SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1997 Commission File Number 0-15435
FIRST ENTERTAINMENT, INC.
(Exact name of Company as specified in its charter)
COLORADO 84-0974303
(State or other jurisdiction I.R.S. Employer Identification No.
of incorporation or organization)
1380 Lawrence Street, Suite 1400, Denver, Colorado 80204
(Address of principal executive offices) (Zip code)
Company's telephone number, including area code (303) 592-1235
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check whether the Company (1) has filed 1) Yes X
all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the 2) Yes X
preceding 12 months (or for such shorter period that
the Company was required to file such reports), and
(2) has been subject to such filing requirements for
the past 90 days.
Indicate the number of shares outstanding of each of the issuer's classes
of stock, as of the latest practicable date.
Number of Shares
Class Outstanding at August 1,
1997
Common stock, $.008 par value 6,076,413 shares
Class A Preferred Stock, $.001 par value 10,689 shares
Class C Preferred Stock, $.001 par value 125,000 shares
FIRST ENTERTAINMENT, INC.
FORM 10-QSB QUARTERLY REPORT
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheet as of June 30,1997
(Unaudited) and December 31, 1996
Consolidated Statements of Operations (Unaudited)
for three months and six months ended June 30, 1997 and 1996
Consolidated Statements of Cash Flows (Unaudited)
for the six months ended June 30, 1997 and 1996
Notes to Consolidated Financial Statements (Unaudited)
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II - OTHER INFORMATION
Items 1 through 6
SIGNATURE
<TABLE>
<CAPTION>
FIRST ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
1997 1996
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 36,598 $ 62,856
Trade accounts receivable, net
of allowance 88,204 105,357
Notes receivable 202,000 218,010
Note receivable, affiliate 14,037 10,000
Inventories 54,912 51,282
Other current assets 16,913 18,176
- -----------------------------------------------------------------------
412,664 465,681
------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Master tape library and film costs 1,600,827 1,600,827
Equipment and furniture 799,242 770,566
Building and leasehold improvement 528,257 528,257
Land 125,000 125,000
- --------------------------------------------------------------------------
3,053,326 3,024,650
Less accumulated
Depreciation 2,451,656 2,399,175
- -------------------------------------------------------------------------
601,670 625,475
--------------------------------------------------------------------------
OTHER ASSETS
License, net of accumulated
Amortization 798,662 1,629,921
Goodwill, net of amortization 484,780 511,712
Note receivable, noncurrent 800,000 0
- -------------------------------------------------------------------------
2,083,442 2,141,633
- --------------------------------------------------------------------------
TOTAL ASSETS $ 3,097,776 $ 3,232,789
===========================================================================
<CAPTION>
"See accompanying notes to consolidated financial statements."
</TABLE>
<TABLE>
<CAPTION>
FIRST ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, continued
(Unaudited)
June 30, December 31,
1997 1996
LIABILITIES AND STOCKHOLDERS' EQUITY (Deficit):
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 84,961 $ 115,711
Accrued interest 341,397 324,805
Accrued liabilities 64,390 166,927
Accrued Bonuses 0 257,600
Notes payable and current portion of
long term debt 835,012 861,392
- ----------------------------------------------------------------------------
Total current liabilities 1,325,761 1,726,425
- ---------------------------------------------------------------------------
LONG TERM DEBT, NET OF CURRENT PORTION 200,938 199,484
- ------------------------------------------------------------------------------
MINORY INTEREST 239,478 163,787
- ------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.001 par value; authorized
5,000,000 shares;
Class A preferred stock, 10,689 shares issued 10 10
Class B preferred stock, no shares issued
Class C preferred stock 125,000 shares issued 125 125
Common stock, $.008 par value; authorized
6,250,000 shares; 5,986,413 and 5,292,238
shares issued 48,508 42,338
Capital in excess of par value 14,132,951 13,460,958
Accumulated deficit (12,365,171) (11,829,707)
Deferred compensation 0 (45,807)
Treasury stock, at cost (484,824) (484,824)
- ---------------------------------------------------------------------------
1,331,599 1,143,093
- ---------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS
EQUITY (DEFICIT) $ 3,097,776 $ 3,232,789
==========================================================================
<CAPTION>
"See accompanying notes to consolidated financial statements."
