As filed with the Securities And Exchange Commission on February 11, 2000
Registration Number 333-91861
U.S. Securities And Exchange Commission
Washington, D.C. 20549
Amendment No. 1 to Form SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
FIRST ENTERTAINMENT HOLDING CORP.
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(Name of small business issuer in its charter)
Nevada 7900 84-0974303
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(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
5495 Marion Street, Denver, Colorado 80216; (303) 382-1500
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(Address and telephone number of principal executive offices)
5495 Marion Street, Denver, Colorado 80216; (303) 382-1500
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(Address of principal place of business or intended
principal place of business)
Douglas R. Olson, 5495 Marion Street, Denver, CO 80216; (303) 382-1500
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(Name, address and telephone number of agent for service)
With a copy to:
Alan L. Talesnick, Esq.
Francis B. Barron, Esq.
Patton Boggs LLP
1660 Lincoln Street
Suite 1900
Denver, Colorado 80264
(303) 830-1776
Approximate date of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement
If any securities being registered on this form are to be offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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Title of each class Proposed Maximum Proposed Maximum
of securities to be Amount To Be Offering Price Per Aggregate Offering Amount Of
registered Registered Share Price Registration Fee
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<S> <C> <C> <C> <C>
Common Stock 550,000 $ .875 (1) $481,250(1) $127 (1) (7)
Common Stock 153,846 $1.385 (2) $213,077(2) $ 56 (2)
Common Stock that
may be issued upon 200,000 $ 2.00 (3) $400,000 $106 (7)
exercise of warrants (3)
Common Stock that may be 375,000 $ 1.00 $375,000 $ 99 (7)
issued upon exercise of
warrants(4)
Common Stock that may be 175,000 $1.03 $180,460 $ 48 (5)(7)
issued upon exerercise of
options (5)
Common Stock to be 441,650 (6) $175,205 $ 46 (7)
purchased pursuant to
rescission offer(6)
Common Stock that may be 300,000 $ .75 $225,000 $ 59 (8)
issued upon exercise of
options (8)
Common Stock that may be 153,000 $.65 $100,000 $ 26 (9)
issued upon the exercise
of warrants(9)
TOTAL 2,349,342 $2,149,992 $567 (10)
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(1) The price and filing fee were determined in accordance with Rule 457 based
upon the average of the high and low prices reported by the OTC Bulletin
Board on November 30, 1999, which is within five business days prior to the
date of the initial filing of this registration statement.
(2) The price and filing fee were determined in accordance with Rule 457 based
upon the average of the high and low prices reported by the OTC Bulletin
Board on February 7, 2000, which is within five business days prior to the
date of the filing of this Amendment.
(3) Warrants to purchase these shares are exercisable at $2.00 per share.
(4) Warrants to purchase these shares are exercisable at $1.00 per share.
(5) Options to purchase these shares are exercisable at $1.03 per share. Our
original filing included options to purchase 25,000 shares at this price
and the registration fee of $7 for those securities previously was paid.
This amendment adds 150,000 shares and the additional registration fee of
$41 is included with this filing.
(6) The repurchase price for the rescission offer is based on the total
consideration for which the shares were issued of $175,205.
(7) Previously paid.
(8) Options to purchase these shares are exercisable at $.75 per share. These
shares were not included in our original filing. The registration fee of
$59 for these additional shares is included with this filing.
(9) Warrants to purchase these shares are exercisable for $.65 per share. These
shares were not included in our original filing. The registration fee of
$26 for these shares is included with this filing.
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(10) A total of $463 of the filing fee previously was paid. This filing includes
the payment of an additional $82 of filing fees.
The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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The information in this prospectus is not complete and may be changed. The
selling stockholders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
PROSPECTUS DATED FEBRUARY 11, 2000
SUBJECT TO COMPLETION
SELLING STOCKHOLDER AND
COMPANY RESCISSION OFFER PROSPECTUS
FIRST ENTERTAINMENT HOLDING CORP.
2,349,342 Shares Of Common Stock
The shares covered by this prospectus consist of the following:
* Up to 703,846 shares of common stock purchased by some of selling
stockholders in private placement transactions and upon the exercise
of stock options and warrants.
* Up to 1,203,846 shares of common stock that may be issued to some of
selling stockholders, when they exercise stock options and warrants.
* Up to 441,650 shares of common stock that may be repurchased by us in
a rescission offer to up to five persons who previously received
shares in transactions that were not registered.
The selling stockholders have not entered into any underwriting
arrangements. The prices for the common stock may be the market prices
prevailing at the time of transfer, prices related to the prevailing market
prices, or negotiated prices. Brokerage fees or commissions may be paid by the
selling stockholders in connection with sales of the common stock. We will not
receive any of the proceeds from the sale of these shares.
Our common stock is quoted on the OTC Bulletin Board under the symbol
"FTET". On February 9, 2000, the closing price of the common stock was $1.34 per
share.
Investing in the common stock involves risks. See the "Risk Factors"
section beginning on page 4.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is February ___, 2000
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PROSPECTUS SUMMARY
The following summary highlights information contained in this prospectus.
In addition to reviewing this summary, you should read this entire prospectus
carefully, including the "Risk Factors" section, the financial statements and
the notes to the financial statements. All information in this prospectus should
be considered before investing in the common stock.
The Company We engage in, or hold controlling interests in
entities that engage in, radio, live entertainment
and Internet related businesses. Through our
Quality Communications, Inc. subsidiary, we
operate an FM radio station in Gillette, Wyoming
that plays contemporary country music. Through our
Comedy Works, Inc. subsidiary, we operate a comedy
club in downtown Denver, Colorado. We also are
pursuing Internet related businesses.
The Offering By This prospectus relates to the sale or transfer of
Selling Stockholders up to 1,907,692 shares of common stock. These
shares consist of the following:
* Up to 703,846 shares of common stock
purchased by some of selling stockholders in
private placement transactions and upon the
exercise of stock options and warrants.
* Up to 1,203,846 shares of common stock that
may be issued to some of selling stockholders
when they exercise stock options and warrants
issued by the Company.
The common stock may be sold at market prices or
other negotiated prices. The selling stockholders
have not entered into any underwriting
arrangements for the sale of the shares. For
additional information concerning sales by the
selling stockholders, see, "Selling Stockholders
and Plan of Distribution".
We will not receive any proceeds from the sale of
common stock by the selling stockholders. If the
options and warrants held by the selling
stockholders are exercised, we will use the
proceeds from these exercises for general and
administrative expenses and working capital.
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Rescission Offer We also will use this prospectus to make a
rescission offer to five persons and entities who
were inadvertently issued 441,650 more shares than
were registered on a prior registration statement.
These shares were issued at various rates between
$.20 and $.69 per share in consideration for
services provided to us valued at a total of
$175,205. Although exemptions from registration of
the issuance of the shares may be available,
because the issuance of these shares was violation
of the registration provisions of federal and
state securities laws. We are offering to
repurchase the previously issued shares for cash
equal to the number of shares multiplied by the
price at which those shares were issued plus
interest. Additional information concerning the
Rescission Offer is included in the "Rescission
Offer" section below.
Proposed Name Change In November 1999, we determined to recommend to
the stockholders for their approval that our name
be changed to "F2 Network Inc." We
anticipate that the proposed name change will be
voted upon by the stockholders at a meeting to be
held in March or April 2000.
Company Offices Our offices are located at 5495 Marion Street,
Denver, Colorado 80216, telephone number (303)
382-1500.
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RISK FACTORS
Prospective investors should carefully consider, together with the other
information in this prospectus, the following factors that affect us.
Our auditor's report contains a "going concern" qualification.
The independent certified public accountants' report on our financial
statements contains an explanatory paragraph, which, in general, indicates that
we have suffered recurring losses from operations, have a working capital
deficiency and have defaulted on a substantial portion of our debt. These
conditions raise substantial doubt about our ability to continue in business.
Our plans to address this issue include obtaining additional financing, and/or
extending our existing debt obligations, and/or obtaining additional equity
capital and ultimately achieving profitable operations. There is no assurance
that we will be successful in these plans. In April 1999, we were successful in
obtaining financing from the First National Bank of Gillette to pay debt to a
creditor totaling $125,000, which came due on March 31, 1999. The financial
statements do not include any adjustments that might result from the going
concern uncertainties.
The multimedia entertainment business is speculative in nature.
Profits, if any, from the businesses in which we engage are dependent on
widespread public acceptance of, and interest in, each creative project
undertaken by our various segments. Audience appeal depends upon factors which
cannot be ascertained reliably in advance and over which we may have no control,
including, among other things, unpredictable critical review, positioning in the
market and changeable public tastes. Due to factors such as the unpredictability
of audience appeal, many of our completed projects may fail to generate
sufficient revenues to recover their costs of acquisition, development,
production and distribution. We may not recoup all or any portion of our
investment in a particular project, and cannot guarantee that any project will
yield us profits.
We depend on key employees.
Our success depends on the continued active participation of Douglas Olson,
our President and Chief Operating Officer, and Howard Stern, our Chief Executive
Officer, even though neither of them devotes 100% of his time to our business.
Our Internet business depends on the continued active participation of Michael
Marsowicz. There is no employment agreement with any of Mr. Olson, Mr. Stern or
Mr. Marsowicz, and we do not carry any "key-man" life insurance on any of them.
We cannot predict the status of our property rights.
Although we have developed, and continue to develop, our own Internet
content and products, we have entered into license agreements with respect to
other Internet products. We cannot guarantee that such license rights will
provide us with significant protection from competitors. Property rights
protection generally is uncertain, and involves complex legal and factual
questions. To date, there has emerged no consistent policy regarding the breadth
of claims allowed in connection with such property rights protection. Therefore,
we cannot assure that any rights licensed to us will afford protection against
competitors with similar technologies and that we will have the financial
resources necessary to enforce our property rights.
Even though we have licenses, under the terms of our license agreements, we
generally are responsible for protecting the intellectual property rights
subject to these agreements. Challenges may be instituted by third parties as to
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the validity, enforceability and infringement of the rights. The cost of the
litigation to defend any challenge to uphold the validity and enforceability and
prevent infringement of our licensed rights can be substantial. We may also be
required to obtain additional licenses from others to continue to refine,
develop, and market new products. We may not be able to obtain any such licenses
on commercially reasonable terms or at all or that the rights granted pursuant
to any licenses will be valid and enforceable. As a result, we may incur
substantial expenses to protect property rights. This would result in increased
losses or reduced profits and also distract management from pursuing more
productive activities for us.
We need additional funding to sustain our operations.
In order to continue our business plans fully, we anticipate that we will
need additional funding. We do not have a steady source of revenue to provide
funding to sustain operations. The availability of a reliable source of revenue
to sustain our operations is beyond our control.
We could be adversely impacted by intense competition.
We compete in the areas of radio broadcasting, comedy club operation and
Internet related businesses with other companies. Many of these competitors have
substantially larger financial and other resources than us. In the Internet
area, companies with greater financial resources than us have not been able to
generate positive cash flow or profits from operating Internet related
businesses. From time to time, there may be competition for, and shortage of,
broadcasting talent and comedians, and Internet content and qualified computer
technicians. We may therefore not be able to attract the best available talent
required to develop our businesses. This competition and these shortages could
lead to an increase in costs that could adversely affect us by increasing losses
or reducing profits. We also compete with other companies for advertising on our
radio station and Internet portal. Our Internet revenues are based on the
ability to attract advertisers. In addition, the low cost of entering Internet
related businesses may result in additional competition in the future.
Technology changes.
The Internet related businesses in which we operate and intend to operate
are characterized by rapid and significant technological advancements and
introductions of new products and services using new technologies. As new
technologies develop, we may be placed at a competitive disadvantage, and
competitive pressures may force us to implement those new technologies at a
substantial cost. If other companies implement new technologies before us, those
companies may be able to provide enhanced capabilities and superior quality
compared with what we are able to provide. We cannot ascertain that we will be
able to respond to these competitive pressures and implement new technologies on
a timely basis or at an acceptable cost. This could attract our customers to
competitors, reducing our revenues. The possibility of increased costs to keep
up with technological advancements and reduced revenues if customers depart
would lead to increased losses or reduced profits.
There is limited liquidity in our shares.
There may be no ready market for our shares and an investor cannot expect
to liquidate his investment regardless of the necessity of doing so.
Historically, there has been an extremely limited public market for our shares.
We cannot predict that the market will be sustained or will expand. The prices
of our shares are highly volatile. Due to the low price of the securities, many
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brokerage firms may not effect transactions and may not deal with low priced
securities as it may not be economical for them to do so. This could have an
adverse effect on developing and sustaining the market for our shares. In
addition, there is no assurance that an investor will be in a position to borrow
funds using our shares as collateral because lenders may require a more liquid
form of security.
Penny stock regulation.
The SEC has adopted rules that regulate broker-dealer practices in
connection with transactions in "penny stocks". Generally, penny stocks are
equity securities with a price of less than $5.00 (other than securities
registered on some national securities exchanges or quoted on the Nasdaq
system). If our shares are traded for less than $5 per share, as they currently
are, the shares will be subject to the SEC's penny stock rules unless (1) our
net tangible assets exceed $5,000,000 during our first three years of continuous
operations or $2,000,000 after our first three years of continuous operations;
or (2) we have had average revenue of at least $6,000,000 for the last three
years. We do not meet these requirements. As a result, market transactions in
our shares are subject to the penny stock rules. The penny stock rules require a
broker-dealer, prior to a transaction in a penny stock not otherwise exempt from
the rules, to deliver a standardized risk disclosure document prescribed by the
SEC that provides information about penny stocks and the nature and level of
risks in the penny stock market. The broker-dealer also must provide the
customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction and
monthly account statements showing the market value of each penny stock held in
the customer's account. In addition, the penny stock rules require that prior to
a transaction in a penny stock not otherwise exempt from those rules, the
broker-dealer must make a special written determination that the penny stock is
a suitable investment for the purchaser and receive the purchaser's written
agreement to the transaction. These requirements may have the effect of reducing
the level of trading activity in the secondary market for a stock that becomes
subject to the penny stock rules. As long as our shares are subject to the penny
stock rules, the holders of our shares may find it difficult to sell our shares.
We may suffer contingent liabilities as a result of the shares subject to the
rescission offer.
The shares that are subject to the Rescission Offer may have been issued in
violation of federal and state registration requirements. We are making the
Rescission Offer in an effort to minimize any damages that may be claimed by the
recipients of those shares. Even if the Rescission Offer is completed, there is
no assurance that the SEC or state securities authorities will not pursue fines
or penalties against us. In addition, the rescission offerees retain a federal
cause of action even if the Rescission Offer is completed.
Forward-Looking Statements And Associated Risk
This prospectus contains forward-looking statements. These statements
include:
* our growth strategies,
* our products and planned products,
* the need for additional financing,
* the need for and uncertainty with respect to necessary regulatory
clearances, commercial acceptance of our products and planned
products, and
* our ability to successfully commercialize our products and to achieve
profitability in general.
These forward-looking statements are based largely on our expectations and
are subject to a number of risks and uncertainties, some of which are beyond our
control. Actual results could differ materially from these forward-looking
statements as a result of the factors described in this prospectus, including
the "Risk Factors" section. These factors include regulatory, financial, market
or general economic influences. In light of these risks and uncertainties, there
can be no assurance that the forward-looking statements contained in this
prospectus will in fact transpire or prove to be accurate.
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PRICE RANGE OF COMMON STOCK
Our common stock is traded in the over-the-counter market and has been
quoted on the OTC Bulletin Board since February 6, 1998, the day after it ceased
to be listed on the Nasdaq Stock Market because it did not meet the minimum
price requirements. Our trading symbol is "FTET".
The table below presents the range of high and low closing bid prices for
the common stock during each of the quarters indicated. These quotations were
obtained from brokers who make a market in the common stock and reflect
interdealer prices, without retail mark up, mark down or commission, and may not
represent actual transactions.
Closing Bid Price
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High Low
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1999
First Quarter $1.31 $.1562
Second Quarter $2.0156 $.6406
Third Quarter $4.125 $1.2188
Fourth Quarter (through October 20, 1999) $1.34 $.9688
1998
First Quarter $.75 $.25
Second Quarter $.71 $.20
Third Quarter $.77 $.21
Fourth Quarter $.48 $.12
1997
First Quarter $2.22 $.75
Second Quarter $1.47 $.84
Third Quarter $1.25 $.72
Fourth Quarter $.91 $.66
On February 9, 2000, the closing sale price for the Company's common stock
was $1.34 per share.
Number Of Stockholders Of Record
On February 9, 2000, the number of stockholders of record of the Company
was approximately 1,170.
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DIVIDEND POLICY
We have not declared or paid any cash dividends on the common stock since
the Company's formation and do not presently anticipate paying any cash
dividends on the common stock in the foreseeable future.
THE COMPANY
On December 15, 1997, we changed our state of incorporation from Colorado
to Nevada and changed its name to First Entertainment Holding Corp. We were
originally incorporated under the laws of Colorado on January 17, 1985. In
November 1999, we determined to change our name to "F2 Network Inc.",
subject to stockholder approval, which has not yet been obtained. We anticipate
that the proposed name change will be voted upon by the stockholders at a
stockholders meeting planned for March or April 2000.
Currently, we operate or hold controlling interests in three active and two
non-operating business segments. The three active segments are known as "Radio",
"Live Entertainment" and "Internet". The non-operating segments are known as
"Film", "Video", and "Retail". Initially, our business consisted of the
production of pre-recorded travel guides and special interest videos. In 1987,
we entered the radio broadcasting business by acquiring Quality Communications,
Inc., a Wyoming corporation pursuant to which we operate the radio segment of
its business. In 1992, we acquired a controlling interest in First Films, Inc.
("First Films"), a publicly held Colorado corporation, under which our live
entertainment operations currently are undertaken and under which our film
production activities previously were undertaken. In December 1997, we acquired
a 50.8% interest in Global Internet Corp. Global Internet is a development stage
company whose planned business activity was to operate an Internet gaming site.
The investment in Global Internet was written off as of December 31, 1997 and as
of December 31, 1998 Global Internet had not yet commenced its planned principal
operations. Since early 1999, we have been developing relationships with
Internet content providers, advertisers and gaming companies in an attempt to
create an Internet site with links to entertainment and gaming content and to
provide Internet site development to other parties. In addition, we have been
developing our own content in order to establish an Internet portal emphasizing
entertainment with links to other web sites. The site is located at www.First
Entertainment.com. In December 1996, we commenced operations of selling
infomercial products in freestanding unmanned kiosks in major retail malls
including U.S. Military bases. This segment was known as the "retail" segment.
In January 1998, we determined to discontinue the operations of the "retail"
segment as a result of lower than expected sales.
Radio
In October 1987, we entered the radio broadcasting business through the
acquisition of Quality Communications, Inc. "Quality Communications", a Wyoming
corporation. Through Quality Communications, we operate an FM radio station,
100.7, The Fox, located in Gillette, Wyoming.
In November 1993, the music format of the radio station was changed from a
Top-40 station to a format known as the "Heart of Rock." In February, 1995 the
format was changed again to contemporary country. The changes have had a
positive effect on its market share and gross revenues. In 1996, the radio
station started promoting concerts using up and coming country and western
singers. The radio station was a venue to promote the concerts to add an
additional source of revenue for the radio station.
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In September 1999, we entered into an agreement with Brian Encke to
purchase an FM radio station to be built in Lead, South Dakota, and the Federal
Communications Commission ("FCC") permits necessary to operate the station. The
$300,000 purchase price is to be paid by delivery of $20,000 in cash and a
promissory note for $280,000, with no interest, payable over a 15-year period in
monthly installments of $1,555.56. The purchase of the new station is to close
after the FCC grants its consent to the assignment of the permits to the Company
and all public comment periods expire. The FCC granted its consent on December
9, 1999 and the public comment period expired in January 2000. No negative
comments were received and we are proceeding with the closing of the purchase.
The purchase price will be paid in the manner described above and the Company
will commence construction of the facilities necessary to operate the station.
If there are unexpected construction delays, we believe the construction can be
completed by the end of 2000. We estimate that construction and installation of
the new station will cost approximately $250,000, including $200,000 to acquire
transmitting equipment, computers and other studio equipment. We intend to fund
$50,000 of the costs related to the construction of the new station primarily
from our working capital. We intend to finance the $200,000 of estimated
equipment costs through lease financing transactions where a financial
institution purchases the equipment and leases it to us at a rate that covers
their acquisition costs and a profit or through other debt financing such as
bank loans, if available at acceptable rates and terms.
Live Entertainment
First Films acquired 100 percent of the outstanding stock of Comedy Works,
Inc., a Colorado corporation, on September 13, 1990 in exchange for 200,000,000
shares of common stock. Comedy Works was incorporated in 1982 and has operated
one comedy club from its Larimer Square, Denver, Colorado location since that
time. Comedy Works Larimer Square typically has nine shows per week and has
averaged over 1,500 customers per week for the past fifteen years.
The goal of Comedy Works is to produce first-rate shows in the theater
environment. Revenues are generated through both ticket sales at the door and
beverage and food sales at tables. The club is open to the public only for
shows, which last from 1 to 2 hours each, and number as many as three per night.
Non-show times are devoted to preparing and producing a show that changes
completely each week, and to promoting and marketing the nightclub.
Internet Activities
Since 1997, we have attempted to engage in Internet related businesses.
