SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly
Period Ended September 30, 2000 Commission File Number 0-15435
FIRST ENTERTAINMENT HOLDING CORP.
(Exact name of Small Business Issuer as specified in its charter)
NEVADA 84-0974303
(State or other jurisdiction of
incorporation or organization) (IRS Employer Identification No.)
5495 Marion Street, Denver, CO 80216
(Address of principal executive offices) (Zip code)
(Issuer's telephone number) (303) 382-1500
(Former name, former address and former fiscal year, if changed since
last report.)
Indicate by check whether the 1) Yes X No ------
Company (1) has filed all
reports required to be filed
by Section 13 or 15(d)
of the Securities Exchange
Act of 1934 during the 2) Yes X No ------
preceding 12 months (or for
such shorter period that
the Company was required to
file such reports), and
(2) has been subject to such
filing requirements for
the past 90 days.
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.
Number of Shares
Outstanding at
Class November 6, 1999
----------------------------------------------------------------
Common stock, $.008 par value 44,745,932 shares
Class A Preferred Stock, $.001 par value 10,689 shares
FIRST ENTERTAINMENT HOLDING CORP.
FORM 10-QSB QUARTERLY REPORT
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Consolidated Balance Sheet as of September 30, 2000
(Unaudited) and December 31, 1999 3
Consolidated Statements of Operations (Unaudited)
for three months and nine months ended
September 30, 2000 and 1999 5
Consolidated Statements of Cash Flows (Unaudited)
for the nine months ended September 30, 2000 and 1999 7
Notes to Consolidated Financial Statements (Unaudited) 9
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
PART II - OTHER INFORMATION
Items 1 through 6 14
SIGNATURE 15
FIRST ENTERTAINMENT HOLDING CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
September 30, December 31,
2000 1999
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 51,510 $ 85,783
Accounts receivable trade, net of allowance
for doubtful accounts of $8,740 and $8,740 168,047 135,664
Related party receivables 161,146 46,609
Inventories 20,117 20,247
Prepaid expenses and other current assets 31,773 23,577
----------------------------------------------------------------------------
432,593 311,880
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PROPERTY AND EQUIPMENT
Equipment and furniture 716,721 701,607
Building and leasehold improvement 779,127 590,924
Land 125,000 125,000
-------------------------------------------------------------------------
1,620,848 1,417,531
----------------------------------------------------------------------------
Less accumulated depreciation 844,233 749,799
----------------------------------------------------------------------------
776,615 667,732
----------------------------------------------------------------------------
OTHER ASSETS
License, net of accumulated
amortization of $666,575 and $545,697 863,807 647,814
Web site and content development
net of accumulated amortization of costs, of
$5,000 and $0 40,000 -
Other 25,520 26,231
929,328 674,045
----------------------------------------------------------------------------
TOTAL ASSETS $2,138,536 $1,653,657
============================================================================
</TABLE>
"See accompanying notes to consolidated financial statements."
FIRST ENTERTAINMENT HOLDING CORP.
CONSOLIDATED BALANCE SHEETS, continued
(Unaudited)
<TABLE>
September 30, December 31,
2000 1999
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (Deficit):
CURRENT LIABILITIES
Accounts payable $770,171 $296,163
Accrued liabilities 314,489 206,479
Accrued interest 469,733 448,826
Deferred revenues - 13,000
Notes payable and current portion of
long term debt 844,055 917,373
Notes payable, related parties 34,367 7,080
-------------------------------------------------------------------------------
Total current liabilities 1,901,815 1,888,921
-------------------------------------------------------------------------------
LONG TERM DEBT, NET OF CURRENT PORTION 547,822 242,076
-------------------------------------------------------------------------------
COMMITMENT AND CONTINGENCIES
CLASS A PREFERRED STOCK, 1,500,000 shares
Authorized, 10,689 shares issued and outstanding,
liquidation value $15,000 10 10
STOCKHOLDERS' EQUITY (Deficit):
Preferred stock, $.001 par value; authorized
5,000,000 shares;
Class B preferred stock no
shares issued and outstanding - -
Class C preferred stock, no shares issued - -
Common stock, $.008 par value; authorized
50,000,000 shares; 34,458,244 and 12,480,835
shares issued and outstanding 275,666 99,847
Capital in excess of par value 23,497,300 18,751,618
Accumulated deficit (24,188,018) (19,009,413)
Deferred compensation 319,402
Stock held in escrow (364,058) -
--------------------------------------------------------------------------------
(779,110) (477,340)
--------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT): $2,138,536 $1,653,657
==============================================================================
</TABLE>
"See accompanying notes to consolidated financial statements."
