UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[FEE REQUIRED]
For the Fiscal Year ended:
December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[NO FEE REQUIRED]
Commission File No. 0-15435
FIRST ENTERTAINMENT HOLDING CORP.
(Formerly First Entertainment, Inc.).
(Name of Small Business Issuer as Specified in its Charter)
Nevada 84-0974303
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
7887 E. Bellview, Suite 1114
Englewood, CO 80111
(Address of Principal Executive Offices, Including
Zip Code)
Registrant's telephone number, including area code: (303) 228-1650
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.008 Par Value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
Check if there are no disclosure of delinquent filers in response to
Items 405 of Regulation S-B in this form, and no disclosure will be
contained, to the best of registran's knowledge, in definitive proxy
or information statements incorporated by reference n Part III of this
Form 10-KSB or any amendments to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. $2,324,091
As of September 30, 1998, there were 8,803,837 shares of common stock
(the Registrant's only class of voting stock) outstanding. The
aggregate market value of the 7,135,724 shares of common stock of the
Registrant held by nonaffiliates on September 30, 1998 was
approximately $ 1,498,502 (based on the mean of the closing bid and
asked prices).
Documents incorporated by reference: None
INDEX TO FORM 10-KSB
PART I
Item 1 Description of Business
Item 2 Description of Property
Item 3 Legal Proceedings
Item 4 Submission of Matters to a Vote of
Security Holders
PART II
Item 5 Market for Common Equity and Related
Stockholder Matters
Item 6 Management's Discussion and Analysis or
Plan of Operation
Item 7 Financial Statements
Item 8 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
PART III
Item 9 Directors, Executive Officers, Promoters and
Control Persons
Item 10 Executive Compensation
Item 11 Security Ownership of Certain Beneficial Owners
and Management
Item 12 Certain Relationships and Related Transactions
PART IV
Item 13 Exhibits, Lists and Reports on Form 8K
A) Exhibits
B) Reports on Form 8-K
PART I
Item 1. Description of Business
On December 15, 1997, First Entertainment, Inc. changed its state of
incorporation from Colorado to Nevada and changed its name to First
Entertainment Holding Corp. (the "Company" or "FEHC"). The
Company was originally incorporated under the laws of Colorado on
January 17, 1985.
Currently, the Company is a multi-media entertainment conglomerate,
holding controlling interests in five distinct segments, two active
and three non operating. The two active segments, which are
overviewed by the parent company, FEHC, are known as "Radio," and
"Live Entertainment. The non operating segments are known as
"Film", "Retail" and "Internet". In November 1995, the Company
determined to discontinue the operations of its copyrighted
properties segment, and it was sold in 1996. 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
freestanding unmanned kiosks in major retail malls including U.S.
Military bases. This segment was known as the "retail" segment.
In January, 1998 the Company determined to discontinue the
operations of the "retail" segment as a result of lower than
expected sales. In December 1997 the Company acquired an interest
in Global Internet Corp. (Global Internet). Global Internet is a
development stage company whose planned business activity was to
commence operations of an internet gaming site. The investment in
Global Internet was written off as of December 31, 1997.
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 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 one comedy club 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.
The goal of Comedy Works 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. The club is
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.
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 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 had 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 and is
no longer active in the video market.
Retail
In December 1996, the Company commenced operations of its retail
segment through its subsidiary, "The Best of As Seen On TV, Inc."
(ASOTV). The segment consisted 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 opened its
first four unmanned locations in December, 1996, in Pearl Harbor,
Andrews Air Force Base and Bolling Air Force Base in Washington,
D.C. and Lechmere's in Cambridge, Massachusetts. In March 1997, the
Company terminated its unmanned kiosk operations when the leases to
its first four locations were not renewed. Sales volumes at the
unmanned kiosk locations were not sufficient to maintain profitable
operations. The Company turned its efforts to operating manned
kiosks in major retail malls. Each manned kiosk was approximately
250 square feet and sold the top 50 selling infomercial products.
Commencing August, 1997, the Company opened six manned kiosk
location in six retail malls located in the Denver metropolitan
area. The sales volumes for the manned kiosks were less than
projected and in January 1998, the Company determined to discontinue
the operations of ASOTV due to operating losses and lack of working
capital to further develop the concept
The result of operations of ASOTV for the years ended December 31,
1997 and 1996 are disclosed as discontinued operations.
The assets of ASOTV were written down to their estimated net
realizable value resulting in a write down of $490,000 which is
included in the accompanying statement of operations for the year
ended December 31, 1997 as part of the loss from discontinued
operations.
Internet Activities
On May 1, 1997, the Company entered into an agreement with Global
Casino, Inc. (Global Casino) to acquire 1,500,000 shares of common
stock of Global Internet Corp. owned by Global Casino and a $375,000
note receivable from Global Internet owed to Global Casino in
exchange for 30,000 shares of FEHC Class B Convertible Stock (Class
B Stock). Each share of Class B stock is convertible into 12.5
shares of FEHC restricted common stock. At the time FEHC entered
into the Agreement, FEHC did not have a sufficient number of
authorized but unissued shares of common stock to allow for the
conversion of the preferred stock to common stock. In addition, the
acquisition of Global Internet required the approval of the
shareholders of FEHC. On December 5, 1997 the shareholders of FEHC
approved (i) the increase in the authorized shares of FEHC common
stock and (ii) the acquisition of Global Internet Corp. For
accounting purposes control of Global Internet did not change until
December 5, 1997 and, as such, December 5, 1997 is considered the
acquisition date.
In June 1997, FEHC issued 14,080 shares of Class B convertible
preferred stock to two officers of Global Internet, in exchange for
$176,000 of accrued but unpaid compensation. Global Internet owed
the two officers compensation under the terms of long term
employment agreements. For accounting purposes the Class B
convertible preferred shares issued was recorded on December 5,
1997, the date the shareholders of FEHC approved an increase in the
authorized shares of common stock.
Global Internet was in the process of developing a virtual internet
casino and had a Web Site Development and Maintenance Agreement
(Development Agreement) with Electronic Data Systems (EDS) and DDB
Needham to develop the web site for approximately $1,200,000, of
which $300,000 had been expended to date on the web site
development. FEHC was unable to obtain the financing needed to
complete the web site development and the Development Agreement was
terminated.
In December, 1997 Global Transaction Services, Ltd, a wholly owned
subsidiary of Global Internet, was issued an internet gaming license
from the Commonwealth of Dominica to establish and operate a
computer based gaming business operating exclusively as an off-shore
business. The license is for a period of five years. In order to
maintain the license, operations must commence within one year and
continue without significant interruption throughout its term.
In accordance with the terms of an agreement dated December 15,
1997, if funding of at least $1 million was not received by Global
Internet by February 28, 1998, Global Internet will sell to Anthony
Kay all of the shares of Global Transaction Services, Ltd. for
$17,000. Anthony Kay was a former officer and director of Global
Internet and resigned March, 1998.
On March 2, 1998, Global Internet was notified of its default under
the December 15, 1997 agreement and the shares of Global Transaction
Services, Ltd which holds the gaming license, were sold back to
Anthony Kay.
On July 30, 1998, the Company repurchased all of the issued and
outstanding shares of Global Transaction Services Ltd. from Anthony
Kay by issuing 50,000 shares of common stock of FEHC.
The ability of the Company to obtain the necessary financing to
commence operations of a virtual internet casino is uncertain and as
such the Company's investment in Global Internet was determined by
management to be impaired. Included in the accompanying
consolidated statements of operations for the year ended December
31, 1997 is an impairment write-off of approximately $558,000
representing the Company's investment in Global Internet.
Other Business Developments
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 toy balls, the
exclusive license to sell Balzac products in 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 a Settlement
Agreement whereby Balzac will buy back the exclusive Australian
License 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 by liquidating a minimum of
25,000 shares of common stock of FEHC per quarter held by Balzac,
Inc. The Company would be paid any portion of the sales price per
shares up to $1.00 and Balzac would retain any portion of the sales
price over $1.00 per share. Any unsold stock after 40 months will
become the property of FEHC. The ability of Balzac to sell all
1,000,000 shares held by Balzac at a price of $1.00 to repay its
obligation was determined by management to be unlikely. The common
stock of FEHC has traded at below $1.00 since August, 1997 and on
February 5, 1998, the Company was delisted from NASDAQ. As of
December 31, 1997 the note receivable from Balzac was determined to
be impaired and was written down to its net realizable value of
$81,340 resulting in an impairment loss of approximately $902,000.
Image Marketing Group
On September 6, 1994, the Company acquired an 84 percent interest in
Image Marketing Group, Inc. ("Image") by issuing 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 its inventory or reinvest in new images
from the sale of existing inventory. FEHC 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 to liquidate its inventory to generate
working capital to support continued operations. 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.
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 are disclosed in the accompanying consolidated 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, subject to the approval of the Bankruptcy Court. These
agreements 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 called for the
Company to relinquish all rights or claims to the Indian Motorcycle
Trademark or the use of the Trademark and any licensing rights and
payment of $114,000. All rights acquired by the Company from Scott
Kajiya and Jamie Ruiz for the use of the Indian Motorcycle Trademark
in Japan are also assigned to the Receiver.
The transactions relating to the use of the Indian Motorcycle
Trademark in Japan have been rescinded in the accompanying financial
statements effective from the date the transaction was entered into
as if the transactions did not occur.
Letters of Intent
In June, 1998 FEHC signed a non-binding letter of intent with
Intelek, LLC ("Intelek") to form a joint venture with Intelek for
the purpose of developing and promoting entertainment sites on the
internet.
FEHC will invest in and receive 50% of the revenues from new sources
of internet traffic from multiple adult entertainment sites
presently being operated by Intelek. FEHC would invest $250,000 and
issue 250,000 shares of its restricted common stock to Intelek, Inc.
FEHC would receive a preferential payment of the first $250,000 from
the new sources of revenue thereafter, FEHC would receive 50% of all
revenues received from new sources of internet traffic developed.
Upon receipt of $250,000 FEHC would be obligated to issue an
additional 250,000 shares of restricted stock.
Consummation of this agreement is subject to a number of conditions
including the negotiation of a definitive agreement, completion of
due diligence, approval of the transaction by the Board of Directors
of both companies and approval of any necessary governmental
authorities. Due to the contingencies involved, FEHC is unable to
predict if or when the transaction will be consummated.
In July 1998 FEHC signed a non-binding letter of intent with
SportsNet, Inc. (SNI) to operate an internet gaming site from the
sovereign nation of the Commonwealth of Dominica pursuant to an
International Gaming License issued December 20, 1997, to a
subsidiary of the Company.
On September 15, 1998, the Company entered into a definitive
agreement with SportsNet, Inc. (SNI) The effective date of the
Agreement will be ten days after the following two events have
occurred; (i) SNI has completed a financing of not less than
$1,000,000 and (ii) the Company has entered into a contract with a
credit card processor for participants in the Games satisfactory to
both the Company and SNI. The Agreement, if and when it becomes
effective, would continue in effect as long as the Company has a
valid internet gaming license issued by the Commonwealth of
Dominica or would terminate upon revocation of such license by the
Commonwealth of Dominica.
SNI will at its sole cost and expense provide to FEHC and install
all hardware, system software, graphical user interfaces, will
license or cause SNI subcontractors to license all firewall and
encryption capability necessary to assure integrity of all data
transmitted by and among FEHC, SNI and participants. SNI will also
license to FEHC, in object code format on a non-exclusive basis,
that computer software incorporating a certified random number
generator, game logic and reporting package necessary for FEHC to
offer internet lottery and casino games of blackjack, video poker
and slots. SNI will also maintain and monitor a backup site in the
event the primary gaming site fails. SNI will also undertake to
develop new games including, but not limited to, roulette, baccarat,
paigow and craps.
The Company at its sole cost and expense will be responsible for
providing physical facilities, communications installation, lines
and ,maintenance necessary to accommodate and interface with
computer hardware located in Dominica. In addition, the Company
must provide adequate insurance coverage for the equipment owned by
the Company and SNI. The Internet Gaming License issued by the
Commonwealth of Dominica requires the Company to hire five (5)
people at the prevailing wage for the term of the license and pay 5%
of gross revenues derived from the internet gaming revenue but not
less than $25,000 per year.
FEHC will pay 50% of the Gross Operating Margin to SNI.
SNI will ensure by technical means and means relating to the
acceptance of wagers, eliminate access to the site by participants
located in the United States and any other jurisdiction which
notifies FEHC that providing such access to the games to
participants within such jurisdiction violates that jurisdiction
laws governing gaming.
Competition
Radio
100.7, "The Fox" competes with seven other signals available in the
area. Two of these radio signals originate from Gillette, Wyoming.
The Company presently enjoys the largest share of the market,
estimated to be 44 percent.
Live Entertainment
Competition is intense in the comedy and music night club
entertainment industries. On a national level, the Company competes
for entertainers with companies that are better capitalized, highly
visible and have longer operating histories and larger staffs in
their respective locations. None of the national comedy clubs have
locations in Denver, Colorado. Comedy Works Larimer Square has been
in business in Denver, Colorado for 16 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.