Through internal resources and relationships with other entities, we developed
an Internet portal focusing on entertainment. The site,
www.FirstEntertainment.com, includes original content developed by us as well as
links to other sites. We are also developing relationships with electronic
commerce partners and offers web site development services and plans to add web
site hosting capabilities. Many of the letters of intent we entered into with
potential Internet partners have not led to definitive agreements and have been
terminated.
Our Internet related businesses are conducted through our First 2 Market,
Inc. subsidiary. All That Media, Inc., which was acquired in June 1999, was
merged into First 2 Market, Inc. in June 1999. At the time we acquired it, All
That Media was a newly-formed company that specialized in intellectual property
development, Internet portal development and Internet advertising. We issued an
option to purchase a total of 500,000 shares of common stock for $.75 per share
until October 10, 2001 to the stockholders 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 our Board of Directors in August 1999.
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This prospectus covers the resale of up to 150,000 shares that Mr. Marsowicz may
purchase upon the exercise of these options and an additional 150,000 shares
that the other shareholder of All That Media may purchase upon the exercise of
his options.
Also in June 1999, we acquired a start-up company named EDRON Associates,
Inc. by issuing options to its former stockholders to purchase 300,000 shares of
common stock 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 us. This prospectus covers the resale of up to
150,000 of the shares that may be purchased upon the exercise of these options.
The following is a summary of our current Internet related business.
Internet Portal. We established an Internet portal at
"www.FirstEntertainment.com". We are 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. We have attempted to provide
content on the site internally in order to avoid the expense of obtaining
content from outside sources. We believe that the comedy club and radio station
businesses provide a source for content. We generate revenues through
advertising on our web site as well as through "click fees" and commission
arrangements with operators of other web sites that are accessed through our web
site. We have not yet realized positive cash flows and there is no assurance we
will be able to do so. We are also pursuing "pay-per-view" events utilizing
entertainers in the comedy and country music areas with which we have
relationships through the operation of the comedy club and radio station. In an
attempt to increase traffic over our web site, we have entered into advertising
agreements with Yahoo to place a banner ad and link to our web site on sites
operated by Yahoo. We paid Yahoo $136,000 for advertising through December 31,
1999.
This advertising took place during two periods and included placements of
banner ads on Yahoo sites and inserting advertisements in 2.5 million Yahoo
e-mails. The first program with Yahoo consissted of 3,000,000 advertising
impressions for $36,000. The second program consisted of additional impressions
plus the 2.5 million advertisements in e-mails for $100,000. this program was
focused on Yahoo subscribers who showed an interest in entertainment oriented
information as shown in Yahoo's databases. An impression consists of Yahoo
customer calling up a web site on which our advertisement has been placed.
Web Site Development And Maintenance. We also offer web site development
services to assist other companies in designing and implementing a presence on
the Internet. These services include maintaining and archivin web sites to
include multi-media, audio and video capabilities. These capabilities allow us
and our clients to broadcast information much like a TV or radio station,
including advertisements. We have not yet received significant revenues from
these activities. Web site development and maintenance is a highly competitive
business that is labor intensive and there is no assurance that we will be able
to retain qualified personnel to assist in web site development or that we will
be able to do so at a cost that allows us to operate this business profitably.
Possible Internet Gaming Activities. We also are reviewing the possibility
of engaging in Internet gaming activities. Currently, we offer games and links
to games on our web site. The games we offer do not involve wagering although
some sites reached through links on our site do offer wagering. We are reviewing
legal and other issues in connection with whether to allow wagering on our web
site and whether to continue providing links to web sites that allow wagering.
We will engage in these activities or continue to offer links to sites that
offer wagering only if we determine that these activities will not violate
applicable laws.
Video
Initially, we entered the pre-recorded videocassette product market through
the design, production and distribution of pre-recorded videocassette travel
guides and later expanded into production and distribution of special interest
videocassette productions. We are no longer active in the edited video market.
We are attempting to sell all the remaining footage in raw, unedited form for
use in marketing and Internet sites for travel-related companies.
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Film
We previously engaged in film production activities through our First Films
subsidiary. These activities have been suspended.
Retail
In December 1996, we commenced operations of our retail segment through our
subsidiary, "The Best Of As Seen On TV, Inc." The segment consisted of selling
the most common and most popular infomercial products in free standing unmanned
kiosks in retail outlets throughout the United States. We opened our first four
unmanned locations in December, 1996, in Pearl Harbor, Andrews Air Force Base
and Bolling Air Force Base in Washington, D.C., and Lechmere's in Cambridge,
Massachusetts. In March 1997, we terminated our unmanned kiosk operations when
the leases to our first four locations were not renewed. Sales volumes at the
unmanned kiosk locations were not sufficient to maintain profitable operations.
We turned our efforts to operating manned kiosks in major retail malls. Each
manned kiosk was approximately 250 square feet and sold the top 50 selling
infomercial products. Commencing August, 1997, we opened six manned kiosk
locations in six retail malls located in the Denver metropolitan area. The sales
volumes for the manned kiosks were less than projected and in January 1998, we
determined to discontinue the operations of The Best Of As Seen On TV due to
operating losses and lack of working capital to further develop the concept.
The result of operations of The Best Of As Seen On TV for the years ended
December 31, 1998 and 1997 are disclosed as discontinued operations.
The assets of The Best Of As Seen On TV were written down to their
estimated net realizable value resulting in a write down of $490,000 which is
included in the accompanying statement of operations for the year ended December
31, 1997 as part of the loss from discontinued operations.
Competition
Radio
Our radio station competes with seven other signals available in the area.
Two of these radio signals originate from Gillette, Wyoming. We compete for
listeners with these stations through our music format, on-air talent and
promotional activities. The ability to charge higher advertising rates is
dependent upon attracting larger listener audiences.
Live Entertainment
Competition is intense in the comedy and music night club entertainment
industries. On a national level, we compete for entertainers with companies that
are better capitalized, highly visible and have longer operating histories and
larger staffs in their respective locations. None of the national comedy clubs
have locations in Denver, Colorado. Comedy Works Larimer Square has been in
business in Denver, Colorado for 17 years, longer than any other comedy club in
the Denver area. We believe that Comedy Works Larimer Square provides
higher-quality acts than its local competitors, reflected in the fact that it is
able to charge approximately twice the admission price of its local competitors.
The main competitors of Comedy Works Larimer Square are individually-owned and
located in shopping centers in the suburbs, while Comedy Works is located in the
downtown Denver area.
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Internet
Internet related businesses are subject to intense competition. Companies
with greater financial resources than ours have not been able to generate
positive cash flow or profits from operating Internet related businesses. In
addition, because of the large number of competitors, there is competition for
Internet content and qualified computer personnel. We may not be able to attract
the best available talent to develop our Internet business, which could lead to
an increase in costs that could have a material adverse effect on our business.
We also compete with other companies for advertising on our Internet portal.
Revenues generated from the Internet business are dependent upon advertising. In
addition, the low cost of entering Internet related businesses may result in
additional competition in the future.
Licenses
The FCC issues radio broadcasters a license to operate within their
assigned frequency for seven years. These licenses, upon application, are
renewable for additional seven year periods. The FCC issued our radio station
its original license on October 1, 1983, to operate at a frequency of 100.7 MHz,
24 hours a day, at 100,000 watts of effective radiated power. It was
subsequently reissued in October of 1990 and 1997. During the renewal process,
the public has an opportunity to express its opinion of how well the particular
station is servicing its broadcast area. Extreme public negativity during this
period can delay the reissuance process or result in a denial of the reissuance
of the license. In addition, frequent violations of FCC rules and regulations
can be cause for the denial of the station's license renewal.
The FCC allots a certain number of frequencies for each broadcast area,
based upon community need, population factors and the determination of the
economic viability of another station in the designated region. Currently there
are no other licenses available in the Gillette area. It is possible to request
that the FCC reconsider opening up further frequencies through its rule making
body, but this can be a time consuming process. All sales of stations and
subsequent transfers of licenses must
be approved by the FCC.
Seasonality
Radio
Although revenues are spread over the entire calendar year, the first
quarter generally reflects the lowest and the fourth quarter generally reflects
the highest revenues for each year. The increase in retail advertising each fall
in preparation for the holiday season, combined with political advertising,
tends to increase fourth quarter revenues.
Live Entertainment
We have found that our highest-revenue months are from July 15 to October
15 of each year. From approximately May 15 to July 15 of each year, business is
typically down 30 percent below average, primarily because customers prefer
outdoor activities at that time of year. During the holiday season, management
has found a slight increase due to once-a-year customers, on vacation or hosting
visiting friends or relatives.
Employees
First Entertainment Holding Corp.
Currently, we employ three executives. We contract the accounting,
management information systems and administrative functions to a company owned
by Douglas Olson, our President and one of our directors, and to other
independent consultants.
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Radio Station
The radio station employs approximately eight full-time employees and five
part-time employees. The full-time employees, are engaged mainly in the
administrative radio operations and sales. The part-time employees are engaged
in the on-air activities as on-air personalities.
Live Entertainment
This division has five full-time employees and approximately 26 part-time
employees. Full-time employees are management staff and part-time employees are
waitresses, bartenders, and door personnel.
Internet
This division has eight full-time employees and one part-time employee.
This division also uses independent contractors, primarily for web site
development and maintenance and content development.
Description of Property
First Entertainment Holding Corp.
Our executive offices are located at 5495 Marion Street, Denver, Colorado
80216. This space is provided to us by Creative Business Services as part of the
arrangement between Creative Business Services described in "Transactions
Between The Company And Related Parties". In August 1998, we subleased our prior
executive office space in an effort to further reduce our operating overhead. We
have not been relieved of our obligation as the primary lessee under our prior
office lease as a result of the sub-lease. The primary lease expires in August
2002 and provides for monthly rent of $6,824.
Radio Station
We have facilities in Gillette, Wyoming that house our radio station, 100.7
FM, The Fox. In April 1996, we purchased the land and building which houses the
radio station for $300,000 and the land under which the FM tower sits for
$125,000.
Live Entertainment
Comedy Works Larimer Square leases its premises under the terms of a new 10
year lease, which expires January 31, 2008.
Lease payments in the first year of the lease term, January 1, 1998 to
December 31, 1998, were the total of (1) 8% of gross sales of alcoholic
beverages, (2) 6% of gross sales of food related products and (3) 4% of gross
sales relating to door admission.
Lease payments for the period January 1, 1999 to December 31, 2003 are
based on percentage rent as computed above but shall not be less than 75% of the
average percentage rent paid during the three year period January 1, 1996 to
December 31, 1998. Lease payments for the period January 1, 2004 to January 31,
2008 shall not be less than 75% of the average on percentage rent paid during
the three year period January 1, 2001 to December 31, 2003. Average annual
percentage rent paid during the period January 1, 1996 to December 31, 1998 was
$84,140.
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Internet
Our Internet related businesses are conducted out of offices located at
2500 East Hallandale Beach Blvd., Suite 605, Hallandale, Florida 33009. These
offices consist of approximately 2,300 square feet and are leased pursuant to
the terms of a 36 month lease which terminates in July 31, 2002. Monthly rent is
approximately $1,872.
Legal Proceedings
We know of no litigation pending, threatened, or contemplated, or
unsatisfied judgments against us, or any proceedings of which we or any of our
subsidiaries is a party, except as specified below. We know of no legal actions
pending or threatened, or judgment entered against any of our officers or
directors or any of our subsidiaries in their capacities as such, except as
specified below.
In May 1997, David Spolter and Faige Spolter ("Spolter") filed a lawsuit
against us in the Superior Court of the State of California. The plaintiffs
alleged various federal and state securities violations and sought recovery of
their $75,000 investment plus damages. On July 1, 1998, we entered into a
settlement agreement whereby we agreed to pay Spolter $150,000; $25,000 was paid
upon execution of the Settlement Agreement and the remaining $125,000 was
payable in monthly installments of $5,000 a month until July 15, 1999 at which
time all unpaid principal and interest was due and payable. On July 15, 1999, we
paid the remaining principal and interest and the note has been paid in full.
In 1997, Sharon K. Doud filed a civil action against us, A.B. Goldberg and
Quality Communications. The lawsuit was filed in the District Court for the
Sixth Judicial District of Wyoming (Civil Action No. 21289) and alleged breach
of contract, fraud and misrepresentation for failure to convert Class C
Convertible Preferred Stock into 91,240 shares of common stock. In April, 1998 a
settlement agreement was reached whereby we were required to pay $6,150 in legal
fees, issue a promissory note in the principal sum of $125,000 bearing interest
at 9.5% per annum due March 31, 1999 and the Class C Convertible Preferred
Shares were cancelled. The promissory note and accrued interest were paid in
full on April 2, 1999.
During 1997 and 1998, we, some of our officers and directors 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 SEC filed a civil complaint
against us and A.B. Goldberg in the U.S. District Court in Denver, Colorado. The
SEC alleges in its complaint that we failed to disclose compensation paid to Mr.
Goldberg in our 1995 and 1996 annual reports and in a registration statement and
our proxy statement filed us in 1997. In response to this allegation, we have
disclosed these amounts in the "Executive Compensation" section below. The SEC
also alleges that we failed to timely file some of our periodic reports. The SEC
sought a permanent injunction against future violations of securities laws by
us. On October 22, 1999, we entered into a consent decree with the SEC. Without
admitting or denying the allegations made by the SEC, we agreed not to engage in
violations of the securities laws in the future. As a result of entering into
the consent decree, the civil complaint against us was dismissed. The SEC
alleges that Mr. Goldberg received compensation of approximately $350,000 that
was not disclosed in our public filings. The SEC alleges that Mr. Goldberg
attempted to conceal the compensation by directing the payment of money and
stock through his wife, including the issuance of stock that allegedly was not
approved by our Board Of Directors. The SEC also alleges that Mr. Goldberg
failed to properly disclose his securities holdings in the Company and changes
in those holdings. The SEC seeks a permanent injunction, disgorgement, civil
money penalties, and an officer and director bar against Mr. Goldberg. Mr.
Goldberg has informed us that he intends to vigorously defend the claims made
against him.
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Pursuant to an agreement entered into with Balzac, Inc. in April 1997,
Balzac Inc. was indebted to us in the amount of $985,000, together with accrued
interest. Beginning in April 1997, this amount (which at that time was $1
million) was to be repaid over 40 months at 8% per annum by liquidating a
minimum of 25,000 shares of common stock of the Company per quarter up to a
maximum of one million shares held by Balzac, Inc. We were to be paid any
portion of the sales price per share up to $1.00 and Balzac was to retain any
portion of the sales price over $1.00 per share. Any of the one million shares
not sold after 40 months were to become our property.
In February 1999, an involuntary bankruptcy petition was filed against
Balzac, Inc. by some of its creditors. The bankruptcy petition was filed in the
United States Bankruptcy Court for the Southern District of New York, Case No.
99 B 40646, under Chapter 11 of the Bankruptcy Code. Between March and July
1999, Balzac sold approximately 885,000 shares. The entire $2.06 million of
proceeds from those sales are being held by the Bankruptcy Court pending
resolution of the various claims for those proceeds.
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 and 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. The transfer of the shares underlying these
options is covered by this prospectus.
Available Information
In accordance with the requirements of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), we file reports, proxy statements and other
information with the SEC. These reports, proxy statements and other information
can be read and copied at the Public Reference Room maintained by the SEC at the
following addresses:
* 450 Fifth Street, N.W., Washington, D.C. 20549, Room 1024
* 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511
* 7 World Trade Center, New York, New York 10048
Copies of these materials also can be obtained at prescribed rates by
writing to the SEC, Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549. You may obtain information concerning the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition,
materials we file electronically with the SEC are available at the SEC's
Internet web site at http://www.sec.gov.
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This prospectus is part of the Registration Statement on Form SB-2
(together with all amendments and exhibits, referred to as "Registration
Statement") under the Securities Act of 1933 that we filed with the SEC. The
Registration Statement contains information that is not included in this
prospectus.
Statements contained in this prospectus as to the contents of any contract
or other document are not necessarily complete, and, in each instance, reference
is made to the copy of the particular contract or document filed as an exhibit
to the Registration Statement. Each statement concerning a document that is
filed as an exhibit is qualified in all respects by reference to the copy of the
document filed as an exhibit. For further information with respect to the
Company, reference is made to the Registration Statement.
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 year ended December 31, 1998, and as of
and for the year ended December 31, 1997. Also included is a similar discussion
and comparison as of and for the nine-month periods ended September 30, 1999 and
September 30, 1998. These discussions 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.
Results of Operations
The year ended December 31, 1998 compared with the year ended December 31,
1997
Our net loss decreased from $3,872,000 in 1997 to $782,000 in 1998. This
$3,090,000 improvement is due primarily to reduced expenses. Impairment write
downs decreased by $1,379,000. Selling, general and administrative expenses
decreased by $1,003,000, and loss from continuing operations decreased $701,000.
Total revenues decreased from $2,324,000 in 1997 to $2.233,000 in 1998, a
$91,000 (or 4%) decrease. Live entertainment revenues decreased from $1,390,000
in 1997 to $1,354,000 in 1998. This $36,000 (or 3%) decrease is attributable
primarily to admission revenues. Cost of sales - live entertainment decreased
from $1,212,000 in 1997 to $1,136,000 in 1998. This $76,000 (or 6%) decrease is
primarily attributable to reduced in entertainers' compensation.
Radio revenues increased from $772,000 in 1997 to $804,000 in 1998. This
$32,000 (or 4%) increase is primarily due to increased ad sales. Cost of sales -
radio increased from $526,000 in 1997 to $552,000 in 1998. This $25,000 (or 5%)
increase is primarily due to increased labor costs.
Video sales decreased from $50,000 in 1997 to $0 in 1998. In 1997, we sold
our video distribution rights in the U.S. for $50,000.
Other revenue decreased from $112,000 in 1997 to $75,000 in 1998. The
largest component of this $37,000 decrease relates to a buy-out and subsequent
sublease of former office space.
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Impairment write downs represent the write down of the Balzac note
receivable of $81,000 in 1998 and $902,000 in 1997 to its estimated net
realizable value. In 1997, we also wrote down our $558,000 investment in Global
Internet to its estimated net realizable value.
Depreciation and amortization decreased from $141,000 in 1997 to $104,000
in 1998. This $37,000 decrease is primarily due to the increasing proportion of
fully depreciated assets.
Management and administrative fees - affiliate decreased from $240,000 in
1997 to $225,000 in 1998. This $15,000 decrease is due to a reduction in the
monthly charges effective September 1, 1998.
Selling, general and administrative expenses decreased from $1,790,000 in
1997 to $787,000 in 1998. This $1,000,000 decrease is due primarily to a
$626,000 reduction in compensation from the issuance of stock options and
warrants, a $225,000 reduction in cash and other compensation and consulting
fees, and a $52,000 reduction in legal fees.
Interest expense increased from $95,000 in 1997 to $105,000 in 1998. This
$10,000 increase is due primarily to a $61,000 increase in the average
outstanding balance of long-term debt.
The loss from continuing operations results from the January 1998 decision
to discontinue the operations of The Best Of As Seen On TV, due to operating
losses and lack of working capital to further develop the concept. Accordingly,
the assets of The Best Of As Seen On TV were written down to their estimated net
realizable value, resulting in a write down of $490,000 in 1997. Revenues from
discontinued operations were $54,300 and $174,800 for 1998 and 1997,
respectively. Summarized balance sheet data for the discontinued operations as
of December 31, 1998 and 1997 is as follows:
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1998 1997
---- ----
ASSETS
Cash $ 1,246 $ 9,289
Accounts receivable 6,983
Inventory 66,482
Other 100
Total current assets 1,246 82,854
Goodwill
Property, plant and equipment, net 8,673
Total Assets 1,246 91,527
LIABILITIES
Current liabilities 58,551 144,578
Total Liabilities 58,551 144,578
Minority Interest 0 0
Net assets (liabilities) of discontinued operations $ (57,305) $ (53,051)
As of the date of this filing, there have been no significant changes to
the liability for the periods presented in the accompanying financial
statements, nor are there any remaining contingencies, for these discontinued
operations.
The nine months ended September 30, 1999 compared with the nine months
ended September 30, 1998
Our net loss increased from $587,000 in 1998 and to $2,187,000 in 1999.
This $1,613,000 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 $1,260,000. Start up costs and
expenses in 1998 of our Internet operations totaled $347,000.
Total revenues increased from $1,566,000 in 1998 to $1,949,000 in 1999, a
$383,000 or (24%) increase. Live entertainment revenue increased by $271,000 due
to an increase in attendance. Cost of sales - live entertainment increased from
$814,000 in 1998 to $1,111,000 in 1999. The largest component of this $297,000
(or 36%) increase is labor costs and related costs and benefits, including
entertainers' salaries of.
Radio revenue increased from $587,000 in 1998 to $619,000 in 1999. This
$32,000 (or 5%) increase is primarily the result of an increase in concert
income of $12,000 and supersaver advertising income of $11,000. Cost of sales -
radio, increased from $418,000 in 1998 to $444,000 in 1999. This $26,000 (or 6%)
increase is consistent with the 5% increase in radio revenues.
Other income was $37,000 in 1998 and $106,000 in 1999. This $69,000
increase is the result of sub-lease income that commenced September 1998.
We commenced our Internet division on June 28,1999 and for the quarter
ended September 30, 1999 this division has focused on putting together a team of
Internet engineers, programmers, web site developers, content developers, and
sales and marketing staff, 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 $347,000 are comprised of $170,000 in advertising, $124,000 in salaries
and contract labor, $14,000 in recruiting fees and $39,000 in other operating
costs.
