UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
[FEE REQUIRED]
For the Fiscal Year ended:
December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[NO FEE REQUIRED]
Commission File No. 0-15435
FIRST ENTERTAINMENT, INC.
(Name of Small Business Issuer as Specified in its Charter)
Colorado 84-0974303
(State or Other Jurisdiction of (I.R.S. Employer Incorporation
or Organization) Identification Number)
1380 Lawrence Street, Suite 1400
Denver, Colorado 80204
(Address of Principal Executive Offices, Including Zip Code)
Registrant's telephone number, including area code: (303) 592-1235
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.008 Par Value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 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 X No
Check if there are no disclosure of delinquent filers in response to Items
405 of Regulation S-B in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference n Part III of this Form 10-KSB or any
amendments to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. $2,139,451
As of February 28, 1997, there were 5,799,713 shares of common stock (the
Registrant's only class of voting stock) outstanding. The aggregate market
value of the 5,147,797 shares of common stock of the Registrant held by
nonaffiliates on February 28, 1997 was approximately $5,791,272 (based on
the mean of the closing bid and asked prices).
Documents incorporated by reference: None
INDEX TO FORM 10-KSB
PART I
Item 1 Description of Business
Item 2 Description of Property
Item 3 Legal Proceedings
Item 4 Submission of Matters to a Vote of Security Holders
PART II
Item 5 Market for Common Equity and Related Stockholder Matters
Item 6 Management's Discussion and Analysis or Plan of Operation
Item 7 Financial Statements
Item 8 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
PART III
Item 9 Directors, Executive Officers, Promoters and Control
Persons
Item 10 Executive Compensation
Item 11 Security Ownership of Certain Beneficial Owners and
Management
Item 12 Certain Relationships and Related Transactions
PART IV
Item 13 Exhibits, Lists and Reports on Form 8K
A) Exhibits
B) Reports on Form 8-K
PART I
Item 1. Description of Business
First Entertainment, Inc. (the "Company" or "FTET") was incorporated
under the laws of Colorado on January 17, 1985. Currently, the Company
is a multi-media entertainment conglomerate, holding controlling
interests in five distinct segments, four active and one inactive. The
four active segments, which are overviewed by the parent company, FTET,
are known as "Video," "Radio," "Live Entertainment, and Retail. The
inactive segment is known as Film. In November 1995, the Company
determined to discontinue the operations of its copyrighted properties
segment, which it acquired in 1994. Initially, the Company's business
consisted of the production of pre-recorded travel guides and special
interest videos. In 1987, the Company entered the radio broadcasting
business by acquiring Quality Communications, Inc., a Wyoming corporation
pursuant to which the Company operates the radio segment of its business.
In 1992, the Company acquired a controlling interest in First Films, Inc.
(FFI), a publicly held Colorado corporation, under which its film and
live entertainment operations are undertaken. In December 1996, the
Company commenced operations of selling infomercial products in free
standing unmanned kiosks in major retail malls including U.S. Military
bases. This segment is known as the retail segment.
Video
Initially, the Company entered the pre-recorded videocassette product
market through the design, production and distribution of pre-recorded
videocassette travel guides and later expanded into production and
distribution of special interest videocassette productions. In June
1986, the Company entered into a trademark licensing agreement with Rand
McNally, providing the Company the right to use the Rand McNally name
worldwide for its Video Trip product.
In 1993, the Company negotiated the termination of its relationship with
Rand McNally. In July 1993, the Company entered into a new agreement,
entitling it to use the KODAK trademark of Eastman Kodak Company for
video through its exclusive U.S. distributor, Woodknapp and Company, Inc.
This agreement allowed Woodknapp and Company, Inc. to become the
exclusive domestic distributor for the Company's Video Trip product and
allowed the Company to receive sponsorship assistance from Eastman Kodak
Company. This agreement allowed the Company to pass through some of the
costs of packaging, marketing and distribution to Woodknapp, who is one
of the largest distributors of special interest video in the United
States. The Company bore the expense of editing the Rand McNally
trademarks from the programs. This editing was completed in December
1993 and shortly thereafter, Woodknapp released, domestically, the first
of five release groups created from the Video Trip library. In January
1995, the Company was informed that Woodknapp and Company, Inc. had
ceased operations and would not be able to honor its contract as the
Company's exclusive U.S. distributor of Video Trips. The Company feels
that because of cash flow problems of Woodknapp they were not able to
effectively market their Video Trips in 1994.
In 1995, the Company signed a three year distribution agreement with Fox
Lorber, whereby Fox Lorber would test the distribution of 12 video trip
titles in North America. Fox Lorber has the right to acquire the
remaining 28 video trip titles and extend the term of the agreement from
three years to seven years with an additional advance royalty payment of
$58,000. During 1996, the Company sold all its foreign distribution
rights to Fox Lorber for $50,000.
Radio
In October 1987, the Company entered the radio broadcasting business
through the acquisition of Quality Communications, Inc. ("Quality
Communications"), a Wyoming corporation. At that time, Quality
Communications owned and operated three radio stations, which serve
markets in Northeast Wyoming and central Iowa. In August 1989, the
Company sold two radio stations in Boone, Iowa.
The Company, through Quality Communications, operates a radio station,
100.7, The Fox, located in Gillette, Wyoming.
In November 1993, the Company changed the music format of the radio
station formerly known as KGWY, or Y-100, from a top-40 station to a
format known as the "Heart of Rock." In February, 1995 the format was
changed again to contemporary country. The changes have had a positive
effect on its market share and gross revenues. Independent market
surveys show the radio station has approximately 44% of the market in
Gillette, Wyoming. In 1996, the radio station started promoting concerts
using up and coming country and western singers. The radio station was a
venue to promote the concerts and add an additional source of revenue for
the radio station.
Live Entertainment
FFI owned and operated two comedy clubs, one located in Denver, Colorado
and one in Tampa, Florida. The Tampa, Florida, club was closed on
January 29, 1995 due to less than expected attendance.
The goal of this division is to produce first-rate shows in the theater
environment. Revenues are generated through both ticket sales at the
door and beverage and food sales at tables. Clubs are open to the public
only for shows, which last from 1 to 2 hours each, and number as many as
three per night. Non-show times are devoted to preparing and producing a
show that changes completely each week, and to promoting and marketing
the nightclub.
FFI acquired 100 percent of the outstanding stock of Comedy Works, Inc.,
a Colorado corporation, on September 13, 1990 in an exchange for
200,000,000 shares of common stock. Comedy Works was incorporated in
1982 and has operated from its Larimer Square, Denver, Colorado location
since that time. Comedy Works Larimer Square typically has ten shows per
week and has averaged over 2,000 customers per week for the past fifteen
years.
Retail
In December, 1996 the Company commenced operations of its retail segment.
The segment consists of selling the most common and most popular
informercial products in free standing un-manned kiosks in retail outlets
throughout the United States. The Company intends to expand operations
to include manned kiosks in major retail malls. Each manned kiosks will
be approximately 250 square feet and will have approximately 35 to 50 of
the top selling informercial products. The Company opened its first four
locations in December, 1996, in Pearl Harbor, Andrews Air Force Base and
Bolling Air Force Base in Washington, D.C. and Leichmere's in Cambridge,
Massachusetts. The Company intends to complete a private placement of up
to $800,000 in 1997 to fund the planned expansion of manned kiosks in
major retail malls throughout the United States. The Company operates
the kiosks under the name The Best of As Seen on TV (ASOTV).
Other Business Development
Balzac
In April 1996, the Company acquired certain assets from Balzac, Inc., a
private company which manufactures and distributes toys, including a
product line of toy balls. The assets and rights acquired consisted of
the following: inventory of Balzac toys, the exclusive license of Balzac
for Australia and various other rights.
The exclusive license agreement for Australia was acquired for $800,000
payable within five years based upon a formula of 60% of net profits from
the sale of Balzac products in Australia. The inventory and various
other rights were acquired by issuing 1,100,000 shares of the Company's
restricted common stock valued at $1.2 million. In addition, the Company
granted certain stock options to Balzac to purchase shares of common
stock of the Company.
During 1996, a dispute arose between the Company and Balzac where Balzac
asserted a violation of the Purchase Agreement. Balzac seized the
inventory valued at $1 million, which was collateral on the fixed
obligation due under the Australian Licensing Agreement, to satisfy the
$800,000 obligation under the Licensing Agreement. The Company asserted
that Balzac had no right under the Purchase Agreement or License
Agreement to seize the inventory and apply the proceeds against the note
obligation under the License Agreement.
In April 1997, Balzac and the Company entered into an agreement whereby
Balzac will buy back the Australian Licensing Agreement for $800,000 and
will repay the Company $200,000 which was the difference between the
value of the seized inventory and the obligation under the licensing
agreement. The $1,000,000 will be paid over forty months at 8% per
annum.
Image Marketing Group
On September 6, 1994, the Company acquired an 84 percent interest in
Image Marketing Group, Inc. ("Image"). The Company issued 248,297 shares
of its restricted common stock in exchange for 1,986,374 issued and
outstanding shares of Image. In addition, the Company issued 231,976
shares of its Class B preferred stock in exchange for all the issued and
outstanding preferred stock of Image and approximately $420,000 of
related party debt.
Image had a substantial amount of working capital invested in inventory
items that were not selling, therefore it was unable to recover its
investment in inventory or reinvest in new images from the sale of
existing inventory. FTET invested approximately $700,000 in Image in an
effort to generate sales through introduction of new images to customers.
Image was unable to generate enough sales or liquidate its inventory to
generate working capital to support continued operations. Since 1993,
Image has had losses from operations and at the time it was acquired by
the Company was in need of working capital to finance inventory growth.
Even with a working capital infusion of approximately $700,000, Image
continued to incur losses as a result of declining sales. In November,
1995 it was determined that additional working capital would not be
advanced to Image and that the Company would terminate operations and
seek a buyer for Image. The discontinuance of operations of Image
resulted in a loss of approximately $2.2 million for the year ended
December 31, 1995 of which $1.6 million represents the write down of
assets to their net realizable value.
On April 24, 1996 The Company and Harvey Rosenberg, a former officer and
director of the Company entered into a Purchase Agreement for the sale of
Image. Mr. Rosenberg purchased the Company's 1,986,376 shares of Image
for $1,000 resulting in a gain of approximately $414,000. At the time of
the disposition of Image, Image had liabilities in excess of assets.
The results of operations of Image for the year ended December 31,1996
and 1995 are disclosed in the accompanying statements of operations as
discontinued operations.