</TABLE>
<TABLE>
<CAPTION>
FIRST ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the three months ended For the six months ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
REVENUE:
Live Entertainment 346,503 $ 290,306 774,718 $ 620,531
Radio 207,070 155,107 374,416 333,047
Video 12,640 54,581 50,042 55,164
Retail 3,016 - 12,269 -
Other 8,041 20,532 62,208 26,668
- ---------------------------------------------------------------------------
577,269 520,526 1,273,354 1,035,410
- ----------------------------------------------------------------------------
COSTS AND EXPENSES:
Cost of sales
live entertainment 333,474 262,376 668,709 525,740
Cost of sales radio 147,816 111,131 267,181 255,113
Cost of products sold
- video 11,593 7,287 13,130 7,453
Cost of goods sold
retail 12,642 - 47,834 -
Depreciation and
Amortization 40,510 74,447 120,021 188,581
Selling, general
and administrative 214,235 376,100 668,740 650,099
- ---------------------------------------------------------------------------
760,270 873,841 1,785,615 1,626,986
- ---------------------------------------------------------------------------
OPERATING LOSS FROM CONTINUING
OPERATIONS (183,001) (310,315) (512,126) (549,076)
OTHER INCOME (EXPENSE)
Interest expense (22,958) (25,036) (47,713) (53,150)
Other 557 360 848 22,419
- ---------------------------------------------------------------------------
LOSS FROM CONTINUING
OPERATIONS, BEFORE
MINORITY INTEREST (205,404) (335,491) (559,126) (579,807)
MINORITY INTEREST
IN NET LOSS 7,851 23,662
- -----------------------------------------------------------------------------
LOSS FROM CONTINUING
OPERATIONS (197,553) (335,491) (535,464) (579,807)
DISCONTINUED OPERATIONS
Income (Loss) from
operations of
discontinuance of Image 0 0 0 (28,570)
Gain on disposal of Image 0 0 0 38,720
- ----------------------------------------------------------------------------
NET INCOME (LOSS) $ (197,553) $ (355,491) $ (535,464) $ (226,657)
INCOME (LOSS) APPLICABLE
TO COMMON STOCK
PER SHARE DATA:
Net Income (loss) per
share, continuing
operations (.03) (.09) (.09) (.18)
Net Income (loss) per
share, discontinued
operations .11
Net Income (loss)
per common share (.03) (.09) (.09) (.07)
WEIGHTED-AVERAGE NUMBER OF
SHARES OUTSTANDING 5,794,585 3,895,877 5,794,585 3,244,210
============================================================================
<CAPTION>
"See accompanying notes to consolidated financial statements"
</TABLE>
<TABLE>
<CAPTION>
FIRST ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the six months For the six months
ended June 30, ended June 30,
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (535,464) $ 131,022
Adjustments to reconcile net
income (loss) to net cash
from operations
Depreciation and
Amortization 120,021 71,634
Minority interest (23,662) 0
Common stock issued
for services 466,370 71,446
Gain on disposal of Image (353,902)
Gain on debt extinquishment (21,341)
Changes in operating assets and liabilities
(Increase) decrease in
Receivables 29,096 91,030
Inventories (3,630) 1,528
Other current assets (1,263) 2,332
Other assets 956
Increase (decrease) in
Accounts payable (30,750) (8,079)
Accrued Liabilities (85,945) (11,998)
Cash provided by
discontinued operations 72,168
- ----------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES: (65,227) (46,795)
- ----------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures net (28,676) 0
Investments and other (5,780) 803
Cash used in discontinuing operations 0 0
- ----------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (34,456) 803
- ----------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on debt (24,926) (39,163)
Proceeds from issuance of common
stock of subsidiary 98,351 0
Cash used in discontinuing operations 0 0
- ----------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 73,425 (39,163)
- ----------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH (26,258) 8,435
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 62,856 71,488
- ----------------------------------------------------------------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 36,598 $ 79,923
======================================================================
<CAPTION>
"See accompanying notes to consolidated financial statements."
