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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
_____________________________________________
FORM 10-QSB
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2000
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ________ to ________
Commission File Number 000-27819
_________________________________________________
FOCUS ENTERTAINMENT INTERNATIONAL, INC.
(Exact name of small business issuer as specified in its charter)
|
Florida (State or other jurisdiction of incorporation or organization) |
58-2330633 (IRS Employer Identification No.) |
1739B Cheshire Bridge Rd, Atlanta, GA 30324
(Address of Principal Executive Offices)
(404) 253-1112
(Issuer's telephone number)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No X
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 4,900,000 shares of its Common Stock, $.001 par value, as of November 1, 2000.
FOCUS ENTERTAINMENT INTERNATIONAL, INC. AND SUBSIDIARIES
FORM 10-QSB REPORT INDEX
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Page No. |
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PART I. FINANCIAL INFORMATION |
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Item 1. Financial Statements (Unaudited) |
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Condensed Consolidated Balance Sheets as of September 30, 2000 and June 30, 2000 |
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3 |
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Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2000 and 1999 |
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6 |
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Unaudited Condensed Consolidated Statement of Stockholders' Equity for the Three Months Ended September 30, 2000 and 1999 |
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8 |
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Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2000 and 1999 |
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9 |
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Notes to Condensed Consolidated Financial Statements for the Three Months Ended September 30, 2000 |
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11 |
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation |
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17 |
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PART II. OTHER INFORMATION |
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Item 1. Legal Proceedings |
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21 |
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Item 2. Changes in Securities |
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21 |
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Item 3. Defaults on Senior Securities |
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21 |
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Item 4. Submission of Matters to a Vote of Security Holders |
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21 |
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Item 5. Other Information |
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21 |
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Item 6. Exhibits and Reports on Form 8-K |
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21 |
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Signatures |
22 |
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FOCUS ENTERTAINMENT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2000 and June 30, 2000 (unaudited)
|
ASSETS |
||||||
|
September 30, 2000 |
June 30, 2000 |
|||||
|
Current assets |
||||||
|
Cash and Cash Equivalents |
$262,489 |
$373,661 |
||||
|
Inventory |
2,669,197 |
2,548,797 |
||||
|
Accounts Receivable |
22,305 |
23,755 |
||||
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Prepaid Income Taxes |
- |
75,837 |
||||
|
Prepaid Insurance |
83,135 |
114,125 |
||||
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Prepaid Rentals |
84,578 |
83,815 |
||||
|
|
|
|||||
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Total current assets |
3,121,704 |
3,219,990 |
||||
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Property and equipment |
||||||
|
Land and Buildings |
279,671 |
279,671 |
||||
|
Computers and Software |
420,439 |
387,608 |
||||
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Furniture and Fixtures |
649,779 |
626,505 |
||||
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Leasehold Improvements |
1,111,028 |
961,813 |
||||
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Store Equipment and Signage |
831,537 |
826,630 |
||||
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Vehicles |
54,011 |
54,011 |
||||
|
3,346,465 |
3,136,238 |
|||||
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Accumulated depreciation |
(1,370,084) |
(1,291,255) |
||||
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Net property and equipment |
1,976,381 |
1,844,983 |
||||
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Other assets |
||||||
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Advances to Employees |
372 |
- |
||||
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Due From Stockholders |
33,263 |
2,884 |
||||
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Goodwill - net of amortization |
1,329,984 |
1,335,558 |
||||
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Deferred Income Taxes |
25,000 |
25,000 |
||||
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Deposits |
97,793 |
97,977 |
||||
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Notes Receivable - due after one year |
75,000 |
75,000 |
||||
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Investments |
8,715 |
8,715 |
||||
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Total other assets |
1,570,127 |
1,545,134 |
||||
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Total assets |
$6,668,212 |
$6,610,107 |
||||
The accompanying notes are an integral part of these financial statements.
