FIRST ENTERTAINMENT, INC.
1380 Lawrence Street, Suite 1400
Denver, Colorado 80204
ANNUAL REPORT FOR
THE FISCAL YEAR ENDED DECEMBER 31, 1996
Dear Shareholders:
Fiscal 1996 was not an exceptional year for our Company, although
revenues increased approximately $300,000 over fiscal 1995. However, the
net loss from continuing operations remained at $1.6Million. The
Company embarked upon a program to complete several major acquisitions.
One of these acquisitions was completed after the end of the fiscal
year. As a result, 1997 promises to be a much better year for our
Company. The acquisition of control of Global Internet Corporation, a
Delaware company (Global), has the potential to significantly change
the scope, assets, revenues and earnings of our Company.
I believe in the future of our Company. With the acquisition of Global,
I feel that we as shareholders can look forward to a very exciting
coming fiscal year for our Company.
Very truly yours,
A.B. Goldberg
President
FIRST ENTERTAINMENT, INC.
General Development 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 company, holding controlling
interests in five distinct segments, four active and one inactive. The
four active segments, which are controlled by the parent company, FTET,
are known as "Video," "Radio," "Live Entertainment," and "Retail".
The inactive segment is known as "Film". In November 1995, the Company
determined to discontinue the operations of its copyrighted properties
segment, which it acquired in 1994. Initially, the Company's business
consisted of the production of pre-recorded travel guides and special
interest videos. In 1987, the Company entered the radio broadcasting
business by acquiring Quality Communications, Inc., a Wyoming
corporation pursuant to which the Company operates the radio segment of
its business. In 1992, the Company acquired a controlling interest in
First Films, Inc. ("FFI"), a publicly held Colorado corporation, under
which its film and live entertainment operations are undertaken. In
December 1996, the Company commenced operations of selling infomercial
products in free standing unmanned kiosks in major retail malls
including U.S. Military bases. This segment is known as the "retail"
segment.
Operations
Video
Initially, the Company entered the pre-recorded videocassette
product market through the design, production and distribution of pre-
recorded videocassette travel guides and later expanded into production
and distribution of special interest videocassette productions. In June
1986, the Company entered into a trademark licensing agreement with Rand
McNally, providing the Company the right to use the Rand McNally name
worldwide for its Video Trip product.
In 1993, the Company negotiated the termination of its relationship
with Rand McNally. In July 1993, the Company entered into a new
agreement, entitling it to use the KODAK trademark of Eastman Kodak
Company for video through its exclusive U.S. distributor, Woodknapp and
Company, Inc. This agreement allowed Woodknapp and Company, Inc. to
become the exclusive domestic distributor for the Company's Video Trip
product and allowed the Company to receive sponsorship assistance from
Eastman Kodak Company. This agreement allowed the Company to pass
through some of the costs of packaging, marketing and distribution to
Woodknapp, who is one of the largest distributors of special interest
video in the United States. The Company bore the expense of editing the
Rand McNally trademarks from the programs. This editing was completed
in December 1993 and shortly thereafter, Woodknapp released,
domestically, the first of five release groups created from the Video
Trip library. In January 1995, the Company was informed that Woodknapp
and Company, Inc. had ceased operations and would not be able to honor
its contract as the Company's exclusive U.S. distributor of Video Trips.
The Company feels that because of cash flow problems of Woodknapp they
were not able to effectively market their Video Trips in 1994.
In 1995, the Company signed a three year distribution agreement
with Fox Lorber, whereby Fox Lorber would test the distribution of 12
video trip titles in North America. Fox Lorber has the right to acquire
the remaining 28 video trip titles and extend the term of the agreement
from three years to seven years with an additional advance royalty
payment of $58,000. During 1996, the Company sold all its foreign
distribution rights to Fox Lorber for $50,000.
Radio
In October 1987, the Company entered the radio broadcasting
business through the acquisition of Quality Communications, Inc.
("Quality Communications"), a Wyoming corporation. At that time,
Quality Communications owned and operated three radio stations, which
serve markets in Northeast Wyoming and central Iowa. In August 1989,
the Company sold two radio stations in Boone, Iowa. The Company,
through Quality Communications, operates a radio station, 100.7, The
Fox, located in Gillette, Wyoming.
In November 1993, the Company changed the music format of the radio
station formerly known as KGWY, or Y-100, from a top-40 station to a
format known as the "Heart of Rock." In February, 1995 the format was
changed again to contemporary country. The changes have had a positive
effect on its market share and gross revenues. Independent market
surveys show the radio station has approximately 44% of the market in
Gillette, Wyoming. In 1996, the radio station started promoting
concerts using up and coming country and western singers. The radio
station was a venue to promote the concerts and add an additional source
of revenue for the radio station.
