QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1999 Commission File Number
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)
5495 Marion Street Denver, Colorado 80216
(Address of principal executive office (Zip code)
Company's telephone number, including area code (303) 228-1650
7887 Bellview, Suite 1114 Englewood, CO 80111
(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 July 31, 1999
Common stock, $.008 par value 11,983,646 shares
Class A Preferred Stock, $.001 par value 10,689 shares
FIRST ENTERTAINMENT HOLDING CORP.
FORM 10-QSB/A QUARTERLY REPORT
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheet as of September 30,1999
(Unaudited) and December 31, 1998
Consolidated Statements of Operations (Unaudited)
for three months and six months ended September 30, 1999 and 1998
Consolidated Statements of Cash Flows (Unaudited)
for the six months ended September 30, 1999 and 1998
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.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
</CAPTION>
September 30,
December 31,
1999 1998
<S> <C> . <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 232,453 $ 109,450
Accounts receivable trade, net
of allowance 127,827 101,568
Note receivable, officer 10,710 15,010
Prepaid Salaries 46,635
Inventories 18,299 14,732
Other Current assets 24,529 28,508
- ---------------------------------------------------------------------
460,453 269,268
- ---------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Equipment and furniture 758,467 709,325
Building and leasehold improvement 682,257 532,257
Land 125,000 125,000
- ---------------------------------------------------------------------
1,565,724 1,366,582
Less accumulated depreciation 901,589 845,810
- ---------------------------------------------------------------------
664,135 520,772
- ---------------------------------------------------------------------
OTHER ASSETS
License, net of accumulated
Amortization 657,994 725,684
Web site development costs 99,500
Other 24,984 4,126
- --------------------------------------------------------------------
782,478 729,810
- --------------------------------------------------------------------
TOTAL ASSETS $ 1,907,066 $ 1,519,851
====================================================================
<CAPTION>
"See accompanying notes to consolidated financial statements."
</CAPTION>
</TABLE>
<TABLE>
<CAPTION>
FIRST ENTERTAINMENT HOLDING CORP.
CONSOLIDATED BALANCE SHEETS, continued
(Unaudited)
</CAPTION>
September 30,
December 31,
1999 1998
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (Deficit):
CURRENT LIABILITIES
Accounts payable $ 137,327 $ 188,920
Accrued interest 440,883 430,107
Accrued liabilities 172,746 142,458
Accounts Payable, related party 3,000 3,000
Net Liabilities of discontinued operations 55,934 57,305
Notes Payable and current portion
of long-term debt 866,451 993,384
- --------------------------------------------------------------------
Total current liabilities 1,676,341 1,815,174
- --------------------------------------------------------------------
LONG TERM DEBT, NET OF CURRENT PORTION 320,909 187,699
- --------------------------------------------------------------------
MINORITY INTEREST - -
- --------------------------------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.001 par value; authorized
5,000,000 shares;
Class A preferred stock, 10,689 shares issued
and outstanding 11 10
Class B preferred stock 0 and 11,760
shares issued and outstanding 13
Class C preferred stock no shares issued 0 0
Common stock, $.008 par value; authorized
50,000,000 shares; 11,966,646 and 9,610,170
shares issued 95,855 76,882
Capital in excess of par value 20,079,506 15,924,086
Accumulated (deficit) (18,670,875) (16,484,014)
Deferred compensation (1,594,680)
- ---------------------------------------------------------------------
(90,184) (483,023)
- ---------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS
EQUITY (DEFICIT) $ 1,907,066 $ 1,519,850
====================================================================
<CAPTION>
"See accompanying notes to consolidated financial statements."
</CAPTION>
</TABLE>
<TABLE>
<CAPTION>
FIRST ENTERTAINMENT HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the For the
three months nine
months
ended ended
September 30, September 30, September 30, September
30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
REVENUE:
Live Entertainment $ 405,696 $ 338,804 $1,213,826
$941,682
Radio 234,344 183,899 619,508
587,305
Internet 9,072 9,072
Video 0 0 0
213
Other 25,423 12,522 106,529
37,161
- -----------------------------------------------------------------------
- -
674,535 535,225 1,948,935
1,566,361
- -----------------------------------------------------------------------
- -
COSTS AND EXPENSES:
Cost of sales - live
Entertainment 368,734 276,847 1,111,519
813,937
Cost of sales - radio 165,192 148,879 444,147
417,861
Cost of sales- internet 347,214 347,214
Cost of products sold - video
45
Impairment writedowns 15,000
Depreciation and amortization 27,819 23,079 92,441
74,897
Management and
administrative fees, Affilates 60,000 56,000 116,000
182,000
Selling, general and
Administrative 561,376 123,798 1,897,709
550,870
- -----------------------------------------------------------------------
- -
1,530,315 667,943 4,050,400
2,078,950
- -----------------------------------------------------------------------
- -
OPERATING LOSS FROM CONTINUING
OPERATIONS (885,780)
(132,718)(2,101,465)(379,870)
OTHER INCOME (EXPENSE)
Interest expense (28,899) (10,240) (89,319)
(55,079)
Other 2,149 212 3,923
1,059
- -----------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS,
BEFORE MINORITY INTEREST (882,530) (142,097)
(2,186,861)(566,720)
MINORITY INTEREST IN NET LOSS
OF AFFILIATES
- -----------------------------------------------------------------------
LOSS FROM CONTINUING
OPERATIONS (882,530) (142,097)
(2,186,861)(566,720)
DISCONTINUED OPERATIONS
Income (Loss) from
discontinued operations (20,224)
(20,756)
- -----------------------------------------------------------------------
NET INCOME (LOSS)
$(882,530)$(162,321)$(2,186,861)$(587,476)
=======================================================================
=
PER SHARE DATA: Basic and Diluted
Net Income (loss) per share,
continuing operations,
Basic and Diluted (.08) $ (.02) (.21) $
(.08)
Net Income (loss) per share,
discontinued operations * * * *
Net Income (loss) per
common share,
Basic and Diluted (.08) $ (.02) (.21) $
(.08)
WEIGHTED-AVERAGE NUMBER OF
SHARES OUTSTANDING 10,645,619 7,566,412 10,654,619 7,566,412
=======================================================================
=
<CAPTION>
* Less than $.01 per share
"See accompanying notes to consolidated financial statements"
</CAPTION>
</TABLE>
<TABLE>
<CAPTION>
FIRST ENTERTAINMENT HOLDING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
