $4,724 22,497
-------
Other asset (Notes 2 and 3)
Organizational costs, net of
accumulated amortization of $4,792 7,708
------
Total assets $ 43,775
=========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Checks written in excess of
bank balance $ 165,858
Notes payable (Note 9) 1,349,991
Accounts payable (Note 2) 687,184
Accrued expenses (Note 2) 407,840
Accrued prizes (Note 2) 428,099
---------
Total current liabilities 3,038,972
-----------
Commitments and contingencies
(Notes 2, 3, 8 and 10)
Stockholders' deficit (Notes 2, 6, 7 and 10)
Series A Preferred Stock, no par value,
768,750 shares authorized, no shares
issued and outstanding -
Series A Preferred Stock subscribed,
768,750 shares; liquidation preference
$12,636 3,075,000
Series B Preferred Stock, no par
value, 4,000,000 shares authorized,
1,892,000 shares issued and
outstanding; liquidation preference $0 8,782
Series B preferred stock subscribed 50,000
Common stock; no par value; 50,000,000
shares authorized; 4,864,376 shares
issued and outstanding 3,517,287
Deficit accumulated during
the development stage (9,646,266)
-----------
(2,995,197)
-----------
Total liabilities and
stockholders' deficit $ 43,775
=========
</TABLE>
See notes to financial statements.
F-3
<PAGE>
FANATICS ONLY, INC.
(A development Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
October 10, October 10,
For the Year 1995 1995
Ended (Inception) to (Inception) to
December 31, December 31, December 31,
1996 1995 1996
------------ -------------- ----------------
<S> <C> <C> <C>
Revenues
Game sales $ 342,538 $ - $ 342,538
Merchandise sale 120,367 - 120,367
Interest income 5,977 - 5,977
------- ----- -------
Total revenues 468,882 - 468,882
------- ----- -------
Costs and expenses
General and administrative 2,074,630 869,847 2,944,477
Advertising and promotional
expenses 3,761,461 989,869 4,751,330
Cost of participant kits
and merchandise 1,679,363 - 1,679,363
Interest expense 94,417 - 94,417
Write-off of goodwill and
licensing rights (Note 2) 455,709 - 455,709
Write-off of investment
in joint venture 177,216 - 177,216
-------- -------- --------
Total costs and expenses 8,242,796 1,859,716 10,102,512
-------- -------- --------
Net loss $ (7,773,914) $ (1,859,716) $(9,633,630)
Preferred stock dividends
(Note 6) (12,636) - (12,636)
-------- ------ --------
Net loss applicable to
common stockholders $ (7,786,550) $ (1,859,716) $(9,646,266)
============= ========== ==========
Net loss per common
share $ (.93) $ (.23) $ (1.16)
======= ======= ========
Weighted average
common shares outstanding 8,374,465 8,071,400 8,331,170
========== ========== =========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
FANATICS ONLY, INC.
(A Development Stage Company)
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE PERIOD OCTOBER 10, 1995 (INCEPTION) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
Members' Preferred A Preferred B
Capital Shares Amount Shares Amount
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Balance, October 10,
1995 (date of
inception) $ 10,000 - $ - - $ -
Issuance of common
stock per the
reverse acquisition
agreement (Note 8) (10,000) - - - -
Adjustment to reflect
reverse acquisition
(Note 8) - - - - -
Net loss for the
two months ended
December 31, 1995 - - - - -
--------- -------- ---------- -------- ------
Balance, December 31,
1995 - - - - -
Issuance of common
stock at $3.50 per
share, net of
$20,000 of offering
costs (Note 6) - - - - -
Subscription of
100,000 shares of
Series B Preferred
Stock at $.50 per
share (Note 6) - - - - -
Preferred stock
dividends - - - - -
Conversion of
revenue participation
contracts into
768,750 shares of
Series A Preferred
Stock (Note 2) - 768,750 3,075,000 - -
Conversion of
common stock into
Series B Preferred
Stock (Note 6) - - - 1,892,000 8,782
Net loss for the
year ended
December 31, 1996 - - - - -
------- ------- ------- -------- ------
Balance at
December 31, 1996 $ - 768,750 $3,075,000 1,892,000 $8,782
======== ======== ========= ========= =====
</TABLE>
Continued on the following page.
<TABLE>
<CAPTION>
Deficit
Series B Accumulated
Preferred Stock Common Stock from
Subscribed Shares Amounts Inception
--------------- ------ ------- -----------
<S> <C> <C> <C> <C>
Balance, October 10,
1995 (date of
inception) $ - - $ - $ -
Issuance of common
stock per the reverse
acquisition agreement
(Note 8) - 6,420,000 10,000 -
Adjustment to reflect
reverse acquisition
(Note 8) - 1,651,400 541,884 (549,538)
Net loss for the
two months ended
December 31, 1995 - - - (1,310,178)
------------ ---------- ---------- -----------
Balance, December 31,
1995 - 8,071,400 551,884 (1,859,716)
Issuance of common
stock at $3.50 per
share, net of $20,000
of offering costs
(Note 6) - 855,476 2,974,185 -
Subscription of 100,000
shares of Series B
Preferred Stock at $.50
per share (Note 6) 50,000 - - -
Preferred stock
dividends - - - (12,636)
Conversion of revenue
participation contracts
into 768,750 shares
of Series A Preferred
Stock (Note 2) - - - -
Conversion of common
stock into Series B
Preferred Stock
(Note 6) - (4,062,500) (8,782) -
Net loss for the
year ended December 31,
1996 - - - (7,773,914)
Balance at December 31,
1996 $ 50,000 4,864,376 $3,517,287 $(9,646,266)
========= ========= ========= ===========
</TABLE>
See notes to financial statements.
