SECURITIES AND EXCHANGE COMMISSION
Washington ,D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1998 Commission File Number 0-15435
FIRST ENTERTAINMENT HOLDING CORP.
(Exact name of Company as specified in its charter)
NEVADA 84-0974303
(State or other jurisdiction I.R.S. Employer Identification No.
of incorporation or organization)
7887 Belleview, Suite 1114 Englewood, CO 80111
(Address of principal executive offices) (Zip code)
Company's telephone number, including area code (303) 228-1650
First Entertainment, Inc. 1999 Broadway, Suite 3135 Denver, CO 80202
(Former name, former address and former fiscal year, if changed since
last report.)
Indicate by check whether the Company (1) has filed 1) Yes X
all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the 2) Yes X
preceding 12 months (or for such shorter period that
the Company was required to file such reports), and
(2) has been subject to such filing requirements for
the past 90 days.
Indicate the number of shares outstanding of each of the issuer's
classes
of stock, as of the latest practicable date.
Number of Shares
Class Outstanding at October 1, 1998
Common stock, $.008 par value 8,803,837
Class A Preferred Stock, $.001 par value 10,689 shares
Class B Preferred Stock, $.001 par value 77,547 shares
FIRST ENTERTAINMENT HOLDING CORP.
(Formerly First Entertainment, Inc and Subsidiaries)
FORM 10-QSB QUARTERLY REPORT
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheet as of June 30,1998
(Unaudited) and December 31, 1997
Consolidated Statements of Operations (Unaudited)
for three months and six months ended June 30, 1998 and 1997
Consolidated Statements of Cash Flows (Unaudited)
for the six months ended June 30, 1998 and 1997
Notes to Consolidated Financial Statements (Unaudited)
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II - OTHER INFORMATION
Items 1 through 6
SIGNATURE
<TABLE>
<CAPTION>
FIRST ENTERTAINMENT HOLDING CORP. AND SUBSIDIARIES
(Formerly First Entertainment, Inc and Subsidiaries)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
</CAPTION>
June 30, December 31,
1998 1997
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 88,225 $ 18,049
Accounts receivable trade, net
of allowance 34,934 97,271
Account receivable, officer 20,615 25,524
Notes receivable, other 20,234 20,335
Stock Subscription, receivable 25,000
Inventories 48,138 23,377
Other current assets 25,422 22,127
- -------------------------------------------------------------
237,523 231,683
-------------------------------------------------------------
PROPERTY AND EQUIPMENT
Equipment and furniture 764,311 760,593
Building and leasehold improvement 532,257 532,257
Land 125,000 125,000
- ---------------------------------------------------------------
1,421,568 1,417,850
Less accumulated depreciation 897,001 874,067
- -------------------------------------------------------------
530,567 543,783
--------------------------------------------------------------
OTHER ASSETS
License, net of accumulated
Amortization 745,931 788,401
Note Receivable 61,105 61,105
Other 3,889 3,760
- -------------------------------------------------------------
810,925 853,266
- -------------------------------------------------------------
TOTAL ASSETS $ 1,579,015 $ 1,628,732
=============================================================
<CAPTION>
"See accompanying 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
(Unaudited)
</CAPTION>
June 30, December 31,
1998 1997
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS'
EQUITY (Deficit):
CURRENT LIABILITIES
Accounts payable $ 16,663 $ 172,575
Accrued interest 410,482 394,340
Accrued liabilities 133,110 168,902
Accounts Payable, related party 3,000 3,000
Net liabilities of discontinued
Operations 58,175 53,051
Notes payable and current portion of
long term debt 824,225 850,376
- -----------------------------------------------------------------
Total current liabilities 1,445,655 1,642,244
- -----------------------------------------------------------------
LONG TERM DEBT, NET OF CURRENT
PORTION 433,739 431,120
- --------------------------------------------------------------------
MINORY INTEREST - -
- --------------------------------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.001 par value;
authorized 5,000,000 shares;
Class A preferred stock, 10,689
shares issued 10 10
Class B preferred stock 77,547
and 91,147 shares issued and
outstanding 78 91
Class C preferred stock no
shares issued 0 0
Common stock, $.008 par value;
authorized 50,000,000 shares;
8,231,237 and 6,412,304
shares issued 65,850 51,299
Capital in excess of par value 15,502,767 14,947,898
Accumulated deficit (15,869,084) (15,443,929)
- -----------------------------------------------------------------
(300,378) (444,632)
- -------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS
EQUITY (DEFICIT) $ 1,579,015 $ 1,628,732
<CAPTION>
"See accompanying 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
