As filed with the Securities and Exchange Commission on April 10, 1998
Registration Statement No. 333-______
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
FORTUNE FINANCIAL SYSTEMS, INC.
(Exact name of small business issuer as specified in its Charter)
--------------------------
Nevada 8200 59-3456-228
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification No.) Identification No.)
-------------------------
6975 South Union Park Center
Suite 180
Salt Lake City, Utah 84047
Telephone (801) 233-0100
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
-------------------------
Roger C. Royce, President
Fortune Financial Systems, Inc.
6975 South Union Park Center
Suite 180
Salt Lake City, Utah 84047
Telephone (801) 233-0100
Facsimile No. (801) 233-0001
------------------------------
Approximate date of proposed sale to the public: As soon as practicable after
the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [X]
Proposed Proposed
Maximum Maximum
Title of Amount Offering Aggregate Amount of
Shares to be to be Price Offering Registra-
Registered Registered per Shares(1) Price(1) tion Fee
- ---------------------------------------------------------------------------------------------------------
Common Stock, $.001 par
value per share, reserved
for issuance upon conversion
of Series A Preferred Stock(2) 2,000,000 $1.50 $3,000,000 $ 885.00
Common Stock reserved
for issuance upon exercise
of Common Stock
Purchase Warrants (3) 250,000 $5.00 $1,250,000 $ 368.75
Common Stock reserved etc.
Warrants(4) 250,000 $6.00 $1,500,000 $ 442.50
Total $5,750,000 $ 1,696.25
(1) Estimated solely for the purpose of computing the amount of
the registration fee in accordance with Rule 457(c) under the
Securities Act of 1933, as amended (the "Securities Act"),
based on the average of the closing bid and asked prices for
the Common Stock, per share (the "Common Stock") as reported
on the OTC Bulletin Board at April 7, 1998.
(2) To be offered and sold by the Selling Security Holders upon
conversion of 200,000 outstanding shares of Series A
Convertible Preferred Stock (the "Series A Preferred Stock").
The conversion price for the Series A Preferred Stock (as
represented by the stated value) is equal to 17% off the
average closing bid price of the Common Stock for the ten
consecutive trading days ending one trading day prior to the
date of conversion as reported by Bloomberg L.P. The number of
shares of Common Stock registered represents the maximum
number of shares issuable upon conversion based on a minimum
conversion price of $1.00.
(3) To be offered and sold by the Selling Security Holders upon
any exercise of Common Stock purchase warrants exercisable at
$5.00 per share.
(4) To be offered and sold by the Selling Security Holders upon
any exercise of Common Stock purchase warrants exercisable at
$6.00 per share.
Pursuant to Rule 416 under the Securities Act of 1933, there
are also being registered such additional number of shares as may be
issuable as a result of the anti-dilution provisions of the Series A
Preferred Stock.
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective date
until the Registrant shall file a further amendment which specifically
states that this Registration Statement shall thereafter become
effective in accordance with Section 8(a) of the Securities Act of 1933
or until the Registration Statement shall become effective on such date
as the Commission, acting pursuant to said Section 8(a), may determine.
FORTUNE FINANCIAL SYSTEMS, INC.
-------------------------------
Cross Reference Sheet for Prospectus Under Form SB-2
Form SB-2 Item No. and Caption Caption or Location in Prospectus
------------------------------ ---------------------------------
1. Forepart of Registration Cover Page; Cross Reference
Statement and Outside Sheet; Outside Front Cover
Front Cover of Prospectus Page of Prospectus
2. Inside Front and Outside Back Inside Front and Outside Back
Cover Pages of Prospectus Cover Pages of Prospectus
3. Summary Information, Risk Prospectus Summary; High Risk
Factors Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Cover Page
Price
6. Dilution Not Applicable
7. Selling Security Holders Selling Security Holders
8. Plan of Distribution Outside Front Cover Page of
Prospectus; Selling Security Holders;
Plan of Distribution
9. Legal Proceedings Business
10. Directors, Executive Offi- Management
cers, Promoters and Control
Persons
11. Security Ownership of Cer- Principal Stockholders
tain Beneficial Owners and
Management
12. Description of Securities Description of Securities
13. Interest of Named Experts Legal Matters
and Counsel
14. Disclosure of Commission Undertakings
Position on Indemnifica-
tion for Securities Act
Liabilities
15. Organization within Last Not Applicable
Five Years
16. Description of Business Business
17. Management's Discussion Management's Discussion and
and Analysis and Plan of Analysis or Plan of Operations
Operation
18. Description of Property Business - Properties
19. Certain Relationships and Certain Transactions
Related Transactions
20. Market for Common Equity Price Range for Common Stock;
and Related Stockholder Description of Securities
Matters
21. Executive Compensation Management - Executive Compensation
22. Financial Statements Financial Statements
23. Changes in and Disagree- Not Applicable
ments with Accountants on
Accounting and Financial
Disclosure
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
ITEM 1.
Preliminary Prospectus dated April 10, 1998
Subject to completion
2,500,000 Shares
FORTUNE FINANCIAL SYSTEMS, INC.
Common Stock, Par Value $.01 Per Share
------------------------
This Prospectus (the "Prospectus") relates to the offer and sale of up
to 2,500,000 shares of Common Stock, $.001 par value (the "Common Stock") of
Fortune Financial Systems, Inc. (the "Company" or "Fortune") by certain selling
stockholders (the "Selling Security Holders"). Of the 2,500,000 shares of Common
Stock offered hereby (the "Shares"), (i) up to an aggregate of 2,000,000 Shares
are issuable upon conversion of up to 20,000 Shares of the Company's 5%
Convertible Preferred Stock, par value $.001 per share (the "Series A Preferred
Stock") held by the Selling Security Holders; and (ii) up to 500,000 Shares are
issuable upon exercise of three-year Common Stock purchase warrants exercisable
at $5.00 per Share as to 250,000 Shares and $6.00 per Share as to the remaining
250,000 Shares (collectively the "Warrants"). This Prospectus covers the resale
of the 2,500,000 Shares and, in accordance with Rule 416 under the Securities
Act of 1933, such presently indeterminate number of additional Shares as may be
issuable upon conversion of the Series A Preferred Stock based upon fluctuations
in the conversion price of the Series A Preferred Stock (see "Selling Security
Holders").
The Company's Common Stock is traded on the OTC Bulletin Board under
the symbol "FFSY." On April 7, 1998 the closing bid price for the Common Stock
was $1.50. There can be no assurances that a substantial trading market for its
Common Stock will develop or be sustained in the future. See "Price Range of
Common Stock" and "Description of Securities."
------------------------
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. POTENTIAL PURCHASERS SHOULD NOT
INVEST IN THESE SECURITIES UNLESS THEY CAN AFFORD A LOSS OF THEIR ENTIRE
INVESTMENT HEREIN. SEE "HIGH RISK FACTORS."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is ________________, 1998
The conversion price for the Series A Preferred Stock is equal to 17%
off the average closing bid price of the Common Stock (as adjusted as described
herein), as reported by Bloomberg L.P., for the ten consecutive trading days
(the "Average Market Price") ending one day prior to the date of each
conversion, as agreed to by the Selling Security Holders and the Company
pursuant to the Private Equity Line of Credit Agreement dated as of October 28,
1997 (the "October 28, 1997 Agreement") as modified by Amendment dated March 27,
1998 (the "Amendment") (the October 28, 1997 Agreement and the Amendment are
collectively referred to as the "Agreement") entered into by the parties
thereto. The Warrants currently issued are exercisable for 250,000 shares at an
exercise price of $5.00 per share and for 250,000 shares at $6.00 per share. See
"Selling Security Holders."
The Company believes that the number of shares of Common Stock to which
this Prospectus relates should be the maximum number of shares of Common Stock
that are likely to be issued to the Selling Security Holders and sold hereby.
The Selling Security Holders have advised the Company that they propose
to sell the Shares, from time to time, publicly through broker-dealers acting as
agents for others, or in private sales. See "Selling Security Holders" and "Plan
of Distribution." The Company will not receive any of the proceeds from the sale
of the Shares offered hereby by the Selling Security Holders except upon any
exercise of the Warrants.
The Company will pay all offering expenses for the offering, estimated
at approximately $37,000.00, including (i) the SEC registration fee ($1,696.25);
(ii) legal fees and expenses ($16,000.00); (iii) blue sky fees ($1,000.00); (iv)
accounting fees and expenses ($10,000.00); (v) printing expenses ($8,000.00);
and (vi) miscellaneous expenses ($303.75), but will not pay any discounts or
commissions incurred by the Selling Security Holders.
The Company has informed the Selling Security Holders that the
anti-manipulative rules and regulations under the Securities Exchange Act of
1934, including Regulation M thereunder, may apply to their sales in the market
and has furnished each of the Selling Security Holders with a copy thereof. The
Company has also informed the Selling Security Holders of the need for delivery
of copies of this Prospectus in connection with any sale of Shares registered
hereunder.
------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER
THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE
SUCH AN OFFER IN SUCH JURISDICTION. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME
DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THIS DATE.
The Company will furnish its stockholders with annual reports
containing audited financial statements and may distribute quarterly reports
containing unaudited summary financial information for each of the first three
quarters of each fiscal year.
The Company has filed with the Securities and Exchange Commission
("Commission") a Registration Statement on Form SB-2 (herein together with all
amendments and exhibits referred to as the "Registration Statement") under the
Securities Act of 1933. Reports and other information filed by the Company can
be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's Regional Offices at 7 World Trade Center New York, New York
10048, Room 1204, Everett McKinley Dirksen Building, 219 South Dearborn Street,
Chicago, Illinois 60604, and Suite 500 East, 5757 Wilshire Boulevard, Los
Angeles, California 90036. Copies of such material can be obtained upon written
request addressed to the Commission, Public Reference Section, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. The Commission also maintains
a Web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission
at http://www.sec.gov.
ITEM 3. PROSPECTUS SUMMARY
The following is intended to summarize more detailed information and
financial statements and notes thereto which are set forth more fully elsewhere
in this Prospectus or incorporated herein by reference and, accordingly, should
be read in conjunction with such information.
Other than historical and factual statements, the matters and items
discussed in this Prospectus are forward-looking statements that involve risks
and uncertainties. Actual results may differ materially from the results
discussed in the forward-looking statements. Certain factors that could
contribute to such differences are discussed with the forward-looking statements
throughout this Prospectus and are summarized in Sections "High Risk Factors"
and "Management's Discussion and Analysis or Plan of Operations."
Fortune Financial Systems, Inc. (the "Company") is the parent company
to four wholly-owned subsidiaries. These are Professional Marketing, Inc., a
Utah corporation ("PMI"); Internet Development, Inc., a Utah corporation
("IDI"); Success Media, Inc., a Florida corporation ("SMI") and Fortune
Marketing International, Inc., a Florida corporation ("Fortune Marketing").
Through its subsidiaries the Company operates a financial and business training,
coaching and consulting company which provides training services and consulting
in a range of areas specializing in personal finance, small business, real
estate and Internet product and services.
In addition, the Company has entered into a 10-year license agreement
with option for 10 additional years with Success Holdings, L.L.C., whereby the
Company is entitled use the "Success" trademark in connection with its business
training, workshops, conferences and business coaching programs.
In addition to it's four operating companies, the Company has developed
a program in conjunction with Success Magazine, an international publication
focussed on the entrepreneur, whereby the magazine will be co-branded with many
or all of the Company's programs, and the Company intends to create joint
ventures with entrepreneurs in foreign countries who will license the
publication and distribution rights to the magazine and the right to establish a
seminar and training company in a particular territory.
The Company's executive offices are located at 6975 Union Park Center,
Suite 180, Midvale, Utah 84047. Telephone No.: (801) 233-0100; Facsimile No.:
(801) 233-0001.
The Offering and Outstanding Securities
Common Stock Outstanding..............19,957,253 shares of Common Stock
Common Stock Offered
by Selling Security Holders......2,500,000 shares of Common Stock1
Proceeds to be received upon
exercise of Warrants.............$2,750,0002
Risk Factors..........................Investment in these securities involves a
high degree of risk. See "High Risk
Factors."
OTC Bulletin Board Symbol............."FFSY"
- --------------------
1 Includes up to 500,000 shares issuable upon the exercise of the Warrants.
2 Under the terms of the Warrants, outstanding Warrants to purchase 250,000
shares are exercise at $5.00 per share and Warrants to purchase 250,000
shares are exercisable at $6.00 on or prior to October 28, 2000.
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(Not covered by Accountant's Report)
Summary of Selected Consolidated Financial Information
Consolidated Statement of Operations Data:
Period from Inception
(September 3, 1996) Nine Months Ended
March 31, 1997 December 31, 1997
Operating Revenue $ 5,762,534 $ 18,996,191
Operating Expenses $ 4,817,136 $ 20,049,197
Operating Income (loss) $ 945,398 $ (1,053,006)
Net Income (loss) $ 615,398 $ (534,180)
Net Income Per Share (loss) $ .06 $ (.03)
Balance Sheet Data:
March 31, 1997 December 31, 1997
Cash $ 73,593 $ 692,077
Working Capital (deficit) $ 902,660 $ (510,563)
Total Assets $ 2,200,731 $ 6,207,270
Total Liabilities $ 977,228 $ 2,515,556
Stockholders' Equity $ 1,223,503 $ 2,381,448
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE
FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND
ITS BUSINESS BEFORE PURCHASING THE SECURITIES OFFERED HEREBY. THIS PROSPECTUS
CONTAINS, IN ADDITION TO HISTORICAL INFORMATION, FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS
THAT MIGHT CAUSE OR CONTRIBUTE TO SUCH DIFFERENCE INCLUDE, BUT ARE NOT LIMITED
TO, THOSE DISCUSSED BELOW, AS WELL AS THOSE DISCUSSED IN THIS PROSPECTUS.
Limited Operating History; Loss of Significant Revenues
The Company has only a limited operating history upon which an
evaluation of the Company's performance and prospects can be made. The Company's
prospects must be considered in light of the numerous risks, expenses, delays,
problems and difficulties frequently encountered in the establishment of a new
business in industries characterized by emerging markets, and products, and
intense competition and regulation. Accordingly, there can be no assurance that
the Company will be able to successfully manage and grow operations, or that
failure to do so will not augment the risk inherent in the establishment of an
expanding business. In April 1997, the Company sold its Fortune 21, Inc.
subsidiary (Fortune 21). Fortune 21 accounted for $5,762,534 of the Company's
revenues for the period from September 3, 1996 through March 31, 1997;
accordingly, the Company's financial performance may not be indicative of actual
period operations and there can be no assurance about its ability to generate
comparable revenues and profits in future periods.
Limited Marketing Activity, Uncertainty of Market Acceptance
Developing market acceptance for the Company's existing and proposed
products and services will require substantial marketing and sales efforts and
the expenditure of a significant amount of funds to inform its members and
others of the benefits and cost advantages of the Company's services and
products and to achieve name recognition. There can be no assurance that the
Company will be able to successfully develop or position its products or
services, or that any marketing efforts undertaken by the Company will result in
increased demand for or market acceptance of the Company's products and
services.