FOCUS ENTERTAINMENT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2000 and June 30, 2000 (unaudited)
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LIABILITIES AND STOCKHOLDERS' EQUITY |
||||||
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September 30, 2000 |
June 30, 2000 |
|||||
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Current liabilities |
||||||
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Current portion of long term debt |
$503,357 |
$548,546 |
||||
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Accounts payable |
1,206,208 |
1,163,623 |
||||
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Accrued expenses |
182,299 |
210,068 |
||||
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Total current liabilities |
1,924,744 |
1,922,237 |
||||
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Long-term liabilities |
||||||
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Long term debt (net of current portion) |
466,587 |
563,516 |
||||
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Total liabilities |
2,391,331 |
2,485,753 |
||||
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Minority interest |
1,106,295 |
1,088,198 |
||||
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Stockholders' equity |
||||||
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Common stock; $.001 par value, |
||||||
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50,000,000 shares authorized, 4,900,000 shares issued and outstanding |
4,900 |
4,900 |
||||
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Additional paid-in capital |
254,188 |
254,188 |
||||
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Retained earnings |
2,911,498 |
2,777,068 |
||||
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Total stockholders' equity |
3,170,586 |
3,036,156 |
||||
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Total Liabilities and Stockholders Equity |
$6,668,212 |
$6,610,107 |
||||
The accompanying notes are an integral part of these financial statements.
FOCUS ENTERTAINMENT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended September 30, 2000 and 1999 (unaudited)
|
2000 |
1999 |
||||
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Sales net of returns and allowances |
|||||
|
Product Sales |
$ 2,513,715 |
$ 2,229,304 |
|||
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Service Sales |
754,282 |
1,072,534 |
|||
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Total sales |
3,267,997 |
3,301,838 |
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Cost of Goods Sold |
1,193,312 |
917,928 |
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Gross Profit |
2,074,685 |
2,383,910 |
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General and Administrative Expenses |
1,722,920 |
1,898,159 |
|||
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Income From Operations |
351,765 |
485,751 |
|||
|
Other Income (Expense) |
|||||
|
Rental Income |
13,750 |
15,000 |
|||
|
Interest Income |
2,261 |
7,309 |
|||
|
Interest Expense |
(24,059) |
(13,239) |
|||
|
Other Income |
36,382 |
8,679 |
|||
|
|
|
||||
|
Total Other Income (Expense) |
28,334 |
17,749 |
|||
|
Income Before Income Taxes |
380,099 |
503,500 |
|||
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Provision for Income Taxes |
108,717 |
97,102 |
|||
|
Minority Interest |
136,953 |
240,983 |
|||
|
|
|
||||
|
Net Income |
$134,429 |
$165,415 |
|||
|
Basic EPS |
|||||
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Earnings Per Share of Common Stock |
$0.03 |
$0.03 |
|||
|
Average Number of Common Shares Outstanding |
4,900,000 |
4,875,000 |
|||
|
Diluted EPS |
|||||
|
Earnings Per Share of Common Stock |
$0.03 |
$0.03 |
|||
|
Average Number of Common Shares Outstanding |
4,900,000 |
4,950,000 |
|||
The accompanying notes are an integral part of these financial statements.
FOCUS ENTERTAINMENT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
Three months ended September 30, 2000 and 1999 (unaudited)
|
Additional |
|||||||
|
Common |
Paid in |
Retained |
|||||
|
Stock |
Capital |
Earnings |
Total |
||||
|
Balance as of June 30, 1999 |
$ 4,825 |
$ 2,700 |
$ 2,146,195 |
$ 2,153,720 |
|||
|
Issuance of Common Stock |
50 |
162,450 |
162,500 |
||||
|
Net Income |
|
|
165,415 |
165,415 |
|||
|
Balance as of September 30, 1999 |
$ 4,875 |
$ 165,150 |
$ 2,311,610 |
$ 2,481,635 |
|||
|
Balance as of June 30, 2000 |
$ 4,900 |
$ 254,188 |
$ 2,777,069 |
$ 3,036,157 |
|||
|
Net Income |
|
|
134,429 |
134,429 |
|||
|
Balance as of March 31, 2000 |
$ 4,900 |
$ 254,188 |
$ 2,911,498 |
$ 3,170,586 |
The accompanying notes are an integral part of these financial statements.
