SECURITIES AND EXCHANGE COMMISSION
Washington ,D.C. 20549
FORM 10-QSB/A
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1999 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 E. Bellview, Suite 1114 Englewood, CO 80111
(Address of principal executive offices) (Zip code)
Company's telephone number, including area code (303) 228-1650
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check whether the Company (1) has filed all reports required to
be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
1) Yes X 2) Yes X
Indicate the number of shares outstanding of each of the issuer's classes of
stock, as of the latest practicable date.
Number of Shares Issued and
Class
Outstanding at June 30, 1999
Common stock, $.008 par value 10,996,395 shares
Class A Preferred Stock, $.001 par value 10,689 shares
Class B Preferred Stock, $.001 par value 0 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 March 31,1999
(Unaudited) and December 31, 1998
Consolidated Statements of Operations (Unaudited)
for three months ended March 31, 1999 and 1998
Consolidated Statements of Cash Flows (Unaudited)
for the three months ended March 31, 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
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FIRST ENTERTAINMENT HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
1999 1998
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 73,344 $109,450
Accounts receivable trade, net
of allowance 89,478 101,568
Note receivable officer 15,312 15,010
Inventories 14,080 14,732
PREPAID AND OTHER CURRENT ASSETS 80,555 28,508
272,769 269,268
PROPERTY AND EQUIPMENT
Equipment and furniture 712,359 709,325
Building and leasehold improvement 682,257 532,257
LAND 125,000 125,000
1,519,616 1,366,582
LESS ACCUMULATED DEPRECIATION
AND AMORTIZATION 855,352 845,810
664,264 520,772
OTHER ASSETS
License, net of accumulated
amortization 689,254 725,684
Web Site Development Costs 99,917
OTHER 4,127 4,126
793,298 729,810
TOTAL ASSETS $ 1,730,331 $ 1,519,850
"See accompanying notes to consolidated financial statements."
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<CAPTION>
FIRST ENTERTAINMENT HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, continued
(Unaudited)
</CAPTION>
March 31, December 31,
1999 1998
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (Deficit):
CURRENT LIABILITIES
Accounts payable $ 158,467 $ 188,920
Accrued liabilities 160,855 142,458
Accrued interest 433,901 430,107
Notes payable and current
portion of long term debt 982,723 993,384
Note payable related party 3,000 3,000
NET LIABILITIES OF DISCONTINUED OPERATIONS 58,551 57,305
TOTAL CURRENT LIABILITIES 1,797,497 1,815,174
LONG TERM DEBT, NET OF
CURRENT PORTION 322,162 187,699
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.001 par value; authorized
5,000,000 shares;
Class A preferred stock,
10,689 shares issued and outstanding 10 10
Class B preferred stock, 8,320 shares
issued
and outstanding 7 12
Class C preferred stock no shares issued
Common stock, $.008 par value; authorized
50,000,000 shares; 10,208,395 and
9,610,170
shares issued and outstanding 81,668 76,882
Capital in excess of par value 16,257,371 15,924,087
ACCUMULATED DEFICIT (16,728,384) (16,484,014)
(389,328) (483,023)
TOTAL LIABILITIES AND STOCKHOLDERS
EQUITY (DEFICIT) $ 1,730,331 $ 1,519,850
<CAPTION>
"See accompanying notes to consolidated financial statements."
</CAPTION>
</TABLE>
<TABLE>
FIRST ENTERTAINMENT HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the three months For the three months
ended March 31, ended March 31,
1999 1998
<S> <C> <C>
REVENUE:
Live Entertainment $ 435,942 $ 318,338
Radio 182,985 194,587
Video 65
OTHER 36,574 10,518
655,501 523,506
COSTS AND EXPENSES:
Cost of sales -
live entertainment 380,403 268,288
Cost of products sold -
Radio 125,493 149,266
Cost of products sold -
video 20
Impairment write downs 15,000
Depreciation and
amortization 31,377 26,211
Management and administrative fees, affiliate 42,218 63,000
Selling, general and
ADMINISTRATIVE 278,870 230,193
873,361 736,978
OPERATING LOSS FROM
CONTINUING OPERATIONS (217,860) (213,472)
OTHER INCOME (EXPENSE)
Interest expense (27,727) (22,332)
OTHER 1,217 63
LOSS FROM CONTINUING
OPERATIONS BEFORE
MINORITY INTREST (244,370) (235,741)
MINOITY INTREST IN LOSS
OF SUBSIDIARY 0 0
LOSS FROM CONTINUING
OPERATIONS (244,370) (235,741)
</TABLE>
<TABLE>
FIRST ENTERTAINMENT HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS, Continued
(Unaudited)
<S> <C> <C>
DISCONTINUED OPERATIONS
LOSS FROM DISCONTINUED OPERATIONS
NET INCOME (LOSS) $ (244,370) $ (235,741)
PER SHARE DATA-Basic and Diluted:
Net Income (loss) per share
continuing operations $ (.025) $ (.04)
NET INCOME (LOSS) PER SHARE, DISCONTINUED OPERATIONS *
NET INCOME (LOSS) PER COMMON SHARE $ (.025) $ (.04)
WEIGHTED-AVERAGE NUMBER OF
SHARES OUTSTANDING 9,895,806 6,594,877
<CAPTION>
* Less than $.01 per share
"See accompanying notes to consolidated financial statements."