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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. 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 $75,000 in 1998 to $92,000 in
1999. This $17,000 (or 23%) increase is primarily due to additions to property
and equipment of $160,000 for 1999. 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.
Management and administrative fees - affiliate decreased from $182,000 in
1998 to $116,000 in 1999. This $66,000 (or 36%) decrease is due to a reduction
in the monthly charges effective September 1, 1998. The monthly charges
increased to $22,000 per month effective August 1, 1999.
General and administrative costs increased from $551,000 in 1998 to
$1,898,000 in 1999. This $1,347,000 increase is primarily attributable to an
increase in compensation costs of $1,029,000 associated with options issued
during 1999 accounted for in accordance with SFAS 123 and APB 25. Additionally,
common stock issued for services increased by $230,000.
Interest expense increased from $55,000 in 1998 to $89,000 in 1999. This
$34,000 increase is partially the result of an increase in notes payable of
$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.
Liquidity and Capital Resources
As of September 30, 1999, we had a working capital deficit of $1,216,000.
Despite a loss of $2,187,000, net cash used in operating activities was only
$383,000 primarily due to common stock options granted and common stock issued
for services of $1,656,000. 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 successful for the first nine months ended September 30, 1999
and in 1998 in financing some of our operations through the issuance of common
stock in exchange for services. In 1999, we issued 581,584 shares of common
stock valued at $627,200 or an average of $1.08 per share. In 1998, we issued
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1,169,706 shares of common stock valued at $396,000 or an average of $.34 per
share. In February 1998, our common stock was delisted from NASDAQ, which
adversely affected the price of the stock for most of 1998. Of the total costs
and expenses of $2,079,000 in 1998 and $4,050,000 in 1999, $396,000 was paid in
stock in 1998 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
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.
We paid in full a note payable in the amount of $88,000 that came due in
July 1999. We also had a note payable for $125,000 bearing interest at 9.5% with
monthly payments of $2,353 that was due October 1999 but was extended by the
First National Bank of Gillette to October 2000. Additionally, 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. This is in addition to $136,000 spent to
market our website on sites operated by Yahoo. We 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 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 require
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 $45,000. First 2 Market, the Internet segment
subsidiary, does not yet generate significant revenues and is not expected to be
profitable for 1999. In July and September 1999, we entered into
marketing/advertising agreements with Yahoo totaling $136,000. Currently, we
have limited working capital and do not have sufficient working capital to meet
our existing debt obligations and other working capital needs contemplated under
the various definitive agreements executed in the first quarter of 1999.
Through September 30, 1999, we raised $646,875 in private placement equity
financing through the sale of common and preferred stock and the exercise of
common stock options, 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.
We completed the offering of 47,067 shares of Class B Convertible Preferred
Stock in September 1997 to a limited number of persons pursuant to exemption
from registration under Section 4(2) of the Securities Act and/or Rule 506 of
Regulation D under the Securities Act. We received aggregate proceeds of
$262,750 in this offering.
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We issued options to purchase 150,000 shares of common stock in December
1996 and January 1997 to two persons pursuant to an exemption from registration
in accordance with Section 4(2) of the Securities Act. We received proceeds of
$75,000 in this offering.
We issued 16,000 shares of Class B Convertible Preferred Stock to one
person in June 1998 pursuant to an exemption from registration under Section
4(2) of the Securities Act. We received proceeds of $45,000 in this transaction.
We completed an offering of 771,667 shares of common stock to a limited
number of offerees in September 1998 pursuant to an exemption from registration
pursuant to Section 4(2) of the Securities Act and/or Rule 506 of Regulation D
under the Securities Act. We received proceeds of $168,300 in this offering.
We completed an offering of 280,000 shares of common stock to a limited
number of offerees in August 1999 pursuant to an exemption from registration in
accordance with Section 4(2) of the Securities Act and/or Rule 506 of Regulation
D under the Securities Act. We received total proceeds of $220,000 in this
offering.
At various times during 1999, we issued a total of 1,082,500 shares of
common stock to a limited number of persons upon the exercise of stock options
previously granted to those persons. The issuance of these shares and the
previous grant of the options were made pursuant to exemptions from registration
under Section 4(2) of the Securities Act. We received total proceeds of $448,215
in these transactions from the exercise of the options.
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 September 30, 1999,
we incurred cumulative net losses of approximately $18,671,000 and, as of
September 30, 1999, had an excess of current liabilities over current assets of
approximately $1,216,000 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 received proceeds from the sale of common and
preferred stock of approximately $677,000 through September 30, 1999.
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 $1,656,000 for the nine months ended
September 30, 1999. Net cash used in operations was approximately $384,000 for
the nine months ended September 30, 1999, unless operations become more
profitable, we may not have sufficient cash for use in operations through
December 31, 2000.
21
<PAGE>
Year 2000 Compliance
Year 2000 compliance is the ability of computer hardware and software to
respond to the problems posed by the fact that computer programs traditionally
have used two digits rather than four digits to define an applicable year. As a
consequence, any of our computer programs that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing interruption of
operations, including temporary to perform accounting functions and processing
credit card payment and delays in the receipt of payments from credit card
companies purchasers of oil and gas production, if any. We reviewed our
computers and software as well as other equipment that utilize imbedded computer
chips, such as cash registers, facsimile machines and telephone systems. No
systems have been determined to be Year 2000 Non-Compliant. Substantially all of
the internal accounting function has been outsourced to a related party company.
We have been assured by the related party company that its accounting software
and computers, file servers and other network systems are Year 2000 Compliant
and that services should not be interrupted. To date, we have not encountered
any Year 2000 problems with our systems or those of our customers and suppliers.
In the event we encounter Year 2000 problems, we have identified alternative
vendors to supply us and will rely on manual record keeping procedures. We do
not believe that the cost of Year 2000 compliance will be material.
Recent Accounting Pronouncements
In June 1997, FASB issued Statement of Financial Accounting Standards No.
130, entitled "Reporting Comprehensive Income" ("SFAS 130") and Statement of
Financial Accounting Standards No. 131, entitled "Disclosure about Segments of
Enterprise and Related Information" (SFAS 131). SFAS 130 establishes standards
for reporting and display of comprehensive income, its components and
accumulated balances. Comprehensive Income is defined to include some changes in
equity but not those resulting from investments by owners and distributions to
owners. Among other disclosures, SFAS 130 requires that all items that are
required to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement displayed with the
same prominence as other financial statements. SFAS 131 supersedes Statement of
Financial Accounting Standards No. 14, entitled "Financial Reporting for
Segments of a Business Enterprise." SFAS 131 revises standards of the way public
companies report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS 131 defines operating segments as
components of a company for which separate financial information is available
that is evaluated regularly by the chief operating decision maker in deciding
how to allocate resources and in assessing segment performance.
SFAS 130 and SFAS 131 are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. We adopted SFAS 130 and 131 and restated all prior
periods. The adoption of SFAS 130 and 131 did not have a material effect on its
results of operations for 1998 and 1997.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosure about
Pensions and Other Postretirement Benefits", which standardizes the disclosure
requirements for pensions and other postretirement benefits and requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis. SFAS No. 132 is effective
for years beginning after December 15, 1997 and requires comparative information
for earlier years to be restated, unless such information is not readily
available. The adoption of this statement had no impact on our financial
statements.
The FASB has recently issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"). SFAS No. 133 establishes 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. We have 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 some activities of
mortgage banking enterprises that conduct operations that are substantially
similar to the primary operations of a mortgage banking enterprise. 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.
MANAGEMENT
Our directors and executive officers, their respective positions and ages,
and the year in which each director was first elected, are set forth in the
following table. Each director has been elected to hold office until the next
annual meeting of stockholders and thereafter until his successor is elected and
has qualified. Additional information concerning each of these individuals
follows the table.
22
<PAGE>
<TABLE>
<CAPTION>
Tenure as Officer
Name Age Position or Director
- ---- --- -------- -----------
<S> <C> <C> <C>
Doug Olson 50 President, Chief Operating Office
and director February 1999 to present
Howard Stern 44 Chief Executive Officer, Chairman
of the Board, and director February 1999 to present
Wende Curtis 35 Secretary February 1999 to present
A. B. Goldberg 51 Director April 1993 to present
Michael Marsowicz 36 Chief Technology Officer and
Director August 1999 to present
Philip Puccio 55 Director October 1999 to present
William Rubin 38 Director November 1998 to present
Daniel Stansky 52 Chief Financial Officer December 1999
</TABLE>
All of the directors' terms expire at the next annual meeting of stockholders or
when their successors have been elected and qualified. Our officers serve at the
pleasure of the Board of Directors.
The following sets forth background information concerning the above
directors and Executive Officers:
Douglas Olson has served as our President since August 1999, as Chief
Operating Officer since November 1999, and as a director since February 1999.
Mr. Olson previously served as our President and a director from March 1993 to
February 1995 and as Chief Executive Officer from August 1999 until November
1999. Since February 1995, Mr. Olson has been the President and owner of
Creative Business Services, Inc., which provides accounting and management
information services. We outsource our accounting function to Creative Business.
Wende Curtis has served as our Secretary since February 1999. Since June
1993, Ms. Curtis also has served as the President and General Manager of our
Comedy Works, Inc. subsidiary. Ms. Curtis received a B.A. degree from Colorado
State University, Fort Collins, Colorado, in 1987.
Abraham "A.B." Goldberg has served as a director since April 1998. From
February 1995 until August 1999, he served as President and Chief Executive
Officer. Mr. Goldberg previously served as a producer of First Films and as
Executive Producer and Financial Consultant since January 1987. Mr. Goldberg
served as President of Harvard Financial Group, an independent investment
consulting firm, from November 1976 through April 1982. Since April 1982, Mr.
Goldberg has consulted with a variety of businesses, including First Films. Mr.
Goldberg earned a Bachelor's Degree in Finance from the University of Colorado,
Boulder, Colorado in 1969 and attended the University of Denver College of Law.
23
<PAGE>
Howard Stern has served as a Director since February 1999, as Chairman of
the Board since August 1999, and as our Chief Executive Officer since November
1999. He has been in the life insurance business since his junior year in
college at the University of Pittsburgh in 1975. A Bronze, Silver and Gold Award
winner with Northwestern Mutual, Howard became a provisional applicant to the
Million Dollar Round Table at the age of 21. He became a Life and Qualifying
Member in 1994 and has consistently qualified for the Top of the Table for the
last five years.
In July 1993, Mr. Stern joined The New York Life Insurance Company where he
was extremely active in product development. He also was a charter member of New
York Life's Chairman's Cabinet.
Mr. Stern achieved the position of Council Vice President in 1997,
finishing second among all New York Life agents nationally, and in 1998 became
Council President. Mr. Stern was a 1998 faculty member of NYLIC University's
"Leader For Life" Program.
On October 8, 1998, Mr. Stern ended his relationship with the New York
Life Insurance Company and signed a Career Agent's contract with MassMutual Life
Insurance Company.
Mr. Stern has served as a consultant to several life insurance companies,
both domestically and abroad, on the development of Variable Products marketing
and training, and has been a featured speaker at industry functions. He is a
member of the Advanced Association of Life Underwriters (AALU), National
Association of Life Underwriters (NALU), Broward County Life Underwriters, and a
member of the American Society of CLUs, (BCLUA).
Mr. Stern is a panel member of the National Association of Securities
Dealers (NASD) Arbitration Board. He currently is licensed in 20 states for the
sale of Life Insurance and Variable Products. He is an approved insurance
continuing education instructor in 48 states and in 1998 taught 8 classes
nationally for the American College.
William "Bill" Rubin has served as a director since November 1998. He has
been a commercial loan officer for Enterprise Social Investment Corporation
since 1992, and has served as a vice president with various financial
institutions. Mr. Rubin's responsibilities included underwriting and originating
construction and real estate current employment loans, workout and restructuring
of real estate loans, and management of loan portfolios in excess of $150
million. Mr. Rubin earned a BBA in Finance and Accounting from Southern
Methodist University in 1983. Mr. Rubin serves as a director for Assets
Management.
Michael Marsowicz has served as our Chief Technology Officer since July
1999 and as a director since August 1999. During 1998 and 1999, Mr. Marsowicz
served as Chief Technology Officer for Maxnet, Inc., Virtual Financial Holdings,
and the Presentation Network, all of which were involved in the technology
industry. From 1995 until 1998, Mr. Marsowicz was the Chief Technology Officer
of Net Health Care. Mr. Marsowicz previously served in technical support
positions at New York Life from 1993 until 1995.
Philip Puccio has served as a director since October 1999. Mr. Puccio also
serves as President and Chief Executive Officer of Coleman and Company
Securities, Inc., where his responsibilities include complete management of that
firm and all its personnel. Mr. Puccio has been engaged in the securities
industry for over 30 years. From 1975 until 1985, Mr. Puccio served a director
and Executive Vice President at Drexel, Burnham, Lambert and Company. From 1985
until 1989, Mr. Puccio served as Managing Director of World Wide Sales and
Equity Trading for Dillon, Read and Co. From 1989 until 1991, Mr. Puccio served
as Managing Director and Senior Vice President of World Wide Sales and Trading
for Prudential Securities, Inc. In 1991, Mr. Puccio retired from active
management and became a consultant to brokerage firms that required expertise in
24
<PAGE>
developing trading and sales divisions. Mr. Puccio retired from the securities
industry in 1994 and devoted himself to managing personal and outside capital
until accepting his current position with Coleman and Company Securities, Inc.
in early 1998.
Daniel Stansky has served as chief Financial Officer since December 1999.
During 1998 and 1999, Mr. Stansky served as Chief Operating Officer and Chief
Financial Officer of Summus, Ltd., a technology development firm known for
wavelet based image identification and data compression solutions. From 1995
until 1998, Mr. Stansky was Vice President Finance/IT of Anchor Continental,
Inc. a wholly owned subsidiary of Coating Technologies International, Inc. Prior
to Anchor Continental, Mr. Stansky held financial management positions with
Rogers Corporation, Armour Dial Cororation, and Marathon Oil. Mr. Stansky holds
an MBA from the University of Michigan and a BS in Economics from the University
of Pennsylvania's Wharton School.
No family relationship exists between or among any of the persons named
above. None of our directors are directors of any other company that has a class
of equity securities registered under, or required to file reports pursuant to,
Section 15(d) of the Securities Act of 1933 or Section 12 of the Securities
Exchange Act of 1934, or any company registered as an investment company under
the Investment Company Act of 1940. There are no arrangements or understandings
between any of the named directors or officers and any other persons pursuant to
which any director or officer was selected or nominated as a director or
officer.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth in summary form the compensation received
during each of the last three completed years by our former Chief Executive
Officer . No other executive officer's compensation exceeded $100,000 during the
year ended December 31, 1998 (the "Named Executive Officers"). The figures in
the following table are for fiscal years ended December 31, 1998, 1997, and
1996:
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term Compensation
----------------------
Awards Payouts
------ -------
Securities
Restricted Underlying All Other
Name and Other Annual Stock Options LTIP Compensation
Principal Position Fiscal Year Salary($) Bonus $)(1) Compensation($)(2) Award(s)($) SARs(#)(3) Payouts($)(4) ($)(5)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Abraham B. Goldberg(6) 1998 $14,500 -0- -0- -0- -0- -0- -0-
Former Chairman 1997 $24,000 -0- $47,500(7), $76,500(8) -0- -0- $47,550
of the Board 1996 $24,000 -0- $72,000(7) -0- -0- -0- $84,000
</TABLE>
(1) The dollar value of bonus (cash and non-cash) paid during the year
indicated.
(2) Consists of compensation not properly categorized as salary or bonus,
including perquisites and other personal benefits, securities or
property.
(3) The sum of the number of shares of common stock to be received upon
the exercise of all stock options granted.
(4) We do not have in effect any plan that is intended to serve as
incentive for performance to occur over a period longer than one
fiscal year.
(5) The amounts shown in this column represent amounts that are alleged by
the SEC to be compensation for Mr. Goldberg in the lawsuit described
in the "Legal Proceedings" section of this prospectus. The amounts
alleged by the SEC to constitute compensation include the following:
(a) a total of $148,300 alleged to have been paid by Creative Business
to Munchkintown, a company owned by Mr. Goldberg's wife, including
approximately $30,000 alleged to have been paid in 1995, approximately
$72,000 alleged to have been paid in 1996, and approximately $46,300
25
<PAGE>
alleged to have been paid in 1997, and (b) payments alleged to have
been made by Michael Payne to Mr. Goldberg through Munchkintown of
$42,300 in May 1995 and $21,671 made in July 1995. Other amounts
alleged to have been paid to Mr. Goldberg in the SEC complaint are
included under the headings "Other Annual Compensation" and
"Restricted Stock Awards" and are described in footnotes (7) and (8),
respectively, below. In addition to the amounts shown in the above
table, the SEC alleged in its complaint that the Company failed to
disclose as compensation total payments of $73,971.25 from Michael
Payne to Mr. Goldberg through Munchkintown in 1995 and a payment of
$1,500 to Mr. Goldberg through Munchkintown by Foremont, Inc. in 1995.
(6) Mr. Goldberg resigned from his positions as President, Chief Executive
Officer and Chairman Of The Board on August 9, 1999. At that time,
Douglas Olson was elected President and Chief Executive Officer and
Howard Stern was elected as Chairman Of The Board. Mr. Stern was
elected as Chief Executive Officer in November 1999.
(7) Includes payments to Mr. Goldberg's wife and an entity owned by Mr.
Goldberg's wife in the amount of $5,500 for 1997 and $12,000 for 1996.
See below, "Transactions Between The Company And Related Parties".
(8) Consists of the value of common stock transferred to NMG, LLC, which
is owned by Mr. Goldberg's wife. See below "Transactions Between The
Company and Related Parties".
From time to time, we have granted shares of our common stock as additional
compensation to its officers and key employees for their services, as determined
by the Company's Board of Directors. During 1998 and 1997, no shares were
granted to officers or key employees.
As of December 31, 1998, we had no group life, health, hospitalization,
medical reimbursement or relocation plans in effect which discriminate, in
scope, terms, or operation, in favor of our officers or directors and that are
not generally available to all salaried employees. Further, we have no pension
plans or plans or agreements which provide compensation in the event of
termination of employment or change in control.
Employee Retirement Plans, Long-Term Incentive Plans, and Pension Plans
Other than our stock option plans, we have no employee retirement plan,
pension plan, or long-term incentive plan to serve as incentive for performance
to occur over a period longer than one fiscal year.
Compensation of Directors
During the year ended December 31, 1998, no compensation was paid to our
directors. We reimburse directors for out-of-pocket expenses incurred by them in
connection with our business.
Employment Contracts And Termination Of Employment And Change-In-Control
Arrangements
We do not have any written employment contracts with any of our officers or
other employees. We have no compensatory plan or arrangement that results or
will result from the resignation, retirement, or any other termination of an
executive officer's employment or from a change-in-control or a change in an
executive officer's responsibilities following a change-in-control.
26
<PAGE>
Option Grants
On March 11, 1999, we issued options to our directors and some consultants
to purchase 1,000,000 shares of common stock at $.21 per share until March 11,
2002, which vested immediately. In addition, contingent options for a total of
950,000 shares were issued to directors if an Internet gaming licensing
agreement was executed with Starnet Communications and a definitive software
licensing agreement was executed with Global Games Holdings. These agreements
were subsequently executed. Options earned from the March 11, 1999 issuance are
as follows:
* A.B. Goldberg - 1,000,000
* Doug Olson - 250,000
* Howard Stern - 250,000
* Bill Rubin - 250,000
On September 14, 1999, the Board of Directors determined to reduce the
number of shares that may be purchased pursuant to these options granted to our
directors by 875,000. Mr. Goldberg opposed this resolution of the Board. Mr.
Goldberg's counsel has stated that it is Mr. Goldberg's position that we do not
have the right to cancel options previously issued to Mr. Goldberg and that Mr.
Goldberg does not intend to relinquish those options. On November 17, 1999, the
Board clarified its option cancellation of September 14, 1999 based on the fact
that both of the agreements for which the cancelled options had been granted
either had been or would be cancelled without having resulted in any business
for the Company. Mr. Goldberg's counsel also objected to and denied the
effectiveness of this action. In October 1999, a committee of the Board, based
on information contained in the SEC's complaint described above in "The Company
- - Legal Proceedings" that was not available to the Board in March 1999,
cancelled the remainder of the options granted to Mr. Goldberg in March 1999.
See "Transactions Between The Company And Related Parties".
At the meeting of the Board of Directors held on March 18, 1999, the Board
approved the issuance of options to purchase common stock for each of our
directors, as well as a consultant to the Company. The options are exercisable
at a price of $.53 per share until March 18, 2002. Options to purchase an
aggregate of 1,200,000 shares were issued. The options are contingent upon our
common stock trading at a price of at least $1 per share on December 31, 1999.
In September 1999, the of directors determined to cancel all these options. Mr.
Goldberg opposed this resolution of 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. Our common stock did not trade at a price of
at least $1 per share on December 31, 1999 so that these options have
terminated.