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 and 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.
In December, 1997 the Commonwealth of Dominica issued an internet
gaming license to Global Transaction Services, Ltd., a wholly owned
subsidiary of Global Internet, which allows the Company to establish
and operate a computer based gaming business operating exclusively
as an offshore business. The license is for a period of five years
and operations must commence within one year and continue without
significant interruption throughout its term.
Seasonality
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.
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 Holding Corp
Currently, FEHC, the Holding Company, employs one executive and one
administrative person. The Holding Company contracts the
accounting, management information systems and administrative
function to a company owned by the former president and to other
independent consultants.
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
This division had one full-time executive.
Item 2. Description of Property
First Entertainment Holding Corp.
The Company's executive offices are located at 7887 E. Bellview,
Suite 1114, Englewood, CO 80111 and are leased under the terms of a
12-month lease, which terminates in September 1999. Monthly rental
is approximately $1,100. In August, 1998 the Company subleased its
prior executive office space in an effort to further reduce its
operating overhead. The Company has not been relieved of its
obligation as the primary lessee under its lease as a result of the
sub-lease.
Radio
The Company has facilities in Gillette, Wyoming which house the
radio station, 100.7, The Fox. In April, 1996 the Company
purchased the land and building which houses the radio station for
$300,000 and the land under which the FM tower sits for $125,000, by
issuing preferred stock valued at $275,000 and a mortgage for
$150,000.
Live Entertainment
Comedy Works Larimer Square leases its premises under the terms of a
new 10 year lease, which expires January 31, 2008.
Lease payments in the first year of the lease term, January 1, 1998
to December 31, 1998, shall be the total of (i) 8% of gross sales of
alcoholic beverages, (ii) 6% of gross sales of food related products
and (iii) 4% of gross sales relating to door admission.
Lease payments for the years two through ten January 1, 1999 to
January 31, 2008 shall be based on percentage rent as computed above
but shall not be less than 75% of the average percentage rent paid
during the three year period January 1, 1996 to December 31, 1998.
Percentage rent in 1997 was approximately $7,000 a month.
Item 3. Legal Proceedings
First Entertainment
FEHC knows of no litigation pending, threatened, or contemplated, or
unsatisfied judgments against it, or any proceedings of which FEHC
or any of its subsidiaries is a party, except as specified below.
FEHC 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 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 paid the Receiver
approximately $114,000. (see Item 1, Other Business Developments)
In March 1997, the Company commenced legal proceedings against Image
Marketing Group, Inc. and Harvey Rosenberg, Burt Katz (a director of
the Company) and Michael Katz, individually, for collection of
approximately $700,000 in advances to Image Marketing. Image
Marketing Group, Inc was purchased by the Company from Burt Katz,
Michael Katz and Harvey Rosenberg in September 1994. From September
1994 to November 1995 the Company advanced Image approximately
$700,000. In November, 1995, the Company determined to discontinue
the operations of Image due to substantial losses and demanded
repayment of the advances to Image. Image was unable to repay the
advances; therefore, the Company commenced legal proceedings against
Image and its former shareholders. In July 1997, a settlement was
reached with Image Marketing Group, Harvey Rosenberg, Burt Katz and
Michael Kat whereby 144,410 shares of FEHC common stock held by the
defendants were returned to FEHC. The shares returned were
cancelled and returned to treasury.
In 1997,the Company commenced legal proceedings against HK Retail
Concepts for breech of contract. The claims are for damages of
approximately $50,000. The Suit was filed in Denver District County
Court in May, 1997 and is awaiting trial in January 1999.
In May 1997, David Spolter and Faige Spolter ("Spolter") filed a
lawsuit against FEHC in the Superior Court of the State of
California. The plaintiffs alleged various federal and state
securities violations and sought recovery of their $75,000
investment plus damages. On July 1, 1998 Spolter and FEHC entered
into a settlement agreement whereby FEHC agreed to pay Spolter
$150,000, $25,000 was paid upon execution of the Settlement
Agreement and the remaining $125,000 shall be payable in monthly
installments of $5,000 a month until July 15, 1999 at which time all
unpaid principal and interest shall become due and payable. The
note bears interest of 10% per annum. FEHC agreed to pledge all of
its stock of its wholly owned subsidiary, Quality Communications,
Inc. a collateral on the note and to provide a security interest in
all assets of Quality Communications, Inc. In the event of default,
the amount due shall be $180,000 plus interest at 10% from June 1,
1998, less amounts previously paid. In addition, any principal and
interest amounts shall be due immediately and payable upon sale of
the radio station in Gillette, Wyoming.
In 1997, Sharon K. Doud filed a civil action against FEHC, AB
Goldberg and Quality Communications for breach of contract, fraud
and misrepresentation for failure to convert Class C Convertible
Preferred Stock into 91,240 shares of common stock. In April, 1998
a settlement agreement was reached between FEHC and Sharon Doud
whereby FEHC was required to pay $6,150 in legal fees, issue a
promissory note in the principal sum of $125,000 bearing interest at
9.5% per annum due March 31, 1999 and the Class C Convertible
Preferred Shares were cancelled.
In June 1996, Frank P. D'Alessio, a former director of the Company,
commenced an action against A.B. Goldberg, president and director of
the Company, Nannette Goldberg, wife of A.B. Goldberg, Sara
Goldberg, mother of A.B. Goldberg, Cohig & Associates, Neidiger
Tucker Brunner, Inc, Hanifin, Inhoff, Inc., Southwest Securities,
Inc., Paul Davis and Mike Zenhari in the United States District
Court for the District of Colorado.
The suit alleges that the plaintiff (Mr. D'Alessio) was defrauded by
the defendants pursuant to security transactions involving shares of
common stock purchased by plaintiff in Video Communications and
Radio, Inc. (now First Entertainment Holding Corp.) The defendants
have strenuously denied any violations of any state or federal
statutory or common law.
On October 1, 1996 the plaintiff and the defendants entered into a
Settlement Agreement and Mutual Release. The Settlement Agreement
required A.B. Goldberg to deliver to the plaintiff 150,000 shares of
common stock of First Entertainment Holding Corp. by August 1, 1997,
and such shares will be registered in a Form S-3 filed with the
Securities and Exchange Commission. In addition, Mr. Goldberg was
to deliver to plaintiff a certified or cashier's check in the amount
of $20,000 by May 5, 1997.
On November 19, 1996 50,000 shares of common stock of FEHC were
transferred to Mr. D'Alessio from Mr. Michael Payne, a shareholder
of FEHC. In July 1996 Mr. Payne had been issued 554,000 shares of
common stock of FEHC in exchange for his shares of common stock of
Power Media (see Note C to the Consolidated Financial Statements).
In July 1997 100,000 shares of common stock of FEHC were issued to
NMG, LLC, an entity owned by the wife of the President of the
Company, in exchange for 100,000 shares of ASOTV (see Note C to the
Consolidated Financial Statements) On July 29, 1997 the 100,000
shares of common stock acquired by NMG, LLC were transferred to Mr.
D'Alessio. The 150,000 shares of common stock received by Mr.
D'Alessio were registered in a Form S-3 filed with the Securities
and Exchange Commission in 1997.
The value of the common stock transferred to Mr. D'Alessio, $76,500,
has been classified as officer compensation to A.B. Goldberg in the
accompanying consolidated statements of operations.
Item 4. Submission of Matters to a Vote of Security Holders
On December 5, 1997 a special meeting of the shareholders of FEHC
was held and the shareholders were asked to vote on six issues (i)
the election of AB Goldberg Dr. Nick Catalano and Dr. Theodore
Jacobs as board of directors, (ii) the ratification of the
acquisition of Global Internet, (iii) amending the Company's
articles of incorporation to increase the number of authorized
shares from 6,250,000 to 50,000,000 shares, (iv) change the state of
incorporation from Colorado to Nevada, (v) a change in name of the
Company to First Entertainment Holding Corp and (vi) ratification of
BDO Seidman LLP as the Company's independent public accountants. On
April 6, 1998, the Company was informed by its independent auditors,
BDO Seidman, LLP of BDO Seidman, LLP's resignation, effective as of
that date (See Item 8. Changes in and Disagreements with Accountants
on Accounting on Accounting and Financial Disclosure).
Mr. Goldberg, Mr. Catalano and Mr. Jacobs were elected as directors
of the Company by a vote of 4,339,283 in favor and 2,406 against,
3,907 abstaining.
The ratification and approval of the acquisition of Global Internet
was approved by a vote of 3,400,423 in favor, 6,561 against and 407
abstaining.
To amend the Articles of Incorporation increasing the number of
authorized shares from 6,250,000 to 50,000,000, the motion was
approved by a vote of 4,261,131 in favor, 79,498 against and 4,967
abstaining.
To amend the Company's Articles of Incorporation to change of the
Company's domicile to Nevada and its name to First Entertainment
Holding Corp the motion was approved by a vote of 3,251,218 in
favor, 62,185 against and 5,246 abstaining.
The ratification of BDO Seidman, LLP as the Company's independent
accountant was approved 4,337,461 in favor, 4,819 against and 3,316
abstaining. On April 6, 1998, the Company was informed by its
independent auditors, BDO Seidman, LLP of BDO Seidman, LLP's
resignation, effective as of that date (See item 8. Changes in and
Disagreements with Accountants on Accounting and Financial
Disclosure).
Item 5. Market for the Company's Common Equity and Related
Stockholder Matters
The Company's common stock was traded on NASDAQ in the over-the-
counter market and since October 1988, had been included in NASDAQ.
On February 5, 1998 the Company was notified that as of the close of
business that day, the Company's stock would be delisted from NASDAQ
for failure to meet the minimum bid requirement. Effective February
6, 1998 the Company's stock is trading on the OTC Bulletin Board.
The following table sets forth the high and low bid quotation for
the Company's common stock for each quarterly period in 1997 and
1996. As of September 30, 1998, there were approximately 1,150
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>
1997
First Quarter $ 2.22 $ .75
Second Quarter 1.47 .84
Third Quarter 1.25 .72
Fourth Quarter .91 .66
1996
First Quarter $ .66 $ .44
Second Quarter 1.94 .50
Third Quarter 1.25 .63
Fourth Quarter 1.00 .50
</TABLE>
Item 6. Management Discussion and Analysis or Plan of Operation
Fiscal 1997 as Compared to Fiscal 1996
The Company had a net loss from continuing operations of
approximately $2.9 million in 1997 and $1.6 million in 1996.
The loss from discontinued operations of $731,000 in 1997 includes
only the operations of ASOTV and includes an estimate for shut down
costs of approximately $51,000.
The loss from discontinued operations of $56,000 in 1996 represents
the loss from Image Marketing of approximately $29,000 and the loss
from ASOTV of approximately $27,000. The 1996 financial statements
were restated to reflect the discontinued operations of ASOTV which
were determined to be discontinued in January 1998.
The gain on the sale of discontinued operations in 1996 of $413,704
is the result of the sale of Image Marketing that at the date of
disposition had liabilities in excess of assets.
Overall revenues increased from $2.1 million in 1996 to $2.3 million
in 1997. Live entertainment revenues increased from $1.26 million
in 1996 to $1.39 million in 1997. 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 on
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 and even increase
attendance. With the increase in live entertainment sales in 1997,
cost of sales has also increased from $1.1 million in 1996 to $1.2
million in 1997. The largest component of cost of sales, live
entertainment, is labor, including entertainers salaries which
increased from $547,000 in 1996 to $655,472 in 1997. Of the
$108,000 increase in labor costs in 1997, $83,500 was attributable
to entertainers.
Radio sales have increased from $713,000 in 1996 to $772,000 in 1997
primarily due to an increase in ad sales of $21,500, an increase in
concert income of $23,000 and an increase in trade show income of
$10,000. The radio station in Gillette, Wyoming is a country music
format and began promoting concerts in 1995 for up and coming
country music performers. Revenue from concert income was $33,000
in 1996 and $56,000 in 1997. The radio station still has the
largest audience share in Gillette, Wyoming. Cost of sales-radio
has increased by $14,000 from 1996 to 1997 primarily due to the cost
of the concerts. The single largest component of cost of sales,
radio, is labor which was $296,000 in 1996 and $280,000 in 1997.
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 in 1996 is the result of the sale of foreign
distribution rights for $50,000 and collection of foreign royalties
of $53,000. Video sales in 1997 represents the sale of video
distribution rights in the U.S. for $50,000. The Company is no
longer active in the video distribution market for its destination
video series.
Other revenue increased from $46,000 in 1996 to $112,000 in 1997.
Other revenue consists primarily of T-shirt, coupon books, cigarette
sales and booking agent fees. Other revenues in 1997 includes
$62,500 from a third party paid to the Company to buy-out its office
space. The unrelated third party needed additional office space and
was willing to pay the Company an incentive to move including the
estimated costs of moving. In September 1997, the Company moved to
new office space. Excluding the $62,500 from other revenue, 1997
other income was $49,800 as compared to $46,000 in 1996.
