PROSPECTUS
FIRST ENTERTAINMENT, INC.
A maximum of 585,000 Shares at the Current Market Bid Price
per Share
Outstanding common stock of First Entertainment, Inc. (the
"Company") is hereby offered for sale at the current market
bid price by certain shareholders of the Company (the "Selling
Shareholders") directly to investors on a "best efforts"
basis, for the period of effectiveness of this Prospectus, in
an amount up to the amount registered hereby (the "Shares").
See "SELLING SHAREHOLDERS" and "DESCRIPTION OF SECURITIES."
There are no minimum number of Shares which must be sold by
the Selling Shareholders to utilize the proceeds of the
offering. See "PLAN OF DISTRIBUTION."
The Company's Common Stock is traded in the over-the-counter
market on the NASD Automated Quotation System (NASDAQ) under
the trading symbol FTET. On September 30, 1997, the closing
bid price of the Company's Common Stock was $.97 per share.
See "Risk Factors" for a discussion of certain factors that
should be carefully considered by prospective purchasers of
the Shares offered hereby.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The Shares are offered by the Selling Shareholder, from time
to time, and on a continuous basis at the then-current market
bid price during the effectiveness of this Prospectus, subject
to prior sale and the right to reject orders in whole or in
part.
For the determination of the Offering Price, See
"Determination of Offering Price".
The Selling Shareholders intend to contract from time to time
with licensed Broker-Dealers ("the Broker"), as their agents
for the period of the effective date of this Prospectus for
sale of their Shares on a "best efforts" basis. The term "best
efforts" basis means that the Broker is obligated to use its
best efforts to sell the Shares. All proceeds from the sale of
Shares will be distributed to the Selling Shareholders and
none will be used by the Company. There is no minimum amount
which must be sold by the Selling Shareholders. The Selling
Shareholders will pay the Broker a commission in accordance
with the applicable NASD requirements for all sales of Shares
sold through the Broker. See "PLAN OF DISTRIBUTION".
The date of this Prospectus is December 1 , 1997.
THE SHARES OFFERED HEREBY ARE OFFERED BY THE SELLING
SHAREHOLDERS SUBJECT TO PRIOR SALE, TO ALLOTMENT AND
WITHDRAWAL AND TO CANCELLATION OR MODIFICATION OF THE OFFER
WITHOUT NOTICE. ANY MATERIAL CHANGE TO THE OFFER WILL BE
REFLECTED BY AN AMENDMENT OR SUPPLEMENT TO THE REGISTRATION
STATEMENT, OF WHICH THIS PROSPECTUS IS A PART. THE SELLING
SHAREHOLDERS AND ITS SELLING AGENTS RESERVE THE RIGHT TO
REJECT ORDERS IN WHOLE OR IN PART FOR THE PURCHASE OF ANY OF
THE SHARES OFFERED HEREBY.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 and in accordance therewith is required to file
reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission").
All reports, proxy statements and other information filed by the Company
with the commission can be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20459. Copies can be obtained from the Commission at
prescribed rates by writing to the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549.
The Company has filed with the Commission a registration statement on Form
S-3 (the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the Shares offered hereby.
This Prospectus, which constitutes a part of the Registration Statement,
does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. For further information,
reference is hereby made to the Registration Statement, which may be
obtained from the Public Reference section of the Commission at the
address set forth above. Statements contained in this Prospectus regarding
the contents of any contract or other document are not necessarily
complete, and in each instance, reference is made to the copy of such
contract or document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference.
INCORPORATION BY REFERENCE
The following documents, which have been filed by the Company with the
Securities and Exchange Commission, are hereby incorporated by reference
into this Prospectus except as superseded and modified herein:
1. The Company's Annual Report on Form 10-KSB, as amended, for the fiscal
year ended December 31, 1996.
2. The Company's Quarterly Report on Form 10-QSB, as amended, for the
fiscal quarters ended March 31, 1997, June 30, 1997 and September 30,
1997.
3.The Company's Current Reports on Form 8-K's dated January 24, 1996,
February 6, 1996, April 19, 1996, April 26, 1996 and July 24, 1996 and
August 29, 1997.
Statements contained in the foregoing documents incorporated by reference
herein shall be deemed to be modified or superseded for purposes hereof to
the extent that statements contained herein modify or replace such
statements. Any such statement so modified or superseded shall not be
deemed, except as so modified or replaced, to constitute a part of this
Prospectus. The Company is not providing a copy of the latest Annual
Report to prospective purchasers to accompany this Prospectus.
All documents subsequently filed by the Company pursuant to Sections
13(a), 13 (c), 14 and 15(d) of the Securities and Exchange Act of 1934,
prior to the termination of the Offering or the filing of a post-effective
amendment which indicates that all securities offered have been sold or
which indicates all securities then remaining unsold, shall be deemed to
be incorporated by reference in this Prospectus and shall be a part hereof
from the date of such filing.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of any such person, a copy of any document
described above (other than exhibits unless such exhibits are specifically
incorporated by reference into the information that this Prospectus
incorporates). Requests for such copies should be directed to First
Entertainment, Inc., 1999 Broadway, Suite 3135, Denver, Colorado 80202,
Attention: Secretary (telephone number (303) 382-1235).
THE COMPANY
First Entertainment, Inc. (the "Company" or "FTET") was incorporated under
the laws of Colorado on January 17, 1985. Currently, the Company is a
multi-media entertainment conglomerate, holding controlling interests in
five distinct segments, four active and one inactive. The four active
segments, which are controlled by the parent company, FTET, are known as
"Video," "Radio," "Live Entertainment", and "Retail". The inactive
segment is known as "Film". In November 1995, the Company determined to
discontinue the operations of its copyrighted properties segment, which it
acquired in 1994. Initially, the Company's business consisted of the
production of pre-recorded travel guides and special interest videos. In
1987, the Company entered the radio broadcasting business by acquiring
Quality Communications, Inc, a Wyoming corporation pursuant to which the
Company operates the radio segment of its business. In 1992, the Company
acquired a controlling interest in First Films, Inc. ("FFI"), a publicly
held Colorado corporation, under which its film and live entertainment
operations are undertaken. In December 1996, the Company commenced
operations of selling infomercial products in free standing unmanned
kiosks in major retail malls including U.S. Military bases. This segment
is known as the "retail" segment.
RISK FACTORS
The securities offered hereby represent a speculative investment and
involve a high degree of risk of a loss of part or all of the investment.
Therefore, prospective investors should read this entire Prospectus and
carefully consider, among others, the following risk factors in addition
to the other information set forth elsewhere in this Prospectus prior to
making an investment.
RISKS OF THE OFFERING
History of Losses.
During the period from inception (January 17, 1985) to December 31, 1996,
the Company incurred operating losses in each fiscal year. Cumulative net
losses for that period amount to approximately $11,830,000. As of
December 31, 1996, the Company had a stockholders' equity of approximately
$1,143,000, had an excess of current liabilities over current assets of
approximately $1,261,000 and, in some cases, has been unable to meet its
obligations as they become due. The independent certified public
accountants' report on the financial statements of the Company contain an
explanatory paragraph, which, in general, indicates that the Company has
suffered recurring losses from operations, has a working capital
deficiency and has defaulted on a substantial portion of its debt. These
conditions raise substantial doubt about its ability to continue as a
going concern. Management's plans include obtaining additional financing,
and/or extending its existing debt obligations, and/or obtaining
additional equity capital and ultimately achieving profitable operations.
The financial statements do not include any adjustments that might result
from these uncertainties.
"Best Efforts-No Minimum" Distribution
The Shares offered hereby are offered on a "Best Efforts-No Minimum" only
basis by the Selling Shareholders, and no individual or firm is committed
to purchase or take down any of the Shares so offered; there is no
assurance that any portion of the Shares so offered will be sold. Such
proceeds will be utilized immediately regardless of how much may be raised
in this offering. The funds will be transmitted to the Selling
Shareholders and the Shares will thereupon be issued and no refund will be
made to investors thereafter. See "PLAN OF DISTRIBUTION."
Limited Public Market
Historically, there has been a limited public market for the Common Shares
of the Company. This situation has not changed with the listing of the
Company on the NASDAQ. There can be no assurance that a larger, liquid
market will ever develop or that if developed, it will be sustained.
Individuals may not be able to liquidate their investment on favorable
terms at the time they desire to do so.
Potential Future Sales Pursuant To Rule 144 By Existing Shareholders
At September 30, 1997, there were 6,176,504 shares issued and outstanding.
As most of these shares of Common Stock held by the Company's present
shareholders have not been registered under the Securities Act of 1933, as
amended (the "Act") but are, under certain circumstances, available for
public sale pursuant to Rule 144, promulgated under the Act.
Approximately 95% of these restricted shares have passed the date upon
which such restricted shares may be sold in reliance upon Rule 144.
Generally, under Rule 144, a person (or persons whose shares are
aggregated) who has satisfied a one year holding period may, under certain
circumstances, sell within any three month period a number of shares which
does not exceed the greater of one percent (1%) of the then outstanding
Common Stock or the average weekly trading volume during the four calendar
weeks prior to such sale. Rule 144(k) also permits, under certain
circumstances, the sale of shares without any quantity limitation by a
person who has not been an affiliate of the Company for at least 90 days
and who has satisfied a two year holding period. The possibility of sales
under Rule 144 may adversely affect the market price of the Company's
securities. However, there can be no guarantee what the precise effect, if
any, will be as a result of the registration of these Common Shares.
BUSINESS RISKS
Intense Competition.
Competition is intense in each segment of the entertainment industry in
which the Company engages. Many of the organizations with which the
Company will be in competition have far greater financial and creative
resources and larger staffs than the Company. In addition, many of such
organizations have proven operating histories, which the Company lacks.
See BUSINESS--Competition.
Negotiation of Rights to Literary Properties and Other Risks.
The negotiation of acquisition, production financing, production,
distribution and sub-distribution agreements can be a critical factor in
the Company's business. There can be no assurance of the success of any
such negotiations. It is possible that any or all of the projects
packaged by the Company could fail to receive any commitment for
production financing, production or distribution.
Even when funds are obtained for the production of a particular project,
its actual production may be delayed because of various events beyond the
control of the company such as labor problems, delays in supplies, props
or costumes, equipment breakdowns, weather delay and other circumstances.
The Company intends to seek insurance in order to reduce its exposure to
such risks, but the company's success in obtaining insurance against all
such contingencies is unlikely and additional financing may be required
under such circumstances. In the absence of a completion bond, and in the
event that such financing is not available, or substitute artists,
screenwriters or producers cannot be engaged, the project may have to be
abandoned. If, on the other hand, a delayed project can be produced, it
might be completed only at a substantially higher cost to the Company.
Speculative Nature of the Company's Business.
Profits, if any, from the businesses in which the Company engages are
dependent on widespread public acceptance of, and interest in, each
creative project undertaken by the Company's various segments. Audience
appeal depends upon factors which cannot be ascertained reliably in
advance and over which the Company may have no control, including, among
other things, unpredictable critical reviews, positioning in the market
and changeable public taste. Due to factors such as the unpredictability
of audience appeal, many of the Company's completed projects may fail to
generate sufficient revenues to recover their costs of acquisition,
development, production and distribution. The Company may not recoup all
or any portion of its investment in a particular project, and there can be
no assurance that any project will yield profits to the Company.
Success Dependent on Management.
Success of the Company depends on the continued active participation of
A.B. Goldberg, the Company's President. There is no employment agreement
with him, and the Company has not obtained any "key-man" insurance from
which it would benefit in the event of his death. However, the Company
intends in the future to negotiate an employment agreement with him. The
loss of the services of Mr. Goldberg would adversely affect the continued
development of the Company's business.