FOCUS ENTERTAINMENT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended September 30, 2000 and 1999 (unaudited)
|
2000 |
1999 |
||
|
Cash Flows from Operating Activities |
|||
|
Net Income |
$ 134,429 |
$ 165,415 |
|
|
Adjustments to reconcile net income to net cash |
|||
|
provided by operating activities: |
|||
|
Depreciation |
78,829 |
70,221 |
|
|
Amortization |
17,578 |
4,795 |
|
|
Minority Interest |
136,953 |
240,983 |
|
|
Consulting fees paid with stock |
- |
162,500 |
|
|
Changes in operating assets and liabilities: |
|||
|
Accounts Receivable |
1,450 |
- |
|
|
Inventory |
(120,400) |
(317,212) |
|
|
Advances to Employees |
(372) |
2,748 |
|
|
Prepaid Insurance |
30,991 |
32,791 |
|
|
Prepaid Rentals |
(764) |
7,507 |
|
|
Deposits |
- |
5,000 |
|
|
Accounts Payable and Accrued Expenses |
14,817 |
385,198 |
|
|
Income Taxes |
108,717 |
(422,898) |
|
|
|
|
||
|
Net Cash Provided by Operating |
|||
|
Activities |
402,228 |
337,048 |
|
|
Cash flows from Investing Activities |
|||
|
Purchase of Property and Equipment |
(210,227) |
(31,789) |
|
|
Repurchase of Shares from Minority Interests |
(26,923) |
(102,026) |
|
|
Notes Receivable |
- |
37,723 |
|
|
Net cash Used for Investing Activities |
(237,150) |
(96,092) |
The accompanying notes are an integral part of these financial statements.
Focus Entertainment International, Inc. And Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Three months ended September 30, 2000 and 1999 (unaudited)
|
2000 |
1999 |
||
|
Cash Flows from Financing Activities |
|||
|
Proceeds from Long Term Debt |
$ - |
$ 100,000 |
|
|
Payments on Long Term Debt |
(142,118) |
(115,575) |
|
|
Advances to Stockholder |
(30,379) |
3,577 |
|
|
Minority Interest Distribution |
(103,753) |
(239,051) |
|
|
|
|
||
|
Net Cash Provided by (Used for) |
|||
|
Financing Activities |
(276,250) |
(251,049) |
|
|
Net increase (decrease) in cash |
(111,172) |
(10,093) |
|
|
Cash and cash equivalents, beginning of period |
373,661 |
246,445 |
|
|
Cash and cash equivalents, end of period |
$ 262,489 |
$ 236,352 |
|
|
Supplemental Disclosures of Cash Flow Information: |
|||
|
Cash payments during the period for: |
|||
|
Interest on debt obligations |
$ 24,059 |
$ 13,239 |
|
|
Income taxes |
$ 520,000 |
The accompanying notes are an integral part of these financial statements.
FOCUS ENTERTAINMENT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September30, 2000 (Unaudited)
Note 1 - Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited financial statements have been prepared by Focus Entertainment International, Inc. (the "Company" or "Focus") pursuant to the rules and regulations of the U. S. Securities and Exchange Commission. Certain information and disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments and disclosures necessary for a fair presentation of these financial statements have been included. Such adjustments consist of normal recurring adjustments. This Form 10-QSB Report should be read in conjunction with the Company's Form 10-SB, which contains audited financial statements for the Company for the fiscal year ended June 30, 2000, as filed with the U. S. Securities and Exchange Commission.
The results of operations for the period ended September 30, 2000 are not indicative of the results that may be expected for the full year.
Company's Activities
Focus and its subsidiaries operate Adult Fantasy Stores which rent adult videos and retail in adult videos, marital aids, lotions, novelties, magazines, provocative clothing, lingerie, tobacco, tobacco related products, and adult viewing booths. The stores operate under the trade names of Inserection, Heaven, New York Video, Cupid's Arrow and Water Pipe World and are located in the metropolitan Atlanta Georgia area in Fulton, Cobb, and DeKalb counties and in Myrtle Beach South Carolina in Horry County. The Company has also promoted boxing events under the name "Boxing in Buckhead".
Consolidation Issues
The consolidated financial statements include the accounts of the Company and the following wholly-owned or majority owned subsidiaries: Unique Visuals, LLC; Midtown Visuals, Inc., Creative Visuals, LLC; Exciting Visuals, LLC; Fantastic Visuals, LLC; Northside Visuals, LLC; Cheshire Visuals, LLC; New York Video, LLC; Innovative Visuals, LLC; Internet Visuals, LLC, Snellville Visuals, LLC, Myrtle Beach Visuals, LLC, Federal Visuals, LLC; and Biggs Morrison Boxing, LLC. The consolidated financial statements exclude the results of material transactions between the Company and its consolidated affiliates, or among the Company's consolidated affiliates.
Estimates
Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were used.
Inventory
Inventory is stated at the lower of cost or market. Cost of video inventory is determined on the average cost method. All other inventory is valued by the first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided over the estimated useful lives of the assets by accelerated and straight-line methods. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation expense charged to operations amounted to $78,829 and $70,221 for the three months ended September 30, 2000 and 1999, respectively.
Income Taxes
Deferred income taxes are provided for differences in depreciation for income tax and financial reporting purposes.