Impairment write downs in 1997 represent the write down in a note
receivable of approximately $902,000 to its estimated net realizable
value of $81,340 and a write down of investment in Global of
$557,899 to its estimated net realizable value of $0.
Depreciation and amortization decreased from $326,500 in 1996 to
$141,200 in 1997. The decrease of $ 185,300 is primarily due to the
fact that the master tape library is fully depreciated at December
31, 1996. The master tape library represented approximately 50% of
property and equipment.
Management and administrative fees, affiliate, decreased from
$408,000 in 1996 to $240,000 in 1997. The underlying agreement,
which provides for services valued at $20,000 per month was in
effect for 1997 and 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
$1.33 million in 1996 to $1.53 million in 1997, an increase of
approximately $206,000. The Company made a concerted effort to
reduce SG&A during 1997 and 1996 which resulted in significant
savings. There were certain transaction which had an adverse effect
on SG&A for 1997 and 1996. Included in SG&A in 1997 are expenses
resulting from litigation settlements totaling $150,000 and
compensation of $434,000 for options and warrants issued to non-
employees accounted for under FAS 123. 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 in
1996. Legal fees were approximately $170,000 in 1997 compared to
$195,000 during 1996. Compensation and consulting fees were
approximately $568,000 for 1997 compared to $467,000 for 1996.
Notes payable and long term debt was $1,284,500 in 1997 and
$1,061,000 in 1996. The average outstanding balance of long term
debt was $1,173,000 in 1997 as compared to $1,019,000 in 1996. The
decline in interest expense between 1997 and 1996 is primarily due
to overall the weighted average balance in notes payable in 1997 was
less then 1996. At December 31, 1997 the Company accrued $275,000
as the result of a litigation settlement subsequent to year-end.
These amounts did not accrue interest during 1997.
Liquidity and Capital Resources
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The
opinions of the Company's independent auditors delivered in
connection with the Company's financial Statements for fiscal 1997
and 1996 also contain an explanatory paragraph relative to the going
concern uncertainty. As discussed in Notes A and E to the
consolidated financial statements, the Company has suffered recurring
losses from operations, has a working capital deficiency of
approximately $1.4 million, has negative net worth of approximately
$445,000, and is in default on nearly $386,000 of its notes payable
as of December 31, 1997. In February, 1998 the Company was delisted
from NASDAQ for failure to meet the minimum bid price. The delisting
from NASDAQ has impaired the Company's ability to raise equity
financing. These conditions raise material 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, to make them profitable or to expand current business
segments. The Company must generate additional revenues that must
come from sources other than the existing business segments. The
existing business segments will not generate sufficient operating
income to cover SG&A and other overhead costs. 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 1997 and in 1996 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. In 1997, the Company
issued 751,600 shares of common stock for services valued at $676,215
or an average of $.90 per share. In 1996, the Company issued 532,700
shares of common stock for services valued at $534,000 or $1.00 per
share. In 1997, the Company issued 440,000 shares of its common
stock in settlement of accrued bonus's of $270,800. No shares were
issued in 1996 in settlement of accounts payable. Of the total costs
and expenses of $3.7 million in 1996 and $4.7 million in 1997,
$548,000 was paid by stock in 1996 and $676,000 was paid by stock in
1997. Stock issued for services as a percentage of revenues was 20%
in 1996 and 25% in 1997. Capital expenditures needed by existing
business segments to increase sales and profitability are minimal.
If the Company is successful in negotiating a definitive agreement
with Intelek, LLC. related to the pending letter of intent, between
$250,000 and $500,000 in initial financing will be needed to complete
the Company's obligation under the agreement. The Definitive
Agreement with SportsNet, Inc. requires the Company to provide all
physical facilities and communications installation in the
Commonwealth of Dominica necessary to accommodate and interface with
the required computer hardware to be supplied by SportsNet, Inc. The
Company has not yet determined the ultimate long term costs required
to complete its obligation under the Agreement with SportsNet, Inc.
Through September 30, 1998 the Company was successful in raising
approximately $213,000, net of offering costs in equity financing in
a private offering, but there can be no assurance that the Company
would be successful in raising the additional equity financing needed
to finance the acquisition contemplated under the letter of intent or
the definitive agreement. As of September 30, 1998 the Company has
cash and cash equivalents of $125,000 which it believes is sufficient
to meet its existing obligations through December 31, 1998.
A valuation allowance offsetting the Company's total 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.
"YEAR 2000 PROBLEM". The Company is aware of the issues associated
with the programming code in existing computer systems as the
millenium (Year 2000) approaches. The "Year 2000" problem is
pervasive and complex as virtually every computer operation will be
affected in some way by the rollover of the two digit year value to
00. The issue is whether computer systems will properly recognize
date sensitive information when the year changes to 2000. Systems
that do not properly recognize such information could generate
erroneous data or cause a system to fail. The Company has determined
to purchase new accounting software which is Year 2000 compatible.
The new software will be in place by December 31, 1998 and will cost
less than $10,000.
RECENT ACCOUNTING PRONOUNCEMENTS. The Company adopted FAS No. 128,
"Earnings per Share" and FAS No. 129, "Disclosure of Information
About an Entity's Capital Structure" effective December 31, 1997.
FAS No. 128 provides a different methods of calculating earnings per
share than that currently used in accordance with Accounting
Principles Board Opinion 15 "Earnings per Share." FAS No. 128
provides calculation of "basic" and "diluted" earnings per share.
Basic earnings per share includes no dilution and is computed by
dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted
Earnings per share reflects the potential dilution of securities that
could share in the earnings of an entity, similar to fully diluted
earnings per share. FAS No. 129 establishes standards for disclosing
information about an entity's capital structure. The implementation
of FAS No. 128 and FAS No. 129 has not had a material effect on the
consolidated financial statements of the Company.
In June 1997, FASB issued Statement of Financial Accounting Standard
No. 130, entitled "Reporting Comprehensive Income" ("SFAS 130")
and Statement of Financial Accounting Standard No. 131, entitled
"Disclosure about Segments of Enterprise and Related Information"
(SFAS 131). SFAS 130 establishes standards for reporting and display
of comprehensive income, its components and accumulated balances.
Comprehensive Income is defined to include certain changes in equity
but not those resulting from investments by owners and distributions
to owners. Among other disclosures, SFAS 130 requires that all items
that are requited to be recognized under current accounting standards
as components of comprehensive income be reported in a financial
statement displayed with the same prominence as other financial
statements. SFAS 131 supersedes Statement of Financial Accounting
Standard No. 14, entitled "Financial Reporting for Segments of a
Business Enterprise." SFAS 131 revises standards of the way the
public companies report information about operating segments in
annual financial statements and requires reporting of selected
information about operating segments in interim financial statements
issued to the public. It also establishes standards for disclosures
regarding products and services, geographic areas and major
customers. SFAS 131 defines operating segments as components of a
company about which separate financial information is available that
is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing segment
performance.
SFAS 130 and SFAS 131 are effective for financial statements for
periods beginning after December 15, 1997 and require comparative
information for earlier years to be restated. Because of the recent
issuance of these standards, management has been unable to fully
evaluate the impact of SFAS 130, if any, on future financial
statement disclosures. The Company adopted SFAS 131 and restated all
prior periods. The adoption of SFAS 131 did not have a material
effect on its results of operations for 1997 and 1996.
In February 1998, the FASB issued FAS No. 132 "Employers' Disclosure
about Pensions and other Postretirement Benefits' which standardizes
the disclosure requirements for pensions and other postretirement
benefits and requires additional information on changes in the
benefit obligations and fair values of plan assets that will
facilitate financial analysis. FAS No. 132 is effective for years
beginning after December 15, 1997 and requires comparative
information for earlier years to be restated, unless such information
in not readily available. Management believes the adoption of this
statement will have no impact on the Company's financial statements.
The FASB has recently issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS No. 133"). SFAS No. 133 established
standards for recognizing all derivative instruments including those
for hedging activities as either assets or liabilities in the
statement of financial position and measuring those instruments at
fair value. This Statement is effective for fiscal years beginning
after June 30, 1999. The Company has not yet determined the effect
of SFAS No. 133 on its financial statement.
Item 7. Financial Statements
FIRST ENTERTAINMENT HOLDING CORP. AND SUBSIDIARIES
(Formerly First Entertainment, Inc. and Subsidiaries)
Index to Consolidated Financial Statements
Reports of Independent Certified Public Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
First Entertainment Holding Corp
(Formerly First Entertainment, Inc. and Subsidiaries)
Denver, Colorado
We have audited the accompanying consolidated balance sheet of First
Entertainment Holding Corp. and Subsidiaries as of December 31, 1997
and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for the year then 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the 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
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
First Entertainment Holding Corp. and Subsidiaries as of December 31,
1997 and the results of their operations and their cash flows for the
year 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 E to the consolidated financial statements,
the Company has suffered recurring losses from operations, has a
working capital deficiency of approximately $1.4 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.
Gordon, Hughes & Banks, LLP
November 1, 1998
Denver, Colorado
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
First Entertainment Holding Corp
(Formerly First Entertainment, Inc. and Subsidiaries)
Denver, Colorado
We have audited the accompanying consolidated balance sheet of First
Entertainment Holding Corp. and Subsidiaries as of December 31, 1996
and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for the year then 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the 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
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
First Entertainment Holding Corp. and Subsidiaries as of December 31,
1996 and the results of their operations and their cash flows for the
year 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 E to the consolidated financial statements,
the Company has suffered recurring losses from operations, has a
working capital deficiency, 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
Denver, Colorado
<TABLE>
<CAPTION>
FIRST ENTERTAINMENT HOLDING CORP AND SUBSIDIARIES
(Formerly First Entertainment, Inc. and Subsidiaries)
Consolidated Balance Sheets
</CAPTION>
December 31, 1997 and 1996
1997 1996
<S> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents $ 18,049 $49,128
Trade accounts receivable, net of
allowance for doubtful
accounts of $3,885 and $7,483,
respectively 97,271 86,602
Note receivable, other 20,335 218,010
Accounts receivable officer 25,524
Stock subscription, receivable 25,000
Notes receivable, affiliate 10,000
Inventories 23,377 23,743
Other 22,127 18,176
Net assets of discontinued operations 413,250
- ----------------------------------------------------------------------
231,683 818,909
- ----------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Master tape library and film costs 1,600,827
Equipment and furniture 760,593 741,053
Building and leasehold improvements 532,257 528,257
Land 125,000 125,000
- ---------------------------------------------------------------------
1,417,850 2,995,137
Less accumulated depreciation
and amortization 874,067 2,399,175
- ---------------------------------------------------------------------
543,783 595,962
- ---------------------------------------------------------------------
OTHER ASSETS
License, net of accumulated amortization
of $482,980 and $420,460, respectively 788,401 829,921
License held for sale 800,000
Note receivable 61,105
Other 3,760
- ----------------------------------------------------------------------
853,266 1,629,921
- ----------------------------------------------------------------------
TOTAL ASSETS $ 1, 628,732 $ 3,044,792
===================================================================
<CAPTION>
"See accompanying reports of independent certified public accountants
and notes to consolidated financial statements."
</CAPTION>
</TABLE>
<TABLE>
<CAPTION>
FIRST ENTERTAINMENT HOLDING CORP. AND SUBSIDIARIES
(Formerly First Entertainment, Inc. and Subsidiaries)
Consolidated Balance Sheets, continued
</CAPTION>
December 31, 1997 and 1996
1997 1996
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS'(DEFICIT) EQUITY
CURRENT LIABILITIES
Accounts payable $ 172,575 $ 91,501
Accrued liabilities 168,902 166,917
Accrued interest 394,340 324,805
Accrued bonuses 257,600
Notes payable and current portion
of long-term debt 850,376 861,392
Notes payable, related parties 3,000
Net liabilities of discontinued operations 53,051
- ----------------------------------------------------------------------
1,642,244 1,702,215
- ----------------------------------------------------------------------
LONG-TERM DEBT, NET OF CURRENT PORTION 431,120 199,484
- ----------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' (DEFICIT) EQUITY
Preferred stock, $.001 par value;
authorized 5,000,000 shares;
Class A preferred stock, 1,500,000
shares authorized, 10,689 shares
issued and outstanding, liquidation
value $15,000 10 10
Class B preferred stock, 1,000,000
shares authorized, 91,147 and 0
shares issued and outstanding 91
Class C preferred stock, 1,000,000
shares authorized 0 and 125,000
shares issued and outstanding 125
Common stock, $.008 par value;
authorized 50,000,000 shares;
6,412,304 and 5,292,238 shares
issued and outstanding 51,299 42,338
Capital in excess of par value 14,947,897 13,460,958
Accumulated (deficit) (15,443,929)(11,829,707)
Deferred compensation (45,807)
Treasury stock, at cost, 77,125
shares of common stock (484,824)
- ----------------------------------------------------------------------
(444,632) 1,143,093
- ----------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS'
(DEFICIT) EQUITY $ 1,628,732 $ 3,044,792
======================================================================
<CAPTION>
"See accompanying reports of independent certified public accountants
and notes to consolidated financial statements."