BUSINESS
General
First Entertainment, Inc. (the "Company" or "FTET") was incorporated under
the laws of Colorado on January 17, 1985. Currently, the Company is a
multi-media entertainment company, holding controlling interests in five
distinct segments, four active and one inactive. The four active
segments, which are controlled by the parent company, FTET, are known as
"Video," "Radio," "Live Entertainment," and "Retail". The inactive
segment is known as "Film". In November 1995, the Company determined to
discontinue the operations of its copyrighted properties segment, which it
acquired in 1994. Initially, the Company's business consisted of the
production of pre-recorded travel guides and special interest videos. In
1987, the Company entered the radio broadcasting business by acquiring
Quality Communications, Inc., a Wyoming corporation pursuant to which the
Company operates the radio segment of its business. In 1992, the Company
acquired a controlling interest in First Films, Inc. ("FFI"), a publicly
held Colorado corporation, under which its film and live entertainment
operations are undertaken. In December 1996, the Company commenced
operations of selling infomercial products in free standing unmanned
kiosks in major retail malls including U.S. Military bases. This segment
is known as the "retail" segment.
Video
Initially, the Company entered the pre-recorded videocassette product
market through the design, production and distribution of pre-recorded
videocassette travel guides and later expanded into production and
distribution of special interest videocassette productions. In June 1986,
the Company entered into a trademark licensing agreement with Rand
McNally, providing the Company the right to use the Rand McNally name
worldwide for its Video Trip product.
In 1993, the Company negotiated the termination of its relationship with
Rand McNally. In July 1993, the Company entered into a new agreement,
entitling it to use the KODAK trademark of Eastman Kodak Company for video
through its exclusive U.S. distributor, Woodknapp and Company, Inc. This
agreement allowed Woodknapp and Company, Inc. to become the exclusive
domestic distributor for the Company's Video Trip product and allowed the
Company to receive sponsorship assistance from Eastman Kodak Company.
This agreement allowed the Company to pass through some of the costs of
packaging, marketing and distribution to Woodknapp, who is one of the
largest distributors of special interest video in the United States. The
Company bore the expense of editing the Rand McNally trademarks from the
programs. This editing was completed in December 1993 and shortly
thereafter, Woodknapp released, domestically, the first of five release
groups created from the Video Trip library. In January 1995, the Company
was informed that Woodknapp and Company, Inc. had ceased operations and
would not be able to honor its contract as the Company's exclusive U.S.
distributor of Video Trips. The Company feels that because of cash flow
problems of Woodknapp they were not able to effectively market their Video
Trips in 1994.
In 1995, the Company signed a three year distribution agreement with Fox
Lorber, whereby Fox Lorber would test the distribution of 12 video trip
titles in North America. Fox Lorber has the right to acquire the
remaining 28 video trip titles and extend the term of the agreement from
three years to seven years with an additional advance royalty payment of
$58,000. During 1996, the Company sold all its foreign distribution
rights to Fox Lorber for $50,000.
Radio
In October 1987, the Company entered the radio broadcasting business
through the acquisition of Quality Communications, Inc. ("Quality
Communications"), a Wyoming corporation. At that time, Quality
Communications owned and operated three radio stations, which serve
markets in Northeast Wyoming and central Iowa. In August 1989, the
Company sold two radio stations in Boone, Iowa. The Company, through
Quality Communications, operates a radio station, 100.7, The Fox, located
in Gillette, Wyoming.
In November 1993, the Company changed the music format of the radio
station formerly known as KGWY, or Y-100, from a top-40 station to a
format known as the "Heart of Rock". In February, 1995 the format was
changed again to contemporary country. The changes have had a positive
effect on its market share and gross revenues. Independent market surveys
show the radio station has approximately 44% of the market in Gillette,
Wyoming. In 1996, the radio station started promoting concerts using up
and coming country and western singers. The radio station was a venue to
promote the concerts and add an additional source of revenue for the radio
station.
Live Entertainment
FFI owned and operated two comedy clubs, one located in Denver, Colorado
and one in Tampa, Florida. The Tampa, Florida, club was closed on January
29, 1995 due to less than expected attendance.
The goal of this division is to produce first-rate shows in the theater
environment. Revenues are generated through both ticket sales at the door
and beverage and food sales at tables. Clubs are open to the public only
for shows, which last from 1 to 2 hours each, and number as many as three
per night. Non-show times are devoted to preparing and producing a show
that changes completely each week, and to promoting and marketing the
nightclub.
FFI acquired 100 percent of the outstanding stock of Comedy Works, Inc.,
a Colorado corporation, on September 13, 1990 in an exchange for
200,000,000 shares of common stock. Comedy Works was incorporated in 1982
and has operated from its Larimer Square, Denver, Colorado location since
that time. Comedy Works Larimer Square typically has ten shows per week
and has averaged over 2,000 customers per week for the past fifteen years.
Retail
In December, 1996 the Company commenced operations of its retail segment.
The segment consists of selling the most common and most popular
infomercial products in free standing un-manned kiosks in retail outlets
throughout the United States. The Company intends to expand operations to
include manned kiosks in major retail malls. Each manned kiosks will be
approximately 250 square feet and will have approximately 35 to 50 of the
top selling infomercial products. The Company opened its first four
locations in December, 1996, in Pearl Harbor, Andrews Air Force Base and
Bolling Air Force Base in Washington, D.C. and Leichmere's in Cambridge,
Massachusetts. The Company intends to complete a private placement of up
to $800,000 in 1997 to fund the planned expansion of manned kiosks in
major retail malls throughout the United States. The Company operates the
kiosks under the name "The Best of As Seen on TV" ("ASOTV").
Other Business Development
Balzac
In April 1996, the Company acquired certain assets from Balzac, Inc., a
private company which manufactures and distributes toys, including a
product line of toy balls. The assets and rights acquired consisted of
the following: inventory of Balzac toys, the exclusive license of Balzac
for Australia and various other rights.
The exclusive license agreement for Australia was acquired for $800,000
payable within five years based upon a formula of 60% of net profits from
the sale of Balzac products in Australia. The inventory and various other
rights were acquired by issuing 1,100,000 shares of the Company's
restricted common stock valued at $1.2 million. In addition, the Company
granted certain stock options to Balzac to purchase shares of common stock
of the Company.
During 1996, a dispute arose between the Company and Balzac where Balzac
asserted a violation of the Purchase Agreement. Balzac seized the
inventory valued at $1 million, which was collateral on the fixed
obligation due under the Australian Licensing Agreement, to satisfy the
$800,000 obligation under the Licensing Agreement. The Company asserted
that Balzac had no right under the Purchase Agreement or License Agreement
to seize the inventory and apply the proceeds against the note obligation
under the License Agreement.
In April 1997, Balzac and the Company entered into an agreement whereby
Balzac will buy back the Australian Licensing Agreement for $800,000 and
will repay the Company $200,000 which was the difference between the value
of the seized inventory and the obligation under the licensing agreement.
The $1,000,000 will be repaid over forty months at 8% per annum.
Image Marketing Group
On September 6, 1994, the Company acquired an 84 percent interest in Image
Marketing Group, Inc. ("Image"). The Company issued 248,297 shares of its
restricted common stock in exchange for 1,986,374 issued and outstanding
shares of Image. In addition, the Company issued 231,976 shares of its
Class B preferred stock in exchange for all the issued and outstanding
preferred stock of Image and approximately $420,000 of related party debt.
Image had a substantial amount of working capital invested in inventory
items that were not selling, therefore it was unable to recover its
investment in inventory or reinvest in new images from the sale of
existing inventory. FTET invested approximately $700,000 in Image in an
effort to generate sales through introduction of new images to customers.
Image was unable to generate enough sales or liquidate its inventory to
generate working capital to support continued operations. Since 1993,
Image has had losses from operations and at the time it was acquired by
the Company was in need of working capital to finance inventory growth.
Even with a working capital infusion of approximately $700,000, Image
continued to incur losses as a result of declining sales. In November,
1995 it was determined that additional working capital would not be
advanced to Image and that the Company would terminate operations and seek
a buyer for Image. The discontinuance of operations of Image resulted in
a loss of approximately $2.2 million for the year ended December 31, 1995
of which $1.6 million represents the write down of assets to their net
realizable value.
On April 24, 1996 The Company and Harvey Rosenberg, a former officer and
director of the Company entered into a Purchase Agreement for the sale of
Image. Mr. Rosenberg purchased the Company's 1,986,376 shares of Image
for $1,000 resulting in a gain of approximately $414,000. At the time of
the disposition of Image, Image had liabilities in excess of assets.
The results of operations of Image for the year ended December 31,1996 and
1995 are disclosed in the accompanying statements of operations as
discontinued operations.
Indian Licensing
In February 1995, the Company signed a series of agreements giving it
certain licensing and merchandising rights for the Indian Motor Company,
which required the approval of the bankruptcy court. These rights were
never approved by the Bankruptcy Court.
In January, 1996 A.B. Goldberg, Harvey Rosenberg, a former director and
several other unrelated parties were named as defendants in a law suit
filed by Sterling Consulting Corporation, Receiver for Indian Motorcycle
Manufacturing, Inc. The Company filed a counter claim against the
Receiver in July, 1996. In September 1996, the Company and the Receiver
commenced settlement negotiations whereby all parties would resolve their
dispute. In February, 1997 the Company and the Receiver agreed to the
terms of a settlement. The proposed Settlement Agreement calls for the
Company to relinquish all rights or claims to the Indian Motorcycle
Trademark or the use of the Trademark and any licensing rights. In
addition, all claims by the Receiver and the Company shall be released and
the Company shall pay to the Receiver approximately $114,000. All rights
acquired from Scott Kajiya and Jamie Ruiz for the use of the Indian
Motorcycle Trademark in Japan are also assigned to the Receiver.
The transactions described above relating to Indian Licensing have been
rescinded in the accompanying financial statements effective from the date
the transactions were entered into as if the transactions did not occur.
Letters of Intent
In January, 1997, a non-binding letter of intent was signed with Enternet
Corporation, an international marketer of infomercial products. Enternet
has successfully combined international wholesaling as well as the
franchising of its retail kiosk concept under the name "TV to You". In
addition, Enternet operates the most prominent "As Seen on TV" internet
shopping site under the name "As On TV", offering a complete array of
infomercial products. This potential acquisition fits in well with the
development of "The Best of As Seen on TV" in retail locations in the
United States, combined with Enternet International expertise and an
internet web site. The Company would issue 300,000 shares of common stock
of the Company and 100,000 shares of ASOTV for 60% of Enternet.
Consummation of the acquisition was subject to a number of conditions
including the negotiation of definitive agreements, completion of due
diligence and approval by the Board of Directors of both companies. Upon
completion of the Company's due diligence, the letter of intent was
terminated.
In March, 1997, a non-binding letter of intent was signed with ONLINE
Casino's, Inc. ("ONLINE") regarding the potential acquisition of ONLINE,
which consists of a fully licensed operating gaming casino in the
Caribbean, along with an internet gaming license and internet gaming
software that controls all aspects of the system. The purchase price of
ONLINE was estimated to be $26 million consisting of debt and equity
financing. Consummation of the acquisition was subject to a number of
conditions including the negotiation of definitive agreements, completion
of due diligence and approval by the Directors of both Companies. By
mutual agreement, the Company and ONLINE decided to terminate the
transaction.
The Company signed a letter of intent with Global Casinos, Inc. to acquire
control of their subsidiary Global Internet Corporation (Internet). The
transaction is planned as a purchase such as that Internet will become a
subsidiary of the Company. If the transaction is completed the former
shareholders of Internet would own approximately 4.7% of the Company. The
transaction is intended to be structured as an exchange of Class B
convertible preferred stock of the Company for the common stock of
Internet. At the present time, approximately 50% of the shares of
Internet has been exchanged for approximately 30,000 shares of Class B
Convertible Preferred stock of the Company that is convertible into
375,000 common shares. (See Acquisitions and Mergers- Global Internet)
The present exchange would give the Company effective control of
Internet, and the current shareholders of Internet would become
affiliates of the Company.