In May 1999, we granted options to purchase 750,000 shares to each of our
directors. 250,000 of these options become exercisable on each of January 1,
2000, 2001 and 2002 if the recipient continues to be a director on those
respective dates. These options are exercisable at a price of $1.34 per share
until January 1, 2005. In July, 1999, the Board agreed that the 250,000 options
issued to Mr. Goldberg that were to become exercisable on January 1, 2000 would
become exercisable immediately. In October 1999, a committee of the Board, based
on information contained in the SEC's complaint described above in "The Company
- - Legal Proceedings" that was not available to the Board in July 1999,
determined that the options to purchase 250,000 shares that were allowed to vest
in July 1999 should not have been allowed to vest. Because Mr. Goldberg was a
27
<PAGE>
director on January 1, 2000, these options currently are treated by the Company
as vested. See "Transactions Between The Company And Related Parties". On
January 4, 2000, we cancelled the options granted to directors in May 1999 in
exchange for options to purchase 50,000 shares until January 4, 2003. These
options are exercisable at $.61 per share, which was the closing bid price on
the date of grant. Mr. Rubin and Mr. Puccio agreed to this exchange. Mr.
Goldberg has not agreed.
Also on January 4, 2000, we approved grants of options to purchase 250,000
shares for $.61 per share to each officer who also is a director. The recipients
of these options were Howard Stern, Douglas Olson and Michael Marsowicz. These
options expire on January 4, 2005. These options become exercisable as follows:
Shares Becoming Exercisable Triggering Event
--------------------------- ----------------
* 50,000 When the average closing price of th
common stock is at least $2.25 for 10
consecutive business days.
* 75,000 When the Company achieves annual
revenues of $4.25 million.
* 125,000 When the Company achieves earnings per
share of $.05.
Also on January 4, 2000, we approved grants of options to purchase 187,500
shares for $.61 per share to each of Daniel Stansky, our Chief Financial
Officer, and Robert Fuchs, our marketing director. These options expire on
January 4, 2005. These options are exercisable as follows:
Shares Becoming Exercisable Triggering Event
--------------------------- ----------------
* 37,500 When the average closing price of the
common stock is at least $2.25 for 10
consecutive business days.
* 56,250 When the Company achieves annual
revenues of $4.25 million.
* 93,750 When the Company achieves earnings
per share of $.05.
On January 4, 2000, we also rescinded option grants previously made in July
1999 to Wende Curtis, our Secretary, and another employee. The rescinded options
were each for 25,000 shares at $1.59 per share until July 1, 2004. These options
were replaced with new options to purchase 50,000 shares for $.61 per share for
three years.
All the options terminated and replaced in January 2000 were made with the
acceptance of the option holders, except that Mr. Goldberg objects to any
termination of his options.
On January 4, 2000, we approved options for our officers that become
exercisable only in the event of a change-in-control of the Company. These
options are exercisable for $.61 per share, which was the closing bid price for
our common stock on January 4, 2000. These options were granted as follows:
* Howard Stern - 750,000
* Douglas Olson - 750,000
* Michael Marsowicz - 750,000
* Daniel Stansky - 562,500
* Robert Fuchs - 562,500
28
<PAGE>
On January 25, 2000, we approved grants of options for 75,000 shares to
each of Mr. Stern, Mr. Olson and Mr. Marsowicz and options to purchase 56,250
shares to each of Mr. Stansky and Mr. Fuchs. These options are in effect until
January 25, 2005. The exercise price for these options is $1.33 per share, which
was the closing bid price for the common stock on January 25, 2000. These
options become exercisable only if our common stock trades at a price of $4.50
or higher for 10 consecutive business days between January 25, 2000 and July 1,
2001.
Also on January 25, 2000, we approved the grant of options to purchase
100,000 shares to William Rubin, an outside director. These options become
exercisable at the rate of 25,000 shares per quarter during 2000. The exercise
price is $1.33 per share.
BENEFICIAL OWNERS OF SECURITIES
The following table sets forth information regarding ownership of the
common stock as of February 10, 2000 by: (1) each person known by us to be the
beneficial owner of more than 5 percent of the outstanding common stock; (2)
each director; and (3) all executive officers and directors as a group.
Name and Address Beneficial Percent
of Beneficial Owner Ownership (1) of Class
- ------------------- ------------- --------
A. B. Goldberg 1,150,000 (2) 8.2%
2805 East Long Court
Littleton, CO 80121
Doug Olson 701,966 (3)(4) 5.4%
5495 Marion Street
Denver, CO 80216
Howard Stern 175,099 (3) 1.3%
500 Corporate Drive
Suite 200
Ft. Lauderdale, FL 33334-3603
William Rubin 125,000 (3) *
313 East Fort Ave.
Baltimore, MD 21230
Michael Marsowicz 375,000 (3)(5) 2.8%
2500 E. Hallandale Beach Blvd.
Hallandale, FL 33009
Philip C. Puccio 550,000 (6) 4.1%
c/o Coleman and Company Securities, Inc.
575 Lexington Avenue
New York, NY 10022
Officers and Directors 2,543,750 (2)(3)(4)(5)(6) 20.8%
as a Group (8 persons)
Global Casinos, Inc. 1,500,000 (8) 10.4%
5373 N. Union Blvd., Suite 100
Colorado Springs, CO 80918
29
<PAGE>
* Less than one percent.
(1) "Beneficial Ownership" is defined in the regulations promulgated by the
U.S. Securities and Exchange Commission as having or sharing, directly or
indirectly (i) voting power, which includes the power to vote or to direct
the voting, or (ii) investment power, which includes the power to dispose
or to direct the disposition, of shares of the common stock of an issuer.
The definition of beneficial ownership includes shares underlying options
or warrants to purchase common stock, or other securities convertible into
common stock, that currently are exercisable or convertible or that will
become exercisable or convertible within 60 days. Unless otherwise
indicated, the beneficial owner has sole voting and investment power.
(2) A.B. Goldberg is a director of the Company. Consists of the following:
options to purchase 900,000 shares for $.21 per share until March 11, 2002
that the Board Of Directors has cancelled but that Mr. Goldberg asserts are
still exercisable, and options to purchase 250,000 shares for $1.34 per
share until January 1, 2005 that became exercisable on January 1, 2000.
These transactions are described in the "Executive Compensation" Option
Grants" and "Transactions Between The Company And Related Parties" sections
of this prospectus. All Forms 4 and 5 required to be filed for Changes in
Beneficial Ownership and Annual Statement of Beneficial Ownership have not
been filed by this director.
(3) Includes or consists of options to purchase 50,000 shares for $.61 per
share until January 4, 2005 if the Company achieves an average closing
common stock price of $2.25 per share for 10 consecutive business days and
options to purchase an additional 75,000 shares for $1.68 per share until
January 25, 2005 if the common stock trades at $4.50 per share for 10
consecutive business days.
(4) Includes shares personally owned by Doug Olson, President, Chief Executive
Officer and a director, and shares owned of record by Creative Business
Services, Inc. Mr. Olson is the President and sole stockholder of Creative
Business. Also includes 2,000 shares owned by a company that is 40% owned
by Mr. Olson and for which he serves as a director.
(5) Includes currently exercisable options to purchase 250,000 shares for $.75
per share until October 10, 2001.
(6) Includes options to purchase 50,000 shares for $.61 per share until January
4, 2003. Also includes 500,000 shares underlying options owned by Coleman
and Company Securities, Inc. to purchase common stock for $.875 per share
until July 7, 2004. Phillip C. Puccio, a director of the Company, is the
President of Coleman and Company Securities, Inc. These options were issued
to Coleman and Company Securities, Inc. as consideration for investment
banking services provided to the Company.
(7) Also includes 29,349 shares and options to purchase 50,000 shares held by
Wende Curtis, Secretary, and options to purchase 93,750 shares held by
Daniel Stansky, Chief Financial Officer.
(8) Consists of currently exercisable warrants to purchase 1,500,000 shares of
common stock at $1.00 per share.
Compliance with Section 16
Forms 4 and 5 required to be filed for Changes in Beneficial Ownership and
Annual Statement of Beneficial Ownership have not been timely filed by A.B.
Goldberg, a director of the Company, and by Nicholas Catalano and Theodore
Jacobs, who resigned as directors in August 1998.
30
<PAGE>
TRANSACTIONS BETWEEN THE COMPANY AND RELATED PARTIES
Commencing April 1995, we contracted out substantially all our
administrative, management and accounting functions to Creative Business
Services, Inc.. Creative Business is wholly-owned by Douglas R. Olson, our
President and a director. Monthly fees for such services were $21,000 for the
period January 1, 1997 through August 31, 1998, and thereafter the fees were
reduced to $14,000 per month through July 1999. Commencing August 1999, the fees
were increased to $21,000 per month due to our increased activities. These are
paid in cash or shares of common stock based on market prices. Total annual fees
paid by cash and by the issuance of common stock for 1998 and 1997 were $225,000
and $252,000, respectively, with the 1997 figure consisted of 329,000 shares of
common stock and no cash and the 1998 figure consisted of 339,766 shares and
$37,526 in cash.
In July 1997, we acquired 100,000 shares of common stock of The Best Of As
Seen On TV from NMG, LLC, an entity owned by the wife of A.B. Goldberg, a
director and former president of the Company, in exchange for 100,000 shares of
common stock. The 100,000 shares of the common stock were used by Mr. Goldberg
and his wife to settle a lawsuit against them and other defendants, including
Mr. Goldberg's mother. The value of the common stock issued to NMG, LLC of
$50,000 has been classified as officer compensation in the accompanying
consolidated statements of operations included in the "Financial Statements"
section of this prospectus.
Consulting fees were paid to the wife of A.B. Goldberg for the year ended
December 31, 1997 in the amount of $5,500. The amounts paid to the wife of A.B.
Goldberg have been classified under officer compensation in the consolidated
statements of operations included in the "Financial Statements" section of this
prospectus and in the Summary Compensation Table included in the "Executive
Compensation" section of this prospectus.
Our Internet related businesses are conducted through our First 2 Market,
Inc. subsidiary. All That Media, Inc., which was acquired by us in June 1999,
was merged into First 2 Market, Inc. in June 1999. At the time it was acquired
by us, All That Media was a newly-formed company that specialized in
intellectual property development, Internet portal development and Internet
advertising. We issued an option to purchase a total of 500,000 shares of common
stock for $.75 per share until October 10, 2001 to the stockholders 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 as our Chief Technology Officer
in July 1999 and as a director in August 1999.
On July 7, 1999, we entered into an agreement with Coleman And Company
Securities, Inc. pursuant to which Coleman agreed to act as our exclusive
investment advisor, exclusive private placement agent and exclusive investment
banker. This agreement has a term of 12 months. As compensation, we agreed to
pay Coleman a total of $40,000 and to issue Coleman options to purchase 500,000
shares of common stock at a purchase price of $.875 per share at any time during
the five-year period commencing on July 7, 1999. We granted Coleman registration
rights concerning the transfer of the shares of common stock that may be issued
upon the exercise of these warrants. We also agreed to pay Coleman an amount
equal to 10% of the funds raised by Coleman, a three percent non-accountable
expense allowance with respect to those funds, and placement agent warrants with
an exercise price no more favorable than that given to investors in any private
placement transaction in which Coleman participates equal to 10 percent of the
amount of equity raised by Coleman. In addition, if we enter into a merger
acquisition or sale transaction with the party introduced by Coleman, we agree
to pay Coleman five percent of the first $2,000,000 of value of that
transaction, four percent of the following $2,000,000 of value, three percent of
the following $2,000,000 of value, two percent of the following $2,000,000 of
31
<PAGE>
value, and one percent of the balance of the value of the transaction. We also
agreed to pay Coleman an amount equal to 10 percent of the amount raised by us
from financing sources introduced by Coleman to us if those amounts are raised
within 24 months after the introduction. We granted Coleman a right of first
refusal to undertake any financing on behalf of the Company within the term of
the agreement. In September 1999, subsequent to entering into the agreement with
Coleman, we elected Philip C. Puccio as a director. Mr. Puccio is the President
and Chief Executive Officer of Coleman.
The Board believes that the terms of the related party transactions
described above were as far as those that we could have obtained from unrelated
third parties in arms-length transactions.
On October 7, 1999, the Board Of Directors established a Related Parties
Transactions Committee primarily for the purpose of dealing with issues between
the Company and Mr. A.B. Goldberg concerning prior grants of options as
described above under "Executive Compensation - Option Grants" and related to
reimbursement of Mr. Goldberg's expenses to defend against the SEC's complaint
described under "The Company - Legal Proceedings." Mr. Goldberg is a director of
the Company. From February 1995 until August 9, 1999, Mr. Goldberg was our Chief
Executive Officer. The Related Parties Transactions Committee consists of four
directors.
The Related Parties Transactions Committee held a meeting on October 7,
1999 and determined, among other matters, that all outstanding stock options
previously granted to Mr. Goldberg are null and void and/or cancelled. As
indicated under "Executive Compensation-Option Grants", we previously cancelled,
on a pro rata basis, certain stock options previously granted to Mr. Goldberg
and the other directors of the Company (the "Prior Cancellations"). At that
time, Mr. Goldberg's counsel informed us that Mr. Goldberg does not intend to
relinquish those stock options even though the other directors all indicated
their intent to do so. We anticipate that Mr. Goldberg may elect to litigate
with us concerning the Prior Cancellations as well as the stock options
cancelled by the Related Parties Transactions Committee.
DESCRIPTION OF SECURITIES
Our authorized stock consists of 50,000,000 authorized shares of common
stock, 12,866,847 shares of which were outstanding as of February 10, 2000; and
5,000,000 authorized shares of Preferred Stock, consisting of 1,500,000 shares
of Class A Preferred Stock; 1,000,000 shares of Class B Preferred Stock; and
1,000,000 shares of Class C Preferred Stock. A total of 10,689 Class A Preferred
Stock, no Class B Preferred Stock, and no Class C Preferred Stock were issued
and outstanding as of February 10, 2000.
There are no preemptive rights with respect to any of our capital stock.
Common Stock
Each share of common stock is entitled to one vote, either in person or by
proxy, on all matters that may be voted upon by the owners thereof at a meeting
of the stockholders, including the election of directors. The holders of common
stock:
* have equal, ratable rights to dividends from funds legally available
therefor, when, as and if declared by the Board of Directors
* are entitled to share ratably in all of the assets available for
distribution to holders of common stock upon our liquidation, dissolution
or winding up of our affairs
* do not have preemptive rights or redemption rights
* are entitled to one noncumulative vote per share on all matters on which
stockholders may vote at all meetings of stockholders.
32
<PAGE>
Preferred Stock
A total of 1,500,000 shares of our Preferred Stock has been designated
Class "A" 7% Cumulative, Non-Participating, Convertible Preferred Stock. The
Class A Stock has a 7% dividend and we were required to redeem the 10,689
outstanding shares of Class A Stock on November 18, 1996 at a price of $1.00 per
share. We have not yet redeemed the Class A Stock and the holders have not made
a demand for redemption. The Class A Stock is convertible into common shares at
the rate of two shares of common stock for every share of Class A Stock. The
rights of Class A Stock are superior to all other Preferred Stock.
A total of 1,000,000 shares of our Preferred Stock has been designated
Class "B" 6% Cumulative Preferred Stock. The Class B Stock provides for a
dividend, payable quarterly if and when declared, and is redeemable by the
Company at face value and convertible into common shares at the option of the
holder at a rate determined by the Board Of Directors. The rights of Class B
Preferred Stock are subordinate to Class A Preferred Stock.
A total of 1,000,000 shares of Preferred Stock has been designated Class
"C" Convertible non-dividend Preferred Stock. The Class C Preferred Stock is
convertible into common stock at a conversion price per share of Class C
preferred stock equal to the average previous 30-day bid price of the common
stock on the date of conversion. The rights of Class C preferred stock are
subordinate to Class A and Class B Preferred Stock.
Transfer Agent and Registrar
The transfer agent for our common stock is American Securities Transfer and
Trust, Incorporated, 12039 West Alameda Parkway, Suite Z-2, Lakewood, Colorado
80228. The telephone number is (303) 986-5400. We serve as transfer agent for
our Preferred Shares.
INACTIVE TRADING OF THE COMMON STOCK
Although the common stock is publicly held, there historically has not been
an active trading market for the common stock. The risks of an inactive trading
market are described in "Risk Factors - There is limited liquidity for our
shares."
To the extent that there is trading in the common stock, of which there is
no assurance, the common stock trades in the over-the-counter market and is
quoted on the OTC Bulletin Board. It is not quoted on the Nasdaq stock market
system or any exchange. The closing sale price for the common stock on February
9, 2000 was $1.34 It should be assumed that even with this OTC Bulletin Board
price quote, there is an extremely limited trading market - and very little
liquidity - for the common stock
SELLING SECURITY HOLDERS AND PLAN OF DISTRIBUTION .
This prospectus concerns the transfer by the selling stockholders of up to
1,907,692 shares of common stock. These shares consist of the following:
* Up to 703,846 shares of common stock purchased by selling stockholders
in private placement transactions and upon the exercise of stock
options and warrants.
33
<PAGE>
* Up to 1,203,846 shares of common stock that may be issued to selling
stockholders when they exercise outstanding stock options and
warrants.
The selling stockholders may transfer their common stock at the prices that
they are able to obtain in the market or in negotiated transactions. We will not
receive any proceeds from the transfer of the common stock by the selling
stockholders.
It is anticipated that the selling stockholders will offer the common stock
in direct sales to private persons and in open market transactions. The selling
stockholders may offer the shares to or through registered broker-dealers who
will be paid standard commissions or discounts or other compensation by the
selling stockholders. The selling stockholders also may pledge as collateral for
loans the common stock to be issued upon conversion of those securities. This
prospectus may be used by the lender who receives the pledge of those securities
to sell shares of common stock if a loan is not repaid. The selling stockholders
have informed us that they have not entered into any underwriting arrangement or
other agreements with brokers to transfer any or all of the common stock offered
under this prospectus.
The following table sets forth the name of each selling stockholder, the
number of shares of common stock held by the selling stockholders before this
offering (including shares issuable upon exercise of optional), the number of
shares of common stock to be sold by the selling stockholders, and the number of
shares owned by the selling stockholders after this offering. For additional
information concerning the beneficial ownership of shares by some of the selling
stockholders, see "Beneficial Owners Of Securities".
Number Of Shares Of Number Of
Common Stock Owned Number of Shares Shares Owned
Name Before Offering(1) To Be Offered(2) After Offering
- ---- ------------------ ---------------- --------------
Neil Berman 320,000 300,00 20,000
Balzac, Inc. 575,100(3) 575,000 (3) 100
Jeff Trilling 75,000 75,000 -0-
Greg Welch 75,000 75,000 -0-
James Wexler 100,000 100,000 -0-
John Raybin 25,000(4) 25,000(4) -0-
Michael Marsowicz 375,000 175,000(5) 200,000
Robert Fuchs 100,000(5) 100,000(5) -0-
David Fuchs 12,500(5) 12,500(5) -0-
Kenny Gillis 12,500(5) 12,500(5) -0-
Ron Ratner 75,000(5) 75,000(6) -0-
Ed Arioli 75,000(5) 75,000(6) -0-
Arthur Vogel 307,692(7) 307,692(7) -0-
TOTALS 1,127,792 1,907,692 220,100
- ---------
(1) The number of shares owned before the offering includes all shares
underlying options, even if not currently exercisable.
(2) The number of shares of common stock to be sold assumes that the selling
stockholders sell all the shares of common stock being registered.
(3) Includes 310,000 shares underlying warrants to purchase common stock for
$1.00 per share for three years, an additional 65,000 shares underlying
warrants to purchase common stock for $1.40 per share for three years, and
an additional 200,000 shares underlying warrants to purchase common stock
for $2.00 per share for three years. These warrants are to be issued
pursuant to a settlement agreement with Balzac as described above under
"The Company - Legal Proceedings".
34
<PAGE>
(4) Consists of 25,000 shares underlying options to purchase common stock for
$1.0312 per share until October 14, 2009.
(5) Includes shares underlying options to purchase common stock for $.75 per
share until October 10, 2001.
(6) Consists of shares underlying options to purchase common stock for $1.03
per share until June 28, 2002.
(7) Includes 153,846 shares underlying warrants to purchase common stock for
$.65 per share until February 7, 2002.
Relationships of Selling Stockholders to the Company
The following is a summary of the relationships of some of the selling
stockholders to the Company:
* Michael Marsowicz. We are registering the transfer of 175,000 shares
of common stock that may be issued to Michael Marsowicz if he
exercises stock options. These options are exercisable for $.75 per
share until October 1, 2001. These options are a portion of the total
of 250,000 options received by Mr. Marsowicz when he sold his 50%
interest in All That Media to us in June 1999. At the time of the
sale, Mr. Marsowicz was the President and a 50% owner of All That
Media. Mr. Marsowicz subsequently was elected to our Board of
Directors in August 1999 and as Chief Technology Officer in July 1999.
* Robert Fuchs. We are registering the transfer of 100,000 shares of
common stock underlying options issued to Robert Fuchs in June 1999.
These options are a portion of the 250,000 options issued to Mr. Fuchs
for his 50% interest in All That Media. These options are exercisable
at $.75 per share until October 10, 2001. Mr. Fuchs was a director and
50% owner of All That Media at the time of the sale. Mr. Fuchs
transferred options to purchase 25,000 shares to David Fuchs, his
brother and a former employee of All That Media.We are registering
the transfer of 12,500 shares underlying these options by David
Fuchs. Mr. Fuchs also transferred options to
purchase 25,000 shares to Kenny Gillis, a former employee of All That
Media. We are registering the transfer of 12,500 underlying these
options by Mr. Gillis.