Cash and Cash Equivalents
The Company considers instruments with maturity of three months or less to be cash equivalents for purposes of the statements of cash flows.
Intangible Assets
Goodwill is recognized for financial statement purposes as the excess of the purchase price of interests in subsidiaries from minority investors over the book value of those interests, additionally, goodwill is recognized for financial statement purposes as the excess of the purchase price of assets acquired in the purchase of the Cupid's Arrow business over the fair market value of those assets. Goodwill is being amortized over 240 months.
Amortization expense charged to operations amounted to $17,578 and $4,795 for the three months ended September 30, 2000 and 1999, respectively.
Advertising Costs
Advertising costs are charged to operations when the advertising first takes place. Advertising expense was $57,533 and $75,836 for the three months ended September 30, 2000 and 1999, respectively.
Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement addresses the accounting for derivative instruments, including some types of derivative instruments imbedded in other contracts, and hedging activities. SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. We do not anticipate the adoption of the provisions of SFAS No. 133 will significantly impact our financial reporting.
For the years ended June 30, 2001 and 2000, we have adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 requires the presentation of descriptive information about reportable segments consistent with information our management uses to assess performance. Additionally, SFAS No. 131 requires disclosure of certain information by geographic region. The adoption of the provision of SFAS No. 131 has not significantly impacted our financial reporting.
Note 2 - Notes Payable
On September 21, 1999 the Company borrowed $100,000 from a company in which Michael Morrison holds an equity position. The loan was evidenced by a promissory note, bearing interest at 24% per annum, and required monthly payments of interest and the full repayment of all principle within 90 days. The note was collateralized by the Company's 70% interest in Innovative Visuals, LLC. The note was paid in full in accordance with the terms therein.
On December 30, 1999 the Company issued a promissory note to Big Top Promo and Expo, Inc. for $393,951 as part of the purchase of Big Top's interest in Exciting Visuals, LLC, Northside Visuals, LLC, and New York Video, LLC. The note calls for an initial payment of $101,250, and 30 monthly installments of $10,833 to amortize the balance at 8% per annum.
On January 10, 2000 the Company borrowed $250,000 from RFF Family Partnership, L.P. payable in 24 monthly installments of $11,768 including interest at 12 percent per annum. Additionally there are two loan fee payments of $16,000 and $10,000 payable at the inception of the loan and on or before January 10, 2001 respectively.
On February 8, 2000 the Company issued a promissory note to Videotel, Inc. for $19,429 as part of the purchase of a video booth system to be installed at Snellville Visuals, LLC. The note is payable in 12 monthly installments of $1,692 including interest at 8.25 percent per annum beginning April 15, 2000.
On February 28, 2000 the Company issued a promissory note to Videotel , Inc for $21,000 as part of the purchase of a video booth system to be installed at Myrtle Beach Visuals, LLC. The note is payable in 12 monthly installments of $1,829 including interest at 8.25 percent per annum beginning May 1, 2000.
On March 1, 2000 the Company issued a promissory note to Stormy Bear, LLC for $368,509 as part of the purchase of the assets of a business in Myrtle Beach, South Carolina. The note is payable in 24 monthly installments of $16,667 including interest at 8 percent per annum.
Note 3 - Purchase of Business Assets
On March 1, 2000 the Company purchased the assets of the business venture known as "Cupids Arrow - The Love Store" located at 1434-1474 Highway 501 West, Myrtle Beach, Horry County, South Carolina from Stormy Bear, LLC. The purchase was done in the name of Myrtle Beach Visuals, LLC. The total purchase price was $531,581. The acquisition was recorded under the purchase method of accounting. The fair value of the assets purchased are presented below:
|
Property and Equipment |
$ 18,509 |
|
Goodwill |
513,072 |
|
Net Assets Acquired |
$ 531,581 |
Note 3 - Purchase of Business Assets (continued)
The purchase was completed with a cash payment of $163,072 and a promissory note in the amount of $368,509.
Note 4 - Investments
Investments at September 30, 2000 consist of a 10 percent ownership interest in Bedtyme Stories of St. Petersburg, Inc. that operates an adult fantasy store located in Tampa, Florida.
Note 5 - Income Taxes
The following is a summary of the income tax provision for the nine months ended March 31:
|
2000 |
1999 |
||
|
Current: |
|||
|
Federal |
$ 92,393 |
$ 82,522 |
|
|
State |
16,324 |
14,580 |
|
|
Deferred: |
|||
|
Principally Federal |
- |
- |
|
|
$ 108,717 |
$ 97,102 |
Deferred income taxes are provided for temporary differences between income tax and financial statement recognition of revenues and expenses.