FIRST ENTERTAINMENT HOLDING CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
For the three months ended For the nine months ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
REVENUE:
Live Entertainment $489,253 $405,696 $ 1,355,264 $1,213,826
Radio 224,845 234,344 637,702 619,508
Internet 28,370 9,072 138,438 9,072
--------------------------------------------------------------------------------
742,468 649,112 2,131,403 1,842,406
--------------------------------------------------------------------------------
COSTS AND EXPENSES:
Cost of sales -
live entertainment 416,008 368,734 1,193,575 1,111,519
Cost of sales - radio 144,110 165,192 408,979 444,147
Cost of sales -
Internet 1,132,875 347,214 3,289,972 347,214
Depreciation and
Amortization 63,746 27,819 157,440 92,441
Management and
administrative
fees, affiliates - 60,000 117,500 116,000
Selling, general and
Administrative 469,291 542,661 2,433,900 1,507,697
--------------------------------------------------------------------------------
2,226,030 1,511,620 7,601,366 3,621,018
--------------------------------------------------------------------------------
OPERATING LOSS FROM
CONTINUING OPERATIONS (1,483,562) (862,508) (5,469,963) (1,776,612)
OTHER INCOME (EXPENSE)
Interest expense (44,177) (28,899) (100,125) (89,319)
Balzac settlement - - 358,000 -
Other 26,250 2,149 33,483 3,923
--------------------------------------------------------------------------------
LOSS BEFORE MINORITY
INTEREST (1,501,489) (835,758) (5,178,605) (1,862,008)
MINORITY INTEREST IN NET LOSS
OF AFFILIATES - - - -
--------------------------------------------------------------------------------
NET INCOME (Loss) $(1,501,489) $(835,758) $(5,178,605)$(1,862,008)
================================================================================
PER SHARE DATA: Basic
and Diluted
Net Income (loss) per share,
continuing operations,
Basic and Diluted $ (06) $ (.07) $ (.29) $ (.17)
Net income(loss) per share,
discontinued operations,
Basic and Diluted * * * *
Net income (loss) per
common share, Basic
and Diluted $ (.06) $ (.07) $ (.29) $ (.17)
WEIGHTED-AVERAGE NUMBER
OF SHARES OUTSTANDING 25,585,803 11,168,870 17,926,798 10,654,6192
================================================================================
</TABLE>
* Less than $.01 per share
"See accompanying notes to consolidated financial statements "
FIRST ENTERTAINMENT HOLDING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
For the nine months For the nine months
ended September 30, ended September 30,
2000 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (5,178,605) $(1,862,008)
Adjustments to reconcile net
income (loss) to net cash
from operations
Impairment write down - 15,000
Depreciation and amortization 157,440 92,441
Common Stock issued for services 3,333,384 627,225
Amortization of deferred compensation 319,402 627,225
Common Stock options issued 873,060 703,920
Loss on disposal of property and equipment
Changes in operating assets and liabilities
(Increase) decrease in
Receivables (146,920) (21,959)
Inventories 130 (3,567)
Other (1,487) (16,879)
Increase (decrease) in
Accounts payable 411,009 42,746
Accrued liabilities 128,917 41,064
Deferred revenues (13,000) -
Net cash provided by (used in)
discontinued operations - (1,371)
-----------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (116,670) (383,388)
-----------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures - net (248,317) (49,142)
Other - 22,381
-----------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (248,317) (26,761)
-----------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on debt (45,286) (143,723)
Proceeds from debt 25,000 (143,723)
Proceeds from issuance of common
and preferred stock 351,000 676,875
-----------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 330,714 533,152
-----------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH (34,273) 123,003
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 85,783 18,049
-----------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 51,510 $141,052
===================================================================================
</TABLE>
"See accompanying notes to consolidated financial statements."
SUPPLEMENTED SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
<TABLE>
For the nine For the nine
months ended months ended
September 30, September 30,
2000 1999
<S> <C> <C>
Common stock issued for service 3,333,384 627,225
=========================================================================
Common stock options issued 873,060 1,028,773
=========================================================================
Common stock issued for escrow 364,508 627,225
=========================================================================
Amortization of deferred compensation 319,402 627,225
=========================================================================
Notes and accounts payable issued for
licensing fees 280,000 90,000
=========================================================================
Note payable issued for leasehold
Improvements - 150,000
=========================================================================
Accounts payable converted to common stock - 94,339
=========================================================================
Common stock issued for life
insurance premiums - 30,000
=========================================================================
</TABLE>
FIRST ENTERTAINMENT HOLDING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - BASIS OF PRESENTATION
General
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and in accordance with instructions to Form 10-QSB
and Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. The accompanying financial
information is unaudited but includes all adjustments (consisting of
normal recurring accruals), which, in the opinion of management, are
necessary to present fairly, the information set forth. The consolidated
financial statements should be read in conjunction with the notes to the
consolidated financial statements that are included in the Annual Report
on Form 10-KSB of the Company for the fiscal year ended December 31,
1999. The results for the interim period are not necessarily indicative
of results to be expected for the fiscal year of the Company ending
December 31, 2000.
In March 2000, the Board of Directors approved the name change of the
Company to F2 Network, Inc. subject to shareholder approval.
Going Concern
During the period from inception (January 17, 1985) to September 30,
2000, the Company has incurred cumulative net losses of approximately
$24,188,000 and, as of September 30, 2000, had an excess of current
liabilities over current assets of approximately $1,937,000 and was in
default on certain notes payable. These conditions raise substantial
doubt about the Company's ability to continue as a going concern.
The Company does not have sufficient revenues to generate income from
operations; therefore, it is necessary for the Company to increase
revenues either by expansion or by acquisition or significantly reduce
its operating costs. The Company has been able to issue stock for
management and accounting services, thereby reducing the need for cash
to pay for operating expenses. If the Company would be unable to issue
stock for services, because of limited liquidity for the stock or
otherwise, 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 $3,333,000 and $873,000 by the issuance of options for the
nine months ended September 30, 2000. Net cash used in operations was
approximately $117,000 for the nine months ended September 30, 2000 and,
unless operations become profitable, the Company may not have sufficient
cash for use in operations through December 31, 2000.