Live Entertainment
FFI owned and operated two comedy clubs, one located in Denver,
Colorado and one in Tampa, Florida. The Tampa, Florida, club was closed
on January 29, 1995 due to less than expected attendance.
The goal of this division is to produce first-rate shows in the
theater environment. Revenues are generated through both ticket sales
at the door and beverage and food sales at tables. Clubs are open to
the public only for shows, which last from 1 to 2 hours each, and number
as many as three per night. Non-show times are devoted to preparing and
producing a show that changes completely each week, and to promoting and
marketing the nightclub.
FFI acquired 100 percent of the outstanding stock of Comedy Works,
Inc., a Colorado corporation, on September 13, 1990 in an exchange for
200,000,000 shares of common stock. Comedy Works was incorporated in
1982 and has operated from its Larimer Square, Denver, Colorado location
since that time. Comedy Works Larimer Square typically has ten shows
per week and has averaged over 2,000 customers per week for the past
fifteen years.
Retail
In December, 1996 the Company commenced operations of its retail
segment. The segment consists of selling the most common and most
popular infomercial products in free standing un-manned kiosks in retail
outlets throughout the United States. The Company intends to expand
operations to include manned kiosks in major retail malls. Each manned
kiosks will be approximately 250 square feet and will have approximately
35 to 50 of the top selling infomercial products. The Company opened
its first four locations in December, 1996, in Pearl Harbor, Andrews Air
Force Base and Bolling Air Force Base in Washington, D.C. and Leichmere
s in Cambridge, Massachusetts. The Company intends to complete a
private placement of up to $800,000 in 1997 to fund the planned
expansion of manned kiosks in major retail malls throughout the United
States. The Company operates the kiosks under the name "The Best of As
Seen on TV" ("ASOTV").
Other Business Development
Balzac
In April 1996, the Company acquired certain assets from Balzac,
Inc., a private company which manufactures and distributes toys,
including a product line of toy balls. The assets and rights acquired
consisted of the following: inventory of Balzac toys, the exclusive
license of Balzac for Australia and various other rights.
The exclusive license agreement for Australia was acquired for
$800,000 payable within five years based upon a formula of 60% of net
profits from the sale of Balzac products in Australia. The inventory
and various other rights were acquired by issuing 1,100,000 shares of
the Company's restricted common stock valued at $1.2 million. In
addition, the Company granted certain stock options to Balzac to
purchase shares of common stock of the Company.
During 1996, a dispute arose between the Company and Balzac where
Balzac asserted a violation of the Purchase Agreement. Balzac seized
the inventory valued at $1 million, which was collateral on the fixed
obligation due under the Australian Licensing Agreement, to satisfy the
$800,000 obligation under the Licensing Agreement. The Company asserted
that Balzac had no right under the Purchase Agreement or License
Agreement to seize the inventory and apply the proceeds against the note
obligation under the License Agreement.
In April 1997, Balzac and the Company entered into an agreement
whereby Balzac will buy back the Australian Licensing Agreement for
$800,000 and will repay the Company $200,000 which was the difference
between the value of the seized inventory and the obligation under the
licensing agreement. The $1,000,000 will be repaid over forty months at
8% per annum.
Image Marketing Group
On September 6, 1994, the Company acquired an 84 percent interest
in Image Marketing Group, Inc. ("Image"). The Company issued 248,297
shares of its restricted common stock in exchange for 1,986,374 issued
and outstanding shares of Image. In addition, the Company issued
231,976 shares of its Class B preferred stock in exchange for all the
issued and outstanding preferred stock of Image and approximately
$420,000 of related party debt.
Image had a substantial amount of working capital invested in
inventory items that were not selling, therefore it was unable to
recover its investment in inventory or reinvest in new images from the
sale of existing inventory. FTET invested approximately $700,000 in
Image in an effort to generate sales through introduction of new images
to customers. Image was unable to generate enough sales or liquidate
its inventory to generate working capital to support continued
operations. Since 1993, Image has had losses from operations and at the
time it was acquired by the Company was in need of working capital to
finance inventory growth. Even with a working capital infusion of
approximately $700,000, Image continued to incur losses as a result of
declining sales. In November, 1995 it was determined that additional
working capital would not be advanced to Image and that the Company
would terminate operations and seek a buyer for Image. The
discontinuance of operations of Image resulted in a loss of
approximately $2.2 million for the year ended December 31, 1995 of which
$1.6 million represents the write down of assets to their net realizable
value.
