SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark one)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal quarter ended March 31, 1996
Commission file No. 0-18866
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
First National Entertainment Corp.
(Exact name of small business issuer as specified in its
charter)
Colorado 93-1004651
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2443 Warrenville Road, Suite 600, Lisle, Illinois 60532
(Address of principal executive offices)
(708) 245-5155
(Registrant's telephone number)
125 South Wacker Drive, Suite 300, Chicago, Illinois 60606
(Previous Address)
600 Enterprise Drive, Suite 109, Oak Brook, Illinois 60521
(New Address, as of June 1, 1996)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $0.005 Par Value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [ X ] NO [ ]
As of May 31, 19965 the registrantt had outstanding 16,898,458
shares of its $.005 par value Common Stock.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
First National Entertainment Corp.
CONSOLIDATED BALANCE SHEET (Unaudited)
March 31, 1996
ASSETS
Current Assets
Cash and Cash Equivalents
(including restricted cash of $35,311) $55,266
Accounts receivable (Net of allowance
for doubtful accountsof $875,357) 557,208
Film inventory 407,087
Prepaid expenses, other 10,194
Total Current Assets 1,029,755
Property and Equipment, Net 40,781
Other Assets
Film inventory-non current (net of
accumulated amortization of $6,752,023) 3,795,117
Intangible assets (net of accumulated
amortization of $214,297), other 342,908
Total Other Assets 4,178,025
TOTAL ASSETS $5,208,561
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 400,843
Accrued liabilities, other 129,190
Obligation under capital lease,
current portion 9,972
Total Current Liabilities 540,005
Obligations under Capital Leases 7,789
Shareholders' Equity
Common Stock, $.005 par value, authorized
100,000,000 shares,issued and outstanding
16,898,458 shares 84,576
Preferred Stock, $.0001 par value, authorized
10,000,000 shares, no shares issued
and outstanding --
Paid in capital 26,090,608
Retained earnings (deficit) (21,514,417)
Total Shareholders' Equity 4,660,767
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $5,208,561
See accompanying notes
1
First National Entertainment Corp.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For Three Months Ended March 31, 1996 1995
REVENUES
Film revenues 0 $231,479
COST OF REVENUES
Amortized film costs 0 33,246
GROSS PROFIT 0 198,233
OPERATING EXPENSES
Marketing and selling 0 (22,237)
General and administrative 330,590 348,031
TOTAL OPERATING EXPENSE 330,590 325,794
OPERATING INCOME (LOSS) (330,590) (127,561)
OTHER INCOME (EXPENSE)
Interest income (expense) 74 (3,756)
Other income (expense), net (100,899) 151,651
TOTAL OTHER INCOME (EXPENSE) (100,825) 147,895
NET INCOME (LOSS) ($431,415) ($275,456)
NET LOSS PER SHARE ($.03) ($.03)
Weighted average shares outstanding 13,405,082 10,942,356
See accompanying notes
2
First National Entertainment Corp.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For Nine months Ended March 31, 1996 1995
REVENUES
Film revenues $90,000 $806,324
COST OF REVENUES
Amortized film costs 44,883 390,170
GROSS PROFIT 45,117 416,154
OPERATING EXPENSES
Marketing and selling 17,000 418,908
General and administrative 781,126 1,888,091
TOTAL OPERATING EXPENSE 798,126 2,306,999
OPERATING INCOME (LOSS) (753,009) (1,890,845)
OTHER INCOME (EXPENSE)
Interest income (expense) 576 (28,491)
Other income (expense), net 137,902 259,758
TOTAL OTHER INCOME (EXPENSE) 138,478 (231,267)
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM (614,531) (2,122,112)
EXTRAORDINARY ITEM (2,050,000) --
NET INCOME (LOSS) ($2,664,531) ($2,122,112)
NET LOSS PER SHARE BEFORE
EXTRAORDINARY ITEM ($.05) ($.20)
NET LOSS PER SHARE ($.20) ($.20)
Weighted average shares outstanding 13,405,082 10,942,356
See accompanying notes
3
First National Entertainment Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For Nine Months Ended March 31, 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($2,664,531) ($2,122,112)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Amortization of film costs 44,883 390,170
Stock issued for services and
compensation, net -- 244,152
Other amortization, depreciation,
write-offs 92,597 534,103
Changes in operating assets and
liabilities, net (416,215) (493,515)
NET CASH (USED IN) OPERATING ACTIVITIES (2,943,266) (1,447,202)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (13,910) (32,918)
Disposition of property and equipment,
net 103,527
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 89,617 (32,918)
CASH FLOWS FROM FINANCING ACTIVITIES:
Officer Advances/(Repayments) -- (140,794)
Proceeds from issuance of debt -- (122,000)
Common Stock Issuance/(Cancellation) 2,833,667 (516,538)