Indian Licensing
In February 1995, the Company signed a series of agreements giving it
certain licensing and merchandising rights for the Indian Motor Company,
which required the approval of the bankruptcy court. These rights were
never approved by the Bankruptcy Court.
In January, 1996 A.B. Goldberg, Harvey Rosenberg, a former director and
several other unrelated parties were named as defendants in a law suit
filed by Sterling Consulting Corporation, Receiver for Indian Motorcycle
Manufacturing, Inc. The Company filed a counter claim against the
Receiver in July, 1996. In September 1996, the Company and the
Receiver commenced settlement negotiations whereby all parties would
resolve their dispute.
In February, 1997 the Company and the Receiver agreed to the terms of a
settlement. The proposed Settlement Agreement calls for the Company to
relinquish all rights or claims to the Indian Motorcycle Trademark or the
use of the Trademark and any licensing rights. In addition, all claims
by the Receiver and the Company shall be released and the Company shall
pay to the Receiver approximately $114,000. All rights acquired from
Scott Kajiya and Jamie Ruiz for the use of the Indian Motorcycle
Trademark in Japan are also assigned to the Receiver.
The transactions described above relating to Indian Licensing have been
rescinded in the accompanying financial statements effective from the
date the transactions were entered into as if the transactions did not
occur.
Letters of Intent
In January, 1997, a non-binding letter of intent was signed with Enternet
Corporation, an international marketer of infomercial products. Enternet
has successfully combined international wholesaling as well as the
franchising of its retail kiosk concept under the name TV to You. In
addition, Enternet operates the most prominent As Seen on TV internet
shopping site under the name As On TV, offering a complete array of
infomercial products. This potential acquisition fits in well with the
development of The Best of As Seen on TV in retail locations in the
United States, combined with Enternet International expertise and an
internet web site. The Company would issue 300,000 shares of common
stock of the Company and 100,000 shares of ASOTV for 60% of Enternet.
Consummation of the acquisition is 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. Due
to the contingencies involved, the Company is unable to predict if or
when the transaction will be consummated.
In March, 1997, a non-binding letter of intent was signed with ONLINE
Casino's, Inc. (ONLINE) regarding the potential acquisition of ONLINE,
which consists of a fully licensed operating gaming casino in the
Caribbean, along with an internet gaming license and internet gaming
software that controls all aspects of the system. The purchase price of
ONLINE is estimated to be $26 million consisting of debt and equity
financing. Consummation of the acquisition is subject to a number of
conditions including the negotiation of definitive agreements, completion
of due diligence and approval by the Directors of both Companies. Due to
the contingencies involved, the Company is unable to predict if or when
the transaction will be consummated.
Competition
Video
The production and marketing of pre-recorded video cassettes is a highly
competitive business. The Company vies with many companies and
individuals that have substantial experience in acquiring, producing and
distributing such products. Most have resources substantially greater
than those of the Company. These competitors include both large and
small independent production companies, television and film studios, and
others. The Company knows of numerous other videocassette travel guide
series (including International Video Network's Video Visits, Travelview,
Laura McKenzie's Travel Guide and Fodor's Travel Video); however, the
Company believes that the Kodak name and the quality of its programs set
it apart from its competitors.
Radio
100.7, "The Fox" competes with seven other signals available in the area.
Two of these radio signals originate from Gillette, Wyoming. The Company
presently enjoys the largest share of the market, estimated to be 44
percent.
Live Entertainment
Competition is intense in the comedy and music night club entertainment
industries. On a national level, the Company competes for entertainers
with companies that are better capitalized, highly visible and have
longer operating histories and larger staffs in their respective
locations. None of the national comedy clubs have locations in Denver,
Colorado. Comedy Works Larimer Square has been in business in Denver,
Colorado for 15 years and the Company believes it to be the highest
revenue-producing comedy club in the area. The Company believes that
Comedy Works Larimer Square provides higher-quality acts than its local
competitors, reflected in the fact that it charges approximately twice
the admission price of its local competitors. The two main competitors
of Comedy Works Larimer Square are both individually-owned and located in
shopping centers in the suburbs, while Comedy Works is located in the
downtown Denver area.
Retail
There are several companies that sell infomercial products in retail
locations, none of which have a national presence. Other companies are
more experienced and are better capitalized but the Company believes it
will distinguish itself from competition by offering only the best and
most popular infomercial products and by having a better, more up-scale
presentation of its products.
Licenses
The Federal Communications Commission (FCC) issues radio broadcasters a
license to operate within their assigned frequency for seven years.
These licenses, upon application, are renewable for additional seven year
periods. The FCC issued KGWY its original license on October 1, 1983, to
operate at a frequency of 100.7 MHz, 24 hours a day, at 100,000 watts of
effective radiated power. It was subsequently reissued in October of
1990. It will be up for renewal again on October 1, 1997. During the
renewal process the public has an opportunity to express its opinion of
how well the particular station is servicing its broadcast area. Extreme
public negativity during this period can hold up the reissuance process.
In addition, frequent violations of FCC rules and regulations can be
cause for the denial of the station's license renewal.
The FCC allots a certain number of frequencies for each broadcast area,
based upon community need, population factors and the determination of
the economic viability of another station in the designated region.
Currently there are no other licenses available in the Gillette area. It
is possible to request that the FCC reconsider opening up further
frequencies through its rule making body, but this can be a time
consuming process. All sales of stations and subsequent transfers of
licenses must be approved by the FCC.
Seasonality
Video
Although revenues are spread over the entire calendar year, historically
the third quarter generally reflects the highest revenues for each year
due to increase in wholesale buying for the holiday season.
Radio
Although revenues are spread over the entire calendar year, the first
quarter generally reflects the lowest and the fourth quarter generally
reflects the highest revenues for each year. The increase in retail
advertising each fall in preparation for the holiday season, combined
with political advertising, tends to increase fourth quarter revenues.
Retail
Historically retail is the strongest in the October through December
months. The Company projects a decline in sales during January through
March and July through September with the second and fourth quarters
showing the stronger sales.
Live Entertainment
The Company has found that its highest-revenue months are from July 15 to
October 15 of each year. From approximately May 15 to July 15 of each
year, business is typically down 30 percent below average, primarily
because customers prefer outdoor activities at that time of year. During
the holiday season, management has found a slight increase due to once-a-
year customers, on vacation or hosting visiting friends or relatives.
Employees
First Entertainment, Inc.
Currently, FTET, the Holding Company, employs one executive and one
administrative person. The Holding Company contracts the accounting and
administrative function to a company owned by the former president and to
other independent consultants.
Video
The Company does not have any video employees, but rather relies upon its
distribution for video sales.
Radio
The Company employs approximately five full-time employees and eight
part-time employees. Of the full-time employees, they are engaged mainly
in the administrative radio operations and sales. The part-time
employees are engaged in the on-air activities as on-air personalities.
Live Entertainment
This division has three full-time employees and approximately 20 part-
time employees. Full-time employees are management staff and part-time
employees are waitresses, bartenders, and door personnel.
Retail
Currently, this division has one full-time employee.
Item 2. Description of property
First Entertainment, Inc.
The Company's executive offices are located at 1380 Lawrence Street,
Suite 1400, Denver, Colorado and are leased under the terms of a 66-month
lease, which terminates in August 1997. Monthly rental is approximately
$4,100.
Video
The Company's video operation is housed in the executive offices at 1380
Lawrence Street, Suite 1400, Denver, Colorado. The production facilities
for the Video Division are located in Casper, Wyoming, in the home of the
producer. The Company pays no rent for its production facilities.
Radio
The Company has facilities in Gillette, Wyoming which house the radio
station, 100.7, The Fox. The facilities were leased under a 10-year
lease agreement, which commenced in August 1986, with a trust whose
trustee was the president of the Company until 1992. Annual rent was
approximately $21,000. In addition, the radio station leased its FM
tower site from a ranch owned by the former president's wife for an
annual rent of $5,400. In April, 1996 the Company purchased the land
and building which houses the radio station for $300,000 and the land
under which the FM tower sits for $125,000, by issuing preferred stock
valued at $275,000 and a mortgage for $150,000.
Live Entertainment
The Company rents one facility. Comedy Works Larimer Square leases its
premises under the terms of a five-year lease, which commenced in March
1994. The monthly lease payments are based upon approximately six
percent of gross revenues. The Tampa Comedy Works which closed January
1995 had leased its space on a month-to-month basis.
Retail
This division leases office space at 1380 Lawrence Street, Suite 1400
from the parent company at $750 per month and space for stand alone
kiosks at various prices on short term leases for less than one year.
Item 3. Legal Proceedings
First Entertainment
First Entertainment knows of no litigation pending, threatened, or
contemplated, or unsatisfied judgments against it, or any proceedings of
which First Entertainment or any of its subsidiaries is a party, except
as specified below. First Entertainment knows of no legal actions
pending or threatened, or judgment entered against any of its officers or
directors or any of its subsidiaries in their capacities as such, except
as specified below.
In January, 1996 the Company, AB Goldberg, Harvey Rosenberg and several
other related and unrelated third parties were named as defendants in a
lawsuit filed by Sterling Consulting Corporation as Receiver for Indian
Motorcycle Manufacturing, Inc.(IMMI) The Complaint alleges
interference by defendants in the business of IMMI, conflicts of interest
of AB Goldberg, breach of fiduciary duty, unjust enrichment, and
bankruptcy fraud.
In July 1996, The Company filed suit against the Receiver alleging
intentional interference of contracted relationships and breach of
licensing agreements.
In September 1996, the Company and the Receiver commenced settlement
negotiations whereby all parties would resolve their disputes.
In February 1997, the Company agreed to terms of a Settlement Agreement
with the Receiver whereby the Company would relinquish all rights to the
Indian Motorcycle Trademark and pay the Receiver approximately $114,000.
(see Item 1, Other Business Developments)
In March 1997, the company commenced legal proceedings against Image
Marketing Group, Inc. and Harvey Rosenberg, Burt Katz and Michael Katz,
individually, for collection of approximately $700,000 in advances to
Image Marketing.
In addition, the Company has commenced legal proceedings against HK
Retail Concepts for breech of contract. The claims are for unspecified
damages at this time.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to security holder vote during the fiscal
year ended December 31, 1996.