</CAPTION>
</TABLE>
<TABLE>
<CAPTION>
FIRST ENTERTAINMENT HOLDING CORP. AND SUBSIDIARIES
(Formerly First Entertainment, Inc. and Subsidiaries)
Consolidated Statements of Operations
</CAPTION>
For the Years Ended December 31, 1997 and 1996
1997 1996
<S> <C> <C>
REVENUE
Live entertainment $ 1,389,533 $ 1,255,735
Radio 771,992 713,322
Video 50,239 105,618
Other 112,327 46,021
- ---------------------------------------------------------------------
2,324,091 2,120,696
- ----------------------------------------------------------------------
COSTS AND EXPENSES
Cost of sales, live entertainment 1,211,509 1,078,043
Cost of sales, radio 526,215 512,299
Cost of products sold, video 13,239 9,483
Impairment write downs 1,460,018
Depreciation and amortization 141,176 326,522
Management and administrative fees,
affiliate 240,000 408,000
Selling, general and administrative 1,532,049 1,326,256
- ---------------------------------------------------------------------
5,124,206 3,660,603
- ---------------------------------------------------------------------
OPERATING (LOSS) FROM CONTINUING
OPERATIONS (2,800,115) (1,539,907)
- ----------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest expense (95,333) (102,791)
Other, net 1,206 22,961
- ---------------------------------------------------------------------
(94,127) (79,830)
- ---------------------------------------------------------------------
(LOSS) FROM CONTINUING OPERATIONS
BEFORE MINORITY INTEREST (2,894,242) (1,619,737)
MINORITY INTEREST IN NET (LOSS) OF
SUBSIDIARY 11,473
- ----------------------------------------------------------------------
(LOSS) FROM CONTINUING OPERATIONS (2,882,769) (1,619,737)
- ----------------------------------------------------------------------
DISCONTINUED OPERATIONS (Note D)
(Loss) from discontinued operations,
including provision for operating
losses during phaseout period (731,453) (56,127)
Gain on sale of discontinued
operations 413,704
- ----------------------------------------------------------------------
NET (LOSS) $ (3,614,222) $(1,262,160)
=====================================================================
NET (LOSS) PER COMMON SHARE, CONTINUING
OPERATIONS BASIC AND DILUTED $ (.48) $ (.39)
======================================================================
NET INCOME (LOSS) PER COMMON SHARE,
DISCONTINUED OPERATIONS $ (.12) $ .09
======================================================================
NET (LOSS) PER COMMON SHARE $ (.60) $ (.30)
======================================================================
WEIGHTED-AVERAGE NUMBER OF
SHARES OUTSTANDING BASIC AND DILUTED 6,026,319 4,168,661
=====================================================================
<CAPTION>
"See accompanying reports of independent certified public accountants
and notes to consolidated financial statements."
</CAPTION>
</TABLE>
<TABLE>
<CAPTION>
FIRST ENTERTAINMENT HOLDING CORP AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
For the Years Ended December 31, 1996 and 1995
</CAPTION>
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, 1996 10,689 $ 10 231,976 $ 232 $ 0 $ 0
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
=======================================================================
</TABLE>
<TABLE>
Common Stock Capital In Accumulated
Excess Of
Shares Amount Par Value (Deficit)
<S> <C> <C> <C> <C>
BALANCES,
JANUARY 1, 1996 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
Amortization of
deferred
compensation
Net loss (1,262,160)
- ---------------------------------------------------------------------
BALANCES,
DECEMBER 31,
1996 5,292,238 $ 42,338 $ 13,460,958 (11,829,707)
=======================================================================
</TABLE>
<TABLE>
Deferred Treasury
Compensation Stock Total
<S> <C> <C> <C>
BALANCES,
JANUARY 1, 1996 ($ 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
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>
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>
Preferred stock
issued for:
Cash, net of
offering costs 47,067 47
Cancellation of
treasury stock
Cancellation of
preferred stock in
connection with
litigation
settlement (125,000) (125)
Common stock
issued for:
Consulting
services
Exercise of
stock options
Accrued bonuses
Accounts payable
Business acquisition 44,080 44
Common Stock
options and
warrants issued
Amortization of deferred
compensation
Net loss
- ----------------------------------------------------------------------
BALANCES,
DECEMBER 31,
1997 10,689 $ 10 91,147 $91 0 $0
=======================================================================
</TABLE>
<TABLE>
Common Stock Capital In Accumulated
Excess Of
Shares Amount Par Value (Deficit)
<S> <C> <C> <C> <C>
Preferred stock
issued for:
Cash, net of
offering costs 262,703
Cancellation of
treasury stock (221,534) (1,772) (483,052)
Cancellation of
preferred stock in
connection with
litigation
settlement (124,875)
Common stock
issued for:
Consulting
Services 751,600 6,013 670,202
Exercise of
stock options 150,000 1,200 73,800
Accrued bonuses 420,000 3,360 254,240
Accounts payable 20,000 160 13,040
Business
acquisition 386,856
Common Stock
options and
warrants issued 434,025
Amortization of
deferred
compensation
Net loss (3,614,222)
- ----------------------------------------------------------------------
BALANCES,
DECEMBER 31,
1997 6,412,304 $51,299 $14,947,897 ($15,443,929)
=====================================================================
</TABLE>
<TABLE>
Deferred Treasury
Compensation Stock Total
<S> <C> <C> <C>
Preferred stock
issued for:
Cash, net of
offering costs 262,750
Cancellation of
treasury stock 484,824
Cancellation of
preferred stock in
connection with
litigation
settlement (125,000)
Common stock
issued for:
Consulting
Services 676,215
Exercise of
stock options 75,000
Accrued bonuses 257,600
Accounts payable 13,200
Business
acquisition 386,900
Common Stock
options and
warrants issued 434,025
Amortization of
deferred
compensation 45,807 45,807
Net loss (3,614,222)
- -----------------------------------------------------------------
BALANCES,
DECEMBER 31,
1997 $ 0 0 ($444,632)
=================================================================
<CAPTION>
"See accompanying report of independent certified public accountants
and notes to consolidated financial statements."
</CAPTION>
</TABLE>
<TABLE>
<CAPTION>
FIRST ENTERTAINMENT HOLDING CORP. AND SUBSIDIARIES
(Formerly First Entertainment, Inc. and Subsidiaries)
Consolidated Statements of Cash Flows
</CAPTION>
For the Years Ended December 31, 1997 and 1996
1997 1996
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (3,614,222) $ (1,262,160)
Adjustments to reconcile net loss to
net cash used in operations
Depreciation and amortization 141,176 326,522
Impairment write downs 1,460,018
Assets write downs included in
discontinued operations 445,596
Litigation settlement 150,000
Debt settlements (21,342)
(Gain) on disposal of Image (413,704)
Issuance of stock for services and common
stock options and warrants, net 1,110,240 548,841
Amortization of deferred compensation 45,807 217,258
Minority interest in net loss of
Subsidiary (11,473)
Changes in operating assets and liabilities:
Receivables (6,742) 130,369
Inventories 366 (1,509)
Other assets (7,711) (221)
Accounts payable 40,207 28,233
Accrued liabilities (48,305) 369,492
Cash (used in) discontinued operations (94,526)
- -----------------------------------------------------------------------
NET CASH (USED IN) OPERATING ACTIVITIES (295,043) (172,747)
- -----------------------------------------------------------------------
<CAPTION>
"See accompanying reports of independent certified public accountants
and notes to consolidated financial statements."
</CAPTION>
</TABLE>
<TABLE>
<CAPTION>
FIRST ENTERTAINMENTHOLDING CORP. AND SUBSIDIARIES
(Formerly First Entertainment, Inc. and Subsidiaries)
Consolidated Statements of Cash Flows (Continued)
</CAPTION>
For the Years Ended December 31, 1997 and 1996
1997 1996
<S> <C> <C>
INVESTING ACTIVITIES
Capital expenditures (20,620) (16,147)
Advances to related parties (10,000) (10,000)
Repayment from related parties 100,000
Cash used in discontinued operations (41,786) (29,513)
- ----------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES (72,406) 44,340
- --------------------------------------------------------------------
FINANCING ACTIVITIES
Principal payments on debt (51,380) (66,453)
Proceeds from issuance of stock
of subsidiary 50,000 150,000
Proceeds from issuance of common and
preferred stock, net 337,750 22,500
- ---------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 336,370 106,047
- ---------------------------------------------------------------------
NET (DECREASE) IN CASH
AND CASH EQUIVALENTS (31,079) (22,360)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 49,128 71,488
- ---------------------------------------------------------------------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 18,049 $ 49,128
======================================================================
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Interest paid $ 25,798 $ 98,054
=====================================================================
Income taxes paid $ 0 $ 0
=====================================================================
<CAPTION>
"See accompanying reports of independent certified public accountants
and notes to consolidated financial statements."
</CAPTION>
</TABLE>
<TABLE>
<CAPTION>
FIRST ENTERTAINMENT HLDING CORP. AND SUBSIDIARIES
(Formerly First Entertainment, Inc. and Subsidiaries)
Consolidated Statements of Cash Flows (Continued)
</CAPTION>
For the Years Ended December 31, 1997 and 1996
1997 1996
SUPPLEMENTAL SCHEDULE OF
NONCASH INVESTING AND
FINANCING ACTIVITIES
<S> <C> <C>
Accounts payable and accrued expenses
converted into common stock $ 270,800 $
=======================================================================
Issuance of common stock for
inventory and other licensing
rights $ 1,000,000
=======================================================================
Issuance of preferred stock
for acquisitions $ 386,900 $ 275,000
=======================================================================
Note Payable issued in exchange for
preferred stock $ 125,000 $
=======================================================================
Mortgage notes assumed or provided in
property acquisitions $ $ 150,000
=======================================================================
Common stock and options and warrants
issued for services $ 1,110,240 $ 548,841
=======================================================================
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 of note
Payable $ $ 800,000
=======================================================================
Inventory seized resulting in accounts
receivable, other $ $ 200,000
=======================================================================
<CAPTION>
"See accompanying reports of independent certified public accountants
and notes to consolidated financial statements."
</CAPTION>
</TABLE>
FIRST ENTERTAINMENT HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A NATURE OF BUSINESS AND GOING CONCERN
On December 15, 1997, First Entertainment, Inc. changed its state of
incorporation from Colorado to Nevada and changed its name to First
Entertainment Holding Corp. (the "Company" or "FEHC"). The
change was effected by a merger of First Entertainment, Inc. into
First Entertainment Holding Corp, a newly formed Nevada Corporation.
Upon completion of the merger, the Colorado Corporation ceased to
exist. The transaction was accounted for on a basis similar to a
pooling of interests with no change in the historical financial
statements of the Company. The newly formed Corporation had no
operations prior to the merger.
The Company was originally incorporated as a Colorado corporation on
January 17, 1985. The Company and its subsidiaries are involved in
entertainment through several media; its live entertainment segment
owns and operates a comedy club and its radio station, 100.7 "The
Fox", operates in Gillette, Wyoming. In January 1998, the Company
determined to discontinue the operations of its retail segment.
During the period from inception (January 17, 1985) to December 31,
1997, the Company has incurred cumulative net losses of approximately
$15 million and, as of December 31, 1997, had an excess of current
liabilities over current assets of approximately $1.4 million and is
in default on approximately $386,000 notes payable. 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, restructuring of its debt
obligations and undertaking mergers or acquisitions to improve
market share or operational synergies and improving efficiency of
operations. There are no assurances that any of these events will
occur or that the Company's plan will be successful.
The Company does not have sufficient revenues to generate income from
operations; therefore, it is necessary for the Company to increase
revenues either by expansion or by acquisition or significantly
reduce its operating costs. The Company has been able to issue stock
for management and accounting services, thereby reducing the need for
cash to pay for operating expenses. If the Company would be unable
to issue stock for services, because there would be no liquidity for
the stock, this would have a severe impact upon the Company and its
ability to operate. The value of services paid by issuance of stock
was approximately $676,000 in 1997 and $548,000 in 1996. Net cash
used in operations was $295,000 in 1997 and, unless operations become
more profitable, the Company most likely will not have sufficient
cash for use in operations through December 31, 1999.
The Company believes that current cash, plus $213,000 in equity
financing through September 30, 1998, are sufficient to meet its
obligations through December 31, 1998.
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.
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (Continued)
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 on acquisitions, 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
under SFAS No. 121.
Production equipment, furniture and other equipment are recorded at
cost and depreciated using straight-line and declining balance
methods over the estimated useful lives of the assets, ranging from
three to fifteen years.
Leasehold improvements are recorded at cost and are amortized on a
straight-line basis over their estimated useful lives, but not in
excess of the lease term.