On April 24, 1996 The Company and Harvey Rosenberg, a former
officer and director of the Company entered into a Purchase Agreement
for the sale of Image. Mr. Rosenberg purchased the Company s 1,986,376
shares of Image for $1,000 resulting in a gain of approximately
$414,000. At the time of the disposition of Image, Image had
liabilities in excess of assets.
The results of operations of Image for the year ended December
31,1996 and 1995 are disclosed in the accompanying statements of
operations as discontinued operations.
Indian Licensing
In February 1995, the Company signed a series of agreements giving
it certain licensing and merchandising rights for the Indian Motor
Company, which required the approval of the bankruptcy court. These
rights were never approved by the Bankruptcy Court.
In January, 1996 A.B. Goldberg, Harvey Rosenberg, a former director
and several other unrelated parties were named as defendants in a law
suit filed by Sterling Consulting Corporation, Receiver for Indian
Motorcycle Manufacturing, Inc. The Company filed a counter claim
against the Receiver in July, 1996. In September 1996, the Company
and the Receiver commenced settlement negotiations whereby all parties
would resolve their dispute. In February, 1997 the Company and the
Receiver agreed to the terms of a settlement. The proposed Settlement
Agreement calls for the Company to relinquish all rights or claims to
the Indian Motorcycle Trademark or the use of the Trademark and any
licensing rights. In addition, all claims by the Receiver and the
Company shall be released and the Company shall pay to the Receiver
approximately $114,000. All rights acquired from Scott Kajiya and Jamie
Ruiz for the use of the Indian Motorcycle Trademark in Japan are also
assigned to the Receiver.
The transactions described above relating to Indian Licensing have
been rescinded in the accompanying financial statements effective from
the date the transactions were entered into as if the transactions did
not occur.
Letters of Intent
In January, 1997, a non-binding letter of intent was signed with
Enternet Corporation, an international marketer of infomercial products.
Enternet has successfully combined international wholesaling as well as
the franchising of its retail kiosk concept under the name "TV to You".
In addition, Enternet operates the most prominent "As Seen on TV"
internet shopping site under the name "As On TV", offering a complete
array of infomercial products. This potential acquisition fits in well
with the development of "The Best of As Seen on TV" in retail locations
in the United States, combined with Enternet International expertise and
an internet web site. The Company would issue 300,000 shares of common
stock of the Company and 100,000 shares of ASOTV for 60% of Enternet.
Consummation of the acquisition 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 was subject to a number of
conditions including the negotiation of definitive agreements,
completion of due diligence and approval by the Directors of both
Companies. This non-binding letter of intent was terminated on May 8,
1997.
Competition
Video
The production and marketing of pre-recorded video cassettes is a
highly competitive business. The Company vies with many companies and
individuals that have substantial experience in acquiring, producing and
distributing such products. Most have resources substantially greater
than those of the Company. These competitors include both large and
small independent production companies, television and film studios, and
others. The Company knows of numerous other videocassette travel guide
series (including International Video Network's Video Visits,
Travelview, Laura McKenzie's Travel Guide and Fodor's Travel Video);
however, the Company believes that the Kodak name and the quality of its
programs set it apart from its competitors.
Radio
FM100.7, "The Fox" competes with seven other signals available in
the area. Two of these radio signals originate from Gillette, Wyoming.
The Company presently enjoys the largest share of the market, estimated
to be 44 percent.
Live Entertainment
Competition is intense in the comedy and music night club
entertainment industries. On a national level, the Company competes for
entertainers with companies that are better capitalized, highly visible
and have longer operating histories and larger staffs in their
respective locations. None of the national comedy clubs have locations
in Denver, Colorado. Comedy Works Larimer Square has been in business
in Denver, Colorado for 15 years and the Company believes it to be the
highest revenue-producing comedy club in the area. The Company believes
that Comedy Works Larimer Square provides higher-quality acts than its
local competitors, reflected in the fact that it charges approximately
twice the admission price of its local competitors. The two main
competitors of Comedy Works Larimer Square are both individually-owned
and located in shopping centers in the suburbs, while Comedy Works is
located in the downtown Denver area.
Retail
There are several companies that sell infomercial products in
retail locations, none of which have a national presence. Other
companies are more experienced and are better capitalized but the
Company believes it will distinguish itself from competition by offering
only the best and most popular infomercial products and by having a
better, more up-scale presentation of its products.
Licenses
The Federal Communications Commission (FCC) issues radio
broadcasters a license to operate within their assigned frequency for
seven years. These licenses, upon application, are renewable for
additional seven year periods. The FCC issued KGWY its original license
on October 1, 1983, to operate at a frequency of 100.7 MHZ, 24 hours a
day, at 100,000 watts of effective radiated power. It was subsequently
reissued in October of 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.