The Company has decided to engage in the transaction with Internet to
broaden the asset base and increase the value of the Company's shares as
a result of acquiring a potentially profitable business. None of the
rights of any securities holders will be affected by this transaction.
The securities of the Company which have been issued in this transaction
are Class B preferred shares. It is probable that the Class B
shareholders will elect to convert their shares into common shares of the
Company, which will have the same rights and privileges as all other
common shares but will be restricted securities under the Securities Act
of 1933, as amended. To obtain conversion of Class B preferred shares
into common shares, the Company must obtain approval of the shareholders
to increase its authorized common shares and must file Articles of
Amendment with the Secretary of State of Colorado. While the Class B
preferred shares have been issued, the filing for additional common shares
must await the approval of the shareholders to increase in authorized
common shares.
Competition
Video
The production and marketing of pre-recorded video cassettes is a highly
competitive business. The Company vies with many companies and
individuals that have substantial experience in acquiring, producing and
distributing such products. Most have resources substantially greater
than those of the Company. These competitors include both large and small
independent production companies, television and film studios, and others.
The Company knows of numerous other videocassette travel guide series
(including International Video Network's Video Visits, Travelview, Laura
McKenzie's Travel Guide and Fodor's Travel Video); however, the Company
believes that the Kodak name and the quality of its programs set it apart
from its competitors.
Radio
FM100.7, "The Fox" competes with seven other signals available in the
area. Two of these radio signals originate from Gillette, Wyoming. The
Company presently enjoys the largest share of the market, estimated to be
44 percent.
Live Entertainment
Competition is intense in the comedy and music night club entertainment
industries. On a national level, the Company competes for entertainers
with companies that are better capitalized, highly visible and have longer
operating histories and larger staffs in their respective locations. None
of the national comedy clubs have locations in Denver, Colorado. Comedy
Works Larimer Square has been in business in Denver, Colorado for 15 years
and the Company believes it to be the highest revenue-producing comedy
club in the area. The Company believes that Comedy Works Larimer Square
provides higher-quality acts than its local competitors, reflected in the
fact that it charges approximately twice the admission price of its local
competitors. The two main competitors of Comedy Works Larimer Square are
both individually-owned and located in shopping centers in the suburbs,
while Comedy Works is located in the downtown Denver area.
Retail
There are several companies that sell infomercial products in retail
locations, none of which have a national presence. Other companies are
more experienced and are better capitalized but the Company believes it
will distinguish itself from competition by offering only the best and
most popular infomercial products and by having a better, more up-scale
presentation of its products.
Licenses
The Federal Communications Commission (FCC) issues radio broadcasters a
license to operate within their assigned frequency for seven years. These
licenses, upon application, are renewable for additional seven year
periods. The FCC issued KGWY its original license on October 1, 1983, to
operate at a frequency of 100.7 MHz, 24 hours a day, at 100,000 watts of
effective radiated power. It was subsequently reissued in October of
1997. It will be up for renewal again on October 1, 2004. During the
renewal process the public has an opportunity to express its opinion of
how well the particular station is servicing its broadcast area. Extreme
public negativity during this period can hold up the reissuance process.
In addition, frequent violations of FCC rules and regulations can be
cause for the denial of the station's license renewal.
The FCC allots a certain number of frequencies for each broadcast area,
based upon community need, population factors and the determination of the
economic viability of another station in the designated region. Currently
there are no other licenses available in the Gillette area. It is
possible to request that the FCC reconsider opening up further
frequencies through its rule making body, but this can be a time consuming
process. All sales of stations and subsequent transfers of licenses must
be approved by the FCC.
Seasonality
Video
Although revenues are spread over the entire calendar year, historically
the third quarter generally reflects the highest revenues for each year
due to increase in wholesale buying for the holiday season.
Radio
Although revenues are spread over the entire calendar year, the first
quarter generally reflects the lowest and the fourth quarter generally
reflects the highest revenues for each year. The increase in retail
advertising each fall in preparation for the holiday season, combined with
political advertising, tends to increase fourth quarter revenues.
Retail
Historically retail is the strongest in the October through December
months. The Company projects a decline in sales during January through
March and July through September with the second and fourth quarters
showing the stronger sales.
Live Entertainment
The Company has found that its highest-revenue months are from July 15 to
October 15 of each year. From approximately May 15 to July 15 of each
year, business is typically down 30 percent below average, primarily
because customers prefer outdoor activities at that time of year. During
the holiday season, management has found a slight increase due to once-a-
year customers, on vacation or hosting visiting friends or relatives.
Employees
First Entertainment, Inc.
Currently, FTET, the Holding Company, employs one executive and one
administrative person. The Holding Company contracts the accounting and
administrative function to a company owned by the former president and to
other independent consultants.
Video
The Company does not have any video employees, but rather relies upon its
distribution for video sales.
Radio
The Company employs approximately five full-time employees and eight part-
time employees. Of the full-time employees, they are engaged mainly in
the administrative radio operations and sales. The part-time employees
are engaged in the on-air activities as on-air personalities.
Live Entertainment
This division has three full-time employees and approximately 20 part-time
employees. Full-time employees are management staff and part-time
employees are waitresses, bartenders, and door personnel.
Retail
Currently, this division has one full-time employee.
Legal Proceedings
The Company knows of no litigation pending, threatened, or contemplated,
or unsatisfied judgments against it, or any proceedings of which the
Company or any of its subsidiaries is a party, except as specified below.
The Company knows of no legal actions pending or threatened, or judgment
entered against any of its officers or directors or any of its
subsidiaries in their capacities as such, except as specified below.
In January, 1996 the Company, AB Goldberg, Harvey Rosenberg and several
other related and unrelated third parties were named as defendants in a
lawsuit filed by Sterling Consulting Corporation as Receiver for Indian
Motorcycle Manufacturing, Inc.("IMMI") The Complaint alleges interference
by defendants in the business of IMMI, conflicts of interest of AB
Goldberg, breach of fiduciary duty, unjust enrichment, and bankruptcy
fraud.
In July 1996, The Company filed suit against the Receiver alleging
intentional interference of contracted relationships and breach of
licensing agreements. In September 1996, the Company and the Receiver
commenced settlement negotiations whereby all parties would resolve their
disputes.
In February 1997, the Company agreed to terms of a Settlement Agreement
with the Receiver whereby the Company would relinquish all rights to the
Indian Motorcycle Trademark and pay the Receiver approximately $114,000.
(See Item 1, Other Business Developments herein)
In March 1997, the Company commenced legal proceedings against Image
Marketing Group, Inc. and Harvey Rosenberg, Burt Katz ( a director of the
Company) and Michael Katz, individually (the Defendants), for collection
of approximately $700,000 in advances to Image Marketing. The suit was
filed in Denver District Court. The suit was settled in July 1997 whereby
the defendants returned 144,410 shares of common stock of the Company and
Burt Katz resigned from the board.
In addition, the Company has commenced legal proceedings against HK Retail
Concepts for breech of contract. The claims are for unspecified damages
at this time. The suit was filed in Denver District Court.
In May, 1997 First Entertainment, Inc. was named as a co-defendant in a
lawsuit filed in Superior Court California, Court of San Diego. The
plaintiff alleges securities fraud and is seeking the return of their
$75,000 investment, interest at 10% from the date of their investment
through the date of repayment and legal fees. The Company believes the
lawsuit is without merit. While action involves matters for which the
ultimate liability, if any, has not been determined, management does not
expect the outcome to have a material adverse effect on the financial
position of the Company.
ACQUISITIONS AND MERGERS
Since inception the Company has engaged in a series of mergers and
acquisitions resulting in its present corporate structure and operating
subsidiaries. Currently, the Company has the following transactions to
report:
Power Media
In July, 1996, the Company issued 770,000 shares of its restricted common
stock, valued at $408,100, in exchange for 18,000 of the 25,000 then
issued and outstanding shares of Power Media Communications International,
Inc. (Power Media), or 72% ownership. Power Media was a substantially
dormant company that had developed the concept of selling infomercial
products in kiosks primarily located in retail malls.
In November 1996, a new entity was formed called "The Best Of As Seen on
TV", Inc. ("ASOTV") for the purpose of acquiring all of the issued and
outstanding common stock of Power Media and to provide original
incorporators with ownership in ASOTV. The original incorporators of
ASOTV were issued 464,000 shares of ASOTV for par value ($.001 per share),
which included 220,800 shares issued to NMG, LLP, an entity owned by the
wife of the president of the Company. ASOTV then issued 1,015,000 shares
of common stock to the Company for their 18,000 shares of Power Media and
issued 324,500 shares to an unrelated party for the remaining 7,000 shares
of Power Media. In addition, ASOTV received a stock subscription from the
previous owner of the 7,000 shares of Power Media to purchase
approximately 325,000 shares of common stock of ASOTV for $150,000, of
which $100,000 was received in 1996. As a result of the above
transactions, ASOTV owned 100% of Power Media and the Company owned
approximately 56 percent of ASOTV as of December 31, 1996.
Polton
On May 10, 1994, the Company acquired approximately 80% of the issued and
outstanding common stock of the Polton Corporation ("Polton") by issuing
75,000 shares of the Company's restricted common stock valued at $318,000.
In addition, the Company advanced Polton $200,000 for working capital.
Polton is primarily engaged in the manufacturing and distribution of
compact discs and cassettes for Warner Music labels.
Shortly after the consummation of the Polton acquisition a dispute arose
between the Company and Polton whereby Polton refused to provide financial
information to the Company necessary to report the consolidated results of
operations since the date of acquisition.
In November, 1995, the Company reached an agreement with Mr. Gary Firth,
president of Polton, and Polton whereby Mr. Firth would return the 75,000
shares of the Company's common stock and repay $100,000 of the $200,000
advanced as working capital. The agreement resulted in a write down of
the note receivable of $100,000 which has been reflected in the
accompanying consolidated statement of operations in selling, general and
administrative expenses during 1995.
Global Internet Corporation
General
The Board of Directors had previously decided that the Company should look
at the Internet gaming industry as a potential area of development. The
Board of Directors felt that this industry, while new and subject to
potential risk and uncertainty, particularly in the regulatory area,
offered unique opportunities for substantial profits over a relatively
short period of time with minimal investment. The Board of Directors
exercised its discretion under the Business Judgement Rule as adopted in
the State of Colorado to seek to place the Company into the Internet
gaming industry and believes that such a move is the most appropriate
action for the Company at this time.
It was the feeling of the Board of Directors of the Company that the
Company should look to acquire a company already in that business, even if
only on a development stage or preliminary basis, to accelerate the
Company's ability to become operational in this industry. The Company
looked at two companies in this industry, including Internet. The other
company was called OnLine Casinos, Inc, a private company. No other
companies were considered because these were the only companies which the
Company could find that could be potentially acquired and were of a size
which the Company believed it could absorb into its operations.
The Company performed due diligence on each company. After conducting its
due diligence, the Company chose Internet over OnLine Casinos, Inc.
because the Internet transaction was less dilutive to shareholders, was
less complex to complete, and did not involve a substantial assumption of
debt, which would have been required in the other transaction. The
transaction with OnLine Casinos, Inc. would have required the Company
issuing approximately $10 Million worth of its own securities and assuming
approximately $15 Million in debt. In addition, OnLine Casinos, Inc. did
not have software development contracts in place to the extent that
Internet did. The transaction was negotiated with Internet on an arms-
length basis. The Company's due diligence and prior negotiation with
OnLine Casinos, Inc. had given the Board of Directors an indication of the
prevailing values in this industry.
