SECURITIES AND EXCHANGE COMMISSION
Washington ,D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 2000 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)
5495 Marion Street, Denver, CO 80216
(Address of principal executive offices) (Zip code)
Company's telephone number, including area code (303) 382-1500
(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 March 31, 2000
Common stock, $.008 par value 13,565,077 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 QUARTERLY REPORT
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheet as of March 31,2000
(Unaudited) and December 31, 1999
Consolidated Statements of Operations (Unaudited)
for three months ended March 31, 2000 and 1999
Consolidated Statements of Cash Flows (Unaudited)
for the three months ended March 31, 2000 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. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
</CAPTION>
March 31, December 31,
2000 1999
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $146,918 $85,783
Accounts receivable trade, net
of allowance for doubtful accounts of
$8,740 99,775 135,664
Related party receivables 46,228 46,609
Inventories 19,375 20,247
Prepaid expenses and other current assets 21,708 23,577
- -----------------------------------------------------------------------
334,004 311,880
- -----------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Equipment and furniture 858,666 701,607
Building and leasehold improvement 590,924 590,924
Land 125,000 125,000
- -----------------------------------------------------------------------
1,574,590 1,417,531
- -----------------------------------------------------------------------
Less accumulated depreciation and
Amortization 772,735 749,799
- -----------------------------------------------------------------------
801,855 667,732
- -----------------------------------------------------------------------
OTHER ASSETS
License, net of accumulated amortization
of $629,148 and $608,568, respectively 626,734 647,814
Software, web site and content development
Costs 25,000 -
Other 22,109 26,231
- -----------------------------------------------------------------------
673,843 674,045
- -----------------------------------------------------------------------
TOTAL ASSETS $1,809,702 $ 1,653,657
=======================================================================
<CAPTION>
"See accompanying notes to consolidated financial statements."
</CAPTION>
</TABLE>
<TABLE>
<CAPTION>
FIRST ENTERTAINMENT HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, continued
(Unaudited)
</CAPTION>
March 31, December 31,
2000 1999
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT):
CURRENT LIABILITIES
Accounts payable $223,608 $ 296,163
Accrued liabilities 214,079 206,479
Accrued interest 456,770 448,826
Deferred revenues - 13,000
Notes payable and current
portion of long term debt 840,907 917,373
Note payable related party 26,500 7,080
- -----------------------------------------------------------------------
Total current liabilities 1,761,864 1,888,921
- -----------------------------------------------------------------------
LONG TERM DEBT, NET OF
CURRENT PORTION 302,814 242,076
- -----------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
CLASS A PREFERRED STOCK, 1,500,000 shares
Authorized, 10,689 shares issued and
outstanding, Liquidation value $ 15,000 11 10
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.001 par value; authorized
5,000,000 shares;
Class B preferred stock, 8,320 shares issued
and outstanding - -
Class C preferred stock no shares issued - -
Common stock, $.008 par value; authorized
50,000,000 shares; 13,647,586 and 12,480,835
shares issued and outstanding 109,182 99,847
Capital in excess of par value 20,638,757 18,751,618
Deferred compensation (154,896) (319,402)
Accumulated deficit (20,483,972) (19,009,413)
Stock held in Escrow (364,058) -
- -----------------------------------------------------------------------
(254,897) (477,350)
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $1,809,702 $ 1,653,657
=======================================================================
<CAPTION>
"See accompanying notes to consolidated financial statements."