Regulation
While the Company is not subject to extensive levels of regulation, a
greater number of jurisdictions are broadening the scope of products and
services that come within the jurisdiction of the regulatory authorities within
such states, particularly relevant to the industry in which the Company
operates. Consequently, the trend in regulation on a national basis is to
encompass organizations, similar to the Company, within the ambit of state
regulatory authority, the consequence of which may involve limited or greater
control relevant to the products and services distributed by the Company.
Competition
Although there is limited competition at present in the industry in
which the Company operates, the market could ultimately be characterized by
intense competition, at such time as other organizations perceive the
opportunities available in the industry. In addition, there are no significant
barriers to entry in the business in which the Company engages. For this reason,
the Company's business could be subject to substantial future competition. Many
of the competitors will be substantially larger and have greater financial
resources than the Company. There can be no assurances that the Company will be
able to compete profitably with such other companies on a long-term basis.
Customer Base and Market Acceptance
While the Company believes it can continue to develop a customer base
in the markets it operates through expansion, strategic alliances, and other
commercial relationships, any inability of the Company to develop and expand
such a customer base would have a material adverse effect on the Company.
Although the Company believes that its products and services offer advantages
over competitive products, no assurance can be given that these products will
attain any degree of market acceptance on a sustained basis or that they will
generate revenue sufficient for profitable operations.
Dependence on Key Personnel
The success of the Company will be largely dependent on the efforts of
the members of the management of the Company, especially Mr. Roger Royce, its
Chief Executive Officer, Chairman and President and Mr. Douglas Shane Hackett,
its Executive Vice-President of Marketing and Company co-founder. Although the
Company has entered into employment and consulting agreements with various
members of the management, including Messrs. Royce and Hackett of the Company,
there can be no assurance that such persons will continue their employment with
the Company. The loss of the services of one or more of such key personnel would
have a material adverse effect on the Company's ability to maximize its use of
its products and technologies or to develop related products and technologies.
The success of the Company also is dependent upon its ability to hire and retain
additional qualified executive, programming, engineering and marketing
personnel. There can be no assurance that the Company will be able to hire or
retain such necessary personnel.
Control of the Company by Present Shareholders
Members of management and their affiliates will own and control the
vote of approximately 70.5% of the outstanding shares of Common Stock, which,
among other things, will enable them to elect the Company's entire Board of
Directors and generally control the operations of the Company.
Lack of Reporting Information
The Company, while having a limited trading market for its Common
Stock, is not subject to the reporting requirements under the Securities
Exchange Act of 1934. As a result, until the Company registers its securities
under the federal securities laws, stockholders will not have ready access to
the information required to be reported by publicly-held companies under such
Act and the regulations thereunder.
Limited Market for the Company's Common Stock; Possible Volatility of Securities
Prices
There is currently only a limited trading market for the Common Stock
of the Company. The Common Stock of the Company trades on the OTC Bulletin Board
under the symbol "FFSY," which is a limited market and subject to substantial
restrictions and limitations in comparison to the Nasdaq System. There can be no
assurance that a substantial trading market will develop (or be sustained, if
developed) for the Common Stock. Recent history relating to the market prices of
newly public companies indicates that, from time to time, there may be
significant volatility in the market price of the Company's securities because
of factors unrelated, as well as related, to the Company's operating
performance. There can be no assurances that the Company's Common Stock will
ever qualify for inclusion within the Nasdaq System, or that more than a limited
market will ever develop for its Common Stock.
Possible Applicability of Rules Relating to Low-Priced Stocks; Possible Failure
to Qualify for NASDAQ SmallCap Market Listing.
The Commission has adopted regulations which generally define a "penny
stock" to be any equity security that has a market price (as defined) of less
than $5 per share, subject to certain exceptions. Upon completion of this
Offering, the shares of Common Stock, offered hereby may be deemed to be "penny
stocks" and thus will become subject to rules that impose additional sales
practice requirements on broker/dealers who sell such securities to persons
other than established customers and accredited investors, unless the Common
Stock is listed on the NASDAQ SmallCap Market. There can be no assurance that
the Company will be able to satisfy the listing criteria of the NASDAQ SmallCap
Market or will trade for $5 or more per security after the Offering.
Consequently, the "penny stock" rules may restrict the ability of broker/dealers
to sell the Company's securities and may affect the ability of purchasers in
this Offering to sell the Company's securities in a secondary market.
Although the Company intends to apply for listing of the Common Stock
on the NASDAQ SmallCap Market, there can be no assurance that the trading of the
Common Stock will develop or, if developed, will be sustained. Furthermore,
there can be no assurance that the Securities purchased by the public hereunder
may be resold at their original offering price or at any other price.
In order to qualify for initial listing on the NASDAQ SmallCap Market,
a company must, among other things, have a public float of at least 1 million
shares, a $5 million market value of public float, a minimum bid price of $4.00
per share, at least 3 market makers, and at least 300 shareholders. In addition,
the Company must have net tangible assets of $4 million or net income of
$750,000 in the latest fiscal year or two of the last three fiscal years. The
maintenance standards (as opposed to entry standards) require at least $2
million in net tangible assets or $500,000 in net income in the latest fiscal
year or two of the last three years, a public float of at least 500,000 shares,
a $1 million market value of public float, a minimum bid price of $1.00 per
share, at least two market makers, and at least 300 shareholders.
If the Company is or becomes unable to meet the listing criteria
(either initially or on a maintenance basis) of the NASDAQ SmallCap Market and
is never traded or becomes delisted therefrom, trading, if any, in the Common
Stock would thereafter be conducted in the over-the-counter market in the
so-called "pink sheets" or, if then available, the "Electronic Bulletin Board"
administered by the National Association of Securities Dealers, Inc. (the
"NASD"). In such an event, the market price of the Common Stock may be adversely
impacted. As a result, an investor may find it difficult to dispose of, or
obtain accurate quotations as to the market value of the Common Stock.
Anti-Takeover Provisions
The Board of Directors has the authority to issue 5,000,000 shares of
which 20,000 shares have been issued of the Company's preferred stock
("Preferred Stock") and to fix the dividends, liquidation, conversion,
redemption and other rights, preferences and limitations of such shares without
any further vote or action of the stockholders. Accordingly, the Board of
Directors is empowered, without stockholder approval, to issue Preferred Stock
with dividend, liquidation, conversion voting or other rights which could
adversely affect the voting power or the rights of the holders in the Company's
Common Stock. In the event of issuance, the Preferred Stock could be utilized
under certain circumstances, as a method of discouraging, delaying or preventing
a change in the control of the Company. Furthermore, certain provisions of the
Company's Articles of Incorporation and Bylaws may be deemed to have
anti-takeover effects and may delay, defer or prevent a takeover attempt of the
Company. In addition, certain provisions of the Nevada General Corporation Act
also may be deemed to have certain anti-takeover effects.
Limitation of Liability
The Nevada General Corporation Law provides that a director is not
personally liable for monetary damages to the Company or any other person for
breach of fiduciary duty, except under very limited circumstances. Such a
provision makes it more difficult to assert a claim and obtain damages from a
director in the event of his unintentional breach of fiduciary duty.
ITEM 7. SELLING SECURITY HOLDERS
Private Equity Line of Credit Agreement
The Selling Security Holders have purchased the Series A Preferred
Stock and Warrants in a private placement transaction pursuant to a Private
Equity Line of Credit Agreement dated October 28, 1997 ("October Agreement").
The stated value of the Series A Preferred Stock is $100.00 per Share. In
addition, three-year Warrants to purchase 250,000 shares of Common Stock,
exercisable at $5.00 per share, and three-year Warrants to purchase 250,000
shares of Common Stock, exercisable at $6.00 per Share, have been issued
pursuant to the October Agreement. The parties modified the October Agreement by
an Amendment dated March 27, 1998.
In accordance with the October Agreement, on October 28, 1997, the
Company issued 20,000 shares of its Series A Preferred Stock and Warrants to
purchase 500,000 shares of Common Stock for a cash consideration of $2,000,000
cash. As contemplated by the October Agreement, an additional 20,000 shares of
Series A Preferred Stock, at a purchase price of $100.00 per share, or an
aggregate of $2,000,000, were to be issued and sold to the Selling Security
Holders provided a Registration Statement covering the resale of Shares had
become effective under the Securities Act by February 25, 1998 and certain other
conditions were fulfilled. Because the Company failed to obtain the
effectiveness of its Registration Statement on or before February 25, 1998, the
Company was obligated to pay to the Selling Security Holders an aggregate of
$60,000 for the first 30-day period that such registration statement was not
declared effective and an aggregate of $120,000 for each 30-day period
thereafter. The October Agreement also provided that should the Company fail to
obtain the effectiveness of its registration statement within 210 days following
October 28, 1997, the Selling Security Holders will have the right to sell to
the Company the initial 20,000 shares of Series A Preferred Stock acquired at
the initial closing at the stated value thereof plus accrued and unpaid
dividends. Performance of this obligation is secured by a Security and Pledge
Agreement of various of the Company's assets as well as a pledge of 2,000,000
shares of Common Stock by Mr. Peter R. Morris, a director and principal
stockholder of the Company. The October Agreement also provided that commencing
with the effective date of the registration statement and for a two-year period
thereafter, the Selling Security Holders were to be obligated to purchase up to
160,000 additional shares of Series A Preferred Stock ($16,000,000) provided the
Company has fulfilled its various covenants under the Agreement.
The Company did not register under the conditions of the October
Agreement and, following negotiations, the Company and the Selling Security
Holders entered into an Amendment to the October Agreement. As provided for by
the Amendment, the parties agree that neither of them would have the obligation
to purchase or sell additional shares of the Series A Preferred Stock as
provided by the October Agreement. All penalties, defaults and price adjustments
provided for under the October Agreement were waived under the terms of the
Amendment. The Company remains obligated to use its best efforts to process
expeditiously the Registration Statement. In the event the Registration
Statement does not become effective by July 27, 1998, or in the alternative, if
the Company or other persons are not able to provide the Selling Security
Holders with shares of Common Stock of the Company which would have the rights
and benefits comparable to shares of Common Stock registered under the
Securities Act, the Selling Security Holders would have the right to put their
shares of Series A Preferred Stock to the Company and foreclose on all
collateral provided to them under the October Agreement. The foregoing
notwithstanding, the Selling Security Holders would agree to extend to the
Company a grace period of 60 days from the end of July 27, 1998 in which the
Company would have the right to exercise a redemption option and make a one-time
payment equal to 120% of the stated value of the Preferred Stock to be acquired.
At such time as the Registration Statement becomes effective, the Company also
has a right to a redemption option to acquire 10% of the Series A Preferred
Stock on a monthly basis over a 10-month period (i.e., 2,000 shares of Series A
Preferred Stock each month) at a redemption price of 120% of the stated value of
such shares of Series A Preferred Stock. In addition, on or prior to the earlier
of July 27, 1998 or the date this Registration Statement becomes effective, the
Company will have the right to redeem, in whole or in part, and from time to
time, the Series A Preferred Stock at 110% of the stated value of the Series A
Preferred Stock and without payment of accrued but unpaid dividends.
As modified by the Amendment, at the option of each of the Selling
Security Holders, the Series A Preferred Stock may be converted at any time into
shares of the Company's Common Stock equal in number to the amount to be
determined by dividing $100.00 (representing the stated value thereof) by a
percentage of the average closing price of the Company's Common Stock over the
10-day trading period ending on the day prior to the conversion of the Series A
Preferred Stock, less a discount of 17%. The Selling Security Holders, however,
have agreed to convert not more than 10% of the Series A Preferred Stock during
any 30-day period for a total of 10 months beginning on the earlier of the date
hereof or the date of effectiveness of this Registration Statement.
Holders of Series A Preferred Stock have a right to receive, out of
funds legally available therefor, preferential non-participating dividends at
the rate of 5% of the stated value per Share per year, payable in four equal
installments on March 31, June 30, September 30 and December 31 in each year.
Such dividends are cumulative and if dividends for any dividend period at the
rate specified above shall not have been paid or declared, the deficiency will
be paid with interest thereon at the prime rate as quoted from time to time by
The Wall Street Journal before any dividends are set apart for or paid on any
shares of Common Stock of the Company. The Holders of the Series A Preferred
Stock are entitled to one vote for each share of Series A Preferred Stock owned
by them on all matters required or permitted to be submitted to a vote of the
stockholders of the Company.
With respect to the Warrants, each of the Selling Security Holders
received Warrants to purchase 125,000 Shares of Common Stock exercisable at
$5.00 per Share and Warrants to purchase up to 125,000 Shares of Common Stock at
an exercise price of $6.00 per Share. The Warrants may be exercisable in whole
or in part at any time on or prior to October 28, 2000. The Holders of the
Warrants are not entitled to any rights of a stockholder of the Company. In
addition, the Holders are entitled to an adjustment in the exercise price and/or
the number of shares of Common Stock to be received upon exercise of the
Warrants in the event the Company undertakes certain transactions, including
payment of dividends or distributions with respect to its Common Stock,
subdivisions or combinations of its outstanding Common Stock and
recapitalizations in connection with a consolidation or merger in which the
Company is the continuing corporation.
Performance of the Company's obligations is secured by a Security and
Pledge Agreement consisting of substantially all of the assets of the Company
and a pledge of 2,000,000 shares of Common Stock by Mr. Peter Morris, a director
and one of the principal stockholders of the Company.
The Company has agreed to indemnify the Selling Security Holders
against any liabilities under the Securities Act of 1933 or otherwise, arising
out of or based upon any untrue or alleged untrue statement of a material fact
in the Registration Statement or this Prospectus or by any omission of a
material fact required to be stated therein except to the extent that such
liabilities arise out of or are based upon any untrue or alleged untrue
statement or omission in any information furnished in writing to the Company by
the Selling Security Holder expressly for use in the Registration Statement.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers or persons controlling the Company pursuant
to its Certificate of Incorporation and By-laws, the Company has been informed
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
In connection with the registration of the resale of the Shares offered
hereby, the Company will supply Prospectuses to the Selling Security Holder and
use its best efforts to qualify the Shares for sale in any states wherein
qualification is required.
Joseph Charles and Associates, Inc. and Stenton Leigh Capital
Corporation will receive a total finder's fee of $360,000.00 upon full
completion of the original transaction.
Stock Ownership
The following table sets forth the name of each of the Selling Security
Holders, the amount of shares of Common Stock held directly or indirectly or
underlying the Series A Preferred Stock and Warrants of the Company owned by the
Selling Security Holders on March 31, 1998, the amount of shares of Common Stock
to be offered by the Selling Security Holders and the amount to be owned by the
Selling Security Holders following sale of this shares of Common Stock upon
completion of this offering. As of March 31, 1998, there were outstanding
19,957,253 shares of Common Stock of the Company.
Number Shares Shares to be
Name of Selling of Shares to be Owned After
Security Holder Owned(1) Offered(1) Offering
Deere Park Capital Management, Inc. (2) 1,250,000 1,250,000 0
Profutures Special Equities Fund, L.P.(3) 1,250,000 1,250,000 0
- ----------------------------
(1) Represents maximum number of shares of Common Stock issuable upon
exercise of Series A Preferred Stock based on a minimum conversion
price of $1.00 per share and exercise of the Warrants. This Prospectus
also covers the resale of such presently indeterminate number of
additional Shares as may be issuable upon conversion of the Series A
Preferred Stock based upon such fluctuations in the conversion price.