Item 5. Market for the Company's Common Equity and Related Stockholder
Matters
The Company's common stock is traded on NASDAQ in the over-the-counter
market and since October 1988, has been included in NASDAQ. The
following table sets forth the high and low bid quotation for the
Company's common stock for each quarterly period in 1996 and 1995. As of
February 28, 1997, there were approximately 1,135 shareholders of record
of the Company's common stock. Holders of common stock are entitled to
receive such dividends as they may be declared by the Company's Board of
Directors. No dividends are anticipated to be paid in the foreseeable
future.
<TABLE>
Bid Price
High Low
<S> <C> <C>
1996
First Quarter $ .66 $ .44
Second Quarter 1.94 .50
Third Quarter 1.25 .63
Fourth Quarter 1.00 .50
1995
First Quarter $ 1.90 $ .69
Second Quarter 2.03 1.12
Third Quarter 1.60 1.00
Fourth Quarter 1.22 .66
</TABLE>
Item 6. Management Discussion and Analysis or Plan of Operation
Fiscal 1996 as Compared to Fiscal 1995
The Company had a net loss from continuing operations of approximately
$1.6 million in 1996 and 1995.
The loss from the discontinued operations of Image was $ 28,000 in 1996
compared to $ 593,000 in 1995. The 1995 loss represents a full year of
operation, whereas the 1996 loss represents only three months of
operations of which $60,000 had already been estimated at December 31,
1995.
The loss on the disposal of Image of $1,609,000 in 1995 represents a
write down of assets to their estimated net realizable value of
$1,549,000 and an estimate of the loss through the state of disposition
of Image of $ 60,000. The gain on the sale of Image in 1996 results from
the sale of Image that at the time of disposition had liabilities in
excess of assets.
Overall revenues increased from $1.8 million in 1995 to $2.1 million in
1996. Live entertainment revenues increased from $ 1 million in 1995 to
$1.25 million in 1996. The increase is due in part to a strong economy
which is providing more discretionary income and to increased attendance.
The Comedy Club has been successful in bringing in highly recognized
headliners, some of which performed special engagements during the week
when attendance is less than weekends. As a result of increased
attendance, food sales and liquor sales have also increased. Overall,
the industry has seen a decline in attendance at comedy clubs nationwide,
although the Denver comedy club has been able to retain attendance. With
the increase in live entertainment sales in 1996, cost of goods sold has
also increased from $.9 million in 1995 to $1.1 million in 1996. The
largest component of cost of goods sold, live entertainment, is labor,
including entertainers salaries which increased from $392,000 in 1995 to
$547,000 in 1996. Of the $155,000 increase in labor costs in 1996,
$122,000 was attributable to entertainers.
Radio sales have increased from $678,000 in 1995 to $713,000 in 1996
primarily because the Company began promoting concerts for up and coming
country performers, generating approximately $33,000 in concert revenues.
The radio station still has the largest audience share in Gillette,
Wyoming. Cost of goods sold-radio has increased by $10,000 from 1995 to
1996 primarily due to the cost of the concerts which was a new cost in
1996. The single largest component of cost of goods sold, radio, is
labor which was $296,000 in 1996 and $300,000 in 1995. The radio station
has been successful in increasing radio revenues without adding
additional people. The radio station is continuing in its efforts to
manage its costs and as such has substantially reduced its operating
overhead.
Video sales increased from $31,000 in 1995 to $106,000 in 1996 as a
result of the sale of foreign distribution rights for $50,000 and
collection of foreign royalties of $53,000.
Retail revenues were $19,000 in 1996 and did not exist in 1995. Retail
operations commenced in December, 1996 and revenues are for only one
month. Retail cost of sales is high primarily due to shipping costs in
getting products the retail outlets in time for the Christmas retail
shopping season. In addition, this new division had certain start up
costs which are not expected to recur.
Other revenue decreased slightly from $55,000 in 1995 to $46,000 in 1996.
As a result of significant assets being fully depreciated at December 31,
1995 and the acquisition of the radio station in 1996 depreciation and
amortization decreased by $8,000 from 1995 to 1996.
Management and administrative fees, affiliate, increased from $201,000 in
1995 to $408,000 in 1996. The underlying agreement, which provides for
services valued at $20,000 per month, was in effect for a partial year in
1995 and a full year in 1996. In addition, the 1996 fees include a bonus
paid in common stock of the Company of $168,000.
Selling, general and administrative expenses (SG&A) increased from $1.37
million in 1995 to $1.39 million in 1996, an increase of approximately
$20,000. The Company made a concerted effort to reduce SG&A during 1996
which resulted in significant savings. However, there were certain
transaction which had an adverse effect on SG&A for 1996. Included in
SG&A in 1996 is the accrual for stock bonus awards issued in 1997 for
1996 services of approximately $89,600. In addition, the Company
incurred substantial legal fees in 1996 in connection with the Indian
Motorcycle litigation and settlement negotiations. The settlement
resulted in the Company recording settlement costs of $114,200 during
1996. Legal fees were approximately $69,000 in 1995 compared to $195,000
during 1996. Compensation and consulting fees were approximately
$568,000 for 1995 compared to $467,000 for 1996.
Notes payable and long term debt was $977,000 in 1995 and $1,061,000 in
1996. The average outstanding balance of long term debt was $1,173,000
in 1995 as compared to $1,019,000 in 1996. In addition, in 1995 the
Company discharged nearly $300,000 in debt that was in default that
accrued interest at the default rate of 21%. The decline in interest
expense between 1996 and 1995 is due to the above factors.
In 1995 the Company wrote off its investment in Interactive Video
Technology thereby incurring a loss of $125,000.
In 1995 the Company was more successful in negotiating debt settlements
with unsecured creditors such as note payable holders and accounts
payable holders through the issuance of common stock. These debt
settlements resulted in a gain of $176,717 in 1995.
Liquidity and Capital Resources
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed
in Notes A and F to the consolidated financial statements, the Company has
suffered recurring losses from operations, has a working capital
deficiency of approximately $1.3 million, and is in default on a
substantial portion of its debt. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that
might result from the outcome of these uncertainties.
Management's plans with regard to the Company's ability to continue as a
going concern include continued raising of equity financing, restructuring
of its debt obligations, evaluating mergers and acquisitions to improve
market share or operational synergy's and improving efficiency of
operations. For several years, losses from operations have resulted in
significant cash deficiencies and have hindered the Company's ability to
properly fund certain business segments, such as videos, to make them
profitable or to expand current business segments. The Company has
current liabilities of $1.7 million and presently, the Company does not
have the financial resources it needs to meet its existing obligations and
fund working capital deficits. The Company must generate additional
revenues that must come from sources other than the existing business
segments. The existing business segments will not generate significant
increases in revenues. Therefore new business opportunities will be
needed for the Company to continue in the long term. The Company is
always evaluating additional business opportunities but is limited due to
its lack of working capital.
The Company has been successful in 1996 and in 1995 in financing
operations through issuance of common stock in settlement of accounts
payable and in exchange for services. This form of payment has reduced
the cash requirements of the Company.
A significant capital infusion of up to $3 million will be necessary to
pay down existing debt, finance capital expenditures needed by various
business segments to increase sales and profitability and provide working
capital to finance business expansion. Approximately $800,000 of
financing is needed to expand operations of ASOTV. This money would be
used to finance constructing of manned kiosks in major retail malls,
purchase inventory and furniture and equipment for each kiosk. The
Company is also considering opening a country nightclub in Gillette,
Wyoming to complement the country radio station the Company currently owns
in Gillette. The cost of furniture and equipment is estimated to be
approximately $125,000. The likelihood of obtaining the necessary equity
financing is uncertain at this time.
A valuation allowance offsetting the Company's net deferred tax asset 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.
Item 7. Financial Statements
FIRST ENTERTAINMENT, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Report of Independent Certified Public Accountants
Consolidated Balance Sheets.............................
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
First Entertainment, Inc.
Denver, Colorado
We have audited the accompanying consolidated balance sheets of First
Entertainment, Inc. and Subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, stockholders equity
(deficit) and cash flows for the years than ended. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide 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 First
Entertainment, Inc. and Subsidiaries as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for the years then
ended, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Notes A and F to the consolidated financial statements, the Company has
suffered recurring losses from operations, has a working capital deficiency
of approximately $1.3 million, and is in default on a substantial portion of
its debt. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regards to
these matters are discussed in Note A. The consolidated financial
statements do not include any adjustments that might result from the outcome
of these uncertainties.