</CAPTION>
</TABLE>
<TABLE>
<CAPTION>
FIRST ENTERTAINMENT HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
</CAPTION>
For the three months For the three
months
ended March 31, ended March 31,
2000 1999
<S> <C> <C>
REVENUE:
Live Entertainment $502,947 $ 435,942
Radio 196,483 182,985
Internet 9,030 -
- -----------------------------------------------------------------------
$708,460 618,927
- -----------------------------------------------------------------------
COSTS AND EXPENSES:
Cost of sales - live entertainment 414,983 380,403
Cost of sales - radio 127,488 125,493
Cost of sales - internet 502,685 -
Depreciation and amortization 43,516 31,377
Management and administrative fees,
Affiliate 70,500 42,218
Selling, general and administrative 1,383,033 169,340
- -----------------------------------------------------------------------
2,542,205 748,831
- -----------------------------------------------------------------------
OPERATING LOSS (1,833,745) (144,904)
OTHER INCOME (EXPENSE)
Interest expense (26,387) (27,727)
Balzac settlement 358,000 -
Other 27,573 (13,783)
- -----------------------------------------------------------------------
OPERATING LOSS BEFORE
MINORITY INTREST (1,474,559) (171,414)
MINOITY INTREST IN LOSS OF SUBSIDIARY - -
- -----------------------------------------------------------------------
NET INCOME (LOSS) $(1,474,559) $ (171,414)
=======================================================================
PER SHARE DATA-Basic and Diluted:
Net Income (loss) per common share $ (0.11) $ (0.02)
=======================================================================
WEIGHTED-AVERAGE NUMBER OF
SHARES OUTSTANDING 12,918,891 9,895,806
=======================================================================
<CAPTION>
* Less than $.01 per share
"See accompanying notes to consolidated financial statements."
</CAPTION>
</TABLE>
<TABLE>
<CAPTION>
FIRST ENTERTAINMENT HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
</CAPTION>
For the three months For the three months
ended March 31, ended March 31,
2000 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income (loss) $(1,474,559) $ (171,414)
Adjustments to reconcile net income
(loss) to net cash from operations
Depreciation and amortization 43,516 31,377
Common stock issued for services 368,355 88,760
Common stock options 977,566 12,874
Other - 15,000
Changes in operating assets and
liabilities
(Increase) decrease in
Receivables 36,270 11,788
Inventories 872 652
Other assets 6,492 (10,539)
Increase (decrease) in
Accounts payable (72,555) (28,081)
Accrued liabilities 15,544 22,191
Deferred revenues (13,000) -
Cash (used in) provided by
discontinued operations - 519
- -----------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES: (111,499) (26,873)
- -----------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures - net (182,059) (13,034)
- -----------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (182,059) (13,034)
- -----------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on debt (21,308) (26,199)
Proceeds from issuance of debt 25,000 -
Proceeds from issuance of common stock 351,001 30,000
- -----------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 354,693 3,801
- -----------------------------------------------------------------------
<CAPTION>
FIRST ENTERTAINMENT HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(Unaudited)
</CAPTION>
NET INCREASE (DECREASE) IN CASH 61,135 (36,106)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 85,783 109,450
- -----------------------------------------------------------------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $146,918 $ 73,344
=======================================================================
<CAPTION>
"See accompanying notes to consolidated financial statements."
</CAPTION>
</TABLE>
<TABLE>
<CAPTION>
Supplemental Information
Schedule of Non-cash Investing and Financing Activities
</CAPTION>
2000 1999
<S> <C> <C>
Cash paid for interest $ 10,531 $23,933
=======================================================================
Accounts payable converted into common stock $ - $ 92,372
=======================================================================
Note payable issued for leasehold improvements $ - $150,000
======================================================================
Common stock and options issued for services $1,345,921 $101,634
=======================================================================
Common stock issued for prepaid services $ - $ 41,508
=======================================================================
</TABLE>
FIRST ENTERTAINMENT HOLDING CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
General
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, 1999.
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, 2000. 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, 2000 and 1999.
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.
Going Concern
During the period from inception (January 17, 1985) to March 31, 2000,
the Company has incurred cumulative net losses of approximately
$20,484,000 and, as of March 31, 2000, had an excess of current
liabilities over current assets of approximately $1,428,000 and is in
default on certain notes payable. These conditions raise substantial
doubt about the Company's ability to continue as a going concern.
The Company does not have sufficient revenues to generate income from
operations; therefore, it is necessary for the Company to increase
revenues either by expansion or by acquisition or significantly reduce
its operating costs. The Company has been able to issue stock for
management and accounting services, thereby reducing the need for cash
to pay for operating expenses. If the Company would be unable to issue
stock for services, because there would be limited liquidity for the
stock, this would have a severe impact upon the Company and its ability
to operate. The value of services paid by issuance of stock was
approximately $368,000 for the three months ended March 31, 2000. Net
cash used in operations was approximately $111,000 for the three months
ended March 31, 2000, unless operations become more profitable, the
Company may not have sufficient cash for use in operations through
December 31, 2000.