</CAPTION>
For the six months For the six
months
ended September 30, ended
September 30,
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income (loss) $ (2,186,861) $ (587,476)
Adjustments to reconcile net
income (loss) to net cash
from operations
Depreciation and
Amortization 92,441 74,897
Impairment writedowns 15,000 39,340
Common stock issued
for services 627,225 396,566
Common stock options 1,028,773 66,888
Changes in operating assets
and liabilities
(Increase) decrease in
Receivables (21,959) 10,927
Inventories (3,567) 9,777
Other current assets 3,979 (7,650)
Other assets (20,858) 2,983
Increase (decrease) in
Accounts payable 42,746 (93,532)
Accrued liabilities 41,064 (7,168)
Cash provided by
discontinued operations (1,371) 38,714
- -------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES: (383,388) (48,020)
- -------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures - net (49,142) (8,658)
other 22,381
- -------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (26,761) (8,658)
- -------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on debt (143,723) (75,187)
Proceeds from issuance of common stock - 25,000
Proceeds from issuance of common and
Preferred stock 676,875 213,400
- -------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 533,152 163,213
- -------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH $ 123,003 $ 106,535
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 109,450 18,049
- -------------------------------------------------------------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 232,453 $ 124,584
===================================================================
<CAPTION>
"See accompanying notes to consolidated financial statements."
</CAPTION>
</TABLE>
<TABLE>
Supplemental Schedule of Noncash
Investing and Financing Activities 1999 1998
<S> <C> <C>
Accounts payable converted to common stock $ 92,339 50,163
===================================================================
Accounts payable issued for Web site
Development $ 90,000
====================================================================
Note payable issued for Leasehold
Improvements $ 150,000
===================================================================
Common stock issued for services $ 627,225 $ 396,566
===================================================================
Common stock options issued
for services $ 1,028,773 $ 66,888
===================================================================
Common stock issued for life
insurance premiums $ - $ 30,000
==================================================================
Issuance of Preferred stock for
License 13,500
==================================================================
</TABLE>
FIRST ENTERTAINMENT HOLDING CORP.
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, 1998.
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, 1999. The Company believes that the three month and nine
month report filed on Form 10-QSB is representative of its financial
position and its results of operations and changes in cash flows for
the periods ended September 30, 1999 and 1998.
In June 1999, the Company amended and refiled its Form 10KSB for the
year ended December 31, 1998 restating certain amounts in 1998 and 1997
due to an accounting error discovered in 1997. This Form 10-QSB
includes the restated balances from December 31, 1998. The restatement
did not impact the net loss for the three months or nine months ended
September 30, 1999.
New Accounting Standards
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" is effective for financial statements with fiscal
years beginning after December 15, 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 adopted SFAS No. 130
for 1998 and it did not have a material effect on its financial
position or result of operations.
Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise 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 and annual 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
adopted SFAS No. 131 in 1998; but, it did not have a material effect on
its results of operation for 1998 and 1997.
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 changes in the benefit obligations
and fair values of the plan assets that will facilitate financial
analysis, and eliminates certain disclosures previously required but no
longer useful. The Company adopted SFAS No. 132 in 1998 and it did not
have a material impact on its results of operation.
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.
The FASB recently issued Statement of Financial Accounting Standards
No. 134. "Accounting for Mortgage Backed Securities Retained after the
Securitization of Mortgage Loans Held by Mortgage Banking Enterprises."
(SFAS No. 134) SFAS No. 134 establishes new reporting standards for
certain activities of mortgage banking enterprises that conduct
operations that are substantially similar to the primary operations of
mortgage banking enterprises. This statement is effective for the
fiscal quarter beginning after December 15, 1998. Management believes
the adoption of this statement will have no impact on the Company's
consolidated 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 and has evaluated all
other computer and computer related systems to ensure they will operate
beyond December 31, 1999. The new software will be in place by
December 31, 1999 and will cost less than $10,000.
2. Impairment Writedowns
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.
During 1996, a dispute arose between the Company and Balzac and Balzac
asserted a violation of the Purchase 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. The $1,000,000 was to be repaid to the Company through
sale, by Balzac, of 1,000,000 shares of the Company's 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 $81,344 resulting in an impairment loss of
$902,018. As of December 31, 1998 the note receivable was determined
to be further impaired and was written down to its net realizable value
of $42,000 resulting in a loss of $39,340. Subsequent to December 31,
1998 the Company was informed by Balzac that it had filed Chapter 11
Bankruptcy proceedings. Management determined the note receivable was
unlikely to be collected and the remaining $42,000 was written off as
of December 31, 1998.
Pursuant to a Bankruptcy Court Order dated April 13, 1999 Balzac sold
885,000 shares of the Company's common stock between May, 1999 and
July, 1999 receiving proceeds of approximately $2,056,000. The shares
sold by Balzac pursuant to the Court Order are the shares subject to
the April, 1997 Agreement between Balzac and the Company. As of July
19,1999 Balzac is still in possession of 90,1000 shares of the
Company's common stock and warrants to purchase 500,000 shares of
common stock at $1.00 per share.