The cost and related accumulated depreciation and amortization of
assets sold or retired are removed from the appropriate asset and
accumulated depreciation and amortization accounts and the resulting
gain or loss is reflected in operations.
Maintenance and repairs are charged to operations as incurred and
expenditures for major improvements are capitalized.
License, Goodwill and Intangibles Broadcast licenses, goodwill and
intangibles, recorded at cost, 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 discounted future cash flow and the
carrying value of the intangible assets under SFAS No. 121.
Long Lived Assets
Long lived assets and identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount may not be recoverable. If the expected
undiscontinued future cash flow from the use of the assets and its
eventual disposition is less than the carrying amount of the assets,
an impairment loss is recognized and measured using the asset's fair
value or discontinued cash flows.
Revenue Recognition Video cassette sales and copyrighted materials
are generally recorded upon shipment. Broadcast and ad fees are
recorded as revenue when the broadcast or ad 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 As of December 31, 1997, the Company adopted Statement of
Financial Accounting Standards No. 128 "Earnings per Share" (SFAS No. 128).
This pronouncement provides a different method of calculating earnings per
share than is currently used in accordance with Accounting Board Opinion
(APB No. 15), "Earnings per Share". SFAS No. 128 provides for the
calculation of "Basic" and "Dilutive" earnings per share. Basic earnings
per share includes no dilution and is computed by dividing income available
to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the
potential dilution of securities that could share in the earnings of the
entity. For all prior periods, weighted average and per share information
has been restated in accordance with SFAS No. 128. The adoption of SFAS No.
128 did not effect earnings per share calculations for the years ended
December 31, 1997 and 1996. For the years ended December 31, 1997 and 1996,
total stock options and stock warrants of 908,375 and 95,000 were not
included in the computation of diluted earnings per shares because their
effect was anti-dilutive
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 1996 consolidated
financial statements have been reclassified in order to conform to
the 1997 presentation. The reclassifications had no effect on
financial condition or results of operations.
Income Taxes The Company accounts for income taxes under Statement of
Financial Accounting Standard No. 109 ("SFAS No. 109"). Temporary
differences are differences between the tax basis of assets and
liabilities and their reported amounts in the financial statements
that will result in taxable or deductible amounts in future years.
Deferred Compensation Deferred compensation results from granting
stock options at option prices less than the fair market value of the
stock on the date of grant, under agreements with terms extending
beyond one year. Deferred compensation is initially charged to
stockholders' equity and amortized to expense over the term of the
related agreement.
Cash Equivalents The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or
less to be cash equivalents.
Financial Instruments The following methods and assumptions were
used to estimate the fair value of each class of financial
instruments for which it is practicable to estimate that value;
Accounts Receivable, Accounts Payable and Accrued Liabilities Fair
values of accounts receivables, accounts payable, and accrued
liabilities are assumed to approximate carrying values for these
financial instruments since they are short term in nature and their
carrying amounts approximate fair value or they are receivable or
payable on demand.
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, 1997 and 1996.
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, 1997 December 31, 1996
<S> <C> <C> <C> <C>
Financial Liabilities Carrying Fair Carrying Fair
Notes Payable Amount Value Amount Value
and Mortgage Notes $1,281,496 $1,281,496 $1,060,876 $1,060,876
</TABLE>
Stock Option and Award 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.
Recent Accounting Pronouncements:
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" is effective for financial statements with
fiscal years beginning after December 5, 1997. Earlier application is
permitted. SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. The Company does not expect
the adoption of SFAS No. 130 to have a material effect, if any, on
its financial position or result of operations.
Statement of Financial Accounting Standards No. 131, "Disclosure
about segments of an Enterprises and Related Information" is
effective for financial statements with fiscal years beginning after
December 15, 1997. The new standard requires that public business
enterprises report certain information about operating segments in
complete sets of financial statements of interim periods
issued to shareholders. It also requires that public business
enterprises report certain information about their products and
services, geographic areas in which they operate and their major
customers. The Company has not adopted SFAS No. 131; but, it does
not have a material effect on its results of operation for 1997 and
1996.
Statement of Financial Accounting Standards No. 132, "Employers"
Disclosures about Pension and Other Post retirement Benefits' is
effective for financial statements with fiscal years beginning after
December 31, 1997. Earlier application is permitted. The new
standard revises employers' disclosures about pension and other post
retirement benefit plans but does not change the measurement or
recognition of those plans. SFAS No. 132 standardizes the disclosure
requirements for pensions and other post retirement benefits to the
extent practicable, requires additional information on change in the
benefit obligations and fair values of the plan assets that will
facilitate financial analysis, and eliminates certain disclosure
previously required when no longer useful. The Company does not
expect the adoption of SFAS No. 132 to have a material effect, if
any, on its results of operation.
The FASB has recently issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities": (?"FAS No. 133"). SFAS No. 133 established
standards for recognizing all derivative instruments including those
for hedging activities as either assets or liabilities in the
statement of financial position and measuring those instruments at
fair value. This Statement is effective for fiscal years beginning
after June 30, 1999. The Company has not yet determined the effect
of SFAS No. 133 on its financial statement.
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 infomercial products in kiosks primarily
located in retail malls. The Company purchased Power Media because
it considered the concept viable and, with proper management and
working capital, could be profitable.
At the time of the acquisition, Power Media had net liabilities of
approximately $130,000, and as such, the total purchase price for
Power Media was approximately $538,100. The acquisition of Power
Media was accounted for as a purchase and the purchase price in
excess of net assets acquired was allocated to goodwill.
Amortization of goodwill was computed on a straight line basis over
10 years. Since operations of Power Media prior to the Company's
acquisition were not material, no proforma information has been
provided.
In November 1996, a new entity was formed called "The Best Of As
Seen on TV", Inc. ("ASOTV") for the purpose of acquiring all of
the issued and outstanding common stock of Power Media and to provide
original incorporators with ownership in ASOTV. The original
incorporators of ASOTV were issued 464,000 shares of ASOTV for par
value ($.001 per share), which included 220,800 shares issued to NMG,
LLC, an entity owned by the wife of the president of the Company.
ASOTV then issued 1,010,000 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 and $50,000 received in 1997. In July 1997, the
Company issued 100,000 shares of its common stock in exchange for
100,000 shares of ASOTV owned by NMG, LLC. As a result of the above
transactions, ASOTV owned 100% of Power Media and the Company owned
approximately 58% and 56% of ASOTV as of December 31, 1997 and 1996,
respectively.
In March 1997, the Company terminated its unmanned kiosk operations,
which it started in November 1996, when the leases to its first four
locations were not renewed. Sales volumes at the unmanned kiosk
locations were not sufficient for profitable operations. The
Company turned its efforts to operating manned kiosks in major
retail malls. Each kiosk was approximately 250 square feet and sold
the top 50 selling infomercial products. Commencing August, 1997,
the Company opened six manned kiosk locations in six retail malls
located in the Denver metropolitan area. The sales volumes for the
manned kiosks were less than projected and the operations were
terminated January 31, 1998. Although the Company believes the
concept is viable, it currently does not have the working capital
necessary to further develop the concept. The results of operations
of ASOTV for the years ended December 31, 1997 and 1996 are
disclosed as discontinued operations.
Global Internet Corp
On May 1, 1997, the Company entered into an agreement with Global Casino, Inc.
(Global Casino) to acquire 1,500,000 shares of common stock of Global Internet
Corp. ("Global Internet") owned by Global Casino and a $375,000 note receivable
from Global Internet owed to Global Casino in exchange for 30,000 shares of
FEHC Class B Convertible Preferred Stock (Class B Stock). The 1,500,000
shares of common stock represents 50.3% of the issued and outstanding common
stock of Global Internet. Each share of Class B stock is convertible into
12.5 shares of FEHC restricted common stock. At the time FEHC entered into
the Agreement, FEHC did not have a sufficient number of authorized but
unissued shares of common stock to allow for the conversion of the preferred
stock to common stock.
In addition, the acquisition of Global Internet required the approval of the
shareholders of FEHC. On December 5, 1997 the shareholders of FEHC approved
(i)the increase in the authorized shares of FEHC common stock and (ii) the
acquisition of Global Internet Corp. For accounting purposes control of
Global Internet did not change until December 5, 1997. December 5, 1997 is
considered the acquisition date. The acquisition has been accounted for as
a purchase and the excess of purchase price over net assets acquired was
allocated to goodwill. The operations of Global Internet from
December 5, 1997 have been consolidated with those of the Company.
In June 1997, FEHC also issued 14,080 of Class B convertible
preferred stock to two officers of Global Internet, in exchange for
$176,000 accrued but unpaid compensation. Global Internet owed the
two officers compensation under the terms of long term employment
agreements. For accounting purposes, the Class B convertible
preferred shares issued were recorded on December 5, 1997, the date
the shareholders of FEHC approved an increase in the authorized
shares of common stock.
Global Internet was in the process of developing a virtual internet
casino and had a Web Site Development and Maintenance Agreement
(Development Agreement) with Electronic Data Systems (EDS) and DDB
Needham to develop the web site for approximately $1,200,000, of
which $300,000 had been expended to date on the web site
development. FEHC was unable to obtain the financing needed to
complete the web site development and the Development Agreement was
terminated.
The ability of the Company to obtain the necessary financing to
commence operations of a virtual internet casino is uncertain and as
such the Company's investment in Global Internet was determined by
management to be impaired. Included in the accompanying
consolidated statements of operations for the year ended December
31, 1997 is an impairment write-off of approximately $558,000
representing the Company's investment in Global Internet.
The following unaudited pro forma summary presents information as if
the acquisition of Global Internet had occurred at the beginning of
each period presented. The pro forma information is provided for
informational purposes only and does not purport to be indicative of
what would have occurred had the acquisition been made as of those
dates or of results which may occur in the future.
Pro Forma Information (Unaudited)
<TABLE>
<S> <C> <C>
1997 1996
Net Revenues $ 2,324,091 $ 2,120,696
Net loss from continuing operations $ (3,180,737) $ (2,096,634)
Net Loss per share, continuing operations $ (.53) $ (.50)
</TABLE>
NOTE D DISCONTINUED OPERATIONS
In November 1995, the Board of Directors decided to discontinue the
operations of Image Marketing Group, Inc. (Image). Accordingly, the
assets of Image were written down to their estimated net realizable
value resulting in a write down of $1.6 million as of December 31,
1995. In April, 1996, the Company sold Image to a former director
for $1,000 resulting in a gain on the sale of Image of approximately
$413,000. At the time of the disposition of Image, Image had
liabilities in excess of assets of approximately $414,000.
In January 1998, the Company determined to discontinue the
operations of ASOTV due to losses and lack of working capital to
further develop the concept. Accordingly, the assets of ASOTV were
written down to their estimated net realizable value resulting in a
write down of $490,000 included in the accompanying statement of
operations for the year ended December 31, 1997.
Revenues from discontinued operations were $174,799 and $18,756 for
1997 and 1996, respectively.
Summarized balance sheet data for the discontinued operations as of
December 31, 1997 and 1996 is as follows:
<TABLE>
<S> <C> <C>
1997 1996
ASSETS
Cash $ 9,289 $ 13,728
Accounts receivable 6,983 18,756
Inventory 66,482 27,539
Other 100
- ---------------------------------------------------------------
Total current assets 82,854 60,023
Goodwill 511,712
Property, plant and equipment, net 8,673 29,513
- --------------------------------------------------------------
Total Assets 91,527 601,248
- ---------------------------------------------------------------
LIABILITIES
Current liabilities 144,578 24,211
--------------------------------------------------------------
Total Liabilities 144,578 24,211
- --------------------------------------------------------------
Minority Interest 0 163,787
- --------------------------------------------------------------
Net assets (liabilities) of
discontinued operations $ (53,051) $413,250
===============================================================
</TABLE>
NOTE E NOTES PAYABLE AND LONG-TERM DEBT
The Company is in default under the terms of approximately $386,000
of its debt obligations for non-payment. 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. Notes payable and long term debt is summarized
as follows:
<TABLE>
December 31,
<S> <C> <C>
1997 1996
Notes payable, First National
Bank Gillette (1) $ 422,152 $ 458,719
Note payable to the
State of Wyoming(2) 300,000 300,000
Notes payable, litigation (7) 275,000 0
Mortgage note payable(3) 144,665 149,561
Mortgage note payable(4) 53,883 54,390
Note payable, creditor(5) 19,224 19,224
Various notes payable individuals
and companies(6) 66,572 78,982
- --------------------------------------------------------------
1,281,496 1,060,876
Less current portion 850,376 861,392
- --------------------------------------------------------------
Long-term debt $ 431,120 $ 199,484
==============================================================
</TABLE>
Future maturities of debt as of December 31, 1997 are as follows:
<TABLE>
<C> <C>
1998 $ 850,376
1999 238,471
2000 6,171
2001 58,683
2002 6,631
Thereafter 121,164
Total $1,281,496
==========
</TABLE>
(1) The Notes payable to First National Bank of Gillette are
revolving notes payable that are renewed annually. Currently
the notes bear interest at 10.5% per annum and require monthly
principal and interest of $6,500. The notes are collateralized
by substantially all the assets of the radio station in
Gillette, Wyoming except for the real estate.