Management's plans with regard to the Company's ability to continue as a
going concern include continued raising of equity financing in the U.S.
and/or international markets, restructuring of its debt obligations and
undertaking mergers or acquisitions to improve market share or
operational synergies and improving efficiency of operations. There are
no assurances that any of these events will occur or that the Company's
plan will be successful.
The Company is dependent upon obtaining additional financing, and/or
extending its existing debt obligations, and/or obtaining additional
equity capital and ultimately achieving profitable operations. The
Company has no arrangements in place for such equity or debt financing
and no assurance can be given that such financing will be available at
all or on terms acceptable to the Company. Any additional equity or debt
financing may involve substantial dilution to the interests of the
Company's shareholders as well as warrant and option holders. However,
the Company has received proceeds from the sale of restricted common
stock of $351,000 for the nine months ended September 30, 2000.
If the Company is unable to obtain sufficient funds to satisfy its cash
requirements, it may be forced to curtail operations, dispose of assets
or seek extended payment terms from its vendors. Management is currently
considering the sale of certain of the Company's assets to meet its
current cash flow needs. The Company has signed a letter of intent to
sell its radio operations. There are no arrangements in place for any
other asset sales and no assurance can be given that the letter of
intent will generate a finalized agreement or that any sales will be
available at all or on terms acceptable to the Company.
The Company has been able to issue stock for management and accounting
services, thereby reducing the need for cash to pay for operating
expenses. The Company currently has less than 10,000- shares of
authorized but unissued shares available for issuance other than shares
reserved for issuance upon the exercise of outstanding options and
warrants. The Company is seeking stockholder approval to increase its
authorized capital to 250,000,000 shares at a stockholders meeting
scheduled for December 2000. If the Company would be unable to issue
stock for services, because there are no shares available or 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 and options was approximately $4,206,000 for the nine
months ended September 30, 2000. Net cash used in operations was
approximately $117,000 for the nine months ended September 30, 2000, and
unless operations become profitable, the Company may not have sufficient
cash for use in operations through December 31, 2000.
The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
NOTE B - BUSINESS DEVELOPMENTS
Choice Sports Network, Inc.
The Company signed a letter of intent to merge with Choice Sports
Network, Inc. (CHSP) with the intent to create a major sports and
entertainment internet company. Upon consummation of the merger, the
agreement called for each shareholder of First Entertainment Holdings to
receive a number of shares of common stock in CHSP having a weighted
average trading price for the 20 days preceding the closing date equal
to $1.00 U.S. for each share of FTET held. After additional due
diligence, and due to lack of funding required to be provided to the
Company by CHSP, Company allowed the letter of intent to expire.
W3, Inc.
The Company formed W3, Inc. as a wholly-owned subsidiary, to acquire and
operate a radio station in Lead, South Dakota. In February 2000, the
Company agreed to issue 252,818 shares of restricted common stock to be
held in escrow as security for a $280,000 note payable from W3, Inc. The
note payable was part of the $300,000 consideration in exchange for the
licenses, rights and certain other assets. The station is not yet
operating. The note, which has no stated interest rate, is payable in
monthly installments of $1,556 beginning in March 2000. W3, Inc. was
late with one of its payments on the note and the noteholder threatened
a lawsuit to accelerate the repayment of the note so the entire amount
of the note would be due immediately. W3, Inc. is attempting to work
with the noteholder to resolve matters and has made subsequent payments
on time.
American Communications Enterprises, Inc
In April 2000, we entered into a letter of intent to sell all the assets
related to our radio business to American Communications Enterprises,
Inc. The letter of intent expired with no definitive agreement being
signed.
The Company had no active negotiations with respect to the sale of the
radio station as of September 30, 2000.
NOTE C - STOCKHOLDERS' EQUITY
During the nine months ended September 30, 2000, the Company, pursuant
to exemptions from registration, sold 609,232 shares of common stock,
and options to purchase 325,998 shares of common stock at exercise
prices from $0.50 to $0.65, resulting in net proceeds of $351,000.
Also during the nine months ended September 30, 2000, the Company issued
21,115,259 shares of common stock for consulting services and employee
compensation valued at approximately $3,333,000.
In March 1999, the Board of Directors authorized the issuance of options
to the president, each member of the Board of Directors and a consultant
to purchase up to a total of 3,050,000 shares of common stock at prices
ranging from $0.21 per share to $0.53 per share. The exercise price was
equal to the closing bid price for the Company's common stock on the
date of the grant. The exercise of options for 1,200,000 shares was
contingent on the closing bid price of the Company's common stock of at
least $1.00 on the last trading day for 1999 and the exercise of options
for 950,000 shares was contingent upon the execution of two separate
definitive agreements by December 31, 1999. In September 1999, the Board
of Directors determined to cancel 2,075,000 options issued in March
1999. Mr. Goldberg, a director at that time, 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
become exercisable on each of 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
become exercisable on each of January 1, 2000, 2001 and 2002. These
options have been rescinded.