</CAPTION>
</TABLE>
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<TABLE>
FIRST ENTERTAINMENT HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the three months For the three months
ended March 31, ended March 31,
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income (loss) $ (244,370) $ (235,741)
Adjustments to reconcile net income (loss)
to net cash from operations
Depreciation and amortization 31,377 26,211
Common stock issued for services 88,760 169,838
Common stock options 85,830
Impairment write downs 15,000
Changes in operating assets and liabilities
(Increase) decrease in
Receivables 11,788 89,836
Inventories 652 (1,512)
Other current assets (10,539) (6,939)
Increase (decrease) in
Accounts payable (28,081) (25,694)
Accrued Liabilities 22,191 7,514
CASH (USED IN) PROVIDED BY DISCONTINUED OPERATIONS 519 (443)
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES: (26,873) 23,070
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures - net (3,034) (2,449)
WEB SITE DEVELOPMENT (10,000)
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (13,034) 2,449
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on debt (26,199) (11,366)
Proceeds from issuance of common
30,000 11,250
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 3,801 (116)
NET INCREASE (DECREASE) IN CASH (36,106) 20,505
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 109,450 18,049
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 73,344 $ 38,554
<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 INTO COMMON STOCK $ 92,372 $ 41,739
NOTE PAYABLE ISSUED FOR LEASEHOLD IMPROVEMENTS $ 150,000
COMMON STOCK AND OPTIONS ISSUED FOR SERVICES $ 174,590 $139,838
COMMON STOCK ISSUED FOR PREPAID SERVICES $ 41,508
COMMON STOCK ISSUED FOR LIFE INSURANCE PREMIUMS $ 30,000
ACCOUNTS PAYABLE ISSUED FOR WEB SITE DEVELOPMENT$ 90,000
</TABLE>
<PAGE>
FIRST ENTERTAINMENT HOLDING CORP. 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, 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 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 March 31, 1999 and 1998.
In June 1999, the Company amended and refiled its Form 10KSB for the year ended
December 31, 19998 restating certain amounts in 1998 and 1997 due to an
accounting error discovered in 1997. This Form 10-QSB is hereby amended to
include the restated balances from December 31, 1998 and March 31, 1999. The
restatement did not impact the net loss for the quarter ended March 31, 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. 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.
3. Stockholders Equity
During the quarter ending March 31, 1999, the Company issued 489,225 shares
of common stock for consulting services valued at approximately $222,640 of
which $92,372 was for prior accrued services and $41,508 was for prepaid
services. The common stock issued for consulting services was registered in
an S-8 registration statement. In addition, the Company sold 50,000 shares
restricted common stock in a private placement offering resulting in net
proceeds of $30,000.
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 is 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 is contingent on the closing bid price of
the Company's common stock of at lease $1.00 on the last trading day for
1999. The exercise of options for 950,000 shares is contingent upon the
execution of definitive agreements with two prospective companies that the
Company is currently negotiating with. If definitive agreements are not
executed by December 31, 1999 the options for 1,000,000 shares expire.
As of March 31, 1999 options to purchase 1,375,000 shares of common stock
have vested and the remaining options to purchase 1,675,000 are contingent
upon future events.
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. Options issued to Directors who are
not officers or employees are accounted for under SFAS 123.
For the period end March 31, 199 the Company recognized compensation of
$85,830 for those options granted in March, 1999 that were accounted for in
accordance with SFAS 123.
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:
Deferred tax assets: 1998 1997
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
SPORTSNET, INC.
On September 15, 1998, the Company entered into a definitive agreement with
SportsNet, Inc. (SNI) The effective date of the Agreement was to have been
ten days after the following two events; (i) SNI has completed a financing
of not less than $1,000,000 and (ii) the Company has entered into a contract
with a credit card processor for participants in the Games satisfactory to
both the Company and SNI. The Agreement, if and when it becomes effective,
will continue in effect as long as the Company has a valid internet gaming
license issued by the Commonwealth of Dominica or will terminate upon
revocation of such license by the Commonwealth of Dominica.