A reconciliation of income tax at the statutory rate to the company's effective rate is as follows:
|
|
2000 |
|
1999 |
|
|
|
|
|
|
Computed at Expected Statutory Rates |
34.0% |
|
34.0% |
|
|
|
|
|
|
Income Taxable to Minority Interests |
(12.3%) |
|
(16.3%) |
|
|
|
|
|
|
Non-deductible Meals and Entertainment |
.7% |
|
0.5% |
|
|
|
|
|
|
Excess Book Depreciation over Tax |
- |
|
- |
|
|
|
|
|
|
State Income Tax Net of Federal Benefit |
4.3% |
|
2.9% |
|
|
|
|
|
|
Other |
1.9% |
|
(1.8%) |
|
|
|
|
|
|
|
28.6% |
|
19.3% |
The Company has subsidiaries that are limited liability companies. Limited liability companies are not tax paying entities for income tax purposes. Income of the limited liability companies is taxed to the members in their respective returns. Therefore no income tax provision has been made for the income of the minority interest holders.Note 6 - Minority Interest
The Company has formed Limited Liability Companies (LLCs) to operate its locations. Profits and losses of each location is allocated to the investors based on formulas set forth in the operating agreements of the LLCs. Distributions are made to the investors based on formulas set forth in the operating agreements.
|
Minority |
Minority |
Ownership |
Equity |
|||||
|
Earnings |
Distributions |
September 30, |
September 30, |
|||||
|
Subsidiary |
Fiscal 2001 |
Fiscal 2001 |
2000 |
2000 |
||||
|
Unique Visuals, LLC |
$ - |
$ - |
0.00% |
$ - |
||||
|
Creative Visuals, LLC |
- |
- |
0.00% |
- |
||||
|
Exciting Visuals, LLC |
42,449 |
19,962 |
25.00% |
294,084 |
||||
|
Fantastic Visuals, LLC |
84,518 |
56,128 |
48.75% |
532,346 |
||||
|
Northside Visuals, LLC |
2,070 |
1,875 |
4.17% |
12,492 |
||||
|
Cheshire Visuals, LLC |
- |
- |
0.00% |
- |
||||
|
New York Video, LLC |
1,328 |
2,109 |
29.95% |
132,447 |
||||
|
Innovative Visuals, LLC |
8,145 |
23,679 |
29.90% |
117,988 |
||||
|
1690 Cobb, LLC |
- |
- |
0.00% |
- |
||||
|
Snellville Visuals, LLC |
(1,557) |
- |
9.00% |
16,438 |
||||
|
Myrtle Beach Visuals, LLC |
- |
- |
0.00% |
- |
||||
|
Federal Visuals, LLC |
- |
- |
5.00% |
500 |
||||
|
Total |
$ 136,953 |
$ 103,753 |
$ 1,106,295 |
|
Minority |
Minority |
|||||||
|
Minority |
Minority |
Ownership |
Equity |
|||||
|
Earnings |
Distributions |
September 30, |
September 30, |
|||||
|
Subsidiary |
Fiscal 2000 |
Fiscal 2000 |
1999 |
1999 |
||||
|
Unique Visuals, LLC |
$ - |
$ 3,172 |
13.83% |
$ 28,202 |
||||
|
Creative Visuals, LLC |
- |
- |
0.00% |
- |
||||
|
Exciting Visuals, LLC |
98,310 |
91,408 |
41.67% |
388,189 |
||||
|
Fantastic Visuals, LLC |
108,261 |
105,730 |
48.75% |
395,238 |
||||
|
Northside Visuals, LLC |
8,523 |
8,637 |
14.48% |
41,785 |
||||
|
Cheshire Visuals, LLC |
- |
- |
0.00% |
- |
||||
|
New York Video, LLC |
25,889 |
30,104 |
44.95% |
161,962 |
||||
|
Innovative Visuals, LLC |
- |
- |
29.90% |
140,000 |
||||
|
1690 Cobb, LLC |
- |
- |
5.00% |
- |
||||
|
Federal Visuals, LLC |
- |
- |
5.00% |
500 |
||||
|
Total |
$ 240,983 |
$ 239,051 |
$ 1,155,876 |
Note 7 - Repurchase of Minority Interests
On September 21, 1999, the Company purchased a 20 percent ownership interest in Innovative Visuals, LLC from Ladue Partners, LLC for $100,000. The book value of the interest purchased was $100,000. This transaction resulted in increasing the Company's ownership interest in Innovative Visuals, LLC to 70.1 percent.