(2) Address: 650 Dundee Road, Suite 460, Northbrook, Illinois 60062.
Includes 250,000 Shares of Common Stock underlying Warrants.
(3) Address: 1310 Highway, 620 South, Suite 200, Austin, Texas 78734.
Includes 250,000 shares of Common Stock underlying Warrants.
Neither the Selling Security Holders nor their affiliates have held any
position, office or had any material relationship with the Company previously.
The Company has agreed to pay for all costs and expenses incident to
the issuance, offer, sale and delivery of the Shares, including, but not limited
to, all expenses and fees of preparing, filing and printing the Registration
Statement and Prospectus and related exhibits, amendments and supplements
thereto and mailing of such items. The Company will not pay selling commissions
and expenses associated with any such sales by the Selling Security Holders. The
Company has agreed to indemnify the Selling Security Holders against civil
liabilities including liabilities under the Securities Act of 1933.
ITEM 8. PLAN OF DISTRIBUTION
The Shares offered hereby by the Selling Security Holders may be sold
from time to time by the Selling Security Holders, or by pledgees, donees,
transferees or other successors in interest. Such sales may be made on one or
more exchanges or in the over-the-counter market, or otherwise at prices and at
terms then prevailing or at prices related to the then current market price, or
in negotiated transactions. The Shares may be sold by one or more of the
following methods, including, without limitation: (a) a block trade in which the
broker-dealer so engaged will attempt to sell the Shares as agent, but may
position and resell a portion of the block as principal to facilitate the
transaction; (b) purchases by a broker or dealer as principal and resale by such
broker or dealer for its account pursuant to this Prospectus; (c) ordinary
brokerage transactions and transactions in which the broker solicits purchasers;
and (d) face-to-face or other direct transactions between the Selling Security
Holders and purchasers without a broker-dealer or other intermediary. In
effecting sales, broker-dealers or agents engaged by the Selling Security
Holders may arrange for other broker-dealers or agents to participate. Such
broker-dealers may receive commissions or discounts from the Selling Security
Holders in amounts to be negotiated immediately prior to the sale. Such
broker-dealers and agents and any other participating broker-dealers, or agents
may be deemed to be "underwriters" within the meaning of the Act, in connection
with such sales. In addition, any securities covered by this Prospectus that
qualify for sale pursuant to Rule 144 might be sold under Rule 144 rather than
pursuant to this Prospectus.
Upon the Company being notified by the Selling Security Holders that
any material arrangement has been entered into with a broker-dealer, agent or
underwriter for the sale of shares through a block trade, special offering,
exchange distribution or secondary distribution or a purchase by a
broker-dealer, agent or underwriter, a supplemented Prospectus will be filed, if
required, pursuant to Rule 424(c) under the Act, disclosing (a) the name of each
such broker-dealer, agent or underwriter (b) the number of Shares involved, (c)
the price at which such Shares were sold, (d) the commissions paid or discounts
or concessions allowed to such broker-dealer(s), agent(s) or underwriter(s);or
other items constituting compensation or indemnification arrangements with
respect to particular offerings, where applicable, (e) that such
broker-dealer(s), agent(s) or underwriter(s) did not conduct any investigation
to verify the information set out or incorporated by reference in this
Prospectus, as supplemented; and (f) other facts material to the transaction.
ITEM 9. Legal Matters
There are no material pending legal proceedings to which the Company or
any of its subsidiaries is a party or which any of its property is the subject.
ITEM 10. MANAGEMENT
Directors and Executive Officers
The current executive officers, directors and significant employees of
the Company and its subsidiaries are as follows:
Name Age Position
Roger C. Royce 57 President, Chief Executive Officer
and Director
Douglas Shane Hackett 34 Executive Vice President, Marketing
and Director
Stephen H. Ross 53 Vice President, Chief Financial
Officer, Secretary, Treasurer,
and Director
Joeseph W. Larkin 46 Vice President
Robert W. Harte 32 Director
Steven Comer 41 Director
Steven Thorne 29 Director
Roger C. Royce, President, CEO and Director. Mr. Royce, age 57, brings
to the company over 30 years of operating experience in managing rapid growth
enterprises and running large conglomerate companies in both the public and
private sector. Mr. Royce is the former President and CEO of Motel 6
Corporation, Woodfin Suites Hotles, Inc. and Senior Vice President of
Development and Operations for Fotomat Corporation. He is also known for his
business involvement in numerous entrepreneurial companies in multiple
industries including specialization in the education and training area. He holds
a B.A. Degree and a M.B.A. from California Western University and has taken
postgraduate work at UCLA and Harvard University.
Douglas S. Hackett, Director, Vice President and Secretary. Mr.
Hackett, age 34, has served as Executive Vice President, Secretary and a
Director of the Company since September 10, 1996. He also serves as President of
Fortune Marketing International and is responsible for all marketing and
advertising for the Company including direct management of infomercial and
workshop sales divisions. Prior to serving the Company, Mr. Hackett was Vice
President of Marketing, Financial Services and Broadcasting for the Charles J.
Givens Organization, Financial Concepts and Financial Programs, where he oversaw
the growth and development of one of the largest and most successful personal
development and financial training companies. Mr. Hackett began his career in
radio, having been responsible for the creation and production of several
nationally syndicated radio shows, including "Baseball Sunday with Joe
Garagiola," "Football Sunday" and NBA Basketball Sunday. Mr. Hackett graduated
from William Jewell College in Liberty, Missouri with Bachelor of Arts degrees
in Communications and Public Relations. Additionally, he studied International
Business and Literature at Harlaxton College in Grantham, England.
Stephen H. Ross, Vice President, Chief Financial Officer, Secretary,
Treasurer and Director. Stephen H. Ross, 53, C.P.A., serves as the Chief
financial Officer and director. He is a seasoned result-oriented senior
executive with over 25 years of experience in business both national and
international. For twelve years he was with Peat Marwick and served as a Partner
in the firm. He has held numerous positions of Chief Financial Officer and has
been a principal in his own company specializing in acquisitions, financing and
turnarounds. Mr. Ross is an accounting graduate from Utah State University and
is a CPA in Utah and California.
Joseph W. Larkin, Vice President of Strategic Planning and Human
Resources. Mr. Larkin, 46, has extensive business experience and has held
numerous positions as Vice President of Strategic Planning, Vice President of
Human Resources, Vice President of Marketing and was a Principal and President
of the Consulting firm of Hendrix Information Group. Mr. Larkin has a B.A., M.A.
degree from Brigham Young University and is completing his Ph.D. at the
University of Southern California.
Robert W. Harte, Director Mr. Harte, age 32, serves as principal and
General Managing Partner of various Limited Partnerships and limited liability
companies who manage projects in excess of $50 million in the aggregate. He is
founder and chief executive of Prime Residential Management Company, a full
service property management company. He has served in numerous executive and
advisory roles providing strategic planning, management and administration for
companies such as VMS Reality Partners and Success Holdings, LLC, a media
holding company whose subsidiaries include Success Magazine and Working at Home.
Mr. Harte is a graduate of Quincy University with Bachelor of Science in
Business.
Steven Comer, Director and CEO of Internet Development Inc. ( a
subsidiary) Steven Comer, age 41, has more than 14 years of experience in the
home-based business training and seminar industry. Mr. Comer created Odyssey
Corporation which provided consulting and marketing services to national
training firms. Mr. Comer has authored several training programs that have been
marketed throughout North America. Mr. Comer studied at Brigham Young University
majoring in Electrical Engineering, with additional emphasis in Business
Management.
Steven G. Thorne, Director and President of Professional Marketing,
Inc. (a subsidiary). Mr. Thorne, age 29, has held senior management and training
positions in the telemarketing industry for the past six years. He is co-founder
and president of PMI. Mr. Thorne is responsible for more than 180 employees
working in the areas of telemarketing customer service, coaching and
administration. Mr. Thorne served for two years as the general sales manager for
the telemarketing division of Financial Freedom Report managing 70 sales
consultants. Mr. Thorne also served as a training and team leader for TSI, a
major telemarketing firm in Salt Lake City. Mr. Thorne received his B.S. degree
in business from the University of Phoenix.
Each director is elected to hold office until the next annual meeting
of stockholders and until his successor is elected and qualified. The officers
of the Company serve at the pleasure of the Company's board of directors.
There are no family relationships among any of the executive officers
or directors of the Company.
Board Committees
The Company has an Executive Committee, a Compensation Committee and an
Audit Committee.
The Compensation Committee will administer the Company's future stock
option plan and make recommendations to the full Board of Directors concerning
compensation, including incentive arrangements, of the Company's officers and
key employees.
The Audit Committee will review the engagement of the independent
accountants and review the independence of the accounting firm. The Audit
Committee will also review the audit and non-audit fees of the independent
accountants and the adequacy of the Company's internal accounting controls. The
Audit Committee consists of a majority of independent directors.
ITEM 11. PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of December 31, 1997 (a) by each
person known to the Company to own beneficially or more than 5% of any class of
the Company's securities, including those shares subject to outstanding options
and (b) by each of the Company's Officers and Directors and (c) by all officers
and directors of the Company as a group. As of March, 1998, there were
19,957,253 shares of Common Stock of the Company issued and outstanding.
Name and Address Shares Beneficially Percent
of Owner(1) Owned of Class
James S. Byrd, Jr. 3,206,000 16.06%
and Kimberly Byrd, as
Tenants by the Entirety
1856 Alaqua Drive
Longwood, Florida
Douglas Shane Hackett, 3,000,000 15.03%
and Robin Hackett, as
Tenants by the Entirety
1900 Alaqua Drive
Longwood, Florida
Peter R. Morris(3) 3,100,000 15.53%
875 North Michigan Avenue
Suite 3335
Chicago, Illinois
Success Holdings, LLC(2) 3,100,000 15.53%
733 Third Avenue
New York, New York 10017
Stephen H. Ross
2013 Lincoln Circle 0 0%
Salt Lake City, Utah 84124
Roger C. Royce 1,000,000 5.01%
4362 S. Parkview
Salt Lake City, Utah 84124
Steven Thorne 440,000 2.20%
9873 N. Meadow Lane
Highland, Utah
Steven Comer 229,188 1.15%
538 S. 1020 West
Orem, Utah
Joseph W. Larkin 0 0%
6657 Morro St.
Salt Lake City, Utah
Deere Park Capital Management, Inc. (4) 1,250,000 6.20%
Profutures Special Equities Fund, L.P.(5) 1,250,000 6.20%
All Officers and Directors
as a Group (7 persons) 14,075,188 70.53%
- -------------------
(1) The persons named in this table have sole voting and investment power
with respect to all shares of Common Stock reflected as beneficially
owned by them.
(2) Does not include shares held by Peter R. Morris, individually, Success
Holdings, LLC's Chairman.
(3) Does not include shares owned by Success Holdings LLC of which Mr.
Morris is Chairman.
(4) Address is 650 Dundee Road, Suite 460, Northbrook, Illinois 60062.
Includes 250,000 Shares of Common Stock underlying Warrants.
(5) Address is 1310 Highway, 620 South, Suite 200, Austin, Texas 78734.
Includes 250,000 shares of Common Stock underlying Warrants.
ITEM 12. DESCRIPTION OF SECURITIES
The Company's authorized capital consists of 100,000,000 shares of
Common Stock, $.001 par value, and 5,000,000 shares of Preferred Stock, $.001
par value. As of February 28, 1998, the Company had 19,957,253 shares of common
stock issued and outstanding and 20,000 shares of Series A Convertible Preferred
Stock issued and outstanding.
The transfer agent for the Company is North American Transfer Co., 147
West Merrick Road, Freeport, New York 11520.
Common Stock
The holders of Common Stock are entitled to one vote for each share
held of record on each matter submitted to a vote of shareholders, and are not
entitled to cumulate their votes in the election of directors. This means that
holders of more than 50% percent of shares voting for the election of directors
can elect all of the directors. The holders of 50% percent of the outstanding
Common Stock constitute a quorum at any meeting of shareholders, and the vote by
the holders of a majority of the outstanding shares are required to effect
certain fundamental corporate changes, such as liquidation, merger or amendment
of the Articles of Incorporation.
The Common Stock has no preemptive or other subscription rights and
there are no conversion rights or redemption or sinking fund provisions. Shares
of Common Stock are not liable for further call or assessment.
Holders of shares of Common Stock are entitled to receive ratably any
dividends as may be declared from time to time by the Board of Directors in its
discretion from funds legally available therefor. In the event of a liquidation,
dissolution or winding up of the Company, holders of common stock are entitled
to share ratably in all assets remaining after payment of liabilities and
distribution to holders of preferred stock, if any.
Series A Convertible Preferred Stock
The Company has authorized, the issuance of 200,000 shares of Series A
Preferred Stock. See Selling Security Holders for a description of the Series A
Preferred Stock.
ITEM 13. LEGAL MATTERS
The validity of the issuance of the securities offered hereby will be
passed upon for the Company by Atlas, Pearlman, Trop & Borkson, P.A., Fort
Lauderdale, Florida.
EXPERTS
The financial statements of the Company appearing in this Prospectus
have been audited by Parks, Tschopp, Whitcomb & Orr, PA, independent certified
public accountants, to the extent and for the periods indicated in their report
appearing elsewhere herein, and have been included herein in reliance upon such
report, given upon the authority of said firm as experts in accounting and
auditing.
ITEM 16. BUSINESS
General
Fortune Financial Systems, Inc. (the "Company") is the parent company
to four wholly-owned subsidiaries. These are Professional Marketing, Inc., a
Utah corporation ("PMI"); Internet Development, Inc., a Utah corporation
("IDI"); Success Media, Inc., a Florida corporation ("SMI"); and Fortune
Marketing International, Inc., a Florida corporation ("Fortune Marketing").
Through its subsidiaries the Company operates a financial and business training,
coaching and consulting company which provides training services and consulting
in a range of areas specializing in personal finance, small business and
Internet product and services.
In addition, the Company has entered into a 10-year license agreement
with option for 10 additional years with Success Holdings, L.L.C., whereby the
Company is entitled use the "Success" trademark in connection with its business
training, workshops, conferences and business coaching programs.
In addition to its four operating companies, the Company has developed
a program in conjunction with Success Magazine, an international publication
focussed on the entrepreneur, whereby the magazine will be co-branded with all
of the Company's programs, and the Company intends to create joint ventures with
entrepreneurs in foreign countries who will license the publication and
distribution rights to the magazine and the right to establish a seminar and
training company in a particular territory.
Fortune Marketing International, Inc.
Fortune Marketing operates a financial, business, real estate and
Internet training, coaching and consulting company which provides educational,
training, business coaching and consulting services to individuals and
businesses throughout the United States who want to start or expand a small
business, create or build wealth or utilize the Internet. Fortune Marketing
conducts seminars, conferences and workshops in two primary areas of financial
and business education and also offers a newsletter, Business Advantage, and a
business advice and support network to participants. The primary area of focus
is a general training program teaching the mechanics of starting a small
business, personal finance and the use of the Internet.