(2) 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, 1997, the Company had
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.
(3) Note payable, trust; interest at 9.5%; monthly principal and
interest of $1,500; final payment due October 2012;
collateralized by real property.
(4) 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 $52,300 due May 15, 2000;
collateralized by real estate.
(5) 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.
(6) Various notes payable in default; due to various individuals
and companies with rates ranging from 10 to 21 percent per
annum.
(7) Notes payable due to two individuals in connection with
litigation settlements subsequent to December 31, 1997. The
first note for $125,000 bears interest at 9.5% per annum and is
due March 31, 1999. The second note for $150,000 bears interest
at 10% per annum and is payable in installments of $25,000 for
the first month and of $5,000 per month thereafter until July
15, 1999 at which time all unpaid principal and interest are
due. This note is secured by the stock of FEHC wholly owned
subsidiary, Quality Communications, Inc, which operates the
Company's radio station.
The weighted average interest rate on short-term borrowings was
13.49% and 14.54% for 1997 and 1996, respectively.
NOTE F STOCKHOLDERS' EQUITY
On December 15, 1997 First Entertainment, Inc. (FEI) (a Colorado
Corporation) was merged into First Entertainment Holding Corp.
(FEHC) (a Nevada Corporation) following a special shareholders
meeting on December 5, 1997 in which the shareholders approved a
name change and a change in the state of incorporation from Colorado
to Nevada. As a result of the merger, all of the issued and
outstanding shares of FEI were exchanged for the same amount of
shares of FEHC. FEHC is the surviving corporation and, effective
with the merger, FEI ceased to exist. FEHC has authorized capital
stock consisting of 50,000,000 shares of common stock, $.008 par
value and 5,000,000 shares of preferred stock, $.001 par value. The
Board of Directors has the authority to issue preferred shares in
series and determine the rights and preferences of each series.
A total of 1,500,000 shares of preferred stock has been designated
as Class A, 7% cumulative, non-participating convertible preferred
stock, had a mandatory redemption on November 18, 1996.
Liquidation preference is approximately $15,000. Each class A share
may be converted into two shares of common stock. The Class A
Preferred Stock has not been redeemed as of December 31, 1997.
A total of 1,000,000 shares of preferred stock has been designated
as Class B, 6% cumulative dividend, paid quarterly, if and then
declared, redeemable by the Corporation at face value and each share
of class B is convertible into 12.5 shares of common stock. The
rights of the class B shall be subordinate to Class A.
A total of 1,000,000 shares of preferred stock has been designated
as Class C, non-dividend and each share is convertible into common
stock at a conversion price equal to the average 30 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.
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.
In connection with the acquisition of Global Internet Corporation,
the Company entered into an agreement with two officers of Global
Internet on June 16, 1997 whereby the Company would issue 14,080
shares of Class B convertible preferred stock in exchange for
$176,000 of debt owed to the two officers by Global Internet.
In 1997, the Company issued 751,600 shares of common stock for consulting and
other services valued at $676,215 (includes $252,000 in services from related
parties) or an average of $.90 per share. In 1996, the Company issued 532,700
shares of common stock for consulting and other services valued at $533,841
(includes $240,000 in services from related parties) or an average $1.00 per
share. In 1997, the Company also issued 440,000 shares of common stock in
settlement of accrued bonus's to consultants and employees and accounts
payable totaling $270,800. Stock bonus's accrued for related parties was
$168,000.
In 1997, the Company issued 47,067 shares of Class B Convertible Preferred
Stock for $262,750, which was net of offering costs of $39,750. The Company
also issued 150,000 shares of common stock upon exercise of common stock
options receiving proceeds of $75,000.
In 1997, the Company cancelled 221,534 shares of common stock held as treasury
of which 144,409 represented shares returned to the Company in connection with
a litigation settlement with Image Marketing Group (Note K); 50,000
represented the cancellation of common stock held by a bank as collateral on
a note payable and 27,125 represented shares previously held by
First Films, Inc.
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. During 1997 and 1996, 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.
The following is a summary of the number of shares under option:
<TABLE>
Weighted
Average
Non-Qualifying Exercise Expiration
Stock Options Price Dates
<S> <C> <C> <C>
Balance, January 1, 1996 95,000 $ 3.49 1996-1998
Granted 50,000 .75 1996
Exercised (50,000) .75
Expired____________________________________________________
- ----------------------------------------------------------------------
Balance, December 31, 1996 95,000 3.49
Granted 400,000 .79 1999-2002
Exercised (100,000) .50
Expired/Rescinded (285,625) 2.39_______________
- -----------------------------------------------------------------------
Balance, December 31, 1997 109,375 $ 2.91 1998-2002
============================================================================
</TABLE>
The following table summarized information about stock options
outstanding and exercisable as of December 31, 1997:
<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>
$ 6.40 $ 10.48 9,375 0.75 $ 7.22
$ .50 $ 1.25 100,000 2.50 $ .87
109,375 2.00 $ 2.91
===================================================================
</TABLE>
Options issued to non-employees in 1997 resulted in compensation
expense in 1997 of $78,617 under SFAS 123.
Subsequent to year end an option was issued to purchase 300,000 shares
of common stock at $.40 per share. The option is exercisable for a
period of one year.
NOTE G COMMON STOCK WARRANTS
In connection with a settlement agreement between the Company and
Balzac, Inc, a warrant was issued to Balzac to purchase 500,000
shares of the Company's common stock at $1.00 per share.
The warrant, issued at fair market value, is exercisable for a
period of five years and expires April, 2002.The issuance of these
warrants to Balzac resulted in compensation expense of $315,453 in
1997 under SFAS 123.
In connection with the private sale of Class B convertible preferred
stock, the Company granted to the Underwriter a warrant to purchase
300,000 shares of the Company's common stock at $1.00 per share.
The warrant, issued at fair market value, is for consideration of
future consulting services and expires July, 1999. The issuance of
these warrants to the Underwriter resulted in compensation expense
of $33,434 in 1997 under SFAS 123.
In addition, the two officers of Global Internet have the option,
for a period of five years, to exchange any or all of their 600,000
shares of common stock of Global Internet into FEHC common stock at
a rate of one share of FEHC for four shares of Global Internet. In
addition, for each share exchanged the officers of Global Internet
will receive one warrant to purchase one share of FEHC common stock
at $1.25 a share.
The Company has elected to continue with the accounting treatment
for stock options and warrants issued to employees under APB 25,
which is an intrinsic value-based method, and has not adopted SFAS
123, which is a fair-value based method of accounting for stock
options. The Company estimates the fair value of each stock award
at the grant date by using the Black-Scholes option-pricing model
with the following weighted average assumptions, used for grants in
1997; dividend yield of 0%, expected volatility of .1%, risk free
interest rate of 6%, and expected lives of 5 years for the stock
award. Had compensation costs been determined based on the fair
value at the grant date for stock option and stock warrant grants
to employees consistent with the method of SFAS No. 123, the Company's net
loss from continuing operations and net
loss per share from continuing operations would have increased as
indicated below for the year ended December 31, 1997.
<TABLE>
<S> <C>
Net(loss)from continuing operations, as reported ($2,882,769)
Net (loss) from continuing operations, pro-forma ($2,898,513)
Net (loss) per share, continuing operations
basic and diluted, as reported ($.48)
Net (loss) per share, continuing operations basic
and diluted, pro-forma ($.48)
</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, 1997 and 1996 are:
<TABLE>
Deferred tax assets: 1997 1996
<S> <C> <C>
Net operating loss carryforwards $ 5,466,000 $ 4,195,000
Property, equipment, other assets, net (6,000) 42,000
Stock bonus accrual 95,000
Litigation settlement 102,000 43,000
Discontinued operations (181,000)
Other 88,000 25,000
------------------------------------------------------------------
Total gross deferred tax assets 5,469,000 4,400,000
Less valuation allowance (5,469,000) (4,400,000)
-------------------------------------------------------------------
Net deferred tax assets $ 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 be realized.
The valuation allowance increased $1,069,000 in 1997 and $561,000 in
1996.
The following summary reconciles the income taxes at the statutory
rate of 34% in 1997 and 1996 with the actual taxes:
<TABLE>
1997 1996
<S> <C> <C>
Benefit computed at the statutory
rate-continuing operations $ (980,000) $ (551,000)
Discontinued operations ( 89,000) (10,000)
Valuation allowance 1,069,000 561,000
- ----------------------------------------------------------------------
Provision for income taxes $ 0 $ 0
- ----------------------------------------------------------------------
</TABLE>
As of December 31, 1997, net operating loss carryforwards were
approximately $14 million. Utilization of certain portions of this
amount is subject to limitations under the Internal Revenue Code.
Carryforward amounts expire at various dates through 2017.
NOTE I RELATED PARTY TRANSACTIONS
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 from a trust controlled by a former officer of
the Company. 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, Class C Preferred Stock valued at $150,000 was
converted into 150,000 shares of common stock. In connection with
litigation settlement, the remaining preferred stock valued at
$125,000 was returned to the Company in exchange for a mortgage note
of $125,000.
Commencing April 1995, the Company contracted out some
administrative, management and accounting functions of the Company
to a company wholly owned by the former president and director of
the Company. Monthly fees for such services were $21,000 for 1997
and $20,000 for 1996. Total annual fees paid by the issuancw of
common stock for 1997 and 1996 were $252,000 and $240,000 each year,
respectively. The affiliated company sub-leases office space from
the Company on a month-to-month lease for $500 per month. In
addition, in 1996 the Company accrued a stock bonus of $168,000 due
to the service company payable in common stock which was issued in
February 1997. The stock bonus award was based on recognition of
prior services provided to the Company.
In July 1997, the Company acquired 100,000 shares of common stock of
ASOTV from NMG, LLC, an entity owned by the wife of the president,
in exchange for 100,000 shares of common stock of the Company. The
value of the common stock issued to NMG, LLC, $50,000, has been
classified as officer compensation in the accompanying consolidated
statements of operations.
Consulting fees were paid to the wife of the President for the years
ended December 31, 1997 and 1996 in the amount of $5,500 and
$12,000, respectively. The amounts paid to the wife of the
President have been classified as officer compensation in the
accompanying consolidated statement of operations.
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, 1997 are as follows:
<TABLE>
<C> <C>
1998 $118,537
1999 131,056
2000 112,008
2001 108,401
2002 77,976
</TABLE>
Rent expense for continuing operations was $176,765 and $165,047 in
1997 and 1996. Rent expense for discontinued operations was $77,365
in 1997 and $0 in 1996.
Commencing September,1998 the Company subleased its executive space
under the terms of a four year sublease. The Company has not been
relieved of its primary obligation due under the original lease with
the lessor. The sublease calls for payments of $6,824 per month for
48 months commencing September 1, 1998.
NOTE K LITIGATION
FEHC knows of no litigation pending, threatened, or contemplated, or
unsatisfied judgments against it, or any proceedings of which FEHC
or any of its subsidiaries is a party, except as specified below.
FEHC 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 February 1997, the Company agreed to terms of a Settlement
Agreement with the Receiver whereby the Company would relinquish all
rights to the Indian Motorcycle Trademark and pay the Receiver
approximately $114,000. (see Item 1, Other Business Developments)
In March 1997, the Company commenced legal proceedings against Image
Marketing Group, Inc. and Harvey Rosenberg ( a former officer of the
Company) , Burt Katz (a former director of the Company) and Michael
Katz, individually, for collection of approximately $700,000 in
advances to Image Marketing. Image Marketing Group, Inc was
purchased by the Company from Burt Katz, Michael Katz and Harvey
Rosenberg in September 1994. From September 1994 to November 1995
the Company advanced Image approximately $700,000. In November,
1995, the Company determined to discontinue the operations of Image
due to substantial losses and demanded repayment of the advances to
Image. Image was unable to repay the advances; therefore, the
Company commenced legal proceedings against Image and its former
shareholders. In July 1997, a settlement was reached with Image
Marketing Group, Harvey Rosenberg, Burt Katz and Michael Katz
whereby 144,410 shares of FEHC common stock held by the defendants
were returned to FEHC. The shares returned were cancelled and
returned to treasury.
In 1997, the Company commenced legal proceedings against HK Retail
Concepts for breach of contract. The claims are for damages of
approximately $50,000. The Suit was filed in Denver District County
Court in May 1997 and is waiting trial in January 1999.