As of March 19, 1999, SNI had not completed a financing of $1,000,000 and
the Company terminated the definitive agreement
GLOBAL GAMES CORP.
On March 17, 1999 the Company signed a letter of intent with Global Games
Corp. (Global Games) for the licensing of Global Games' sports book software
and related technology. Under the terms of the agreement Global Games will
receive a percentage of the net gaming revenue for the licensing of its
software of the Company. Consummation of this transaction is subject to the
completion to a definitive agreement, approval by the Board of Directors of
both companies, entering into an agreement with a credit card processor and
confirmation of the extension of the Company's internet gaming license
issued by the Commonwealth of Dominica in December, 1997. Under the letter
of intent, Global Games will provide all technical service and support. The
gaming site will be operated from the Commonwealth of Dominica and will be
accessable on a play for fun basis from North America. The Company is
committed to maintaining strict compliance with all existing and pending
federal, state and local legislation regarding Internet gaming and would
ensure operation of the site in strict compliance of local, state and
federal laws. The Company is awaiting a legal opinion from outside legal
counsel regarding structure for sublicensing internet gaming software to
unrelated entities which will operate an internet site which would accept
wagers. The Company is unable to predict if or when the agreement will be
signed and the transaction will be consummated.
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, 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.
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 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 May 14, 1999 the 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.
The Company is committed to maintaining strict compliance with all existing
and pending U.S. legislation regarding internet gaming. In addition, the
agreement with Softec requires that the Company not accept wagers from
persons residing in Canada and to implement all measures stipulated by
Softec to ensure persons residing in Canada are not able to wager utilizing
the licensed software.
DIMENSION ON LINE
On April 5, 1999 the Company signed a letter of intent with South Florida
publisher Skarco Press for the acquisition of the exclusive internet rights
to their Young Jewish Lifestyle Publications, Dimensions Magazine.
Published six times a yearly, Dimensions is a distinctive and contemporary
glossy magazine reach South Florida's upscale Jewish population.
Consummation of this transaction is subject to the completion of due
diligence, completion of a definitive agreement, determination of the cost
of the exclusive internet rights and approval by the Board of Directors of
both Companies. Under the letter of intent Skarco Press will provide the
contents of the Dimensions Magazine to the web site as well as customization
of the online content for regional editions to be made available in major
advertising markets. Skarco press will also provide the sales and marketing
for the Dimensions On Line Magazine. The Company will provide hosting of
the Dimensions On Line Magazine and receive a portion of advertising
revenues. The Company is unable to predict if or when the agreement will be
signed and the transaction will be consummated.
GLOBAL GAMES-BINGO
On April 29, 1999, the Company entered into a letter of intent with Global
Games Corp. to form a 50/50 joint venture to acquire certain Bingo
software.
The joint venture will operate a web site, hosted in Canada, where
participants can play for free and win prizes which will be provided by
advertisers. In addition, the joint venture will license software to other
unrelated entities who would offer bingo for money on the internet. The
joint venture would receive licensing fees from the licensing of the
software to these third parties. Under the proposed letter of intent the
Company would acquire a 50% interest in the software by issuing 300,000
shares of its common stock. The software would then be contributed to the
joint venture. In addition, Global Games Corp will contribute its internet
gaming license granted by the Commonwealth of Dominica.
Consummation of this transaction is subject to the completion of additional
due diligence, a joint venture agreement, bingo software acquisition
agreement and approval by the Board of Directors of both Companies.
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.
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
media company called "All That Media" to acquire a controlling interest in
that All That Media by issuing a option to its shareholders to purchase
500,000 shares of common stock of the Company at $.75 per share. The option
to acquire All That Media will be exercisable commencing January 1,2000 and
will expire April 30, 2000.
All That Media is a company that specializes in intellectual property
development, internet portal development and internet advertising. The
Company has 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 intents to commence. The
minimum costs to the Company contemplated under the contract is $5,000 a
month.
ITEM 2. MANAGEMENT DISCUSSION AND PLAN OF OPERATION.
Results of Operation March, 1999 vs. March, 1998
For the quarter ended March 31, 1999 the Company incurred a loss from
continuing operations of approximately $244,000 as compared to a loss from
continuing operations of approximately $236,000 for the quarter ended March
31, 1998. The increase in the net loss for the quarter ended March 31, 1999
as compared to March 31, 1998 is the primarily result of an increase in
general and administrative expenses and impairment write downs.