Training Programs range from a basic $79.95 small business primer to a
three or five-day intensive training course costing $1,500.00 to $1,995.00,
which teaches participants key requirements to launching, marketing and
operating a successful small business. Current course topics include: small
business secrets; development of a business plan; development of a marketing
plan, including an advertising campaign; tax strategies; financial analysis and
evaluation, including return on equity, cash flows, balance sheets, income
statements and market value methods of raising capital; record keeping methods;
business expansion; retirement planning and current trends in business and hot
market niches and about personal finance. Through Fortune Marketing's toll-free
telephone support network (the "coaching system"), advisers are available to
participants five days a week from 9 a.m. to 6 p.m. to provide advice on
business planning, partnerships, raising capital (including venture capital and
SBA loans) taxes, marketing and sales, money market accounts, debt and credit,
insurance, retirement plans and business opportunities. Participants receive a
five-volume reference library, especially prepared by Fortune Marketing, which
presents a step by step method of starting and operating a small business. These
volumes are entitled: How to Start a Successful Small Business, Marketing a
Successful Small Business, Personal Selling, Negotiation for Profit and Small
Business Tax Strategies. Participants also receive four motivational cassettes
on sales, negotiating and body language, and a business basics workbook.
Participants work with Fortune Marketing advisers in applying a business plan
model provided by Fortune Marketing to their respective businesses. The business
plan model topics include the Executive Overview, Introduction and Background,
Target Market Profile, Marketing Strategy, Business Objectives, Financial
Projections. Budgets, Expenses, and Summary. Participants also receive Business
Advantage, a monthly update information package, through which Fortune Marketing
provides the latest information on Business Trends/Strategies, Tax
Developments/Laws, Human Resource Trends, Financial Markets (Investments,
Interest Rates), Personal Finance, Real Estate and Successful Members.
Distribution and Sales
The Company markets its products and services through direct response
media, such as television, radio and mail programs, and as a component of free
workshops offered around the country. The workshops serve as lead generators,
introducing interested attendees to the Company programs described above. These
attendees may enroll in one or more of the Company's business training programs
or purchase other products or services offered, and become members of the
Fortune Marketing coaching system. The free workshops are typically half-day
seminars, held in a group of three to six sessions, and offered during a three
to four-day period in a given geographic market. During the workshops, attendees
are exposed to the Company's products and services and are offered the
opportunity to enroll in the more extensive training programs offered by Fortune
Marketing.
The Company currently has three infomercials in various stages of
production: a small business infomercial which has been released and tested in
several markets, a Wealth Building infomercial in production and an Internet
infomercial which is in pre-production. The release and national distribution of
these three infomercials are an integral component of the Company's growth plan.
The products offered by the Company through these infomercials are a basic video
and book training course which introduce the purchaser to the Fortune programs.
Professional Marketing, Inc.
PMI, a Utah corporation organized in July, 1996, is a telephone sales
and marketing company based in American Fork, Utah, which employs a
telemarketing staff of approximately 90 telesales consultants who market
business and financial services and products to Company clients and members, as
well as to unrelated persons for third-party clients. PMI provides the Company
with the marketing and sales staff necessary to respond effectively to sales
leads generated through the Company's seminar, training and infomercial
programs.
Internet Development, Inc.
IDI provides Internet access, training and other Internet business
products and programs. IDI, a Utah corporation organized on March 7, 1996, is
based in Orem, Utah and was acquired by the Company on May 2, 1997. IDI is a
vendor to the Company, supplying all of the Company's Internet products,
programs and services. Internet training, products and business programs are a
substantial segment of the Company's product mix, and by acquiring IDI, the
Company achieved integration of this component of its business. The Company
intends to create a significant marketing program for IDI, including the
production and national roll-out of an Internet infomercial and seminar program.
Success Consulting, Inc.
SCI is a newly-formed subsidiary of Fortune Marketing, organized for
the purpose of handling the Company's coaching system and consulting functions
to its dues-paying members. By spinning off these functions to this new
subsidiary, the Company intends to expand its coaching and consulting services
into new areas. These programs are offered to Fortune Marketing members, each of
whom pays monthly dues (currently $19.95), which entitles the member to
unlimited access to the Company's consultants, comprised of business owners,
certified financial planners and college business professors, who provide basic
advisory services. The dues also entitle the member to the Company's monthly
newsletter and a copy of Success Magazine. SCI will collect monthly dues from
all Company members, and provide all training and coaching as described in this
document. Currently, there are approximately 1,500 members in the Company
coaching system.
Success Media, Inc.
SMI is a wholly-owned subsidiary which is a media production and buying
company which produces and purchases all media for the Company and for third
parties. SMI produces infomercials, television, radio and print advertising and
receives fees and commissions for its services.
Government Regulation
In addition to federal, state and local laws applicable to businesses
generally, the Company's business is subject to regulation by the Federal Trade
Commission ("FTC"), the U.S. Postal Service, and various states' Attorneys
General and other state and local consumer protection agencies. Although the
Company does not offer business opportunities currently, to the extent that it
may do so in the future such activity is regulated by the FTC and state
authorities. The Company believes that its operations comply in all material
respects with applicable Federal and State laws.
Competition
The Company competes directly with several companies that generate
sales from presenting financial and education seminars and programs. Some of
these competitors have substantially greater financial, marketing and other
resources than the Company. The Company believes that it has, by virtue of the
breadth and depth of its programs and services, positioned itself to distinguish
the Company from its competitors.
Employees
As of March 31, 1998 the Company currently employs 310 persons
full-time (including the employees employed by various subsidiaries and
affiliates of the Company).
Business Transactions
The Company's immediate predecessor is U.S. Medical Services, Inc., a
Nevada corporation ("USMS"), whose predecessor was Vancouver Tax Shelter and
Investment Seminar, Inc. ("VTS"). VTS was incorporated on October 2, 1985 in
British Columbia, Canada, for the purpose of operating an investment and seminar
company in Canada. VTS abandoned its business plan due to its inability to raise
necessary capital.
On November 3, 1985, VTS issued 6,000 shares of its Common Stock to
investors through a private offering conducted in British Columbia. VTS
subsequently engaged in the acquisition business and under new management,
increased its authorized share capital to 2,500,000 shares, and issued 1,903,703
shares.
VTS did not proceed with acquisitions and remained inactive until 1994,
when VTS management was presented with an opportunity in the computerized
medical services industry. In furtherance of that opportunity, the Company
organized a wholly-owned Nevada subsidiary corporation, U.S. Medical Services,
Inc. (USMS) on June 6, 1994.
On June 25, 1994, all of the VTS shareholders entered into a share
exchange agreement, whereby they exchanged their VTS shares for shares of USMS
on a one-for-one basis VTS then became inactive and was wound up on May 16,
1996.
During the third quarter of 1996, USMS began negotiation with Fortune
21, Inc., a Florida corporation incorporated on August 9, 1996. On September 10,
1996, USMS and Fortune 21, Inc. entered into an exchange agreement whereby the
two shareholders of Fortune 21, Inc. (James S. Byrd, Jr. and Douglas S. Hackett)
exchanged all of their shares of Fortune 21, Inc. (comprising all the issued and
outstanding shares of Fortune 21, Inc.), for 6,025,000 shares of the Company's
Common Stock (including 2,000,000 previously issued to Byrd in July 1996,
1,000,000 of which was assigned to Hackett in August 1996. ) The Company
subsequently changed its name from U.S. Medical Services, Inc. to Fortune
Financial Systems, Inc. On September 30, 1996, the Company's then wholly-owned
subsidiary Fortune 21, Inc., acquired substantially all of the assets of
Performance Link, Inc., a Florida corporation originally incorporated on March
1, 1994 ("PLI"). As consideration for the assets acquired, the Company issued 1
million shares of Common Stock to James J. Francis, the sole shareholder of PLI
a prior officer of the Company. Subsequent to this acquisition on November 25,
1996, PLI and Fortune filed articles of merger, with PLI as the surviving
corporation and, simultaneously, PLI amended its corporate charter to change its
name to "Fortune 21, Inc."
On November 5, 1996, the Company entered into an agreement with Real
Estate Link, Inc., a company that provides real estate investment financing,
pursuant to which the Company issued 25,000 shares of Common Stock in
consideration for the acquiring the rights to certain real estate educational
materials. An additional 12,500 shares of Common Stock were issued to Real
Estate Link on February 23, 1997.
On February 7, 1997, the Company and its principal shareholders,
Messrs. Byrd and Hackett, entered into a Contribution and Operating Agreement
("Contribution Agreement") with Peter R. Morris ("Morris") and Success Holdings,
LLC, an Illinois limited liability company ("Success"). Pursuant to the terms of
the Contribution Agreement, the Company issued a total of 6.2 million shares of
Common Stock (3.1 million shares to each of Morris and Success), in
consideration for a minimum of $500,000 cash, $3 million in media credits and
certain licensing rights to trademarks and intellectual property owned by
Success. In addition, Morris agreed to guarantee a $250,000 credit line for use
by the Company
On March 22, 1997, the Company entered into an Acquisition and Plan of
Reorganization Agreement with the stockholders of PMI, which was subsequently
amended, whereby the Company agreed to acquire all of the issued and outstanding
capital stock of PMI, in exchange for a total of 1,060,000 shares of the
Company's Common Stock, with 440,000 shares of the Company's Common Stock issued
to each of Robert A. Stahura and Steven G. Thorne (currently a director of the
Company), with the additional stock to be issued to PMI's key employees.
On May 2, 1997 the Company acquired all of the outstanding stock of
IDI, in exchange for 1,000,000 shares of the Company's common stock, with
458,000 shares each being allocated to Brent Crabtree and Steven Comer, (who is
a director of the Company) and the balance of the shares to other IDI
stockholders. Some of these shares are subject to hold back provisions, based
upon performance.
Effective April 1, 1997, the Company divested itself of the common
stock of Fortune 21, Inc., a subsidiary, by transferring the stock to James
Byrd, a former officer and director of the Company. This transfer was due to the
discontinuation of certain real estate and seminar programs offered by Fortune
21.
ITEM 17. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION OR PLAN OF OPERATIONS
General
Fortune Financial Systems, Inc. (FFSY or the Company) is in the
business of providing products, training, consulting and other services in a
range of areas specializing in Internet, small business, real estate and
personal finance. Until September 3, 1996 the only activity of the Company was
raising equity funding. Through a reverse common stock acquisition and common
stock purchase in September, 1996, formal business operations began. The Company
has established a fiscal year-end of March 31.
In March, 1997, FFSY began to establish, acquire and sell companies to
establish itself as the premier provider of financial and business training
services. Results of operations for the nine months ended December 31, 1997
include the operations of FFSY's wholly-owned subsidiaries from their dates of
acquisition, and of subsidiaries sold during the period owned by FFSY.
The following discussion and analysis should be read in conjunction
with the consolidated financial information and notes thereto, and is qualified
in its entirety by the foregoing and by other more detailed financial
information included elsewhere in this Prospectus.
Background
FFSY's immediate predecessor was U.S. Medical Services, Inc., a Nevada
corporation ("USMS") whose predecessor was Vancouver Tax Shelter and Investment
Seminar, Inc. ("VTS"). VTS was incorporated on October 2, 1985 in British
Columbia, Canada, for the purpose of operating an investment and seminar company
in Canada. VTS abandoned its business plan due to its inability to raise
necessary capital.
On November 3, 1985, VTS issued 6,000 shares of its Common Stock to
investors through a private offering conducted in British Columbia. VTS
subsequently engaged in the acquisition business and, under new management,
increased its authorized share capital to 2,500,000 shares and issued 1,903,703
shares.
VTS did not proceed with acquisitions and remained inactive until 1994,
when VTS management was presented with an opportunity in the computerized
medical services industry. In furtherance of that opportunity, the Company
organized a wholly-owned Nevada subsidiary corporation, U.S. Medical Services,
Inc. on June 6, 1994.
On June 25, 1994, all of the VTS shareholders entered into a share
exchange agreement, whereby they exchanged their VTS shares for shares of USMS
on a one-for-one basis. VTS then became inactive and was wound up on May 16,
1996.
During the third quarter of 1996, USMS began negotiation with Fortune
21, Inc., a Florida corporation incorporated on August 9, 1996. On September 10,
1996, USMS and Fortune 21, Inc. entered into an exchange agreement whereby the
shareholders of Fortune 21, Inc. exchanged all of their shares of Fortune 21,
Inc. for shares of the USMS's common stock. USMS subsequently changed its name
from U.S. Medical Services, Inc. to Fortune Financial Systems, Inc. ("FFSY").
Fortune 21 was a seminar company based in Orlando, Florida. On April 1,
1997 Fortune Financial Systems, Inc. sold the operations and stock of Fortune
21. FFSY agreed to provide administrative services to Fortune 21 for a period of
one year with one year extensions.
In March of 1997, FFSY acquired the stock of Professional Marketing,
Inc. ("PMI"). This acquisition was completed by trading stock in FFSY for all of
the stock in PMI. PMI is a telephone sales and marketing company which was
organized in July, 1996. PMI's telesales consultants market business, financial
services and products. Additionally, PMI offers coaching programs where clients
contract with a personal PMI coach who assists in enhancing their business.
In May of 1997 FFSY acquired the stock of Internet Development, Inc.
("IDI"). This acquisition was completed by trading stock in FFSY for all of the
stock in IDI. IDI provides internet access, training, programs and other
Internet business opportunities. IDI was organized in March of 1996.
Additionally, IDI offers an integrated software management program for the small
business person.
In August of 1997 FFSY organized Fortune Marketing International
("FMI"). FMI operates a financial, real estate, business and Internet training,
coaching and consulting company. FMI trains entrepreneurs throughout the United
States who want to start or expand a small business and build wealth. FMI
conducts seminars, conferences, workshops and offers a newsletter to train and
support its clients. The primary focus of this training program is to teach the
mechanics of starting and operating a small business, and the use of the
Internet.
The company's business strategy is to acquire and operate a network of
training companies and to offer related services to support the core business
with the idea of providing training and knowledge to make the small and private
business person successful.
Results of Operations
The following table sets forth for the periods indicated certain line
items from FFSY's statement of operations as a percentage of FFSY's consolidated
revenue:
Period from
Inception
(September 3, 1996
through Nine Months Ended
March 31, 1997 December 31, 1997
Net sales--------------------------------------------------- 100.0% 100.0%
Cost of sales----------------------------------------------- 58.4 76.0
Gross profit------------------------------------------------ 41.6 24.0
General and administrative expenses------------------------- 25.2 29.5
Other income------------------------------------------------ - 1.2
Net income (loss) before taxes------------------------------ 16.4 (4.3)
Net sales for the nine months ended December 31, 1997 of $19.0 million
represents a 330% increase over the period from inception, September 3, 1996
through March 31, 1997. The increase is due to (i) the addition of products and
services from Company acquisitions accounted for from acquisition dates, (ii)
sales occurred during the seminar busy season and (iii) the fact that the nine
month reporting period is 50% longer than the period from inception reporting
period. The first quarter of a calendar year is typically the seminar busy
season.