The Company has decided to engage in the transaction to broaden the asset
base and increase the value of the Company's shares as a result of
acquiring a business which plans to be in an industry which the Company
believes can be a source of profit in a short period of time. None of the
rights of any securities holders will be affected by this transaction. The
securities of the Company issued in this transaction are preferred shares,
which have the same rights and privileges as all other preferred shares of
the same class and are restricted securities under the Securities Act of
1933, as amended. The Company is acquiring Internet for its preexisting
debt, as measured in the securities of the Company, with no premium
attached to the price of the acquisition.
As far as the Company's common share are concerned, both the high and low
bid prices as of the date preceding public announcement of the transaction
were $1.06.
The Terms.
This transaction was planned as a purchase such that Internet became a
subsidiary of the Company and the former shareholders of Internet would
thereby own approximately 4.7%of the Company. This transaction has been
accounted for as a purchase. At the present time, approximately 50% of
the shares of Internet has been exchanged for approximately 30,000 shares
of Class B Convertible Preferred stock of the Company that is convertible
into 375,000 common shares. This percentage will be the total ownership
of the Company in Global and will require the authorization of
approximately 350,000 additional common shares by the shareholders to
complete the transaction.
The present exchange has given the Company effective control of Internet,
and the current control shareholders of Internet are now affiliates of the
Company. However, at the present time, Internet is in the development
stage and has not commenced operations. Internet is expected to commence
operations only after the Company has completed a private placement to
fund its efforts.
The Company has decided to engage in the transaction with Internet to
broaden the asset base and increase the value of the Company's shares as
a result of acquiring a potentially profitable business. At the present
time, Global, as well as the Company, has a going concern qualification to
its financial statements. In addition, Global will need substantial
capital and must overcome potentially significant regulatory hurdles to
begin business. However, the Company believes that the combination of the
two companies will create a potential which neither company presently has
to raise additional capital to carry out the Global business plan.
None of the rights of any securities holders will be affected by this
transaction. The securities of the Company which have been issued in this
transaction are Class B preferred shares. It is probable that the Class B
shareholders will elect to convert their shares into common shares of the
Company, which will have the same rights and privileges as all other
common shares but will be restricted securities under the Securities Act
of 1933, as amended. To obtain conversion of the Class B preferred shares
into common shares, the Company must obtain the approval of the
shareholders to increase its authorized common shares and must file
Articles of Amendment with the Secretary of State of Colorado. While the
Class B preferred shares have been issued, the filing for additional
common shares must await the approval of the shareholders to the increase
in authorized common shares.
Global Internet Corporation (Internet) was incorporated in June 1996, for
the purpose of developing a virtual casino to provide gambling on the
Internet. Internet's operations will eventually be based offshore and
Internet will focus its attention on creating a worldwide market. Internet
is a development stage company which has not yet commenced operations.
Internet has no material inventories or accounts receivable. No
independent market surveys have ever been conducted to determine demand
for the Internet's products and services. Internet has never generated any
revenues. At the present time, Internet's principal assets are the
software contracts which it possesses to develop a virtual casino.
Narrative Description of the Business
In June 1996, Internet entered into a Web Site Development and Maintenance
Agreement with DDB Needham Interactive Communications ("DDB"), whereby
DDB, with the assistance of Electronic Data Systems Corporation ("EDS") as
a subcontractor, agreed to develop a Virtual Internet Casino. As of March
1997, the June Agreement was superseded with a new agreement.
The agreement outlines a two-phase Web Site development program. Under
Phase 1, the agreement calls for the development of five gaming sites:
black jack, poker, roulette, slot machines and keno. At these sites,
players would be able to use money to play against the house or to enter
tournaments in which top place finishers would win prizes. The purpose of
Phase 1 is to have a fully operational site where the application can gain
acceptance while a customer base is being developed. In Phase 2, Internet
intends to expand the complexity of the games to include multi-player
games site that will generate additional revenue as a percentage of the
money gambled.
Internet has to date paid DDB a total of $282,509 for the work which has
already been completed. The new agreement provides that DDB will resume
work on Phase 1 once Internet places the remaining balance due of
$1,250,000 into escrow.
The Company intends to do an equity financing raising approximately $2.2
million exclusive of commissions and expenses to complete the funding
obligation to DDB and ongoing expenses necessary for the operations of
Internet through 1998. DDB has agreed to extend the escrow requirement
until financing is completed. This equity financing will be for common
shares of the Company and is expected to be priced at $.75 per common
share and thus is not expected to be substantially dilutive to existing
Company shareholders.
The Company has a letter of intent from Commercial Capital Corp. and Four
Seasons Partners, Inc., a financing firm, to provide the financing in a
private placement. If the Company is unable to finance the private
placement transaction, the Company will seek alternative financing, none
of which it presently possesses. The Company will look at additional
equity financings or at debt financings, if such can be arranged on terms
beneficial to the Company. At the present time, the Company has no
definite financing plans other than the letter of intent for a private
financing.
Under Phase 1, there will be development of a virtual Internet casino.
Internet intends to engage in Internet commerce in countries other than
the U.S. completely through a foreign subsidiary, and therefore does not
plan to obtain any federal, state or local permits. The decision to not
obtain any such federal, state, or local permits is based upon an opinion
from the law firm of Graham, Bright & Smith, P.C., Dallas, Texas, which
stated that neither the Company, Internet, nor the Dominica corporation
(see following paragraph) will be required to file or obtain any U.S.
federal, state or local permits to engage in the activities conducted on
Internet's web site. It should be noted that the laws in the United
States are unclear as to the extent of federal, state, or local
jurisdiction. There is a potential risk for the foreseeable future that
regulatory authorities in the United States may attempt to assert
jurisdiction in this industry, including over US domiciled corporations
who have their off shore operations in foreign subsidiaries. There can be
no guarantee that Internet will be free of such attempts to assert
jurisdiction. Any such attempts to assert jurisdiction on Internet could
have a materially adverse effect on Internet's and the Company's
operations. The successful assertion of U.S. jurisdiction would also have
a materially adverse impact on both Internet's and the Company's
operations. At the present time, the Company cannot assess the likelihood
that such attempts to assert jurisdiction will occur.
Internet intends to obtain licenses to operate in countries where Internet
gaming is regulated and legal. To date, Internet has made application for
a license to operate a virtual casino on the island of Dominica, which is
a country in the West Indies with a population of approximately seventy
thousand residents. None are expected to be involved as customers of the
virtual casino. Internet expects to be granted such license promptly,
which is the primary reason for seeking to do business in Dominica.
The terms of the proposed license are as follows. The term of the initial
license will be for five years. No renewal provisions are contained in the
proposed license. The license is expected to be granted upon the payment
of a $15,000US fee. The license would be non-exclusive, although no other
licensee may have more favorable terms than Internet. Internet must
commence operations within one year of the grant of the license and
maintain constant operations during the term thereof. Any third party
advertising placed on the Internet must be approved by the appropriate
Dominica governmental authority. Internet must agree to pay the government
of Dominica per annum 5% of the net win/loss wagered or $25,000US,
whichever is greater. This provision is subject to audit by the Government
of Dominica. In addition Internet must agree to hire a minimum of six
persons at a rate of not less than $3.00 per hour to assist in the
operation of the business in Dominica. Internet must pay all charges,
costs, levies, and other expenses in connection with the use and access to
the Internet. Any breach of the license must be remedied within sixty days
of notice or the license is revoked. On its behalf, Dominica would agree
to provide to Internet access under the most favorable terms available to
international telecommunications services, to give Internet the right to
import all of its equipment for Internet gaming on a duty free basis, to
provide all work permits for such technical and managerial personnel as
may be necessary to operate Internet's business, to exempt from income,
withholding, sales and other taxes Internet's revenues and those of its
subsidiary and to exempt from such taxes all non-resident employees of
Internet or its subsidiary and all winnings of non-Dominican customers of
Internet. Disputes under the license are subject to arbitration under
Dominica law. The license, which Internet plans to obtain, is contains all
of the requirements for Internet to operate in Dominica.
No independent market surveys have ever been conducted to determine demand
for the Internet's products and services on Dominica. Internet plans to
use Dominica essentially as a base for its world wide virtual casino. At
the present time, Internet has not selected which countries it intends to
target to develop a customer base nor has it conducted any independent
market surveys to determine demand for the Internet's products and
services elsewhere in the world. Internet plans to select the countries it
intends to target after the Company has completed the private placement
for Internet. Internet will retain local counsel for each proposed
principal jurisdiction, will review the laws of each potential
jurisdiction abroad and will select only those jurisdictions in which it
believes that its activities will not contravene local laws. In the
Company's opinion, such activities could be completed within six months of
commencement and could cost approximately $50,000US, which has already
been included in the planned budget. As of the date hereof, no advertisers
have agreed to furnish prizes or otherwise be associated with Internet's
efforts.
Internet intends, however, to exclude U.S. residents from being able to
play commercially on its virtual casino system. Internet will use a
variety of methods to do so, such as addresses and questionnaires.
However, the primary basis will be origin of funds as the determinant of
eligibility. In addition to posting a warning on the site that persons
resident in the United States are not eligible to play on the site,
Internet intends to verify origin of funds. If the funds originate from
a banking source located in the Continental U.S. or U.S. administered
territory, the transaction will not be completed. In case of
electronically transferred funds such as Visa or Mastercard, Internet will
check country of origin as part of the initial funds verification. If the
source comes back to the United States, the transaction will be denied.
In cases where funds are transferred by wire or remitted by check, if
found to be originating in the United States, the funds will be returned
to the sender on receipt. THIS METHOD OF EXCLUDING U.S. RESIDENTS IS NOT
WITHOUT RISK BECAUSE NO ONE CAN OFFER COMPLETE CERTAINTY THAT SUCH
RESIDENTS SHALL BE EXCLUDED. The decision to principally rely upon this
method of exclusion is based solely upon the Board of Directors belief
that such is the best option available at the present time. Principal
reliance upon this method may be subject to actions from governmental
regulators. It should be noted again that the laws in the United States
are unclear as to the extent of federal, state, or local jurisdiction. At
this time, it is not possible to obtain clear and definitive legal advice
as to the limits of U.S. jurisdiction in this matter. Therefore, the
Company is taking a risk in going forward in this industry. There is a
potential risk for the foreseeable future that regulatory authorities in
the United States may attempt to assert jurisdiction in this industry,
including over US domiciled corporations who have their off shore
operations in foreign subsidiaries. There can be no guarantee that
Internet will be free of such attempts to assert jurisdiction. Any such
attempts to assert jurisdiction on Internet could have a materially
adverse effect on Internet's and the Company's operations. The successful
assertion of U.S. jurisdiction would also have a materially adverse impact
on both Internet's and the Company's operations. At the present time, the
Company cannot assess the likelihood of such attempts to assert
jurisdiction occurring. Internet plans to continually refine its
operations to achieve certainty that US residents will be completely
excluded. The ultimate success of such plans cannot be determined at this
time. Internet plans to use the most current technology available to
exclude U.S. residents from its virtual casino.
Phase 1 will require DDB to develop a proprietary connection on the
Internet. This will enable players to have a continuous interactive
connection with the Server. The rapid response time and percentage
decrease in inadvertent disconnections between the User and the Server
will be a deciding factor in the success of this Phase.
The agreement with DDB provides that Internet will own all proprietary
rights to the software and the underlying technology.
Prior to the virtual casino site becoming operational the Company expects
to incur the following costs.
*As previously stated, a payment to DDB in the amount of $1,250,000
due under the terms of the Web Site Development and Maintenance Agreement
is to be paid into escrow for DDB to resume work on Phase 1. This amount
includes all test service and all other associated costs. There are no
other costs involved.
*Executive Salaries of $17,000 per month.
*Consulting fees of $14,000 per month
*Other general and administrative expenses such as rent,
advertising, telephone, legal, accounting, marketing, travel and
entertainment, office supplies and all other expenses, estimated to be
approximately $9,000 per month.