During the nine months ended September 30, 2000 the Company issued
options to purchase 425,000 shares of common stock to its employees. The
options, which vest through December 2001, may be exercised at prices
from $0.31 to $0.63 through 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 nine months ended September 30, 2000, the Company recognized
compensation of $873,000 for 1,270,000 options granted during that
period that were accounted for in accordance with SFAS 123 and APB 25
and $319,000 of compensation related to options issued in prior periods.
The options may be exercised from $0.50 to $2.00 through 2005.
The Board's decision to cancel options and issue other options as
described above was based on a determination, for the reasons described
above, that the Company did not receive sufficient value to justify the
original grant of the options that were cancelled or that the options no
longer provided incentive to the option holders due to the high exercise
price of the options relative to the trading price of the common stock
at that time. The new options were granted subject to vesting terms
that the Board believed provided more incentive for the performance of
the recipients of those options and more closely aligned the interests
of the recipients with our shareholders.
All the options described which were held by the directors and officers
on September 15, 2000 have been relinquished by those persons so that
each may participate in the Company's 2000 Management Compensation Plan
described below.
On September 15, 2000, the Board of Directors determined that the
outstanding options held by officers and directors no longer provided
incentive due to the high exercise price of the options relative to the
trading price of the common stock at that time. The Board then enacted
the 2000 Management Compensation Plan to compensate directors, officers
and consultants and to provide incentives for those persons in acting on
behalf of the Company. In order to participate in the Management
Compensation Plan, officers and consultants were required to relinquish
any options previously granted to them. Options to purchase common
stock have been issued pursuant to the Management Compensation Plan, and
5,000,000 shares of common stock and additional options to purchase
common stock were authorized to be issued.
All recipients of shares and options under the Management Compensation
Plan were officers and employees at the time of grant except for a
consultant providing accounting and administrative services. The
options are exercisable at a price of $.08 per share until September 15,
2005. The closing sales price for the common stock on September 15,
2000 was $.08. The options are exercisable 25% immediately and 25% on
each of the first three anniversaries of the date of grant provided that
the recipient continues to be a director, officer, employee or
consultant at that respective time. In addition, the options provide
that when the last sales price for the common stock is at least $.16 per
share for three consecutive trading days, the option holder may elect to
exchange each option exercisable at $.08 per share for two options
exercisable at $.16 per share. Similarly, the option holder may
exchange each of his options for two options to purchase one share of
common stock each at $.32 per share at such time as the last sales price
for the common stock is at least $.32 per share for three consecutive
trading days. If these price levels are attained and if all the
recipients of the initial options to purchase 5,000,000 shares of common
stock elect to exchange them for options exercisable at each of the
higher prices, options to purchase a total of 20,000,000 shares would be
outstanding at an exercise price of $.32 per share.
Participants will not be issued the shares authorized by the Management
Compensation Plan, and the Participants may not exercise the options
granted pursuant to the Management Compensation Plan, unless either our
authorized capital is increased to at least 75,000,000 shares of common
stock or the Board otherwise determines that the Company's authorized
capital, assuming issuance of the shares and exercise of options granted
pursuant to the Management Compensation Plan, is sufficient to satisfy
the Company's needs. Stockholder approval of an increase in authorized
capital to 250,000,000 shares is being sought at a special meeting
scheduled for December 2000.
NOTE D - SOFTWARE, WEB SITE AND RICH MEDIA CONTENT DEVELOPMENT COSTS
The Company utilizes American Institute of Certified Public Accountants
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use", to account for
software and similar costs. In accordance with SOP 98-1, the Company
expenses costs incurred in the preliminary project stage and,
thereafter, capitalizes costs incurred in developing or obtaining
internal use software. Certain related costs, such as maintenance and
training, are expensed as incurred. The Company capitalizes certain
direct costs of developing the portion of its website and rich media
content. Capitalized software costs will be amortized over a period of
not more than 3 years after the software is placed into operation.
Capitalized software costs are subject to impairment evaluation in
accordance with SFAS 121.
NOTE E - RELATED PARTY TRANSACTIONS
The Company outsourced certain administrative, management and accounting
functions to a company that was, until July 2000, wholly-owned by a
current director and president of the Company. Monthly fees for such
services were $21,000 for the period January 1, 1998 through August 31,
1999; thereafter the fees were reduced to $14,000. During the nine
months ended September 30, 2000, the fees were $23,500 per month. Total
fees paid by cash and by the issuance of common stock for the nine
months ended September 30, 2000 were approximately $117,500. Effective
July 1, 2000, the officer sold the Company to his sister.
Another entity, 43% of which is owned by the same director and
president, performs other administrative functions for the Company on an
as-needed, hourly basis. The Company also leases computer equipment from
this related entity and has amounts due to this entity of $5,580 as of
September 30, 2000. Total fees paid by cash and by the issuance of
common stock for the nine months ended September 30, 2000 were
approximately $2,000.
In March 2000, the Company's president loaned the Company $25,000 at 9%.
The note payable is not collateralized and due on demand.
In 1998, Mr. Goldberg was advanced approximately $25,000 that was being
repaid in monthly repayments of approximately $1,000 with a balance of
$10,710 as of December 31, 1999. Also as of December 31, 1999, Mr.