Corresponding with the revenue increase is a 429% increase in cost of
sales to $14.4 million. The dollar increase correlates to the previously
explained increase in revenue. The increase as a percentage of net sales is
primarily due to revenue splitting agreements with third-party partners who
provide revenue leads. The revenues split due the companies providing successful
leads is included in cost of sales.
General and administrative expenses of $5.6 million is a 387% increase
over the period from inception, September 3, 1996 through March 31, 1997. The
aggregate dollar increase is due to the building of a corporate structure along
with the general and administrative expenses that relate to the companies
acquired and formed. As a percentage of sales these expenses have increased
modestly to a level more reflective of a company that is no longer in the
start-up phase and is experiencing rapid sales growth.
Other income consists primarily of interest income earned on a note
receivable from the sale of a subsidiary along with management fees earned from
a management agreement to continue to manage the sold subsidiary.
Plan of Operations for the Company and Liquidity
During the next 12 months, the Company will continue to operate and
manage its wholly-owned subsidiaries. In addition, the Company plans to continue
to identify, evaluate and acquire other companies that will fit within its
business strategy. It is the intention of the Company to utilize various
combinations of cash, promissory notes and stock in executing acquisitions. At
the present time, there are no understandings, agreements or commitments with
respect to any prospective acquisition.
In July, 1997 the Company completed a private placement Regulation "D"
offering for $1,000,000. Additionally, the Company has been financed by internal
cash flow and by periodic short-term loans which in the aggregate have not
exceeded $600,000. Some of the short-term loans have stock conversion features.
The company entered into a $20,000,000 credit facility dated October
28, 1997, which was ultimately contingent on the Company becoming effective on
Form S-1 and Form 10 registration statements with the Securities and Exchange
Commission no later than 120 days subsequent to the initial closing date. The
Company issued 20,000 shares of its Series A Preferred Stock and Warrants to
purchase 500,000 shares of Common Stock for a cash consideration of $2,000,000.
The warrants allow the Investors to purchase an aggregate of 500,000 shares of
Common Stock at the following prices: (i) 250,000 shares at a price of $6.00 per
share, and (ii) 250,000 shares at a price of $5.00 per share.
The Company was not able to fulfill the conditions of the October
Agreement and, accordingly, modified the Agreement by an Amendment dated March
27, 1998. As provided for by the Amendment, the parties agree that neither of
them would have the obligation to purchase or sell additional shares of the
Series A Preferred Stock as provided by the October Agreement. All penalties,
defaults and price adjustments provided for under the October Agreement were
waived under the terms of the Amendment. The Company remains obligated to use
its best efforts to process expeditiously the Registration Statement. In the
event the Registration Statement does not become effective by July 27, 1998, or
in the alternative, if the Company or other persons are not able to provide the
Selling Security Holders with shares of Common Stock of the Company which would
have the rights and benefits comparable to shares of Common Stock registered
under the Securities Act, the Selling Security Holders would have the right to
put their shares of Series A Preferred Stock to the Company and foreclose on all
collateral provided to them under the October Agreement.
The foregoing notwithstanding, the Selling Security Holders would agree
to extend to the Company a grace period of 60 days from the end of July 27, 1998
in which the Company would have the right to exercise a redemption option and
make a one-time payment equal to 120% of the stated value of the Preferred Stock
to be acquired. At such time as the Registration Statement becomes effective,
the Company also has a right to a redemption option to acquire 10% of the Series
A Preferred Stock on a monthly basis over a 10-month period (i.e., 2,000 shares
of Series A Preferred Stock each month) at a redemption price of 120% of the
stated value of such shares of Series A Preferred Stock. In addition, on or
prior to the earlier of July 27, 1998 or the date this Registration Statement
becomes effective, the Company will have the right to redeem, in whole or in
part, and from time to time, the Series A Preferred Stock at 110% of the stated
value of the Series A Preferred Stock and without payment of accrued but unpaid
dividends.
As modified by the Amendment, at the option of each of the Selling
Security Holders, the Series A Preferred Stock may be converted at any time into
shares of the Company's Common Stock equal in number to the amount to be
determined by dividing $100.00 (representing the stated value thereof) by a
percentage of the average closing price of the Company's Common Stock over the
10-day trading period ending on the day prior to the conversion of the Series A
Preferred Stock less a discount of 17%. The Selling Security Holders, however,
have agreed to convert not more than 10% of the Series A Preferred Stock during
any 30-day period for a total of 10 months beginning on the earlier of the date
hereof or the date of effectiveness of this Registration Statement.
Should the Company make additional acquisitions, the number of total
employees could increase substantially, based upon the size of the acquisition.
The Company has no significant commitments for expenditures other than
commitments under certain employment agreements and the lease of its corporate
and subsidiary's offices. The Company has entered into employment contracts with
key members of management, the terms of which expire at various times through
2002. The contracts provide for minimum salary levels, aggregating $4,500,000,
and incentive bonuses based on the attainment of certain management goals
primarily based on net sales and net operating income before taxes.
Generally, the Company has few capital expenditure requirements except
for sophisticated phone systems, stations and office equipment. The Company
estimates that it will incur additional capital expenditures of approximately
$1,000,000 during the next 12 months to support its growth.
Should the Company not make any new acquisitions, management believes
that operating cash flow, available cash and available credit resources,
together with the net proceeds from the credit facility, will be adequate to
make the repayments of indebtedness, to meet the working capital cash needs of
the Company and to meet anticipated capital expenditure needs during the next 12
months. However, it is the Company's intention to identify, evaluate and make
additional acquisitions within the next twelve months. Because the Company's
cash requirements in the future are heavily dependent upon the frequency and
cost of future acquisitions, as well as the combination of cash, promissory
notes and stocks used in executing acquisitions, it is impossible to determine
at this time the effect of the Company's acquisition strategy on its future cash
requirements. If significant acquisition opportunities arise, the Company may
need to seek additional capital to complete them.
Litigation
There is no known litigation pending against the Company.
Seasonality and Inflation
The Company has some seasonality in its operations. The
seminar/training season is typically strong in the first quarter, slow in the
second and third quarters and strong in the fourth quarter. The affect of
seasonality is contingent on the mix of sales among the subsidiaries and may be
further affected by the timing of future acquisitions.
The effect of inflation on the Company's operations has not been
significant to date. However, there can be no assurance that a high rate of
inflation in the future would not have an adverse effect on the Company's future
operating results.
ITEM 18. Description of Property
The Company leases approximately 2,844 square feet of office space at
6975 Union Park Center, suite 180, Midvale, Utah. The monthly lease expense for
the Midvale office is approximately $4,325.00. The lease expires on September
20, 2002. The Company leases 3,100 square feet of office space at 1200 West
State Road 434, Longwood, Florida. The base rent under the lease is $3,409.25
per month. The lease expires on July 31, 1997 and has two one-year lease
renewals. Additionally, the Company leases 8,600 square feet of office space at
443 Commerce Road, Orem. The monthly lease expense for the Orem office is
approximately $4,300.00. The lease expires in May, 2001. The Company also leases
approximately 10,000 square feet of office space at 791 East 340 South, American
Fork, Utah. The base rent under the lease is approximately $5,717.00 per month
and expires in December, 2000.
The Company does not currently own real property.
ITEM 19. CERTAIN TRANSACTIONS
The following section describes transactions since inception to which
the Company or its subsidiaries were a party and in which any of the Company's
officers, directors, director nominees, or principal shareholder had a direct or
indirect interest:
Under the terms of the September 10, 1996 Exchange Agreement, Byrd and
Hackett each received 3 million shares of the Company's Common Stock and,
thereby gained control of the Company. These included 2,000,000 shares
previously issued to Byrd in July 1996, 1,000,000 of which were assigned to
Hackett in August 1996. Byrd and Hackett each made a capital contribution of
$50,000 to the Company. Subsequently, Byrd became Chairman, President and CEO of
the Company and Hackett became Vice President and Secretary and a Director of
the Company. Each of Byrd and Hackett were issued an additional 500,000 shares
of the Company's Common Stock subsequently in consideration of additional
capital contributions made to the Company, in the amount of $80,000 each.
Under the terms of Fortune 21's acquisition of substantially all of the
assets of PLI, the Company issued 1 million shares of its Common Stock to PLI,
which were distributed to Francis. Francis served as the Company's Vice
President, Treasurer and a Director.
On November 5, 1996, the Company issued 25,000 shares of Common Stock
to Real Estate Link, Inc., a company that provides real estate investment
financing in consideration for acquiring the rights to certain real estate
educational materials. James J. Francis, the Company's then Vice President,
Treasurer and a Director, also is a Director of Real Estate Link. An additional
12,500 shares of Common Stock were issued to Real Estate Link on February 23,
1997.
On February 7, 1997, the Company and its principal shareholders,
Messrs. Byrd and Hackett, entered into a Contribution and Operating Agreement
("Contribution Agreement") with Peter R. Morris ("Morris") and Success Holdings,
LLC, an Illinois limited liability company ("Success"). Pursuant to the terms of
the Contribution Agreement, the Company issued a total of 6.2 million shares of
Common Stock (3.1 million shares to each of Morris and Success), in
consideration for a minimum of $500,000 cash, $3 million in media credits and
certain licensing rights to trademarks and intellectual property owned by
Success. In addition, Morris agreed to guarantee a $250,000 credit line to the
Company.
On July 14, 1997, the company acquired all of the stock of Gateway
Marketing International, Inc., an educational material and distribution company,
from Roger C. Royce, President and CEO for 1,000,000 shares of the Company's
common stock. Mr. Royce subsequently became President and CEO of the Company
under a 5-year contract.
As of December 31, 1997, Messrs. Byrd, Hackett and Morris had loans to
the Company in the aggregate of over $360,000.00 of which $172,000.00 was
outstanding. These loans are short term non-interest bearing and will be paid
upon demand.
ITEM 20. PRICE RANGE OF COMMON STOCK
The Company's Common Stock trades in the over-the-counter market under
the symbol "FFSY." There was no trading in the Company's Common Stock prior to
October, 1995. The following table shows the quarterly high and low bid prices
for 1995, 1996 and 1997 as reported by the National Quotation Bureau
Incorporated. These prices reflect inter-dealer quotations without adjustments
for retail markup, markdown or commission, and do not necessarily represent
actual transactions.
Year Period High Low
1995 First Quarter N/A N/A
(USMS) Second Quarter N/A N/A
Third Quarter N/A N/A
Fourth Quarter N/A N/A
1996 First Quarter N/A N/A
Second Quarter N/A N/A
Third Quarter $ 0 $ 0
Fourth Quarter $ 0 $ 0
1997 First Quarter $0 $0
Second Quarter $0 $0
Third Quarter $8.75 $3.72
Fourth Quarter $7.91 $2.59
1998 First Quarter $4.00 $1.75
DIVIDEND POLICY
The Company has not paid, and does not anticipate paying in the
foreseeable future, any dividends on its Common Stock. The Company currently
intends to retain its future earnings for use in operations and expansions of
its business. Declaration and payment of future dividends, if any, will be at
the sole discretion of the Board of Directors.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997 as adjusted to give effect to the issuance and sale of the
20,000 shares of Series A Convertible Preferred Stock sold by the Company in
October 1997. This table should be read in conjunction with the financial
statements and related notes appearing elsewhere in this Prospectus.
December 31, 1997
Actual
5% convertible series "A" preferred stock, convertible into common stock
or a note payable,cumulative, aggregate liquidation preference
of $2,200,000; 5,000,000 shares authorized; .001 par value;
20,000 shares issued and outstanding $ 1,310,000
Stockholders' equity:
Common Stock, 100,000,000 shares authorized; .001
par value; 19,957,253 shares issued and outstanding 19,957
Additional paid-in capital 5,298,081
Warrants outstanding 300,000
Stock subscriptions receivable (3,300,000)
Retained earnings 63,410
-----------
Total stockholders equity $ 2,381,448
============
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The selected financial data for the period from inception (September 3,
1996) through March 31, 1997, have been derived from the audited financial
statements of the Company. The selected financial data for the nine months
ending December 31, 1997 is derived from the unaudited financial statements of
the Company. The unaudited financial statements include all adjustments,
consisting of only normal recurring adjustments, that the Company considers
necessary for a fair presentation of the financial position and results of
operations for these periods. Operating results for the nine months ended
December 31, 1997 are not necessarily indicative of the operating results that
may be expected for the entire fiscal year ending March 31, 1998. This
information should be read in conjunction with the Financial Statements and
"Management's Discussion and Analysis of Financial Condition or Plan of
Operations."
ITEM 21. Executive Compensation
Below is the aggregate annual remuneration of each of the highest paid
persons who are officers or directors of the Company during the Company's last
fiscal year. The Company's fiscal year end was March 31, 1997.
Summary Compensation Table
================== ==================================================== =======================================================
Annual Compensation Long-Term Compensation
---------------------------- ==========================
Awards Payouts
================== --------- ------------ ------------ ---------------- --------------- ------------ ------------- ============
Securi-
ties
March Other Under- All
31 Annual Restricted lying LTIP Other
Name and Fiscal Salary Bonus Compen- Stock Options/ Payouts Com-
Principal Year ($) ($) sation Award(s) SARs ($) pensa-
Position ($) ($) (#) tion
($)
================== --------- ------------ ------------ ---------------- --------------- ------------ ------------- ============
Douglas Shane
Hackett* 1997 $85,500 N/A N/A
Executive Vice N/A N/A N/A N/A
President
================== --------- ------------ ------------ ---------------- --------------- ------------ ------------- ============
James S. Byrd
Chairman** 1997 $85,500 N/A N/A N/A N/A N/A N/A
================== ========= ============ ============ ================ =============== ============ ============= ============
James J. Francis
Vice President 1997 $59,500 N/A N/A N/A N/A N/A N/A
================== ========= ============ ============ ================ =============== ============ ============= ============
The Company did not provide any additional compensation to its directors or
executive officers. No options were granted to such officers or directors in the
last fiscal year.
Employment Agreements
The Company has entered into the employment agreements described below:
Roger C. Royce
Employment Agreement on July 28, 1997. Under the Employment Agreement
Royce serves as Chairman, President and Chief Executive Officer of the Company.
As compensation for his services, Royce receives a base salary of $25,000 per
month, subject to an annual 5% increase. In the event of a cash flow shortage
after the Company's credit line has been exhausted, the base salary may be
reduced to $15,000 per month. Royce is entitled to a cash bonus equal to 10% of
the Company's net earnings before taxes and before deductions for bonuses
("pre-tax profits"), not to exceed $200,000. Royce is also entitled to receive
an additional bonus in the event that the Company's pre-tax profits exceed $5
million, on a sliding scale. The additional bonus is to be paid in a combination
of cash and stock options ( percentages to be determined by the Board) with the
following net values: for pre-tax profits between $5 and $6 million: $250,000;
for pre-tax profits between $6 and $7 million: $350,000; for pre-tax profits in
excess of $7 million: $500,000. Royce is entitled to participate in all employee
benefit plans available to Fortune Marketing employees and is entitled to five
weeks of paid vacation per year. He also receives a total of $2,400.00 per month
of additional benefits including an automobile allowance, an entertainment
allowance and a club membership. The term of the Employment Agreement is five
years unless earlier terminated according to its terms. Royce is subject to
certain non-solicitation and non-competition provisions under the Employment
Agreement.