On October 1, 1999 the Company purchased all remaining minority ownership interests in Unique Visuals, LLC for $50,000. The book value of the interest purchased was $28,202. This transaction resulted in the recognition of $21,798 in goodwill, and increased the Company's ownership to 100 percent.
On December 30, 1999 the Company purchased a 16.67 percent interest in Exciting Visuals, LLC from Big Top Promo and Expo, Inc. for $389,316. The book value of the interest purchased was $179,745. This transaction resulted in the recognition of $209,571 in goodwill, and increased the Company's ownership to 75 percent.
On December 30, 1999 the Company purchased a 5.94 percent interest in Northside Visuals, LLC from Big Top Promo and Expo, Inc. for $43,407. The book value of the interest purchased was $20,055. This transaction resulted in the recognition of $23,352 in goodwill, and increased the Company's ownership to 91.46 percent.
On December 30, 1999 the Company purchased a 15 percent interest in New York Video, LLC from Big Top Promo and Expo, Inc. for $130,279. The book value of the interest purchased was $60,169. This transaction resulted in the recognition of $70,110 in goodwill, and increased the Company's ownership to 70.05 percent.
On May 30, 2000 the Company purchased a 5 percent interest in 1690 Cobb, LLC from the Company's Secretary for no dollars. The book value (deficit) of the interest purchased was ($879). This transaction resulted in the recognition of $879 in goodwill, and increased the Company's ownership to 100.00 percent.
On September 30, 2000 the Company purchased a 4.38 percent interest in Northside Visuals, LLC from two minority investors for $26,923. The book value of the interest purchased was $15,103. This transaction resulted in the recognition of $11,820 in goodwill, and increased the Company's ownership to 95.83 percent.
Note 8 - Issuance of Stock in Private Transactions
On August 1, 1999 the Company entered into an agreement with Stockbroker Associates, Inc. wherein Stockbroker Associates, Inc. would provide certain consulting services including corporate image advertising, business development and strategy, corporate compensation policies, financial public relations and promotional services. The Company agreed to pay to Stockbroker Associates a weekly fee of $5,000. Additionally, the Company agreed to issue 25,000 shares of its common stock per month commencing on August 1, 1999. The agreement was terminated by the Company on October 12, 1999. 75,000 shares were issued under the agreement. The fair market value of the stock issued was determined by recently quoted market pricing, which the Company felt was reflective of the value of its shares based on earnings, and expensed as consulting fees. The issuance of these 75,000 shares resulted in consulting expense of $251,563.
On October 22, 1999, an option to purchase 25,000 shares of the Company's common stock at an exercise price of $.05 per share expired without being exercised.
Note 9 - Contingencies
The Company has formed Limited Liability Companies (LLCs) to operate its locations. Distributions are made to the investors based on formulas set forth in the operating agreements for the LLCs. Under the terms of the operating agreements, distributions are to be made to the investors from net cash from operations of the LLC. The term "net cash from operations" is defined as the gross cash proceeds from operations (including, without limitation, sales and dispositions in the ordinary course of business) less the portion thereof used to pay or establish reserves for all LLC expenses, debt payments, capital improvements, replacements, and contingencies, all as determined by the Manager. Net cash from operations shall not be reduced by depreciation, amortization, cost recovery deductions, or similar allowances, but shall be increased by any reductions of reserves previously established. At September 30, 2000, the Company estimates that $188,016 has been withheld from distribution to minority investors for reserves. Should the reserved amounts be reduced, some, or all of that amount would be due and payable to the minority investors.
Note 10 - Related Party Transactions
The Company leased a building from a former minority owner before and after his remaining interest was acquired by Michael Morrison the Company's majority stockholder. Lease payments amounted to $-0- and $44,206 for the three months ended September 30, 2000 and 1999, respectively. The lease agreement was cancelled at November 30, 1999.
The spouse of one of the minority owners provided construction and renovation services to the Company amounting to $88,649 and $26,295 during the three months ended September 30, 2000 and 1999, respectively. The son-in-law of the same minority owner provided electrical work amounting to $24,543 and $9,209 during the three months ended September 30, 2000 and 1999, respectively.