* Ron Ratner. We are registering the transfer of 75,000 shares by Ron
Ratner. These shares may be issued upon the exercise of options issued
to Mr. Ratner in June 1999 to purchase his 50% interest in EDRON
Associates, Inc. These options are exercisable at $1.03 per share
until June 28, 2002. Mr. Ratner was the 50% owner and Vice President
of EDRON at the time of the sale.
* Ed Arioli. We are registering the transfer of 75,000 shares by Ed
Arioli. These shares may be issued upon the exercise of options issued
to Mr. Arioli in June 1999 to purchase his 50% interest in EDRON
Associates, Inc. These options are exercisable at $1.03 per share
until June 28, 2002. Mr. Arioli was the 50% owner and President of
EDRON at the time of the sale.
35
<PAGE>
RESCISSION OFFER
We will use this prospectus to make a rescission offer to five persons (the
"Rescission Offerees") who were inadvertently issued shares in excess of those
registered on a prior registration statement on Form S-8.
Reason. In December 1997, we registered the issuance of up to 500,000
shares of common stock to employees and consultants. This registration was
accomplished by filing a registration statement on Form S-8 with the SEC.
Through clerical errors and oversight, we inadvertently issued 441,650 more
shares (the "Overage Shares") than were registered on that Form S-8. These
shares were issued to the Rescission Offerees at various rates from $.20 to $.69
per share in consideration of services provided to us in the total amount of
$175,205. Although we believe that exemptions from registration may be available
with respect to the issuance of these shares, the Overage Shares may have been
issued in violation of the registration provisions of federal and state
securities laws. We are offering to rescind the issuance of the Overage Shares
in an attempt to limit potential liability for sales of unregistered securities.
We are offering to repurchase the Overage Shares for cash equal to the number of
shares being repurchased multiplied by the price at which those shares
originally were issued. In addition, we will pay interest at the rate of 8% per
year since the date of issuance of the Overage Shares.
Remedies. Potential remedies available to the Rescission Offerees against
us include claims for amounts by which they were damaged as a result of the
receipt of securities that were not registered and seeking rescission of the
sale of unregistered securities to them. All the Rescission Offerees are
Colorado residents. The Rescission Offer has been structured to comply with
Colorado's law concerning the rescission of transactions that do not comply with
registration or exemption requirements. Colorado law provides that if we did not
have a valid exemption for the sale of the Overage Shares we are liable for the
following if the Overage Shares are returned to us:
* the consideration paid for the Overage Shares
* interest at the statutory rate (currently 8%) from the date of payment
* costs and reasonable attorneys fees
If a Rescission Offeree no longer owns the Overage Shares, and we did not
have a valid exemption, we are liable for damages equal to the amount the
Rescission Offeree would have received had he returned the shares to us less the
value of the Overage Shares when they were disposed of and interest at the
statutory rate from the date of disposition. Colorado law provides that the
recipients of the Overage Shares may not recover damages after the 30-day
rescission period expires. We believe that all the Overage Shares that were
issued were sold by the Rescission Offerees. Amounts received from the sale of
the shares were credited against amounts we owed the Rescission Offerees for
services. No amounts are owed to the Rescission Offerees for services they
performed for us, so we do not believe any of the Rescission Offerees suffered
any damages. As a result, we do not expect to have to pay out any cash to the
Rescission Offerees.
There is no assurance that the SEC or state securities authorities will not
pursue fines or penalties against us. The Rescission Offerees will still have a
federal cause of action even if we complete the Rescission Offer.
Duration. The rescission offer will be open for a period of 30 days after
delivery of this prospectus to the Rescission Offerees.
36
<PAGE>
Participation In Rescission Offer. To participate in the Rescission Offer,
a Rescission Offeree must give us written notice of his acceptance of the offer
within 30 days after receiving this prospectus. The written notice must include
the certificate representing the Overage Shares owned by that person and/or
evidence of the date on which and the price at which that person sold his
Overage Shares. We will determine the amount, if any, owed to that Rescission
Offeree and send a check within 15 days of receipt of the notice.
SECURITIES AND EXCHANGE COMMISSION POSITION
ON CERTAIN INDEMNIFICATION
Pursuant to Delaware law, our Board of Directors has the power to indemnify
officers and directors, present and former, for expenses incurred by them in
connection with any proceeding they are involved in by reason of their being or
having been an officer or director. The person being indemnified must have acted
in good faith and in a manner he or she reasonably believed to be in or not
opposed to our best interests. Our Bylaws grant this indemnification to our
officers and directors.
Insofar as indemnification for liability arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
LEGAL MATTERS
Patton Boggs LLP, Denver, Colorado, acted as our counsel in connection with
this offering, including the validity of the issuance of the securities offered
hereby.
EXPERTS
Our audited financial statements appearing in this prospectus have been
examined by Gordon, Hughes & Banks, LLP, independent certified public
accountants, as set forth in their report appearing elsewhere herein, and are
included in reliance upon such report and upon the authority of said firm as
experts in accounting and auditing.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS AND
CAUTIONARY STATEMENTS
This prospectus includes forward-looking statements. All statements other
than statements of historical fact included in this prospectus, including
without limitation the statements under "Prospectus Summary", "Risk Factors",
"Management's Discussion And Analysis Of Financial Condition And Results Of
Operations", and "Business And Properties" regarding our financial position,
business strategy, plans and objectives of management for future operations and
capital expenditures, are forward-looking statements. Although we believe that
the expectations reflected in the forward-looking statements and the assumptions
upon which the forward-looking statements are based are reasonable, we can give
no assurance that these expectations will prove to have been correct.
Additional statements concerning important factors that could cause actual
results to differ materially from our expectations ("Cautionary Statements") are
disclosed in the "Risk Factors" section and elsewhere in this prospectus. All
written and oral forward-looking statements attributable to us or persons acting
on our behalf subsequent to the date of this prospectus are expressly qualified
in their entirety by the Cautionary Statements.
37
<PAGE>
FINANCIAL INFORMATION
FIRST ENTERTAINMENT HOLDING CORP. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Report of Independent Certified Public Accountants...........................F-1
Consolidated Balance Sheets as of December 31, 1998 and 1997 ................F-2
Consolidated Statements of Operations for each of the years ended
December 31, 1998 and 1997...................................................F-4
Consolidated Statements of Stockholders' (Deficit) for each
of the years ended December 31, 1998 and 1997...............................F-5
Consolidated Statements of Cash Flows for each of the years ended
December 31, 1998 and 1997...................................................F-6
Notes to Consolidated Financial Statements...................................F-7
Consolidated Balance Sheet as of September 30, 1999
(Unaudited) and December 31, 1998.........................................Q-1
Consolidated Statements of Operations (Unaudited)
for three months and nine months ended September 30, 1999 and 1998 .......Q-3
Consolidated Statements of Cash Flows (Unaudited)
for the nine months ended September 30, 1999 and 1998.....................Q-4
Notes to Consolidated Financial Statements (Unaudited).......................Q-6
F-1
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
First Entertainment Holding Corp.
Denver, Colorado
We have audited the accompanying consolidated balance sheets of First
Entertainment Holding Corp. and Subsidiaries as of December 31, 1998 and 1997
and the related consolidated statements of operations, stockholders' (deficit)
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Entertainment
Holding Corp. and Subsidiaries as of December 31, 1998 and 1997 and the results
of operations and cash flows for the years then ended, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Notes A and E
to the consolidated financial statements, the Company has suffered recurring
losses from operations, has a working capital deficiency of approximately $1.5
million and is in default on a substantial portion of its debt. The Company has
limited cash to pay for operations. In addition, substantial amounts of debt
become due in 1999 and there is no assurance that the Company will have the cash
to pay the debts when they become due, or alternatively, to raise additional
equity funding or to successfully restructure the debts, both of which have
happened in the past. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regards
to these matters are discussed in Note A. The consolidated financial statements
do not include any adjustments that might result from the outcome of these
uncertainties.
As discussed in Note C to the financial statements, an error resulting in the
understatement of general and administrative expenses and net loss of $258,000
for the year ended December 31, 1997 was discovered by the Company in 1999.
Accordingly, an adjustment has been made to general and administrative expense
for 1997 and to capital in excess of par and retained deficit as of December 31,
1998 and 1997.
/s/ Gordon, Hughes & Banks, LLP
- -------------------------------
Gordon, Hughes & Banks, LLP
March 17,1999, except for Note C as to which
The date is June 11, 1999
Englewood, Colorado
F-1
<PAGE>
<TABLE>
<CAPTION>
FIRST ENTERTAINMENT HOLDING CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
1998 1997
---- ----
ASSETS
CURRENT
<S> <C> <C>
Cash and cash equivalents $ 109,450 $ 18,049
Trade accounts receivable, net of allowance for doubtful
accounts of $2,500 and $3,885, respectively 101,568 97,271
Note receivable, other 20,335
Note receivable officer 15,010 25,524
Stock subscription, receivable 25,000
Inventories 14,732 23,377
Prepaids and other current 28,508 22,127
- --------------------------------------------------------------------------------------
269,268 231,683
- --------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Equipment and furniture 709,325 760,593
Building and leasehold improvements 532,257 532,257
Land 125,000 125,000
- --------------------------------------------------------------------------------------
1,366,582 1,417,850
Less accumulated depreciation and amortization 845,810 874,067
- --------------------------------------------------------------------------------------
520,772 543,783
- --------------------------------------------------------------------------------------
OTHER ASSETS
License, net of accumulated amortization
of $545,697 and $482,980, respectively 725,684 788,401
Note receivable 61,105
Other 4,126 3,760
- --------------------------------------------------------------------------------------
729,810 853,266
- --------------------------------------------------------------------------------------
TOTAL ASSETS $1,519,850 $1, 628,732
======================================================================================
"See accompanying reports of independent certified public accountants
and notes to consolidated financial statements."
F-2
<PAGE>
FIRST ENTERTAINMENT HOLDING CORP. AND SUBSIDIARIES
Consolidated Balance Sheets, continued
December 31, 1998 and 1997
1998 1997
---- ----
LIABILITIES AND STOCKHOLDERS'(DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 188,920 $ 172,575
Accrued liabilities 142,458 168,902
Accrued interest 430,107 394,340
Notes payable and current portion of long-term debt 993,384 850,376
Notes payable, related parties 3,000 3,000
Net liabilities of discontinued operations 57,305 53,051
- --------------------------------------------------------------------------------------------
1,815,174 1,642,244
- --------------------------------------------------------------------------------------------
LONG-TERM DEBT, NET OF CURRENT PORTION 187,699 431,120
- --------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
MANDATORILY REDEEMABLE PREFERRED STOCK
Class A preferred stock, 1,500,000 shares authorized,
10,689 shares issued and outstanding, liquidation
value $15,000 10 10
STOCKHOLDERS' (DEFICIT)
Preferred stock, $.001 par value; authorized 5,000,000
shares;
Class A preferred stock, 1,500,000 shares authorized,
10,689 shares issued and outstanding, liquidation
value $15,000 10 10
Class B preferred stock, 1,000,000 shares authorized,
13,040 and 91,147 shares issued and outstanding 13 91
Class C preferred stock, 1,000,000 shares authorized
no shares issued and outstanding
Common stock, $.008 par value; authorized 50,000,000
shares; 9,610,170 and 6,412,304 shares issued
and outstanding 76,882 51,299
Capital in excess of par value 15,924,086 15,205,897
Accumulated (deficit) (16,484,014) (15,701,929)
- --------------------------------------------------------------------------------------------
(483,033) (444,642)
- --------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS'
(DEFICIT) $ 1,519,850 $ 1,628,732
============================================================================================
"See accompanying reports of independent certified public accountants
and notes to consolidated financial statements."
F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIRST ENTERTAINMENT HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31, 1998 and 1997
1998 1997
---- ----
REVENUE
<S> <C> <C>
Live entertainment $ 1,353,667 $ 1,389,533
Radio 804,004 771,992
Video 213 50,239
Other 75,049 112,327
- -----------------------------------------------------------------------------------------
2,232,933 2,324,091
- -----------------------------------------------------------------------------------------
COSTS AND EXPENSES
Cost of sales, live entertainment 1,135,734 1,211,509
Cost of sales, radio 551,502 526,215
Cost of products sold, video 44 13,239
Impairment write downs 81,340 1,460,018
Depreciation and amortization 104,160 141,176
Management and administrative fees, affiliate 224,850 240,000
Selling, general and administrative 786,730 1,790,049
- -----------------------------------------------------------------------------------------
2,884,360 5,382,206
- -----------------------------------------------------------------------------------------
OPERATING (LOSS) FROM CONTINUING OPERATIONS (651,427) (3,058,115)
- -----------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest expense (104,725) (95,333)
Other, net 4,211 1,206
- -----------------------------------------------------------------------------------------
(100,514) (94,127)
- -----------------------------------------------------------------------------------------
(LOSS) FROM CONTINUING OPERATIONS
BEFORE MINORITY INTEREST (751,941) (3,152,242)
MINORITY INTEREST IN NET (LOSS) OF SUBSIDIARY 11,473
- -----------------------------------------------------------------------------------------
(LOSS) FROM CONTINUING OPERATIONS (751,941) (3,140,769)
- -----------------------------------------------------------------------------------------
DISCONTINUED OPERATIONS
(Loss) from discontinued operations, including provision
for operating losses during phaseout period (30,144) (731,453)
- -----------------------------------------------------------------------------------------
NET (LOSS) $ (782,085) $(3,872,222)
=========================================================================================
NET (LOSS) PER COMMON SHARE, CONTINUING
OPERATIONS BASIC AND DILUTED $ (.10) $ (.52)
=========================================================================================
NET INCOME (LOSS) PER COMMON SHARE,
DISCONTINUED OPERATIONS $ -- $ (.12)
=========================================================================================
NET (LOSS) PER COMMON SHARE, Basic and Diluted $ (.10) $ (.64)
=========================================================================================
WEIGHTED-AVERAGE NUMBER OF
SHARES OUTSTANDING BASIC AND DILUTED 7,967,926 6,026,319
=========================================================================================
"See accompanying reports of independent certified public accountants
and notes to consolidated financial statements.
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIRST ENTERTAINMENT HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
For the Years Ended December 31, 1998 and 1997
Class A Class B Class C
Preferred Stock Preferred Stock Preferred Stock
-------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
BALANCES,
JANUARY 1, 1997 10,689 $ 10 0 $ 0 125,000 $ 125
Preferred stock issued for:
Cash, net of offering costs -- -- 47,067 47 -- --
Cancellation of treasury stock -- -- -- -- -- --
Cancellation of preferred stock
in connection with litigation
settlement -- -- -- -- (125,000) (125)
Common stock issued for:
Consulting services -- -- -- -- -- --
Exercise of stock options -- -- -- -- -- --
Accrued Bonuses -- -- -- -- -- --
Accounts Payable -- -- -- -- -- --
Business acquisition -- -- 44,080 44 -- --
Common stock options and
Warrants issued -- -- -- -- -- --
Amortization of deferred
compensation -- -- -- -- -- --
Net loss -- -- -- -- -- --
------------------------------------------------------------------------------------
BALANCES,
DECEMBER 31, 1997 10,689 $ 10 91,147 $ 91 0 $ 0
Preferred Stock issued for:
Acquisition of property -- -- 16,000 16 -- --
Common stock issued for:
Cash, net of offering costs -- -- -- -- -- --
Consulting services -- -- -- -- -- --
Accounts payable -- -- -- -- -- --
Life insurance premiums -- -- -- -- -- --
Conversion from preferred stock -- -- (94,107) (94) -- --
Business acquisition -- -- -- -- -- --
Exercise of warrant -- -- -- -- -- --
Common stock options and
Warrants issued -- -- -- -- -- --
Net (loss) -- -- -- -- -- --
------------------------------------------------------------------------------------
BALANCES
DECEMBER 31, 1998 10,689 $ 10 13,040 $ 13 0 $ 0
===============================================================================================================================
Table continues on next page.
F-5
<PAGE>
FIRST ENTERTAINMENT HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
For the Years Ended December 31, 1998 and 1997 (Continued)
Common Stock Capital In
--------------------- Excess of Accumulated
Shares Amount Par Value (Deficit)
------ ------ --------- ---------
BALANCES,
JANUARY 1, 1997 5,292,238 $ 42,338 $ 13,460,958 $(11,829,707)
Preferred stock issued for:
Cash, net of offering costs -- -- 262,703 262,750
Cancellation of treasury stock (221,534) (1,772) (483,052) --
Cancellation of preferred stock
in connection with litigation
settlement -- -- (124,875) --
Common stock issued for:
Consulting services 751,600 6,013 670,202 --
Exercise of stock options 150,000 1,200 73,800 --
Accrued Bonuses 420,000 3,360 254,240 --
Accounts Payable 20,000 160 13,040 --
Business acquisition -- -- 386,856 --
Common stock options and
Warrants issued -- -- 692,025 --
Amortization of deferred
compensation -- -- -- --
Net loss -- -- -- (3,872,222)
---------------------------------------------------------
BALANCES,
DECEMBER 31, 1997 6,412,304 $ 51,299 $ 15,205,897 ($15,701,929)
Preferred Stock issued for:
Acquisition of property -- -- 44,984 --
Common stock issued for:
Cash, net of offering costs 771,667 6,173 162,127 --
Consulting services 986,016 7,888 352,855 --
Accounts payable 83,750 670 49,493 --
Life insurance premiums 130,000 1,040 37,960 --
Conversion from preferred stock 1,176,333 9,411 (9,317) --
Business acquisition 50,000 400 13,100 --
Exercise of warrant 100 1 99 --
Common stock options and
Warrants issued -- -- 66,888 --
Net (loss) -- -- -- (782,085)
---------------------------------------------------------
BALANCES
DECEMBER 31, 1998 9,610,170 $ 76,882 $ 15,924,086 ($16,484,014)
=================================================================================================
Tabel continues on next page.
F-5(a)
<PAGE>
FIRST ENTERTAINMENT HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
For the Years Ended December 31, 1998 and 1997 (Continued)
Deferred Treasury
Compensation Stock Total
------------ ----- -----
BALANCES,
JANUARY 1, 1997 $ (45,807) $ (484,824) 1,143,093
Preferred stock issued for:
Cash, net of offering costs
Cancellation of treasury stock -- 484,824 --
Cancellation of preferred stock
in connection with litigation
settlement -- -- (125,000)
Common stock issued for:
Consulting services -- -- 676,215
Exercise of stock options -- -- 75,000
Accrued Bonuses -- -- 257,600
Accounts Payable -- -- 13,200
Business acquisition -- -- 386,900
Common stock options and
Warrants issued -- -- 692,025
Amortization of deferred
compensation 45,807 -- 45,807
Net loss -- -- (3,614,222)
--------------------------------------------
BALANCES,
DECEMBER 31, 1997 $ 0 0 ($ 444,632)
Preferred Stock issued for:
Acquisition of property -- -- 45,000
Common stock issued for:
Cash, net of offering costs -- -- 168,300
Consulting services -- -- 360,743
Accounts payable -- -- 50,163
Life insurance premiums -- -- 39,000
Conversion from preferred stock -- 0
Business acquisition -- -- 13,500
Exercise of warrant -- -- 100
Common stock options and
Warrants issued -- -- 66,888
Net (loss) -- -- (782,085)
--------------------------------------------
BALANCES
DECEMBER 31, 1998 $ 0 $ 0 ($ 483,023)
=================================================================================
"See accompanying report of independent certified public accountants
and notes to consolidated financial statements."
F-5(b)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIRST ENTERTAINMENT HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1998 and 1997
1998 1997
---- ----
OPERATING ACTIVITIES
<S> <C> <C>
Net (loss) $ (782,085) $(3,872,222)
Adjustments to reconcile net (loss) to net cash
used in operations
Depreciation and amortization 104,160 141,176
Impairment write downs 81,340 1,460,018
Assets write downs included in discontinued operations 445,596
Litigation settlement 150,000
Loss on disposition of property and equipment 9,322
Issuance of stock for services and common
stock options and warrants, net 466,631 1,368,240
Amortization of deferred compensation 45,807
Minority interest in net loss of subsidiary (11,473)
Changes in operating assets and liabilities:
Receivables 31,317 (6,742)
Inventories 8,645 366
Other assets (6,747) (7,711)
Accounts payable 66,408 40,207
Accrued liabilities 22,823 (48,305)
Cash provided by discontinued operations 4,354
- -------------------------------------------------------------------------------------------
NET CASH, PROVIDED BY (USED IN)
OPERATING ACTIVITIES 6,168 (295,043)
- -------------------------------------------------------------------------------------------
"See accompanying reports of independent certified public accountants
and notes to consolidated financial statements."
F-6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIRST ENTERTAINMENTHOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
For the Years Ended December 31, 1998 and 1997
1998 1997
---- ----
INVESTING ACTIVITIES
<S> <C> <C>
Capital expenditures (27,754) (20,620)
Advances to related parties (10,000)
Cash used in discontinued operations (41,786)
- --------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES (27,754) (72,406)
- --------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Principal payments on debt (100,413) (51,380)
Proceeds from issuance of stock of subsidiary 50,000
Proceeds from issuance of common and preferred stock, net 213,400 337,750
- --------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 112,987 336,370
- --------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 91,401 (31,079)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 18,049 49,128
- --------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 109,450 $ 18,049
======================================================================================
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Interest paid $ 68,135 $ 25,798
======================================================================================
Income taxes paid $ 0 $ 0
======================================================================================
"See accompanying reports of independent certified public accountants
and notes to consolidated financial statements."