Pursuant to the Bankruptcy Court Order, the proceeds from the sales of
the common stock is held in escrow subject to a later determination by
the Bankruptcy Court as to the respective extent, priority and validity
of claims to the proceeds. The Company believes that it is a secured
creditor and has secured rights to the proceedings from the sale of the
common stock. The ultimate disposition of the Company's claim will
depend on the outcome of bankruptcy proceeds, which is uncertain at
this time.
3. Stockholders Equity
In November, 1999 the Board of Directors approved the name change of
the Company to F2 Network Group, Inc. The name change is subject to
shareholder approval.
During the nine months ending September 30, 1999, the Company issued
846,976 shares of common stock for consulting services and employee
compensation valued at approximately $673,861 of which $94,339 was for
prior accrued services and $41,508 was for prepaid services. In
addition, the Company sold 50,000 shares restricted common stock in a
private placement offering resulting in net proceeds of $30,000 and
received $646,875 from the exercise of 1,312,500 common stock options.
In March, 1999 the Board of Directors authorized the issuance of
options to the president, each member of the Board of Directors and a
consultant to purchase up to 3,050,000 shares of common stock at prices
ranging from $.21 per share to $.53 per share. The exercise price was
equal to the closing bid price for the Company's common stock on the
date of the grant. The exercise of options for 1,200,000 shares was
contingent on the closing bid price of the Company's common stock of at
least $1.00 on the last trading day for 1999 and the exercise of
options for 950,000 shares was contingent upon the execution of two
separate definitive agreements by December 31, 1999. In September 1999,
the Board of Directors determined to cancel 2,075,000 options issued in
March, 1999. Mr. Goldberg, a director, opposed this resolution by the
Board. Mr. Goldberg's counsel has stated that it is Mr. Goldberg's,
position that the Company does not have the right to cancel options
previously issued to Mr. Goldberg and that Mr. Goldberg does not intend
to relinquish those options. Of the total 2,075,000 options cancelled,
1,000,000 were issued to Mr. Goldberg.
In May 1999, the Board of Directors authorized the issuance of stock
options to each Board of Director as Director compensation. Each
Director has options to purchase 250,000 shares of common stock at
$1.34 on January 1, 2000, January 1, 2001 and January 1, 2002. For the
options to vest each current Director must be a Director on the
anniversary dates noted above. In August 1999, a new director was
elected to the Board of Directors and he was granted options to
purchase 250,000 shares of common stock at $1.89 per share on January
1, 2000, 2001 and 2002.
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 adopted SFAS 123, which is a fair
value based method of accounting for stock options.
For the period ended September 30, 199 the Company recognized
compensation of $1,028,773 for options granted during that period that
were accounted for in accordance with SFAS 123 and APB 25 and deferred
compensation of $1,594,680 for option compensation attributable to
future periods..
4. 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, 1998 and 1997 are:
<TABLE>
Deferred tax assets: 1998 1997
<S> <C> <C>
Net operating loss carryforwards $ 6,009,000 $ 5,466,000
Property and Equipment (8,000) (6,000)
Litigation Settlement 102,000
Discontinued operations (15,000) 181,000
Other 24,000 88,000
- --------------------------------------------------------------------
Total gross deferred tax assets 6,010,000 5,469,000
Less valuation allowance (6,010,000) (5,469,000)
- --------------------------------------------------------------------
Deferred tax liabilities:
Property and equipment
- --------------------------------------------------------------------
Net deferred taxes $ -0- $ -0-
====================================================================
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 $541,000 in 1998 and $1,069,000 in
1997.
As of December 31, 1998, net operating loss carryforwards were
approximately $16 million. Utilization of certain portions of this
amount is subject to limitations under the Internal Revenue Code.
Carryforward amounts expire at various dates though 2018.
5. Other Business Developments
Internet Activities
The Company commenced it's internet business in June, 1999, after
several failed attempts dating back to 1997. Through internal
resources and relationships with other entities, the Company developed
an internet portal focusing on multimedia internet entertainment. The
site, www.FirstEntertainment.com, includes original content developed
by the Company as well as links to other sites. The Company also is
developing relationships with electronic commerce partners and offers
web site development services and plans to add web site hosting
capabilities. Some of the letters of intent entered into by the
Company, prior to June 1999, with potential internet partners have not
led to definitive agreements and others have been terminated.
The Company's internet related businesses are conducted through the
Company's First 2 Market, Inc. subsidiary. All That Media, Inc., which
was acquired by the Company in June 1999, was merged into First 2
Market, Inc. in June 1999. At the time it was acquired by the Company,
All That Media was a newly-formed company that specialized in rich
media development, and internet advertising. The Company issued an
option to purchase a total of 500,000 shares of the Company's common
stock for $.75 per share until October 10, 2001 to the shareholders of
All That Media for all the outstanding stock of All That Media.
Michael Marsowicz, the President and 50 percent owner of All That
Media, received 250,000 of these options. Mr. Marsowicz subsequently
was elected to the Company's Board of Directors in August 1999.
Also in June 1999, the Company acquired a start-up retail website
development company named EDRON Associates, Inc. by issuing options to
its former shareholders to purchase 300,000 shares of common stock of
the Company at $1.03 per share for a period of three years. EDRON was
a start up company with little revenue and no proprietary or intangible
assets at the time of its acquisition by the Company.
The following is a summary of the Company's current internet related
business.
Internet Portal
The Company has established a multimedia internet entertainment portal
at "www.FirstEntertainment.com". The Company is attempting to develop
this site into a stand-alone internet site containing entertainment and
gaming information as well as a "portal" with links to other sites.
