<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 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.)
477 E. Butterfield Rd., Suite 307, Lombard, IL 60148
----------------------------------------------------
(Address of principal executive offices)
600 Enterprise Drive, Suite 109, Oak Brook, IL 60521
----------------------------------------------------
(Address of previous executive offices)
(630) 971-9924
--------------
(Registrant's telephone number, including area code)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference of Part III of this Form 10-KSB, or any amendment to
this Form 10-KSB. [ ]
Registrant's revenues for the Twelve Month Period Ending 12/31/98: $1,951,900.
As of March 31, 1999 the registrant had 18,537,458 shares of its $.005 par value
Common Stock outstanding. The aggregate market value of shares of Common Stock
held by non-affiliates was $1,650,301 as of this date.
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Part I.
Page
<S> <C> <C>
Item 1. Business............................................................................. 1
Item 2. Properties........................................................................... 9
Item 3. Legal Proceedings.................................................................... 9
Item 4. Submission of Matters to a Vote of Security Holders.................................. 9
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................ 9
Item 6. Management's Discussion and Analysis of Financial Conditions and results
of operations........................................................................ 10
Item 7. Financial Statements and Supplementary Data.......................................... 13
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosures.......................................................................... 13
Part III.
Item 9 Directors and Executive Officers of the Registrant................................... 13
Item 10 Executive Compensation............................................................... 14
Item 11 Security Ownership of Certain Beneficial Owners and Management....................... 15
Item 12 Certain Relationships and Related Transactions....................................... 16
Part IV
Item 13 Exhibits, Financial Statement Schedules and Reports on Form 8-K...................... 16
</TABLE>
<PAGE> 3
PART I
ITEM 1 - BUSINESS
GENERAL
First National Entertainment Corp. (the "Corporation") was founded to
pursue the acquisition, distribution and marketing of high quality entertainment
properties targeted at the family market in all forms of media. The Corporation
was incorporated on January 10, 1985, under the name of Power Capital Inc., a
Colorado corporation. In November of 1989, Power Capital became a public
company. On October 26, 1990 Power Capital acquired 100% of the stock of 1st
National Film Corp., a California corporation (1st National Film - California)
in a tax-free, stock-for-stock exchange. For financial reporting purposes this
acquisition was considered a reverse acquisition, in which 1st National
Film-California was deemed the acquiring or successor parent corporation. In
December of 1990 the name of the Corporation was changed to 1st National Film
Corp. (the "Corporation"), and 1st National Film - California's inception date
of July 7, 1989 is considered the Corporation's inception date. In October of
1994, the Corporation changed its name to First National Entertainment Corp.
In December, 1991 the Corporation completed the acquisition of all U.S.
and Canadian distribution, merchandising and ancillary licensing rights to the
completed animated film property Happily Ever After for approximately $1.35
million.
In 1993, the Corporation left the developmental stage and entered the
operational stage concurrent with the national theatrical release of Happily
Ever After. The revenue resulting from the release of the motion picture,
including other forms of media, was well below projections. Resulting losses
were significant and the Company accumulated a substantial tax-loss
carry-forward.
With the entry of a new management team in 1997 a business plan was
developed with the approval of the Board of Directors to immediately develop an
income stream, establish positive cash flow, pursue continuation and expansion
in the entertainment industry while exploring new business opportunities that
could immediately utilize its other unique resources.
In 1997 the Corporation established First National Finance Corp. This
division provides short term, high yield bridge loans primarily to developers
and redevelopers of real estate in the Chicago area. The cash flow from this
division currently supports the daily cash requirements of the entire
Corporation.
The Corporation had been listed and traded on the NASDAQ since July,
1991 until it was delisted July 3, 1997. The Corporation was denied its
delisting appeal on January 28, 1998 by the NASD Board of Governors.
Currently the Corporation trades on the OTC Bulletin Board.
FIRST NATIONAL ENTERTAINMENT CORP.(THE CORPORATION)
Holding Corporation for subsidiaries in the general entertainment
industry and the finance industry. The company has the following wholly owned
subsidiaries. A brief overview and then in depth presentations follow.