Phase 1 will be hosted in the Plano WebRANCH (an existing high visibility
web site) for four (4) months to do BETA testing of the games. Phase I is
expected to take five months to complete. During this time Internet will
allow players to "gamble" with "fun money." Internet plans to promote the
Web Site to advertisers based on the number of hits at the Web Site.
During this period, Internet plans to conduct tournaments that will offer
prizes from advertisers based on criteria such as highest number of
points, top fifty players, or most wins. Because an advertiser is
interested in capturing demographic information about the user and certain
users are unwilling to enter this information, it is anticipated that the
games will be run under two different levels in Phase 1. Level one will
allow anybody to play for free and will not require the user to enter any
demographic information. Level 2 will allow players to compete in
"tournaments" and against the house. This Phase will require the user to
enter all the appropriate demographic information. Internet will focus
its attention on gaining a customer base in Europe and Asia and believes
that by offering this multi-level virtual casino experience it will be
able to gain a better penetration into the marketplace.
Phase 2 will include the development of multi-player games. Under Phase
2 it will be possible for players to reserve a table and play against the
dealer with their own friends. Internet's revenue for multi-player games
will be a percentage of the actual money gambled. In addition, Internet
will seek advertising revenue by selling the demographic information
obtained from its players or by offering advertising space on the Web
Site. Internet envisions designing advertising space that would be
similar to the shops at the forum at Caesar's Palace Hotel and Casino.
During this Phase, the user will be playing directly against the dealer.
The Web Site will be very visual and will simulate as many aspects
associated with a live casino experience as possible. Once the user is
connected to the Game Server, the Game Server will tell the user which
card, number and suit, or symbol to display. Based on this interplay, the
user will win, lose or draw.
Markets
Internet's marketing plan will be focused solely on international markets
for its virtual casino. This plan will be the primary focus for Internet's
marketing efforts during the coming fiscal year.
During the past fiscal year, Internet has focused soley on development
stage activities. At the present time, Internet has not selected which
countries it intends to target to develop a customer base nor has it
conducted any independent market surveys to determine demand for the
Internet's products and services elsewhere in the world. Internet plans to
select the countries it intends to target after the Company has completed
the private placement for Internet.
Raw Materials
Internet plans to use no material raw materials in its operations
Customers and Competition
The principal customers of Internet are expected to be individuals from
countries outside the U.S. There are a number of companies which now or in
the future plan to market similar competing products and services as those
of Internet. At the present time, Internet is aware of no major competitor
in its proposed market. Internet believes that the market is divided up
among very small operations, none of whom have a significant share of the
market on an individual basis.
To the extent that Internet is unable to interest consumers to accept its
proposed products and services, Internet could have difficulty in
achieving its goals and objectives, of ever becoming profitable, or of
even continuing as a viable entity. Internet believes that it can develop
a viable segment of its proposed market, although Internet has not yet
started to compete. In any case, Internet expects competition to be
intense. The market for all of Internet's proposed products and services
probably has limited barriers to entry for other competing operations, so
that the competitive picture could change at any time. Consequently, the
number of competitors could be substantial, although such is not the case
at this point.
Proprietary Information
Internet plans to use copyrighted software, trade secrets, and other
proprietary information in connection with its proposed operations. At the
present time, Internet, as a development stage company, owns no material
proprietary information.
Government Regulation
Internet's proposed operations are expected to involve potentially
significant governmental oversight and regulation. In order to begin
operations, Internet's foreign subsidiary must obtain a license from the
government of Dominica, which is expected to exercise a continuing role in
the oversight of Internet's foreign subsidiary's operations. Other
jurisdictions may also exercise oversight of Internet's foreign
subsidiary's operations. Internet believes that, while such oversight and
regulation will have a significant impact on its ability to operate,
Internet will make every effort to become adequately staffed to deal with
this impact. The complete impact of such governmental regulation cannot
be foreseen at this time.
Internet will otherwise also be governed by federal and state laws of
general applicability, none of which are expected to be material to
Internet's planned operations. Such regulation is not considered to be
burdensome on Internet or to have a material effect on Internet's ability
to operate or to make a profit. Otherwise, Internet is not subject to any
material governmental regulation or approvals.
Research and Development
Internet has not made any expenditures as of the six months ended June 30,
1997 for research and development.
Environmental Compliance
Internet is not expected to be subject to any material costs for
compliance with any environmental laws in any jurisdiction in which it
proposes to operate.
Employees
Internet has two employees. They are Anthony Kay, President, CEO and
Treasurer and Steven E. Bright Vice-President and Secretary Internet's
employees are not represented by any union or collective bargaining group,
and there is no history of any labor problems, or disputes. Internet has
the human resources at present time to fulfill it current business plan
but expects to hire additional employees in the future for expansion of
its operations in the ordinary course of business.
Mr. Kay has served as President, CEO and Treasurer of Global since
September, 1996. From December 1978 to September 1996, Mr. Kay served as
President and CEO of Secutron Corp. where he was successful in leading the
Company from a one man operation to a corporation with 40 employees and
annual revenues in excess of $5 million. Utilizing the technical training
offered by IBM, including IBM's campus program at the University of
Pennsylvania's Wharton School, he became a recognized expert in the design
and development of software systems for the securities industry. In
addition, he designed and built systems for the manufacturing and
distribution, oil and gas and trucking industries.
Mr. Kay is a founding member and former treasurer of the Colorado Software
Association. Mr. Kay also founded Midrange Solutions Corporation, a wholly
owned subsidiary of Secutron Corp., which specializes as a systems
integrator and third party solution provider. Midrange became one of the
regions largest resellers of IBM's equipment and has won IBM's business
partner of the year award. Midrange was also selected by JD Edwards
Company to market and sell its newly announced Genesis Product in a six
state area.
Mr. Steven Bright has served as President and Director of Global since its
inception until September 1996 when he resigned as President and became
Vice President. Mr. Bright is engaged full time in the practice of law
and currently serves as an officer, director and principal shareholder of
Graham, Bright & Smith, P.C. in Dallas, Texas. Mr. Bright's practice
emphasizes international law, commercial, financial and business planning.
Mr. Bright attended the University of Texas and received his Juris
Doctorate Degree Cum Laude from Baylor School of Law in 1975.
Internet's employees are not represented by any union or collective
bargaining group, and there is no history of any labor problems, or
disputes. Internet has the human resources at present to fulfill its
current business plan but expects to hire additional employees in the
future for expansion of its operations in the ordinary course of business.
Internet has not been subject to any bankruptcy, receivership or similar
proceedings.
Backlog
At September 30, 1997, Internet had no backlogs.
Financial Statements, Global Internet Corporation
Enclosed are the audited financial statements of Global Internet
Corporation for the period ended December 31, 1996 and unaudited
financial statements for the period ended September 30, 1997.
To the Board of Directors
Global Internet Corporation
Denver, Colorado
Independent Auditor's Report
I have audited the accompanying balance sheet of Global Internet
Corporation ( A Development Stage Company) as of December 31, 1996, and
the related statements of operations, changes in stockholders' deficiency,
and cash flows for the period June 4, 1996 (Inception) through December
31, 1996. These financial statements are the responsibility of the
Company's management. My responsibility is to express an opinion on these
financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing
standards. Those standards require that I 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. I believe that my audit
provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Global Internet
Corporation (A Development Stage Company) as of December 31, 1996, and the
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered losses from operations and
has a net capital deficiency, which raise substantial doubt about its
ability to continue as a going concern. Additionally, the Company has
entered into a Web Site and Development and Maintenance Agreement with an
unaffiliated third party which requires the Company to place into escrow
approximately $1,250,000 to fund the development of the software necessary
for the Company to commence its business plan. Should the Company be
unsuccessful in obtaining the funds necessary to meet the escrow
requirements by January 15, 1998, the Web Site Development and Maintenance
Agreement shall terminate and the contractual relationship between the
parties will end. Accordingly, the Company would have to explore other
avenues of developing its business plan.
As further discussed in Note 1 to the financial statements, the Company's
business plan encompasses creating software aimed at developing a virtual
casino to provide gambling on the Internet. There are no assurances that
the Company will receive the necessary permits and or licenses from the
various federal, state, local or international authorities that will allow
the Company to commence and implement its business plan. Management's
plans regarding these matters are described in Note 1. The financial
statements do not include and adjustments that might result from the
outcome of these uncertainties.
Gerald R. Hendricks & Company, P.C.
May 21, 1997, expect for the third paragraph of
Note 6, the date of which is November 25, 1997
Westminster, Colorado
<TABLE>
<CAPTION>
GLOBAL INTERNET COPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
ASSETS
December 31, September 30,
1996 1997
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 68,918 $ 1,924
- -------------------------------------------------------------------------
Total current assets 68,918 1,924
PROPERTY AND EQUIPMENT, net 607 2,358
- -------------------------------------------------------------------------
$ 69,525 $ 4,282
=========================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Convertible note-related party $ 325,000 $ 357,000
Unsecured advances - 35,300
Accounts payable-
Third party 83,648 3,456
Related party 48,849 55,946
Accrued expenses-related parties-
Salaries 68,000 221,000
Interest 6,000 31,875
- --------------------------------------------------------------------------
Total current liabilities 531,497 704,577
- --------------------------------------------------------------------------
COMMITMENT AND CONTINGENCIES - -
STOCKHOLDERS' DEFICIENCY:
Preferred stock, $.01 par value,
5,000,000 shares authorized,
none issued - -
Common stock, $.001 par value,
10,000,000 shares authorized,
2,985,000 issued and outstanding 2,985 2,985
Additional paid-in capital 11,940 11,940
Deficit accumulated during the
development stage (476,897) (715,220)
- --------------------------------------------------------------------------
(461,972) (700,295)
$ 69,525 $ 4,282
=========================================================================
<CAPTION>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
GLOBAL INTERNET COPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
Cumulative
Inception Inception
(June 4, 1996) For the Nine (June 4, 1996)
To Months Ended To
December 31, September 30, September 30,
1996 1997 1997
(Unaudited) (Unaudited)
<S> <C> <C> <C>
INTEREST INCOME $ 1,132 $ 90 $ 1,222
OPERATING EXPENSES:
Research and development 292,507 ? 292,507
Professional fees-
Third party 860 ? 860
Related parties 96,103 38,817 134,920
Salaries
related parties 68,000 153,000 221,000
Interest related
Parties 6,000 25,875 31,875
Marketing 4,030 75 4,105
Travel and entertainment 3,983 6,022 10,005
Telephone and
communications 2,935 5,496 8,431
Deprecation ? 563 563
Other 3,611 8,565 12,176
- -----------------------------------------------------------------------
478,029 238,413 716,442
- -----------------------------------------------------------------------
NET LOSS $ (476,897) $ (238,323) $ (715,220)
========================================================================
NET LOSS PER
COMMON SHARE $ (.16) $ (.08) $ (.24)
========================================================================
WEIGHTED AVERAGE
NUMBER OF
SHARES OUTSTANDING 2,985,000 2,985,000 2,985,000
========================================================================
<CAPTION>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
GLOBAL INTERNET COPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
Deficit
Accumulated
Additional During the
Class A Common Stock Paid-in Development
Shares Amount Capital Stage Total
<S> <C> <C> <C> <C> <C>
BALANCE, June 4,
1996, (Inception) ? $ ? $ ? $ ? $ ?