(Unaudited)
</CAPTION>
For the three months ended For the six months ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
REVENUE:
Live Entertainment $ 284,540 346,503 $ 602,878 774,718
Radio 208,819 207,070 403,406 374,416
Video 148 12,640 213 50,042
Other 14,123 8,041 2 4,639 54,925
- -----------------------------------------------------------------------
507,630 574,253 1,031,136 1,253,802
- -----------------------------------------------------------------------
COSTS AND EXPENSES:
Cost of sales -
live entertainment 268,802 333,474 537,090 668,709
Cost of sales - radio 127,716 147,816 276,982 267,181
Cost of products sold
- video 25 11,593 45 13,130
Depreciation and
Amortization 25,606 40,510 51,818 120,021
Selling, general
and administrative 251,878 208,178 545,071 649,699
- ----------------------------------------------------------------------
674,028 741,571 1,411,006 1,718,740
- ---------------------------------------------------------------------
OPERATING LOSS FROM
CONTINUING OPERATIONS (166,038) (167,318) (379,870) (464,938)
OTHER INCOME (EXPENSE)
Interest expense (22,508) (22,958) (44,839) (47,713)
Other 24 557 87 848
- ----------------------------------------------------------------------
LOSS FROM CONTINUING
OPERATIONS,
BEFORE MINORITY
INTEREST (188,882) (189,719) (424,622) (511,803)
MINORITY INTEREST IN
NET LOSS
- ------------------------------------------------------------------------
LOSS FROM CONTINUING
OPERATIONS (188,882) (189,719) (424,622) (511,803)
DISCONTINUED OPERATIONS
Income (Loss) from
discontinued operations (532) (7,834) (532) (23,662)
- -----------------------------------------------------------------------
NET INCOME (LOSS) $ (189,414) $ (197,553) $ (425,154)$(535,465)
=======================================================================
PER SHARE DATA:
Basic and Diluted
Net Income (loss)
per share,
continuing operations,
Basic and Diluted $ (.03) $ (.03) $ (.06) $ (.09)
Net Income (loss) per share,
discontinued operations * * * *
Net Income (loss)
per common share,
Basic and Diluted $ (.03) $ (.03) $ (.06) $ (.09)
WEIGHTED-AVERAGE
NUMBER OF
SHARES OUTSTANDING 6,887,906 5,794,585 6,887,906 5,794,585
======================================================================
<CAPTION>
* Less than $.01 per share
"See accompanying 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
(Unaudited)
</CAPTION>
For the six months For the six months
ended June 30, ended June 30,
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income (loss) $ (425,154) $ (535,464)
Adjustments to reconcile net
income (loss) to net cash
from operations
Depreciation and
Amortization 51,818 120,021
Minority interest (23,662)
Common stock issued
for services 370,519 466,370
Common stock options 66,888
Changes in operating assets
and liabilities
(Increase) decrease in
Receivables 92,347 29,096
Inventories (24,761) (3,630)
Other current assets (3,295) (1,263)
Other assets (129)
Increase (decrease) in
Accounts payable (155,912) (30,750)
Accrued liabilities (19,650) (85,945)
Cash provided by
discontinued operations 29,555
- ---------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES: (17,774) (65,227)
- ----------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures - net (3,718) (28,676)
Investments and other (5,780)
- ---------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (3,718) (34,456)
- ----------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on debt (23,532) (24,926)
Proceeds from issuance of common
stock of subsidiary 115,200 98,351
Cash used in discontinuing
Operations 0 0
- ---------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 91,668 73,425
- --------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH 70,176 (26,258)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 18,049 62,856
- --------------------------------------------------------------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 88,225 $ 36,598
====================================================================
<CAPTION>
"See accompanying notes to consolidated financial statements."
</CAPTION>
</TABLE>
FIRST ENTERTAINMENT HOLDING CORP. AND SUBSIDIARIES
(Formerly First Entertainment, Inc and Subsidiaries)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation and Significant Accounting Policies:
The accompanying consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and in accordance with instructions to
Form 10-QSB and Regulation S-B. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. The accompanying
financial information is Unaudited but includes all adjustments
(consisting of normal recurring accruals) which, in the opinion of
management, are necessary to present fairly the information set forth.
The consolidated financial statements should be read in conjunction with
the notes to the consolidated financial statements which are included in
the Annual Report on Form 10-KSB of the Company for the fiscal year
ended December 31, 1997.