Overall, revenues increased by approximately $132,000, from $524,000 in 1998
to $656,000 in 1999. Most of the increase is from live entertainment
revenue which increased $117,000 and other income increased $26,000. Radio
sales decreased by approximately $12,000. The increase in live entertainment
revenues was due to increased attendance as a result of more big name acts
in the first quarter of 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.
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
$194,500 of which radio advertising was $156,000 or 80% of the total radio
sales. In 1999, total radio revenue was $183,000 of which radio advertising
was $160,000 or 87% of the total radio sales. Radio advertising sales
increased $4,000 or 2.5% in 1999 compared to 1998. The primary reason for
the overall reduction in radio revenue of approximately $12,000 in 1999
compared to 1998 was a reduction of concert income which was $13,800 in 1998
and $0 in 1999. No concerts were scheduled for the first quarter of 1999.
Other income at March 31, 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. In the
first quarter of 1999, sublease income was $28,000 as compared to $0 for the
first quarter of 1998.
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 84% in
1998 to 87% in the first quarter of 1999. Although attendance increased,
the labor cost also increased which resulted in a lower gross profit. Labor
costs, which includes entertainers salaries, increased from $140,000 in 1998
to $213,000 in 1999. Labor costs as a % of revenues was 44% in 1998 and 49%
in 1999.
Cost of goods sold radio, decreased approximately $ 24,000 comparing 1999 to
1998. The cost of sales radio as compared to radio sales was 69% in 1999
and 77% in 1998. The primary reason for the decrease in cost of operations
was a reduction of promotion expense which decreased $15,000 from 1998 to
1999.
A substantial portion of the Company's assets are fully depreciated and
additions to property and equipment was $153,000 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 approximately $20,000 a
month in 1998 and $14,000 a month in 1999.
General and administrative costs increased approximately $48,000 in 1999 as
compared to 1998. The increase is primarily attributable to compensation
costs of $86,000 associated with options issued March, 1999 accounted for in
accordance with SFAS 123. The increase in compensation costs associated
with the issuance of common stock options is partially offset by $39,000 in
life insurance expense in 1998 that was not incurred in 1999.
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 in which interest did not accrue until after the first
quarter of 1998.
Liquidity and Capital Resources
As of March 31, 1999, the Company had a working capital deficit of
approximately $1.5 million. Despite a loss of approximately $244,000, net
cash used in operating activities was only $27,000 primarily due to common
stock options granted and common stock issued for services of $175,000. 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 new lines of business contemplated by the various letters of
intents and agreements entered into in the first quarter of 1999. 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 189,775 shares of common stock valued at $88,760
or an average of $.47 per share. In 1998, the Company issued 459,850 shares
of Common Stock valued at $169,837 or an average of $.37 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 $737,000 in 1998 and $873,000 in 1999, $170,000 was paid in
stock in1998 and $89,000 was paid in stock in 1999. Stock issued as a
percentage of revenue was 23% in 1998 and 14% in 1999.
Commencing with the new lease for the Comedy Works space in Larmier 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 has a note payable due July, 1999 for approximately $88,000 and
has a note payable due October, 1999 of approximately $125,000. As a result
of the definitive agreement with Softec, the Company is obligated to pay
$90,000 to Softec in $10,000 increments commencing May, 1999. Additionally,
working capital is needed for marketing the internet gaming site, although
the Company has not yet determined the marketing budget. The Agreement
signed with Uproar Entertainment requires the Company to design, construct,
host, market and manage the web site. Working capital is needed to complete
their obligation under the Uproar Agreement. The Company is also
negotiating to purchase a radio station in Leeds, South Dakota. The
Agreement, if consummated, would require a $20,000 non-refundable down
payment, with the remaining $280,000 payable monthly over 15 years. The
Company estimates that it will require approximately $150,000 in equipment
to commence operations.
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 addition, working capital of
approximately $170,000 is needed to commence operations of the new radio
station. If the Company is successful in negotiating definitive agreements
related to pending letters of intent, additional working capital would also
be needed to commence operations.
In 1998, the Company raised $168,000 in equity financing and in March, 1999
it raised $30,000, 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 the
first quarter of 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 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, 1999 and will
cost less than $10,000.
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. The
Company has since been notified by the Central Regional Office of the SEC
that it plans to recommend to the Commission that an enforcement action be
instituted against the Company, its president and a former director for
failure to make required filings and failure to report certain information
required by the securities laws. The Company believes it has made all
required filings to date and believes it has disclosed all information
required by the securities laws. There can be no assurance as to the final
outcome of the investigation or the impact, if any, on the operations of the
Company.
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
<PAGE>
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: June 30 , 1999 _______________________
A.B. Goldberg
President and Principal Executive Officer
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