1
<PAGE> 4
ENTERTAINMENT SUBSIDIARIES
FIRST NATIONAL ENTERTAINMENT CORP.(FNAT)
This Company maintains unrestricted distribution rights to a
variety of media and products for Canada and the United States relating to its
full length animated movie - Happily Ever After. This movie is primarily aimed
at the 3 to 7 year old market, films of this nature have continuing value since
the target age group turns over quickly and there is a new market available
every 3 to 5 years. An added asset is the fact that the movie has never been
viewed on public or cable television.
The company anticipates continued efforts toward revenue generation in
1999 from the Happily Ever After property.
EQUATOR ENTERTAINMENT
The Plan to diversify was enhanced in 1998 with the addition of Mr.
Peter Keefe located in Los Angeles area. A new company was created and will
operate under the name Equator Entertainment will focus upon programs that have
"all-family" appeal and that are calculated to achieve success in the domestic
and international market place. Mr. Peter Keefe has many years of experience in
children's animated entertainment and is a well known and respected executive in
the television industry.
STYLUS RECORDS
A Company acquired in 1994 (80%) which ceased operations several years
ago.
VIDEO CHAIN SUBSIDIARY
FIRST NATIONAL VIDEO CORP.
In April, 1998 the Company acquired the assets of Windy City Video a
chain of six retail video stores in the Chicagoland area.
FINANCING SUBSIDIARY
FIRST NATIONAL FINANCE CORP.
In 1997 the Corporation established a wholly owned subsidiary to
contain the assets of Shiloh Corporation, a company engaged in relatively small,
high yield bridge loans.
PRAIRIE BUSINESS CREDIT, INC.
Company was formed in January, 1999 to acquire the name and assets of a
corporation engaged in accounts receivable factoring. The purchase was recorded
on January 1, 1999.
2
<PAGE> 5
OTHER SUBSIDIARY
FIRST NATIONAL ENVIRONMENTAL TECHNOLOGIES, INC.
The company was established in 1997 to take advantage of an advanced
system for underground pipe service repairs. In 1997 unreconcilable differences
with the European management group led to the corporation extracting itself from
the European subsidiaries, the company was disposed of in 1998.
FIRST NATIONAL ENTERTAINMENT CORP.(FNAT) - (THE CORPORATION)
MISSION STATEMENT
The Corporation has developed or continues to develop mission
statements for each subsidiary to establish clear operating parameters. These
statements assist in monitoring each company to maintain a well defined
direction in daily operations and long term planning.
INSURANCE
The Company maintains adequate insurance policies, including general
liability, workers compensation and employers' liability and officers and
directors. There can be no assurance that any of the above coverage's will be
adequate for the Company's needs.
EMPLOYEES
As of December 31, 1998 the Company had four permanent employees,
including two officers and two staff. No employee of the Company is represented
by a labor union or is subject to a collective bargaining agreement. The Company
believes that its relationship with its employees is good.
RESEARCH AND DEVELOPMENT
The Company did not incur any research and development (R&D) costs for
the period ended December 31, 1998 or the fiscal year ended December 31, 1997.
The Company does not expect to generate any significant R&D costs in fiscal
1999.
REGULATION
The Code and Ratings Administration of the Motion Picture Association
of America, an independent industry trade association, assigns ratings for age
suitability for viewing of motion pictures. The Company has and will continue to
submit its films for ratings.
United States television stations and networks, as well as foreign
governments, impose restrictions on the content of motion pictures and other
entertainment properties. There can be no assurance that future restrictions on
entertainment properties released by the Company may not affect the Company's
ability to exhibit or sell such entertainment properties.
INDUSTRY OVERVIEW
The Company competes with many other entertainment companies that have
greater industry experience, acceptance and financial resources than the
Company. The Company faces significant
3
<PAGE> 6
competition from companies in the field of acquiring, financing, developing,
producing, marketing and distributing quality entertainment products into
related markets.
EQUATOR ENTERTAINMENT (EE)
GENERAL
Mr. Peter Keefe was named to head up the company's entertainment
operations. Mr. Keefe will be responsible for expanding the Company's presence
in the industry through program creation, production and sales & marketing, with
an emphasis upon building an entertainment program library in which the Company
will have a substantial ownership.