Goldberg is in possession of certain of the Company's equipment with an
approximate net book value of $9,000. Additionally, the Company has
recorded a separate receivable of $3,314 due from Mr. Goldberg. See also
the discussion in Note C related to options issued to Mr. Goldberg and
later canceled by the Board of Directors. Mr. Goldberg's counsel has
stated that it is Mr. Goldberg's position that the Company does not have
the right to cancel options previously issued to Mr. Goldberg and that
Mr. Goldberg does not intend to relinquish those options.
NOTE F - LITIGATION
The Company knows of no litigation pending, threatened, or contemplated,
or unsatisfied judgments against it, or any proceedings of which the
Company or any of its subsidiaries is a party, except as specified
below. The Company knows of no other 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
disclosed in Note B and as specified below.
On March 27, 2000, the Company filed a complaint in the District Court
for Arapahoe County, Colorado against Mr. Goldberg, the Securities
Investor Protection Corporation, and the U.S. Internal Revenue Service.
In the Complaint, the Company alleged that, during Mr. Goldberg's tenure
as an officer and director, Mr. Goldberg engaged in fraudulent
activities, breached his fiduciary duties, and acted negligently, all of
which resulted in our suffering damages. In the Complaint, the Company
are seeking compensatory and punitive damages from Mr. Goldberg, the
return of Company property, and a declaration that stock options granted
to Mr. Goldberg were fraudulently obtained, were void, and that Mr.
Goldberg must repay us for the options that he exercised before we
became aware of the true facts after granting the options in March 1999.
The SIPC and IRS were included as Defendants in this matter because the
SIPC holds a judgment against Mr. Goldberg that it is attempting to
collect and has claimed an interest in the stock options that we are
seeking to void, and the IRS has assessed a tax lien against Mr.
Goldberg that it is seeking to collect. A third party, Sterling
Consulting Corp. ("Sterling"), has indicated that it will seek to
intervene in this matter because it is attempting to collect on a debt
owed by Mr. Goldberg. Mr. Goldberg has filed an Answer denying our
claims. Mr. Goldberg has not asserted any counterclaims against the
Company in this matter. The IRS has sought to remove this matter to the
U.S. District Court for the District of Colorado. The IRS has been
dismissed from the lawsuit. SIPC has moved to be dismissed from this
matter because it believes that its interests are adequately protected
in the Denver District Court matter described in the next paragraph; the
Company have not opposed SIPC's motion to be dismissed. In October
2000, the Company agreed to settle the claims by Sterling in return for
the issuance of 200,000 shares of restricted common stock. As a result
of the dismissal of the IRS and the settlement with Sterling, the case
is expected to be transferred back to the District Court for Arapahoe
County.
SIPC's attempts to collect its judgment against Mr. Goldberg are pending
in the District Court, City and County of Denver, State of Colorado.
The primary parties to that case are SIPC, as real party in interest,
and Mr. Goldberg, as defendant. The Company first became involved in
this matter on September 20, 1999, when an order was issued directing us
to turn over to that court any of Mr. Goldberg's property which the
Company held. The Company responded to the order by stating that the
Company did not hold any property belonging to Mr. Goldberg; however,
the Company also informed the court that Mr. Goldberg may claim the
Company owes him options as described above, and that the Company
disputes his claims to options. In January 2000, the court issued
another order which referred to the Company's dispute with Mr. Goldberg
over the options and which directed that if, after the Company's dispute
with Mr. Goldberg was resolved, it was determined that the Company did
owe securities to Mr. Goldberg, those securities should be deposited
with the court. The Company intend to fully comply with the court's
orders as soon as the dispute with Mr. Goldberg is resolved. However,
after the court issued the January 2000 order, SIPC filed a motion
seeking to hold the Company in contempt because SIPC felt that the
Company did not adequately respond to the September 1999 order. SIPC
filed this motion despite the fact that (1) the Company did not have any
of Mr. Goldberg's property or even any tangible evidence of property
that Mr. Goldberg may claim, and (2) the Company did provide to SIPC's
counsel and to the court the minutes of Board meetings during which the
Board discussed the issuance of options as described above. SIPC's
motion for a contempt order was denied at a hearing of the court on May
3, 2000, and an additional hearing was scheduled before the Denver
District Court on June 22, 2000 to determine whether any March 11, 1999
options belong to Mr. Goldberg and should be turned over to the court.
On June 23, 2000, the Court ordered the Company to provide a letter to
the Court indicating that the March 11, 1999 options existed in order to
avoid a contempt citation. The Company provided the required letter and
have appealed the Court's decision.
In June 2000, the seller of the radio station our W3, Inc. subsidiary is
purchasing threatened a lawsuit to require immediate repayment of the
$280,000, 15-year note we delivered as payment because W3, Inc. was late
with a monthly payment. W3, Inc. has made subsequent payments on time
and is attempting to work with the seller to resolve this dispute.
In August 2000, Rock Creek Holdings, Inc. ("Rock Creek") filed a
complaint in the State of New York alleging breach of contract, breach
of warranty, fraud and misrepresentation, and conversion with respect to
a contract alleged to have been signed by Mr. Goldberg. According to
Rock Creek, payment was to be in the form of options to purchase 300,000
shares of the Company's common stock at an exercise price of $0.38 per
share. The complaint alleges damages of more than $876,000. The Company
filed a response denying all charges and noting that the Company's Board
of Directors did not approve the contract, nor the issuance of options.