Shares issued
for cash at
$.005 per share 2,985,000 2,985 11,940 ? 14,925
Net loss for
the period ? ? ? (476,897) (476,897)
- ------------------------------------------------------------------------------
BALANCE, December
31, 1996 2,985,000 2,985 11,940 (476,897) (461,972)
Net loss for
the period ? ? ? (238,323) (238,323)
- ------------------------------------------------------------------------------
BALANCE, September
30, 1997,
(Unaudited) 2,985,000 $ 2,985 $ 11,940 $(715,220) $(700,295)
==============================================================================
<CAPTION>
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
GLOBAL INTERNET COPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
Cumulative
Inception For the Nine Inception
(June 4, 1996) Months (June 4, 1996)
To Ended To
December 31, September 30, September 30,
1996 1997 1997
(Unaudited) (Unaudited)
<S> <C> <C> <C>
CASH FLOW FROM OPERATING
ACTIVITIES:
Net loss $ (476,897) $ (238,323) $ (715,220)
- -----------------------------------------------------------------------------
Adjustments to reconcile net
loss to net cash used in
operating activities-
Deprecation - 563 563
Change in liabilities-
Increase (decrease)
in accounts payable 132,497 (73,095) 59,402
Increase in accrued expenses 74,000 178,875 252,875
- ---------------------------------------------------------------------------
206,497 106,343 312,840
- ---------------------------------------------------------------------------
NET CASH USED IN OPERATING
ACTIVITIES (270,400) (131,980) (402,380)
- ----------------------------------------------------------------------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property
and equipment (607) (2,314) (2,921)
- ----------------------------------------------------------------------------
NET CASH USED IN
INVESTING ACTIVITIES (607) (2,314) (2,921)
- ----------------------------------------------------------------------------
CASH FLOW FROM FINANCING
ACTIVITIES:
Proceeds from
convertible note 325,000 32,000 357,000
Proceeds from unsecured
Advances - 35,300 35,300
Issuance of common
stock for cash 14,925 ? 14,925
- ---------------------------------------------------------------------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 339,925 67,300 407,225
- ----------------------------------------------------------------------------
NET INCREASE (DECREASE)
IN CASH 68,918 (66,994) 1,924
CASH AND CASH EQUIVALENTS,
Beginning - 68,918 -
- ---------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS,
Ending $ 68,918 $ 1,924 $ 1,924
===========================================================================
<CAPTION>
The accompanying notes are an integral part of these financial statements.
</TABLE>
[CAPTION]
GLOBAL INTERNET CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Financial data at September 30, 1997 and for the nine month
period ended September 30, 1997 is unaudited)
1.Organization and Business Activity
Interim Financial Statements (Unaudited)
In the opinion of Global Internet Corporation (the Company), the
accompanying unaudited financial statements contain all adjustments
(consisting of only normal recurring accruals) necessary to present fairly
the financial position of the Company at September 30, 1997, and the
results of its operations and changes in cash flows for the nine months
ended September 30, 1997. There were no significant, material operations
of Company from June 4, 1996 (inception) through September 30, 1996. The
results of operations for the nine months ended September 30, 1997, are
not necessarily indicative of the results to be expected for the full
year.
The Company
The Company was incorporated in the State of Delaware on June 4, 1996. The
Company is in the development stage and development stage activities have
consisted of raising equity and debt capital and research and development
activities aimed at developing a virtual casino to provide gambling on the
Internet. Global Casinos, Inc. (Global) owns 58.6% of the Company's
outstanding common stock.
During the period ended December 31, 1996, the Company received $14,925 of
equity financing in cash and $325,000 in debt financing from Global
through the issuance of a 10% note, due October, 1997. In February 1997,
the Company received an additional $32,000 in debt financing from Global.
(See Note 4). During the nine month period ended September 30, 1997, the
Company received $35,300 in unsecured advances from First Entertainment,
Inc. (First Entertainment). (See Notes 5 and 9).The Company is
attempting to raise additional equity capital. As further discussed in
Note 6, the Company has entered into a Web Site Development and
Maintenance Agreement with an unaffiliated third party which requires the
Company to place into escrow approximately $1,250,000 to fund the
development of the software necessary for the Company to commence its
business plan. Should the Company be unsuccessful in obtaining the funds
necessary to meet the escrow requirements by January 15, 1998, the Web
Site Development and Maintenance Agreement shall terminate and the
contractual relationship between the parties will end. Accordingly, the
Company would have to explore other avenues of developing its business
plan.
The Company's business plan encompasses creating software aimed at
developing a virtual casino to provide gambling on the Internet. There
are no assurances that the Company will receive the necessary permits and
or licenses from the various federal, state, local or international
authorities that will allow the Company to commence and implement its
business plan.
GLOBAL INTERNET CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Financial data at September 30, 1997 and for the nine month
period ended September 30, 1997 is unaudited)
There can be no assurance that the Company's business will develop as
anticipated by management or that additional financing will be available.
Management is attempting to raise additional equity capital to meet the
requirements of the Web Site Development and Maintenance Agreement, and to
provide working capital. Additionally, the Company is attempting to
identify and comply with the necessary permits and licenses necessary to
develop and implement a virtual casino to provide gambling on the
Internet. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities that might result
if the Company is unable to continue as a going concern.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased with a maturity of three months or
less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost and are depreciated using the
straight line method over the estimated useful lives of five years.
Expenditures for maintenance and repairs are charged directly to the
appropriate operating account at the time the expense is incurred.
Expenditures determined to represent additions and betterments are
capitalized.
Capitalized Software Costs
Pursuant to Statement of Financial Accounting Standards No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed, issued by the Financial Accounting Standards Board,
the Company is required to capitalized certain software development and
production costs once technological feasibility has been achieved; that
is, when the product design and a working model of the software have been
completed and the working model and its consistency with the product
design have been confirmed by testing. The cost of purchased software is
capitalized when related to a product which has achieved technological
feasibility or that has an alternative future use. The Company records
all costs incurred to establish the technological feasibility of computer
software to be sold, leased or otherwise marketed as research and
development costs. For the periods ended December 31, 1996 and September
30, 1997, the Company did not capitalized any software development costs.
GLOBAL INTERNET CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Financial data at September 30, 1997 and for the nine month
period ended September 30, 1997 is unaudited)
Impairment of Long-Lived Assets
Management of the Company periodically reviews the carrying value of long-
lived assets for potential impairment by comparing the carrying value of
those assets with their related, expected future net cash flows. Should
the sum of the related, expected future net cash flows be less than the
carrying value, management would determine whether an impairment loss
should be recognized. An impairment loss would be measured by the amount
by which the carrying value of the asset exceeds the future discounted
cash flows.
Income Taxes
Deferred income taxes are reported using the liability method. Deferred
tax assets are recognized for deductible temporary differences and
deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of
assets and liabilities and their tax bases. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates
on the date of enactment.
2. Summary of Significant Accounting Policies, continued
Net Loss Per Common Share
The net loss per common share is based on the weighed average number of
common shares outstanding during the periods, including the common stock
equivalents resulting from dilutive stock options. No common stock
equivalents are included in the computation of net loss per share as these
equivalents are antidilutive.
Stock Options
In October 1995 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-
Based Compensation. This new standard defines a fair value based method
for accounting for an employee stock option or similar equity instrument.
This statement gives entities a choice of recognizing related
compensation expense by adopting the new fair value method or to continue
to measure compensation using the intrinsic value approach under
Accounting Principles Board (APB) Opinion No. 25, the former standard. If
the former standard for measurement is elected, SFAS No. 123 requires
supplemental disclosure to show the effects of using the new measurement
criteria. The Company intends to use the measurement prescribed by APB
Opinion No. 25, and accordingly, this pronouncement will not affect the
Company's financial position or results of operations.
GLOBAL INTERNET CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Financial data at September 30, 1997 and for the nine month
period ended September 30, 1997 is unaudited)
Use of Estimates in the Preparation of Financial Statements
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.
Fair Value of Financial Statements
The carrying amounts of financial instruments, consisting of cash and cash
equivalents, approximates fair value as of December 31, 1996 and September
30, 1997, because of the relatively short maturity of these instruments.
The carrying value of the convertible note payable approximates fair value
as of December 31, 1996 and September 30, 1997, based upon market prices
for the same or similar debt issues.
3. Property and Equipment
Property and equipment, consisting solely of office equipment, had a net
book value of $607 and $2,358 at December 31, 1996 and September 30, 1997,
respectively.
Depreciation expense for the periods ended December 31, 1996 and September
30, 1997 was $0 and $563, respectively.
4. Convertible Note
During the period ended December 31, 1996, the Company received, from time
to time, advances from Global amounting to $325,000. Subsequently in
February 1997, the Company executed a Convertible Promissory Note (the
Convertible Note) with Global. The Convertible Note bears interest at
10%, is due October 31, 1997. The Convertible Note is without collateral.
Global can elect to convert the principal and any accrued and unpaid
interest into common stock of the Company at the greater of the current
market price of the Company's stock or $.25.
In February 1997, the Company received an additional $32,000 from Global
and added this amount to the outstanding balance of the convertible note
with the same terms and conditions.
Interest expense charged to operations for the periods ended December 31,
1996 and September 30, 1997, was $6,000 and $25,875, respectively.
GLOBAL INTERNET CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Financial data at September 30, 1997 and for the nine month
period ended September 30, 1997 is unaudited)
5. Related Parties
During the periods ended December 31, 1996 and September 30, 1997, the
Company incurred $6,125 and $27,000, respectively, in consulting fees to
an entity in which an officer, director and stockholder is a principal.
During the periods ended December 31, 1996 and September 30, 1997, the
Company incurred legal fees to two individuals, one who is a stockholder
and one who is an officer and stockholder totaling $89,978 and $11,817,
respectively.
The Company has entered into employment agreements with two individuals
one who is an officer, director and stockholder and one who is an officer
and stockholder. The employment agreement with the President and Chief
Executive Officer is for a period of ten years from September 1, 1996, and
calls for monthly payments in the amount of $10,000 until the Company
achieves profitability, at which point his compensation shall be increased
to $15,000. In the event that his salary is deferred, he is entitled to
receive additional compensation equal to 5% interest on the deferred
amount. In connection with the execution of this agreement, this
individual received 50,000 stock options to acquire shares of the
Company's common stock at an exercise price of $.25 per share.
The other employment agreement with the Vice President and Secretary is
for a period of three years from September 1, 1996, and calls for monthly
payments in the amount of $7,000. In the event that his salary is
deferred, he is entitled to receive additional compensation equal to 5%
interest on the deferred amount. In connection with the execution of this
agreement, this individual received 50,000 stock options to acquire shares
of the Company's common stock at an exercise price of $.25 per share.
The Company has not paid any amounts to these individuals pursuant to
their employment contracts. For the periods ended December 31, 1996 and
September 30, 1997, the Company recorded salary expense of $68,000 and
$153,000, respectively, and a corresponding liability totaling $68,000 and
$221,000, respectively.
5. Related Parties, continued
During the nine month period ended September 30, 1997, the Company
received advances from First Entertainment amounting to $35,300. The
advances are not pursuant to any formal loan agreement, bear no interest
and have no specific repayment terms.
GLOBAL INTERNET CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Financial data at September 30, 1997 and for the nine month
period ended September 30, 1997 is unaudited)
6. Commitment and Contingencies
Commitment
The Company has entered into a Web Site Development and Maintenance
Agreement with an unaffiliated third party to develop a virtual Internet
casino. The Web Site Development and Maintenance Agreement was amended in
November 1996 and subsequently in March 1997.
The March 1997 amendment requires escrow payments to be made in the amount
of $1,039,840 payable as follows: $346,613 at the execution of the March
1997 amendment, $346,613 upon the commencement of work as evidenced by
written notice from the unaffiliated third party that work has commenced;
and, $346,613 at the completion of the initial phase. If the escrow is
funded after March 25, 1997 but before June 16, 1997, the cost of the
initial phase will be increased 5%. If the escrow is funded after June
16, 1997 but before September 15, 1997, the cost of the initial phase will
be increased 10%.