NET CASH (USED IN) FINANCING ACTIVITIES 2,833,667 (779,332)
NET INCREASE/(DECREASE) IN CASH (19,982) (2,259,452)
CASH - BEGINNING OF PERIOD 75,248 2,350,335
CASH - END OF PERIOD $55,266 $90,883
See accompanying notes
4
First National Entertainment Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 1996
First National Entertainment Corp. (the Company), was originally
incorporated as a Colorado Corporation in January of 1985. The
Company's strategy has been to produce and distribute film,
music, and interactive entertainment products with classical and
enduring appeal suitable for family oriented and mainstream
consumers. The Company has earned approximately $7 million in
revenues to date through its Feature Films division with the
animated motion picture property Happily Ever After, which is a
sequel to the Grimm Brothers' fairy tale classic Snow White
story. Since October 19, 1993, the Company shipped over 1
million copies of the home video version of Happily Ever After
to thousands of retail video stores, including Blockbuster Video.
The video was distributed through Worldvision Enterprises, which
has since merged with Republic Pictures, (hereafter referred to
as "Republic Pictures").
As of the date of this filing, the Company is pursuing additional
royalties due to the Company for producer bonuses on the first
million videos sold, as well as credit for excessive reserve
allowances which the Company believes were determined by Republic
Pictures in a manner inconsistent with its distribution
agreement. In September of 1994, the Company conducted a
comprehensive third-party audit of all reported video results
which resulted in Republic Pictures subsequently revising its
August 16, 1994 accounting statement for the number of videos
shipped, and on September 26, 1994 delivered payment to the
Company for this revised accounting statement, plus interest.
However, according to the auditor's report, Republic owes the
Company for a producer's bonus of 5% of the first one million
units sold in addition to amounts owed the Company for excess
units held in reserve. The Company intends to continue
collection procedures in respect to these receivables, however,
due to the uncertainty of the results, the Company has reserved
for the entire balance up through June 30, 1995.
On October 4, 1995 the Company signed an agreement with SeaGull
Entertainment, Inc., a New York and Los Angeles based
distributor, for the distribution of Happily Ever After. SeaGull
Entertainment will act as the Company's agent through June 30,
2001. Under this agreement, SeaGull Entertainment will distribute
Happily Ever After in North America in the following areas:
TV VIDEO
Pay Cable Mass Merchandising
Basic Cable Direct - Happily Ever After
Syndication Direct - Happily Ever After combined with
Happily Ever After video game
The Company previously announced that it had begun a
diversification plan to acquire video store chains nationwide.
During 1995 the Company had signed mutual letters of intent
covering the acquisition of over one hundred video stores, and in
the quarter ending December 31, 1995 entered into definitive
stock purchase agreements with three chains (see below). As
stated in previous filings, all of the video store acquisitions
were contingent upon the satisfactory completion of due
diligence, execution of mutually acceptable definitive agreements
and the receipt of the requisite financing. In entering into
these definitive agreements, the Company believed that the
requisite financing required was being arranged and would shortly
be available through the efforts of a third party investment
banker previously engaged by the Company to procure such
financing.
5
First National Entertainment Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 1996
On December 1, 1995 the Company entered into an agreement to
purchase Video Tyme, Inc. (which owns and operates 9 retail video
stores in Las Vegas) for approximately $5 million. The purchase
was structured to include short term notes from the Company to
the sellers which were due (after extensions) on April 1, 1996.
Because neither the requisite financing nor a commitment for such
financing was obtained within this time period, the Company and
the owners of Video Tyme, Inc. mutually terminated the stock
purchase agreement. The Company was refunded $449,084 in prior
payments made relating to this acquisition and reimbursed Video
Tyme, Inc. $25,000 for expenses incurred. and $250,000 of the
refunded amount, which was given to the sellers on December 1,
1995, is included in the Company's accounts receivable as of
December 31, 1995. Based on these events, no assets or
liabilities nor results of operations relating to this
acquisition have been recorded in the Company's financial
statements.