Equator Entertainment will focus upon programs that have family appeal
and that will be successful in the domestic and international marketplace. One
of the initial primary thrusts is in representing international programs for
sale to American television networks.
SALES & MARKETING
Equator Entertainment will prudently "grow" its business with the
addition of further key executives to compliment its new business plan. In
addition, Mr. Keefe has an extensive network of contacts in the television
broadcast and production community as well as in the merchandise licensing
business throughout the world entertainment market. The focus will be
extraordinary, character driven entertainment properties which appeal to
children two to eleven years old.
OPERATIONS
Currently, the Company has two employees and is located in California.
All accounting, payroll and operating requirements are handled through an
agreement with the Corporation.
COMPETITION
Competing in a world entertainment environment, competition comes from
a variety of international producers, distributors and studios. Equator expects
to market high end, world class children's entertainment properties in the
global television, video, music, publishing and merchandising marketplace. A
sample of the competition ranges from Disney to Canal Plus and Egmont in Europe.
FINANCIAL CONDITION
Equator does not expect any revenue until the latter part of 1999. A
Board approved forecast has a goal of break even for the initial full year of
operations. Agreements with television networks require substantial advance
timing before revenue is recognized due to the nature of industry scheduling.
The Corporation is prepared to fund operations until a positive Cash
Flow can be expected, during year two of operations, in 2000.
FIRST NATIONAL VIDEO CORP.(FNVC)
GENERAL
In April, 1998 the corporation acquired the assets of a chain of six
retail video stores. These stores are located in the Chicago area. Five of the
six stores were in excellent locations. The sixth store was marginal and
eventually closed in the fourth quarter 1998.
4
<PAGE> 7
OPERATIONS
A General Manager oversees a manager at each location. Controls over
cash and credit card receipts are maintained on a daily basis. Currently, videos
are purchased in a range of $25.00 to $85.00 and in turn rented or sold.
During 1998 it was determined the best course of action for an under
performing store was to close it. This was completed in November, 1998. In order
to attract more traffic, Illinois Lotto was added to each store.
EMPLOYEES
Collectively the stores employ approximately 60 full and part time
employees. Managers and some assistant managers are salaried with the remainder
of the employees hourly. Currently, the company has no union and does not
anticipate one.
INDUSTRY OUTLOOK/COMPETITION
Currently the independent video store segment of the industry is under
siege from the large national chains, particularly Blockbuster and Hollywood
Video. In addition to opening hundreds of new stores nationally (some of which
may affect the company's existing locations) Blockbuster has negotiated a
tremendously favorable deal with the major studios. This deal is detrimental to
the sales health of many independent stores. This type of deal is Pay Per View -
which is a plan offering the videos at a very nominal cost, usually $8.00 or
less, and sharing in the revenue. This allows for many more copies per store
with a nominal initial cash investment.
The company has an agreement with Rentrak, a company which provides
videos on a Pay Per View basis. This should result in obtaining a competitive
quantity of first run titles during the second quarter of 1999. It is uncertain
at this time how revenue sharing will effect income for 1999.
FINANCIAL CONDITION
A loan of $400,000 was obtained from a national bank and all payments
have been made on a timely basis.
With the rapidly changing adverse market the company lost a substantial
amount during 1998. The company has and will continue to make cost cutting and
revenue enhancing steps so as not to incur additional losses in 1999.
STYLUS RECORDS
In 1998, the company was able to negotiate a repurchase of all shares
of Stylus and has allowed the company to be dissolved.
The guarantee of certain stock values for 60,000 shares of First
National Entertainment Corp. common stock was negotiated and the shares returned
or the guarantee eliminated. (See Financial Statement, Note 12 "Stylus
Records").
5
<PAGE> 8
PRAIRIE BUSINESS CREDIT, INC.(PBCI)
THE COMPANY
Prairie Business Credit, Inc. is in the business of factoring, i.e.
purchasing accounts receivable from companies and those in transition that do
not qualify for bank standard credit. Prairie succeeds in this form of lending
to companies by relying on the credit of the client's customers, not the credit
of the client. Extensive credit research reduces a significant (although not
all) possible losses through the failure of the ultimate customer to pay the
factored invoices.