The Company fully intends to defend its position and has not recorded a
contingent liability relating to this matter.
In October 2000, the Company received notices from the Internal Revenue
Service (IRS) for past due payroll taxes, penalties and interest
totaling approximately $152,000. The Company is attempting to establish
an installment plan to settle these amounts, although no definitive
agreement has been reached as of the date of this filing. The
outstanding balance will continue to accrue interest until paid.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion and comparison of our financial
condition and results of operations as of and for the three and nine
months ended September 30, 2000 and September 30, 1999. This discussion
should be read in conjunction with the financial statements, the notes
to the financial statements, and the other financial data included
elsewhere in this filing.
The three months ended September 30, 2000 compared with the three months
ended September 30, 1999.
Our net loss increased from $836,000 in 1999 to $1,502,000 in
2000. This $666,000 increase is primarily the result of the costs
and expenses incurred in our Internet operations, which were not
started until June 28, 1999, totaling $1,133,000. This total
includes compensation related to the issuance of common stock
options issued for services, and cash compensation.
Total revenues increased from $649,000 in 1999 to $742,000 in
2000, a $93,000 (14%) increase. Revenue from our Internet division
was $28,000 in the 2000 period. We commenced our Internet division
on June 28, 1999. Costs and expenses for the quarter ended
September 30, 2000 for the Internet division totaled $1,133,000.
This total consists of $1,197,000 in salaries, contract labor and
related expenses, $152,000 in advertising costs, $58,000 in
professional fees, and $247,000 in other operating costs that
include internet hosting, telecommunications, rent, and travel and
entertainment, and other expenses.
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. We are attempting to sell advertising
on the site to increase revenues. In addition, we are constantly
identifying companies with compatible Internet e-commerce and for rich
media development capabilities or business models that through strategic
alliances, mergers or acquisitions, could help us reach our ultimate
goal much sooner.
We are continually analyzing working capital needed to develop our
Internet business. Working capital needs include retail website,
development, advertising and marketing, rich media development, and
affiliate program development and e-commerce development. Currently,
working capital is not sufficient to fund the Internet division and its
other corporate needs. 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. We have also made
some employee cuts and are attempting to reduce other expenses without
damaging our business model.
Live entertainment revenue increased by $83,000 (20%) during the
three months ended September 30, 2000 compared to the three months ended
September 30, 1999 due to an increase in attendance as a result of some
nationally recognized acts. Cost of sales - live entertainment also
increased from September 30, 1999 to September 30, 2000 as a result of
the nationally recognized acts, from $369,000 in 1999 to $416,000 in
2000, a $47,000 (13%) increase. As a result, the margins increased from
$37,000 to $73,000, a $36,000 (97%) increase.
Radio revenue decreased from $234,000 in 1999 to $224,000 in 2000.
This $10,000 (4%) decrease is primarily the result of a $27,000 decrease
in concert revenues, due to almost one concert presented in 2000
compared to four in 1999. This decrease is offset by an increase in
radio sales of $11,000 due to increased ad rates and increased spots.
Further, trade show income increased $7,000 as a result of more trade
shows in 2000. Cost of sales - radio decreased from $165,000 in 1999 to
$144,000 in 2000. This $21,000 (13%) decrease is due primarily to the
decrease in concert expenses. The gross margin in 2000 was $81,000 or
36%, compared to $69,000 or 39% in 1999.
Depreciation and amortization on the accompanying statement of
operations increased from $28,000 in 1999 to $63,000 in 2000. The total
increase of $35,000 is primarily due to additions to property and
equipment of $160,000 in 1999 and $165,000 in 2000. In February 1999,
the comedy club completed a $150,000 remodeling project. The remodeling
costs are being amortized over the nine-year life of the lease. During
2000, the Company acquired computer and other equipment for its Internet
division. The license for the W3, Inc. station is now being depreciated.
Management and administrative fees - affiliate decreased from
$60,000 in 1999 to $0 in 2000. This decrease is due to the affiliate's
sale of this consulting company effective July 1, 2000. Therefore, the
related charges are included in general and administrative expenses, not
in this line item.
General and administrative costs decreased from $543,000 in 1999
to $469,000 in 2000. This $74,000 (4%) decrease is primarily
attributable to a $80,000 decrease in compensation costs recorded for
stock issued to consultants. Professional fees decreased by
approximately $29,000. These two significant decreases were offset by an
increase in travel expenses.
Interest expense as presented on the accompanying statement of
operations increased from $29,000 in 1999 to $44,000 in 2000. This
increase is due to interest on past due payroll taxes due to the IRS.
There has been no significant change in the Company's debt structure.
The Company does not have variable interest rate debt, therefore the
expense is anticipated to remain consistent. However, the outstanding
balance will continue to accrue interest until paid.
The nine months ended September 30, 2000 compared with the nine months
ended September 30, 1999.
Our net loss increased from $1,862,000 in 1999 to $5,179,000 in
2000. This $3,317,000 increase is primarily the result of the previously
mentioned higher expenses in our Internet division. Costs and expenses
in 2000 of our Internet operations, which were started in 1999, totaled
$3,290,000. This total includes compensation related to the issuance of
common stock options issued for services, and cash compensation.