In May 1997, David Spolter and Faige Spolter (Spolter) filed a
lawsuit against FEHC in the Superior Court of the State of
California. The plaintiffs alleged various federal and state
securities violations and sought recovery of their $75,000
investment plus damages. On July 1, 1998, Spolter and FEHC entered
into a settlement agreement whereby FEHC agreed to pay Spolter
$150,000. $25,000 was paid upon execution of the Settlement
Agreement and the remaining $125,000 shall be payable in monthly
installments of $5,000 a month until July 15, 1999 at which time all
unpaid principal and interest shall become due and payable. The
note bears interest of 10% per annum. FEHC agreed to pledge all of
its stock of its wholly owned subsidiary, Quality Communications,
Inc. and to provide a security interest in all assets of Quality
Communications, Inc. In the event of default, the amount due shall
be $180,000 plus interest at 10% from June 1, 1998, less amounts
previously paid. Any unpaid amounts shall be due and payable upon
sale of the radio station in Gillette, Wyoming.
In 1997, Sharon K. Doud filed a civil action against FEHC, AB
Goldberg and Quality Communications for breach of contract, fraud
and misrepresentation for failure to convert Class C Convertible
Preferred Stock into 91,240 shares of common stock. In April 1998,
a settlement agreement was reached between FEHC and Sharon Doud
whereby FEHC was required to pay $6,150 in legal fees, issue a
promissory note in the principal sum of $125,000 bearing interest at
9.5% per annum due March 31, 1999 and cancel the Class C Convertible
Preferred Shares.
In June 1996, Frank P. D'Alessio, a former director of the Company,
commenced an action against A.B. Goldberg, president and director of
the Company, Nannette Goldberg, wife of A.B. Goldberg, Sara
Goldberg, mother of A.B. Goldberg, Cohig & Associates, Neidiger
Tucker Brunner, Inc, Hanifin, Inhoff, Inc., Southwest Securities,
Inc., Paul Davis and Mike Zenhari in the United States District
Court for the District of Colorado.
The suit alleges that the plaintiff (Mr. D'Alessio) was defrauded by
the defendants pursuant to security transactions involving shares of
common stock purchased by plaintiff in Video Communications and
Radio, Inc. (now First Entertainment Holding Corp.). The defendants
have strenuously denied any violations of any state or federal
statutory or common law.
On October 1, 1996, the plaintiff and the defendants entered into a
Settlement Agreement and Mutual Release. The Settlement Agreement
required A.B. Goldberg to deliver to the plaintiff 150,000 shares of
common stock of First Entertainment Holding Corp. by August 1, 1997,
and such shares will be registered in a Form S-3 filed with the
Securities and Exchange Commission. In addition, Mr. Goldberg was
to deliver to plaintiff a certified or cashier's check in the amount
of $20,000 by May 5, 1997.
On November 19, 1996, 50,000 shares of common stock of FEHC were
transferred to Mr. D'Alessio from Mr. Michael Payne, a shareholder
of the Company. In July 1996, Mr. Payne had been issued 554,000
shares of common stock of FEHC in exchange for his shares of common
stock of Power Media (see Note C). In July 1997 100,000 shares of
common stock of FEHC were issued to NMG, LLC, an entity owned by the
wife of the President of the Company, in exchange for 100,000 shares
of ASOTV. (see Note C). On July 29, 1997, the 100,000 shares of
common stock acquired by NMG, LLC were transferred to Mr. D'Alessio.
The value of the common stock transferred to Mr. D'Alessio,
$76,500, has been classified as officer compensation to A.B.
Goldberg in the accompanying consolidated statements of operations.
NOTE L FOURTH QUARTER ADJUSTMENTS
During the fourth quarters of 1997 and 1996, the Company recorded
the following year-end
adjustments, which it believes are material to the results of that
quarter:
<TABLE>
1997 1996
<S> <C> <C>
Effect of Balzac dispute resolution
(see Note M):
Decrease in inventory $ 1,000,000
Decrease in notes payable $ 800,000
Increase in accounts receivable $ 200,000
Effect of Indian Motorcycle settlement
(See Note K and M):
Decrease in receivables $ 143,000
Decrease in certain rights $ 300,000
Increase in accrued settlement $ 114,000
Decrease in stockholders' equity $ 300,000
Decrease in amortization expense due
to the above $ 127,500
Write-down of assets, including goodwill
of discontinued operations of ASOTV to net
realizable value $ 490,000
Impairment write down of Balzac
note receivable $ 902,000
Impairment write down of Global Casino's
Investment $ 558,000
Compensation for issuance of common stock
options and warrants $ 434,025
</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.
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 $1.0
million.
During 1996, a dispute arose between the Company and Balzac and
Balzac asserted a violation of the Purchase Agreement. Balzac
seized the inventory valued at $1 million, which was collateral on
the fixed obligation due under the Australian Licensing Agreement,
to satisfy the $800,000 obligation under the Licensing Agreement.
The Company asserted that Balzac had no right under the Purchase
Agreement or License Agreement to seize the inventory and apply the
proceeds against the note obligation under the License Agreement.
In April 1997, Balzac and the Company entered into an agreement
whereby Balzac will buy back the Australian Licensing Agreement for
$800,000 and will repay the Company $200,000 which was the
difference between the value of the seized inventory and the
obligation under the licensing agreement. The $200,000 is
classified as an account receivable, other in the accompanying
consolidated balance sheet at December 31, 1997. The $1,000,000
will be repaid over forty months at 8% per annum. The $1,000,000
will be repaid to the Company through the sale, by Balzac, of
1,000,000 of the Company's shares of common stock owned by Balzac.
The ability of Balzac to sell all 1,000,000 shares held by Balzac at
a price of $1.00 to repay its obligation was determined by
management to be unlikely. As of December 31, 1997 the note
receivable from Balzac was determined to be impaired and was written
down to its net realizable value of $81,340 resulting in an
impairment loss of $902,018.
NOTE N SUBSEQUENT EVENTS
In April and June 1998, the Company settled two lawsuits against the
Company resulting in payables to the plaintiffs totaling $275,000
(See Note K).
For the nine months ended September 30,1998 the Company sold 771,667
shares of common stock and 16,000 shares of convertible preferred
stock for $202,050, net of offering costs. On June 16, 1998 the
Company issued a stock option to purchase 300,000 shares of common
stock for $.40 per share. The option is exercisable for a period of
one year.
On September 15, 1998, the Company entered into a definitive
agreement with SportsNet, Inc. (SNI) The effective date of the
Agreement will be ten days after the following two events have
occurred; (i) SNI has completed a financing of not less than
$1,000,000 and (ii) the Company has entered into a contract with a
credit card processor for participants in the Games satisfactory to
both the Company and SNI. The Agreement, if and when it becomes
effective, will continue in effect as long as the Company has a
valid internet gaming license issued by the Commonwealth of
Dominica or will terminate upon revocation of such license by the
Commonwealth of Dominica.
Under the Agreement, the Company, at its sole cost and expense, will
be responsible for providing physical facilities, communications
installation, phone lines and maintenance necessary to accommodate
and interface with computer hardware located in Dominica. In
addition, the Company must provide adequate insurance coverage for
the equipment owned by the Company and SNI. The Internet Gaming
License issued by the Commonwealth of Dominica requires the Company
to hire five (5) people at the prevailing wage for the term of the
license and pay 5% of gross revenues derived from the internet
gaming revenue but not less than $25,000 per year to the
Commonwealth of Dominica.
In June, 1998 FEHC signed a non-binding letter of intent with
Intelek, LLC ("Intelek") to form a joint venture with Intelek for
the purpose of developing and promoting entertainment sites on the
internet.
FEHC will invest in and receive 50% of the revenues from new sources
of internet traffic from multiple adult entertainment sites
presently being operated by Intelek. FEHC would invest $250,000 and
issue 250,000 shares of its restricted common stock to Intelek, Inc.
FEHC would receive a preferential payment of the first $250,000 from
the new sources of revenue thereafter, FEHC would receive 50% of all
revenues received from new sources of internet traffic developed.
Upon receipt of $250,000 FEHC would be obligated to issue an
additional 250,000 shares of restricted stock.
Consummation of this agreement is subject to a number of conditions
including the negotiation of a definitive agreement, completion of
due diligence, approval of the transaction by the Board of Directors
of both companies and approval of any necessary governmental
authorities. Due to the contingencies involved, FEHC is unable to
predict if or when the transaction will be consummated.
NOTE O SEGMENT INFORMATION
Financial information by industry segments for the years ended
December 31, 1997 and 1996 is summarized as follows:
<TABLE>
Live Other
Radio Video Entertainment Segments (1)(2)
<S> <C> <C> <C> <C>
FOR THE YEAR
ENDED
DECEMBER 31,
1997
Revenue
Unaffiliated $771,992 $ 50,239 $ 1,389,533 $ 112,327
Revenue
affiliated 175,956
Operating
income
(loss),
continuing
operations 104,000 (31,732) 193,471 (3,065,854)
Identifiable
Assets 1,317,535 985,982 337,063 1,318,719
Depreciation
and amortization 87,100 35,525 4,105 14,446
Capital
Expenditures 10,144 0 5,224 5,252
</TABLE>
<TABLE>
Eliminations Consolidated
<S> <C> <C>
FOR THE YEAR
ENDED
DECEMBER 31,
1997
Revenue
Unaffiliated $ 0 $ 2,324,091
Revenue
Affiliated (175,956)
Operating
income
(loss),
continuing
operations (2,800,115)
Identifiable
Assets (2,330,567) 1,628,732
Depreciation
and amortization 141,176
Capital
Expenditures 20,620
</TABLE>
<TABLE>
Live Other
Radio Video Entertainment Segments (1)(2)
<S> <C> <C> <C> <C>
FOR THE YEAR
ENDED DECEMBER 31,
1996
Revenue
Unaffiliated $ 713,322 $ 105,618 $ 1,255,735 $ 46,021
Revenue
Affiliated 175,956
Operating
income (loss),
continuing
operations 51,606 (110,865) 84,134 (1,564,782)
Identifiable
Assets 1,383,683 1,005,280 259,776 2,558,430
Depreciation
and amortization 77,549 207,000 3,841 38,132
Capital expenditures 439,193 1,322 30,145
</TABLE>
<TABLE>
Eliminations Consolidated
<S> <C> <C>
FOR THE YEAR
ENDED
DECEMBER 31,
1996
Revenue
Unaffiliated $ 0 $ 2,120,696
Revenue
Affiliated (175,956)
Operating
income
(loss),
continuing
operations (1,539,907)
Identifiable
Assets (2,162,377) 3,044,792
Depreciation
and amortization 326,522
Capital
Expenditures 470,660
</TABLE>
(1) Other segments represents the operations of the parent company
which is primarily responsible for incurring general and administrative
expenses. Identifiable assets are essentially investments in
subsidiaries which are eliminated in consolidation.
(2) Identifiable assets includes net assets of discontinued operations
in 1996 of $413,250.
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
On April 6, 1998, the Company was informed by its independent
auditors, BDO Seidman, LLP of BDO Seidman, LLP's resignation,
effective that date. The reports on the consolidated financial
statements of the Company for each of the two fiscal years in the
period ending December 31, 1996 did not contain any adverse opinion
or disclaimer of opinion and were not qualified as to audit scope or
accounting principles. However, the reports of BDO Seidman, LLP did
contain an explanatory paragraph relative to a going concern
uncertainty. There were no accounting disagreements with BDO
Seidman, LLP that resulted in their resignation.
PART III
Item 9. Directors , Executive Officers , Promoters and Control
Persons
Information concerning the Directors and Executive Officers of the
Company is as follows:
Tenure as Officer
Name Age Position or Director
[C] [C] [C] [C]
A. B. Goldberg 50 Director April 1993 to present
President Commencing February
and Chief 1995
Executive
Officer
William Rubin 38 Director November 1998 to present
Dr. Theodore Jacobs 66 Director November 1996 to August
1998
Dr. Nick Catalano 57 Director March 1992 to August 1998
Cindy Jones 43 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:
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.
William "Bill" Rubin is a commercial loan officer having served as
a vice president with various financial institutions. Mr. Rubin's
responsibilities included underwriting and originating construction
and real estate loans, workout and restricting of real estate loans
management of loan portfolios in excess of $150 million. Mr. Rubin
earned a BBA in Finance and Accounting from Southern Methodist
University in 1983. Mr. Rubin serves as a director for Assets
Management.
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. Mr. Catalano resigned effective
August 29, 1998.
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. Dr. Jacobs resigned effective August 7, 1998.
Cynthia Jones served as the corporate controller for the Company
from 1982 to 1995. She currently serves as corporate controller for
Creative Business Services, Inc.
No family relationship exists between or among any of the persons
named above. None of the Company's Directors are directors of any
other company that has a class of equity securities registered
under, or required to file reports pursuant to, Section 15(d) of the
Securities Act of 1933 or Section 12 of the Securities Exchange Act
of 1934, or any company registered as an investment company under
the Investment Company Act of 1940. There are no arrangements or
understandings between any of the named directors or officers and
any other persons pursuant to which any director or officer was
selected or nominated as a director or officer.
Item 10. Executive Compensation
Only one executive officer received cash compensation in excess of
$100,000 during the fiscal year ended December 31, 1997 and 1996.