On December 31, 1995 the Company entered into an agreement to
purchase Adventures in Video, Inc. (which owns and operates 16
retail video stores in Minneapolis) and KDDJ, Inc. (which owns
and operates 3 retail video stores in San Francisco) for
approximately $4 million. These purchases wereis premised on the
occurrence of certain events and the production of certain
documentation no later than March 1, 1996. As of the date of this
filing, Tthese conditions were not met, and the Company has
rescinded the transactions with both companies. The Company was
refunded $105,000 in prior payments made relating to these
acquisitions and reimbursed Adventures in Video $52,500 for
expenses incurred. and Based on these events, no assets or
liabilities nor results of operations relating to these
acquisitions have been recorded in the Company's financial
statements.
The Company still intends to enter the retail video store
industry and continues to hold discussions with video store chain
owners who desire to work with the Company to build a publicly
held chain. The Company is currently reevaluating its pricing
model as well as seeking alternative financing for its
acquisition plans, taking into account the current conditions in
the retail video store industry. The Company is currently in
negotiations to acquire a new platform video store chain to serve
as a base for its video store operations. Of course, no
assurance can be given as to the ultimate acceptance of the
Company's acquisition strategy and financing structure by the
market place.
6
First National Entertainment Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)\
March 31, 1996
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-QSB. Accordingly, they do not include all
of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments considered necessary for a
fair presentation of the interim financial statements have been
included. Operating results for the three-month period ended
March 31, 1996 are not necessarily indicative of the results that
may be expected for the year ending June 30, 1996. For further
information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form
10-KSB for the year ended June 30, 1995.
NOTE 2 FILM INVENTORY
The Company's film inventory is summarized as follows:
Unamortized film costs for Happily Ever After
allocated to the secondary market $3,795,117
Acquisition and development costs for Cinderella
allocated to the primary market 407,087
Total Inventory $4,202,204
Amortization of capitalized film property costs is computed using
the individual-film-forecast computation method as promulgated
under Statement of Financial Accounting Standards No. 53,
Financial Reporting by Producers and Distributors of Motion
Picture Films.
NOTE 3 COMMON STOCK
In the second quarter of 1996December of 1995, the Company
initiated an equity restructuring program in which the Company
issued 1.260 million shares of its common stock (par value $.005)
along with warrants to purchase an additional 1.260 million
shares of its common stock (par value $.005) at $1.00/share. for
Total proceeds from the offering amounted to $630,000. All of
the warrants expire on December 15, 1997.
Rentrak, Inc., of Portland, Oregon, is the largest distributor of
video cassettes on a pay per view basis nationally. In
conjunction with a 10 year Agreement the Company entered into on
December 22, 1995, Rentrak purchased 357,143 shares of common
stock (par value $.005) for $200,000 as an advance in an
agreement to buy an additional $10,000 of shares for each new
non-Rentrak video store acquired by the Company.
On December 22, 1995 the Company issued 4,000,000 shares of
common stock (par value $.005) as part of the settlement of the
class action lawsuit (See Note 5 "Legal Settlement").
7
First National Entertainment Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 1996
NOTE 44 CONTINGENCIES
The Company received notice from the Screen Actors Guild that
supplemental residuals of 4.5% of the first $1,000,000 and 5.4%
of all remaining gross producer receipts are due them. The
Company's entertainment counsel is researching the matter to
determine if the Company has a liability related to this matter.
As of the date of this filing there has been no determination and
the Company believes that if any residuals are due they should be
the responsibility of Lou Scheimer and Filmation (the original
producer of the film).
On May 18, 1995, the Company received notice from Della Miles,
Stylus Record's feature artist, that Stylus was in material
breach of its contract with her. After several meetings with Ms.
Miles and her counsel, the Company placed the entire advanced
royalty receivable amount relating to this contract in its
reserve for doubtful accounts , and is in discussions with the
board members of Stylus Records regarding this issue.
The Founders' Agreement of Stylus Records calls for certain
actions by the Company if the Company's common stock price is not
equal to $5 or greater on March 31, 1996 (the stock price on
April 1, 1996 was $.25). These actions relate to 60,000 shares
of a total of 160,000 issued in April 1994 in exchange for the
Company's 80% interest in Stylus Records. Per the Agreement, the
Company would be required to make up any shortfall in value,
either in cash or via the issuance of additional shares. The
Company has submitted the Agreement to its legal counsel to
determine if it is indeed obligated to take such actions.