Management's plans with regard to the Company's ability to continue as
a going concern include continued raising of equity financing in the
U.S. and/or international markets, restructuring of its debt
obligations and undertaking mergers or acquisitions to improve market
share or operational synergies and improving efficiency of operations.
There are no assurances that any of these events will occur or that the
Company's plan will be successful.
The Company is dependent upon obtaining additional financing, and/or
extending its existing debt obligations, and/or obtaining additional
equity capital and ultimately achieving profitable operations. The
Company has no arrangements in place for such equity or debt financing
and no assurance can be given that such financing will be available at
all or on terms acceptable to the Company. Any additional equity or
debt financing may involve substantial dilution to the interests of the
Company's shareholders as well as warrants and options holders.
However, the Company has received proceeds from the sale of restricted
common stock of approximately $350,000 through March 31, 2000.
If the Company is unable to obtain sufficient funds to satisfy its cash
requirements, it may be forced to curtail operations, dispose of assets
or seek extended payment terms from its vendors. Management is
currently considering the sale on certain of the Company's assets to
meet its current cash flow needs. The Company has signed a letter of
intent to sell its radio operations. There are no arrangements in place
for any other asset sales and no assurance can be given that the letter
of intent will generate a finalized agreement or that any sales will be
available at all or on terms acceptable to the Company.
The Company has been able to issue stock for management and accounting
services, thereby reducing the need for cash to pay for operating
expenses. If the Company would be unable to issue stock for services,
because there would be no liquidity for the stock, this would have a
severe impact upon the Company and its ability to operate. The value of
services paid by issuance of stock was approximately $368,000 for the
three months ended March 31, 2000. Net cash provided by operations was
approximately $55,000 for the three months ended March 31, 2000, unless
operations become more profitable, the Company may not have sufficient
cash for use in operations through December 31, 2000.
The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
New Accounting Standards
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 adoption of this statement had no impact on the Company's
consolidated 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. The adoption of this
statement had no impact on the Company's consolidated financial
statements.
NOTE B - BUSINESS DEVELOPMENTS
Balzac, Inc.
In April 1996, the Company acquired certain assets of Balzac, Inc.
("Balzac") a private company that 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. Subsequent to December 31, 1998 Balzac informed the Company
that it had filed Chapter 11 Bankruptcy proceedings. As a result of
these events, the Company had written off its entire investment in
Balzac.
In August 1999, Balzac filed an adversary proceeding with the
bankruptcy court, Adversary No. 99-2237, claiming that we caused damage
to Balzac by failing to register the resale of shares of common stock
underlying warrants to be issued to Balzac pursuant to agreements
between us and Balzac entered into in April 1997. Balzac sought damages
of at least $3,268,356 plus interest thereon. In addition, we filed a
counterclaim against Balzac and third party complaints against two of
Balzac's executive officers and directors and Alex Brown, Incorporated.
In the counterclaim and third party claims, we sought damages from
Balzac, Mr. Deutsch and Mr. Spector for tortious interference with
contract and bad faith, and for impairing our security interest in the
shares held by Balzac that were to be liquidated to pay amounts owed to
us. We also sought damages against Alex Brown based on our allegations
that Alex Brown, Incorporated interfered with this security interest,
as well as breached a trust owed to us in failing to liquidate the
shares of the Company owned by Balzac.
We reached an agreement with Balzac to settle these disputes. Pursuant
to this agreement, which has been approved by the Bankruptcy Court,
Balzac paid us $358,000 in cash, which is included as a separate line
item in the accompanying statement of operations. We issued Balzac
options to purchase 200,000 shares of our common stock at $2.00 per
share, 310,000 shares of common stock at $1.00 per share, and 65,000
shares of common stock at $1.40 per share. These options expire three
years after issuance.
W3, Inc.
The Company formed W3, Inc. as a wholly-owned subsidiary, to acquire
and operate a radio station in Lead, South Dakota. In February 2000,
the Company agreed to issue 252,818 shares of restricted common stock
to be held in escrow as security for a $280,000 note payable. The note
payable was part of the $300,000 consideration in exchange for the
licenses, rights and certain other assets. The station is not yet
operating. The note, which has no stated interest rate, is payable in
monthly installments of $1,556 beginning in March 2000.