Compensation does not include minor business-related and other
expenses paid by the Company for its officers during fiscal year
1997 and 1996, nor the personal usage of a Company automobile. Such
amounts in the aggregate do not exceed $10,000. The Company's Chief
Executive Officer, A.B. Goldberg received compensation of $148,000,
and $96,000 for 1997, and 1996, respectively. Amounts paid to the
wife of A.B. Goldberg in the amounts of $12,000 and $5,000 for 1997
and 1996 have been recorded as officer compensation. In addition,
the value of common stock transferred to NMG, LLC in connection with
litigation settlement are classified as officer compensation. (See
Part I Item 3)
From time to time, the Company has granted shares of its common
stock as additional compensation to its officers and key employees
for their services, as determined by the Company's Board of
Directors. During 1997 and 1996, no shares were granted to officers
or key employees.
As of December 31, 1997, the Company had no group life, health,
hospitalization, medical reimbursement or relocation plans in effect
which discriminates, in scope, terms, or operation, in favor of
officers or directors of the Company and that are not generally
available to all salaried employees. Further, the Company has no
pension plans or plans or agreements which provide compensation on
the event of termination of employment or change in control of the
Company.
The Company does not pay members of its board of Directors any fees
for attendance or similar remuneration, but reimburses them for any
out-of-pocket expenses incurred by them in connection with Company
business.
<TABLE>
Summary Compensation Table
Annual Compensation Long term
Awards Payouts
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name and Other Restricted Underlying All Other
Principal Annual Stock Options LTIP Compensation
Position Compen- Award(s) SARs(#) Payouts ($)
Year Salary($)Bonus($)sation ($) ($) ($)
A.B.
Goldberg 1997 $24,000 $47,500 $76,500
President
and 1996 $24,000 $72,000
Chief
Executive
Officer
</TABLE>
Item 11. Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth certain information regarding
ownership of the Common Stock of the Company as of July 31, 1998 by
(I) each person known by the Company to be the beneficial owner of
more than 5 percent of the outstanding common stock of the Company;
(ii) each director of the Company; and (iii) all executive officers
and directors of the Company as a group.
<TABLE>
Names and Addresses Beneficial Percent
of Beneficial Owner Ownership of Class
<S> <C> <C>
Balzac, Inc. 975,000 11.5%
7887 E. Belleview, Suite 1114
Englewood, CO 80111
Creative Business Services, Inc. (2) 577,366 6.8%
5495 Marion Street
Denver, CO 80216
A. B. Goldberg (1) 22,338 .3%
7887 E. Belleview, Suite 1114
Englewood, CO 80111
William Rubin (4) 183,670 2.2%
313 East Fort Ave.
Baltimore, MD 21230
Cindy Jones 0 0%
7887 E. Belleview, Suite 1114
Englewood, CO 80111
Nick Catalano (3) 23,050 .3%
189-32 44th Avenue
Flushing, NY 11358
Dr. Theodore Jacobs
1999 Broadway, Suite 3135 (3) 138,859 1.6%
Denver, CO 80202
Officers and Directors 206,008 2.4%
as a Group (2 persons)
</TABLE>
(1) Include shares owned by Nannette Goldberg, wife of A.B. Goldberg
Director of Company and shares owned by his mother and his two
children. There are no stock options issued or outstanding to A.
B. Goldberg.
(2) Includes shares owned by Doug Olson, president and sole
shareholder of Creative Business Services.
(3) Form 4 and 5 required to be filed for changes in beneficial
ownership have not been timely filed by these directors who have
resigned August, 1998.
(4) Includes 6,347 shares of Class B convertible preferred stock
convertible into 79,337 shares of common stock.
Item 12. Certain Relationships and Related Transactions
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 from a trust controlled by a former officer of
the Company. 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, Class C Preferred Stock valued at $150,000 was
converted into 150,000 shares of common stock. In connection with
litigation settlement, the remaining preferred stock valued at
$125,000 was returned to the Company in exchange for a mortgage note
of $125,000.
Commencing April 1995, the Company contracted out some
administrative, management and accounting functions of the Company
to a company wholly owned by the former president and director of
the Company. Monthly fees for such services for 1997 and 1996 were
$21,000 and $20,000 respectively. Total annual fees paid for 1997
and 1996 were $252,000 and $240,000. The affiliated company sub-
leases office space from the Company on a month-to-month lease for
$500 per month. In addition, in 1996, the Company accrued a stock
bonus of $168,000 due to the service company payable in common stock
which was issued in February 1997. The stock bonus award was based
on recognition of prior services provided to the Company.
In July 1997, the Company acquired 100,000 shares of common stock of
ASOTV from NMG, LLC, an entity owned by the wife of the president,
in exchange for 100,000 shares of common stock of the Company. The
value of the common stock issued to NMG, LLC, $50,000, has been
classified as officer compensation in the accompanying consolidated
statements of operations.
Consulting fees were paid to the wife of the President for the years
ended December 31, 1997 and 1996 in the amount of $5,500 and $12,000
respectively. The amounts paid to the wife of the President have
been classified under officer compensation in the accompanying
consolidated statements of operations.
PART IV
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits. The following exhibits are filed herewith pursuant
to Rule 601 of Regulation S-K or are incorporated by reference to
previous filings.
Exhibit
Table No Document Reference
2) Plan of acquisition, reorganization,
arrangement, liquidation, None
or succession
(3) Articles of Incorporation and Bylaws (A)
(4) Instruments defining the rights of security holders, including
(B) indentures
(9) Voting trust agreement None
(10) Material contracts (C)
(13) Annual or quarterly reports, Form 10-QSB None
(16) Letter on change in certifying accountant (F)
(18) Letter on change in accounting principles None
(21) Subsidiaries of the registrant (D)
(22) Published report regarding matters submitted
to a vote of security holders None
(23) Consent of experts and counsel (E)
(24) Power of attorney None
(27) Financial Data Schedule (6)
(28) Information from reports furnished to state insurance None
regulatory authorities
(99) Additional exhibits None
(A) A complete copy of the Company's Articles of Incorporation as
currently in effect and all amendments thereto was filed as Exhibit
89.3.1 to the Registrant' Form 10-K for the fiscal year ended December
31, 1989, and a complete copy of the Company's Bylaws as currently in
effect was filed as Exhibit 86-3(c) to the Company's Registration
Statement on Form S-18 (Registration No. 33-9163-D) and are
incorporated herein by reference thereto.
(B) The Company hereby agrees to furnish a copy of the form of its
convertible subordinated debentures to the Commission upon request.
(C) The following material contracts are filed herewith or incorporated
herein by reference thereto:
Document Title Reference Commission Filing
Stock Option Agreement 86-10(a) Registration Statement
on Robert Beattie on Form S-18 (33-9163-D)
Host Agreement - Annette Funnicello 86-10(b) Registration Statement
on Form S-18 (33-9163-D)
Host Agreement - Jill St. John 86-10(c) Registration Statement
on Form S-18 (33-9163-D)
Host Agreement - James Farentino 86-10(d) Registration Statement
on Form S-18 (33-9163-D)
Host Agreement - Tony Randall 86-10(e) Registration Statement
on Form S-18 (33-9163-D)
Video Distribution Agreement - 86-10(f) Registration Statement
Lightning Video (Vestron) on Form S-18 (33-9163-D)
Trademark License Agreement - 86-10(g) Registration Statement
Rand McNally & Company on Form S-18 (33-9163-D)
Stock Option Agreement 86-10(h) Registration Statement
Peter TenEyck on Form S-18 (33-9163-D)
November 4, 1987 amendment to 87-10(a) Registration Statement
Vestron Distribution Agreements on Form S-18 (33-9163-D)
January 29, 1988 amendment to 87-10(b) Registration Statement
Trademark License Agreement on Form S-18 (33-9163-D)
Selluloid Agreement dated March 4, 1988 87-10(d)Registration Statement
on Form S-18 (33-9163-D)
Children as Teachers of Peach 87-10(e) Registration Statement
Agreement dated June 6, 1988 on Form S-18 (33-9163-D)
Eastman's Outdoor World and Western 87-10(f) Registration Statement
American Films, Inc. dated March 17, 1988 on Form S-18 (33-9163-D)
Sturgis Exclusive Licensing and Use 87-10(g) Registration Statement
Agreement dated July 1987 on Form S-18 (33-9163-D)
Best Film and Video Corporation 87-10(h) Registration Statement
Distribution Agreement dated December on Form S-18 (33-9163-D)
7, 1987
Gillette,Wyoming Office Lease Agreement 87-10(i)Registration Statement
on Form S-18 (33-9163-D)
KGWY-FM Tower Lease 87-10(j) Registration Statement
on Form S-18 (33-9163-D)
December 15, 1988 Atlantis Video 89-10(a) Form 10-K for the year
License Agreement ended December 31, 1988
Iowa Radio Stations Asset Purchase 89-10(b ) Form 10-K for the year
Agreement dated April 18, 1989 ended December 31, 1988
January 31, 1989 License Agreement with 89-10(c) Form 10-K for the year
Adler Video Marketing, Ltd. ended December 31, 1988
Stock Option Agreement - Ray Ricci 89.10.1 Form 10-K for the year
ended December 31, 1989
Stock Option Agreement - Ray Ricci 89.10.2 Form 10-K for the year
ended December 31, 1989
Stock Option Agreement - Keller, Wing, 89.10.3 Form 10-K for the year
Godbolt and Polakovic ended December 31, 1989
Stock Option Agreement - Dennis Dowd 89.10.4 Form 10-K for the year
ended December 31, 1989
Rand McNally Video Trip Guide to Ohio 89.10.5 Form 10-K for the year
Agreement, dated January 11, 1990 ended December 31, 1989
Wyoming Radio Station Letter of Intent 89.10.6 Form 10-K for the year
dated March 28, 1990 ended December 31, 1989
Settlement Agreement with Miller & 89.10.7 Form 10-K for the year
Weiss, P.C., dated March 30, 1990 ended December 31, 1989
Distributor Agreement with Adler Video 89.10.8 Form 10-K for the year
Marketing, Ltd. ended December 31, 1989
Post-Production Services Agreement 93-10.1 Form 10-K for the year
ended December 31, 1993
Settlement Agreement with DCC and 93.10.2 Form 10-K for the year
Marshall Blonstein ended December 31, 1993
Agreement with Rand McNally and Company 93.10.3 Form 10-K for the year
ended December 31, 1993
Promissory note with Keller, Wing & Godbolt 93.10.4 Form 10-K for the
year ended December 31, 1993
Distribution/licensing agreement with 93.10.5 Form 10-K for the year
Woodknapp and Company ended December 31, 1993
Amendment to Articles of Incorporation 93.10.6 Form 10-K for the year
Name change ended December 31, 1993
Amendment to Articles of Incorporation 93.10.7 Form 10-K for the year
increase authorized shares ended December 31, 1993
Stock Option Agreement Robert Young 93.10.8 Form 10-K for the year
ended December 31, 1993
Letter of Intent Polton Corporation 93.10.9 Form 10-K for the year
ended December 31, 1993
Promissory note sample bridge lenders 93.10.10 Form 10-K for the
year ended December 31, 1993
Subscription Agreement 93.10.11 Form 10-K for the year
ended December 31, 1993
(D) Not required since the information is ascertainable from the
Company's financial statements filed herewith.
(E) A list of all subsidiaries of the Company was filed as Exhibit 89-
22(a) to the Company's Form 10-K for the year ended December 31,
1988 and is incorporated herein by reference thereto.
(b) Reports on Form 8-K
One report on Form 8-K was filed by the Registrant during the last
quarter of the period covered by this report.
Form 8-K dated December 10, 1997; Item 1, 2, 5 and 7.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
FIRST ENTERTAINMENT HOLDING CORP
Dated: December 1 , 1998 By ________________
A. B. Goldberg, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the Company and in the capacities and on the dates indicated.
Dated: December 1 , 1998 __________
A. B. Goldberg
President and Principal Executive
Officer
Dated: December 1 , 1998 _________________________
Cynthia M. Jones
Secretary and Treasurer
Principal Accounting Officer
Dated: December 1 , 1998 _________________________
William Rubin
Director
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-31-1997
<PERIOD-END> Dec-31-1997
<CASH> 18
<SECURITIES> 0
<RECEIVABLES> 172
<ALLOWANCES> (4)
<INVENTORY> 23
<CURRENT-ASSETS> 232
<PP&E> 1418
<DEPRECIATION> (874)
<TOTAL-ASSETS> 1629
<CURRENT-LIABILITIES> 1642
<BONDS> 0
<COMMON> 51
0
1
<OTHER-SE> (497)
<TOTAL-LIABILITY-AND-EQUITY>1629
<SALES> 2324
<TOTAL-REVENUES> 2324
<CGS> 1751
<TOTAL-COSTS> 5124
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 95
<INCOME-PRETAX> (2883)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2883)
<DISCONTINUED> (731)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3614)
<EPS-PRIMARY> (.60)
<EPS-DILUTED> (.60)
</TABLE>