The existing ratio appears to be in the neighborhood of 50% proprietary
links. The Company has attempted to provide content on the site
internally. The Company believes that its comedy club and radio
station businesses provide a source for content. Although the Company
is not yet realizing positive cash flow from its internet activities,
the Company believes that it will be able to obtain positive cash flow
through advertising on the Company's web site as well as sponsorship,
proprietary e-commerce arrangements and commission arrangements with
operators of other web sites that are accessed through the Company's
web site. The Company also is pursuing "pay-per-view" events utilizing
entertainers in the comedy and country music areas with which the
Company has relationships through its operation of the comedy club and
radio station. Advertising buys were made to increase traffic to the
Company's web site, the Company has entered into two separate
advertising agreements with yahoo. The first to place banner ads and
links to the Company's web site on sites operated by Yahoo. The second
as a participant in the Yahoo "Holiday 99" e-commerce program. The
Company has paid Yahoo $136,000 for advertising through December
31,1999. Similarly, the Company has entered into relationships with
Hyperbanner and other Internet advertising providers.
Web Site Development And Hosting
The Company also offers web site development services to assist other
companies in designing and implementing a presence on the internet.
Web site development is a highly competitive business that is labor
intensive and there is no assurance that the Company will be able to
retain qualified personnel to assist in web site development or that
the Company will be able to do so at a cost that allows the Company to
operate this business profitably. The Company also is considering
entering into the web hosting business where the Company would operate
a customers' web site on the Company's computer servers for a monthly
fee. Although the Company would be required to spend additional
amounts to purchase computer servers and hire computer maintenance
personnel, the Company believes the revenues that may be generated by
this business would offset these costs.
Possible Internet Gaming Activities
The Company also is reviewing the possibility of engaging in internet
gaming activities. Currently, the Company offers games and links to
games on its web site. However, these games do not involve wagering.
The Company is reviewing legal and other issues in connection with
whether to allow wagering on the Company's web site or providing links
to web sites that allow wagering. The Company will engage in these
activities only if it determines that these activities will not violate
applicable laws.
EMNet Corp.
On March 20, 1999, the Company signed a letter of intent with EMNet
Corp ("EMNet") to form a joint venture and create a significant
Internet based website business for "Comedy" products based around the
affiliation and content derived from a circuit of the leading comedy
clubs in America. Revenue streams would be generated through providing
Internet marketing services to member clubs, producing regular
sponsored live exclusive programming on the Internet and develop a pay-
per-view model, and through the sale of comedy CD's and direct
downloads, associated merchandise and admissions to live performances
at member clubs.
Under the terms of the letter of intent EMNet would be responsible for
supplying all necessary internet requirements including but not limited
to i) building and maintaining the "Comedy" website, ii) providing an
account executive to drive the business online, run the AOL advertising
and promotion and live entertainment programming, iii) develop and
implement the online advertising and iv) provide all necessary
technology requirements.
The Company would be responsible for supplying all necessary content
for the website which shall include but not be limited to i) providing
a minimum of five member comedy clubs as members sufficient to provide
critical mass, ii) a high profile comic to host the site as
spokesperson, iii) a series of live events which could be broadcast on
Internet radio or video cast and iv) supply comedy news and other
content.
The closing of this transaction will be subject to negotiating a
definitive agreement by May 31, 1999 and commencing business by June
30, 1999, approval by the Board of Directors of both companies,
completion of a detailed business plan, completion of the required
agreements with America On Line ("AOL") and the signing of a minimum of
5 member clubs. The Company is unable to predict if or when the
agreement will be signed and the transaction will be consummated. As
of the date of this filing the parties have not been able to come to
terms of a definitive agreement and it seems unlikely that they will.
Softec Systems Caribbean, Inc,
On March 23, 1999 a wholly owned subsidiary of the Company, Kensington
Investments, Inc., entered into an agreement with Softec Systems
Caribbean Inc, (Softec) a wholly owned subsidiary of Starnet
Communications International Inc., to license its internet casino
software to the Company.
The Company will be supplied with a customized, full service Internet
gaming system, including virtual casino games, a sportsbook with real-
time odds feed from Las Vegas and Europe, and simulated horse and dog
racing. The Company's customers will be able to place wagers via a
secure, on line financial transaction system. Softec will supply all
hardware, software, that is Year 2000 complaint, and an appropriate
connection to the Internet with sufficient bandwidth to properly
operate the licensed software.
The Agreement commenced March 30, 1999 upon payment of $10,000 by the
Company. The Company is required to pay Softec a one time set up fee
of $100,000, of which $10,000 was paid upon signing of the Agreement,
$10,000 is due May 30, 1999 and $10,000 is due for eight consecutive
months commending August 30, 1999. The Company shall pay Softec a
licensing fee ranging from 25% of net monthly revenue to 12.5 % of net
monthly revenue but not less than $25,000 a month. The Company has not
made the payment required on May 30,1999.
The Agreement shall be in effect for one year and shall be
automatically renewed indefinitely with additional one year terms
unless the Company gives written notice of termination at least 45 days
prior to the end of any one year period.
The Company is responsible for obtaining and maintaining all necessary
licenses, as required by the Antigua Free Trading Zone, Antigua, West
Indies, for all the operations of an Internet Casino and an Internet
Sportsbook operation.
As of October 15 Company's subsidiary has not yet been issued its
internet gaming license from Antigua, West Indies, which is required to
commence wagering on its internet site.
Since the Company has not received a favorable opinion from outside
legal counsel regard internet gaming the Company has decided to
terminate this licensing agreement.
Global Games-Bingo
On August 2, 1999 the Company entered into a limited use software
license agreement whereby the Company would be permitted to use the
software to allow Bingo to be played for free on the internet.
Revenues generated from advertising on the Bingo for free web site
would be split whereby the Company would receive 75% and Global Games
Corp would receive 25%. In addition, the Company would issue 10,000
shares for consulting fees related to software set-up and installation.