F-5
<PAGE>
FANATICS ONLY, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year October 10, 1995 October 10, 1995
Ended (Inception) to (Inception) to
December 31, December 31, December 31,
1996 1995 1996
------------ -------------- --------------
<S> <C> <C> <C>
Cash flows from operating
activities
Net loss $(7,786,550) $(1,859,716) $(9,646,266)
--------------- ------------- -------------
Adjustments to reconcile
net loss to net cash
used by operating
activities -
Depreciation and
amortization 44,363 8,277 52,640
Revenue participation
contract for services - - 50,000
Write-off of goodwill
and licensing rights 455,709 - 455,709
Write-off of investment
in joint venture 177,216 - 177,216
Changes in assets and
liabilities -
Accounts receivable (10,000) - (10,000)
Prepaid expenses 49,291 (2,725) (3,434)
Checks written in
excess of bank balance 165,858 - 165,858
Deferred participation
kit costs 120,375 (120,375) -
Accounts payable, accrued
expenses and accrued
prizes 1,998,608 80,006 2,078,614
---------- ------- ----------
3,001,420 (34,817) 2,966,603
---------- --------- -----------
Net cash used by
operating activities (4,785,130) (1,894,533) (6,679,663)
------------ --------- ---------
Cash flows from investing
activities
Purchase of property
and equipment (11,385) (15,836) (27,221)
Organizational costs - (12,500) (12,500)
Investment in joint
venture (177,216) - (177,216)
Acquisition of
licensing rights
and goodwill - (498,833) (498,833)
--------- -------- -------
Net cash used
by investing
activities (188,601) (527,169) (715,770)
-------- ------- -------
Cash flows from financing
activities
Proceeds from notes
payable 794,500 - 794,500
Revenue participation
contracts - 3,025,000 3,025,000
Payment of offering costs - (74,785) (74,785)
Proceeds from common stock
and subscribed stock 3,098,970 551,884 3,650,854
--------- --------- ---------
Net cash provided
by financing
activities 3,893,470 3,502,099 7,395,569
--------- --------- ---------
Net (decrease) increase
in cash (1,080,261) 1,080,397 136
Cash - beginning of period 1,080,397 - -
----------- --------- ---------
Cash - end of period $ 136 $1,080,397 $ 136
=========== ========= ======
</TABLE>
Supplemental disclosure of non-cash financing activity
During the period ended December 31, 1995, the Company entered into a
$50,000 revenue participation contract for future services included in prepaid
expenses (Note 4).
During the year ended December 31, 1996, the Company converted $3,075,000
of revenue participation contracts into Series A Preferred Stock valued at
$3,075,000. Additionally, during 1996, the stockholders converted 4,062,500
shares of common stock into 1,892,000 shares of Series B Preferred Stock with
a value of $8,782.
During 1996, the Company converted $555,491 of accounts payable to a note
payable (Note 2).
See notes to financial Statements
F-6
<PAGE>
FANATICS ONLY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -----------------------------------------------------------------------------
Organization and Description of Business
- --------------------------------------------
On October 10, 1995 Fanatics Only, Inc. (the "Company") began operations and
was legally formed as a limited liability corporation under the laws of
Colorado on November 13, 1995. In December 1995, the Company completed a
reverse acquisition with Cashbuilder, Inc. (Note 7). The Company's business
through 1996 was to develop, produce, market and operate fantasy games and
game kits to the public, and to sell services and merchandise related thereto.
The Company's new primary business will utilize its Fantasy Game concept and
game operation expertise to provide turn-key sweepstakes and promotions to
large corporate sponsors, professional sports teams and other third party
entities, while attempting to build a large, and demographically specific,
database to which the Company may market a variety of related products and
services. The Company expects to generate revenue through two main revenue
centers; (1) game operations contracts to run third party Fantasy Games; and
(2) mass-market, free entry, sponsor-driven Fantasy Games.
Advertising Costs
- ------------------
The Company expenses advertising costs as incurred except for direct-response
advertising, which is capitalized and amortized over its expected period for
future benefits. Direct response advertising consists primarily of radio,
print and television advertisements nationwide to elicit sales of game kits
and will be recognized in conjunction with the related revenue over the
fantasy game. At December 31, 1996, the Company had not deferred any
advertising costs. Due to a change in the Company's primary business,
management does not anticipate significant expenditures for future
advertising.
Property and Equipment
- ------------------------
Property and equipment are recorded at cost and are depreciated on a
straight-line basis over the estimated lives of five to seven years.
Licensing Rights
- -----------------
The Company's cost of obtaining and licensing rights to patents was stated at
cost and was being amortized on a straight line basis over thirteen years
(Note 2).