On December 31, 1995, the Company entered into an agreement to
purchase Adventures in Video, Inc. contingent upon the occurrence
of certain events and the production of certain documentation.
As of the date of this filing, these events have not occurred and
some of the documentation has not been produced. The Company
believes the sales agreement will be terminated or renegotiated.
Therefore, no assets or liabilities associated with this sale
have been recorded in the Company's financial statements.
NOTE 55 LEGAL SETTLEMENT
Class Action Lawsuit - The Company and its former executive
officers and directors were defendants in a class action lawsuit
which commenced in the United States District Court for the
Eastern District of Pennsylvania. The action was commenced July
8, 1993, certified as a class action on September 8, 1994, and
alleges fraud and various violations of securities laws in
connection with the Company's public disclosures during the
period preceding and through the theatrical release of the film
Happily Ever After. A change of venue moved the case to the
Western District of Texas on January 31, 1995. On November 22,
1995 the Company, subject to final Court approval, settled the
suit for $50,000 in cash and $2,000,000 in stock at $0.50/share,
i.e., 4 million shares of common stock (par value $.005). These
amounts have been recorded in the Company's financial statement
as an extraordinary item. A second class action lawsuit filed on
June 30, 1995 has been dismissed by the plaintiffs based on the
settlement of the previous suit. Final approval by the Court was
obtained on April 12, 1996.
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Overview
The Company recognizes revenue when it releases entertainment
properties into primary or secondary markets. Revenue recognition
generally precedes collection due to standard industry collection
cycles. Revenues and results of operations for any period are
dependent upon the availability and public acceptance of the
Company's entertainment products which may fluctuate from period
to period and may not be indicative of future results.
8
First National Entertainment Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 1996
For Happily Ever After, the Company recognizes film costs using
the individual-film-forecast computation method as pronounced
under Statement of Financial Accounting Standards No. 53 (SFAS
53). Film costs for each period are amortized in proportion to
the revenue earned in the current period, relative to
management's estimate of the total revenue to be realized from
all markets for a film over its commercial life. Capitalized
film costs include acquisition costs, distribution costs, film
print and certain advertising costs, and other related marketing
costs which benefit future periods. In accordance with SFAS 53,
management reviews its total revenue estimates for a film on a
periodic basis, which may result in changes of projections of
film revenues, costs, rate of cost amortization and net income.
Results of Operations
The Company recorded no revenues 60,000 from operations during
its third fiscal quarter of 1996 ended March 31, 1996, as
compared to $231,479 in the comparable period of
the prior fiscal year. $90,000 of the current year revenues and
most of the prior year revenues were derived from sales of the
Company's home video version of its feature film property Happily
Ever After. Both current year and prior year sales were derived
from sales of the Company's home video version of its feature
film property Happily Ever After. Current year sales were
estimated based on information from Republic Pictures. Prior to
May, 1996, the Company received no fionalized accounting for the
current fiscal year and has had to make estimates based on
partial reports from Republic. The Company recently received
revised and supposedly final reports covering the current fiscal
year and reporting no revenues for the quartter ending March 31,
1996. While the Company question these reports and will
investigate this matter thoroughly, it has recorded no revenues
for the current fiscal quarter.
Amortized film costs (i.e. costs for the acquisition, marketing
and distribution of Happily Ever After) associated with the nine
months revenues were $44,883 as compared to
$390,170 in the comparable period of fiscal 1995. To
date, the Company has expensed approximately $6.7 million or 64%
of its total capitalized costs of Happily Ever After.
General and Administrative (G&A) expenses (other than those non-
recurring) were $330,590 in the current quarter as
compared to $348,031 in the comparable quarter of
the prior fiscal year. Current G&A expenses consisted mostly of
payroll costs, legal fees and other professional fees. The
previous year's quarterly G&A expenses were mostly comprised of
amortization of unearned compensation expense from previous stock
grants to the Company's executive officers, administrative
salaries and legal fees.
The Company had a net loss (before the $2,050,000 in
extraordinary costs) net incomeof ($431,415) or $(.03) per share
during the thirdfirst quarter ended March 31, 1996, as compared
to a net loss of ($275,456) or ($.03) per share in the comparable
quarter of the previous fiscal year. In addition, the Company
had net loss (before the $2,050,000 in extraordinary costs) of
($614,531) in the first nine months of fiscal 1996 compared to a
net loss of ($2,122,112) in the same period for last year.