PBCI was started in July of 1993 by Trevor Morgan who has more than
twenty five years experience lending to business. PBCI has a staff of seasoned
lenders and accounts receivable professionals.
THE MARKET
Prairie's target market is new companies with a brief history of
selling a proven product without sufficient history or credit worthiness to
obtain standard banking financing. PBCI fills this short term void. Client
longevity with Prairie has been six months to three years. Our clients either
achieve enough success to be bankable or have sufficient internal cash.
Factoring is particularly attractive to fast growing young companies who do not
want to, or cannot raise equity to fund a growth surge. New business is usually
obtained through referrals from banks, attorneys, accountants and other business
professionals. Some new business has come from replies to our web page.
THE BUSINESS
Factoring is the purchase of accounts receivable at a discount by a
third party. Prairie typically advances 60-80% of the face value of the account
receivable invoice upon verification of its validity. The amount not advanced,
the "reserve", less the factor's discount, the "commission", is remitted to the
client after collection. Prairie purchases accounts on a full recourse basis,
i.e. the client must buy them back if the invoice goes 60 days past terms.
Prairie requires personal guarantees from all clients. PBC may not necessarily
purchase all a clients receivables but has the right and the capability to
notify all the client's customers to pay Prairie directly to satisfy any past
due accounts regardless if the client has submitted the account to Prairie for
factoring. Prairie also has full offset rights.
MARKETING
Mr. Morgan leads the sales effort through numerous professional
referral contacts in the banking industry, public accounting and business
professionals. The marketing goal for 1999 is to significantly increase the
purchases of receivables from existing and new prospects. Personnel, systems and
procedures are in place to increase capacity to well over $5,000,000 a month in
purchased invoices. The company expects some moderate growth from our existing
clients and significant growth from new clients due to significantly increased
advertising and calling efforts. The ultimate size and success will be
determined by the ability to attract and retain highly qualified employees and
to raise funds.
FINANCIAL CONDITION
In order to attain the goal of $5,000,000 per month in purchased
invoices, a new line of credit will need to be established increasing the amount
to approximately $3,000,000 to $4,000,000. Currently the company is in the
process of obtaining a revolving bank loan to meet our objective.
6
<PAGE> 9
FIRST NATIONAL FINANCE CORP.(FNFC)
The Corporation established FNFC as a wholly owned subsidiary to
acquire certain assets from Shiloh Corporation. Mr. Charles E. Nootens was
elected Chairman of the company's Board of Directors effective June 30, 1997.
FNFC issued $3,500,000 principal amount of preferred stock and 50 call
pack options, at $10,000 each, to purchase 20 million shares of the
Corporation's Common Stock at 10 cents a share in exchange for the assets of Mr.
Nootens business. As of June 30, 1997, FNFC had issued additional call pack
options to purchase an aggregate of 8 million of the Corporation's common
shares. These calls were issued for a consideration of 2.5 cents per share and
entitled the holder to purchase shares at 10 cents per share or an aggregate of
$800,000.
The Corporation obtained approximately $3.5 million dollars of assets
($2.9 million liquid short-term) with the issuance of preferred stock in FNFC
and Call Options. Included in the short term assets are loans receivable,
interest and cash. (See Financial Statements, Note 15 "Continuing Operations,
Acquisitions and Subsequent Events").
INDUSTRY OVERVIEW
Urban areas are experiencing significant demands for redevelopment of
single and multiple family dwellings. Many qualified developers responding to
this demand require short term financing. The Company provides this financing
generally in large metropolitan areas.
FNFC'S FINANCING SERVICE OVERVIEW
FNFC is an active business engaged in making relatively small, high
yield bridge loans. These loans are typically in the range of $25,000 to
$100,000 to developers and redevelopers of real estate and to a lesser extent
tangible personal property and to producers, inventors, authors and syndicators
of media, software and other similar entertainment and intellectual properties.
The Corporation expanded through the acquisition of Prairie Business Credit an
accounts receivable factoring company. The company anticipates transferring a
significant amount of its bridge loan portfolio cash to the factoring
subsidiary.
During 1998 FNFC financed certain old time successful television shows
which were being released on VHS and DVD. These loans were for six months or
less and secured by a library of established television shows previously
converted to video tape.