Total revenues increased from $1,842,000 in 1999 to $2,131,000 in
2000, a $289,000 (16%) increase. Live entertainment revenue increased by
$141,000 due to an increase in attendance and an increase in liquor and
food pricing. Cost of sales - live entertainment increased from
$1,112,000 in 1999 to $1,194,000 in 2000, an $82,000 (7%) increase. The
largest component of this increase is labor costs and related costs and
benefits, including entertainers' salaries of the entertainers.
Radio revenue increased from $620,000 in 1999 to $638,000 in 2000.
This $18,000 (3%) increase is primarily the combination of an increase
in advertisers and an increase in rates. The overall increase was offset
by a decrease in the number of concerts presented in 2000. Cost of sales
- radio decreased from $444,000 in 1999 to $409,000 in 2000. This
$35,000 (8%) decrease was due to a $10,000 transmitter repair in 1999
due to a lightning strike. The remaining decease was due to a decrease
in music licensing fees and concert related expenses.
We commenced our Internet division on June 28, 1999. Costs and
expenses for the nine months ended September 30, 2000 for the Internet
division totaled $3,290,000. This total is comprised of $1,559,000 in
salaries, contract and consulting labor and related expenses, $212,000
in advertising expenses, $111,000 in professional fees; and $275,000 in
other operating costs that include Internet hosting, telecommunications,
rent, and travel and entertainment expenses.
Depreciation and amortization increased from $93,000 in 1999 to
$157,000 in 2000. This $64,000 increase is primarily due to additions to
property and equipment of $160,000 for 1999 and $211,000 in 2000. In
February 1999, the comedy club completed a $150,000 remodeling project.
The remodeling costs are being amortized over the nine-year life of the
lease. During the nine months ended September 30, 2000, the Company
acquired computer and other equipment for its Internet division.
Management and administrative fees - affiliate increased from
$116,000 in 1999 to $117,000 in 2000. This slight increase is due to a
change in the monthly charges from $18,000 per month in the prior year
to $23,500 per month in the current year. Effective July 1, 2000, the
affiliated entity was sold and the related charges are included in
general and administrative expenses, not in this line item.
General and administrative costs increased from $1,508,000 in 1999
to $2,434,000 in 2000. This $926,000 increase is primarily attributable
to a $169,000 increase in compensation costs related to stock options
that are accounted for in accordance with SFAS 123 and APB 25, and
$319,000 of amortized compensation expense for options issued in 1999.
Wages increased $113,000. Also, consulting expenses increased $88,000,
professional fees increased $30,000, travel increased $84,000, and
public relations increased $90,000.
Interest expense increased from $89,000 in 1999 to $100,000 in
2000. This increase is due to interest on past due payroll taxes due to
the IRS, offset by decreases due to scheduled principal amortization.
There has been no significant change in the Company's debt structure.
The Company does not have variable interest rate debt, therefore the
expense is anticipated to remain consistent. However, the outstanding
balance will continue to accrue interest until paid.
Liquidity and Capital Resources.
As of September 30, 2000, we had a working capital deficit of
$1,937,000. Despite a loss of $5,179,000, net cash used in operating
activities was only $117,000 primarily due to common stock options
granted and common stock issued for services of $5,080,000. We have been
able to issue common stock for services, thereby reducing the need for
working capital. However, we currently have less than 10,000 shares
available unless an increase in our authorized capital is approved. We
are requesting shareholder approval at a meeting schedule in December
2000.
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. The likelihood of
obtaining the necessary equity financing is uncertain at this time (see
the discussion of recent sales of unregistered securities, below).
We have been able for the nine months ended September 30, 2000 to
finance some of our operations through the issuance of common stock in
exchange for services. In 2000, we issued 21,115,359 shares of common
stock valued at $3,333,000 or an average of $0.16 per share. In 1999, we
issued 581,584 shares of common stock valued at approximately $627,000
or an average of $1.08 per share.
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 were paid by the landlord (lessor) as tenant
improvements, and Comedy Works paid $150,000. The landlord (lessor) has
agreed to finance our portion of the remodeling cost payable monthly at
12% per annum over 10 years. The monthly payments are $2,300.
Working capital is needed for all operations, and especially for
marketing our Internet site. While we are not currently funding any
advertising, this expense has been and could be in the future as much as
$45,000 per month on both traditional and Internet advertising. We do
not have the capital to meet this need.
We also purchased a radio station in Lead, South Dakota. The
agreement required a $20,000 non-refundable down payment, with the
remaining $280,000 payable monthly over 15 years upon the approval of
the transfer of the license by the FCC. As of February 10, 2000, all
steps, including the expiration of the time for public objections,
necessary to transfer the license had been completed. We estimate that
we will 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 have hired staff related to Internet web development, Internet
advertising and marketing. Recently, the Company has cut back on the
number of employees in an effort to reduce expenses. The monthly
obligation for salaries and overhead is approximately $50,000. First 2
Market, the Internet segment subsidiary, does not yet generate
significant revenues. As such, we have very limited working capital and
do not have sufficient working capital to meet our existing debt
obligations and other working capital needs contemplated under various
agreements.
Through September 30, 2000, we raised $351,000 in private
placement equity financing through the sale of common stock , 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 by the Company. In some
cases, we have not yet completed our due diligence procedures, which
include an analysis of the working capital needed.