F-6(a)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIRST ENTERTAINMENT HLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
For the Years Ended December 31, 1998 and 1997
1998 1997
---- ----
SUPPLEMENTAL SCHEDULE OF
NONCASH INVESTING AND
FINANCING ACTIVITIES
<S> <C> <C>
Accounts payable and accrued expenses
converted into common stock $ 50,163 $ 270,800
===================================================================================
Issuance of preferred stock
for acquisitions $ 13,500 $ 386,900
===================================================================================
Note Payable issued in exchange for preferred stock $ 0 $ 125,000
===================================================================================
Common stock and options and warrants issued for services $ 427,631 $1,368,240
===================================================================================
Common stock issued for life insurance premiums $ 39,000 0
===================================================================================
"See accompanying reports of independent certified public accountants
and notes to consolidated financial statements."
F-6(b)
</TABLE>
<PAGE>
FIRST ENTERTAINMENT HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE A NATURE OF BUSINESS AND GOING CONCERN
- -------------------------------------------
On December 15, 1997, First Entertainment, Inc. changed its state of
incorporation from Colorado to Nevada and changed its name to First
Entertainment Holding Corp. (the "Company" or "FEHC"). The change was
effected by a merger of First Entertainment, Inc. into First Entertainment
Holding Corp, a newly formed Nevada Corporation. Upon completion of the
merger, the Colorado Corporation ceased to exist. The transaction was
accounted for on a basis similar to a pooling of interests with no change
in the historical financial statements of the Company. The newly formed
Corporation had no operations prior to the merger.
The Company was originally incorporated as a Colorado corporation on
January 17, 1985. The Company and its subsidiaries are involved in
entertainment through several media; its live entertainment segment owns
and operates a comedy club in Denver, Colorado and its radio station, 100.7
"The Fox", operates in Gillette, Wyoming. In January 1998, the Company
determined to discontinue the operations of its retail segment.
During the period from inception (January 17, 1985) to September 30, 1999,
the Company has incurred cumulative net losses of approximately $18,
671,000 and, as of September 30, 1999, had an excess of current liabilities
over current assets of approximately $1,216,000 and is in default on
certain notes concern. The Company is dependent upon obtaining additional
financing, and/or extending its existing debt obligations, and/or obtaining
additional equity capital and ultimately achieving profitable operations.
The 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. If the
Company is unable to obtain payable. These conditions raise substantial
doubt about the Company's ability to continue as a going 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. The
accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
Management's plans with regard to the Company's ability to continue as a
going concern include continued raising of equity financing in the U.S.
and/or international markets, restructuring of its debt obligations and
undertaking mergers or acquisitions to improve market share or operational
synergies and improving efficiency of operations. There are no assurances
that any of these events will occur or that the Company's plan will be
successful. The Company has received proceeds from the sale of common and
preferred stock of approximately $677,000 through September 30, 1999.
The Company does not have sufficient revenues to generate income from
operations; therefore, it is necessary for the Company to increase revenues
either by expansion or by acquisition or significantly reduce its operating
costs. The Company has been able to issue stock for management and
accounting services, thereby reducing the need for cash to pay for
operating expenses. If the Company would be unable to issue stock for
services, because there would be no liquidity for the stock, this would
have a severe impact upon the Company and its ability to operate. The value
of services paid by issuance of stock was approximately $1,656,000 for the
nine months ended September 30, 1999. Net cash used in operations was
approximately $384,000 for the nine months ended September 30, 1999, unless
operations become more profitable, the Company may not have sufficient cash
for use in operations through December 31, 2000.
F-7
<PAGE>
FIRST ENTERTAINMENT HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -------------------------------------------------
Basis of Consolidation The accompanying consolidated financial statements
include the accounts of the Company and its subsidiaries. The Company owns
the following subsidiaries:
Name of Subsidiary Percentage Owned
------------------ ----------------
Quality Communications, Inc. 100%
Comedy Works, Inc. 100%
First Films, Inc. 80%
Global Internet Corp. 50.8%
The Best of As Seen On TV, Inc. 58%
First 2 Market, Inc. 100%
As of December 31, 1998, the minority interest in First Films, Inc., Global
Internet Corp., and The Best of As Seen on TV, Inc. has been reduced to
zero due to losses in the respective subsidiaries. There is no continuing
obligation by the minority interest stockholders to fund the operations of
the respective subsidiaries.
All significant intercompany accounts and transactions have been
eliminated.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles necessarily requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts of
revenues and expense during the reporting periods. Actual results could
differ from those estimates.
Inventories. Inventories are stated at the lower of cost or market value
(first-in, first-out basis). Inventories are comprised of liquor supplies.
Property and Equipment. Production equipment, furniture and other equipment
are recorded at cost and depreciated using straight-line and declining
balance methods over the estimated useful lives of the assets, ranging from
three to fifteen years.
Leasehold improvements are recorded at cost and are amortized on a
straight-line basis over their estimated useful lives, but not in excess of
the lease term.
The cost and related accumulated depreciation and amortization of assets
sold or retired are removed from the appropriate asset and accumulated
depreciation and amortization accounts and the resulting gain or loss is
reflected in operations.
Maintenance and repairs are charged to operations as incurred and
expenditures for major improvements are capitalized.
License, Goodwill and Intangibles. Broadcast licenses, goodwill and
intangibles, recorded at cost, are amortized on a straight-line basis over
a period of 10 to 20 years.
Periodically the Company reviews the recoverability of its intangible
assets based on estimated undiscounted future cash flows from operating
activities compared with the carrying value of the intangible assets.
Should the aggregate future cash flows be less than the carrying value, a
write-down would be required measured by the difference between the
discounted future cash flow and the carrying value of the intangible assets
under SFAS No. 121.
Long Lived Assets. Long lived assets and identifiable intangibles are
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. If the expected
undiscounted future cash flow from the use of the assets and its eventual
disposition is less than the carrying amount of the assets, an impairment
loss is recognized and measured using the asset's fair value or discounted
cash flows.
Revenue Recognition. Broadcast and ad fees are recorded as revenue when the
broadcast or ad is aired. Live Entertainment revenues are recognized at the
time of the performance, generally nightly. Retail sales are recognized at
the time the merchandise is sold and are net of returns.
Net Loss Per Share. As of December 31, 1997, the Company adopted Statement
of Financial Accounting Standards No. 128 "Earnings per Share" (SFAS No.
128). This pronouncement provides a different method of calculating
earnings per share than was used in accordance with Accounting Board
Opinion (APB No. 15), "Earnings per Share". SFAS No. 128 provides for the
calculation of "Basic" and "Dilutive" earnings per share. Basic earnings
per share includes no dilution and is computed by dividing income available
to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the
potential dilution of securities that could share in the earnings of the
entity. For all prior periods, weighted average and per share information
F-8
<PAGE>
FIRST ENTERTAINMENT HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICES (Continued)
- ------------------------------------------------------------
has been restated in accordance with SFAS No. 128. The adoption of SFAS No.
128 did not effect earnings per share calculations for the year ended
December 31, 1997. For the years ended December 31, 1998 and 1997, total
stock options and stock warrants of 2,699,900 and 2,409,375 were not
included in the computation of diluted earnings per shares because their
effect was anti-dilutive, therefore basic and fully diluted earnings per
share are the same.
Concentration of Risk. Financial instruments which potentially expose the
Company to concentration of credit risk consist primarily of cash
equivalents and accounts receivable with the Company's various customers.
The Company establishes an allowance for doubtful accounts based on factors
surrounding the credit risk of specific customers, historical trends and
other information.
The Company maintains all cash in bank deposit accounts, which at times may
exceed federally insured limits. The Company has not experienced losses in
such accounts.
Reclassifications. Certain balances in the 1997 consolidated financial
statements have been reclassified in order to conform to the 1998
presentation. The reclassifications had no effect on financial condition or
results of operations.
Income Taxes. The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109 ("SFAS No. 109"). Temporary
differences are differences between the tax basis of assets and liabilities
and their reported amounts in the financial statements that will result in
taxable or deductible amounts in future years.
Deferred Compensation. Deferred compensation results from granting stock
options at option prices less than the fair market value of the stock on
the date of grant, under agreements with terms extending beyond one year.
Deferred compensation is initially charged to stockholders' equity and
amortized to expense over the term of the related agreement.
Cash Equivalents. The Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash
equivalents.
Financial Instruments. The following methods and assumptions were used to
estimate the fair value of each class of financial instruments for which it
is practicable to estimate that value;
Accounts Receivable, Accounts Payable and Accrued Liabilities. Fair
values of accounts receivable, accounts payable, and accrued
liabilities are assumed to approximate carrying values for these
financial instruments since they are short term in nature and their
carrying amounts approximate fair value or they are receivable or
payable on demand.
Notes Payable. These notes substantially bear interest at a floating
rate of interest based upon the lending institutions' prime lending
rate. Accordingly, the fair value approximates their reported carrying
amount at December 31, 1998 and 1997.
Mortgage Notes. Estimated based upon current market borrowing rates
for loans with similar terms and maturities.
The estimated fair values of the Company's financial instruments for
continuing operations are as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C> <C> <C>
Carrying Fair Carrying Fair
Financial Liabilities Amount Value Amount Value
Notes Payable ------ ----- ------ -----
and Mortgage Notes $1,181,083 $1,181,083 $1,281,496 $1,281,496
</TABLE>
F-9
<PAGE>
FIRST ENTERTAINMENT HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Stock Award and Stock Option Plans
----------------------------------
The Company grants common stock and stock options to employees and
non-employees. The Company applies APB Opinion 25, "Accounting for Stock
Issued to Employees", and related Interpretations in accounting for all
stock option plans. Following the guidance of APB Opinion 25, compensation
cost has been recognized for stock options issued to employees as the
excess of the market price of the underlying common stock on the date of
the grant over the exercise price of the Company's stock options on the
date of the grant.
SFAS No. 123, "Accounting for Stock-Based Compensation", requires the
Company to provide pro forma information regarding net income as if
compensation cost for the Company's stock option plans had been determined
in accordance with the fair value based method prescribed in SFAS No. 123.
To provide the required pro forma information, the Company estimates the
fair value of each stock option at the grant date by using the
Black-Scholes option-pricing model.
In certain instances, the Company issues common stock for services, in lieu
of accounts payable and in other similar situations. Transactions in equity
instruments with non-employees for goods or services are generally
accounted for by the fair value method, which relies on the valuation of a
transaction at the data of the transaction based on public and private
stock sales..
Recent Accounting Pronouncements:
---------------------------------
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 revise employers'
disclosures about pension and other post retirement benefit plans but do
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.
F-10
<PAGE>
FIRST ENTERTAINMENT HOLDING CORP. AND SUBSIDIARIES Notes to Consolidated
Financial Statements (Continued)
NOTE C RESTATEMENT OF FIANCIAL INFORMATION
- ------------------------------------------
The Company has restated its consolidated financial statements for the year
ended December 31, 1997. This action was taken as a result of the Company
identifying that it had not accounted for stock warrants issued to Global
Casino's in May 1997. The 1997 consolidated financial statements have been
restated to account for warrants issued to Global Casinos in accordance
with SFAS 123 resulting in compensation expense of $258,000. All material
adjustments necessary to correct the financial statements have been
recorded. The impact of this adjustment on the Company's consolidated
financial results as originally reported is summarized below:
<TABLE>
<CAPTION>
1997
----
As Reported As Restated
----------- -----------
<S> <C> <C>
Revenues $ 2,324,091 $ 2,324,091
Costs and Expense 5,124,206 5,382,206
---------------------------------------------------------------------------------------
Operating Loss from Continuing Operations (2,800,115) (3,058,115)
---------------------------------------------------------------------------------------
Net Loss $ (3,614,222) $ (3,872,222)
---------------------------------------------------------------------------------------
Net Loss Per Share, continuing operations,
Basic and Diluted $ (.48) $ (.52)
=======================================================================================
Net Loss Per Share, Basic and Diluted $ (.60) $ (.64)
=======================================================================================
Accumulated Deficit at End of Year $(15,443,928) $(15,701,929)
=======================================================================================
Stockholders' Deficit, at End of Year $ (444,632) $ (444,632)
=======================================================================================
</TABLE>
NOTE D ACQUISITIONS
- -------------------
Power Media
-----------
In July, 1996, the Company issued 770,000 shares of its restricted common
stock, valued at $408,100, in exchange for 18,000 of the 25,000 then issued
and outstanding shares of Power Media Communications International, Inc.
(Power Media), or 72% ownership. Power Media was a substantially dormant
company that had developed the concept of selling infomercial products in
kiosks primarily located in retail malls.
The acquisition of Power Media in 1996 was accounted for as a purchase and
the purchase price in excess of net assets acquired was allocated to
goodwill. Amortization of goodwill was computed on a straight-line basis
over 10 years until its write-off in 1997.
In November 1996, a new entity was formed called "The Best Of As Seen on
TV", Inc. ("ASOTV") for the purpose of acquiring all of the issued and
outstanding common stock of Power Media and to provide original
incorporators with ownership in ASOTV. The original incorporators of ASOTV
were issued 464,000 shares of ASOTV for par value ($.001 per share), which
included 220,800 shares issued to NMG, LLC, an entity owned by the wife of
the president of the Company. ASOTV then issued 1,010,000 shares of common
stock to the Company for their 18,000 shares of Power Media and issued
325,600 shares to an unrelated party for the remaining 7,000 shares of
Power Media and $150,000. In November 1996, ASOTV sold 100,000 shares of
its common stock for $50,000. In July 1997, the Company issued 100,000
F-11
<PAGE>
FIRST ENTERTAINMENT HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statement (Continued)
NOTE D ACQUISITIONS, Continued
- ------------------------------
shares of its common stock in exchange for 100,000 shares of ASOTV owned by
NMG, LLC. As a result of the above transactions, ASOTV owned 100% of Power
Media and the Company owned approximately 58% of ASOTV as of December 31,
1998 and 1997.
In March 1997, the Company terminated its unmanned kiosk operations, which
it started in November 1996, when the leases to its first four locations
were not renewed. Sales volumes at the unmanned kiosk locations were not
sufficient for profitable operations. The Company turned its efforts to
operating manned kiosks in major retail malls. Each kiosk was approximately
250 square feet and sold the top 50 selling infomercial products.
Commencing August 1997, the Company opened six manned kiosk locations in
six retail malls located in the Denver metropolitan area. The sales volumes
for the manned kiosks were less than projected and the operations were
terminated January 31, 1998. Although the Company believes the concept is
viable, it currently does not have the working capital necessary to further
develop the concept. The results of operations of ASOTV for the years ended
December 31, 1998 and 1997 are disclosed as discontinued operations.
Global Internet Corp
--------------------
On May 1, 1997, the Company entered into an agreement with Global Casino,
Inc. (Global Casino) to acquire 1,500,000 shares of common stock of Global
Internet Corp. ("Global Internet") owned by Global Casino and a $375,000
note receivable from Global Internet owed to Global Casino in exchange for
30,000 shares of FEHC Class B Convertible Preferred Stock (Class B Stock).
The 1,500,000 shares of common stock represents 50.3% of the issued and
outstanding common stock of Global Internet. Each share of Class B stock is
convertible into 12.5 shares of FEHC restricted common stock. Global Casino
also received warrants to purchase 1,500,000 shares of the Company's common
stock at $1 per share. The warrant expires May 1, 2002. At the time FEHC
entered into the Agreement, FEHC did not have a sufficient number of
authorized but unissued shares of common stock to allow for the conversion
of the preferred stock to common stock nor for the exercise of the
warrants.
In addition, the acquisition of Global Internet required the approval of
the shareholders of FEHC. On December 5, 1997 the shareholders of FEHC
approved (i) the increase in the authorized shares of FEHC common stock and
(ii) the acquisition of Global Internet Corp. For accounting purposes
control of Global Internet did not change until December 5, 1997. December
5, 1997 is considered the acquisition date. The acquisition has been
accounted for as a purchase and the excess of purchase price over net
assets acquired was allocated to goodwill. The operations of Global
Internet from December 5, 1997 have been consolidated with those of the
Company.
In June 1997, FEHC also issued 14,080 of Class B convertible preferred
stock to two officers of Global Internet, in exchange for $176,000 accrued
but unpaid compensation. Global Internet owed the two officers compensation
under the terms of long term employment agreements. For accounting
purposes, the Class B convertible preferred shares issued were recorded on
December 5, 1997, the date the shareholders of FEHC approved an increase in
the authorized shares of common stock.
Global Internet was in the process of developing a virtual internet casino
and had a Web Site Development and Maintenance Agreement (Development
Agreement) with Electronic Data Systems (EDS) and DDB Needham to develop
the web site for approximately $1,200,000, of which $300,000 had been
expended to date on the web site development. FEHC was unable to obtain the
financing needed to complete the web site development and the Development
Agreement was terminated.
The ability of the Company to obtain the necessary financing to commence
operations of a virtual internet casino is uncertain and as such the
Company's investment in Global Internet was determined by management to be
impaired. Included in the accompanying consolidated statements of
operations for the year ended December 31, 1997 is an impairment write-off
of approximately $558,000 representing the Company's investment in Global
Internet.
F-12
<PAGE>
FIRST ENTERTAINMENT HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE E DISCONTINUED OPERATIONS
- ------------------------------
In January 1998, the Company determined to discontinue the operations of
ASOTV due to losses and lack of working capital to further develop the
concept. Accordingly, the assets of ASOTV were written down to their
estimated net realizable value resulting in a write down of $490,000
included in the accompanying statement of operations for the year ended
December 31, 1997.
Revenues from discontinued operations were $54,300 and $174,800 for 1998
and 1997, respectively.
Summarized balance sheet data for the discontinued operations as of
December 31, 1998 and 1997 is as follows:
1998 1997
---- ----
ASSETS
Cash $ 1,246 $ 9,289
Accounts receivable 6,983
Inventory 66,482
Other 100
---------------------------------------------------------------------
Total current assets 1,246 82,854
Goodwill
Property, plant and equipment, net 8,673
---------------------------------------------------------------------
Total Assets 1,246 91,527
---------------------------------------------------------------------
LIABILITIES
Current liabilities 58,551 144,578
---------------------------------------------------------------------
Total Liabilities 58,551 144,578
---------------------------------------------------------------------
Minority Interest 0 0
---------------------------------------------------------------------
Net assets (liabilities) of
discontinued operations $ (57,305) $ (53,051)
=====================================================================
The Company is in default under the terms of approximately $386,000 of its
debt obligations for non-payment. Substantially all of the Company's assets
are pledged as collateral to one or more obligations. Notes that are not in
compliance are classified as current liabilities. Notes payable and long
term debt is summarized as follows:
<TABLE>
December 31,
-----------------
1998 1997
---- ----
<S> <C> <C>
Notes payable, First National Bank Gillette (1) $ 380,483 $ 422,152
Note payable to the State of Wyoming(2) 300,000 300,000
Notes payable, litigation (7) 231,501 275,000
Mortgage note payable(3) 139,947 144,665
Mortgage note payable(4) 53,243 53,883
Note payable, creditor(5) 19,224 19,224
Various notes payable individuals and companies(6) 56,685 66,572
----------------------------------------------------------------------------
1,181,083 1,281,496
Less current portion 993,384 850,376
----------------------------------------------------------------------------
Long-term debt $ 187,699 $ 431,120
============================================================================
</TABLE>
Future maturities of debt as of December 31, 1998 are as follows:
1999 $ 993,384
2000 5,726
2001 56,484
2002 5,020
2003 5,120
Thereafter 115,349
-------------
Total $ 1,181,083
=============
F-13
<PAGE>
FIRST ENTERTAINMENT HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statement (Continued)
NOTE F NOTES PAYABLE AND LONG-TERM DEBT
- ---------------------------------------
(1) The Notes payable to First National Bank of Gillette are renewed
annually in November. Currently the notes bear interest at 9% per
annum and require monthly principal and interest of $6,500. The notes
are collateralized by substantially all the assets of the radio
station in Gillette, Wyoming except for the real estate.
(2) In February 1989, the Company borrowed $300,000 from the State of
Wyoming for the purpose of purchasing equipment, inventory and to
provide working capital necessary to establish a video duplicating
facility. As of December 31, 1998, the Company had not yet established
an operating duplicating facility and was in violation of several of
the compliance requirements of this note. Although the note, by its
original terms, was not due until March 1, 1999, the State of Wyoming
deemed the note to be currently due as a result of the violations of
the compliance requirements. The note, with default interest at 16.5
percent, is due in daily installments of $150, and is collateralized
by the Company's master tape library. No principal and interest
payments have been made nor has the State of Wyoming demanded payment
on the note.
(3) Note payable, trust; interest at 9.5%; monthly principal and interest
of $1,500; final payment due October 2012; collateralized by real
property.
(4) Note payable to mortgage company; interest at 8.015% per annum;
monthly principal and interest payments of $403 for 59 months with a
balloon payment of $52,300 due May 15, 2000; collateralized by real
estate.
(5) Note payable to a trade creditor dated October 21, 1993; interest at
10 percent; due on May 1, 1996; collateralized by the Company's master
tape inventory and subordinated to previously filed liens.
(6) Various notes payable in default; due to various individuals and
companies with interest rates ranging from 10 to 21 percent per annum.