The code required to run the software has not been transferred to the
Company as such the Company is unable to complete the transaction.
ET&T
On May 3, 1999 the Company entered into a joint venture agreement with
eConnect and Electronic Transaction Technologies (ET&T) to bring to
market its patented ATM smart card devices for electronic e-commerce
transactions, taking internet transactions from credit to cash.
The name of the joint venture is Intragate.com and the sole purpose
shall be to develop and exploit the e-commerce cash transfer technology
and to arrange for necessary financing.
In accordance with the joint venture agreement each joint venture
partner shall contribute a best efforts financing commitment for up to
50% of the costs to develop, produce, and exploit the technology which
is estimated to be $200,000. In addition, ET&T will contribute its
rights, title and interest in and to the technology. The joint venture
net profits and losses shall be allocated 50% to each joint venture
partner.
The Company was granted a non-exclusive license to use the ET&T
technology for e-connect sites that the Company owns, operates or
licenses and all fees associated with the non-exclusive license shall
be waived.
As part of the Agreement the Company granted an option to ET&T to
purchase 500,00 shares of the Company's common stock at $.83 per share
and ET&T has granted an option to the Company to purchase 500,00 shares
of ET&T at $.63 per share. Both options shall expire on December 31,
2000.
As of the date of this filing the joint venture has had no activity in
either development, exploitation or fund raising activities.
Uproar Enertainment
On May 5, 1999 the Company entered into an agreement with Uproar
Entertainment (Uproar) for the production and maintenance of a web site
and the sale of Uproar products on the web site.
The Company shall design and construct, at its own expense, a web site
and provide hosting and marketing for the site and will offer Uproars
products for sale. Uproar will be responsible for fulfilling and
shipping all sales order generated through the web site. The Company
will pay $8.00 per CD and $6.00 per cassette ordered to Uproar. The
Company will receive all proceeds from the sale of products on the web
site and remit to Uproar on a monthly basis the cost of products sold.
The agreement shall be for a period of five years and is renewable by
mutual consent of both parties.
All That Media
On May 10, 1999 the Company entered into an agreement with a newly
formed rich media development company called "All That Media" to
acquire a controlling interest in that All That Media by issuing a
option to its shareholders that allow the former shareholders to
purchase 500,000 shares of common stock of the Company at $.75 per
share. The option to acquire All That Media was exercisable commencing
January 1, 2000 and will expire April 30, 2000. In June, 1999 the
Company exercised its option to acquire "All That Media". The
consideration for the acquisition was the option given to its
shareholders for 500,000 shares of the Company's common stock at $.75
per share. The options expire on October 10, 2001. The value of the
options pursuant to FAS 123 was $355,000 which has been recorded as
compensation in the accompanying statement of operations as "All That
Media" was a start-up company with no revenue, proprietary rights or
any other assets for which the acquisition costs could be attributable
to pursuant to APB 16.
All That Media was a company that specialized in rich media
development, internet portal development and internet advertising. The
Company had contracted with the principals of All That Media for web
site development, internet portal development and internet advertising
for the various new internet businesses the Company intended to
commence.
In June 1999, the Company acquired a start-up retail website
development company called EDRON Associates by issuing options to its
former shareholders to purchase 300,000 shares of common stock of the
Company at $1.03. The options are exercisable for a period of two
years. EDRON was a start-up company with little revenue, but
significant relationships with local ISP's for hosting and site
development.
Concurrent with the acquisition of EDRON the Company formed a new
entity called First 2 Market, Inc. and both EDRON and All That Media
were merged into First 2 Market. The value of the options to acquire
EDRON pursuant to FAS 123 was $152,400 of which $114,300 has been
recorded as compensation in the accompanying statement of operations
and $38,100 has been recorded as deferred compensation in the
accompanying balance sheet. EDRON was a start-up company with little
revenue and no proprietary or intangible assets for which the
acquisition costs could be attributable to pursuant to APB 16.
Poker Races Joint Venture
On May 16, 1999 the Company signed a letter of intent with Poker Races
(a partnership) to form a joint venture. The closing of this
transaction is subject to completion of due diligence procedures,
negotiation and execution of a definitive joint venture agreement and
approval of the transaction by the Board of Directors of the Company
and the partners of Poker Races.
In accordance with the letter of intent, the Company would be obligated
to provide a prominent link on the Company's home page linked to a URL
designated by Poker Races. The Company will promote and advertise
Poker Races throughout the Company's portal and related sites. Poker
Races would be obligated to provide all software to play Poker Races
and track all financial transactions. All profits and expenses shall
be allocated 25% to the Company and 75% to Poker Races.
As of the date of this filing the letter of intent had terminated.
Air Travel E-Commerce
On May 24, 1999 the Company entered into an agreement with Air Travel
Discounts, Inc. (ATD) to provide the business of selling travel over
the internet.
Per the terms of the Agreement, ATD will include content and products,
the domain name, airdisc.com, and would fulfill and process all orders
generated through the web site. The Company would provide banner
advertising from its internet site promoting ATD. Commissions earned
from fulfillment originated from the Company's sites will be allocated
75% to ATD and 25% to the Company.
As of the date of this filing ATD has not provided the content and
products as required by the Agreement, as such the agreement is not in
effect.
Healthnet International
On May 18, 1999 the Company entered into a letter of intent with
Healthnet International, Inc. (Healthnet) to provide health related
products over the internet.
Under the terms of the letter of intent, Healthnet would be responsible
for a health related e-commerce site, pricing and commissions for all
health related products. The Company would provide space on the
Company Go2Market web page, and banner advertising on the Company's web
pages.
Consummation of this transaction is subject to a number of conditions
including completion of due diligence procedures, completion of a
definitive agreement, completion of a web site by Healthnet and
approval of the transaction by the Board of Directors of both
companies.