Goodwill
- --------
The Company's cost of acquiring a 50% interest in a corporation was recorded
as goodwill and was being amortized over 13 years (Note 2).
Organization Costs
- -------------------
Organization costs are recorded at cost and are amortized on a straight line
basis over five years.
Revenue Recognition
- --------------------
The Company entered into revenue participation contracts which entitled
holders to future royalty and other revenues based on Company sales of game
kits to participants. The proceeds from sales of the revenue participation
contracts were deferred and were to be amortized as revenue using the ratio of
current revenues from game kit sales to total anticipated gross revenues from
kit sales over the life of the contracts. During 1996, these revenue
participation contracts were converted into shares of Series A Preferred Stock
by the Company (Notes 2 and 6).
Revenue from sales of fantasy game kits is deferred and recognized over the
related fantasy game season (i.e., for baseball, from approximately April to
September). Direct costs related to each specific fantasy game for which
revenue has not been recognized, will be deferred, only to the extent of
revenue, and recognized in conjunction with the related revenue over the
fantasy game season.
Income Taxes
- -------------
The Company calculates and records the amount of taxes payable or refundable
currently or in future years for temporary differences between the financial
statement basis and income tax basis based on the current enacted tax laws.
Temporary differences are differences between the tax basis of assets and
liabilities and their reported amounts in the financial statements that will
result in taxable or deductible amounts in future years. The Company's
temporary differences result primarily from operating loss carryforwards.
Loss Per Common Share
- ------------------------
Loss per common share is computed by dividing the net loss applicable to
common stockholders by the weighted average common shares outstanding during
the period. All warrants and options to purchase common stock have been
excluded because the effect would be antidilutive.
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 reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Financial Instruments
- ----------------------
The carrying value of the Company's cash, accounts receivable, accounts
payable and accruals and notes payable approximate their fair values due to
the short-term nature of the financial instruments.
Investment in Joint Venture
- ------------------------------
The Company had an investment in a joint venture which is reported on the
equity method of accounting (Note 3).
NOTE 2 - COMMITMENTS AND CONTINGENCY
- -----------------------------------------
Licensing Agreement
- --------------------
The Company entered into a License Agreement for $200,000 plus approximately
$23,000 of legal and consulting fees whereby the Company had the exclusive
right to use certain patents owned by the licensor in the development,
production and sale of fantasy games.
The Company was also required to pay royalties to the licensor equal to 10% of
the gross revenues from sales of patented products to participants playing
fantasy games including game related services, five percent of wholesale
revenues from other Company merchandise which is not related to games, and
fifty percent of royalties or other passive revenues of the Company
attributable to wholesale game related merchandise sales by sublicencees and
to affiliates of the Company (33 percent if attributable to non-game related
merchandise). If any consulting services were provided in addition to the
first $5,000 per month as discussed above, the Company was to receive a credit
against the royalties for the additional consulting services provided and paid
for.
During the period ended December 31, 1996, the Company paid no royalties under
the agreement, as excess consulting services discussed above exceeded
royalties due under the agreement.
In order to maintain the exclusive rights, the License Agreement required the
Company to obtain certain performance criteria. The Company did not meet the
minimum yearly payments for year 1; therefore, forfeited its exclusive rights.
The Company still has the right to promote the production and sale of fantasy
games. As a result of losing the exclusive right to the patented technology,
the significant losses to date from the Company's initial two games sales, and
because management does not believe the license provides it with any
competitive advantage, the License Agreement with a net book value of $203,626
was fully impaired and therefore written off as of December 31, 1996.
Separately, and in conjunction with obtaining the License Agreement, the
Company acquired outstanding common stock of a corporation, which previously
owned the patents, for $275,000. No Company officer, director or stockholder
was an officer, director, or principal stockholder in the entity from which
the Company purchased the common stock. Additionally, the Company was
required to pay the individual a royalty of $0.25 per game kit until total
aggregate royalties of $275,000 were paid, and thereafter increase to a
royalty of $0.50 per game kit. For the period ended December 31, 1996, no
material royalties were due under the contract due to limited sales of its
first two game kits.
Due to significant operating losses, the corporation's liabilities exceeded
its assets by approximately $625,000 at December 31, 1995. The purchase price
was allocated to goodwill in the accompanying financial statements. The
goodwill associated with the acquisition was being amortized over the life of
the underlying patent or 13 years until December 31, 1996 when, due to
re-occurring operating losses of the Company, the Company determined the
goodwill to have been fully impaired and therefore wrote off the remaining net
book value of the goodwill of $252,083.
Media Service Agreement
- -------------------------
The Company entered into an agreement with a marketing company, in which two
stockholders (of which one was a Director and Officer) of the Company own
minority interests, for $770,000. Under the agreement, the marketing company
was to obtain contracts with celebrity spokespersons and locate commercial
airtime for a four game sport season, commencing with the 1996 baseball
season. The Company was to make royalty payments equaling $1.00 per game kit
sold for each sport advertised by the marketing company and had the option to
terminate the agreement on thirty days written notice to the marketing
company, in which case, royalty payments would cease at the end of the thirty
day period. As of December 31, 1995, the Company paid the initial $770,000 to
the marketing company and expensed the costs. No material royalties are due
under the contract at December 31, 1996 due to limited sales of its first two
game kits.