The Company obtained maintenance and janitorial help from Gone Fishin, LLC, which is a company owned and controlled by Joseph Steingold (now deceased) the step-father of Michael Morrison, an officer, director, and majority shareholder of the Company. The Company elected to outsource its maintenance and janitorial services in order to reduce employee benefit costs associated with such employees. The company paid $9,774 and $110,141 respectively for the three months ended September 30, 2000 and 1999, respectively.
Advances to and from the majority stockholder have no stated terms.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Certain statements in this Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2000 on Form 10-QSB, may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements, expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed herein.
The words "believe", "expect", "anticipate", "seek" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made.
Results of Operations
Revenues
For the three months ended September 30, 2000, the Company had net sales of $3,267,997, as compared to net sales in the three months ended September 30, 1999 of $3,301,838, a decrease of $33,841, or 1.02%. A comparison of revenues by type in fiscal 2001 to fiscal 2000 is set forth below:
|
|
FY2001 |
FY2000 |
|
Product Sales |
$ 1,503,589 |
$ 1,292,241 |
|
Video Sales |
1,042,215 |
942,933 |
|
Video Rentals |
616,388 |
559,871 |
|
Booth Revenues |
137,894 |
489,309 |
|
Boxing Revenues |
- |
23,354 |
|
Misc. Sales |
11,916 |
28,248 |
|
Sales and Credit Card Discounts |
(44,005) |
(34,118) |
|
|
|
|
|
Totals |
$ 3,267,997 |
$ 3,301,838 |
The Company opened new locations in the Atlanta metropolitan area in July 1999, and March 2000 and purchased an existing store in Myrtle Beach, SC in March 2000. The new stores allowed the Company to stabilize revenues even though its inner-city locations suffered an overall 17.72% reduction in net sales. This decrease is attributed to a 80.00% net reduction in video viewing booth revenues and a 8.53% reduction in video sales and rental revenues from those inner-city locations. Management believes the decrease is primarily attributable to increased price competition in the Metropolitan Atlanta area. The decrease in video sales has been partially offset by increases in rental revenues and product sales.
The decline in the sales from the inner-city locations is attributed to competition from discount stores that have opened within the past two years within close proximity to the Company's locations, and a reduction in parking availability to the Company's midtown location due to construction of a new government office building adjacent thereto. The competitors were able to gain market share in the video viewing booth segment of the market as well. With the increased competition in the Atlanta inner-city, the Company believes the market in such areas has become saturated.
The Company does not expect revenues in its inner-city locations to continue decreasing. Revenues in the inner-city locations are stabilizing due to more effective advertising, no additional store "cannibalization" and overall increases in inner-city commerce due to improved demographics among inner-city residents, and greater inner-city commerce resulting from continued redevelopment of the area. Additionally, the Company is investigating various strategies to stem the decline in video booth revenues, including outsourcing management and operation of the booths, but thus far the effort has been unsuccessful.
The Company is actively seeking good locations in the suburban areas around Atlanta to offset the declines in the inner-city locations, as well as pursuing opportunities in neighboring states.
Cost of Goods Sold
For the three months ended September 30, 2000, cost of goods sold were $1,193,312, as compared to cost of goods sold in the three months ended September 30, 1999 of $917,928, an increase of $275,384, or 30.00%. As a percentage of net sales, cost of goods sold increased from 27.8% to 36.5% from 1999 to 2000. Cost of goods sold as a percentage of net sales increased as a result of increased price competition from discount stores located in close proximity to the Company's locations. Additionally, an overall reduction of video booth revenues of 71.8% or $351,415 is indicative of a change in the overall sales mix to less profitable lines. A comparison of cost of goods sold by type in fiscal 2001 to fiscal 2000 is set forth below:
|
|
FY2001 |
FY2000 |
||
|
|
Cost of Goods Sold |
% of Revenues |
Cost of Goods Sold |
% of Revenues |
|
Product Sales |
$ 766,004 |
51.0% |
$ 571,401 |
44.2% |
|
Video Sales |
427,308 |
41.0% |
339,456 |
36.0% |
|
Video Rentals |
- |
- |
- |
-- |
|
Booth Revenues |
- |
- |
- |
-- |
|
Boxing Revenues |
- |
- |
3,970 |
17.0% |
|
Misc. Sales |
- |
- |
3,101 |
11.0% |
|
|
|
|
|
|
|
Totals |
$ 1,193,312 |
36.5% |
$917,928 |
27.8% |
General and Administrative Expenses
For the three months ended September 30, 2000, general and administrative expenses were $1,722,920, as compared to $1,898,159 for the three months ended September 30, 1999, a decrease of $175,239, or 9.23%. As a percentage of net sales, general and administrative expenses decreased from 57.49% to 52.72% from 1999 to 2000. The decrease in general and administrative expenses was primarily the result of a $219,500 expenditure for promotional and consulting services in fiscal year 2000 relating to the Company pending registration under the Securities Exchange Act of 1934. Additionally there was a decrease of $52,290 for promotional costs primarily related to the Boxing in Buckhead events. These decreases were partially offset by an increase in computer expenses of $30,248, an increase in travel and entertainment expenses of $26,168, and the payment of penalties and fines of $33,376.