NOTE C - STOCKHOLDERS' EQUITY
During the three months ending March 31, 2000, the Company, in a
private placement offering, sold 609,232 shares of common stock, and
options to purchase 325,998 shares of common stock at exercise prices
from $0.50 to $0.65, resulting in net proceeds of $351,000.
Also during the three months ending March 31, 2000, the Company issued
304,701shares of common stock for consulting services and employee
compensation valued at approximately $368,000.
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 $0.21 per share to $0.53 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 three months ended March 31, 2000, the Company recognized
compensation of $813,000 for 1,150,000 options granted during that
period that were accounted for in accordance with SFAS 123 and APB 25
and $164,506 of compensation related to options issued in prior
periods. The options may be exercised from $0.50 to $2.00 through 2005.
NOTE D - SOFTWARE, WEB SITE AND RICH MEDIA CONTENT DEVELOPMENT COSTS
The Company utilizes American Institute of Certified Public Accountants
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" to account for
software and similar costs. In accordance with SOP 98-1, the Company
expenses costs incurred in the preliminary project stage and,
thereafter, capitalizes costs incurred in developing or obtaining
internal use software. Certain related costs, such as maintenance and
training, are expensed as incurred. The Company capitalizes certain
direct costs of developing the portion of its website and rich media
content. Capitalized software costs will be amortized over a period of
not more than 3 years after the software is placed into operation.
Capitalized software costs are subject to impairment evaluation in
accordance with SFAS 121.
NOTE E - RELATED PARTY TRANSACTIONS
The Company outsources substantially all administrative, management and
accounting functions to a company wholly-owned by a current director of
the Company. Monthly fees for such services were $21,000 for the period
January 1, 1998 through August 31, 1999; thereafter the fees were
reduced to $14,000. During the three months ended March 31, 2000, the
fees were $23,500 per month. Total fees paid by cash and by the
issuance of common stock for the three months ended March 31, 2000 were
approximately $225,000.
Another entity, 43% of which is owned by the same director, performs
other administrative functions for the Company on an as-needed, hourly
basis. The Company also leases computer equipment from the related
entity and has amounts due to this entity of $5,580 as of March 31,
2000. Total fees paid by cash and by the issuance of common stock for
the three months ended March 31, 2000 were approximately $225,000.
In March 2000, the Company's president loaned the Company $25,000 at
9%. 2001. The note payable is not collateralized and due on demand.
In 1998, Mr. Goldberg was advanced approximately $25,000 that was being
repaid in monthly repayments of approximately $1,000 with a balance of
$10,710 as of December 31, 1999. Also as of December 31, 1999, Mr.
Goldberg is in possession of certain of the Company's equipment with an
approximate net book value of $9,000. Additionally, the Company has
recorded a separate receivable of $3,314 due from Mr. Goldberg. See
also the discussion in Note C related to options issued to Mr. Goldberg
and later canceled by the Board of Directors. 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.
NOTE F -- LITIGATION
The Company knows of no litigation pending, threatened, or
contemplated, or unsatisfied judgments against it, or any proceedings
of which the Company or any of its subsidiaries is a party, except as
specified below. The Company knows of no legal actions pending or
threatened, or judgment entered against any of its officers or
directors or any of its Subsidiaries in their capacities as such.
However, the Company has a dispute with Mr. Goldberg, as discussed in
Note E.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion and comparison of our financial condition and
results of operations as of and for the three months ended March 31, 2000
and as of and for the three months ended March 31, 1999. This discussion
should be read in conjunction with the financial statements, the notes to
the financial statements, and the other financial data included elsewhere in
this prospectus.
The three months ended March 30, 2000 compared with the three months ended
March 30, 1999
Our net loss increased from $171,000 in 1999 and to $1,475,000 in
2000. This $1,304,000 increase is primarily the result of higher expenses in
two categories. Compensation related to the issuance of common stock options
issued for services, and cash compensation, increased $1,244,000. Costs and
expenses in 2000 of our Internet operations totaled $503,000.