SALES AND MARKETING
Through networking the Company has established contacts in local
markets allowing the Company to capitalize on their expertise. Guidelines have
been established to attract clients capable of fulfilling their business loan
obligations on a timely basis. The Company's marketing strategy incorporates a
continued review of client's needs, areas which require its services and
development of long-term relationships with borrowers to more fully understand
and anticipate their needs. The Company is currently negotiating with several
banks for an increase in its line of credit to expand its financing activities.
COMPETITION
The short term loan industry is very competitive and fragmented. There
are limited barriers to entry and new competitors frequently enter the market.
Some may possess substantially greater resources. The Company believes that the
availability of quality loan candidates, level of service, effective monitoring
7
<PAGE> 10
of loan and renovation performance and the price of service are the principal
elements of competition in bridge loans.
EMPLOYEES
As of March 15, 1999 FNFC has no employees and has a management
agreement for all services with First National Entertainment Corp.
PROPERTIES
The Company shares space with its parent in a leased office which has
an annual lease ending December 31, 2001.
SUBSEQUENT EVENTS (FNFC)
FNFC completed the acquisition of the name and assets of Prairie
Business Credit, Inc. in February, 1999 retroactive to January 1, 1999. (See
Financial Statement, Note 15 "Continuing Operations, Acquisitions, and
Subsequent Events").
FIRST NATIONAL ENVIRONMENTAL TECHNOLOGIES, INC. (FNET)
In 1997 the corporation established a subsidiary (FNET) which acquired
a Swiss management company and an 80% interest in a German subsidiary.
The companies were to develop operating systems for seamless
underground pipe repair utilizing a state of the art system which would save
customers thousands of dollars when compared to the current repair methods.
Significant differences arose and it became evident the corporation
could not agree on a business plan with the European managers. An original plan
to shut down the company in January of 1998 failed due to the inability of the
Europartners to fulfill their obligations in the agreement. In July, 1998 an
agreement was reached to dispose of FNET and ownership was transferred to a new
company formed by two of the three Swiss shareholders. All warrants were
negated. Two of three Swiss owners returned 735,000 Common shares. The company
received a $270,000 note conditional upon the new company meeting certain
performance measurements. There is no guarantee the loan in the amount of
$270,000 will be collected. (See Financial Statements, Note 4 "Notes
Receivable"). The net effect of this transaction was to recognize a gain on
disposal of approximately $5,700.
FIRST NATIONAL ENTERTAINMENT CORP.(THE CORPORATION)
TURNAROUND PLAN & SUBSEQUENT EVENTS
The corporation continues to follow a Business Turnaround Plan
developed in 1997, when the new management team led by Chairman Mr. Charles
Nootens was established. At that time it was determined that the company had
primary assets of a large shareholder base on the OTC Market and a tax-loss
carry-forward of approximately $23,500,000.
The Plan consisted of two major parts - establish and expand a
financial services business primarily in bridge loans and accounts receivable
factoring while re-establishing a viable general entertainment division. In 1998
and early 1999 the Corporation has completed two acquisitions toward
8
<PAGE> 11
these goals with the addition of Mr. Peter Keefe (now Equator Entertainment)
and Prairie Business Credit, Inc. (See Financial Statements, Note 15 "Continuing
Operations, Acquisitions, and Subsequent Events").
ITEM 2 - PROPERTIES
The Corporation's principal executive offices are located at 477 E.
Butterfield Road, Suite 307, Lombard, Illinois 60148, telephone (630) 971-9924.
The Company leases approximately 1300 square feet of office space in an
executive office building. The lease expires on December 31, 2001.
Prairie Business Credit, Inc. principal executive offices are located
at 221 West Jefferson St., Naperville, IL 60540, telephone (630) 717-1155. The
Company leases approximately 900 square feet of office space in an executive
office building. The lease expires on June 30, 1999.
The corporation is investigating the possibility of combining the two
offices.
In addition, the FNVC leases five stores for its video operation with
varying length of lease ending dates. (See Financial Statement, Note 13
"Leases").
The corporation anticipates establishing a sales and marketing office
for Equator Entertainment in the Los Angeles area by the end of the first
quarter, 1999.