The results for the interim period are not necessarily indicative of
results to be expected for the fiscal year of the Company ending
December 31, 1998. The Company believes that the six months report
filed on Form 10-QSB is representative of its financial position and its
results of operations and changes in cash flows for the periods ended
June 30, 1998 and 1997.
New Accounting Standards
In June 1997 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard No. 131 "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131") and
issued Statement of Financial Accounting Standard No. 130 "Reporting
Comprehensive Income ("SFAS" 130") the financial Accounting Standards
Board ("FASB".) SFAS 130 establishes standards for reporting and
display of comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include all changes in
equity except those resulting from investments by owners and
distributions to owners. Among other disclosures, SFAS 130 requires
that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported
in a financial statement that displays with the same prominence as other
financial statements. SFAS 131 supercedes Statement of Financial
Accounting Standard No. 14 "Financial Reporting for Segments of a
Business Enterprise." SFAS 131 establishes standards of the way that
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 standard 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 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, if any, the standards may have on future financial statement
disclosures. Results of operations and financial position, however,
will be unaffected by the implementation of these standards.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Post-retirement Benefits" which standardizes
the disclosure requirements for pensions and other post-retirement
benefits and requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate
financial analysis. SFAS No. 132 is effective for years beginning after
December 15, 1997 and requires comparative information for earlier years
to be restated, unless such information is not readily available.
Management believes the adoption of this statement will have no material
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 statements.
"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 properly 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.
2. Stockholders Equity
Balzac, Inc.
In April 1996, the Company acquired certain assets of Balzac, Inc.
("Balzac") a private company which manufactures and distributes toys,
including a product line of toy balls. The assets and rights acquired
consisted of: an exclusive license for Australia, inventory of Balzac
toys and various other rights.
The exclusive license agreement for Australia was acquired for $800,000
and was payable within five years based upon a formula of 60% of net
profits from the sale of Balzac products in Australia. The inventory
and other assets were acquired by issuing 1,100,000 shares of the
Company's restricted common stock valued at $1.6 million.
During 1996, a dispute arose between the Company and Balzac and Balzac
asserted a violation of the Purchase Agreement. Balzac seized the
inventory valued at $1 million, which was collateral on the fixed
obligation due under the Australian Licensing Agreement, to satisfy the
$800,000 obligation under the licensing agreement.
The Company asserted that Balzac had no right under the Purchase
Agreement or License Agreement to seize the inventory and apply the
proceeds against the note payable under the Licensing Agreement.
In April 1997, Balzac and the Company entered into an agreement whereby
Balzac will buy back the Australian Licensing Agreement for $800,000 and
will repay the Company $200,000 which was the difference between the
value of the seized inventory and the obligation under the licensing
agreement. The $1,000,000 will be repaid over forty months at 8% annum.
For the year ended December 31, 1997 the Company wrote the note
receivable down by $902,119 to its net realizable value.
During the quarter ending March 31, 1998, the Company issued 359,850
shares of common stock for consulting services valued at approximately
$147,638 of which $16,800 was for prior accrued services. The common
stock issued for consulting services was registered in an S-8
registration statement and were free trading upon issuance. In
addition, the Company issued 130,000 shares of restricted common stock
in lieu of payment life insurance premiums for certain officers and
consultants. In addition, the Company sold 41,667 shares restricted
common stock in a private placement offering resulting in net proceeds
of $11,250.
During the quarter ended June 30, 1998 the Company sold 290,000 shares
of common stock and 16,000 shares of Class B Convertible Preferred Stock
resulting in net proceeds of $103,950. In addition 29,600 shares of
Class B Convertible Preferred Stock were converted to 370,000 shares of
common stock. The Company issued 627,416 shares of common stock for
services valued at $200,682 or an average of $.32 a share. On June 16,
1998 the Company issued an option to purchase 300,000 shares of common
sock at $.40 per share. The option is outstanding for a period of one
year. The issuance of this option resulted in compensation expense of
$66,888 under SFAS 123.
3. Income Taxes
The tax effects of temporary differences and carryforward amounts that
give rise to significant portions of the deferred tax assets and
deferred tax liabilities as of December 31, 1997 and 1996 are:
<TABLE>
Deferred tax assets: 1997 1996
<S> <C> <C>
Net operating loss carryforwards $ 5,466,000 $ 4,195,000
Property and Equipment (6,000) 42,000
Stock Bonuses 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)
- ------------------------------------------------------------------
Deferred tax liabilities:
Property and equipment
- -------------------------------------------------------------------
Net deferred taxes $ -0- $ -0-
===================================================================
</TABLE>
A valuation allowance has been established to reflect management's
evaluation that it is more likely than not that all of the deferred tax
assets will not be realized.