Douglas S. Hackett
Employment Agreement on February 7, 1997. Under the Employment
Agreement, Hackett serves as Executive Vice President and is Director of the
Company. As compensation for his services, Hackett receives a base salary of
$25,000 per month, subject to an annual 5% increase. In the event of a cash flow
shortage after the Company's credit line has been exhausted, the base salary may
be reduced to $15,000 per month. Hackett is entitled to a cash bonus equal to
10% the Company's pre-tax profits, not to exceed $200,000, however. Hackett is
also entitled to receive an additional bonus in the event that the Company's
pre-tax profits exceed $5 million, on a sliding scale. The additional bonus is
to be paid in a combination of cash and stock options (percentages determined by
the Board) with the following net values: for pre-tax profits between $5 and $6
million: $250,000; for pre-tax profits between $6 and $7 million: $350,000; for
pre-tax profits in excess of $7 million: $500,000. Hackett is entitled to
participate in all employee benefit plans available to Fortune Marketing
employees and is entitled to five weeks of paid vacation per year. He also
receives a total of approximately $2,400.00 per month of additional benefits
including a automobile allowance, a monthly entertainment allowance and a club
membership. The term of the Employment Agreement is five years unless earlier
terminated according to its terms. Hackett is subject to certain
non-solicitation and non-competition provisions under the Employment Agreement.
James S. Byrd, Jr.
Upon the resignation of James Byrd as Chairman of the Board as of
December 31, 1997, the Company agreed to continue using the legal and
acquisition expertise of Mr. Byrd who was a cofounder of the Company. Under the
new Consulting Agreement which replaced Mr. Byrd's five year employment
contract, the Company agreed that Mr. Byrd will continue to act as the Company's
active legal counsel, consult in matters of corporate finance, seek
acquisitions, develop shareholder stock appreciation programs and promote the
Company. It is anticipated that this arrangement will have a minimum term of
four years and he will receive a fee of $15,000.00 per month. Further, Mr. Byrd
will participate in a pro-rata "stock lock up" which is unanimously agreed to by
the Company's major shareholders. Mr. Byrd will also receive the sum of
$5,000.00 per month in a non compete agreement in which he has agreed to not
involve himself in forming or working with any company which competes in anyway
with the Fortune Companies.
ITEM 22. FINANCIAL STATEMENTS
Financial Statements
FORTUNE FINANCIAL SYSTEMS, INC.
AND SUBSID\8trIARIES
March 31,
FORTUNE FINANCIAL SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Financial Statements
March 31, 1997
(With Independent Auditors' Report Thereon)
FORTUNE FINANCIAL SYSTEMS, INC. AND SUBSIDIARIES
Table of Contents
March 31, 1997
Independent Auditors' Report...............................................1
Consolidated Balance Sheet...........................................2
Consolidated Statement of Operations.................................3
Consolidated Statement of Stockholders' Equity.......................4
Consolidated Statement of Cash Flows.................................5
Notes to Consolidated Financial Statements.................................6
Independent Auditors' Report
To the Board of Directors and Stockholders
Fortune Financial Systems, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of Fortune Financial
Systems, Inc. and Subsidiaries as of March 31, 1997, and the related
consolidated statement of operations, stockholders' equity and cash flows for
the period from inception (September 3, 1996) through March 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Fortune Financial
Systems, Inc. and Subsidiaries, as of March 31, 1997, and the results of their
operations and their cash flows for the period from inception (September 3,
1996) through March 31, 1997 in conformity with generally accepted accounting
principles.
May 20, 1997
Maitland, Florida
FORTUNE FINANCIAL SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
March 31, 1997
ASSETS
Current assets:
Cash $ 73,593
Finance contracts receivable, less
allowance for collection losses of $200,000 (note 6) 1,373,756
Other accounts receivable 152,544
Inventory 95,215
Prepaid expenses 184,780
-------
Total current assets 1,879,888
---------
Property and equipment, net (note 2) 165,060
Merchant deposits 140,195
Other assets 15,588
------
Total assets $ 2,200,731
===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 570,164
Note payable and line of credit (note 5) 77,064
Income taxes payable 330,000
-------
Total current liabilities 977,228
-------
Stockholders' equity:
Common stock, 25,000,000 shares authorized;
.001 par value; 17,315,253 issued and outstanding 17,315
Additional paid in capital 3,890,790
Stock subscriptions receivable (3,300,000)
Retained earnings 615,398
-------
Total stockholders' equity 1,223,503
---------
Total liabilities and stockholders' equity $ 2,200,731
===============
See accompanying notes to consolidated financial statements.
2
FORTUNE FINANCIAL SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statement of Operations
For the period from inception (September 3, 1996) through March 31, 1997
Sales of products and services $ 5,762,534
Cost of sales 3,366,413
--------
Gross profit 2,396,121
General and administrative expenses 1,450,723
--------
Net income before income taxes 945,398
-------
Income taxes (note 4) 330,000
-------
Net income $ 615,398
============
Net income per share (note 3) $ 0.06
============
See accompanying notes to consolidated financial statements.
3
FORTUNE FINANCIAL SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
For the period from inception (September 3, 1996) through March 31, 1997
Additional Stock
Common Stock Paid in Subscriptions Retained
Shares $ Capital Receivable Earnings Total
------ - ------- ---------- -------- -----
Balances, September 3, 1996 6,000,000 $ 6,000 $ 94,000 $ - $ - $ 100,000
Recapitalization, including impact of
reverse acquisition 1,903,203 1,903 - - - 1,903
Shares issued in exchange for services 3,100,000 3,100 2,996,900 (3,000,000) - -
Shares issued in share for share exchange 1,060,000 1,060 66,940 68,000
- -
Issuance of common stock 5,252,050 5,252 653,507 (300,000) - 358,759
Capital contribution - - 79,443 - - 79,443
Net income - - - - 615,398 1,223,503
---------- ---------- ----------- ------------ ------------ ------------
Balances, March 31, 1997 17,315,253 $ 17,315 $ 3,890,790 $ (3,300,000) $ 615,398 $ 1,223,503
========== ========== =========== ============ ============ ============
See accompanying notes to consolidated financial statements.
4
FORTUNE FINANCIAL SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
For the period from inception (September 3, 1996) through March 31, 1997
Cash flows from operating activities:
Net income $ 615,938
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation
3,770
Cash provided by (used for) changes in assets
and
liabilities:
Finance contract and other receivables (1,526,300)
Inventories (95,215)
Prepaid expenses (184,780)
Accounts payable accrued expenses 572,067
Income taxes payable 330,000
Other assets (155,783)
-----------------
Net cash used in operating activities (440,843)
-----------------
Cash flows from investing activities:
Additions to property and equipment (168,830)
-----------------
Net cash used in investing activities (168,830)
-----------------
Cash flows from financing activities:
Proceeds from sale of common stock 606,202
Proceeds from long-term debt 77,064
-----------------
Net cash provided by financing activities 683,266
-----------------
Net increase in cash and cash equivalents 73,593
Cash and cash equivalents, beginning of period -
-----------------
Cash and cash equivalents, end of period $ 73,593
=================
Supplemental disclosures of cash flow information:
Cash paid for interest $ -
=================
Income taxes paid $ -
=================
See accompanying notes to consolidated financial statements.
5
FORTUNE FINANCIAL SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1997
(1) Organization and Significant Accounting Policies
------------------------------------------------
(a) Organization
------------
The accompanying consolidated financial statements include the accounts of
Fortune Financial Systems, Inc. (Fortune or the Company) and its wholly
owned subsidiaries, Fortune 21, Inc. (Fortune 21) and Professional
Marketing, Inc. All significant intercompany balances and transactions have
been eliminated in consolidation.
U.S. Medical Services, Inc. (USMS) was incorporated on June 6, 1994 in the
State of Nevada with capital stock of 25,000,000 shares with no par value.
Fortune 21 was incorporated under the laws of the State of Florida on
September 3, 1996. It provides financial and business training services.
On September 10, 1996, Fortune agreed to exchange shares with USMS, a
Nevada public company. Accordingly, Fortune 21 exchanged 6,000,000 shares
of the company stock for 6,000,000 of USMS stock in a business combination
accounted for as a reverse acquisition. During the period USMS was in
existence prior to the reverse acquisition, its only activity was to raise
equity capital. For accounting purposes, the reverse acquisition is
reflected as if Fortune issued its stock (6,000,000 shares) for the net
assets of USMS. The net assets of USMS were not adjusted in connection with
the reverse acquisition since they were monetary in nature. Coincident with
the reverse acquisition, USMS changed its name to Fortune Financial
Systems, Inc.
Performance Link, Inc. (Performance) was incorporated in 1994 for the
purpose of providing business and financial services.
On September 30, 1996, Fortune acquired the net assets of Performance in
exchange for 1,025,000 shares of stock. This business acquisition has been
accounted for as a purchase transaction, and accordingly, the assets and
liabilities of Performance have been reflected in the accompanying
consolidated financial statements at fair market value. The accompanying
statements of operations include the results of operations of Performance
subsequent to the acquisition date. Coincident with the business
combination, Performance changed its name to Fortune 21, Inc.
(Continued)
6
FORTUNE FINANCIAL SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1), Continued
On March 31, 1997, Fortune acquired the net assets of Professional
Marketing International in exchange for 1,060,000 shares of stock. This
business combination has been accounted for as a purchase transaction, and
accordingly, the assets and liabilities of Professional Marketing
International as of March 31, 1997 have been reflected in the accompanying
consolidated balance sheet at fair market value. The accompanying
consolidated statement of operations does not include the results of
operations of Professional Marketing International because the acquisition
occurred on March 31, 1997. These operations will be accounted for by
Fortune prospectively.
(b) Revenue recognition
-------------------
The principal sources of revenues are derived from the sale of business
training products and services, and are recognized when the products or
services are delivered.
(c) Cash flows
----------
The Company considers all investments, originally purchased with a maturity
of three months or less, to be cash equivalents.
(d) Property and equipment
----------------------
Property and equipment acquired through the acquisition of other companies
is recorded at the predecessor Company's net book value prior to date of
acquisition. All other property and equipment is recorded at cost.
Depreciation is calculated using the straight-line method over the
following estimated useful lives:
Furniture and equipment 5 years
Leasehold improvements 7 years
(e) Inventory
---------
Inventory consists of product supplies such as books and tapes. Inventory
is stated at cost or the first-in, first-out method.
(Continued)
7
FORTUNE FINANCIAL SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1), Continued
(f) Income taxes
------------
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(g) Use of Estimates
----------------
Management of the Company has made certain estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results
could differ from those estimates.
(h) Concentration of Credit Risk and Fair Value of Financial Instruments
--------------------------------------------------------------------
The carrying amount reported in the balance sheet for cash, accounts
receivable, accounts payable and accrued expenses approximates fair value
because of the immediate or short-term maturity of these financial
instruments. Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade and other
accounts receivable which amount to approximately $1,500,000. The Company
performs periodic credit evaluations of its trade customers and generally
does not require collateral.
(2) Property and Equipment
----------------------
At March 31, 1997, furniture and equipment consist of the following:
Furniture and equipment $ 127,509
Leasehold improvements 41,321
-----------
168,830
Less accumulated depreciation 3,770
-----------
$ 165,060
===========
8
FORTUNE FINANCIAL SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Net Income Per Share
--------------------
Net income per share is based on the weighted average shares outstanding of
10,489,047 for the period from inception (September 3, 1996) through March 31,
1997. For purposes of computing the weighted average number of shares
outstanding, the number of shares of Fortune 21 stock outstanding prior to the
business combination with the Company has been adjusted as if the conversion of
those shares took place on September 3, 1996.
(4) Income Taxes
------------
Income tax expense for the period ended March 31, 1997 consist of:
Current Deferred Total
Federal $ 310,000 - $ 310,000
State 20,000 - 20,000
----------- ----------- ----------
$ 330,000 - $ 330,000
=========== =========== ==========
Income tax expense (benefit) attributable to income from continuing operations
differed from the amount computed by applying the U.S. federal income tax rate
of 34% to income (loss) from continuing operations before income taxes as a
result of the following:
Computed "expected" tax expense $ 320,000
Increase in income tax expense resulting from:
State and local income taxes, net of federal
income tax benefit 30,000
Other (20,000)
-------
$ 330,000
=============
9
FORTUNE FINANCIAL SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Note Payable and Line of Credit
-------------------------------
Note payable and line of credit consist of the following:
Line of credit payable to bank (with borrowings up to
$35,000), bearing interest at the banks prime rate,
plus 1% renewable annually $ 27,064
Note payable to individual, bearing interest at 10%
due in September, 1997 50,000
------
$ 77,064
=========
(6) Subsequent Events
-----------------
Acquisition
-----------
On May 2, 1997, Fortune acquired the net assets of Internet Development,
Inc. based in Orem, Utah. The acquisition was made in a share for share
exchange accounted for on a purchase transaction in which Fortune issued
250,000 shares. Up to an additional 750,000 shares of stock could be earned
by the sellers if the acquired company achieves certain income levels.
Assignment of Accounts Receivable
---------------------------------
In April 1997, the Company entered into an agreement with a finance company
to assign an undivided interest in its portfolio of finance contracts,
subject to limited recourse provisions, in an amount not to exceed $
1,500,000.
The assignment of said contracts was used to secure an advance of $501,000
which was used for working capital.
10
FORTUNE FINANCIAL SYSTEMS, INC.
AND
SUBSIDIARIES
Consolidated Financial Statements
December 31, 1997
(Unaudited)
FORTUNE FINANCIAL SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 1997
(Unaudited)
ASSETS
------
Current assets:
Cash and cash equivalents $ 692,077
Accounts receivable, less allowances of $62,080 836,404
Current portion of finance contracts receivable, less
allowances of $214,633 310,350
Receivable from an officer 2,724
Inventory 60,995
Prepaid assets 102,443
-------------
Total current assets 2,004,993
Furniture and equipment, net 497,815
Finance contracts receivable, less current portion and
allowances of $107,317 155,174
Note receivable from stockholder 3,005,734
Merchant deposits 317,754
Other assets 25,534
Goodwill 200,000
-------------
$ 6,207,004
============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable$ 1,175,245
Refunds payable 382,680
Accrued expenses 232,792
Commissions payable 177,425
Income taxes payable 50,000
Notes payable and line of credit 197,414
-------------
Total current liabilities 2,515,556
-------------
5% Convertible series "A" preferred stock, convertible into
common stock or a note payable, cumulative, aggregate
liquidation preference of $2,200,000; 5,000,000 shares
authorized; .001 par value; 20,000 shares issued and outstanding 1,310,000
------------
Commitments (note 5)
Stockholders' equity:
Common stock, 100,000,000 shares authorized;
.001 par value; 19,957,253 shares issued and outstanding 19,957
Additional paid in capital 5,298,081
Warrants outstanding 300,000
Stock subscriptions receivable (3,300,000)
Retained earnings 63,410
-------------
Total stockholders' equity 2,381,448
-------------
$ 6,207,004
=============
See accompanying notes to consolidated financial statements.