ITEM 3 - LEGAL PROCEEDINGS
In the ordinary course of its business, the Corporation is from time to
time threatened with or named as a defendant in various lawsuits. The
Corporation is not currently involved in any material litigation. (See Financial
Statement, Note 14 "Commitments and Contingencies").
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Corporation's $.005 par value Common Stock shares were traded on
the NASDAQ 'Small Cap' Market System under the symbol "FNAT" through July 3,
1997. The following table shows the range of reported high and low bid
quotations for the Corporation's Common shares, as indicated on the OTC Market
Reports.
High Low
For the year ended 12/31/98 $0.10 $0.01
As of April 1, 1998, the Corporation had an estimated 3,500
shareholders of record. The Company has never paid a cash dividend on its Common
Stock and does not expect to pay a cash dividend on its Common Stock in the
foreseeable future.
9
<PAGE> 12
On October 6, 1996 the Corporation's Board of Directors approved and
issued an Extension and Optional New Pricing Offer to the holders of Warrants
from its Private Placement of 1,260,000 of the Corporation's common stock in
December 1995. These 1,260,000 Warrants originally entitled the holders to
purchase an additional share each of the Corporation's common stock at a price
of $1.00 through an expiration date of December 15, 1997. The Extension and
Optional New Pricing Offer allows an extension at the same price until December
31, 1998 for no additional consideration or an extension until December 31, 1999
at a share price of $.15 for additional consideration of $.05 per Warrant or an
extension until December 31, 2000 at a share price of $.05 for additional
consideration of $.10 per Warrant.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
When the new management team began the challenge of returning the
corporation to profitability, it was determined that a business plan that
acquired the assets of the short term bridge loan company for immediate positive
cash flow and allowed for re-entry into general entertainment would eventually
generate positive earnings on a consolidated basis.
When attempting a turnaround certain ventures entered into are
successful and others less successful. At the same time a great deal of effort
must be made to clear up any past financial problems which may have been harmful
to the turnaround. Stylus Records (See Financial Statement, Note 12, "Stylus
Records") is one example. The company was able to negotiate a favorable
settlement of the potential liability in cash or stock and bring this venture to
a conclusion.
During 1998 the publishing company proved unsuccessful and the company
experienced a limited loss which has been concluded.
The video store chain requires a great deal of effort, especially in a
rapidly changing industry. The company has made numerous changes in services,
personnel and operations to restore this subsidiary to profitability. At the
same time consideration is being given towards sale of the stores.
After almost one year of negotiation an agreement was reached in 1999
to acquire the name and assets of Prairie Business Credit, Inc. an accounts
receivable factoring company. The corporation believes this will contribute
profits to the corporation almost immediately.
The bridge loan business continued to provide the necessary cash flow
to operate the company. During the latter part of the year our policy changed to
one of faster turnover of the business loans. The loans are primarily made for
residential (up to 3 apartments) renovation in Chicago. The availability of
properties and the market for these properties remains strong. During 1998
expansion of the loan base did require additional bank and shareholder
borrowings.
In establishing Equator Entertainment the corporation is in pursuit of
the second part of the two part business plan - entry into the children's
entertainment industry. Currently in phase one the company has obtained upwards
of twenty animated children's shows from international producers for sale in the
U.S. Equator will obtain a percentage of the sales price.
First National Environmental Technologies was converted to a loan and
at this time the subsidiary is dormant.
10
<PAGE> 13
During 1998 it was the intention of the corporation to begin a first
class world tour travel company, however, after extensive review the Board of
Directors determined to loan funds on a convertible basis rather than establish
First National World Tours, Inc. as a wholly owned subsidiary.
THE YEAR 2000 ISSUE
As the year 2000 approaches, a significant business issue has emerged
regarding how existing application software programs and operating systems can
accommodate the date value for the year 2000. Many existing software application
products, including software application products used by the Corporation and
its suppliers and customers, were designed to accommodate only a two digit date
value, which represents the year. For example, information relating to the year
1996 is stored in the system at "96". As a result, the year 1999 (i.e. "99")
could be the maximum date value that these systems will be able to process
accurately.