Legal Proceedings
The Company knows of no litigation pending, threatened, or
contemplated, or unsatisfied judgments against it, or any proceedings of
which the Company or any of its subsidiaries is a party, except as
specified below. The Company knows of no legal actions pending or
threatened, or judgment entered against any of its officers or directors
or any of its subsidiaries in their capacities as such, except as
specified below.
In January, 1996 the Company, AB Goldberg, Harvey Rosenberg and
several other related and unrelated third parties were named as
defendants in a lawsuit filed by Sterling Consulting Corporation as
Receiver for Indian Motorcycle Manufacturing, Inc.("IMMI") The
Complaint alleges interference by defendants in the business of IMMI,
conflicts of interest of AB Goldberg, breach of fiduciary duty, unjust
enrichment, and bankruptcy fraud.
In July 1996, The Company filed suit against the Receiver alleging
intentional interference of contracted relationships and breach of
licensing agreements. In September 1996, the Company and the Receiver
commenced settlement negotiations whereby all parties would resolve
their disputes.
In February 1997, the Company agreed to terms of a Settlement Agreement
with the Receiver whereby the Company would relinquish all rights to the
Indian Motorcycle Trademark and pay the Receiver approximately $114,000.
(See Item 1, Other Business Developments herein)
In March 1997, the Company commenced legal proceedings against
Image Marketing Group, Inc. and Harvey Rosenberg, Burt Katz 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.
Acquisitions and Mergers
Since inception the Company has engaged in a series of mergers and
acquisitions resulting in its present corporate structure and operating
subsidiaries. Currently, the Company has the following transactions to
report:
Power Media
In July, 1996, the Company issued 770,000 shares of its restricted
common stock, valued at $408,100, in exchange for 18,000 of the 25,000
then issued and outstanding shares of Power Media Communications
International, Inc. (Power Media), or 72% ownership. Power Media was a
substantially dormant company that had developed the concept of selling
infomercial products in kiosks primarily located in retail malls.
In November 1996, a new entity was formed called "The Best Of As
Seen on TV", Inc. ("ASOTV") for the purpose of acquiring all of the
issued and outstanding common stock of Power Media and to provide
original incorporators with ownership in ASOTV. The original
incorporators of ASOTV were issued 464,000 shares of ASOTV for par value
($.001 per share), which included 220,800 shares issued to NMG, LLP, an
entity owned by the wife of the president of the Company. ASOTV then
issued 1,015,000 shares of common stock to the Company for their 18,000
shares of Power Media and issued 324,500 shares to an unrelated party
for the remaining 7,000 shares of Power Media. In addition, ASOTV
received a stock subscription from the previous owner of the 7,000
shares of Power Media to purchase approximately 325,000 shares of common
stock of ASOTV for $150,000, of which $100,000 was received in 1996. As
a result of the above transactions, ASOTV owned 100% of Power Media and
the Company owned approximately 56 percent of ASOTV as of December 31,
1996.
Polton
On May 10, 1994, the Company acquired approximately 80% of the
issued and outstanding common stock of the Polton Corporation ("Polton")
by issuing 75,000 shares of the Company's restricted common stock valued
at $318,000. In addition, the Company advanced Polton $200,000 for
working capital. Polton is primarily engaged in the manufacturing and
distribution of compact discs and cassettes for Warner Music labels.
Shortly after the consummation of the Polton acquisition a dispute
arose between the Company and Polton whereby Polton refused to provide
financial information to the Company necessary to report the
consolidated results of operations since the date of acquisition.
In November, 1995, the Company reached an agreement with Mr. Gary
Firth, president of Polton, and Polton whereby Mr. Firth would return
the 75,000 shares of the Company's common stock and repay $100,000 of
the $200,000 advanced as working capital. The agreement resulted in a
write down of the note receivable of $100,000 which has been reflected
in the accompanying consolidated statement of operations in selling,
general and administrative expenses during 1995.
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.
Subsequent Event
The Company entered into a definitive agreement to acquire control
of Global Internet Corporation, a Delaware corporation (Internet). This
transaction was planned as a purchase such that Internet became a
subsidiary of the Company and the former shareholders of Internet would
thereby own approximately 4.7%of the Company. This transaction has been
accounted for as a purchase. At the present time, approximately 50% of
the shares of Internet has been exchanged for approximately 30,000
shares of Class B Convertible Preferred stock of the Company that is
convertible into 375,000 common shares. The present exchange has given
the Company effective control of Internet, and the current control
shareholders of Internet are now affiliates of the Company.