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, 2000, we incurred cumulative net losses of approximately
$24,188,000 and, as of September 30, 2000, had an excess of current
liabilities over current assets of approximately $1,937,000 and are 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 raising of equity financing in the U.S. and/or
international markets, restructuring of its debt obligations and
undertaking mergers or acquisitions to improve market share or
operational synergies and improving efficiency of operations. There are
no assurances that any of these events will occur or that our plan will
be successful.
We do not have sufficient revenues to generate income from
operations; therefore, it is necessary for us to increase revenues
either by expansion or by acquisition or significantly reduce our
operating costs. We have been able to issue stock for management and
accounting services, thereby reducing the need for cash to pay for
operating expenses. If we were unable to issue stock for services,
because there would be no liquidity for the stock, this would have a
severe impact upon the Company and its ability to operate. The value of
services paid by issuance of stock was approximately $3,333,000 for the
nine months ended September 30, 2000. Net cash used in operations was
approximately $117,000 for the nine months ended September 30, 2000 and,
unless operations become more profitable, we may not have sufficient
cash for use in operations through December 2000 or for fiscal 2001.
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
During and following the quarter ended September 30, 2000, the
following legal proceedings were instituted. Also during and following
the quarter, there were no material developments in previously reported
legal proceedings except as set forth below.
During and following the quarter ended September 30, 2000, the
following legal proceedings were institiued. Also during and following
the quarter, there were no material developments in previously reported
legal proceedings except as set forth below.
On March 27, 2000, we filed a complaint in the District Court for
Arapahoe County, Colorado against Mr. Goldberg, the Securities Investor
Protection Corporation, and the U.S. Internal Revenue Service. In the
Complaint, we alleged that, during Mr. Goldberg's tenure as an officer
and director, Mr. Goldberg engaged in fraudulent activities, breached
his fiduciary duties, and acted negligently, all of which resulted in
our suffering damages. In the Complaint, we are seeking compensatory
and punitive damages from Mr. Goldberg, the return of Company property,
and a declaration that stock options granted to Mr. Goldberg were
fraudulently obtained, were void, and that Mr. Goldberg must repay us
for the options that he exercised before we became aware of the true
facts after granting the options in March 1999. The SIPC and IRS were
included as Defendants in this matter because the SIPC holds a judgment
against Mr. Goldberg that it is attempting to collect and has claimed an
interest in the stock options that we are seeking to void, and the IRS
has assessed a tax lien against Mr. Goldberg that it is seeking to
collect. A third party, Sterling Consulting Corp., ("Sterling"), has
indicated that it will seek to intervene in this matter because it is
attempting to collect on a debt owed by Mr. Goldberg. Mr. Goldberg has
filed an Answer denying our claims. Mr. Goldberg has not asserted any
counterclaims against the Company in this matter. The IRS has sought to
remove this matter to the U.S. District Court for the District of
Colorado. The IRS has been dismissed from the lawsuit. SIPC has moved
to be dismissed from this matter because it believes that its interests
are adequately protected in the Denver District Court matter described
in the next paragraph; the Company have not opposed SIPC's motion to be
dismissed. In October 2000, the Company agreed to settle the claims by
Sterling in return for the issuance of 200,000 shares of restricted
common stock. As a result of the dismissal of the IRS and the
settlement with Sterling, the case is expected to be transferred back to
the District Court for Arapahoe County.
In June 2000, the seller of the radio station our W3, Inc.
subsidiary is purchasing threatened a lawsuit to require immediate
repayment of the $280,000, 15-year note we delivered as payment because
W3, Inc. was late with a monthly payment. W3, Inc. has made subsequent
payments on time and is attempting to work with the seller to resolve
this dispute.
In August 2000, Rock Creek Holdings, Inc. ("Rock Creek") filed a
complaint in the State of New York alleging breach of contract, breach
of warranty, fraud and misrepresentation, and conversion with respect to
a contract alleged to have been signed by Mr. Goldberg. According to
Rock Creek, payment was in the form of options to purchase 300,000
shares of the Company's common stock at an exercise price of $0.38 per
share. The complaint alleges damages of more than $876,000. The Company
filed a response denying all charges and noting that the Company's Board
of Directors did not approve the contract, nor the issuance of options.
The Company fully intends to defend its position and has not recorded a
contingent liability relating to this matter.
In October 2000, the Company received notices from the Internal
Revenue Service (IRS) for past due payroll taxes, penalties and
interest totaling approximately $152,000. The Company is
attempting to establish an installment plan to settle these
amounts, although no definitive agreement has been reached as of
the date of this filing. The outstanding balance will continue to
accrue interest until paid.
Item 2: Changes in Securities
None
Item 3: Defaults upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8-K
(A) Exhibits
None
(B) Reports on Form 8-K
The Company filed an 8-K on August 22, 2000 reporting an
event occurring August 16, 2000.The Company filed an 8-K on
September 15, 2000 reporting an event occurring September 13,
2000.
The Company files an 8-K on November 6, 2000 reporting an
event occurring November 6, 2000.
SIGNATURE
Pursuant to the requirements of the Exchange Act, the Company has duly
caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
First Entertainment Holding Corp.
DATE: November 15, 2000 /s/ Howard B. Stern
Howard B. Stern
Chief Executive Officer