BDO Seidman, LLP
March 3, 1997, except for Note N which is dated April 11, 1997
Denver, Colorado
<TABLE>
<CAPTION>
FIRST ENTERTAINMENT, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1995
1996 1995
ASSETS
<S> <C> <C>
CURRENT
Cash and cash equivalents $ 62,856 $ 71,488
Trade accounts receivable,
net of allowance for doubtful accounts
of $7,483 and $2,776 105,357 89,203
Accounts receivable, other 218,010 145,778
Notes receivable, affiliate 10,000 100,000
Inventories 51,282 22,234
Other 18,176 18,911
- --------------------------------------------------------------------------
465,681 447,614
- --------------------------------------------------------------------------
PROPERTY AND EQUIPMENT (Notes B and F)
Master tape library and film costs 1,600,827 1,600,827
Equipment and furniture 770,566 725,324
Building and leasehold improvements 528,257 227,839
Land 125,000
- ---------------------------------------------------------------------------
3,024,650 2,553,990
Less accumulated depreciation
and amortization 2,399,175 2,162,103
- ---------------------------------------------------------------------------
625,475 391,887
- ---------------------------------------------------------------------------
OTHER ASSETS
License, net of accumulated amortization
of $420,460 and $357,941, respectively 1,629,921 892,441
Goodwill, net of accumulated amortization
of $26,932 (Note C) 511,712
Other 956
- ---------------------------------------------------------------------------
2,141,633 893,397
- ---------------------------------------------------------------------------
TOTAL ASSETS $ 3,232,789 $ 1,732,898
============================================================================
<CAPTION>
See accompanying report of independent certified public accountants and
notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
FIRST ENTERTAINMENT, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, continued
December 31, 1996 and 1995
1996 1995
LIABILITIES AND STOCKHOLDERS' EQUITY(DEFICIT)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 115,701 $ 63,268
Accrued liabilities 166,927 122,830
Accrued interest 324,805 325,185
Accrued bonuses 257,600
Notes payable and current portion
of long-term debt (Note F) 861,392 923,048
Notes payable, related parties 13,167
Net liabilities of discontinued
operations (Note D) 297,565
- -----------------------------------------------------------------------
1,726,425 1,745,063
- -----------------------------------------------------------------------
LONG-TERM DEBT, NET OF CURRENT
PORTION (Note F) 199,484 54,281
- ------------------------------------------------------------------------
MINORITY INTEREST (Note C) 163,787
- ------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note J)
STOCKHOLDERS' EQUITY(DEFICIT) (Note G)
Preferred stock, $.001 par value;
authorized 5,000,000 shares;
Class A preferred stock, 10,689
shares issued 10 10
Class B preferred stock, 0 and
231,976 shares issued 232
Class C preferred stock, 125,000
and 0 shares issued 125
Common stock, $.008 par value;
authorized 6,250,000 shares;
5,292,238 and 2,631,544
shares issued 42,338 21,052
Capital in excess of par value 13,460,958 11,227,696
Accumulated deficit (11,829,706) (10,567,547)
Deferred compensation (45,807) (263,065)
Treasury stock, at cost, 77,125
shares of common stock (484,824) (484,824)
- ------------------------------------------------------------------------
1,143,093 (66,446)
- ------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 3,232,789 $ 1,732,898
========================================================================
<CAPTION>
See accompanying report of independent certified public accountants and
notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
FIRST ENTERTAINMENT, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31, 1996 and 1995
1996 1995
<S> <C> <C>
REVENUE
Live entertainment $ 1,255,735 $ 1,051,993
Radio 713,322 678,685
Video 105,618 31,177
Retail 18,755
Other 46,021 55,005
- -------------------------------------------------------------------------
2,139,451 1,816,860
- -------------------------------------------------------------------------
COSTS AND EXPENSES
Cost of sales, live entertainment 1,078,043 899,585
Cost of products sold, radio 512,299 502,438
Cost of products sold, video 9,483 19,913
Cost of sales, retail 17,540
Depreciation and amortization 326,522 334,164
Management and administrative fees,
affiliate (Note I) 408,000 201,000
Selling, general and administrative 1,394,683 1,373,833
- -------------------------------------------------------------------------
3,746,570 3,330,933
- -------------------------------------------------------------------------
OPERATING LOSS FROM CONTINUING OPERATIONS (1,607,119) (1,514,073)
- --------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest expense (102,791) (196,698)
Other, net 22,961 55,468
- -------------------------------------------------------------------------
(79,830) (141,230)
- -------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS
BEFORE MINORITY INTEREST (1,686,949) (1,655,303)
MINORITY INTEREST IN NET LOSS OF
SUBSIDIARY 39,655
- --------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS (1,647,294) (1,655,303)
DISCONTINUED OPERATIONS (Note D)
Loss from operations of discontinuance
of Image (28,570) (593,674)
Estimated Loss on disposal of Image,
including provision of $60,000
for operating losses during
phaseout period (1,609,208)
Gain on sale of Image 413,704
- ---------------------------------------------------------------------------
NET LOSS $ (1,262,160) $ (3,858,185)
============================================================================
NET LOSS PER COMMON SHARE, CONTINUING
OPERATIONS $ (.39) $ (.70)
- --------------------------------------------------------------------------
NET INCOME (LOSS) PER COMMON SHARE,
DISCONTINUED OPERATIONS $ .09 $ (.93)
- -------------------------------------------------------------------------
NET LOSS PER COMMON SHARE $ (.30) $ (1.63)
- --------------------------------------------------------------------------
WEIGHTED-AVERAGE NUMBER OF
SHARES OUTSTANDING 4,168,661 2,363,231
- --------------------------------------------------------------------------
</TABLE>
[CAPTION]
See accompanying report of independent certified public accountants and notes
to consolidated financial statements.
<TABLE>
<CAPTION>
FIRST ENTERTAINMENT, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders Equity (Deficit)
For the Years Ended December 31, 1996 and 1995
Class A Class B Class C
Preferred Stock Preferred Stock Preferred Stock
Shares Amount Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C>
BALANCES,
JANUARY 1, 1995 13,469 $13 231,976 $232
Common stock issued
for:
Cash, net of offering
costs
Consulting services
Settlement of accounts
Exercise of stock
Conversion of Class A
preferred (2,780) (3)
Conversion of
Notes Payable
Common stock options,
issued for services
Return of Common
Stock Issued
for Polton
Acquisition
Retirement of
Treasury Stock
Amortizaiton of
deferred
compensation
Net loss
BALANCES,
DECEMBER 31,
1995 10,689 10 231,976 232
Preferred stock
issued for:
Acquisition of
property 275,000 275
Common stock
issued for:
Consulting services
Exercise of
stock options
Conversion of
Class B
preferred (231,976) (232)
Conversion of
Class C
preferred (150,000) (150)
Inventory and rights
Business combination
Common stock options,
issued for
services
Amortization of
deferred
compensation
Net loss
BALANCES,
DECEMBER 31,
1996 10,689 $10 0 $ 0 125,000 $125
Common Stock Capital In Excess Accumulated
Shares Amount of Par Value Deficit
<S> <C> <C> <C> <C>
BALANCES,
JANUARY 1,1995 1,919,872 $15,359 $8,869,076 ($6,709,362)
Common stock issued
for:
Cash, net of
offering
costs 125,000 1,000 133,400
Consulting services 194,250 1,553 699,476
Settlement of
accounts payable 33,450 268 192,108
Exercise of stock
options 362,500 2,900 952,514
Conversion of
Class A
preferred 695 6 (3)
Conversion of
Notes Payable 70,777 566 258,275
Common stock
options,
issued for
services 440,250
Return of Common
Stock Issued
for Polton
Acquisition
Retirement of
Treasury Stock (75,000) (600) (317,400)
Amortizaiton of
deferred
compensation
Net loss (3,858,185)
BALANCES,
DECEMBER 31,
1995 2,631,544 21,052 11,227,696 (10,567,547)
Preferred stock
issued for:
Acquisition of
property 274,725
Common stock
issued for:
Consulting
services 532,700 4,262 529,579
Exercise of
stock options 50,000 400 22,100
Conversion of
Class B
preferred 57,994 464 (232)
Conversion of
Class C
preferred 150,000 1,200 (1,050)
Inventory and
rights 1,100,000 8,800 1,141,200
Business
combination 770,000 6,160 401,940
Common stock
options,
issued for
services 15,000
Amortization
of deferred
compensation
Net loss (1,262,160)
BALANCES,
DECEMBER 31,
1996 5,292,238 $42,338 $13,460,958 ($11,829,707)
Deferred Investment Treasury
Compensation in Polton Stock Total
<S> <C> <C> <C> <C>
BALANCES,
JANUARY 1,1995 ($10,417) ($318,000) ($484,824) $1,362,077
Common stock
issued for:
Cash, net of
offering
costs 134,400
Consulting
services (254,250) 446,779
Settlement of
accounts payable 192,376
Exercise of stock
options 955,414
Conversion of
Class A
preferred 0
Conversion of
Notes Payable 258,841
Common stock
options,
issued for
services (191,000) 249,250
Return of Common
Stock Issued
for Polton
Acquisition 318,000 (318,000) 0
Retirement of
Treasury Stock 318,000 0
Amortizaiton of
deferred
compensation 192,602 192,602
Net loss (3,858,185)
BALANCES,
DECEMBER 31,
1995 (263,065) (484,824) (66,446)
Preferred stock
issued for:
Acquisition of
property 275,000
Common stock
issued for:
Consulting
services 533,841
Exercise of
stock options 22,500
Conversion of
Class B
preferred
Conversion of
Class C
preferred
Inventory and
rights 1,000,000
Business
combination 408,100
Common stock
options,
issued for
services 15,000
Amortization
of deferred
compensation 217,258 217,258
Net loss (1,262,160)
BALANCES,
DECEMBER 31,
1996 ($45,807) ($484,824) $1,143,093
</TABLE>
<TABLE>
<CAPTION>
FIRST ENTERTAINMENT, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1996 and 1995
1996 1995
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (1,262,160) $ (3,858,185)
Adjustments to reconcile net loss
to net cash used in operations
Depreciation and amortization 326,522 369,564
Write-off of goodwill 13,452
Amortization of Image inventory
purchase valuation 160,000
Loss on investments 125,000
Debt settlements (21,342) (176,717)
(Gain) loss on disposal of Image (413,704) 1,609,208
Issuance of stock for services and common
stock options, net 766,098 888,632
Minority interest in net loss of subsidiary (39,655) (78,950)
Changes in operating assets and liabilities:
Receivables 111,614 (32,333)
Inventories (29,048) 18,399
Other assets (221) 7,792
Accounts payable 52,433 (53,900)
Accrued liabilities 369,492 129,062
Cash provided by (used in)
discontinued operations (19,048) 131,371
- ---------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (159,019) (747,605)
- ----------------------------------------------------------------------------
<CAPTION>
See accompanying report of independent certified public accountants and
notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
FIRST ENTERTAINMENT, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
For the Years Ended December 31, 1996 and 1995
1996 1995
<S> <C> <C>
INVESTING ACTIVITIES
Capital expenditures (45,660) (62,229)
Advances to related (10,000)
Repayment from related parties 100,000
Cash used in discontinued operations (4,029)
- ------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 44,340 (66,258)
- -------------------------------------------------------------------------
FINANCING ACTIVITIES
Principal payments on debt (66,453) (132,856)
Proceeds from issuance of stock of subsidiary 150,000
Proceeds from issuance of common stock 22,500 1,089,814
Checks issued against future deposits (40,039)
Cash used in discontinued operations (93,712)
- ------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 106,047 823,207
- ------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (8,632) 9,344
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 71,488 62,144
- -----------------------------------------------------------------------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 62,856 $ 71,488
========================================================================
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Interest paid $ 98,054 $ 72,123
- -----------------------------------------------------------------------
Income taxes paid $ 0 $ 0
- -----------------------------------------------------------------------
<CAPTION>
See accompanying report of independent certified public accountants and
notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
FIRST ENTERTAINMENT, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
For the Years Ended December 31, 1996 and 1995
1996 1995
<S> <C> <C>
SUPPLEMENTAL SCHEDULE OF
NONCASH INVESTING AND
FINANCING ACTIVITIES
Notes payable and accrued interest
converted into common stock $ 258,840
- ----------------------------------------------------------------------------
Accounts payable and accrued expenses
converted into common stock $ 192,376
- ----------------------------------------------------------------------------
Issuance of common stock for
inventory and other licensing rights $ 1,000,000
- ----------------------------------------------------------------------------
Issuance of preferred stock
for acquisitions $ 275,000
- ----------------------------------------------------------------------------
Treasury stock acquisition and retirements $ 318,000
- ----------------------------------------------------------------------------
Mortgage notes assumed or provided in
property acquisitions $ 150,000 $ 57,600
- ----------------------------------------------------------------------------
Common stock and options issued for
services $ 548,841 $1,141,280
- ----------------------------------------------------------------------------
Common stock issued for investment
in subsidiary $ 408,100
- ----------------------------------------------------------------------------
Liabilities assumed for investment
in subsidiary $ 130,544
- ----------------------------------------------------------------------------
Conversion of liabilities assumed
for investment in subsidiary
to minority interest $ 100,000
- ----------------------------------------------------------------------------
Rights acquired for note payable $ 800,000
- ----------------------------------------------------------------------------
Inventory seized in settlement for
notes payable $ 800,000
- ----------------------------------------------------------------------------
Inventory seized resulting in
accounts receivables, other $ 200,000
- ----------------------------------------------------------------------------
<CAPTION>
See accompanying report of independent certified public accountants and
notes to consolidated financial statements.