The Company has extended the agreement until January 15, 1998; however, in
connection with this extension, the Company was informed by the
unaffiliated third party that the total cost to develop the virtual
Internet casino has increased another 10%. Accordingly, the Company
anticipates that the total costs to develop this software will now
approximate $1,250,000. If the escrow is not funded on or before January
15, 1998, the Web Site Development and Maintenance Agreement shall
terminate and the contractual relationship between the parties will end.
Contingencies
Global
During 1995 and 1996, Global and certain officers and directors of Global
received requests for information from the U.S. Securities and Exchange
Commission (SEC) related to an investigation begun by the SEC during
1994 into various matters, including certain transactions in securities by
Global and one of its officers and directors. On January 13, 1997, Global
was notified that the SEC staff intended to recommend initiation of
administrative procedures for a Cease and Desist Order against Global and
two of its former officers and directors with violations of certain
provisions of federal securities laws. Global has engaged in negotiations
with the SEC staff concerning possible disposition of this matter. Based
upon the content of these discussions, management of Global believes that
the outcome of this matter will not have a material adverse effect on the
business of Global; however, there can be no assurance as to the final
outcome of the investigation or the impact, if any, on the operations of
the Company.
GLOBAL INTERNET CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Financial data at September 30, 1997 and for the nine month
period ended September 30, 1997 is unaudited)
6. Commitment and Contingencies, continued
Contingencies, continued
Income taxes
As of September 30, 1997, the Company had not filed its federal and state
income tax returns for the period ended December 31, 1996. The Company
believes that no taxes are due and owing because of the significant losses
that the Company has incurred; however, there may be penalties that the
Company has incurred due to its noncompliance with federal tax laws.
Management is attempting to prepare and file the necessary returns.
7. Stockholders' Deficiency
Preferred stock
The Company is authorized to issue 5,000,000 shares of its $.01 par value
preferred stock. The shares may be issued in such series and with such
preferences as may be determined by the Board of Directors. No preferred
shares have been issued by the Company.
Common stock
During the period ended December 31, 1996, the Company received $14,925 in
cash and issued 2,985,000 shares ($.001 per share) of its common stock.
Stock Option Plan
The Company established the 1996 Stock Option Plan (the Plan) and
reserved up to 750,000 shares to be issued pursuant to the Plan. Under
the Plan, stock option can be granted at prices not less than 100% of the
fair market value of the Company's stock at the date of grant. Options
are exercisable for a period of five years.
<TABLE>
<S> <C>
Option information is as follows:
Options outstanding, June 4, 1996 (inception) -
Granted 450,000
Options outstanding, December 31, 1996 450,000
Granted 100,000
Options outstanding, September 30, 1997 550,000
Option exercise prices $ .25
Exercisable options 550,000
Weighted average exercise price $ .25
Options available for future grant 200,000
</TABLE>
7. Stockholders' Deficiency, continued
Rescinded Stock Transaction
During the period ended September 30, 1997, the Company entered into an
agreement to sell 600,000 shares of its $.001 par value stock for $3,000,
or $.005 per share. The sale agreement was made between the Company and
two entities; one of which is owned by the wife of the president and chief
executive officer of First Entertainment, and the other is owned by a
shareholder of First Entertainment. The sale agreement was not approved
by the Board of Directors of First Entertainment; accordingly, the amounts
received from these two entities have been recorded as accounts payable.
8. Income Taxes
At September 30, 1997, the Company has net operating loss carryforwards,
for federal income tax purposes of approximately $715,000 expiring in
2012.
When more than a 50% change in ownership occurs, over a three year period,
as defined, the Tax Reform Act of 1986 limits the utilization of net
operating loss (NOL) carryforwards in the year following the change in
ownership. Therefore, it is possible that the Company's utilization of
its NOL carryforwards may be partially reduced as a result of future
changes in stock ownership due to the proposed Agreement and Plan of
Reorganization discussed in Note 9. No determination has been made as of
September 30, 1997 as to what implications, if any, there will be in net
operating loss carryforwards of the Company.
9. Subsequent Event
In May 1997, Global entered into an Agreement and Plan of Reorganization
with First Entertainment whereby Global would exchange 1,500,000 (86%)
shares of the Company's commons stock that it owns and the $357,000
convertible note that Global holds for 30,000 shares of First
Entertainment Class B Convertible Preferred Stock and 1,500,000 warrants.
The warrants shall be for a period of five years from the date of
issuance and will be exercisable at $1.25 per share.
The Agreement and Plan of Reorganization allows other stockholders of the
Company to exchange their shares at a different exchange rate. Each share
tendered by stockholders other than Global, shall be exchanged for one
warrant that is exercisable for a five year period at $1.25 per share.
The Agreement and Plan of Reorganization is subject to the approval of the
stockholders of the Company and First Entertainment.
Management's Discussion and Analysis or Plan of Operation
The Company incurred a loss of approximately $477,000 for the period ended
December 31, 1996 whose activities consisted of raising debt and equity
financing and research and development activities aimed at developing a
virtual casino to provide gambling on the Internet. The Company incurred
a loss of $238,000 for the nine months ended September 31, 1997 and its
activities are limited due to the lack of working capital and consist
primarily of capital raising activities. For the period June 4, 1996
(inception) to September 30, 1996 there were no material operations of the
Company as such a statement of operations has not been included.
The Company had essentially no revenues, deriving interest income of
$1,100 from the investment of idle cash for 1996. Total costs and expenses
for 1996 were $478,000 of which $292,000 represented research and
development costs, $97,000 in legal fees, $68,000 in accrued salaries and
other general and administrative expenses of $21,000. The Company accrues
salaries of $17,000 a month for its president and vice-president under the
terms of employment agreements which commenced September, 1996. Total
costs and expenses for the nine months ended September 30, 1997 were
$238,000 of which $153,000 represents accrued salaries, $25,000 in
interest, $39,000 in related party consulting fees and $21,000 in other
general and administrative expenses. The Company has not paid any amounts
to these individuals pursuant to their employment contracts.
Of the total of $292,000 in research and development costs in 1996 ,
$283,000 represents payments to DDB Needham Interactive Communications to
develop a virtual internet casino. There were no research and development
costs incurred in 1997.
At December 31, 1996 the Company had a working capital deficit of $462,000
and at September 30, 1997 the working capital deficit increased to
$703,000. To finance part of its operations in 1997 the Company received
an advance from First Entertainment, Inc. of $35,000. The advance is
unsecured and non-interest bearing. In addition, the Company is in default
on the $357,000 convertible note payable. The accompanying financial
statements have been prepared assuming the Company will continue as a
going concern. As discussed in Note 1 to the financial statements the
Company has incurred losses form operations and has a working capital
deficit. The Company has a Web Site Development and Maintenance Agreement
with an unaffiliated third party which requires the payment of
approximately $1.25 million. Further software development is on hold
until such time as the payment is made under the Agreement. Once the
monies have been escrowed the Company expects the software to be completed
140 days after commencement. It is imperative that the Company raise the
financing required, approximately $2.2 million, to develop the internet
gaming site and to provide working capital through the end of 1998. There
can be no assurance that the Company will be successful in raising the
financing necessary. If the Company is unsuccessful it will have to
explore other avenues of developing its business plan.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Consolidated Financial Statements of the
Company are based on the Consolidated Financial Statements of the Company,
adjusted to give effect of the acquisition of Global Internet Corporation
The unaudited pro forma combined balance sheet at September 30, 1997
presents adjustments for the acquisition of Global Internet Corporation as
if the transaction had occurred on September 30, 1997.
The unaudited pro forma combined statement of operations data for the year
ended December 31, 1996 and for the nine months ended September 30, 1997
presents adjustments for the acquisition of Global Internet Corporation as
if the transaction had occurred on January 1, 1996.
In the opinion of management, all adjustments have been made that are
necessary to present fairly the pro forma data.
The unaudited pro forma combined financial statements should be read in
conjunction with the Company's Consolidated Financial Statements and the
Notes thereto, and the Financial Statements and Notes thereto of Global
Internet Corporation. The unaudited pro forma combined financial
statements of operations data are not necessarily indicative of the
results that would have been reported had such events actually occurred on
the date specified, nor are they indicative of the Company's future
results. There can be no assurance that the pending acquisition of Global
Internet Corporation will be consummated.
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1996
Company
Company Global Pro Forma Pro Forma
As Reported As Reported(1) Adjustments Combined
<S> <C> <C> <C> <C>
Revenues $ 2,139,451 $2,139,451
- ------------------------------------------------------------------------------
Cost of goods sold 1,617,365 1,617,365
Depreciation and
amortization 326,522 49,400(2) 375,922
Management fees, affiliate 408,000 408,000
Selling, general and
Administrative 1,394,683 472,029 1,866,712
- ---------------------------------------------------------------------------------
Total cost and expenses 3,746,570 472,029 4,267,999
Operating loss from
continuing operations (1,607,119 (472,029) (2,128,548)
Other Income (Expense)
Interest expense (102,791) (6,000) 6,000(3) (102,791)
Interest income 1,132 1,132
Other, net 22,961 22,961
- -----------------------------------------------------------------------------
Loss from continuing
operations before
minority interest (1,686,949) (476,897) (2,207,246)
Minority interest
in net loss
of subsidiaries 39,655 238,448(4) 278,103
- -----------------------------------------------------------------------------
Loss from continuing
Operations (1,647,294) (1,929,143)
Net Loss Per Share
Continuing Operations $(.39) $(.46)
Weighted Average Shares
Outstanding 4,168,661 4,168,661
</TABLE>
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(1) Reflects the historical operating results of Global Internet
Corporation as though the acquisition had been consummated on January 1,
1996.
(2) Reflects the amortization of the goodwill on a straight line basis
over ten years.
(3) Consolidation elimination entry to eliminate related party interest
income with related party interest expense.
(4) Reflects minority interest in net loss of Global Internet
Corporation.
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
September 30, 1997
Company Global Pro Forma Pro Forma
As Reported As Reported Adjustments Combined
<S> <C> <C> <C> <C>
Assets
Current assets $ 427,574 $ 1,924 $357,000(1) $ 429,498
- ------------------------------------------------------------------------------
(357,000)(2)
Property and
equipment, net 616,372 2,358 618,730
License, net of
Amortization 783,033 783,033
Note receivable,
noncurrent 900,000 900,000
Goodwill, net 521,313 32,000(1) 864,639
- ------------------------------------------------------------------------------
(388,970)(1)
700,296(3)
Total assets $3,248,292 $ 4,282 $ 3,595,900
===============================================================================
Liabilities and
Stockholders Equity
Current portion of
long term debt $ 818,767 357,000 (357,000)(2) $ 818,767
Other current
Liabilities 517,911 347,577 865,488
- -----------------------------------------------------------------------------
Total current
Liabilities 1,336,678 704,577 1,684,255
- -----------------------------------------------------------------------------
Long term debt 199,791 199,791
- ------------------------------------------------------------------------------
Minority interest 199,428 199,428
- -------------------------------------------------------------------------------
Preferred stock 161 30 (1) 191
Common stock 49,412 2,985 (2,984)(3) 49,413
Additional paid
in capital 14,027,505 11,940 (11,940)(3) 14,027,505
Accumulated deficit (12,564,683) (715,220) 715,220 (3) (12,564,683)
- ------------------------------------------------------------------------------
Stockholders'
equity (deficit) 1,512,395 (700,295) 1,512,426
- ------------------------------------------------------------------------------
Total Liabilities
and Stockholders'
Equity $3,248,292 $ 4,282 $ 3,595,900
</TABLE>
[CAPTION]
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(1) Reflects the issuance of 30,000 shares of the Company's convertible
preferred stock to acquire 1,500,000 shares of Global Internet Corporation
and a convertible note receivable from Global Casinos Inc. on September
30, 1997.
(2) Consolidation elimination entry to eliminate the convertible note
receivable against the convertible note payable.