FORTUNE FINANCIAL SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statement of Operations
For the nine months ended December 31, 1997
(Unaudited)
Sales of products and services $ 18,996,191
Cost of sales 14,428,246
----------------
Gross profit 4,567,945
Selling, general and administrative expenses 5,620,951
----------------
Loss from operations (1,053,006)
Other income (expense):
Interest income 162,804
Management fee (note 7) 75,000
Other income 1,022
----------------
Total other income, net 238,826
Loss before benefit for income tax (814,180)
Benefit for income taxes (note 4) (280,000)
-----------------
Net loss $ (534,180)
=================
Net loss applicable to common shares $ (551,988)
=================
Net loss per common share (both basic and diluted) $ (0.03)
=================
See accompanying notes to consolidated financial statements.
FORTUNE FINANCIAL SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
For the nine months ended December 31, 1997
(Unaudited)
Cash flows from operating activities:
Net loss $ (534,180)
Adjustments to reconcile net loss to net
cash used in operating activities:
Interest income on note receivable from stockholder (159,384)
Depreciation 37,398
Provision for doubtful accounts 584,030
Common stock issued for services 8,000
Changes in assets and liabilities:
Accounts receivable (736,366)
Finance contracts receivable (987,474)
Receivable from an officer (2,724)
Inventory (60,995)
Prepaid expenses (102,443)
Other assets (315,069)
Accounts payable 1,362,961
Refunds payable 382,680
Accrued expenses 115,687
Commissions payable 177,425
Income taxes payable (280,000)
-------------
Net cash used in operating activities (510,454)
-------------
Cash flows from investing activities:
Advances to stockholder (1,366,881)
Purchases of furniture and equipment (327,118)
Net cash used in investing activities (1,693,999)
------------
Cash flows from financing activities:
Proceeds from sale of preferred stock and warrants 1,610,000
Proceeds from sale of common stock 1,042,587
Proceeds from issuance of debt 840,414
Repayments of debt (670,064)
-------------
Net cash provided by financing activities 2,822,937
------------
Net increase in cash and cash equivalents 618,484
Cash and cash equivalents, beginning of period 73,593
--------------
Cash and cash equivalents, end of period $ 692,077
=============
Supplemental disclosures of cash flow information:
Cash paid for interest $ -
==================
Income taxes paid $ -
==================
See accompanying notes to consolidated financial statements.
FORTUNE FINANCIAL SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
For the nine months ended December 31, 1997
(Unaudited)
Additional Stock
Common Stock Paid in Warrants Subscriptions Retained
Shares Amount Capital Outstanding Receivable Earnings Total
----------------------- ------- ----------- ---------- -------- -----
Balances, March 31, 1997 17,315,253 $ 17,315 $ 3,890,790 - $(3,300,000) $ 615,398 $ 1,223,503
Shares issued for acquisition
of business 1,000,000 1,000 200,932 - - - 201,932
Shares issued in exchange
for marketing rights 1,000,000 1,000 199,000 - - - 200,000
Issuance of common stock for cash 626,000 626 999,375 - - - 1,000,001
Shares issued in exchange
for services 16,000 16 7,984 - - - 8,000
Warrants outstanding - - - 300,000 - - 300,000
Net loss - - - - - (534,180) (534,180)
Preferred stock dividends - - - - - (17,808) (17,808)
----------- ----------- ------------ ------------ ------------ ---------- -----------
Balances, December 31, 1997 19,957,253 $ 19,957 $ 5,298,081 $ 300,000 $ (3,300,000) $ 63 ,410 $ 2,381,448
=========== =========== ============ ============ ============ ========== ===========
See accompanying notes to consolidated financial statements.
FORTUNE FINANCIAL SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997
(Unaudited)
(1) Organization and Significant Accounting Policies
------------------------------------------------
(a) Organization
------------
The accompanying consolidated financial statements include the
accounts of Fortune Financial Systems, Inc. (Fortune or the
Company) and its wholly owned subsidiaries, Fortune Marketing
International, Inc., Professional Marketing, Inc., Internet
Development, Inc. and Success Media, Inc. All significant
intercompany balances and transactions have been eliminated in
consolidation.
On April 1, 1997, Fortune entered into a Stock Sale and
Management Agreement, whereby, Fortune sold all of the issued and
outstanding common stock of Fortune 21 to a company owned by a
former director and significant shareholder of Fortune. Fortune
agreed to manage Fortune 21 for a period of one year with annual
renewals (See note 7).
On May 2, 1997, Fortune acquired the stock of Internet
Development, Inc. (IDI) in exchange for 1,000,000 shares of
common stock. This business combination has been accounted for as
a purchase transaction, and accordingly, the assets and
liabilities of IDI have been reflected in the accompanying
Consolidated Balance Sheet at fair market value. The estimated
fair value of the assets acquired approximate net book value and
therefore, no goodwill was recorded. The accompanying
Consolidated Statement of Operations includes the results of
operations of IDI subsequent to the acquisition date.
Fortune has formed and incorporated several other companies that
provide related products or services or support the operations of
other subsidiaries.
(b) Revenue recognition
-------------------
The principal sources of revenues are derived from the sale of
business training products and services, and are recognized when
the products or services are delivered.
(c) Cash flows
----------
The Company considers all investments, originally purchased with
a maturity of three months or less, to be cash equivalents.
(d) Furniture and equipment
-----------------------
Furniture and equipment are recorded at cost. Depreciation is
calculated using the straight-line method over their estimated
useful lives. Leasehold improvements are amortized over the terms
of the respective leases or the estimated economic lives of the
assets, whichever is shorter. The depreciation and amortization
periods are as follows:
FORTUNE FINANCIAL SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997
(Unaudited)
Computer equipment 2 - 5 years
Office equipment 3 - 7 years
Leasehold improvements and other 5 - 33 years
(e) Inventories
-----------
Inventories consist of product supplies such as books, tapes and
software. Inventories are stated at the lower of cost or market,
cost being determined using the first-in, first-out method.
(f) Income taxes
------------
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply when differences are expected to be realized or settled.
(g) Advertising
-----------
The Company expenses the cost of advertising for seminars in the
period the seminar occurs. For the nine months ended December 31,
1997, advertising expense totaled approximately $1,170,000 and is
included in cost of sales in the accompanying Consolidated
Statement of Operations.
(h) Finance Contracts Receivable
----------------------------
The Company offers a financing option to purchase its training
products. Generally, the amounts financed are payable in 18
monthly installments at an annual interest rate of 18%. Interest
is recognized when the monthly installment is received.
A third party is used to service and collect the financed
amounts. The third party is paid on a fee schedule for the
services performed.
Management performs periodic reviews of the performance of the
portfolio to assess collectability and the adequacy of the
allowance for uncollectible accounts. For the nine months ended
December 31, 1997 approximately $4,000 in contracts have been
written off as uncollectible and $326,000 has been expensed and
included in selling, general and administrative expenses.
(i) Net Loss per Common Share
-------------------------
(Continued)
FORTUNE FINANCIAL SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997
(Unaudited)
Basic net loss per common share ("Basic EPS") excludes dilution
and is computed by dividing net loss applicable to common shares
by the weighted average number of common shares outstanding
during the period. Diluted net loss per common share ("Diluted
EPS") reflects the potential dilution that could occur if
contracts to issue common stock including preferred stock were
exercised or converted into common stock. The computation of
Diluted EPS does not assume exercise or conversion of securities
that would have an anti-dilutive effect on net loss per common
share. Because the Company has incurred a loss for the period
presented, no conversions have been considered as they would be
anti-dilutive, thereby decreasing the net loss applicable to
common shares.
For the nine months ended December 31, 1997, preferred stock
dividends of $17,808 have been added to the net loss to determine
the net loss applicable to common shares.
The weighted average number of common shares outstanding was
19,138,024.
(j) Use of estimates
----------------
Management of Fortune has made certain estimates and assumptions
relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those
estimates.
(k) Concentration of Credit Risk and Fair Value of Financial
---------------------------------------------------------
Instruments
-----------
The carrying amount reported in the Consolidated Balance Sheet
for cash, accounts receivable, accounts payable and accrued
expenses approximates fair value because of the immediate or
short-term maturity of these financial instruments. Financial
instruments which potentially subject Fortune to concentrations
of credit risk consist principally of accounts receivable and
finance contracts receivable which are approximately $1,686,000.
Fortune performs periodic credit evaluations of its trade
customers and generally does not require collateral.
(2) Furniture and Equipment
-----------------------
At December 31, 1997, furniture and equipment consist of the following:
Furniture and equipment $468,638
Leasehold improvements 87,462
------
556,100
Less: accumulated depreciation and
amortization (58,285)
-------
$497,815
========
(Continued)
FORTUNE FINANCIAL SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997
(Unaudited)
(3) Notes Payable
-------------
At December 31, 1997, notes payable consist of the following:
Unsecured bank line of credit, interest at
prime rate plus 2% (10.5% at
December 31, 1997), due on demand $ 25,414
Note payable to a shareholder and
director issued October 16, 1997,
due on demand 94,500
Note payable to a shareholder issued
October 16, 1997, due on demand 25,250
Note payable to a shareholder, officer
and director issued October 16, 1997,
due on demand 52,250
------
$ 197,414
==============
All notes from shareholders, officers and directors are short term
bridge loans which carry no interest rate due to the expected short
term nature of these notes.
(4) Income Taxes
------------
Income tax benefit for the none months ended December 31, 1997 consists
of the following:
Federal $ (268,000)
State (12,000)
-----------
$ (280,000)
===========
The Company is on a calendar year for tax purposes and a March 31
fiscal year for financial reporting purposes. The tax benefit
represents the amount by which the tax calendar year 1997 tax liability
will be reduced.
Income tax benefit attributable to income from continuing operations
differed from the amount computed by applying the U.S. Federal income
tax rate of 34% to income from continuing operations before income
taxes as a result of the following:
Computed "expected" tax benefit $ (276,800)
Increase in income tax benefit
resulting from:
(Continued)
FORTUNE FINANCIAL SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997
(Unaudited)
State and local income benefit,
net of Federal income tax
benefit (3,200)
------
$ (280,000)
===========
(5) Commitments
-----------
Fortune leases various office and warehouse space, and equipment under
noncancelable operating leases which expire in various years to 2003.
Management expects that, in the normal course of business, leases that
expire will be renewed or replaced by other leases.
Aggregate future minimum rental commitments under these leases are as
follows:
Year ending March 31,
1999 $ 349,000
2000 342,000
2001 207,000
2002 85,000
2003 29,000
-----------
Total minimum lease payments $ 1,012,000
=========
Lease payments charged to selling, general and administrative expense
in the Consolidated Statement of Operations for the nine months ended
December 31, 1997 amounted to approximately $173,000.
(6) Supplemental Statement of Operations Information
------------------------------------------------
All of Fortune's acquisitions have been accounted for using the
purchase method.
The following unaudited pro forma acquisition information reflects what
Fortune's results of operations would have been on a consolidated basis
had the purchase of IDI occurred on April 1, 1997. The pro forma
results have been prepared for comparative purposes only and do not
purport to be indicative of what would have occurred had the
acquisitions been made at the beginning of the period or of the results
which may occur in the future.
Unaudited Pro Forma Results of Operations
Net revenues $ 19,396,900
Loss from operations (958,859)
Net loss (176,762)
Net loss per common share $ (0.01)
(Continued)
FORTUNE FINANCIAL SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997
(Unaudited)
(7) Related Party Transactions
--------------------------
On April 1, 1997, Fortune entered into a Stock Sale and Management
Agreement, whereby, Fortune sold all of the issued and outstanding
common stock of Fortune 21 to a company owned by a stockholder and
former Chairman of the Board for a $1,484,912 note. The note is for a
seven year period with quarterly principal payments of $74,246
beginning April 1, 1999. Interest at the rate of 10% was charged for
the first six months and 8% per year thereafter and is payable
quarterly starting January 2, 1998. Fortune receives a management fee
of $10,000 per month for the first six months and $5,000 per month
thereafter.
Additionally, Fortune entered into an agreement to provide Fortune 21 a
revolving line of credit. The line is for a five year period that
matures on March 31, 2002. No principal payments are required until the
fifth year at which time quarterly payments equal to one forth of the
outstanding balance must be made and no additional borrowings can be
made in the fifth year. Interest on the line is at 10% for the first
six months and 8% thereafter and is calculated quarterly on the average
outstanding balance during the quarter. As of December 31, 1997,
$1,361,438 has been drawn on the line with accrued interest of $159,384
due on the note and line of credit.
The total notes receivable and accrued interest under these two
agreements was $3,005,734 as of December 31, 1997, and is secured by
1,500,000 shares of common stock of the Company held by the
stockholder.
Office/warehouse space, furniture and equipment for the operations in
Florida is rented from Fortune 21. The amount charged is approximately
$3,800 per month. Total payments for the nine months ended December 31,
1997 are approximately $15,000.
(8) Supplemental Cash Flow Information
----------------------------------
The following table supplements the Consolidated Statement of Cash
Flows and sets forth information relating to Fortune's acquisitions of
certain businesses and sale of Fortune 21:
Fair value of assets acquired $ 184,010
Liabilities assumed 25,105
Related party notes receivable
on sale of Fortune 21 1,479,469
(9) Joint Venture Agreement
-----------------------
On December 1, 1997 a joint venture agreement was entered into among
First Resource, Inc. (FRI, a wholly-owned subsidiary of the Company),
Blair Investment Properties, Inc. (Blair) and Home Buyers of America
(Continued)
FORTUNE FINANCIAL SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997
(Unaudited)
(HBA) to develop a marketing program for the sale of training seminars,
coaching and materials on how to make money buying real estate. Blair
and HBA will contribute $400,000 to the venture to offset marketing
costs. FRI will market, operate and manage the program. The parties to
the agreement will split any net profits and bear any losses on a 50%
basis to FRI and 50% basis to Blair and HBA. Net profits are defined as
all revenues generated as a result of the program less all direct costs
and a reasonable allocation of certain overhead costs, as defined, for
managing the program. The agreement is for a five-year period but can
be cancelled at anytime by either party. If expiration or termination
cancels the agreement none of the parties can participate in a similar
program anywhere in the United States for a two-year period.
As of December 31, 1997, Blair and HBA had contributed $150,000 which
was used to offset marketing costs and has accordingly reduced cost of
sales expense in the accompanying Consolidated Statement of Operations.
(10) Capital Transactions
--------------------
Preferred Stock
The Company entered into a $20,000,000 credit facility (the
"Agreement") dated October 28, 1997, which was ultimately contingent on
the Company becoming effective on a registration statement with the
Securities and Exchange Commission no later than 120 days subsequent to
the initial closing date. On October 28, 1997, the Company issued
20,000 shares of its 5% Convertible Series A Preferred Stock (Series A
Preferred Stock) and Warrants to purchase 500,000 shares of Common
Stock for a net cash consideration of $1,610,000 ($2,000,000 gross
proceeds less direct offering costs of $390,000). The Warrants allow
the Investors to purchase an aggregate of 500,000 shares of Common
Stock for three years at the following prices: (i) 250,000 shares at a
price of $5.00 per share, and (ii) 250,000 shares at a price of $6.00
per share. Of the net cash consideration received, $300,000 was
assigned as the value of the warrants.