</TABLE>
[CAPTION]
FIRST ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A NATURE OF BUSINESS AND GOING CONCERN
First Entertainment, Inc. (the "Company") was incorporated as a Colorado
corporation on January 17, 1985. The Company and its subsidiaries are
involved in entertainment through several media: its video segment
produces and markets travel videos; its live entertainment segment owns
and operates a comedy club; and its radio station, 100.7 The Fox
operates in Gillette, Wyoming. In 1995, the Company discontinued its
copyrights and proprietary properties division which consisted of the
publication of books and the printing of art.
During the period from inception (January 17, 1985) to December 31, 1996,
the Company has incurred cumulative net losses of approximately $11.8
million and, as of December 31, 1996, had an excess of current liabilities
over current assets of approximately $1.3 million, and is in default on a
significant portion of its debt. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. The Company
is dependent upon obtaining additional financing, and/or extending its
existing debt obligations, and/or obtaining additional equity capital and
ultimately achieving profitable operations. The accompanying consolidated
financial statements do not include any adjustments that might result from
the outcome of these uncertainties.
Management's plans with regard to the Company's ability to continue as a
going concern include continued raising of equity financing in the U.S.
and/or international markets, completing negotiations for improved
domestic and international distribution channels for its products,
restructuring of its debt obligations, evaluating mergers or acquisitions
to improve market share or operational synergies and improving efficiency
of operations.
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation The accompanying consolidated financial
statements include the accounts of the Company and its subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
Use of Estimates The preparation of financial statements in conformity
with generally accepted accounting principles necessarily requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts
of revenues and expense during the reporting periods. Actual results could
differ from those estimates.
Inventories Inventories are stated at the lower of cost or market value
(first-in, first-out basis). Inventories are comprised of video cassettes
and liquor supplies.
Property and Equipment The Company has a library of master video tapes
and film cost inventory related to its video product line. Capitalized
costs, when completed, are amortized over the estimated economic life of
the master tape, generally not in excess of seven years. The excess, if
any, of the capitalized costs of master tapes over anticipated gross
revenues is charged to expense. As of December 31, 1996 and 1995, the
aggregate net book value of the master tape library and film cost
inventory was approximately $64,000 and $74,000.
Production equipment, furniture and other equipment are recorded at cost
and depreciated using straight-line and declining balance methods over the
estimated useful lives of the assets, ranging from three to fifteen years.
Leasehold improvements are recorded at cost and are amortized on a
straight-line basis over their estimated useful lives, but not in excess
of the lease term.
The cost and related accumulated depreciation and amortization of assets
sold or retired are removed from the appropriate asset and accumulated
depreciation and amortization accounts and the resulting gain or loss is
reflected in operations.
Maintenance and repairs are charged to operations as incurred and
expenditures for major improvements are capitalized.
License, Goodwill and Intangibles Broadcast licenses, goodwill and
intangibles, consisting of copyright rights, are amortized on a straight-
line basis over a period of 10 to 20 years.
Periodically the Company reviews the recoverability of its intangible
assets based on estimated undiscounted future cash flows from operating
activities compared with the carrying value of the intangible assets.
Should the aggregate future cash flows be less than the carrying value, a
write-down would be required measured by the difference between the
undiscounted future cash flow and the carrying value of the intangible
assets.
Revenue Recognition Video cassette sales and copyrighted materials are
generally recorded upon shipment. Broadcast fees are recorded as revenue
when the broadcast is aired. Live Entertainment revenues are recognized
at the time of the performance, generally nightly. Retail sales are
recognized at the time the merchandise is sold and are net of returns.
Net Loss Per Share Net loss per share is computed on the basis of the
weighted-average number of shares outstanding during the respective
periods presented. The assumed conversion of stock options, warrants,
debentures and convertible preferred stock would be antidilutive for all
periods presented and are not included in the computation of weighted-
average shares.
Concentration of Risk Financial instruments which potentially expose the
Company to concentration of credit risk consist primarily of cash
equivalents and accounts receivable with the Company's various customers.
The Company establishes an allowance for doubtful accounts based on
factors surrounding the credit risk of specific customers, historical
trends and other information.
The Company maintains all cash in bank deposit accounts which at times may
exceed federally insured limits. The Company has not experienced losses
in such accounts.
Reclassifications Certain balances in the 1995 consolidated financial
statements have been reclassified in order to conform to the 1996
presentation. The reclassifications had no effect on financial condition
or results of operation.
Income Taxes The Company accounts for income taxes under Statement of
Financial Accounting Standard No. 109 (SFAS No. 109). Temporary
differences are differences between the tax basis of assets and
liabilities and their reported amounts in the financial statements that
will result in taxable or deductible amounts in future years.
Deferred Compensation Deferred compensation results from granting stock
options at option prices less than the fair market value of the stock on
the date of grant, under agreements with terms extending beyond one year.
Deferred compensation is initially charged to stockholders' equity and
amortized to expense over the term of the related agreement.
Cash Equivalents The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to
be cash equivalents.
Financial Instruments The following methods and assumptions were used to
estimate the fair value of each class of financial instruments for which
it is practicable to estimate that value;
Notes Payable These notes substantially bear interest at a floating rate
of interest based upon the lending institutions prime lending rate.
Accordingly, the fair value approximates their reported carrying amount at
December 31, 1996 and 1995.
Mortgage Notes Estimated based upon current market borrowing rates for
loans with similar terms and maturates.
The estimated fair values of the Company's financial instruments for
continuing operations are as follows:
<TABLE>
December 31, 1996 December 31, 1995
<S> <C> <C> <C> <C>
Financial Liabilities Carrying Fair Carrying Fair
Notes Payable Amount Value Amount Value
and Mortgage Notes $1,060,876 $1,060,876 $977,329 $977,329
Stock Option Plans The Company applies APB Opinion 25, Accounting for
Stock Issued to Employees, and related Interpretations in accounting for
all stock option plans. Following the guidance of APB Opinion 25,
compensation cost has been recognized for stock options issued to
employees as the excess of the market price of the underlying common stock
on the date of the grant over the exercise price of the Company's stock
options on the date of the grant.
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
Company to provide pro forma information regarding net income as if
compensation cost for the Company's stock option plans had been determined
in accordance with the fair value based method prescribed in SFAS No. 123.
To provide the required pro forma information, the Company estimates the
fair value of each stock option at the grant date by using the Black-
Scholes option-pricing model.
NOTE C ACQUISITIONS
Power Media
In July, 1996, the Company issued 770,000 shares of its restricted common
stock, valued at $408,100, in exchange for 18,000 of the 25,000 then
issued and outstanding shares of Power Media Communications International,
Inc. (Power Media), or 72% ownership. Power Media was a substantially
dormant company that had developed the concept of selling informercial
products in kiosks primarily located in retail malls. The Company
purchased Power Media because it considers the concept viable and, with
proper management and working capital, profitable
At the time of the acquisition, Power Media had net liabilities of
approximately $130,000, as such, the total purchase price for Power Media
was approximately $538,100. The acquisition of Power Media was accounted
for as a purchase and the purchase price in excess of net assets acquired
was allocated to goodwill. Amortization of goodwill is computed on a
straight line basis over 10 years. Since operations of Power Media prior
to the Company's acquisition were not material, no proforma information
has been provided.
In November 1996, a new entity was formed called The Best Of As Seen on
TV, Inc. (ASOTV) for the purpose of acquiring all of the issued and
outstanding common stock of Power Media and to provide original
incorporators with ownership in ASOTV. The original incorporators of
ASOTV were issued 464,000 shares of ASOTV for par value ($.001 per share),
which included 220,800 shares issued to NMG, LLP, an entity owned by the
wife of the president of the Company. ASOTV then issued 1,015,000 shares
of common stock to the Company for their 18,000 shares of Power Media and
issued 324,500 shares to an unrelated party for the remaining 7,000 shares
of Power Media. In addition, ASOTV received a stock subscription from the
previous owner of the 7,000 shares of Power Media to purchase
approximately 325,000 shares of common stock of ASOTV for $150,000, of
which $100,000 was received in 1996. As a result of the above
transactions, ASOTV owned 100% of Power Media and the Company owned
approximately 56 percent of ASOTV as of December 31, 1996.
The operations of Power Media and ASOTV are included in the accompanying
statements from the date of acquisition.
Minority interest at December 31, 1996 includes $100,000 of convertible
preferred stock of ASOTV.
Polton
On May 10, 1994, the Company acquired approximately 80% of the issued and
outstanding common stock of the Polton Corporation ("Polton") by issuing
75,000 shares of the Company's restricted common stock valued at $318,000.
In addition, the Company advanced Polton $200,000 for working capital.
Polton is primarily engaged in the manufacturing and distribution of
compact discs and cassettes for Warner Music labels.
Shortly after the consummation of the Polton acquisition a dispute arose
between the Company and Polton whereby Polton refused to provide financial
information to the Company necessary to report the consolidated results of
operations since the date of acquisition. Because the Company did not have
the ability to exercise significant influence over operating and financial
policies, Polton was accounted for using the cost method.
In November, 1995, the Company reached an agreement with Mr. Gary Firth,
president of Polton, and Polton whereby Mr. Firth will return the 75,000
shares of the Company's common stock and repay $100,000 of the $200,000
advanced as working capital. The agreement resulted in a write down of
the note receivable of $100,000 which has been reflected in the
accompanying consolidated statement of operations in selling, general and
administrative expenses during 1995.
NOTE D DISCONTINUED OPERATIONS
On September 6, 1994, the Company purchased approximately 84% of the
issued and outstanding common stock of Image Marketing Group, Inc.