This was primarily due to the the Company downsizing its
overheadsubstantially by reducing edthe size of its parent
corporate staff which (as of the date of this filing) includes
three full time employees, selling most of its furniture and
fixtures to a former officer, and moving its offices to a significantly
smaller location.. The Company's losses in the prior year are
attributable to the amortization of previously capitalized film
costs for Happily Ever After together with operating expenses and
investment start-up costs.
9
First National Entertainment Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 1996
Liquidity and Capital Resources
At March 31, 1996, the Company had cash and cash equivalents of
$55,266 andnet accounts receivable of $557,208 (net of reserve
for doubtful accounts) . Accounts
receivable are primarily comprised of amounts due from Republic
Pictures for sales of the Company's Happily Ever After home video
property, from American Softworks Corporation for Happily Ever
After video game sales, amounts owed the Company from the
Company's former officer for the sale of certain assets and
amounts paid prior to December 31, 1995 to the sellers of Video
Tyme, Inc. (as discussed above).
The Company had $5,208,561 in total assets and $547,794 in total
liabilities at the end of its thirdfirst fiscal quarter of 1996.
The majority of the Company's assets are comprised of capitalized
inventory costs for Happily Ever After. The Company plans to
amortize its capitalized inventory costs against future revenues
from this property, although there can be no assurance that the
Company will be able to generate sufficient revenues to realize
its complete investment in this property.
On October 13, 1995 the Company announced that its Board of
Directors had approved a stock offering of up to 10,000,000
shares of its par value $0.005 Common Stock at $0.50 per share.
The offering was made only to a limited number of Accredited
Investors (as that term is defined in the federal securities
laws). The shares beingoffered will not be registered under the
federal securities laws or the securities laws of any state and
accordingly arewill not be tradable and may not be reoffered or
resold in the United States unless they are subsequently
registered or an applicable exemption from registration is
available. Total proceeds from this offering were $630,000.
(See Note 3 - "Common Stock").
Rentrak, Inc., in conjunction with a 10 year Agreement with the
Company entered into on December 22, 1995, purchased 357,143
shares for $200,000. (See Note 3 - "Common Stock").
PART II-OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
On February 20, 1996, the Company stated in an 8-K filing that
Company President Stephen J. Denari requested and received the
resignation of his father, Eugene E. Denari, Jr., as CEO and as a
director and officer of the Company. Replacing him on the Board
of Directors and as Secretary is the Company's current Corporate
Controller Joanne K. Fabere. In addition, the Company received
the resignations of Senior Vice President Tim Denari (son of
Eugene Denari) and Vice President Matt Hampton, who had
previously headed up the video store diversification plan. The
Company's new Board of Directors engaged an outside certified
public accounting firm and law firm to investigate the events
surrounding all of these resignations. As a result, on May 7,
1996, the Company accepted a revised resignation agreement from
Eugene E. Denari, Jr., whereby all 500,000 options of the
Company's Common stock (par value $.005) previously granted to
him were forfeited and canceled.
On January 16, 1996 the Company stated in an 8-K filing that on
December 31, 1995 it had agreed to purchase Adventures in Video,
Inc. (16 stores in Minneapolis) and KDDJ, Inc. (3 stores in San
Francisco) for approximately $4 million. On March 5, 1996 the
Company rescinded these transactions. (See Part I)
On December 15, 1995, the Company stated in an 8-K filing that on
December 1, 1995 it had completed its acquisition of Video Tyme,
Inc. of Las Vegas, a 14 year old 25 store video retail chain,
including 9 corporate owned and 16 licensed locations for
approximately $5 million. On April 2, 1996 the Company and the
owners of Video Tyme mutually terminated the acquisition. (See
Part I)
10
SIGNATURE
In accordance with the requirements of the Securities Exchange
Act of 1934, the registrant has caused this report to be signed
on its behalf by the undersigned, thereunto authorized.
First National Entertainment Corp.
Dated:___________________ By:
_____________________________
Stephen J. Denari
President
11
SIGNATURE
In accordance with the requirements of the Securities Exchange
Act of 1934, the registrant has caused this report to be signed
on its behalf by the undersigned, thereunto authorized.
First National Entertainment Corp.
Dated: _May 31, 1996___
/s/ Stephen J. Denari
Stephen J. Denari
President
11