Effective March 27, 1998, the agreement was amended. As provided for by
the amendment, the parties agree that neither of them would have the
obligation to purchase or sell additional shares of the Series A
Preferred Stock. All penalties, defaults and price adjustments provided
for under the October Agreement were waived under the terms of the
Amendment. The Company remains obligated to use its best efforts to
process expeditiously a registration statement. In the event a
registration statement does not become effective by July 27, 1998, or
in the alternative, if the Company or other persons are not able to
provide the Selling Security Holders with shares of Common Stock of the
Company which would have the rights and benefits comparable to shares
of Common Stock registered under the Securities Act, the Selling
Security Holders would have the right to put their shares of Series A
Preferred Stock at stated value plus accrued and unpaid dividends and
foreclose on collateral provided to them under the October Agreement.
The Selling Security Holders agreed to extend to the Company a grace
period of 60 days from the end of July 27, 1998 in which the Company
would have the right to exercise a redemption option and make a
one-time payment equal to 120% of the stated value of the Preferred
Stock to be acquired. At such time as the registration statement
becomes effective, the Company also has a right to a redemption option
to acquire 10% of the Series A Preferred Stock on a monthly basis over
(Continued)
FORTUNE FINANCIAL SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997
(Unaudited)
a 10-month period (i.e., 2,000 shares of Series A Preferred Stock each
month) at a redemption price of 120% of the stated value of such shares
of Series A Preferred Stock. In addition, on or prior to the earlier of
July 27, 1998 or the date a registration statement becomes effective,
the Company will have the right to redeem, in whole or in part, and
from time to time, the Series A Preferred Stock at 110% of the stated
value of the Series A Preferred Stock and without payment of accrued
but unpaid dividends.
As modified by the Amendment, at the option of each of the Selling
Security Holders, the Series A Preferred Stock may be converted at any
time into shares of the Company's Common Stock equal in number to the
amount to be determined by dividing $100.00 (representing the stated
value thereof) by a percentage of the average closing price of the
Company's Common Stock over the 10-day trading period ending on the day
prior to the conversion of the Series A Preferred Stock less a discount
of 17%. The Selling Security Holders, however, have agreed to convert
not more than 10% of the Series A Preferred Stock during any 30-day
period for a total of 10 months beginning on the earlier of the date
hereof or the date of effectiveness of a Registration Statement.
Common Stock
On May 2, 1997, Fortune purchased Internet Development, Inc. (IDI) in
exchange for 1,000,000 shares of common stock. The stock was valued at
fair market value. The estimated fair value of the assets acquired
approximate net book value and therefore, no goodwill was recorded.
On July 2, 1997, Fortune issued 10,000 shares of common stock as part
of a short-term loan agreement. The Company recorded $2,000 in the note
receivable from stockholder related to this issuance.
On July 14, 1997, Fortune purchased Gateway Management International,
Inc., an educational and distribution company, which has marketing
rights to various educational materials in exchange for 1,000,000
shares of common stock. The stock was valued based upon the estimated
fair value of the assets acquired which consisted solely of marketing
rights and is classified as Goodwill on the Consolidated Balance Sheet.
Management believes that no impairment of the value has occurred since
the date of acquisition. Subsequent to the purchase, Gateway's sole
shareholder became the CEO and President of Fortune.
On July 25, 1997, Fortune sold 625,000 shares of common stock under
rule 504 of the Securities and Exchange Act to a single investor, in
exchange for $1,000,000 in cash.
On August 21, 1997, Fortune issued 1,000 shares of common stock to each
of six employees and recorded in selling, general and administration
the $6,000 related to these issuances.
ADDITIONAL INFORMATION
The Company intends to furnish to its shareholders annual reports,
which will include financial statements audited by independent accountants, and
such other periodic reports as it may determine to furnish or as may be required
by law, including Sections 13(a) and 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act").
The Company has filed with the Securities and Exchange Commission (the
"Commission"), 450 Fifth Street, N.W., Washington, D.C. 20549, a Registration
Statement on Form SB-2 (the "Registration Statement") under the Securities Act
with respect to the securities offered hereby. This Prospectus does not contain
all the information set forth in the Registration Statement and the exhibits
thereto, as permitted by the rules and regulations of the Commission. For
further information, reference is made to the Registration Statement and to the
exhibits filed therewith. Statements contained in this Prospectus as to the
contents of any contract or other document which has been filed as an exhibit to
the Registration Statement are qualified in their entirety by reference to such
exhibits for a complete statement of their terms and conditions. The
Registration Statement and the exhibits thereto may be inspected without charge
at the offices of the Commission and copies of all or any part thereof may be
obtained from the Commission's principal office at 450 Fifth Street, N.W.,
Washington, D.C. 20549 or at certain of the regional offices of the Commission
located at 7 World Trade Center, 13th Floor, New York, New York 10048 and 500
West Madison Street, Suite 1400, Chicago, Illinois 60661, upon payment of the
fees prescribed by the Commission. Electronic reports and other information
filed through the Electronic Data Gathering, Analysis, and Retrieval System are
publicly available through the Commission's website (http://www.sec.gov.). In
addition, following approval of the Common Stock for quotation on The Nasdaq
SmallCap Market, reports and other information concerning the Company may be
inspected at the office of the National Association of Securities Dealers, Inc.,
1735 K Street, N.W., Washington, D.C. 20006.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Section 78.751 of the General Corporation Law of Nevada, under which
jurisdiction the Company is incorporated, empowers a corporation to indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative by reason of the fact that he or she
is or was a director, officer, employee or agent of the corporation or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation or enterprise. A corporation may indemnify against
expenses (including attorneys' fees) and, other than in respect of an action by
or in the right of the corporation, against judgments, fines and amounts paid in
settlement actually and reasonably incurred in connection with such action, suit
or proceeding if the person indemnified acted in good faith and in a manner he
or she reasonably believed to be in or not opposed to the best interests of the
corporation, and with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful. In the case of an
action by or in the right of the corporation, no indemnification of expenses may
be made in respect to any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation unless and only to the extent
that the court in which such action was brought shall determine that, despite
the adjudication of liability, such person is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper. Section 78.751 of
the General Corporation Law of Nevada further provides that to the extent a
director, officer, employee or agent of the corporation has been successful in
the defense of any action, suit or proceeding referred to above or in the
defense of any claim, issue or matter therein, he or she shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
him or her in connection therewith.
The Company's Articles of Incorporation provide that no director or
officer of the Company shall be personally liable to the Company or its
stockholders for breach of fiduciary duty as a director or officer involving any
act or omission in such capacity, provided that the foregoing will not limit the
liability of such officers and directors for acts or omissions involving
intentional misconduct, fraud or knowing violation of the law, or the payment of
dividends in violation of Nevada law. The Company's By-Laws provide that the
Company will indemnify its directors and officers for liabilities arising by
reason of having served the Company in such capacity or where such officer or
director is adjudged to be liable for negligence or misconduct in connection
with actions performed on behalf of the Company.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to any charter provision, by-law, contract, arrangement,
statute or otherwise, the Company has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
Item 25. Other Expenses of Issuance and Distribution.
The estimated expenses payable by the Company in connection with the
issuance and distribution of the securities being registered (other than
II-1
underwriting discounts and commissions and the Representative's nonaccountable
expense allowance) are as follows:
Securities and Exchange Commission registration fee.. $ 1,696.25
Legal fees and expenses.............................. 16,000.00
Accounting fees and expenses......................... 10,000.00
Printing expenses.................................... 8,000.00
Miscellaneous........................................ 1,303.75
Total $ 37,000.00
Item 26. Recent Sales of Unregistered Securities
The following information sets forth certain information with respect
to all securities of the Company sold by it in the past three years. During such
period no securities were registered under the Securities Act of 1933, as
amended (the "Securities Act").
The Company did, however, issue shares of Common Stock as consideration
in the following transactions, all of which were exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) Regulation D
thereof. The shares issued in these offerings bear a restrictive legend
indicating they are subject to transfer restrictions and not freely tradeable
pursuant to the Securities Act and Rule 144 promulgated thereunder.
On October 28, 1997, the Company issued an aggregate of 20,000 shares
of its Series A Preferred Stock and common stock purchase warrants to purchase
500,000 shares of common stock to Deere Park Capital Management, Inc. and
Profutures Special Equities Fund, L.P.
On August 21, 1997, the Company issued 1,000 shares of common stock to
each of six employees.
In July 1997, the Company issued 625,000 shares of common stock under
rule 504 to a single investor, in exchange for $1,000,000.00.
On July 14, 1997, the Company issued 1,000,000 shares to the
shareholders of Gateway Management pursuant to an acquisition agreement between
the Company and Gateway.
On July 2, 1997, the Company issued 10,000 shares of common stock to
Norm Kaufman as partial payment of interest on a short-term loan.
On May 2, 1997, the Company issued 1,000,000 shares to the shareholders
of Internet Development pursuant to an acquisition agreement between the Company
and Internet Development, Inc.
On March 22, 1997, the Company issued 1,060,000 shares of Common Stock
to Professional Marketing, Inc. in connection with the acquisition of the stock
of PMI.
On February 23, 1997, the Company issued James Etter, Robert Nelson,
II-2
and Jennifer Brenner, 35,700, 42,850 and 500 shares, respectively, of the
Company's Common Stock. These shares were issued to the above-named individuals
in connection with a subscription for shares.
On February 7, 1997, the Company issued a total of 6,200,000 shares of
its Common Stock pursuant to the terms of a contribution and operating agreement
with Peter R. Morris and Success Holdings, LLC. These securities were issued in
consideration for a minimum of $500,000 in cash, $3,000,000 in media credits and
certain licensing rights to trademarks intellectual property owned by Success.
In addition, Mr. Morris agreed to guarantee a $250,000 credit line for use by
the Company.
On November 5, 1996, the Company issued 25,000 shares of its Common
Stock in connection with the acquisition of certain real estate educational
materials owned by Real Estate Link, Inc. An additional 12,500 shares were
issued on February 23, 1997 to Real Estate Link, Inc. in connection with a
subscription agreement.
On September 30, 1996, the Company issued 1,000,000 shares as
consideration for the acquisition of all of the assets of Performance Link, Inc.
by the Company's then wholly-owned subsidiary, Fortune 21. These shares were
issued to James J. Francis, a former officer and director of the Company and
PLI's sole shareholder.
On September 10, 1996, the Company issued 6,000,000 shares of its
Common Stock to James S. Byrd and Douglas Shane Hackett, who were officers and
directors of the Company pursuant to an agreement between the Company and
Fortune 21, Inc. Subsequent to the transaction, the Company issued additional
shares to each of Messrs. Byrd and Hackett on November 5, 1996 in the amount of
500,000 shares each in consideration for an additional $73,758 capital
contribution from each individual. These shares included 2,000,000 shares of
stock previously issued to Byrd in July 1996, 1,000,000 of which were assigned
to Hackett in August 1996.
On June 25, 1994, the Company issued 1,903,703 shares of its Common
Stock to all of the shareholders of VTS in exchange for their shares.
Item 27. Exhibits.
Exhibit Number
3.1 Articles of Incorporation of Fortune Financial Systems, Inc. as Amended
3.2 By-Laws of Incorporation of Fortune Financial Systems, Inc. (Merged)
4.1 Form of Common Stock Certificate
5.0 Opinion of Atlas, Pearlman, Trop & Borkson, P.A. (to be filed later bY
amendment)
10.1 Exchange Agreement between VTS and USMS, dated June 25, 1994
10.2 Exchange Agreement between USMS and Fortune 21, Inc.,
dated September 10, 1996
II-3
10.3 Contribution and Operating Agreement among the Company,
Byrd, Hackett, Success and Morris, dated February 7, 1997
10.4 License Agreement between Success Holdings, LLC dated
February 7, 1997
10.5 Acquisition Agreement between the Company and Professional
Marketing, Inc., dated March 22, 1997
10.6 Fortune 21, Inc. Agreement, dated April 1, 1997
10.7 Acquisition Agreement between the Company and Internet
Development, Inc., dated May 3, 1997
10.8 Acquisition Agreement between the Company and
Gateway Management International, Inc., dated July 14, 1997
10.9 Employment Agreement between the Company and Douglas
Shane Hackett, dated February 7, 1997
10.10 Employment Agreement with the Company and Roger C. Royce, dated
July 28, 1997
10.11 Consulting Agreement between James S. Byrd, Jr. and the Company,
dated , December 31, 1997
10.12 Deere Park Capital Management, Inc. and Profutures Special Equities
Fund, L.P. Private Equity Line of Credit Agreement, dated October 28,
1997
23 Consent of Parks, Tschopp, Whitcomb & Orr, P.A. Certified Public
Accountants
23.1 Consent of Atlas, Pearlman, Trop & Borkson, P.A. [contained in such
firm's opinion filed as Exhibit 5.1]
24 Power of Attorney relating to the signing of amendments
hereto is incorporated in the signature pages of this
Registration Statement
27 Financial Data Schedule
Item 28. Undertakings
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which it offers or sells
securities being made, a post-effective amendment to this Registration
Statement:
II-4
(i) To include any Prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
which, individually or together, represent a fundamental change in the
information set forth in the Registration Statement;
(iii) To include any additional or changed material
information with respect to the
plan of distribution.
(2) For determining any liability under the Securities Act of
1933, as amended, treat each post-effective amendment as a new registration
statement relating to the securities offered, and the offering of the securities
at that time to be the initial bona fide offering.
(3) To file a post-effective amendment to remove any of the
securities that remain unsold at the end of the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Act"), may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that, in the opinion
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-5
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the city of Salt
Lake City, State of Utah on April 10, 1998.
FORTUNE FINANCIAL SYSTEMS, INC.
/s/ Roger C. Royce
By: _____________________________
Roger C. Royce, President
POWER OF ATTORNEY
Know all men by these presents, that each person whose signature
appears below constitutes and appoints Roger C. Royce and such person true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for such person and in such person's name, place and stead, in
any and all capacities (including such persons' capacity as a director and/or
officer of Fortune Financial Systems, Inc. to sign any and all amendments
(including post-effective amendments pursuant to Rule 462(b) or otherwise) to
this Registration Statement, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto each said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that each said
attorney-in-fact and agent, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue thereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates stated.
Signature Title Date
Chairman, President,
Chief Executive Officer,
/s/ Roger C. Royce and Director April 10, 1998
- ----------------------------
Roger C. Royce
Executive Vice President
/s/Douglas S. Hackett and Director April 10, 1998
- -----------------------
Douglas S. Hackett
Vice President, Chief Financial
Officer, Secretary, Treasurer
/s/ Stephen H. Ross and Director April 10, 1998
- ----------------------------
Stephen H. Ross
/s/ Steve Comer Director April 10, 1998
- ----------------------------
Steve Comer
/s/ Steve G. Thorne Director April 10, 1998
- ----------------------------
Steve Thorne