("Image"). Image, an art publisher, had expanded its business activities
to include the development and exploitation of copyrighted properties in
multi-media marketing formats.
In November 1995 the Board of Directors decided to discontinue the
operations of Image. Accordingly, the assets of Image were written down
to their estimated net realizable value resulting in a write down of $1.6
million. In April, 1996, the Company sold Image to a former director for
$1,000 resulting in a gain on the disposition of Image of approximately
$413,000. At the time of the disposition of Image, Image had negative
net assets of approximately $414,000.
The accompanying 1995 financial statements include an estimated loss on
disposal of Image of $1,609,208, which includes a provision for
anticipated operating losses until disposition of $60,000.
</TABLE>
<TABLE>
Summarized balance sheet data for the discontinued operations as of December
31, 1995 is as follows:
1995
<S> <C>
ASSETS
Accounts receivable $ 100,000
Inventory 350,000
Other 34,318
- -------------------------------------------------------------------------
Total current assets 484,318
Property, plant and equipment, net 188,721
- --------------------------------------------------------------------------
Total 673,039
- --------------------------------------------------------------------------
LIABILITIES
Current liabilities 970,604
- -------------------------------------------------------------------------
Total 970,604
- ------------------------------------------------------------------------
Net liabilities of discontinued operations $ (297,565)
- --------------------------------------------------------------------------
</TABLE>
NOTE E RADIO STATION OPERATIONS
The Company operates a radio station in Gillette, Wyoming. The assets of
the radio station are collateral on certain bank debt.
On December 1, 1993, the Company executed notes bearing a principal
balance of $588,257 and interest at seven percent per annum to replace
certain past-due notes. The notes were renegotiated during December 1996,
extending the due date to November 20, 1997 with monthly principal and
interest payments of $5,250 at nine percent per annum.
In order to obtain an extension of the maturity date of the notes in 1993,
the bank required the Company to issue 50,000 shares of its common stock
to Quality Communications as collateral. The Company then granted the
bank a security interest in the 50,000 common shares such that, upon
default or nonperformance under the terms of the notes, the bank may sell
the 50,000 common shares. The Company agreed to make all necessary
filings to register the collateral to provide for its free trading by
August 1, 1994. Such shares have not been registered as of December 31,
1996 but the shares are no longer restricted and are free trading. The
Company has recorded the issuance of the 50,000 common shares as treasury
stock in the accompanying consolidated financial statements.
NOTE F NOTES PAYABLE AND LONG-TERM DEBT
The Company is not in compliance under the original terms of substantially
all of its debt obligations. In an effort to restructure its debt, a
number of the terms of the original loans were rewritten and/or
renegotiated. However, the majority of these notes are past due and due at
various times over the next year. Creditors may commence execution of
judgments already obtained or commence legal proceedings to obtain
judgments. Substantially all of the Company's assets are pledged as
collateral to one or more obligations. Notes that are not in compliance
are classified as current liabilities.
<TABLE>
December 31,
1996 1995
<S> <C> <C>
Notes payable, First National Bank
Gillette (See Note E) $ 458,719 $ 479,364
Note payable to the State of Wyoming(1) 300,000 300,000
Mortgage note payable(2) 149,561
Mortgage note payable(3) 54,390 54,808
Note payable, creditor(4) 19,224 18,475
Various notes payable individuals and
companies(5) 78,982 124,682
Discontinued Operations:
Notes payable bank 500,324
Capital lease obligations 38,397
- ----------------------------------------------------------------------------
1,060,876 1,516,050
Less current portion 861,392 923,048
Less amount included in net assets of
discontinued operations 538,721
- ----------------------------------------------------------------------------
Long-term debt $ 199,484 $ 54,281
- ----------------------------------------------------------------------------
</TABLE>
<TABLE>
Future maturities of debt as of December 31, 1996 are as follows:
<C> <C>
1997 $ 861,392
1998 4,901
1999 5,381
2000 5,906
Thereafter 183,296
Total $ 1,060,876
</TABLE>
(1) In February 1989, the Company borrowed $300,000 from the State of
Wyoming for the purpose of purchasing equipment, inventory and to
provide working capital necessary to establish a video duplicating
facility. As of December 31, 1996, the Company has not yet
established an operating duplicating facility and was in violation of
several of the compliance requirements of this note. Although the
note, by its original terms, is not due until March 1, 1999, the
State of Wyoming has deemed the note to be currently due as a result
of the violations of the compliance requirements. The note, with
default interest at 16.5 percent, is due in daily installments of
$150, and is collateralized by the Company's master tape library.
(2) Note payable, trust; interest at 9.5%; monthly principal and
interest of $1,500; final payment due October 2012; collateralized by
real property.
(3) Note payable to mortgage company; interest at 8.015% per annum;
monthly principal and interest payments of $403 for 59 months with a
balloon payment of $53,000 due August 1, 2000; collateralized by
certain property and equipment.
(4) Note payable to a trade creditor dated October 21, 1993; interest
at 10 percent; due on May 1, 1996; collateralized by the Company's
master tape inventory and subordinated to previously filed liens.
(5) Various notes payable in default; due to various individuals and
companies with rates ranging from 10 to 21 percent per annum.
NOTE G STOCKHOLDERS' EQUITY
The Company has the authority to issue 5,000,000 shares of preferred
stock and 6,250,000 shares of common stock. The Board of Directors has
the authority to issue such preferred shares in series and determine the
rights and preferences of the shares.
On January 18, 1996 the Board of Directors amended the Articles of
Incorporation creating a Class C preferred stock. Of the 5,000,000
shares of preferred stock authorized, 3,000,000 shall be designated as
Class A, 1,000,000 shall be designated as Class B and 1,000,000 shall be
designated as Class C.
On April 9, 1996, the Board of Directors approved a 4 for 1 reverse stock
spilt. Accordingly, all references in the consolidated financial
statements to average number of shares outstanding and related prices,
per share amounts, common stock purchase rights, stock option plan data
and shares issued have been restated to reflect the reverse stock split.
The Class A shares have annual cumulative dividends of 7% per annum,
redeemable by the Company by November 18, 1996, convertible into common
stock on a four-for-one basis and carry a liquidation preference of
approximately $15,000.
The Class B shares have annual cumulative dividends of 6%, payable
quarterly if and when declared, redeemable by the Company into common
stock at of the Company at the option of the Company upon terms and
conditions to be established by the Corporation prior to the issuance of
Class B preferred stock and is subordinated to Class A shares.
The Class C shares have no dividends and are convertible into common
stock at a conversion price of Class C preferred stock equal to the
average previous thirty day bid price of the Common Stock on the date of
conversion. The rights of the Class C shall be subordinate to Class A
and Class B shares.
Common Stock Options In June 1994, the Company adopted a Non-Qualified
Stock Option Plan, under which the Company's Board of Directors are
authorized to issue options to purchase up to 62,500 shares of the
Company's common stock to qualified employees, officers and directors of
the Company. The option price may be changed at the discretion of the
Board of Directors. No options have been issued under this plan,
therefore, no pro forma net loss or net loss per share amounts have been
provided as set forth under provisions of SFAS No. 123. During 1996 and
1995, the Company has also issued other non-qualified stock options to
non-employees under terms and at prices deemed appropriate by the Board
of Directors.
<TABLE>
The following is a summary of the number of shares under option:
Weighted
Average
Non-Qualifying Exercise Expiration
Stock Options Price Dates
<S> <C> <C> <C>
Balance, January 1, 1995 241,250 $3.61 1995-1998
Granted 425,000 .74 1995-1996
Exercised (337,500) .87
Expired (233,750) 2.39
- ---------------------------------------------------------------------
Balance, December 31, 1995 95,000 3.49 1996-1998
Granted 50,000 .75 1996
Exercised (50,000) .75
Expired
======================================================================
Balance, December 31, 1996 95,000 $3.49
========================================================================
</TABLE>
<TABLE>
The following table summarized information about stock options
outstanding and exercisable as of December 31, 1996:
Weighted
Average Weighted
Range of Number Remaining Average
Exercise Prices Outstanding & Contractual Exercise
From To Exercisable Life in Years Price
<C> <C> <C> <C> <C>
$ .40 $ .40 35,625 0.8 $ 0.40
$ 4.00 $ 6.40 57,500 0.7 $ 5.18
$10.40 $10.40 1,875 1.8 $ 10.40
95,000
</TABLE>
NOTE H 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>
<S> <C> <C>
Deferred tax assets: 1996 1995
Net operating loss carryforwards $ 4,195,000 $ 3,325,000
Property, equipment, other assets, net 42,000
Stock bonus accrual 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)
- ----------------------------------------------------------------------------
Subtotal 104,000
Deferred tax liability:
Property and equipment (104,000)
- ----------------------------------------------------------------------------
Net deferred taxes $ -0- $ -0-
- ----------------------------------------------------------------------------
</TABLE>
A valuation allowance has been recorded equal to the net deferred tax
asset, as management was not able to determine if it is more likely than
not that the deferred tax assets will not be realized.
The valuation allowance increased $560,000 in 1996 and $1,158,000 in
1995.
The following summary reconciles the income taxes at the statutory rate
of 34% in 1996 and 1995 with the actual taxes:
<TABLE>
1996 1995
<S> <C> <C>
Benefit computed at the statutory
rate-continuing operations $ ( 560,000) $ (563,000)
Discontinued operations (595,000)
Valuation allowance 560,000 1,158,000
- --------------------------------------------------------------------------
Provision for income taxes $ 0 $ 0
</TABLE>
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 through 2011.
NOTE I RELATED PARTY TRANSACTIONS
In July 1986, the Company entered into a ten-year operating lease
agreement with a trust controlled by a former officer of the Company for
an office building and land which houses the Company's radio station.
Annual rent was $21,000. The Company also leased land which is occupied
by its radio tower from an entity controlled by a former officer of the
Company. The lease had a ten-year term beginning in 1992 with an annual
rent of $5,400. In April 1996, the Company acquired the office building
and land which houses its radio station and the land occupied by its
radio tower for $425,000. The Company issued 275,000 shares of Class C
Preferred Stock valued at $275,000 and a mortgage note in the amount of
$150,000. In 1996, 150,000 shares of the Class C Preferred Stock were
converted into 150,000 shares of common stock.