The marketing company paid $112,500 to two stockholders as a commission for
the Company entering into the media service contract and an additional
$180,000 to creditors of one of the stockholders. During 1996, the
stockholders reimbursed the $292,500 total payments to the marketing company.
During 1997, the Company sent notices to the marketing company requesting a
refund of a portion of the $770,000. Management of the Company believes it is
due a refund for services that were not performed as agreed. There can be no
assurance that the Company will be successful in recovering all or any portion
of the $770,000 and therefore no asset has been reflected in the accompanying
balance sheet.
Revenue Participation Contracts
- ---------------------------------
The Company entered into revenue participation contracts ("RPC's") which
entitled holders to a royalty payment of $0.50 per game kit sold during each
specific quarter (based on a $100,000 unit). In addition, each holder was
also entitled to a pro rata share of sixty percent of the Company's gross
profit from sources of revenue related to the Company's License Agreement
sales. The Company has accrued $82,500 of royalties for game kits sold.
During 1996, the holders of the RPC's converted the contracts and all related
rights into 768,750 shares of Series A Preferred Stock which were subscribed
at December 31, 1996 and issued in August 1997. The Company also issued
warrants to purchase 153,750 shares of the Company's common stock as part of
the RPC conversion. The warrants are exercisable through December 31, 1998 at
$5.00 per share.
Lease
- -----
The Company leased office space under an agreement which was to expire in
November 1998. During 1996, the Company paid $10,000 to terminate the lease.
In conjunction with the joint venture (Note 3), the Company signed on three
store leases which expire through 2006.
Rent expense was $2,822 for the two months ended December 31, 1995 and $44,114
for the year ended December 31, 1996 which includes the terminated office
lease.
Service Contracts
- ------------------
In February 1996, the Company entered into a one year service contract with
MCI Telecommunications Corporation (MCI) primarily to provide live operator
services at pre-established rates.
Concurrently, the Company entered into a 30 month agreement with MCI to
establish, maintain and update participant files and to provide participant
support. Under the agreement, the Company must meet certain performance
criteria as follows:
During each year, generate $1,800,000 of revenues from participants for
the corporation including at least $1,200,000 from the use of an 800 number
service.
If during any year after the 1996 ramp up period, the revenues to MCI do not
meet the $1,200,000, the Company is required to pay an under-utilization
charge equal to 100% of the difference between the discount rate applied and
MCI's standard rates.
The Company is currently negotiating new contracts with MCI as part of the
Venture Agreement with The Sporting News (Note 10).
Because the number of participants playing the two fantasy games (baseball and
football) the Company operated during 1996 did not meet expectations, the
Company was unable to meet the minimum revenue requirements outlined above and
incurred significant operating losses. As a result, in November 1996, the
Company executed a promissory note with MCI for all amounts it owed to MCI.
The $605,491 promissory note required an initial payment of $50,000 and twelve
equal monthly principal and interest payment of $48,547 each (Note 9). The
unsecured note was to mature November 20, 1997 and had an interest rate of 9%
per annum. The Company made the first six payments under the note, but due to
cash restrictions was unable to make the six additional payments (Note 10).
During 1996, the Company entered into an agreement with a management company
for management, marketing and sales services for a two year period. The
agreement required the Company to pay $15,000 per month. Additionally, the
Company was to pay the management company a 15% commission on gross revenues
generated by the Company and a $1.00 fee for every kit sold per sport. The
fee increases to $1.50 after 50,000 kits are sold per sport. One half, or
$7,500 of the monthly payments are a credit against monthly commissions
earned.
Prizes
- ------
In connection with the Company's first two games, baseball and football, the
Company has obligations to pay prizes to weekly and yearly game winners. As
of December 31, 1996, the Company had accrued $428,099 for cash and
merchandise prizes. Due to working capital deficiencies at December 31, 1996,
the Company was unable to meet these obligations. Subsequent to year end, the
Company was able to satisfy certain prizes out of proceeds from the
line-of-credit (Notes 9 and 10).
NOTE 3 - JOINT VENTURES
- ---------------------------
In November 1996, the Company entered into a letter of intent with an
unrelated company (the Partner) to form a joint venture. The joint venture,
Win America Promotions(WIN), is owned 50% by the Company and 50% by the
Partner. The joint venture was formed to develop, market and operate
mass-market, free entry, sponsor driven fantasy sports games. As of December
31, 1996, the Company had not made any contributions to WIN and therefore no
investment is reflected in the accompanying balance sheet. In addition, WIN
had minimal activity for the period from inception through December 31, 1996
and therefore the Company did not record any equity in the income or loss from
this joint venture.
During 1997, the Company has contributed $140,000 in cash to WIN. However,
the Company and the Partner are currently negotiating the additional
contributions the Company will be required to make in order to maintain its
50% ownership in WIN. Based on the Company's current working capital position
there can be no assurance that the Company will be able to meet the additional
capital requirements. Therefore, there can be no assurance of what portion of
the Company's investment in WIN it may realize.