</TABLE>
[CAPTION]
FIRST ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General:
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and in accordance with instructions to Form 10-QSB
and Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. The accompanying
financial information is Unaudited but includes all adjustments
(consisting of normal recurring accruals) which, in the opinion of
management, are necessary to present fairly the information set forth.
The consolidated financial statements should be read in conjunction with
the notes to the consolidated financial statements, which are included
in the Annual Report on Form 10-KSB of the Company for the fiscal year,
ended December 31, 1996.
The results for the interim period are not necessarily indicative of
results to be expected for the fiscal year of the Company ending
December 31, 1997. The Company believes that the three and six month
report filed on Form 10-QSB is representative of its financial position
and its results of operations and changes in cash flows for the periods
ended June 30, 1997 and 1996.
2. Stockholders Equity
Indian Licensing
Effective March 31, 1996, the Company entered into a Purchase Agreement
with certain individuals whereby the Company would acquire 55% of the
issued and outstanding common stock of Indian Motorcycle Company Japan,
a development stage company, and certain licensing rights in exchange
for 300,000 shares of the Company's Class C Preferred Stock valued at
$1.00 per share. In connection with a settlement agreement entered into
with the Receiver for Indian Motorcycle Manufacturing, Inc. In February
1997, the Company relinquished the rights acquired and the 300,000
shares of Class C Preferred stock were returned to the Company.
The transaction described above relating to Indian Licensing have been
rescinded in the accompanying financial statements effective from the
date the transaction were entered into as if the transactions did not
occur.
Balzac, Inc.
In April 1996, the Company acquired certain assets of Balzac, Inc.
(Balzac) a private company, which manufactures and distributes toys,
including a product line of toy balls. The assets and rights acquired
consisted of an exclusive license for Australia, inventory of Balzac
toys and various other rights.
The exclusive license agreement for Australia was acquired for $800,000
and was payable within five years based upon a formula of 60% of net
profits from the sale of Balzac products in Australia. The inventory
and other assets were acquired by issuing 1,100,000 shares of the
Company's restricted common stock valued at $1.6 million.
During 1996, a dispute arose between the Company and Balzac and Balzac
asserted a violation of the Purchase Agreement. Balzac seized the
inventory valued at $1 million, which was collateral on the fixed
obligation due under the Australian Licensing Agreement, to satisfy the
$800,000 obligation under the licensing agreement.
The Company asserted that Balzac had no right under the Purchase
Agreement or License Agreement to seize the inventory and apply the
proceeds against the note payable under the Licensing Agreement.
In April 1997, Balzac and the Company entered into an agreement whereby
Balzac will buy back the Australian Licensing Agreement for $800,000 and
will repay the Company $200,000 which was the difference between the
value of the seized inventory and the obligation under the licensing
agreement. The $1,000,000 will be repaid over forty months at 8% annum.
During the quarter ending March 31, 1997, the Company issued 200,500
shares of common stock for consulting services valued at approximately
$292,000. The common stock issued for consulting services was registered
in an S-8 registration statement and were free trading upon issuance.
In addition, the Company issued 420,000 shares of common stock for
payment of accrued bonuses to certain key employees and consultants.
During the quarter ended June 30, 1997, the Company issued 126,000
shares of common stock for consulting services valued at approximately
$110,100. The common stock was registered in an S-8 registration
statement and were free trading upon issuance. In addition, the Company
issued 20,000 shares restricted common stock for payment of royalties
valued at $13,000.
3. Income Taxes
The tax effects of temporary differences and carryforward amounts that
give rise to significant portions of the deferred tax assets and
deferred tax liabilities as of December 31, 1996 and 1995 are:
<TABLE>
Deferred tax assets: 1996 1995
<S> <C> <C>
Net operating loss carryforwards $ 4,195,000 $ 3,325,000
Property and Equipment 42,000
Stock Bonuses 95,000
Litigation Settlement 43,000
Discontinued operations 595,000
Other 25,000 24,000
- -----------------------------------------------------------------
Total gross deferred tax assets 4,400,000 3,944,000
Less valuation allowance (4,400,000) (3,840,000)
Deferred tax liabilities:
Property and equipment (104,000)
- -----------------------------------------------------------------
Net deferred taxes $ -0- $ -0-
=================================================================
</TABLE>
A valuation allowance has been established to reflect management's
evaluation that it is more likely than not that all of the
deferred tax assets will not be realized.