Other Income (Expense)
For the three months ended September 30, 2000, Other Income (Expense) increased by $10,585, from $17,749 for the three months ended September 30, 1999 to $28,334 for the three months ended September 30, 2000. This is primarily attributable to an increase in payment discounts of $27,703 from 1999 to 2000, which was partially offset by an increase in interest expense of $10,820.
Income Taxes
For the three months ended September 30, 2000, the Company incurred income tax expense of $108,717, as compared to income tax expense of $97,102 for the three months ended September 30, 1999, an increase of $11,615, or 11.96%. The increase is primarily attributable to a decrease in taxable income attributable to minority interest holders and an increase in non deductible expenses. As of September 30, 2000 and 1999, the Company had Deferred Income Taxes of $25,000. Statement of Financial Accounting Standards No. 109 requires a valuation allowance to be recorded when it is more likely than not that some or all of the deferred tax assets of a company will not be realized. At September 30, 2000, no valuation allowance was recorded against the deferred tax asset because the Company determined from its projections that it is more likely than not that future taxable income will be sufficient to realize the deferred tax asset.
Net Income
For the three months ended September 30, 2000, the Company had net income of $134,429, compared to net income of $165,415 for the three months ended September 30, 1999, a decrease of $30,986, or18.73%. Even though the Company's general and administrative expenses decreased dramatically, the increase in cost of sales as a percentage of net sales more than offset the benefits of the reduction.
Liquidity and Capital Resources
As of September 30, 2000, the Company had net working capital of $1,196,960, compared to net working capital of $1,655,516 as of September 30, 1999, a decrease of $458,556, and net working capital of $1,297,753 on June 30, 2000. As of September 30, 2000, the Company's long-term debt was $466,587, as compared to long-term debt of $370,325 at September 30, 1999, of which $141,926 was held by the Company's majority stockholder. Cash was reduced during the three months ended September 30, 2000 by the buildup of inventory for the holiday season, and the purchase of fixed assets, and payments on long term debt. This was offset by earnings from operations. During the three months ended September 30, 2000, the Company continued to concentrate on improving and consolidating its long-term financial position. The improvements in the Company's balance sheet in fiscal 2001 should improve the long-term profitability of the Company's current operations and position the Company for future sustained growth.
The Company funds its short-term working capital needs, including the purchase of video and other inventory, primarily through cash from operations. The Company expects that cash from operations and extended vendor terms will be sufficient to fund future video and other inventory purchases and other working capital needs for its existing locations. As a part of its growth strategy, however, the Company requires greater working capital to fund the costs of new store openings. There can be no assurance that cash from operations and extended vendor terms will be sufficient to fund future video and other inventory purchases and other working capital to sustain the continued growth of the Company.
The Company's primary long-term capital needs are for opening and acquiring new locations. The Company expects to fund such needs through cash flows from operations, the net proceeds from the possible sale of debt or equity securities, bank credit facilities, trade credit, and equipment leases.
Quantitative and Qualitative Disclosure about Market Risk
The Company's market risk sensitive instruments do not subject it to material risk exposures. The carrying value of the Company's debt approximates fair value at September 30, 2000 and June 30, 2000. The carrying value of the Company's notes receivable approximate fair market value at September 30, 2000 and June 30, 2000.
PART II. OTHER INFORMATION.
Item 1. Legal Proceedings.
Not Applicable.
Item 2. Changes in Securities.
Not Applicable.
Item 3. Defaults Upon Senior Securities.
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
Item 5. Other Information.
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
|
Exhibit Number |
Description and Incorporation by Reference |
|
27 |
Financial Data Schedule |
(b) Reports on Form 8-K.
Not Applicable.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
FOCUS ENTERTAINMENT INTERNATIONAL, INC. |
|
Date: November 14, 2000 |
/s/ Michael S. Morrison |
|
|
By: Michael S. Morrison, President and Chief Financial Officer |
|
|