(7) Notes payable due to two individuals in connection with litigation
settlements subsequent to December 31, 1997. The first note for
$125,000 bears interest at 9.5% per annum and is due March 31, 1999
and are secured by two parcels of land in Gillette, Wyoming on which
the Company's radio station operations are located. The second note
for $150,000 bears interest at 10% per annum and is payable in
installments of $25,000 for the first month and $5,000 per month
thereafter until July 15, 1999 at which time all unpaid principal and
interest are due. This note is secured by the stock of FEHC wholly
owned subsidiary, Quality Communications, Inc, which operates the
Company's radio station.
The weighted average interest rate on short-term borrowings was 13.49
for 1998 and 1997, respectively.
NOTE G STOCKHOLDERS' DEFICT
- ---------------------------
On December 15, 1997 First Entertainment, Inc. (FEI) (a Colorado
Corporation) was merged into First Entertainment Holding Corp. (FEHC) (a
Nevada Corporation) following a special shareholders meeting on December 5,
1997 in which the shareholders approved a name change and a change in the
state of incorporation from Colorado to Nevada. As a result of the merger,
all of the issued and outstanding shares of FEI were exchanged for the same
amount of shares of FEHC. FEHC is the surviving corporation and, effective
with the merger, FEI ceased to exist. FEHC has authorized capital stock
consisting of 50,000,000 shares of common stock, $.008 par value and
5,000,000 shares of preferred stock, $.001 par value. The Board of
Directors has the authority to issue preferred shares in series and
determine the rights and preferences of each series.
F-14
<PAGE>
FIRST ENTERTAINMENT HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statement (Continued)
NOTE G STOCKHOLDERS' DEFICIT continued
- --------------------------------------
A total of 1,500,000 shares of preferred stock have been designated as
Class A, 7% cumulative, non-participating convertible preferred stock, and
had a mandatory redemption on November 18, 1996. As of December 31, 1998
the holders of the Class A Preferred Stock have not demanded redemption.
Liquidation preference is approximately $15,000. Each class A share may be
converted into two shares of common stock. The Class A Preferred Stock has
not been redeemed as of December 31, 1998.
A total of 1,000,000 shares of preferred stock has been designated as Class
B, 6% cumulative dividend, paid quarterly, if and when declared, redeemable
by the Corporation at face value and each share of class B is convertible
into 12.5 shares of common stock. The rights of the Class B shares shall be
subordinate to Class A shares.
A total of 1,000,000 shares of preferred stock has been designated as Class
C, non-dividend and each share is convertible into common stock at a
conversion price equal to the average 30 day bid price of the common stock
on the date of conversion. The rights of the Class C shares shall be
subordinate to Class A and Class B shares.
In connection with the acquisition of Global Internet Corporation, the
Company entered into an agreement with two officers of Global Internet on
June 16, 1997 whereby the Company issued 14,080 shares of Class B
convertible preferred stock in exchange for $176,000 of debt owed to the
two officers by Global Internet.
In 1997, the Company issued 751,600 shares of common stock for consulting
and other services valued at $676,215 (includes $252,000 in services from
related parties) or an average of $.90 per share. In 1997, the Company also
issued 440,000 shares of common stock in settlement of accrued bonuses to
consultants and employees and accounts payable totaling $270,800. Stock
bonuses accrued for related parties were $168,000.
In 1997, the Company sold 47,067 shares of Class B Convertible Preferred
Stock for $262,750, which was net of offering costs of $39,750. The Company
also issued 150,000 shares of common stock upon exercise of common stock
options receiving proceeds of $75,000.
In 1997, the Company cancelled 221,534 shares of common stock held as
treasury of which 144,409 represented shares returned to the Company in
connection with a litigation settlement with Image Marketing Group; 50,000
represented the cancellation of common stock held by a bank as collateral
on a note payable and 27,125 represented shares previously held by First
Films, Inc.
In 1998, the Company sold 16,000 shares of Class B Convertible Preferred
Stock and 771,667 shares of common stock for $213,300 which is net of
offering costs.
In 1998, the Company issued 1,116,016 shares of common stock for consulting
and other services valued at $399,743 (includes $225,000 in services from
related parties) or an average of $.36 per share.
Common Stock Options In June 1994, the Company adopted a Non-Qualified
Stock Option Plan, under which the Company's Board of Directors are
authorized to issue options to purchase up to 62,500 shares of the
F-15
<PAGE>
FIRST ENTERTAINMENT HOLDING CORP.
AND SUBSIDIARIES Notes to Consolidated Financial Statement (Continued)
NOTE G STOCKHOLDERS' DEFICIT, Continued
- ---------------------------------------
Company's common stock to qualified employees, officers and directors of
the Company. The option price may be changed at the discretion of the Board
of Directors. No options have been issued under this plan. During 1998 and
1997, the Company has also issued other non-qualified stock options to
non-employees under terms and at prices deemed appropriate by the Board of
Directors.
The following is a summary of the number of shares under option:
Weighted
Average
Non-Qualifying Exercise Expiration
Stock Options Price Dates
-----------------------------------------
Balance, January 1, 1997 95,000 $ 3.49
Granted 400,000 .79 1999-2002
Exercised (100,000) .50
Expired/Rescinded (285,625) 2.39
---------------------------------------------------------------------------
Balance, December 31, 1997 109,375 $ 2.91 1998-2002
---------------------------------------------------------------------------
Granted 300,000 $ .40 1999
Exercised
Expired (9,375) 3.49
---------------------------------------------------------------------------
Balance December 31, 1998 400,000 $ .51 1999-2002
---------------------------------------------------------------------------
The following table summarized information about stock options outstanding
and exercisable as of December 31, 1998:
Weighted
Average Weighted
Range of Number Remaining Average
Exercise Prices Outstanding & Contractual Exercise
From To Exercisable Life in Years Price
-------------------------------------------------------------------------
$ .40 $ .40 300,000 0.50 $ .40
$ .50 $ 1.25 100,000 2.50 $ .87
---------------------------------------------
400,000 1.00 $ .5175
=============================================
Options issued to non-employees in 1998 and 1997 resulted in compensation
expense of $66,888 and $78,617 respectively, under SFAS 123.
NOTE H COMMON STOCK WARRANTS
- ----------------------------
In connection with a settlement agreement between the Company and Balzac,
Inc, a warrant was issued to Balzac to purchase 500,000 shares of the
Company's common stock at $1.00 per share.
The warrant, issued at fair market value, is exercisable for a period of
five years and expires April, 2002.The issuance of these warrants to Balzac
resulted in compensation expense of $315,453 in 1997 under SFAS 123. In
1998, Balzac exercised their option to purchase 100 shares of common stock.
In connection with the private sale of Class B convertible preferred stock,
the Company granted to the Underwriter a warrant to purchase 300,000 shares
of the Company's common stock at $1.00 per share. The warrant, issued at
fair market value, is for consideration of future consulting services and
expires July 1999. The issuance of these warrants to the Underwriter
resulted in compensation expense of $33,434 in 1997 under SFAS 123.
F-16
<PAGE>
FIRST ENTERTAINMENT HOLDING CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statement (Continued)
NOTE H, COMMON STOCK WARRANTS, Continued
- ----------------------------------------
In connection with the acquisition of Global Internet on May 1, 1997 Global
Casino's was issued warrants to purchase 1,500,000 shares of common stock
of the Company for $1.00 per share. The warrants expire on May 1, 2002.
In addition, the two officers of Global Internet have the option, for a
period of five years, to exchange any or all of their 600,000 shares of
common stock of Global Internet into FEHC common stock at a rate of one
share of FEHC for four shares of Global Internet. In addition, for each
share exchanged the officers of Global Internet will receive one warrant to
purchase one share of FEHC common stock at $1.25 a share.
The Company has elected to continue with the accounting treatment for stock
options and warrants issued to employees under APB 25, which is an
intrinsic value-based method, and has adopted SFAS 123, which is a
fair-value based method of accounting for stock options. The Company
estimates the fair value of each stock award at the grant date by using the
Black-Scholes option-pricing model with the following weighted average
assumptions, dividend yield of 0%, expected volatility of .1%, risk free
interest rate of 6%, and expected lives of 5 years for the stock award. No
options were issued to employees in 1998. Had compensation costs been
determined based on the fair value at the grant date for stock option and
stock warrant grants to employees consistent with the method of SFAS No.
123, the Company's net loss from continuing operations and net loss per
share from continuing operations would have increased as indicated below
for the year ended December 31, 1997.
Net (loss) from continuing operations, as reported ($ 3,058,115)
Net (loss) from continuing operations, pro-forma ($ 3,073,859)
Net (loss) per share, continuing operations basic
and diluted, as reported ($ .52)
Net (loss) per share, continuing operations basic
and diluted, pro-forma ($ .52)
NOTE I 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 $ 5,554,000
Property, equipment, other assets, net (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 5,557,000
Less valuation allowance (6,010,000) (5,557,000)
-----------------------------------------------------------------------
Net deferred tax assets $ 0 $ 0
=======================================================================
A valuation allowance has been recorded equal to the net deferred tax
asset, as management was not able to determine if it is more likely than
not that the deferred tax assets will be realized.
The valuation allowance increased $541,000 in 1998 and $1,157,000 in 1997.
F-17
<PAGE>
FIRST ENTERTAINMENT HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statement (Continued)
NOTE I INCOME TAXES, Continued
- ------------------------------
The following summary reconciles the income taxes at the statutory rate of
37% in 1998 and 1997 with the actual taxes:
1998 1997
---- ----
Benefit computed at the statutory
rate-continuing operations $ (232,000) $(1,068,000)
Discontinued operations (7,000) (89,000)
Valuation allowance 239,000 1,157,000
---------------------------------------------------------------------
Provision for income taxes $ 0 $ 0
=====================================================================
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 through 2018.
NOTE J RELATED PARTY TRANSACTIONS
- ---------------------------------
The Company contracts out substantial administrative, management and
accounting functions to a company wholly owned by the former president and
a current director of the Company. Monthly fees for such services were
$21,000 for the period January 1, 1997 through August 31, 1998, thereafter
the fees were reduced to $14,000. Total annual fees paid by cash and by the
issuance of common stock for 1998 and 1997 were $225,000 and $252,000 each
year, respectively.
In July 1997, the Company acquired 100,000 shares of common stock of ASOTV
from NMG, LLC, an entity owned by the wife of the president, in exchange
for 100,000 shares of common stock of the Company. The value of the common
stock issued to NMG, LLC, $50,000, has been classified as officer
compensation in the accompanying consolidated statements of operations.
Consulting fees were paid to the wife of the President for the year ended
December 31, 1997 in the amount of $5,500. The amounts paid to the wife of
the President have been classified as officer compensation in the
accompanying consolidated statement of operations.
In 1997 and 1998, the President was advanced approximately $25,000 which is
being repaid in monthly installment of approximately $1,000.
NOTE K COMMITMENTS
- ------------------
Lease Commitments The Company has long-term operating lease agreements for
office space, building and certain equipment. Future minimum lease payments
required under long-term leases in effect at December 31, 1998 are as
follows:
Minimum Rent SubleaseRent Net
------------ ------------ ---
1999 $165,109 $81,888 $83,221
2000 153,541 81,888 71,653
2001 147,414 81,888 65,526
2002 115,769 54,592 61,177
2003 63,105 63,105
Thereafter 257,679 257,679
Rent expense for continuing operations was $191,795 and $176,765 in 1998
and 1997. Rent expense for discontinued operations was $7,449 in 1998 and
$77,365 in 1997.
Commencing September 1998 the Company subleased its executive space under
the terms of a four-year sublease. The Company has not been relieved of its
primary obligation due under the original lease with the lessor. Monthly
payments due under the lease are $6,394. The sublease calls for payments of
$6,824 per month for 48 months commencing September 1, 1998. Both the
primary lease and the sublease expire August 2002.
F-18
<PAGE>
FIRST ENTERTAINMENT HOLDING CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statement (Continued)
NOTE K COMMITMENTS, Continued
- -----------------------------
In January 1997 the Company completed its expansion of the comedy club
which included significant leasehold improvements. The lessor agreed to
finance the leasehold improvement totaling $150,000. The $150,000 note
payable bear interest at 12% and is due in 108 monthly installments of
$2,278 commencing February 1, 1999.
NOTE L LITIGATION
- -----------------
FEHC knows of no litigation pending, threatened, or contemplated, or
unsatisfied judgments against it, or any proceedings of which FEHC or any
of its subsidiaries is a party, except as specified below. FEHC knows of no
legal actions pending or threatened, or judgment entered against any of its
officers or directors or any of its subsidiaries in their capacities as
such, except as specified below.
In May 1997, David Spolter and Faige Spolter (Spolter) filed a lawsuit
against FEHC in the Superior Court of the State of California. The
plaintiffs alleged various federal and state securities violations and
sought recovery of their $75,000 investment plus damages. On July 1, 1998,
Spolter and FEHC entered into a settlement agreement whereby FEHC agreed to
pay Spolter $150,000. $25,000 was paid upon execution of the Settlement
Agreement and the remaining $125,000 shall be payable in monthly
installments of $5,000 a month until July 15, 1999 at which time all unpaid
principal and interest shall become due and payable. The note bears
interest of 10% per annum. FEHC agreed to pledge all of its stock of its
wholly owned subsidiary, Quality Communications, Inc. and to provide
security interest in all assets of Quality Communications, Inc. In the
event of default, the amount due shall be $180,000 plus interest at 10%
from June 1, 1998, less amounts previously paid. Any unpaid amounts shall
be due and payable upon sale of the radio station in Gillette, Wyoming.
In 1997, Sharon K. Doud filed a civil action against FEHC, AB Goldberg and
Quality Communications for breach of contract, fraud and misrepresentation
for failure to convert Class C Convertible Preferred Stock into 91,240
shares of common stock. In April 1998, a settlement agreement was reached
between FEHC and Sharon Doud whereby FEHC was required to pay $6,150 in
legal fees, issue a promissory note in the principal sum of $125,000
bearing interest at 9.5% per annum due March 31, 1999 and cancel the Class
C Convertible Preferred Shares.
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.
F-19
<PAGE>
FIRST ENTERTAINMENT HOLDING CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statement (Continued)
NOTE M FOURTH QUARTER ADJUSTMENTS
- ---------------------------------
During the fourth quarters of 1998 and 1997, the Company recorded the
following year-end adjustments, which it believes are material to the
results of that quarter:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Write-down of assets, including goodwill of discontinued
operations of ASOTV to net realizable value $490,000
Impairment write down of Balzac note receivable $ 81,000 $902,000
Impairment write down of Global Casino's investment $558,000
Compensation for issuance of common stock options
and warrants $692,025
</TABLE>
NOTE N SETTLEMENTS AND RESCISSIONS
- ----------------------------------
Balzac, Inc.
------------
In April 1996, the Company acquired certain assets from Balzac, Inc.,
("Balzac") a private company, which manufactures and distributes toys,
including a product line of toy balls. The assets and rights acquired
consisted of an exclusive license for Australia, inventory of Balzac toys
and various other rights.
During 1996, a dispute arose between the Company and Balzac and Balzac
asserted a violation of the Purchase Agreement. obligation under the
Licensing Agreement.
In April 1997, Balzac and the Company entered into an agreement whereby
Balzac would buy back the Australian Licensing Agreement for $800,000 and
would 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 was to be repaid over forty months at 8% per annum. The
$1,000,000 was to be repaid to the Company through the sale, by Balzac, of
1,000,000 of the Company's shares of common stock owned by Balzac.
The ability of Balzac to sell all 1,000,000 shares held by Balzac at a
price of $1.00 to repay its obligation was determined by management to be
unlikely. As of December 31, 1997 the note receivable from Balzac was
determined to be impaired and was written down to its net realizable value
of $81,344 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 year-end Balzac informed the Company 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.
NOTE O OTHER BUSINESS DEVELOPMENTS
- ----------------------------------
On September 15, 1998, the Company entered into a definitive agreement with
SportsNet, Inc. (SNI) The effective date of the Agreement will be ten days
after the following two events have occurred; (i) SNI has completed a
financing of not less than $1,000,000 and (ii) the Company has entered into
a contract with a credit card processor for participants in the Games
satisfactory to both the Company and SNI. The Agreement, if and when it
becomes effective, will continue in effect as long as the Company has a
valid internet gaming license issued by the Commonwealth of Dominica or
will terminate upon revocation of such license by the Commonwealth of
Dominica.
As of March 19, 1999, SNI had not completed a financing of $1,000,000 and
the Company terminated the definitive agreement.
F-20
<PAGE>
FIRST ENTERTAINMENT HOLDING CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statement (Continued)
NOTE P SUBSEQUENT EVENTS
- ------------------------
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 1,000,000 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.
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 and approval by the Board of
Directors of both companies. 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 accessible on a play for fun
basis from North America. The Company is unable to predict if or when the
agreement will be signed and the transaction will be consummated.
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. 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.
F-21
<PAGE>
<TABLE>
<CAPTION>
FIRST ENTERTAINMENT HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE Q SEGMENT INFORMATION
- --------------------------
Financial information by industry segments for the years ended December 31,
1998 and 1997 is summarized as follows:
Live Other
Radio Video Entertainment Segments (1) Eliminations Consolidated
-------------------------------------------------------------------------------------
FOR THE YEAR ENDED
DECEMBER 31, 1998
<S> <C> <C> <C> <C> <C> <C>
Revenue unaffiliated $ 804,004 $ 213 $ 1,353,667 $ 75,049 $ 2,232,933
Revenue affiliated 175,956 (175,956)
Operating income (loss),
continuing operations 173,883 169 231,442 (1,056,761) (651,427)
Total assets 1,240,090 960,980 444,095 1,193,262 (1,357,597) 1,519,850
Depreciation and amortization 78,619 6,597 18,944 104,160
Capital expenditures 3,705 24,049 27,754
Interest Expense 50,417 23,771 4,316 26,221 104,725
FOR THE YEAR ENDED
DECEMBER 31, 1997
Revenue unaffiliated $ 771,992 $ 50,239 $ 1,389,533 $ 112,327 $ 0 $ 2,324,091
Revenue affiliated 175,956 (175,956)
Operating income (loss),
continuing operations 104,000 (31,732) 193,471 (3,323,854) (3,058,115)
Identifiable assets 1,317,535 0 337,063 1,318,719 (1,344,585) 1,628,732
Depreciation and amortization 87,100 35,525 4,105 14,446 141,176
Capital expenditures 10,144 0 5,224 5,252 20,620
Interest Expense 54,577 33,206 4,625 3,394 95,333
(1) Other segments represent the operations of the parent company, which is
primarily responsible for incurring general and administrative expenses.
Identifiable assets are essentially investments in subsidiaries, which are
eliminated in consolidation.
F-22
</TABLE>
<PAGE>
FIRST ENTERTAINMENT HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
September 30,
1999
----
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 232,453
Accounts receivable trade, net
of allowance 127,827
Note receivable, officer 10,710
Prepaid salaries 46,635
Inventories 18,299
Other current assets 24,529
- --------------------------------------------------------------------------------
460,453
- --------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
Equipment and furniture 758,467
Building and leasehold improvement 682,257
Land 125,000
- --------------------------------------------------------------------------------
1,565,724
Less accumulated depreciation 901,589
- --------------------------------------------------------------------------------
664,135
- --------------------------------------------------------------------------------
OTHER ASSETS
License, net of accumulated
Amortization 657,994
Licensing fees 99,500
Other 24,984
- --------------------------------------------------------------------------------
782,478
- --------------------------------------------------------------------------------
TOTAL ASSETS $1,907,066
================================================================================
"See accompanying notes to consolidated financial statements."
Q-1
<PAGE>
FIRST ENTERTAINMENT HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET, continued
(Unaudited)
September 30,
1999
----
LIABILITIES AND STOCKHOLDERS' EQUITY (Deficit):
CURRENT LIABILITIES
Accounts payable $ 137,327
Accrued liabilities 172,746
Accrued interest 440,883
Notes Payable and current portion
of long-term debt 866,541
Notes payable, related parties 3,000
Net liabilities of discontinued operations 55,934
- --------------------------------------------------------------------------------
Total current liabilities 1,676,341
- --------------------------------------------------------------------------------
LONG TERM DEBT, NET OF CURRENT PORTION 320,909
- --------------------------------------------------------------------------------
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
Class B preferred stock 0 and 11,760
shares issued and outstanding 0
Class C preferred stock no shares issued 0
Common stock, $.008 par value; authorized
50,000,000 shares;
11,966,646 and 9,610,170 shares issued 95,855
Capital in excess of par value 20,079,506
Accumulated (deficit) (18,670,875)
Deferred compensation (1,594,680)
- --------------------------------------------------------------------------------
(90,184)
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS
EQUITY (DEFICIT) $ 1,907,066
================================================================================
"See accompanying notes to consolidated financial statements."