The valuation allowance increased $560,000 in 1996 and $1,158,000
in 1995.
As of December 31, 1996, net operating loss carryforwards were
approximately $11.3 million. Utilization of certain portions of
this amount is subject to limitations under the Internal Revenue
Code. Carryforward amounts expire at various dates though 2011.
Letter of Intent
In January 1997, a non-binding letter of intent was signed with
Ethernet Corporation, an international marketer of informercial
marketer of informercial products. Enternet has successfully
combined international wholesaling as well as the franchising of
its retail kiosk concept under the name TV to You. In
addition, Enternet operates the most prominent As Seen on TV
internet shopping site under the name As On TV, offering a
complete array of informercial products. This potential
acquisition fits in well with the development of The Best of As
Seen on TV in retail locations in the United States, combined
with Enternet International expertise and an internet web site.
The Company would issue 300,000 shares of common stock of the
Company and 100,000 shares of ASOTV for 60% of Enternet.
Consummation of the acquisition was subject to a number of
conditions including the negotiation of definitive agreements,
completion of due diligence and approval by the Board of Directors
of both companies. The letter of intent was terminated July 1997.
Contingent Acquisition
On May 1, 1997, the Company entered into an Agreement and Plan of
Reorganization with Global Casinos, Inc. to acquire common stock
of Global Internet, Inc. held by Global Casinos, Inc.
The Company will issue 30,000 shares of Class B Convertible
Preferred Stock and 1,500,000 warrants to acquire 1,500,000 shares
of common stock of Global Internet, Inc. and a Note Receivable of
$375,000 held by Global Casinos, Inc. Each share of Class B
Convertible Preferred Stock shall have a face value of $12.50 and
may be converted into 10 shares of common stock of the Company.
Each of the 1,500,000 warrants shall be exercisable at $1.25 per
share.
Currently the Company does not have a sufficient number of shares
of common stock authorized to allow the conversion of the Class B
Convertible Preferred Stock nor the exercise of the warrants. The
Company has agreed to call a shareholders meeting to increase the
number of common shares at least sufficient to permit the
conversion of Class B Convertible Preferred Stock and the exercise
of the warrant. Since the acquisition of Global Internet, Inc. is
Contingent upon the increase in the authorized shares of common
stock of the Company, this Plan of Reorganization is accounted for
as a contingent acquisition.
ITEM 2. MANAGEMENT DISCUSSION AND PLAN OF OPERATION.
Results of Operation
June, 1997 vs. June, 1996
For the quarter ended June 30, 1997 the Company incurred a loss
from continuing operations of $197,553 as compared to a loss from
continuing operations of $335,491 for the quarter ended June 30,
1996. The decrease in the net loss for the quarter ended June 30,
1997 as compared to June 30, 1996 is the result of an increase in
revenue and a decrease in general and administrative expenses.
For six months ended June 30, 1997, the Company incurred a loss
from continuing operations of $535,464 as compared to a loss from
continuing operations of $571,807 from six months ended June 30,
1996. The decrease in the loss from 1996 to 1997 is the result of
an overall increase in revenues of $238,000 offset by increased
costs and expenses of $200,000.
For the quarter ended June 30, 1997 revenues increased by
approximately $57,000, from $520,000 in 1996 to $577,000 in 1997.
For six months ended June 30, 1997 revenues increased
approximately $238,000 as compared to six months ended June 30,
1996. Most of the increase is from an increase in live
entertainment revenue of $154,000 and radio sales of $41,000. The
increase in live entertainment revenues was due to increased
attendance as a result of big name acts in the first and second
quarter, some of whom performed on weeknights which boosted
revenues. The first two quarters of 1996 were exceptionally
strong for live entertainment as compared to historical results
for the same six month period. The first two quarters of 1997
have surpassed 1996 and are our most profitable quarters to date.