As of the date of this filing the letter of intent had expired.
Fighting Bull
On June 14, 1999 the Company and Fighting Bull Technologies, LLC (FTB)
entered into a letter of intent whereby FTB would license 3D software
to create a virtual internet community. The Company would test and
market the 3-D technology.
Consummation of this transaction is subject to a number of conditions
consisting of completion of the development of the 3-D technology,
completion of a definitive agreement, completion of a licensing
agreement and approval by the Board of Directors of both Companies.
In August, 1999 the letter of intent expired and the parties have not
moved forward to negotiate a definitive agreement.
E-Commerce Partners
In May and June, 1999 the Company signed agreements with various e-
commerce partners whereby the Company would provide a link from its web
site to the e-commerce partners web site. The Company would also
provide space on its Go2Market web page that would represent banner
advertising for the e-commerce partner. The Company would retain a
portion of the revenues from the orders fulfilled by the e-commerce
partners from traffic originating from the Company's web site. All e-
commerce partner agreements are for a period of one year.
Coleman and Company Securities, Inc.
On July 7, 1999 the Company signed an agreement with Coleman and
Company Securities, Inc. to act as the Company's exclusive investment
advisor, exclusive private placement agent and investment banker for a
period of one year.
As compensation for these services Coleman would receive a commission
of 13% for any public or private placement financing and a warrant to
purchase 500,000 shares of the Company's common stock at $.875 per
share. The warrants are exercisable for a period of five years and
would have certain registration rights for a period of two years. In
addition, Coleman would earn a fee in connection with a merger,
acquisition or sale of the Company.
First 2 Interviews
On July 7, 1999 the Company entered into an agreement with Krutchie,
Inc. whereby Krutchie would provide a minimum of 2 edited celebrity
interviews for the Company's web site on a weekly basis. The agreement
is for a period of two years. As compensation, Krutchie will receive
options to purchase 100,000 shares of common stock at $1.63. The
option is exercisable for a period of two years and will carry piggy-
back registration rights for a period of six months from the date of
the agreement.
E-Commerce Web-Site Development
In July 1999 the Company signed an agreement with Smith-Gardner, a
developer of e-commerce software to build web sites for Smith-Gardner
clients that license their e-commerce software. Smith-Gardner has
subsequently decided to produce these websites themselves.
ITEM 2. MANAGEMENT DISCUSSION AND PLAN OF OPERATION.
Results of Operation September, 1999 vs. September, 1998
For the nine months ended September 30, 1999 the Company incurred a
loss from continuing operations of approximately $2.2 million as
compared to a loss from continuing operations of approximately $567,000
for the nine months ended September 30, 1998. The increase in the net
loss for the nine months ended September 30, 1999 as compared to
September 30, 1998 is primarily the result of compensation related to
the issuance of common stock options totaling 1,029,000 and an increase
in common stock issued for services of $230,000.
The loss from continuing operations for the three months ended
September 30, 1999 of approximately $883,000 as compared to $142,000
for the three months ended September 30, 1998 is due to compensation
related to the issuance of common stock options and the addition of the
internet business segment which had a loss from it's start-up
operations of $338,000.
Overall, revenues increased by approximately $383,000, from $1,566,000
in 1998 to $1,949,000 in 1999. Most of the increase is from live
entertainment revenue which increased $272,000, radio revenue of
$32,000 and other income increased $13,000. The increase in live
entertainment revenues was due to increased attendance as a result of
more big name acts in 1999. Although big name headliners usually draw
more attendance, their cost is also substantially higher. Big name
headliners were not as available for club acts in 1998 as compared to
1999.
For the three months ended September 30, 1999 radio sales increased by
approximately $50,000 as compared to the three months ended September
30, 1998. Live entertainment revenues also increased $67,000 and other
income increased $13,000 for the three months ended September 30,1999
as compared to the three months ended September 30,1998.
Internet revenue consists of web site design, marketing, sponsorships,
e-commerce revenue sharing and banner advertising. The internet
segment commenced operations on June 28, 1999 therefore there are no
comparable operations in 1998.
The Company no longer distributes any videotapes, therefore sales are
minimal.
Radio sales is comprised of radio advertising, concert income, trade
show income and super saver advertising income. In 1998, total radio
revenue was $587,300 of which radio advertising was $508,700 or 82% of
the total radio sales. In 1999, total radio revenue was $619,500 of
which radio advertising was $513,500 or 83% of the total radio sales.
Radio advertising sales increased $4,800 or 1% in 1999 compared to
1998. The primary reason for the overall increase in radio revenue of
approximately $32,000 in 1999 compared to 1998 was a increase of
concert income of $12,000, supersaver advertising income of $11,000 and
trade show income of $5,000.
For the three months ended September 30, 1999 radio sales increased by
approximately $50,000 compared to the three months ended September 30,
1998. Radio advertising was $183,000 for the quarter ended September
30, 1999 as compared to $177,000 for the quarter ended September 30,
1998. For the three months ended September 30, 1999 concert income was
$38,000 compared to no concert income for the same period in 1998.
Other income at September 30, 1999 and 1998 represents rent income, T-
shirt, coupon books and cigarette sales. The primary reason for the
increase in other income is sublease income which commenced September,
1998. Sublease income for 1999 was $71,000 compared to $6,000 in 1998.
For the nine months ended September 30, 1999 cost of sales live
entertainment increased as a result of an increase in revenues and the
percent of cost of sales to sales increased from 86% in 1998 to 91% in
1999. Although attendance increased, the labor cost also increased
which resulted in a lower gross profit. For the nine months ended
September 30, 1999 labor costs, which includes entertainers salaries,
increased from $410,000 in 1998 to $591,000 in 1999. Labor costs as a
% of revenues was 44% in 1998 and 49% in 1999.