The valuation allowance increased $1,069,000 in 1997 and $561,000 in
1996.
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 though 2012.
4. Letter 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 the first joint venture 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 occrued; (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.
5. Other
In February 1998, the Company was delisted from NASDAQ for failure to
meet the minimum bid price. The delisting has impaired the Company's
ability to raise equity financing.
ITEM 2. MANAGEMENT DISCUSSION AND PLAN OF OPERATION.
Results of Operation June, 1998 vs. June, 1997
For the six months ended June 30, 1998 the Company incurred a loss form
continuing operations of $424,600 as compared to $511,800 for the six
months ended June 30, 1997. The primary reason for the reduction in the
operating loss from continuing operations is the decrease in general and
administrative expenses of approximately $104,000 and a reduction of
depreciation and amortization of $69,000.
For the quarter ended June 30, 1998 the Company incurred a loss from
continuing operations of approximately $188,900 as compared to a loss
from continuing operations of approximately $189,800 for the quarter
ended June 30, 1997. The decrease in the net loss for the quarter ended
June 30, 1998 as compared to June 30, 1997 is the primarily result of a
decrease in all cost and expense categories except general and
administrative.
For the quarter ended June 30, 1998 revenues decreased by approximately
$67,000 as compared to the quarter ended June 30, 1997. The primary
reason for the decline is a decrease in live entertainment revenues from
$346,000 in 1997 to $284,000 in 1998. The decrease in live
entertainment revenues in the second quarter is due to fewer high
profile headliners which resulted in fewer patrons. The decrease in
patrons effects both admission revenues and liquor sales.
For the six months ended June 30, 1998 as compared to the six months
ended June 30, 1997, overall revenues decreased by approximately
$223,000. Live entertainment revenues decreased by $172,000 due to
reduced attendance. Radio sales increased by $29,000 or 8% due to a
stronger economy in Gillette which impacts advertising sales rates.
Video sales decreased by $50,000 and the Company no longer sells videos.
Other revenues also decrease by $30,000 comparing 1997 to 1998. Other
income for the six months ended June 30, 1997 included a payment of
$40,000 from an unrelated third party to buy out the Company's lease for
office space. Other income included T-shirt, coupon books and cigarette
sales and approximately $1,500 in rent income per quarter.
The decrease in live entertainment revenues was due to decreased
attendance as a result of fewer big name headliners in the first quarter
of 1998. The first quarter of 1997 was our most profitable quarter to
date for live entertainment. Although big name headliners usually draw
more attendance, their cost is also substantially higher. In 1997 the
Company was not as successful in increasing attendance due to big name
headliners as it was in 1996 therefore those types of headliners were
reduced for 1998. In addition, big name headliners were not as
available for club acts in 1998.
Cost of sales live entertainment decreased as a result of a decrease in
revenues and the percent of cost of sales to sales decreased from 96% in
1997 to 95% in the second quarter of 1998. Cost of sales as a percent
of total sales for live entertainment increased from 86% to 89% for the
six months ended June 30, 1997 as compared to the six months ended June
30, 1998. Overall attendance decreased but the labor cost remained the
same which resulted in a lower gross profit.
Cost of goods sold radio, decreased approximately $ 20,000 comparing the
second quarter of 1998 to 1997. The cost of sales radio as compared to
radio sales was 61% in 1998 and 71% in 1997. For the six months ended
June 30, 1998 as compared to the six months ended June 30, 1997 cost of
sales - radio decreased to 69% from 71%. The Company is aggressively
pursuing additional advertising revenues in 1998 and increasing is
promotions to obtain a larger market share thereby allowing the station
to increase its advertising rates.
In 1998, depreciation and amortization decreased substantially as
compared to 1997. The three months ended June 30, 1997, included
approximately 15,000 in amortization of licensing right acquired from
Balzac which were sold back to Balzac in the second quarter of 1997.
Many fixed assets became fully depreciated in 1997 and deprecation of
property and equipment was $52,000 in 1997 as compared to $23,000 in
1998.
General and administrative costs increased $43,700 for the quarter ended
June 30, 1998 as compared to the quarter ended June 30, 1997. The
increase of approximately 21% is due to compensation costs for stock
options valued at $66,888 for the quarter. General and administrative
costs decreased approximately $105,000 in 1998 as compared to 1997. The
decrease is primarily attributable to a reduction in consulting services
of approximately $154,000.