Radio sales were a little weak in the first quarter of 1997 as
compared to 1996, but have rebounded strongly in the second
quarter to where 1997 sales exceed 1996 sales by $40,000.
Retail is a new line of business, which commenced December 1996
and represents the sales of informercial products in manned and
unmanned kiosks located in major retail outlets. As a start-up
business the sales volume has not yet reached a break even point.
The Company has signed leases for five spaces in retail malls in
Colorado, which will open in the third quarter of 1997. The
Company expects this new line of business to be profitable by the
end of the fourth quarter in 1997.
Cost of sales live entertainment increased as a result of an
increase in revenues but the percent of cost of sales to sales
increased from 80% in 1996 to 86% in 1997. Overall attendance
increased substantially, entertainer cost have increased, but
labor cost remained the same thereby reducing the overall gross
profit.
Cost of goods sold radio, increased approximately $ 12,000
comparing 1997 to 1996. The cost of sales radio as compared to
Radio sales was 71% in 1997 and 77% in 1996. The Company is
aggressively pursuing additional advertising revenues in 1997 and
increasing is promotions to obtain a larger market share.
Depreciation and amortization decreased 26,000 comparing 1997 to
1996 primarily due to the return of Balzac licensing rights which
were amortized through March 31, 1997.
General and administrative costs increased $18,000 in 1997 as
compared to 1996. The major reason for the increase is due to the
use of consultants, the addition of one staff and increased legal
fees.
Interest expense decreased slightly in 1997 over 1996 as a result
of the continued reduction of long term debt in 1996.
Liquidity and Capital Resources
As of June 30, 1997, the Company had a working capital deficit of
approximately $913,000 , a decrease of $348,000 over the working
capital deficit at December 31, 1996. The primary reason for the
decrease is the issuance of common stock in settlement of accrued
bonuses of $258,000 and proceeds from the issuance of common stock
of a subsidiary of $98,000. Despite a loss of $535,000, net cash
used by operating activities was only $65,000. The Company has
been able to issue common stock for services thereby reducing the
need for working capital.
The Company's ability to continue as a going concern will largely
depend on its ability to generate working capital through debt or
equity financing and profitable operations. Working capital
deficiencies have hindered the Companies ability to fund certain
business segments. Currently the Company has bank debt of $1.1
million, which is currently due, and due later in 1997. Working
capital is needed to further develop the retail line of business.
The likelihood of obtaining the necessary equity financing is
uncertain at this time.
PART II - OTHER INFORMATION
- ---------------------------------------------
Item 1: Legal Proceedings
In March 1997, The Company commenced legal proceedings against Image
Marketing Group, Inc and Harvey Rosenberg, Burt Katz, Burton Katz and
Michael Katz, individually for collection of approximately $700,000 in
advances to Image Marketing.
In July 1997, a settlement was reached with Image Marketing Group,
Harvey Rosenberg, Burt Katz and Michael Katz whereby 144,410 shares of
the Company's common stock held by the defendants were returned to the
Company. The shares were cancelled and returned to the treasury.
In March 1997, the Company commenced legal proceedings against HK Retail
Concepts for breech of contract. The claims are unspecified damages at
this time.
Item 2: Changes in Securities
None
Item 3: Defaults upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8-K
(A) Exhibits
None
(B) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Exchange Act, the Company has duly
caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
First Entertainment Inc.
DATE: August 13, 1997 /s/ A.B. Goldberg
A.B. Goldberg
President
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Jun-30-1997
<CASH> 37
<SECURITIES> 0
<RECEIVABLES> 88
<ALLOWANCES> 0
<INVENTORY> 54
<CURRENT-ASSETS> 413
<PP&E> 3053
<DEPRECIATION> 2452
<TOTAL-ASSETS> 3098
<CURRENT-LIABILITIES> 1326
<BONDS> 0
<COMMON> 49
0
1
<OTHER-SE> 1282
<TOTAL-LIABILITY-AND-EQUITY>3098
<SALES> 1273
<TOTAL-REVENUES> 1273
<CGS> 997
<TOTAL-COSTS> 1786
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 48
<INCOME-PRETAX> (535)
<INCOME-TAX> 0
<INCOME-CONTINUING> (535)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (535)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