Retail Stores Joint Venture
- ------------------------------
During 1996, the Company entered into a joint venture agreement with a retail
sports apparel company. The joint venture was formed to sell sports apparel
and the Company's games and merchandise primarily through factory outlet
centers. The parties subsequently entered into a letter of intent whereby the
Company was to purchase all of the sports apparel company's assets in exchange
for 300,000 shares of the Company's common stock. As of December 31, 1996,
the Company had contributed $177,216 to the joint venture and the joint
venture had opened three stores.
During the first half of 1997, the Company contributed an additional $200,000
to the joint venture and paid expenses of $36,717 on behalf of the joint
venture. In October 1997, the sports apparel company notified the Company
that it was liquidating all of the assets of the joint venture and closing all
of the retail stores. Therefore, the joint venture is being dissolved and the
Company's investment in the joint venture is fully impaired. The Company has
written off its investment of $177,216 in this joint venture as of December
31, 1996. In addition, as a part of this joint venture, the Company had
signed three retail space leases which were set to expire through 2006. As of
October 23, 1997 the Company was negotiating settlements on these three leases
for approximately $100,000 which is included in accrued expenses in the
accompanying 1996 financial statements.
NOTE 4 - RELATED PARTY TRANSACTIONS
- ----------------------------------------
The Company entered into a $50,000 revenue participation contract with a
Stockholder and Director for future services. Additionally, the Company
entered into a $100,000 revenue participating contract with a Stockholder and
Director for cash (Note 2). During the year ended December 31, 1996, the
revenue participation contracts were converted to 37,500 shares of Series A
Preferred Stock (Notes 2 and 6).
NOTE 5 - INCOME TAXES
- -------------------------
The Company has net operating loss carryforwards at December 31, 1996 of
approximately $9,600,000, which expire in the years 1999 through 2011.
At December 31, 1996, the Company has recorded a deferred tax asset for the
net operating loss of approximately $3,552,000, and has provided a 100%
valuation allowance on the deferred tax asset due to uncertainty as to the
ultimate utilization of the net operating loss carryforwards. As a result of
the anticipated future equity transactions, there could be a change in
ownership which could limit the recognition of net operating loss
carryforwards in the future.
NOTE 6 - STOCKHOLDERS' DEFICIT
- ----------------------------------
Reverse Stock Split
- ---------------------
Effective December 15, 1995, the Board of Directors approved a 1:100 reverse
stock split and a decrease in the number of authorized common shares to
50,000,000. Additionally, the Board approved an increase in the number of
authorized preferred shares from 1,000,000 to 5,000,000 and elimination of the
par value of the preferred shares, changing them into shares without par
value. All shares and per share amounts have been restated to reflect the
reverse split.
Preferred Stock
- ----------------
Series A Preferred Stock - The Board of Directors has designated 768,750
- ---------------------------
shares of preferred stock as Series A Preferred Stock. The Series A Preferred
- -----
Stock is non-voting, earns cumulative dividends at the rate of 10% per annum,
unpaid dividends with a liquidation preference to common stock and Series B
Preferred Stock, and is convertible into common shares of the Company on a
one-for-one basis as follows:
(1) By the holders of the Series A Preferred Stock if the common stock
trades at a price of at least $8.00 per share for at least 20 out of 30
trading days. Such conversion by the holders shall be possible for 30
calendar days after the date the notice of convertibility is given to such
holders by the Company.
(2) By the Company if (a) the common stock trades at a price of at least
$10.00 per share for at least 20 out of 30 trading days and (b) the daily
trading volume of the common stock during such 20 out of 30 days has been
equal to at least 1% of the total outstanding shares of common stock. Such
conversion by the Company shall be effective as of the date of notice thereof
to such holders.
(3) Dividends are to be paid to holders of record on April 30, of each
year. To the extent dividends are not paid in cash, dividends are to be paid
by issuing shares of common stock.
The Series A Preferred Stock and the shares of common stock issuable upon
conversion of the Series A Preferred Stock have piggyback registration rights
in the event the Company undertakes a registration of its shares.
Series B Preferred Stock - The Board of Directors has designated 4,000,000
- ---------------------------
shares of Preferred Stock for issuance as shares of Series B Preferred Stock.
- ---
During 1996, certain management and shareholders of the Company exchanged
4,062,500 shares of common stock for 1,892,000 shares of Series B Preferred
Stock.
The Series B Preferred Stock is non-voting, has no liquidation rights and
receives no dividends.
Shares of Series B Preferred Stock shall be convertible to common stock, on a
one-for-one basis, as follows:
(1) All issued and outstanding shares of Series B Preferred Stock shall be
converted to shares of common stock if the Company has earned after tax at
least the following amounts per share on a fully diluted basis: $.35 for the
year ending December 31, 1996; $.39 for the year ending December 31, 1997;
$.41 for the year ending December 31, 1998; $.47 for the year ending December
31, 1999; or $.51 for the year ending December 31, 2000.
(2) A total of 75% of the issued and outstanding shares of Series B
Preferred Stock shall be converted to shares of Common Stock on a one-for-one
basis if the Company has earned after tax at least the following amounts per
share on a fully diluted basis; $.26 for the year ending December 31, 1996;
$.29 for the year ending December 31, 1997; $.31 for the year ending December
31, 1998; $.35 for the year ending December 31, 1999; or $.38 for the year
ending December 31, 2000. If the Company earns after tax the minimum
preceding amount per share of Common Stock in any year so that 75% of the
shares of Series B Preferred Stock are converted to shares of Common Stock,
the remaining shares of Series B Stock shall be convertible if the Company in
any subsequent year earns the minimum amount per share of Common Stock on an
after tax basis pursuant to the preceding paragraph (1).