(3) Consolidation elimination entry to eliminate the stockholders equity
of Global Internet Corporation (the acquiree) and to record the excess of
purchase price over net assets acquired as goodwill.
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
For the Nine Months Ended September 30, 1997
Company
Company Global Pro Forma Pro Forma
As Reported As Reported(1) Adjustments Combined
<S> <C> <C> <C> <C>
Revenues $ 1,784,502 $1,273,354
- -------------------------------------------------------------------------------
Cost of goods sold 1,462,510 1,462,510
Depreciation and
amortization 180,967 563 25,750(2) 207,280
Selling, general and
Administrative 870,182 211,975 1,082,157
- ------------------------------------------------------------------------------
Total cost and
Expenses 2,513,659 212,538 2,751,947
- -------------------------------------------------------------------------------
Operating loss from
continuing operations ( 729,157) (212,538) (1,478,593)
Other Income (Expense)
Interest expense (70,590) (25,875) 25,875(3) (70,590)
Interest income 90 90
Other, net 1,059 1,059
- -------------------------------------------------------------------------------
Loss before minority
Interest (798,688) (238,323) (1,548,034)
Minority interest in
Net Loss 63,712 118,684(4) 182,396
- ------------------------------------------------------------------------------
Net Loss $(734,976) $(238,323) $(1,365,638)
==============================================================================
Net Loss Per Share $(.13) $(.23)
Weighted Average Shares
Outstanding 5,818,474 5,818,474
</TABLE>
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(1) Reflects the historical operating results of Global Internet
Corporation as though the acquisition had been consummated on January 1,
1996.
(2) Reflects the amortization of the goodwill on a straight line basis
over ten years.
(3) Consolidation elimination entry to eliminate related party interest
income with related party interest expense.
(4) Reflects minority interest in net loss of Global Internet
Corporation.
Closing of the Transaction.
This agreement was entered into on May 3, 1997, and the convertible
preferred stock was issued to Global Casino's Inc. (Subject to
ratification and approval of the Company's shareholders)with the approval
of the Boards of Directors of both the Company and Internet. The Board of
the Company has submitted this transaction to the shareholders of the
Company for ratification and approval of the completed transaction.
DETERMINATION OF OFFERING PRICE
The public price of the Shares are based upon the trading price of the
Common Shares as determined by the market from time to time. All sales of
Shares will at the then-current market bid price. Except that the Shares
are being sold at the trading price, such price, or prices, as the case
may be, otherwise bears no relationship to the Company's assets, book
value, net worth, earnings, actual results of operations or any other
established investment criteria. Further, except to the extent of the
historical trading price of the Common Shares, the sale prices of the
Shares should not be considered an indication of the actual or potential
value of the Company's securities See "RISK FACTORS" and "DESCRIPTION OF
SECURITIES."
SELLING SHAREHOLDERS
The following Selling Shareholders are registering their shares for sale
to the public in connection with this distribution:
<TABLE>
Name Relationship to Company Amount of Securities
Prior to Offering
<S> <C> <C>
Creative Business
Services, Inc. Consultant 120,000(2)
Charles Bonniwell Shareholder 30,000(2)
Frank D"Alessio Shareholder 150,000(2)
Michael Payne Shareholder 120,000(2)
Monty R. Lamirato, PC Consultant 25,000(2)
Cindy Jones Officer 20,000(1)
Michael Berry Employee 15,000(2)
Wende Curtis Employee 15,000(2)
Nicholas Catalano Director 10,000(1)
David Wagner Attorney 20,000(2)
Steven Goodman Consultant 15,000(2)
Image Producers Consultant 20,000(2)
Palmer, Guest and
Esses, P.C. Consultant 10,000(2)
Isaacson, Rosenbaum,
Woods and Levy, P.C. Consultant 15,000(2)
</TABLE>
(1)These individuals have the right, by ownership or option, to the number
of shares indicated and are affiliates, as that term is used under Rule
405 the Securities Act of 1933, as amended. As a result, their shares are
control securities which must be sold pursuant to a reoffer prospectus and
are otherwise subject to the limitations of Rule 144(e). That is, each
person may not reoffer or resell, whether individually or acting in
concert with other persons, more than one percent of the issued and
outstanding shares of the Company in any consecutive three month period.
At the present time, one percent would equal approximately 62,000 shares.
(2)Each individual plans to sell all shares owned by such person which can
be sold pursuant to this Form S-3 Registration Statement.
PLAN OF DISTRIBUTION
The Selling Shareholders are offering their Shares at the then-current
market bid price of the Shares for the period of the effectiveness of this
Prospectus for sale on a "best efforts basis," to the public. Broker-
dealers may be utilized by the Selling Shareholders to sell some or all of
the Shares and, if so, will be paid the ordinary and customary commissions
for such sales. At the present time, there are no firm arrangements with
any broker-dealers for sales of the Shares. See "DESCRIPTION OF
SECURITIES" and "SELLING SHAREHOLDERS."
The Selling Shareholders intend to sell all of their Shares registered
hereunder and will immediately utilize the proceeds of the offering as and
when raised and regardless of how many Shares are ultimately sold. The
Company will receive no proceeds whatsoever from the sale of the Shares.
Securities To Be Outstanding After The Offering
As of the date of this Prospectus, 6,176,504 Shares of the Company's
$.008 par value Common Stock were issued and outstanding, along with a
total of 10,689 shares of Class A Preferred Stock, 23,867 shares of Class
B Preferred Stock and a 125,000 shares of Class C Preferred Stock. The
Selling Shareholders are selling previously issued Shares. Therefore, upon
the sale of the maximum number of Shares in of this Offering, the same
number of Shares will be outstanding.
Use of Proceeds
The Selling Shareholders will utilize any and all of proceeds of this
Offering which are not paid for commissions to licensed broker-dealers.
The Company will receive no portion whatsoever of the proceeds of this
Offering.
DESCRIPTION OF SECURITIES
Common Stock
The Company is authorized to issue 6,250,000 shares of Common Stock, par
value $.008 per share. Immediately prior to this Offering, 6,176,504
shares of Common Stock were outstanding. The holders of Common Stock have
one vote per share on all matters (including election of Directors)
without provision for cumulative voting. Thus, holders of more than 50%
of the shares voting for the election of directors can elect all of the
directors, if they choose to do so. The Common Stock is not redeemable
and has no conversion or preemptive rights.
The Common Stock currently outstanding is validly issued, fully paid and
non-assessable. In the event of liquidation of the Company, the holders
of Common Stock will share equally in any balance of the Company's assets
available for distribution to them after satisfaction of creditors and the
holders of the Company's senior securities. The Company may pay
dividends, in cash or in securities or other property when and as declared
by the Board of Directors from funds legally available therefor, but has
paid no cash dividends on its Common Stock.
Preferred Stock
The Company is authorized to issue 5,000,000 shares of Preferred Stock,
$0.001 par value. As of the date of this Prospectus, 10,689 shares of
Class A Preferred Stock, 23,867 Share of Class B Preferred Stock and
125,000 shares of Class C Preferred Stock are issued and outstanding.
Generally , the Preferred Stock may be issued in series from time to time
with such designation, rights, preferences and limitations as the Board of
Directors of the Company may determine by resolution. The rights,
preferences and limitations of separate series of Preferred Stock may
differ with respect to such matters as may be determined by the Board of
Directors, including, without limitation, the rate of dividends, method
and nature of payment of dividends, terms of redemption, amounts payable
on liquidation, sinking fund provisions (if any), conversion rights (if
any), and voting rights. The potential exists, therefore, that preferred
stock might be issued which would grant dividend preferences and
liquidation preferences to preferred shareholders over common
shareholders. Unless the nature of a particular transaction and
applicable statutes require such approval, the Board of Directors has the
authority to issue these shares without shareholder approval. The
issuance of Preferred Stock may have the affect of delaying or preventing
a change in control of the Company without any further action by
shareholders. Except as disclosed herein, there are no present plans to
issue any such shares.
A total of 3,000,000 shares have been classified as Class A Preferred
Stock. This Stock has annual cumulative dividends of 7% per annum, was
redeemable by the Company not later than November 18, 1996, and is
convertible into common shares on a four-for-one basis. This Stock also
carries a liquidation preference superior to all other equity of the
Company.
A total of 1,000,000 shares have been classified as Class B Preferred
Stock. This Stock has annual cumulative dividends of 6% per annum, if and
when declared, is redeemable by the Company into common shares at a rate
of $12.00 per share.
A total of 1,000,000 shares have been classified as Class C Preferred
Stock. This Stock has no dividend provision, is convertible by the
Company into common shares at a conversion price of Class C Preferred
Stock equal to the average previous thirty day bid price of the Common
Shares on the date of conversion.
Dividend Policy
The Company has never declared nor paid dividends on its Common Stock. At
the present time, the Company has an accumulated deficit which precludes
it from paying dividends. Nevertheless, it is the present intention of
the Company not to pay dividends in the foreseeable future; but rather to
retain its earnings, if any, to finance its growth, and to increase its
capital base.
LEGAL MATTERS
David Wagner & Associates, P.C., Englewood, Colorado, Attorneys at Law,
has rendered its opinion that the Shares offered pursuant to this
Prospectus will, when issued as described in this Prospectus, be duly
authorized, validly issued, fully paid and non-assessable shares of the
Company.
TRANSFER AGENT
The transfer agent for the Company's Common Stock is American Securities
Transfer, Incorporated, 988 Quail Street, Suite 101, Lakewood, Colorado
80215. The telephone number is (303) 234-5300.
ANNUAL REPORTS
The Company furnishes to Shareholders, after the close of each fiscal
year, an annual report which contains financial statements examined by
independent public accountants. In addition, the Company furnishes to
Shareholders unaudited quarterly reports.
EXPERTS
The financial statements of the Company incorporated by reference into
this Prospectus have been audited by BDO Seidman, LLP, independent
certified public accountants, to the extent and for the periods set forth
in their report, which contains an explanatory paragraph regarding the
Company's ability to continue as a going concern, incorporated herein by
reference, and are incorporated herein in reliance upon such report, given
upon the authority of said firm as experts in auditng and accounting.
The financial statements of Global Internet Corporation have been audited
by Gerald R. Hendricks & Company, P.C., an independent certified public
accountant, to the extent and for the periods set forth in their report,
which contains an explanatory paragraph regarding Global's ability to
continue as a going concern, are included herein, given upon the authority
of said firm as experts in auditing and accounting.
No dealer, salesman or other person is
authorized to give any information or to
make any representation other than those
contained in this Prospectus, and if given
or made such information or representation
must not be relied upon as having been
authorized by the Company. This Prospectus
does not constitute an offer to sell any
security other than the securities offered
by this Prospectus or an offer to sell or a
solicitation of an offer to buy the
securities in any jurisdiction to any
person to whom it is unlawful to make such
offer or solicitation in such jurisdiction.
Neither the delivery of this Prospectus
nor any sale hereunder shall under any
circumstance create any implication that
there has been no change in the affairs of
the Company since the date hereof. Any
material change to the offer will be
reflected by an amendment or supplement to
the Registration Statement, of which this
Prospectus is a part.
TABLE OF CONTENTS
Item Page
AVAILABLE INFORMATION
INCORPORATION BY
REFERENCE
THE COMPANY
RISK FACTORS
BUSINESS
DETERMINATION OF
OFFERING PRICE
SELLING SHAREHOLDERS
PLAN OF DISTRIBUTION
DESCRIPTION OF SECURITIES
LEGAL MATTERS
TRANSFER AGENT
ANNUAL REPORTS
Until February 28, 1998 (90 days after the date of this Prospectus), all
dealers
effecting transactions in the securities offered hereby, whether or not
participating in this distribution, may be required to deliver a current
Prospectus. This is in addition to the obligation of dealers to deliver a
current Prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
FIRST ENTERTAINMENT, INC.
PROSPECTUS
December 11, 1997