Commencing April 1995, the Company contracted out some administrative,
management and accounting functions of the Company to a company owned by
the former president and a Director of the Company. Monthly fees for
such services were $15,000 for the period April 1 to July 31, 1995 and
$20,000 thereafter. In addition, a one time start-up fee of $25,000 was
also paid. Total fees for 1996 and 1995 were $240,000 and $201,000. The
affiliated company sub-leases office space from the Company on a month-
to-month lease for $500 per month. In addition, the Company accrued a
stock bonus of $168,000 due to the service company payable in common
stock which was issued in February 1997.
NOTE J COMMITMENTS
Lease Commitments The Company has long-term operating lease agreements
for office space, building, and certain equipment. Future minimum lease
payments required under long-term leases in effect at December 31, 1996
are as follows:
<TABLE>
<S> <C> <C>
1997 $121,649
1998 38,349
1999 9,950
$169,948
</TABLE>
Rent expense for continuing operations was $165,047 and $179,121 in 1996
and 1995. Rent expense for discontinued operations was $261,903 in 1995.
NOTE K LITIGATION
In January 1996, the Company, AB Goldberg, Harvey Rosenberg and several
other related and unrelated parties were named as defendants in a lawsuit
filed by Sterling Consulting Corporation as Receiver for Indian
Motorcycle Manufacturing, Inc. (IMMI). The complaint alleges
interference by defendants in the business of IMMI, conflicts of interest
of AB Goldberg, breach of fiduciary duty, unjust enrichment, and
bankruptcy fraud.
In July 1996, the Company filed suit against the Receiver alleging
intentional interference of contracted relationships and breach of
licensing agreements.
In February 1997, the Company agreed to terms of a Settlement Agreement
with the Receiver whereby the Company would relinquish all rights to the
Indian Motorcycle Trademark and pay the Receiver approximately $114,000.
Such amount has been reflected in the accompanying financial statement as
of December 31, 1996.
NOTE L FOURTH QUARTER ADJUSTMENTS
During the fourth quarters of 1996 and 1995, the Company recorded the
following year-end adjustments, which it believes are material to the
results of that quarter:
<TABLE>
1996 1995
Effect of Balzac dispute resolution
(see Note N):
<S> <C> <C>
Decrease in inventory $ 1,000,000
Decrease in notes payable $ 800,000
Increase in accounts receivable $ 200,000
Effect of Indian Motorcycle settlement
(See Note K and M):
Decrease in receivables $ 143,000
Decrease in certain rights $ 300,000
Increase in accrued settlement $ 114,000
Decrease in stockholders equity $ 300,000
Decrease in amortization expense
due to the above $ 127,500
Write-off of goodwill $ 144,793
Write-down of assets of
discontinuedoperations to net
realizable value $ 1,609,208
</TABLE>
NOTE M SETTLEMENTS AND RESCISSIONS
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 the settlement discussed in Note K, the
Company relinquished the rights acquired and the 300,000 shares of Class
C Preferred stock were returned to the Company.
The transactions described above relating to Indian Licensing have been
rescinded in the accompanying financial statements effective from the
date the transactions were entered into as if the transactions did not
occur.
NOTE N SUBSEQUENT EVENT
Balzac, Inc.
In April 1996, the Company acquired certain assets from 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 obligation under the License Agreement.
In April 1997, Balzac and the Company entered into an agreement whereby
Balzac will buy back the Australian Licensing Agreement for $800,000 and
will repay the Company $200,000 which was the difference between the
value of the seized inventory and the obligation under the licensing
agreement. The $1,000,000 will be paid over forty months at 8% per
annum.
NOTE O SEGMENT INFORMATION
Financial information by industry segments for the years ended December 31,
1996 and 1995 is summarized as follows:
<TABLE>
Live
Radio Video Entertainment Retail
<S> <C> <C> <C> <C>
FOR THE YEAR
ENDED
DECEMBER 31,
1996
Revenue
unaffiliated $ 713,322 $ 105,618 $ 1,255,735 $ 18,753
Revenue
affiliated
Operating
income
(loss),
continuing
operations 51,606 (110,865) 84,134 (65,628)
Identifiable
assets 1,383,683 1,005,280 259,776 601,247
Depreciation
and
amortization 77,549 207,000 3,841 26,932
Capital
expenditures 439,193 1,322 29,512
FOR THE YEAR
ENDED
DECEMBER 31,
1995
Revenue
unaffiliated $ 678,685 $ 31,177 $ 1,051,993
Revenue
affiliated
Operating
income
(loss),
continuing
operations 83,474 11,264 170,939
Identifiable
assets 1,015,647 258,102 177,129
Depreciation
and
amortization 84,325 231,020 1,920
Capital
expenditures 31,855 62,486
</TABLE>
<TABLE>
Other Segments Eliminations Consolidated
<S> <C> <C> <C>
FOR THE YEAR
ENDED
DECEMBER 31,
1996
Revenue
unaffiliated $ 46,023 $ $2,139,451
Revenue
affiliated 175,956 (175,956)
Operating
income
(loss),
continuing
operations (1,566,366) (1,607,119)
Identifiable
assets 2,175,180 (2,192,377) 3,232,789
Depreciation
and
amortization 11,200 326,522
Capital
expenditures 633 470,660
FOR THE YEAR
ENDED
DECEMBER 31,
1995
Revenue
unaffiliated $ 55,005 $ $1,816,860
Revenue
affiliated 293,652 (293,652)
Operating
income
(loss),
continuing
operations (1,779,750) (1,514,073)
Identifiable
assets 3,889,944 (3,607,924) 1,732,898
Depreciation
and
amortization 16,899 334,164
Capital
expenditures 25,488 119,829
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no disagreements with BDO Seidman, LLP with regard to matters
of accounting principle or disclosure.
PART III
Item 9. Directors , Executive Officers , Promoters and Control Persons
Information concerning the Directors and Executive Officers of the
Company is as follows:
Tenure as Officer
Name Age Position or Director
A. B. Goldberg 49 Director April 1993 to present
President and Commencing February 1995
Chief Executive Officer
Dr. Theodore Jacobs 56 Director November 1996 to present
Dr. Nick Catalano 56 Director March 1992 to present
Burt Katz 72 Director December 1994 to present
Cindy Jones 42 Secretary and April 1994 to present
Treasurer
All of the Directors' terms expire at the next annual meeting of
shareholders or when their successors have been elected and qualified.
The Officers of the Company serve at the pleasure of the Board of
Directors.
The following sets forth background information concerning the above
Directors and Executive Officers:
Dr. Nick Catalano is presently serving in his twenty-fourth year as
professor of English Literature, Communications and music at Pace
University, New York City. He is also the University's director for the
Performing Arts. Over the past several years, he has been a
writer/producer for several television network shows, including The Bill
Cosby Show, PBS documentaries, Doug Hennings' The World of Illusion, and
TV specials for Richard Belzer on HBO. Dr. Catalano has produced
travelogue videos for Video Trips on Greece, the Greek Islands, Utah, St.
Martin and is currently completing the Hamptons. In addition, he is the
founder of "The Big Apple Comedy Showcase" at Pace University, now in its
18th year. It is the oldest college comedy series in the country.
Abraham "A.B." Goldberg has been employed by First Films as Executive
Producer and Financial Consultant since January 1987. Mr. Goldberg
served as Executive Producer for "Almost Blue" and "The Amityville
Curse." In addition, he served as Executive Producer for "Mind Killer,"
"Night Vision" and "Lone Wolf." Mr. Goldberg has been an independent
consultant and has advised several film companies, beginning in 1977 with
Innovations/ECA, which produced "The Buddy Holly Story" starring Gary
Busey and "Under The Rainbow" starring Chevy Chase and Carrie Fisher. He
also advised Robert Halmi Productions, a New York-based production
company which was merged with Hal Roach Studios and later acquired by
Quintex Entertainment. Mr. Goldberg served as President of Harvard
Financial Group, an independent investment consulting firm, from November
1976 through April 1982. Since April 1982, Mr. Goldberg has consulted
with a variety of businesses, including First Films. Mr. Goldberg earned
a Bachelor's Degree in Finance from the University of Colorado, Boulder,
Colorado in 1969 and attended the University of Denver College of Law.
Mr. Goldberg was elected President and Chief Executive Officer in
February 1995.
Burton Katz. Mr. Katz graduated from New York University and the United
States Military Academy at West Point. Mr. Katz has over forty years
experience in the image publishing business. He founded the Company's
former wholly owned subsidiary, Bernard Picture Co., Inc., in 1951 and
relocated the business to Stamford, Connecticut in 1979. His extensive
experience includes all aspects of art publishing, including printing,
matting, silk screening and picture framing.
Dr. Theodore Jacobs, M.D. graduated from New York Medical College in
1955 where he was honored by achieving the highest award to a graduating
medical student. Dr. Jacobs was Board Certified in Internal Medicine in
1962 and Re-Certified in 1977. Since 1963, Dr. Jacobs has worked in
private practice in Internal Medicine in an office in Las Vegas, Nevada.
Dr. Jacobs has served as a member of the Nevada State Board of Medical
Examiners, serving for fifteen years as president from 1980 to 1995. Dr.
Jacobs is currently a Clinical Professor of Medicine, University of
Nevada School of Medicine and Member, Advisory Board to the Dean of the
School of Medical Sciences, University of Nevada/Reno. Dr. Jacobs is a
member of the Board of Directors of Nevada Dance Theater, Las Vegas
Symphonic and Chamber Music Society and the Nevada Opera Theater. Dr.
Jacobs has received numerous awards for outstanding achievement and
contributions to his profession and community. Dr. Jacobs was a member
of the Board of Directors of Power Media Communications International,
Inc.
Cynthia Jones served as the corporate controller for the Company from
1982 to 1995. She currently serves as corporate controller for Creative
Business Services, Inc.
No family relationship exists between or among any of the persons named
above. None of the Company's Directors are directors of any other
company that has a class of equity securities registered under, or
required to file reports pursuant to, Section 15(d) of the Securities Act
of 1933 or Section 12 of the Securities Exchange Act of 1934, or any
company registered as an investment company under the Investment Company
Act of 1940. There are no arrangements or understandings between any of
the named directors or officers and any other persons pursuant to which
any director or officer was selected or nominated as a director or
officer.
Item 10. Executive Compensation
Only one executive officer received cash compensation in excess of
$100,000 during the fiscal year ended December 31, 1996 and 1995.
Compensation does not include minor business-related and other expenses
paid by the Company for its officers during fiscal year 1996 and 1995,
nor the personal usage of a Company automobile. Such amounts in the
aggregate do not exceed $10,000. The Company's Chief Executive Officer,
A.B. Goldberg received compensation of $96,000, $53,800 and $16,100 for
1996, 1995 and 1994, respectively.