Cost of goods sold radio, increased approximately $ 26,000 comparing
1999 to 1998. The cost of sales radio as compared to radio sales was
72% in 1999 and 71% in 1998.
The Company commenced its internet gaming division on June 28,1999 and
for the quarter ended September 30, 1999 this division has focused on
putting together the team of internet engineers, programmers, web site
developers, content development and sales and marketing as well as
establishing strategic relationships with e-commerce partners, traffic
partners and content development.
Costs and expenses for the period ended September 30, 1999 for the
internet division totaling $348,000 are comprised of $170,000 in
advertising, $124,000 in salaries and contract labor, $14,000 in
recruiting fees and $40,000 in other operating costs.
The goal of this division is to continue to expand the multimedia
internet entertainment through the exploitation of our existing assets
in an internet model, in addition to the growth of our retail website
development, advertising, marketing, rich media development, e-commerce
and syndicated affiliate programs. In addition, we are constantly
identifying companies with compatible Internet e-commerce and for rich
media development capabilities or business models that through
strategic alliances, mergers or acquisitions, could help us reach our
ultimate goal much sooner.
We have not yet completed a full analysis of the working capital needed
to develop the Internet business which will include retail website,
development, advertising and marketing, rich media development,
affiliate program development and e-commerce development, although
working capital currently is not sufficient to fund the internet
division and its needs for additional staff for the next year. The
internet division has been issuing S-8 stock to employees to fund
salaries, wages and consulting fees thereby reducing the requirement
for working capital. There can be no assurances that the Company would
be successful in obtaining the working capital necessary to complete
the business plan for the internet segment and commerce profitable
operations.
A substantial portion of the Company's assets are fully depreciated and
additions to property and equipment was $160,000 for 1999. In
February, 1999 the comedy club completed a major remodeling project
which costs $150,000. The remodeling costs are being amortized over
the life of the lease, approximately 9 years. As a result of the
depreciation associated with the remolding costs depreciation expense
for 1999 increased over 1998.
Management and administration fees, affiliate represents fees paid to a
related party for accounting and administrative functions which are
outsourced to the related company. Monthly fees were $21,000 a month
for the period January 1, 1998 through August 31, 1998 and $14,000 a
month for the period September, 1998 through April 30, 1999 and
increasing to $22,000 a month beginning September 1,1999.
General and administrative costs increased approximately $1,347,000 in
1999 as compared to 1998. The increase is primarily attributable to
compensation costs of $1,029,000 associated with options issued in 1999
accounted for in accordance with SFAS 123 and APB 25. In addition,
common stock issued for services increased from $396,000 in 1998 to
$627,000 in 1999, an increase of $230,000 or 58%. For the period ended
September 30, 1999 legal fees were $144,000 compared to $46,000 for the
same period in 1998.
Interest expense increased 1999 over 1998 as a result of an increase in
notes payable of approximately $275,000 due to litigation settlements
in April and July, 1998 and an increase in notes payable of 150,000 in
February, 1999 associated with leasehold improvements at Comedy Works
in which interest did not accrue until after the first quarter of 1998
for the litigation settlements but were in effect for the entire six
months of 1999.
Liquidity and Capital Resources
As of September 30, 1999, the Company had a working capital deficit of
approximately $1.2 million. Despite a loss of approximately $2.1
million, net cash used in operating activities was only $383,000
primarily due to non cash expenses such as common stock options
compensation and common stock issued for services of $1.66 million.
The Company has been able to issue common stock for services thereby
reducing the need for working capital.
The Company's ability to continue as a going concern will largely
depend on its ability to extend existing debt obligations, 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 the new internet
line of business. The likelihood of obtaining the necessary equity
financing is uncertain at this time.
The Company has been successful in 1999 and in 1998 in financing some
of its operations through the issuance of common stock in exchange for
services. In 1999, the Company issued 581,584 shares of common stock
valued at $627,200 or an average of $1.08 per share. In 1998, the
Company issued 1,169,706 shares of common stock valued at $396,000 or
an average of $.34 per share. In February 1998 the Company was delisted
from NASDAQ which had adversely affected the price of the stock for
most of 1998. Of the total costs and expenses of $2.1 million in 1998
and $4.1 million in 1999, $396,000 was paid in stock in1998 and
$627,200 was paid in stock in 1999. Stock issued as a percentage of
revenue was 19% in 1998 and 15% in 1999.
Commencing with the new lease for the Comedy Works space in Larimer
Square effective January 1, 1998 Comedy Works began a significant
remodeling project. The remodeling was completed in February, 1999.
The seating capacity was increased by approximately 20 seats from 285
to 305. 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 were approximately $300,000 of which
$150,000 was paid by the landlord (lessor) as tenant improvements and
$150,000 was paid by Comedy Works. The landlord (lessor) has agreed to
finance the Company's portion of the remodeling cost payable monthly at
12% per annum over 10 years. The monthly payments are approximately
$2,300.
The Company had a note payable in the amount of $88,000 which came due
in July, 1999 that was paid in full and had a note payable for
approximately $125,000 that was due October, 1999 but was extended by
the bank to October, 2000 with monthly payments of $2353.
Additionally, working capital is needed for marketing the internet
site, although the Company has not yet determined the marketing budget
currently $45,000 is spent on both traditional and internet
advertising. The Company also purchased a radio station in Leeds,
South Dakota. The Agreement, required a $20,000 non-refundable down
payment, with the remaining $280,000 payable monthly over 15 years upon
the approval of the transfer of the license by the FCC. As of November
1,1999 the FCC had not yet approved the transfer. The Company
estimates that it will require approximately $150,000 to $200,000 in
equipment to commence operations which the Company expects to finance
in equipment leasing.