Q-2
<PAGE>
FIRST ENTERTAINMENT HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the nine months ended
September 30, September 30,
1999 1998
---- ----
REVENUE:
Live Entertainment $ 1,213,826 $ 941,682
Radio 619,508 587,305
Internet 9,072 --
Video -- 213
Other 106,529 37,161
- --------------------------------------------------------------------------------
1,948,935 1,566,361
- --------------------------------------------------------------------------------
COSTS AND EXPENSES:
Cost of sales - live
Entertainment 1,111,519 813,937
Cost of sales - radio 444,147 417,861
Cost of sales- internet 347,214 --
Cost of products sold - video 45
Impairment writedowns 15,000 --
Depreciation and amortization 92,441 74,897
Management and
administrative fees, Affilates 116,000 182,000
Selling, general and
Administrative 1,897,709 550,870
- --------------------------------------------------------------------------------
4,050,400 2,078,950
- --------------------------------------------------------------------------------
OPERATING LOSS FROM CONTINUING
OPERATIONS (2,101,465) (512,589)
OTHER INCOME (EXPENSE)
Interest expense (89,319) (55,079)
Other 3,923 1,059
- --------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS,
BEFORE MINORITY INTEREST (2,186,861) (566,720)
MINORITY INTEREST IN NET LOSS
OF AFFILIATES
LOSS FROM CONTINUING
OPERATIONS (2,186,861) (566,720)
DISCONTINUED OPERATIONS
Income (Loss) from
discontinued operations (20,756)
- --------------------------------------------------------------------------------
NET INCOME (LOSS) $ (2,186,861) $ (587,476)
================================================================================
PER SHARE DATA: Basic and Diluted
Net Income (loss) per share,
continuing operations,
Basic and Diluted (.21) $ (.08)
Net Income (loss) per share,
discontinued operations * *
Net Income (loss) per
common share,
Basic and Diluted (.21) $ (.08)
WEIGHTED-AVERAGE NUMBER OF
SHARES OUTSTANDING 10,654,619 7,566,412
================================================================================
* Less than $.01 per share
"See accompanying notes to consolidated financial statements"
Q-3
<PAGE>
<TABLE>
<CAPTION>
FIRST ENTERTAINMENT HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
For the nine Months ended September 30,1999 (unaudited)
Class A Class B Class C
Preferred Stock Preferred Stock Preferred Stock
--------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
BALANCES,
JANUARY 1, 1999 10,689 $ 10 11,760 $ 12 0 $ 0
Common stock issued for:
Conversion from Preferred
stock -- -- (11,760) (12) -- --
Consulting Services -- -- -- -- -- --
Cash, net offering costs -- -- -- -- -- --
Exercise of stock options -- -- -- -- -- --
Account Payable -- -- -- -- -- --
Common stock options and
Warrants issued -- -- -- -- -- --
Amortization of deferred
compensation -- -- -- -- -- --
Net loss -- -- -- -- -- --
-----------------------------------------------------------------------------------
BALANCES,
SEPTEMBER 30,1999 10,689 $ 10 0 $ 0 0 $ 0
Q-4
Table continues on next page.
<PAGE>
FIRST ENTERTAINMENT HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
For the nine Months ended September 30,1999 (unaudited) (Continued)
Common Stock Capital In
-------------------- Excess of Accumulated
Shares Amount Par Value (Deficit)
------ ------ --------- ---------
BALANCES,
JANUARY 1, 1999 9,610,170 $ 76,882 $ 15,924,087 $(16,484,014)
Common stock issued for:
Conversion from Preferred
stock 147,00 1,176 (1,164) --
Consulting Services 581,584 4,414 775,299 --
Cash, net offering costs 50,000 400 29,600 --
Exercise of stock options 1,312,500 10,500 636,375 --
Account Payable 310,392 2,483 91,856 --
Common stock options and
Warrants issued -- -- 2,623,453 --
Amortization of deferred
compensation -- -- -- --
Net loss -- -- -- (2,186,861)
--------------------------------------------------------
BALANCES,
SEPTEMBER 30,1999 11,966,646 $ 95,855 $ 20,079,506 ($18,670,875)
Q-5
Table continues on next page.
<PAGE>
FIRST ENTERTAINMENT HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
For the nine Months ended September 30,1999 (unaudited) (Continued)
Deferred Treasury
Compensation Stock Total
------------ ----- -----
BALANCES,
JANUARY 1, 1999 $ 0 $ 0 ($ 483,023)
Common stock issued for:
Conversion from Preferred
stock -- -- 0
Consulting Services -- -- 779,713
Cash, net offering costs -- -- 30,000
Exercise of stock options -- -- 646,875
Account Payable -- -- 148,695
Common stock options and
Warrants issued (2,623,453) -- 0
Amortization of deferred
compensation 1,028,773 -- 1,028,773
Net loss -- -- (2,186,861)
-------------------------------------------
BALANCES,
SEPTEMBER 30,1999 ($ 1,594,680) 0 ($ 90,184)
"See accompanying report of independent certified public accountants
and notes to consolidated financial statements."
Q-6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FIRST ENTERTAINMENT HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the nine months For the nine months
ended September 30, ended September 30,
1999 1998
---- ----
CASH FLOWS FROM OPERATING
ACTIVITIES
<S> <C> <C>
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
Loss on disposal of property 7,714
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)
Investments and 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 stock
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
============================================================================================
"See accompanying notes to consolidated financial statements."
Q-7
</TABLE>
<PAGE>
Supplemental Schedule of Noncash
Investing and Financing Activities 1999 1998
- ---------------------------------- ---- ----
Accounts payable converted to common stock $ 94,339 $ 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
================================================================================
Q-8
<PAGE>
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 aand
changes in cash flows forthe 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.
Basis of Presentation and Going Concern
During the period from inception (January 17, 1985) to September 30, 1999,the
Company has incurred cumulative net losses of approximately $18,671,000 and, as
of September 30, 1999, had an excess of current liabilities over current assets
of approximately $1,216,000 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 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. 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. The accompanying consolidated
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
Management's plans with regard to the Company's ability to continue as a going
concern include continued raising of equity financing in the U.S. and/or
international markets, restructuring of its debt obligations and undertaking
mergers or acquisitions to improve market share or operational synergies and
improving efficiency of operations. There are no assurances that any of these
events will occur or that the Company's plan will be successful. The Company has
received proceeds from the sale of common and preferred stock of approximately
$677,000 through September 30, 1999.
The Company does not have sufficient revenues to generate income from
operations; therefore, it is necessary for the Company to increase revenues
either by expansion or by acquisition or significantly reduce its operating
costs. The Company has been able to issue stock for management and accounting
services, thereby reducing the need for cash to pay for operating expenses. If
the Company would be unable to issue stock for services, because there would be
no liquidity for the stock, this would have a severe impact upon the Company and
its ability to operate. The value of services paid by issuance of stock was
approximately $1,656,000 for the nine months ended September 30, 1999. Net cash
used in operations was approximately $384,000 for the nine months ended
September 30, 1999, unless operations become more profitable, the Company may
not have sufficient cash for use in operations through December 31, 2000.
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.
Q-9
<PAGE>
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 90,100
shares of the Company's common stock and warrants to purchase 500,000 shares of
common stock at $1.00 per share.
Q-10
<PAGE>
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:
Q-11
<PAGE>
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
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 saale of comedy CD's and
directdownloads, 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 hhave not been able to come toterms 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.
Q-12
<PAGE>
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.
Q-13
<PAGE>
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 Entertainment
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.
Q-14
<PAGE>
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.
Q-15
<PAGE>
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.
Q-16
<PAGE>
----------------------------
Dealer Prospectus Delivery Obligation
Until (insert date), all dealers
that effect transactions in these
securities, whether or not participating
in this offering, may be required to
deliver a prospectus. This is in
addition to the dealers' obligation to
deliver a prospectus when acting as
underwriters and with respect to their
unsold allotments or subscriptions.
FIRST ENTERTAINMENT HOLDING CORP.
2,349,342 Shares of Common Stock
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY...................... 2
RISK FACTORS............................ 4
PRICE RANGE OF COMMON STOCK............. 9
DIVIDEND POLICY......................... 10
THE COMPANY............................. 10
MANAGEMENT'S DISCUSSION AND __________________
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.............. 18 SELLING STOCKHOLDER
MANAGEMENT.............................. 24 AND COMPANY RESCISSION OFFER
EXECUTIVE COMPENSATION.................. 26 PROSPECTUS
BENEFICIAL OWNERS OF SECURITIES......... 28 ________________________
TRANSACTIONS BETWEEN THE
COMPANY AND RELATED PARTIES........... 31
DESCRIPTION OF SECURITIES............... 32
INACTIVE TRADING OF THE
COMMON STOCK.......................... 33
SELLING SECURITY HOLDERS AND PLAN OF
DISTRIBUTION.......................... 33
RESCISSION OFFER ....................... 35
SECURITIES AND EXCHANGE
COMMISSION POSITION ON
CERTAIN INDEMNIFICATION............... 35 February __, 2000
LEGAL MATTERS........................... 36
EXPERTS................................. 36
DISCLOSURE REGARDING FORWARD-
LOOKING STATEMENTS and
CAUTIONARY STATEMENTS................ 36
FINANCIAL INFORMATION................... F-1
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification Of Directors And Officers.
Section 78.7502(3) of the Nevada General Corporation Law (the "Nevada
Code") provides for mandatory indemnification by a corporation of expenses,
including attorneys' fees, incurred by a director or officer in connection with
any proceeding brought by reason of his position as a director or officer, so
long as he was successful, on the merits or otherwise, in defense of a
proceeding.
In addition, Section 78.7502(1) of the Nevada Code permits a corporation to
indemnify a person who is party to a proceeding or threatened proceeding, other
than an action by or in the right of the corporation (a "Derivative Action"),
because of his status as a director, officer, employee or agent of a corporation
if "he acted in good faith and in a manner which he reasonably believed to be in
or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful."
In a Derivative Action or threatened Derivative Action, Section 78.7502(2)
of the Nevada Code permits indemnification if the person acted in good faith and
in a manner which he reasonably believed to be in or not opposed to the best
interests of the corporation. However, no indemnification is allowed if the
person is ultimately adjudged to be liable to the corporation unless a court of
competent jurisdiction rules that, in view of the facts and circumstances of the
case, the person is fairly and reasonably entitled to indemnification.
The Company's articles of incorporation provide that directors and officers
shall be indemnified to the full extent permitted by the Nevada Code. The
Company's bylaws provide that no director or officer shall be liable to the
Company for his acts or omissions resulting in a loss to the Company, except in
cases where the act or omission resulted from his willful misconduct, willful
neglect or gross negligence. The bylaws also provide that the Company may
purchase and maintain liability insurance on behalf of any director, officer,
employee or agent regardless of whether he may be indemnified pursuant to other
provisions of the bylaws.
Item 25. Other Expenses Of Issuance And Distribution.
The following is an itemization of all expenses (subject to future
contingencies) incurred or to be incurred by the Registrant in connection with
the registration of the securities being offered. The Selling Security Holders
will not pay any of the following expenses.
Registration and filing fee.................................$ 567
Printing(1).................................................$ 5,000
Accounting fees and expenses(1) ............................$ 2,500
Legal fees and expenses(1) .................................$ 15,000
Miscellaneous(1)............................................$ 933
Total(1) $ 24,000
(1 Estimated
II-2
<PAGE>
Item 26. Recent Sales Of Unregistered Securities.
The Company completed the offering of 47,067 shares of its Class B
Convertible Preferred Stock in September 1997 to a limited number of persons
pursuant to exemption from registration under Section 4(2) of the Securities Act
of 1933, as amended (the "Securities Act") and/or Rule 506 of Regulation D under
the Securities Act. The Company received aggregate proceeds of $262,750 in this
offering.
The Company issued options to purchase 150,000 shares of common stock in
December 1996 and January 1997 to two persons pursuant to an exemption from
registration in accordance with Section 4(2) of the Securities Act. The Company
received proceeds of $75,000 in this offering.
The Company issued 16,000 shares of Class B Convertible Preferred Stock to
one person in June 1998 pursuant to an exemption from registration under Section
4(2) of the Securities Act. The Company received proceeds of $45,000 in this
transaction.
The Company completed an offering of 771,667 shares of common stock to a
limited number of offerees in September 1998 pursuant to an exemption from
registration pursuant to Section 4(2) of the Securities Act and/or Rule 506 of
Regulation D under the Securities Act. The Company received proceeds of $168,300
in this offering.
The Company completed an offering of 280,000 shares of common stock to a
limited number of offerees in August 1999 pursuant to an exemption from
registration in accordance with Section 4(2) of the Securities Act and/or Rule
506 of Regulation D under the Securities Act. The Company received total
proceeds of $220,000 in this offering.
At various times during 1999, the Company issued a total of 1,082,500
shares of common stock to a limited number of persons upon the exercise of stock
options previously granted to those persons. The issuance of these shares and
the previous grant of the options were made pursuant to exemptions from
registration under Section 4(2) of the Securities Act. The Company received
total proceeds of $448,215 in these transactions from the exercise of the
options.
On February 10, 2000, the Company accepted a subscription from one
accredited investor to purchase 153,846 shares of common stock and warrants to
purchase an additional 153,846 shares of common stock. The warrants are
exercisable for $.65 per share until February 7, 2002. The shares and warrants
were sold pursuant to an exemption from registration in accordance with Section
4(2) of the Securities Act and/or Rule 506 of Regulation D under the Securities
Act. The Company received total proceeds of $100,000 from this sale.
Item 27. Exhibits.
The following is a complete list of Exhibits filed as part of this
Registration Statement, which Exhibits are incorporated herein.
Number Description
- ------ -----------
3.1 Articles Of Incorporation (A)
3.3 Bylaws (A)
5.1 Opinion of Patton Boggs LLP concerning the legality of
the securities being registered
10.1 Form of Agreement between the Company and the stockholders
of All That Media, Inc.
II-3
<PAGE>
Number Description
- ------ -----------
10.2 Agreement dated July 7, 1999 between the Company and Coleman
and Company Securities, Inc.
10.3 Form of Agreement between the Company and Yahoo, Inc.
10.4 Asset Purchase Agreement Inc. dated September 21, 1999
between W3, Inc. (a subsidiary of the Company) and Brian M. Encke.
23.1 Consent of Patton Boggs LLP (included in Opinion in Exhibit 5.1)
23.2 Consent of Gordon, Hughes & Banks, LLP
24.1 Power of Attorney (included in Part II of Registration Statement)
- --------------------
(A) A complete copy of the Company's Articles of Incorporation as currently in
effect and all amendments thereto was filed as Exhibit 89.3.1 to the
Registrant' Form 10-K for the fiscal year ended December 31, 1989, and a
complete copy of the Company's Bylaws as currently in effect was filed as
Exhibit 86-3(c) to the Company's Registration Statement on Form S-18
(Registration No. 33-9163-D) and are incorporated herein by reference
thereto.
Item 28. Undertakings.
1. The Company hereby undertakes:
(a) to file, during any period in which offers or sales are being
made, a post-effective amendment to the Registration Statement:
(1) to include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(2) to reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in
the information in Registration Statement (or the most
recent post-effective amendment thereof); and
(3) to include any additional or changed material information on
the plan of distribution.
(b) That for determining liability under the Securities Act of 1933,
each post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of the securities at that time shall be
deemed to be the initial bona fide offering thereof;
(c) To file a post-effective amendment to remove from registration
any of the securities being registered which remain unsold at the
end of the offering.
II-4
<PAGE>
3. Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the option of the Securities And Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or a controlling person of the Company
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or a controlling person in connection with the securities
being registered, the Company will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of Denver,
State of Colorado, on February 11, 2000.
FIRST ENTERTAINMENT HOLDING CORP.
Dated: February 11 , 2000 By: /s/ Howard Stern
---------------------------------
Howard Stern, Chief Executive Officer
(Principal Executive Officer)
In accordance with the requirements of the Securities Act of 1933, the
Registration Statement was signed by the following persons in the capacities and
on the dates indicated.
Dated: --------------------------------------------
A.B. Goldberg, Director
Dated: February 11, 2000 /s/ Michael Marsowicz
--------------------------------------------
Michael Marsowicz, Director
Dated: February 11, 2000 /s/ Douglas R. Olson
--------------------------------------------
Douglas R. Olson, President and Director
Dated:
--------------------------------------------
Philip C. Puccio, Director
Dated: February 11, 2000 /s/ Howard Stern*
--------------------------------------------
William Rubin, Director
Dated: February 11, 2000 /s/ Howard Stern*
--------------------------------------------
Howard Stern, Chief Executive Officer,
(Principal Executive Officer), and Director
Dated: February 11, 2000 /s/ Daniel Stansky
--------------------------------------------
Daniel Stansky, Chief Financial Officer and
(Principal Financial Officer)
* As Attorney In Fact
<PAGE>
EXHIBIT INDEX
The following is a complete list of Exhibits filed as part of this
Registration Statement, which Exhibits are incorporated herein.
Number Description
- ------ -----------
3.1 Articles Of Incorporation (A)
3.3 Bylaws (A)
5.1 Updated opinion of Patton Boggs LLP concerning the legality
of the securities being registered
10.1 Form of Agreement between the Company and the stockholders of
All That Media, Inc. (B)
10.2 Agreement dated July 7, 1999 between the Company and Coleman
and Company Securities, Inc. (B)
10.3 Form of Agreement between the Company and Yahoo, Inc.
10.4 Asset Purchase Agreement Inc. dated September 21, 1999 between
W3, Inc. (a subsidiary of the Company) and Brian M. Encke. (B)
23.1 Consent of Patton Boggs LLP (included in Opinion in Exhibit 5.1)
23.2 Consent of Gordon, Hughes & Banks, LLP
24.1 Power of Attorney (included in Part II of Registration
Statement) (B)
- --------------------
(A) A complete copy of the Company's Articles of Incorporation as currently in
effect and all amendments thereto was filed as Exhibit 89.3.1 to the Registrant'
Form 10-K for the fiscal year ended December 31, 1989, and a complete copy of
the Company's Bylaws as currently in effect was filed as Exhibit 86-3(c) to the
Company's Registration Statement on Form S-18 (Registration No. 33-9163-D) and
are incorporated herein by reference thereto.
(B) Previously filed.
EXHIBIT 10.3(b)
Material Terms Of Advertising Insertion Orders
During 1999, First Entertainment Holding Corp. (the "Company") entered into
separate agreements entitled "Advertising Insertion Order" with Yahoo, Inc.
("Yahoo"). The Form of these Insertion Orders has is filed as Exhibit 10.3(a).
Pursuant to each Advertising Insertion Order, Yahoo agreed to place
advertisements promoting the Company's web site into other web sites controlled
by Yahoo. Yahoo also agreed to include similar advertisements in e-mail messages
sent by Yahoo to its subscriber database.
Following is a description of the material terms of the Advertising
Insertion Orders, which covered two separate periods during 1999:
Period Terms
May 1999 * Total price paid by the Company: $36,300
* Web site impressions: 3,000,000
November 15 - December 31, 1999 * Total price paid by the Company: $100,000
* Web site impressions: 7,500,000
* E-mail advertisements: 2,500,000
EXHIBIT 5.1
Patton Boggs LLP
1660 Lincoln Street
Suite 1900
Denver, Colorado 80264
(303) 830-1776
February 11, 2000
First Entertainment Holding Corp.
5495 Marion Street
Denver, CO 80216
Gentlemen and Ladies:
We have acted as counsel for First Entertainment Holding Corp., a Nevada
corporation (the "Company"), in connection with preparation of the Company's
Registration Statement on Form SB-2 (the "Registration Statement") under the
Securities Act of 1933, as amended, concerning registration of 2,349,342 shares
of the Company's $.008 par value common stock (the "Common Stock"), including
the transfer of 1,907,692 shares of Common Stock by certain stockholders of the
Company (the "Selling Stockholders"). These shares consist of (1) 703,846 shares
(the "Placement Shares") of Common Stock issued by the Company to Selling
Stockholders in private placement transactions pursuant to exemptions from
federal and state registration requirements, (2) 1,203,486 shares (the "Option
Shares") issuable upon the exercise of options and warrants to purchase Common
Stock, and (3) 441,650 shares (the "Rescission Shares") of Common Stock that may
be issued in a rescission offer (the "Rescission Offer") to five persons who
previously received shares in transactions that were not registered.
We have examined the Articles Of Incorporation and the Bylaws of the
Company and the record of the Company's corporate proceedings concerning the
registration described above. In addition, we have examined such other
certificates, agreements, documents and papers, and we have made such other
inquiries and investigations of law as we have deemed appropriate and necessary
in order to express the opinion set forth in this letter. In our examinations,
we have assumed the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, photostatic, or conformed copies and the
authenticity of the originals of all such latter documents. In addition, as to
certain matters we have relied upon certificates and advice from various state
authorities and public officials, and we have assumed the accuracy of the
material and the factual matters contained herein.
Subject to the foregoing and on the basis of the aforementioned
examinations and investigations, it is our opinion that the Placement Shares and
the Rescission Shares, as described in the Registration Statement, have been
legally issued and are fully paid and non-assessable and that the Option Shares
to be issued upon the exercise of the options and warrants and payment of the
exercise price will have been legally issued, and will constitute fully paid and
non-assessable shares of the Company's Common Stock.
We hereby consent (a) to be named in the Registration Statement and in the
prospectus that constitutes a part of the Registration Statement as acting as
counsel in connection with the offering, including with respect to the issuance
of securities offered in the offering; and (b) to the filing of this opinion as
an exhibit to the Registration Statement.
This opinion is to be used solely for the purpose of the registration of
the Common Stock and may not be used for any other purpose.
Very truly yours,
/s/ PATTON BOGGS LLP
PATTON BOGGS LLP
PB: ALT/FBB
EXHIBIT 23.2
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-91861 of First Entertainment Holding Corp. of our report dated March 17,
1999, except for Note C as to which the date is June 11, 1999, relating to the
financial statements of First Entertainment Holding Corp. appearing in the
Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ GORDON, HUGHES & BANKS, LLP
GORDON, HUGHES & BANKS, LLP
Denver, Colorado
February 11, 2000