From time to time, the Company has granted shares of its common stock as
additional compensation to its offices and key employees for their
services, as determined by the Company's Board of Directors. During 1996
and 1995, no shares were granted to officers or key employees.
As of December 31, 1996, the Company had no group life, health,
hospitalization, medical reimbursement or relocation plans in effect
which discriminates, in scope, terms, or operation, in favor of officers
or directors of the Company and that are not generally available to all
salaried employees. Further, the Company has no pension plans or plans
or agreements which provide compensation on the event of termination of
employment or change in control of the Company.
The Company does not pay members of its board of Directors any fees for
attendance or similar remuneration, but reimburses them for any out-of-
pocket expenses incurred by them in connection with Company business.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding ownership of
the Common Stock of the Company as of February 28, 1997 by (I) each
person known by the Company to be the beneficial owner of more than 5
percent of the outstanding common stock of the Company; (ii) each
director of the Company; and (iii) all executive officers and directors
of the Company as a group.
</TABLE>
<TABLE>
Names and Addresses Beneficial Percent
of Beneficial Owner Ownership of Class
<S> <C> <C>
A. B. Goldberg(1) 29,213 .5%
1380 Lawrence Street, Suite 1400
Denver, CO 80204
Cindy Jones 2,500 .1%
1380 Lawrence Street, Suite 1400
Denver, CO 80204
Nick Catalano 5,000 .1%
189-32 44th Avenue
Flushing, NY 11358
Dr. Theodore Jacobs
1380 Lawrence Street, Suite 1400 69,739 1.2%
Denver, CO 80204
Burt Katz
1380 Lawrence Street, Suite 1400(2) 195,089 3.4%
Denver, CO 80204
Officers and Directors 301,541 5.2%
as a Group (6 persons)
</TABLE>
(1) Include shares owned by Nannette Goldberg, wife of A.B. Goldberg
Director of Company and shares owned by his mother and two children.
There are no stock options issued or outstanding to A. B. Goldberg.
(2) Includes shares owned by the wife and children of Burt Katz.
Item 12. Certain Relationships and Related Transactions
Commencing April 1995, the Company contracted out some administrative,
management and accounting functions of the Company to a company owned by
the former president and director of the Company. Monthly fees for such
services were $15,000 for the period April 1 to July 31, 1995 and $20,000
thereafter. In addition, a one time start-up fee of $25,000 was also
paid. Total fees for 1996 and 1995 were $240,000 and $201,000
respectively.
PART IV
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits. The following exhibits are filed herewith pursuant to
Rule 601 of Regulation S-K or are incorporated by reference to previous
filings.
Exhibit
Table No. Document Reference
(2) Plan of acquisition, reorganization, arrangement, liquidation, None
or succession
(3) Articles of Incorporation and Bylaws (A)
(4) Instruments defining the rights of security holders, including (B)
indentures
(9) Voting trust agreement None
(10) Material contracts (C)
(13) Annual or quarterly reports, Form 10-QSB None
(16) Letter on change in certifying accountant (F)
(18) Letter on change in accounting principles None
(21) Subsidiaries of the registrant (D)
(22) Published report regarding matters submitted to a vote of None
security holders
(23) Consent of experts and counsel (E)
(24) Power of attorney None
(27) Financial Data Schedule (6)
(28) Information from reports furnished to state insurance None
regulatory authorities
(99) Additional exhibits None
(A) A complete copy of the Company's Articles of Incorporation as currently
in effect and all amendments thereto was filed as Exhibit 89.3.1 to the
Registrant' Form 10-K for the fiscal year ended December 31, 1989, and a
complete copy of the Company's Bylaws as currently in effect was filed as
Exhibit 86-3(c) to the Company's Registration Statement on Form S-18
(Registration No. 33-9163-D) and are incorporated herein by reference
thereto.
(B) The Company hereby agrees to furnish a copy of the form of its
convertible subordinated debentures to the Commission upon request.
(C) The following material contracts are filed herewith or incorporated
herein by reference thereto:
Document Title Reference Commission Filing
Stock Option Agreement 86-10(a) Registration Statement
on Robert Beattie on Form S-18 (33-9163-D)
Host Agreement - Annette Funnicello 86-10(b) Registration Statement
on Form S-18 (33-9163-D)
Host Agreement - Jill St. John 86-10(c) Registration Statement
on Form S-18 (33-9163-D)
Host Agreement - James Farentino 86-10(d) Registration Statement
on Form S-18 (33-9163-D)
Host Agreement - Tony Randall 86-10(e) Registration Statement
on Form S-18 (33-9163-D)
Video Distribution Agreement - 86-10(f) Registration Statement
Lightning Video (Vestron) on Form S-18 (33-9163-D)
Trademark License Agreement - 86-10(g) Registration Statement
Rand McNally & Company on Form S-18 (33-9163-D)
Stock Option Agreement - 86-10(h) Registration Statement
Peter TenEyck on Form S-18 (33-9163-D)
November 4, 1987 amendment to 87-10(a) Registration Statement
Vestron Distribution Agreements on Form S-18 (33-9163-D)
January 29, 1988 amendment to 87-10(b) Registration Statement
Trademark License Agreement on Form S-18 (33-9163-D)
Selluloid Agreement dated March 4, 1988 87-10(d) Registration Statement
on Form S-18 (33-9163-D)
Children as Teachers of Peach 87-10(e) Registration Statement
Agreement dated June 6, 1988 on Form S-18 (33-9163-D)
Eastman's Outdoor World and Western 87-10(f) Registration Statement
American Films, Inc. dated March 17, 1988 on Form S-18 (33-9163-D)
Sturgis Exclusive Licensing and Use 87-10(g) Registration Statement
Agreement dated July 1987 on Form S-18 (33-9163-D)
Best Film and Video Corporation 87-10(h) Registration Statement
Distribution Agreement dated December on Form S-18 (33-9163-D)
7, 1987
Gillette, Wyoming Office Lease Agreement 87-10(I) Registration Statement
on Form S-18 (33-9163-D)
Document Title Reference Commission Filing
KGWY-FM Tower Lease 87-10(j) Registration Statement
on Form S-18 (33-9163-D)
December 15, 1988 Atlantis Video 89-10(a) Form 10-K for the year
License Agreement ended December 31, 1988
Iowa Radio Stations Asset Purchase 89-10(b) Form 10-K for the year
Agreement dated April 18, 1989 ended December 31, 1988
January 31, 1989 License Agreement with 89-10(c) Form 10-K for the year
Adler Video Marketing, Ltd. ended December 31, 1988
Stock Option Agreement - Ray Ricci 89.10.1 Form 10-K for the year
ended December 31, 1989
Stock Option Agreement - Ray Ricci 89.10.2 Form 10-K for the year
ended December 31, 1989
Stock Option Agreement - Keller, Wing, 89.10.3 Form 10-K for the year
Godbolt and Polakovic ended December 31, 1989
Stock Option Agreement - Dennis Dowd 89.10.4 Form 10-K for the year
ended December 31, 1989
Rand McNally Video Trip Guide to Ohio 89.10.5 Form 10-K for the year
Agreement, dated January 11, 1990 ended December 31, 1989
Wyoming Radio Station Letter of Intent 89.10.6 Form 10-K for the year
dated March 28, 1990 ended December 31, 1989
Settlement Agreement with Miller & 89.10.7 Form 10-K for the year
Weiss, P.C., dated March 30, 1990 ended December 31, 1989
Distributor Agreement with Adler Video 89.10.8 Form 10-K for the year
Marketing, Ltd. ended December 31, 1989
Post-Production Services Agreement 93-10.1 Form 10-K for the year
ended December 31, 1993
Settlement Agreement with DCC and 93.10.2 Form 10-K for the year
Marshall Blonstein ended December 31, 1993
Agreement with Rand McNally and Company 93.10.3 Form 10-K for the year
ended December 31, 1993
Promissory note with Keller, Wing & Godbolt 93.10.4 Form 10-K for the year
ended December 31, 1993
Distribution/licensing agreement with 93.10.5 Form 10-K for the year
Woodknapp and Company ended December 31, 1993
Amendment to Articles of Incorporation 93.10.6 Form 10-K for the year
Name change ended December 31, 1993
Amendment to Articles of Incorporation 93.10.7 Form 10-K for the year
increase authorized shares ended December 31, 1993
Stock Option Agreement Robert Young 93.10.8 Form 10-K for the year
ended December 31, 1993
Letter of Intent Polton Corporation 93.10.9 Form 10-K for the year
ended December 31, 1993
Promissory note sample bridge lenders 93.10.10 Form 10-K for the year
ended December 31, 1993
Subscription Agreement 93.10.11 Form 10-K for the year
ended December 31, 1993
(D) Not required since the information is ascertainable from the Company's
financial statements filed herewith.
(E) A list of all subsidiaries of the Company was filed as Exhibit 89-22(a)
to the Company's Form 10-K for the year ended December 31, 1988 and
is incorporated herein by reference thereto.
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
FIRST ENTERTAINMENT, INC.
Dated:April 14, 1997 By ________________
A. B. Goldberg, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
Dated: April 14,, 1997 __________
A. B. Goldberg
President and Principal Executive Officer
Dated: April 14, 1997
Cynthia M. Jones
Secretary and Treasurer
Dated: April 14, 1997 _________________________
Dr. Nicholas Catalano
Director
Dated: April 14, 1997 _________________________
Burt Katz
Director
Dated: April 14, 1997
Dr. Theodore Jacobs
Director
<TABLE> <
S> <C>
<ARTICLE>5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-31-1996
<PERIOD-END> Dec-31-1996
<CASH> 63
<SECURITIES> 0
<RECEIVABLES> 341
<ALLOWANCES> (7)
<INVENTORY> 51
<CURRENT-ASSETS> 466
<PP&E> 3025
<DEPRECIATION> (2399)
<TOTAL-ASSETS> 3233
<CURRENT-LIABILITIES> 1726
<BONDS> 0
<COMMON> 42
0
135
<OTHER-SE> 1100621
<TOTAL-LIABILITY-AND-EQUITY> 3233
<SALES> 2139
<TOTAL-REVENUES> 2139
<CGS> 1617
<TOTAL-COSTS> 3747
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 103
<INCOME-PRETAX> (1647)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1647)
<DISCONTINUED> 385
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1262)
<EPS-PRIMARY> (.30)
<EPS-DILUTED> (.30)
</TABLE>