The Company has also increased its staff related to internet web
development, internet advertising and marketing. Commencing June 28,
1999 the monthly obligation for salaries and overhead is approximately
$45,000. First 2 Market, the internet segment subsidiary, does not yet
generate significant revenues and is not expected to be profitable
1999. In July and September, 1999 entered into marketing/advertising
agreements with Yahoo totaling $136,000.
Currently, the Company has limited working capital and does not have
sufficient working capital to meet its existing debt obligations and
other working capital needs contemplated under the various definitive
agreements executed in the first quarter of 1999.
In 1999 through September 30, 1999, the Company raised $646,875 in
equity financing through the sale of common and preferred stock and the
exercise of common stock options, but there can be no assurance that
the Company would be successful in raising the additional equity
financing needed as contemplated under the letters of intent or the
definitive agreements executed in 1999. In some cases, the Company has
not yet completed its due diligence procedures which includes an
analysis of the working capital needed. For those letters of intent in
which the Company is still performing due diligence and other
evaluation procedures it is not possible to estimate the working
capital needed to consummate these agreements and execute the business
plan.
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
millennium (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 examined its computer
hardware and software as well as all other equipment that utilizes
inbedded computer chips, such as cash registers, facsimile machines and
telephone systems and has determined that all systems are Year 2000
compliant. The company has also been assured by the related party
Company for which we outsource the accounting and administrative
functions, that its accounting software, computers, servers and other
network systems are Year 2000 compliant.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" is effective for financial statements with fiscal
years beginning after December 15, 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 adopted SFAS No. 130
for 1998 and it did not have a material effect on its financial
position or result of operations.
Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise 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 and annual 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
adopted SFAS No. 131 in 1998; but, it did not have a material effect on
its results of operation for 1998 and 1997.
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 changes in the benefit obligations
and fair values of the plan assets that will facilitate financial
analysis, and eliminates certain disclosures previously required but no
longer useful. The Company adopted SFAS No. 132 in 1998 and it did not
have a material impact on its results of operation.
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.
The FASB recently issued Statement of Financial Accounting Standards
No. 134. "Accounting for Mortgage Backed Securities Retained after the
Securitization of Mortgage Loans Held by Mortgage Banking Enterprises."
(SFAS No. 134) SFAS No. 134 establishes new reporting standards for
certain activities of mortgage banking enterprises that conduct
operations that are substantially similar to the primary operations of
mortgage banking enterprises. This statement is effective for the
fiscal quarter beginning after December 15, 1998. Management believes
the adoption of this statement will have no impact on the Company's
consolidated financial statements.
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.
During 1997 and 1998, the Company, certain officers and directors of
the Company and other unrelated parties received requests for
information from the U.S. Securities and Exchange Commission ("SEC")
related to an investigation begun by the SEC during 1997 into various
matters. On August 2, 1999 The Commission sued First Entertainment
Holding Corp ("First Entertainment") and its president, Abraham B.
Goldberg ("Goldberg") charging that the Company and Goldberg
fraudulently failed to disclose approximately $350,000 in money and
stock paid to Goldberg.
The Commission alleges that from 1995 through 1997 Goldberg received
compensation of approximately $350,000 that was not disclosed in First
Entertainment's public filings. Specifically, the Commission alleges
that First Entertainment paid stock to certain consultants of First
Entertainment who paid kickbacks to Goldberg's wife, Nannette Goldberg.
Goldberg and his wife also each allegedly received consulting fees that
should have been disclosed. In addition, the Commission alleges that
Nannette Goldberg received $100,000 worth of First Entertainment stock
in 1997 without approval of the First Entertainment board. The
Commission alleges that material facts or omissions concerning
Goldberg's compensation were contained in First Entertainment's 1995
and 1996 annual reports and in registration statement and a proxy
statement filed by the company in 1997. Finally, the Commission also
charges that Goldberg failed to report his securities and changes in
his securities holdings.
The Commission alleges that First Entertainment violated the antifraud
and filing provisions of the securities laws, Section 17(a) of the
Securities Act of 1933 ("Securities Act") and Sections 10(b), 13(a),
and 14(a) of the Exchange Act of 1934 ("Exchange Act") and Rules 10b-5,
12b-20, 12b-25,13a-1, 13a-13, 14a-3 and 14a-9. The Commission alleges
that Goldberg violated Section 17(a) of the Securities Act and Sections
10(b), 14(a) and 16(a) of the Exchange Act and Rules 10b-5, 12b-20,
14a-3, 14a-9 and 16a-3 thereunder, and that Goldberg aided and abetted
First Entertainment's violations of Section 13(a) of the Exchange Act
and Rules 12-b-25, 13a-1 and 13a-13. The Commission filed its
complaint in federal court in Denver, Colorado, and seeks permanent
injunction against First Entertainment and Goldberg and seeks
disgorgement, civil money penalties, and an officer and director bar
against Goldberg.
Mr. Goldberg believes the Commissions allegations are without merit and
will vigorously defend this action.
On October 22, 1999, the Company entered into a consent decree with the
SEC. Without admitting or denying the allegations made by the SEC, the
Company agreed not to engage in violations of the securities laws in
the future. As a result of entering into the consent decree, the civil
action against the Company will be dismissed.
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
August 30, 1999
Item 5:Other Events
August 18, 1999
Item 5: Other Events
August 13, 1999
Item 6: Resignation of Directors
August 5, 1999
Item 5: Other Events
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: November 15,1999 /s/ Doug Olson
Doug Olson
President, Chief Executive
Officer
And Chief Financial Officer
</TABLE>
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<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
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<SALES> 1949
<TOTAL-REVENUES> 1949
<CGS> 1903
<TOTAL-COSTS> 4050
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 89
<INCOME-PRETAX> (2187)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2187)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2187)
<EPS-BASIC> (.21)
<EPS-DILUTED> (.21)
</TABLE>