If the Series B stock is not converted after the year ending December 31,
2000, the outstanding shares of Preferred Stock shall be canceled and the
certificates shall be void and without value thereafter, and the shares of
Series B Preferred Stock which previously had been issued and outstanding
shall be returned to the class of unissued Series B Preferred Stock. However,
in the event of a merger or acquisition of the Company or its assets by an
unaffiliated person or company during the period when there are shares of
Series B Preferred Stock issued and outstanding, and such merger or
acquisition is approved by the holders of a majority of the outstanding shares
of Common Stock of the Company, such shares of Preferred Stock shall be
converted as of the effective date of such merger or acquisition into a like
number of fully paid and nonassessable shares of Common Stock.
Upon issuance of audited financial statements for the Company accounting for
said conversion which show the required earnings, all outstanding shares of
Series B Preferred Stock shall be deemed fully converted to a like number of
fully paid and nonassessable shares of Common Stock.
Stock Issuance
- ---------------
Prior to the reverse acquisition (Note 7), the Company authorized the issuance
of 486,000 shares of common stock to directors and advisers of the Company
under an Employee Stock Compensation Plan (ESC) at a time common stock had a
fair value of $.01. Subsequent to year end, the Board terminated the plan and
rescinded the issuance of the 486,000 shares under the plan and the shares are
to be returned and canceled. Concurrently the Company's former majority
stockholder agreed to transfer 486,000 shares of its common stock to the
directors, former directors and advisors in place of the ESC shares which were
rescinded.
Sale of Stock in a Private Placement
- ------------------------------------------
From December 1995 through March 1996, the Company sold approximately 85.5
units of common stock for $3.50 per share for proceeds of $2,974,185, net of
$20,000 of deferred offering costs. Each unit consists of 10,000 shares of
common stock and 5,000 three-year warrants to purchase one share of the
Company's common stock at $8.50 per share. Subsequently, the Company was
unable to complete a proposed public offering by June 30, 1996 and therefore
the exercise price of the warrants was lowered to $5.00.
Series B Preferred Stock Conversion
- ---------------------------------------
During 1996, the holders of 5,637,835 shares of common stock returned their
shares of common stock and were issued 1,892,000 shares of Series B Preferred
Stock. Of the 5,637,835 returned, 4,062,500 shares have been retired and the
remaining 1,575,335 are being held in escrow to be retired pending completion
of the transaction. Additionally, holders of an additional 1,770,632 shares
of common stock have agreed to return their shares to the Company to be
retired. They will not receive any Series B Preferred Stock. The Series B
Preferred Stock issued was valued based on the original $10,000 common stock
purchase by the LLC members in the reverse acquisition (Note 7) as all shares
of Series B Preferred Stock issued were issued to LLC members for the return
of their original common stock.
In addition, the Company converted $50,000 of debt for subscription of 100,000
shares of Series B Preferred Stock.
Incentive Stock Option Plan
- ------------------------------
The Company adopted a Incentive Stock Option Plan for officers, key employees,
potential key employees, non-employee directors and advisors (the "ISO Plan").
The Company has reserved a maximum of 500,000 Common Shares to be issued upon
the exercise of options granted under the ISO Plan. The ISO is administered
by a committee appointed by the Board of Directors (Committee), and requires
that options be granted at an exercise price of 100% of the fair value of the
common stock of the Company on the date of the grant or the par value.
Options granted to stockholders who possess more than 10% of the outstanding
common stock have a required exercise price of the greater of 110% of fair
value of the common stock on the date of grant or the par value. The options
are exercisable one year after the date of grant and expire up to ten years
from date of grant or up to five years from the date of grant for options to
stockholders who possess more than 10% of the outstanding common stock.
During 1996, the Company granted 250,000 options to an officer and stockholder
with an exercise price of $3.50.
The following is a summary of outstanding options and warrants:
<TABLE>
<CAPTION>
Exercise
Options Warrants Price
----------- ----------- -------------
<S> <C> <C> <C>
Balance, December 31,
1995 - - $ -
Options granted 250,000 - 3.50
Warrants issued - 637,938 5.00 - 8.50
------- ------- ------------
Balance, December 31,
1996 250,000 637,938 $ 3.50 - 5.00 *
======== ======== ==============
</TABLE>
* The exercise price was lowered from $8.50 to $5.00 for warrants issued in
conjunction with the private placement completed in March 1996.
The Company has adopted the disclosure only requirements of FASB 123
accounting for stock options. There is no material effect due to the issuance
of options and warrants.
NOTE 7 - BUSINESS COMBINATION
- ---------------------------------
In December 1995, the Company completed a reverse acquisition with
Cashbuilders, Inc. (CBI), a Colorado Corporation. CBI's previous activities
were limited to discussions of potential business combinations.