The Company has decided to engage in the transaction with Internet
to broaden the asset base and increase the value of the Company's shares
as a result of acquiring a potentially profitable business. None of the
rights of any securities holders will be affected by this transaction.
The securities of the Company which have been issued in this transaction
are Class B preferred shares. It is probable that the Class B
shareholders will elect to convert their shares into common shares of
the Company, which will have the same rights and privileges as all other
common shares but will be restricted securities under the Securities Act
of 1933, as amended. To obtain conversion of the Class B preferred
shares into common shares, the Company must obtain the approval of the
shareholders to increase its authorized common shares and must file
Articles of Amendment with the Secretary of State of Colorado. While the
Class B preferred shares have been issued, the filing for additional
common shares must await the approval of the shareholders to the
increase in authorized common shares at the next meeting of
shareholders.
Principal Market or Markets
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 March 30, 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>
Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Fiscal 1996 as Compared to Fiscal 1995
The Company had a net loss from continuing operations of approximately
$1.7 million in 1996 and $1.6 million in 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.
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
========================================================================
=
</TABLE>
"See accompanying report of independent certified public accountants and
notes to consolidated financial statements."
FIRST ENTERTAINMENT, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, continued
December 31, 1996 and 1995
<TABLE>
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 partie
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 (11,829,707)
(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
==============
===========
"See accompanying report of independent certified public accountants and
notes to consolidated financial statements."
</TABLE>
FIRST ENTERTAINMENT, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31, 1996 and 1995
<TABLE>
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
=========================
"See accompanying report of independent certified public accountants
and notes to consolidated financial statements."
</TABLE>
FIRST ENTERTAINMENT, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders Equity (Deficit)
For the Years Ended December 31, 1996 and 1995
<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 8,800 991,200
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>
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 (JanuaryE17, 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.
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (Continued)
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.
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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
</TABLE>
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.
FIRST ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to consolidated Financial Statements (Continued)
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.
FIRST ENTERTAINMENT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statement (Continued)
NOTE C ACQUISITIONS (Continued)
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 CompanyOs 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.
Summarized balance sheet data for the discontinued operations as of
December 31, 1995 is as follows:
<TABLE>
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.
NOTE E RADIO STATION OPERATIONS (Continued)
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:
<S> <C>
1997 $861,392
1998 4,901
1999 5,381
2000 5,906
Thereafter 183,296
-------
Total $1,060,876
==========
</TABLE>
NOTE F NOTES PAYABLE AND LONG-TERM DEBT (Continued)
(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 a rate of $12.00 per share, so long as the 30-day average bid
price of the Company s common stock is at least $12 per share and is
subordinated to Class A shares.
NOTE G STOCKHOLDERS' EQUITY (Continued)
The Class C shares have no dividends and are convertible into common
stock (four shares of preferred to one share of common) 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>
The following table summarized information about stock options
outstanding and exercisable as of December 31, 1996:
<TABLE>
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 CompanyOs 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.
NOTE I RELATED PARTY TRANSACTIONS (Continued)
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>
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
<S> <C> <C>
Effect of Balzac dispute resolution (see Note N):
Decrease in inventor $ 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 discontinued operations
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.
NOTE N SUBSEQUENT EVENT (Continued)
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 repaid 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.
Directors and Executive Officers of the Company
The Directors and Executive Officers of the Company, their ages and
present positions held in the Company are as follows:
Tenure as Officer
Name Age Position or Director
A. B. Goldberg 49 Director April 1993 to
present
President and Commencing
Chief Executive Officer February 1995
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
June 30, 1997
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.
Form 10-KSB
A copy of the Form 10-KSB filed with the U.S. Securities and Exchange
Commission is available to any shareholder upon written request to:
Corporate Secretary
FIRST ENTERTAINMENT, INC.
1380 Lawrence Street, Suite 1400
Denver, Colorado 80204
Shareholder Information
Corporate Offices:
1380 Lawrence Street, Suite 1400
Denver, Colorado 80204
Independent Auditor:
BDO Seidman, LLP
Certified Public Accountants
600 Seventeenth Street
Denver, Colorado 80202
Transfer Agent:
American Securities Transfer, Inc.
1825 Lawrence Street, Suite 444
Denver, Colorado 80202-1817
Special Meeting
Stockholders of the Company are invited to attend the Special Meeting of
the Company in lieu of the Annual Meeting, which will be held at the
Comedy Works, 1226 15th Street, Denver, Colorado, on August 25, 1997,
at 10:00 a.m., local time.
A Proxy Statement will be sent to shareholders of record as of July 18,
1997.
</TABLE>