Interest expense changed only slightly comparing 1998 to 1997 even
though notes payable and long term debt is $222,000 higher at June 30,
1998 as compared to June 30, 1997. At December 31, 1997 the Company
recorded notes payable of $275,000 resulting from litigation settlements
which occurred subsequent to year-end. The $275,000 in notes payable do
not commence accruing interest until June 1998.
Liquidity and Capital Resources
As of June 30, 1998, and December 31, 1997 the Company had a working
capital deficit of approximately $1.2 million and $1.4 million,
respectively. Despite a loss of approximately $425,000, net used in
from operating activities was only $17,800 primarily due to common stock
issued for services of $370,000. The Company has been able to issue
common stock for services thereby reducing the need for working capital
and collections of receivables was up nearly $90,000 in 1998.
The Company's ability to continue as a going concern will largely depend
on its ability to generate working capital through debt or equity
financing and profitable operations. Working capital deficiencies have
hindered the Companies ability to fund certain business segments.
Working capital is needed to further develop both existing lines of
business and any new lines of business. The likelihood of obtaining the
necessary equity financing is uncertain at this time.
The Company has been successful in 1998 and in 1997 financing some of
its operations through the issuance of common stock in exchange for
services. In 1998, the Company issued 1,087,266 shares of common stock
valued at $370,520 or an average of $.34 per share. In 1997 the Company
issued 326,500 shares of common stock for services valued at $402,000 or
$1.23 per share. In February 1998 the Company was delisted from NASDAQ
which has adversely affected the price of the stock. Of the total costs
and expenses of $1,344,000 in 1998 and $1,719,000 in 1997, $370,520 paid
in stock in1998 and $466,370 was paid in stock in 1997. Stock issued as
a percentage of revenue was 36% in 1998 and 37% in 1997.
Commencing with the new lease for the Comedy Works space in Larmier
Square effective January 1, 1998, Comedy Works has begun a significant
remodeling project. The remodeling is expected to be completed by mid-
October, 1998. The seating capacity will be increased by approximately
40 seats from 285 to 325. The increase in seating capacity is expected
to increase revenues for those shows which have typically sold out in
prior years. The total remodeling costs are approximately $300,000 of
which $100,000 is to be paid by the landlord (lessor) as tenant
improvements and $200,000 will be paid by Comedy Works. The landlord
(lessor) has agreed to finance the $200,000 at 12% per annum over 10
years.
If the Company is successful in negotiating a definitive agreement
related to the pending letter of intent with Intelek, Inc., between
$250,000 and $500,000 in 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.
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 he Company would be
successful in raising the additional equity financing needed to finance
either acquisitions contemplated under the letter of intent or the
definitive agreement.
A valuation allowance offsetting the Company's net deferred tax asset
has been established to reflect management's evaluation that it is more
likely than not that all of the deferred tax assets will not be
realized.
"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 properly 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.
SFAS 130 and SFAS 131 are effective for financial statements for periods
beginning after December 1, 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 131, if any, on future financial statement disclosures. The Company
adopted SFAS 130 and restated all prior periods. Results of operations
and financial position, however will be unaffected by the implementation
of these standards.
PART II - OTHER INFORMATION
- ---------------------------------------------
Item 1: Legal Proceedings
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 unspecified damages
at this time. The Suit was filed in Denver District County Court in
May, 1997 and is awaiting a trial date.
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 the Class C Convertible Preferred Shares were cancelled.
In June 1996, Frank 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 fir 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 was issued 554,000 shares of common
stock of FEHC in exchange for his shares of common stock of Power Media.
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. On July 29, 1997 the 100,000
shares of common stock acquired by NMG, LLC were transferred to Mr.
D'Alessio.
Item 2: Changes in Securities
None
Item 3: Defaults upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8-K
(A) Exhibits
None
(B) Reports on Form 8-K
February 5, 1998 Item 5. Other Events
Delisting from NASDAQ
April 10, 1998 Item 4. Change in Registrants Certifying
Accountants
Resignation of BDO Seidman, LLP
August 12, 1998 Item 4. Change in Registrants Certifying
Accountants
Appointment of Gordon, Hughes & Banks,
LLP
Item 6. Resignation of Director
Resignation of Dr. Theodore Jacobs
September 11, 1998 Item 6. Resignation of Director
Resignation of Dr. Nicholas Catalano
SIGNATURES
Pursuant to the requirements of the Exchange Act, the Company has
duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
First Entertainment Holding Corp.
DATE: December 1, 1998 /s/ A.B. Goldberg
A.B. Goldberg
President
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