On December 18, 1995, the Company and CBI approved a plan of merger of the
Company into CBI. The merger agreement contained the following material
provisions and understandings:
(i) CBI effected a 1:100 reverse stock split of its outstanding
common stock (Note 6). As of December 18, 1995, CBI had 2,316,628 shares of
common stock issued and outstanding.
(ii) The majority stockholder of CBI voluntarily surrendered 665,228
shares of common stock for cancellation without compensation to the
stockholder. After the cancellation of the 665,228 shares, CBI had 1,651,400
shares of common stock still outstanding which is reflected as an adjustment
to record the reverse acquisition in the accompanying financial statements.
(iii) Subsequent to the reverse stock split, CBI issued 6,420,000
shares of common stock to the Company for all of its assets, net of existing
liabilities.
(iv) The Board of Directors of the Company after completion of the
reverse acquisition consists of existing directors of the Company.
The Company was formerly known as Fanatics Only LLC (LLC). When the reverse
acquisition was completed, LLC merged into CBI and ceased to exist as a
separate entity. CBI remained the legal surviving entity and changed its name
to Fanatics Only, Inc. in February 1996. For financial reporting purposes,
the business combination was accounted for as an additional capitalization of
the Company (a reverse acquisition with LLC as the acquirer). The historical
financial statements from October 10, 1995 (inception) to December 31, 1995,
are those of LLC. The operations of LLC are the only continuing operations
of the Company after the reverse acquisition. Proforma combined financial
statements at December 31, 1995 have not been included as they are not
materially different from the financial statements included herein.
On March 13, 1996, the Board approved a change in year end to December 31.
NOTE 8 - CONTINUED OPERATIONS AND REALIZATION OF ASSETS
- ---------------------------------------------------------------
The Company is in the development stage of operations and has not yet
commenced its planned principal operations. Since its inception through
December 31, 1996, the Company has accumulated a deficit of approximately $9.6
million. To date, the Company's activities have consisted primarily of
establishing the business, raising capital through private placement
offerings, establishing lines of credit and developing and operating its 1996
baseball and football fantasy games.
Management's original business plan was to market and operate its own fantasy
sports games. However, the Company was unsuccessful in operating its own
fantasy sports games and determined a new business strategy would need to be
implemented. In April 1997, the board of directors was reassembled and a new
business strategy was implemented whereby the Company would pursue operating
and administering fantasy sports games. This strategy has resulted in a
Venture Agreement with The Sporting News (Note 10).
The Company is also pursuing generating cash through an investment in the WIN
joint venture (Note 3).
Also as discussed in Note 10, the Company has raised significant amounts of
capital during 1997 through private placement offerings and has engaged JAC to
raise additional capital through a private placement offering. As discussed
in Note 9, the Company has obtained a $1.0 million line-of-credit with a bank
that is guaranteed by its board of directors. The Company also obtained a
$500,000 loan from its board of directors. Management of the Company believes
that funds made available to it through the line-of-credit, loan and the
additional funds expected to be raised through the JAC private placement
offering will allow it to fund its operations and establish the necessary
infrastructure until sufficient revenues are generated from The Sporting News
agreement. However, there can be no assurance that the Company will be
successful in raising additional capital or obtaining additional financing or
that it will be successful in its new planned operations.
The accompanying financial statements do not include any adjustments that
might be necessary if the Company is unable to continue as a going concern.
NOTE 9 - NOTES PAYABLE
- --------------------------
<TABLE>
<CAPTION>
December 31,
1996
-----------
<S> <C>
Notes payable - individuals, with no interest and a
10% origination fee. The notes were due in
January 1997, without collateral. $ 794,500
Note payable - MCI interest at 9% per annum,
without collateral, payable in monthly principal
and interest installments of $48,547 through
November 1997 (Notes 2 and 10). 555,491
--------
$ 1,349,991
=========
</TABLE>
In connection with certain of the notes to individuals, the Company issued
warrants to purchase 56,450 shares of common stock at $5.00 per share. No
loan costs were recorded at December 31, 1996 for the imputed value of the
warrants as it was immaterial.
Subsequent to year end, the Company converted $389,500 of notes into 111,286
shares of common stock, 27,821 shares of Series B Preferred Stock and warrants
to purchase 55,642 shares of common stock at $5.00.
Line-of-Credit
- --------------
In March 1997 the Company obtained a $1 million line-of-credit from a bank.
The line-of-credit bears interest at The Wall Street Journal published prime
rate and matures in March 1998. Interest is payable monthly. Five members of
the Company's board of directors have guaranteed the line-of-credit. In
exchange for the guarantee of the line-of-credit, each of the five board will
receive 80,000 shares of the Company's common stock, 200,000 shares of Series
B Preferred Stock, 50,000 common stock purchase warrants and 15,000 options to
purchase shares of common stock. The warrants are exercisable at $5.00 per
share and expire in three years. The options are exercisable at $3.50 per
share and are also exercisable for three years.