Total revenues increased from $619,000 in 1999 to $708,000 in 2000, an
$89,000 (or 14%) increase. Live entertainment revenue increased by $67,000
due to an increase in attendance. Cost of sales - live entertainment
increased from $380,000 in 1999 to $415,000 in 2000. The largest component
of this $35,000 (or 9%) increase is labor costs and related costs and
benefits, including entertainers' salaries of the entertainers.
Radio revenue increased from $183,000 in 1999 to $196,000 in 2000. This
$13,000 (or 7%) increase is primarily the result of an increase in
advertising revenues due to a combination of an increase in advertisers.
Cost of sales - radio increased from $125,000 in 1999 to $127,000 in 2000.
This $2,000 (or 1%) increase is consistent with the increase in radio
revenues and is primarily the result of increases in compensation.
We commenced our Internet division on June 28, 1999. For the quarter
ended March 30, 2000 this division has focused on completing its team of
Internet engineers, programmers, web site developers, content developers,
and sales and marketing staff. We are now concentrating on establishing
strategic relationships with e-commerce partners, traffic partners and
content development. Costs and expenses for the period ended March 30, 2000
for the Internet division totaling $503,000 are comprised of, $362,000 in
salaries, contract labor and related expenses, $72,000 in professional fees,
$32,000 in travel and entertainment, $19,000 in rent, and $18,000 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 are continuing to modify an analysis of the working capital needed
to develop our Internet business. Working capital needs include retail
website, development, advertising and marketing, rich media development,
affiliate program development and e-commerce development. Currently,
working capital is not sufficient to fund the Internet division and its
needs for additional staff for the next year. We have been issuing stock to
Internet division employees and consultants to fund salaries, wages and
consulting fees thereby reducing the requirement for working capital.
Depreciation and amortization increased from $31,000 in 1999 to
$44,000 in 2000. This $13,000 (or 41%) increase is primarily due to
additions to property and equipment of $160,000 for 1999 and $157,000 in
2000. In February 1999 the comedy club completed a $150,000 remodeling
project. The remodeling costs are being amortized over the nine-year life
of the lease. During the three months ended March 31, 2000, the Company
acquired computer and other equipment for its Internet division.
Management and administrative fees - affiliate increased from $42,000
in 1999 to $70,000 in 1999. This $28,000 (or 66%) increase is due to a
change in the monthly charges from $14,000 per month in the prior year to
$23,500 per month in the current year.
General and administrative costs increased from $170,000 in 1999 to
$1,383,000 in 1999. This $1,213,000 increase is primarily attributable to
an increase in compensation costs of $1,244,000 associated with stock
options issued accounted for in accordance with SFAS 123 and APB 25.
Interest expense remained consistent at approximately $27,000 per
quarter. There has been no significant change in the Company's debt
structure. The Company has not variable interest rate debt, therefore the
expense is anticipated to remain consistent.
Liquidity and Capital Resources
As of March 30, 2000, we had a working capital deficit of $1,428,000.
Despite a loss of $1,475,000, net cash used in operating activities was
$111,000 primarily due to common stock options granted and common stock
issued for services of $1,346,000. We have been able to issue common stock
for services thereby reducing the need for working capital.
Our ability to continue as a going concern will largely depend on our
ability to extend existing debt obligations, generate working capital
through debt or equity financing and profitable operations. Working capital
deficiencies have hindered our ability to fund certain business segments.
Working capital is needed to further develop both existing lines of business
and new lines of business and the new Internet line of business. The
likelihood of obtaining the necessary equity financing is uncertain at this
time (see the discussion of recent sales of unregistered securities, below).
We have been able for the three months ended March 30, 2000 to finance
some of our operations through the issuance of common stock in exchange for
services. In 2000, we issued 304,701 shares of common stock valued at
$368,000 or an average of $1.21 per share. In 1999, we issued 189,775
shares of common stock valued at approximately $89,000 or an average of
$.0.47 per share. In February 1998, our common stock was delisted from
NASDAQ, which adversely affected the price of the stock.