NOTE 10 - SUBSEQUENT EVENTS(Unaudited)
- ------------------------------------------
The Sporting News Venture Agreement
- ---------------------------------------
Effective July 31, 1997, the Company and The Sporting News (TSN), a division
of Times Mirror Magazines, Inc., entered into a Venture Agreement. The
executed Venture Agreement will govern the Company's and TSN's relationship
until the definitive agreement is executed. The definitive agreement is
expected to be executed in December 1997. Under the terms of the Venture
Agreement, the Company will provide fantasy gaming expertise and related
operations and TSN will allow the use of its trademark and certain marketing
and advertising services for the promotion of a series fantasy sports leagues
in various sports through the publication of The Sporting News and other Times
Mirror publications. The Company will be the exclusive North American
supplier of fantasy games in all sports and any related activities,
merchandise and services offered by TSN. The Venture Agreement expires at the
end of the 2001/2002 National Hockey League and National Basketball
Association seasons. The terms of the Venture Agreement will be extended for
an additional two years if certain criteria as set forth therein are met.
The Company will pay to TSN the greater of 50% of the annual gross profit or
20% of the annual gross revenue, both as defined in the Venture Agreement. In
addition, if TSN delivers 30,000 paying participants per year to the fantasy
games, the Company has guaranteed that the minimum annual payment to TSN will
be $1.3 million.
Among other covenants of the Venture Agreement, the Company has agreed to
establish a live operator call center and has also agreed to name a
representative of TSN to its board of directors.
Service Agreement
- ------------------
During October 1997 the Company negotiated with MCI a new settlement of all
amounts the Company had due to MCI. As of October 20, 1997 the Company was
indebted to MCI in the amount of $393,293. The settlement required the
Company to pay $147,000 prior to October 25, 1997. The Company made this
payment with funds received from a loan from its board of directors. The
remaining balance due of $246,293 was rolled into a new promissory note. The
new promissory note between MCI and the Company was executed effective
October 20, 1997. The new promissory note requires twelve equal monthly
principal and interest installments of $21,596 each. This unsecured note
matures September 20, 1998 and bears interest at 9.5%. The Company has paid
the October and November loan payments.
As part of the settlement with MCI, the Company agreed to execute an Escrow
Agreement with MCI for $50,000. The Company has given the $50,000 of escrow
funds to MCI. In addition, the Company has agreed to prepay $8,500 to MCI
each week beginning January 5, 1998. The $8,500 payment is the estimated
billing for the call center and other services MCI is to provide in connection
with the Company's Venture Agreement with The Sporting News (Note 10).
Prizes
- ------
As of November 26, 1997, the Company has satisfied all but $247,050 of prizes
and has scheduled payment arrangements to satisfy a majority of the remaining
balance.
1997 Private Placements
- -------------------------
During 1997 the Company has raised approximately $1.1 million of gross
proceeds through private placement offerings of its stock to accredited
investors. In connection with the private placement, the Company will issue
approximately 309,000 shares of its common stock, 77,000 shares of its Series
B Preferred Stock and warrants to purchase 154,000 shares of its common stock.
The warrants to purchase common stock are exercisable at $5.00 per share and
expire through November 2000.
Proposed Private Placement and Public Offerings
- ----------------------------------------------------
During November 1997, the Company engaged Joseph Charles & Associates, Inc.
(JCA), an investment banking firm, to assist the Company in performing an
additional private offering of its stock. This private placement offering is
for up to $1.519 million in gross proceeds and consists of 62 Units at $24,500
each. Each Unit consists of 7,000 shares of Common Stock, 1,750 shares of
Series B. Preferred Stock and 3,500 Common Stock Purchase Warrants.
The Company has also executed a letter of intent with JCA for a public
offering of its common stock. The letter of intent for the public offering
proposes issuing up to 2,850,000 shares of the Company's common stock for
gross proceeds of up to $8 million. The public offering is expected to occur
during 1998.
In connection with the private placement and public offerings, JCA is to
receive a underwriting commission of 10% and an expense allowance of 3% of the
gross proceeds. In addition, JCA is to receive warrants to purchase up to an
equivalent of 10% of the Units sold.
There can be no assurance that the Company will be successful in raising any
funds under the private placement or that it will be able to successfully
complete a public offering of its stock.
Loan
- ----
In November 1997, four members of the Company's board of directors loaned the
Company $500,000. The unsecured loans are non interest bearing and mature
November 2000. Three of the four board members will each receive 60,000
shares of the Company's common stock, 150,000 shares of Series B Preferred
Stock, 37,500 common stock purchase warrants and 11,250 options to purchase
shares of common stock. The fourth board member, who is also the Company's
President, will receive 20,000 shares of the Company's common stock, 50,000
shares of Series B Preferred Stock, 12,500 common stock purchase warrants and
3,750 options to purchase shares of common stock. The warrants are
exercisable at $3.50 per share and expire in three years. The options are
exercisable at $3.50 per share and are also exercisable for three years. The
Company has used the funds from the loan to make the payments required under
the MCI settlement, to continue the development of a call center for The
Sporting News contract and for certain other obligations.
Lease
- -----
Effective November 1, 1997, the Company began leasing new office space in
Lakewood, Colorado. The Company is leasing approximately 7,500 square feet at
a monthly rental rate of approximately $6,300. The leases expire through
September 2000 with options to extend for an additional three years.
Approximately 3,000 square feet of the new leased space was a pre-existing
call center that will be utilized as a call center by the Company to service
the TSN Venture Agreement.
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<PERIOD-END> DEC-31-1996
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