Commencing with the new lease for the Comedy Works space in Larimer
Square in Denver, Colorado, effective January 1, 1998, Comedy Works began a
significant remodeling project. The remodeling was completed in February
1999. The total remodeling costs were $300,000 of which $150,000 was paid
by the landlord (lessor) as tenant improvements and Comedy Works paid
$150,000. The landlord (lessor) has agreed to finance our portion of the
remodeling cost payable monthly at 12% per annum over 10 years. The monthly
payments are $2,300.
Working capital is needed for marketing the Internet site. Although
we have not yet determined the marketing budget, we currently anticipate
spending $45,000 on both traditional and Internet advertising. We also
purchased a radio station in Lead, 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 February 10, 2000, all steps, including the expiration of
the time for public objections, necessary to transfer the license had been
completed. We estimate that we will approximately $250,000 for construction
and equipment to commence operations, which we expect to finance through
working capital and equipment leasing or other forms of debt financing.
We also have increased our staff related to Internet web development,
Internet advertising and marketing. The monthly obligation for salaries and
overhead is approximately $50,000. First 2 Market, the Internet segment
subsidiary, does not yet generate significant revenues and is not expected
to be profitable until second or third quarter 2000. Currently, we have
limited working capital and do may have sufficient working capital to meet
our existing debt obligations and other working capital needs contemplated
under various definitive agreements.
Through March 30, 2000, we raised approximately $350,000 in private
placement equity financing through the sale of common, but there can be no
assurance that we 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, we have not yet
completed our due diligence procedures, which include an analysis of the
working capital needed. For those letters of intent for which we are 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 our 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.
During the period from inception (January 17, 1985) to March 31, 2000,
we incurred cumulative net losses of approximately $20,484,000 and, as of
March 31, 2000, had an excess of current liabilities over current assets of
approximately $1,428,000 and is in default on certain notes payable. These
conditions raise substantial doubt about our ability to continue as a going
concern. We are dependent upon obtaining additional financing, and/or
extending our existing debt obligations, and/or obtaining additional equity
capital and ultimately achieving profitable operations. We have no
arrangements in place for such equity or debt financing and no assurance can
be given that such financing will be available at all or on terms acceptable
to us. Any additional equity or debt financing may involve substantial
dilution to the interests of our shareholders as well as warrants and
options holders. If we are unable to obtain sufficient funds to satisfy our
cash requirements, we may be forced to curtail operations, dispose of assets
or seek extended payment terms from our vendors. The accompanying
consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
Our plans with regard to the ability to continue as a going concern
include continued raising of equity financing in the U.S. and/or
international markets, restructuring of its debt obligations and undertaking
mergers or acquisitions to improve market share or operational synergies and
improving efficiency of operations. There are no assurances that any of
these events will occur or that our plan will be successful.
We do not have sufficient revenues to generate income from operations;
therefore, it is necessary for us to increase revenues either by expansion
or by acquisition or significantly reduce our operating costs. We have been
able to issue stock for management and accounting services, thereby reducing
the need for cash to pay for operating expenses. If we were unable to issue
stock for services, because there would be no liquidity for the stock, this
would have a severe impact upon the Company and its ability to operate. The
value of services paid by issuance of stock was approximately $368,000 for
the three months ended March 31, 2000. Net cash used in operations was
approximately $111,000 for the three months ended March 31, 2000 and, unless
operations become more profitable, we may not have sufficient cash for use
in operations through December 2000.
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.
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
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: May 22, 2000 /s/ Doug Olson
Doug Olson
President
DATE: May 22, 2000 /s/ Howard B. Stern
Howard B. Stern
Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Mar-31-2000
<CASH> 194
<SECURITIES> 0
<RECEIVABLES> 121
<ALLOWANCES> 0
<INVENTORY> 17
<CURRENT-ASSETS> 358
<PP&E> 1529
<DEPRECIATION> 873
<TOTAL-ASSETS> 1791
<CURRENT-LIABILITIES> 1763
<BONDS> 0
<COMMON> 88
0
0
<OTHER-SE> (298)
<TOTAL-LIABILITY-AND-EQUITY>1791
<SALES> 1274
<TOTAL-REVENUES> 1274
<CGS> 1022
<TOTAL-COSTS> 2520
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60
<INCOME-PRETAX> (1305)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1305)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1305)
<EPS-BASIC> (.13)
<EPS-DILUTED> (.13)
</TABLE>