Total compliance of all systems is expected by management to be
completed by the third quarter of 1999. The Corporation does not anticipate
material costs in addressing the Year 2000 issue. At this time it does not
appear that future operating results or financial condition will be materially
affected. With new software in FNVC required to comply with Rentrak Pay Per View
reporting, all video stores will be Y2K ready. However, if such modifications
and conversions are not made, or are not completed timely, the year 2000 issue
could have a material adverse impact on the operations of the Corporation. In
addition there can be no assurance that unforseen problems in the Corporation's
computer systems, or the systems of third parties on which the Corporation's
computers rely, will not have an adverse effect on the Corporation's systems or
operations.
FORWARD LOOKING STATEMENTS
The form 10-K includes certain "forward looking" statements, which
reflect the Corporation's current expectations regarding the future results of
operations, performance, and achievements. First National Entertainment Corp.
has tried, wherever possible, to identify these statements by having words such
as "believe", "anticipate", "expect" and similar expressions. These
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performances or achievements of
the Corporation or its industry to be materially different from any future
results, performance or achievements expressed or impaired by such
forward-looking statements. The risks and uncertainties include the following:
economic activity in the United States, continued strong building rehabilitation
market with available mortgage funds; the Corporation's ability to attract new
businesses to its plan of diversification; the retention of key personnel;
exposure to liability risk and changes in tax or regulatory requirements.
REVENUE
The Corporation's revenues were generated from interest and loan fees
in the Finance subsidiary and video store rentals and sales.
NET OPERATING REVENUE
Net operating revenue from continuing operations increased from $-0-
for the year ended June 30, 1997 to $301,434 for the six months ended December
31, 1997 to $1,535,047 for the year ended December 31, 1998.
11
<PAGE> 14
OPERATING EXPENSES
Operating expenses from continuing operations went from $2.8 million
for the year ended June 30, 1997 to $755,102 for the six month period ended
December 31, 1997 to $1.8 million for the year ended December 31, 1998. There
were $490,000 and $2.2 million in expenses related to the write-off of film
inventory costs for the periods ended December 31, 1997 and June 30, 1997,
respectively (See Financial Statements, Note 6 - "Amortization of Film
Inventory"). For the year ended December 31, 1998 there was a $216,000 loss
recorded in conjunction with the sale of real estate held for development. In
addition approximately $175,000 was paid to Mr. Petere Keefe as a signing bonus
for him to join the Corporation and run the newly formed Equator Entertainment
subsidiary. The reserve for loan losses was increased by $113,000 and
approximately $35,000 was recorded as a lease liability in conjunction with
closing one of the video stores.
OPERATING LOSS
Operating loss from continuing operations decreased from $2.8 million
for the year ended June 30, 1997 to $(453,668) for the six months ended December
31, 1997 to $237,675 for the year ended December 31, 1998.
OTHER (INCOME) EXPENSE
Other income of $44,000 was generated for the year ended December 31,
1998 compared to $102,000 for the six months ended December 31, 1997 and other
expense of $173,000 for the year ended June 30, 1997.
INCOME TAXES
No income tax effect for the year ended December 31, 1998. The
corporation is limited in its annual utilization of loss carrryforwards under
IRC Section 382. "Limitation of Net Operating Loss Carryforwards", based on
certain changes in ownership. (See Financial Statement, Note 10 "Income Taxes").
NET LOSS
Net loss of $320,963 for the year compared to $1,116,527 net loss for
the six months ended December 31, 1997 and $2,983,712 net loss for the year
ended June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Corporation has financed its operations through cash
generated by operating activities and through external financing, including sale
of warrants, bank credit and private placement of lines of credit.
The corporation believes that its cash balance, funds from operations
and planned line of revolver credit to be sufficient to fund the operation of
corporate management and growth for the next twelve months.
MANAGEMENT REPORT
The accompanying financial statements of First National Entertainment
Corp. and Subsidiaries (the "Company") are the responsibility of and have been
prepared by the Corporation in conformity with generally accepted accounting
principles. It is necessary to include some amounts that are based on best
12
<PAGE> 15
judgment and estimates. The Corporation seeks to assure the objectivity and
integrity of its financial records by careful selection of its employees and by
insuring that its policies and methods are understood. The Board of Directors
pursue oversight of financial reporting and internal control on a regular basis.
It is believed by management as stated earlier it has sufficient funding to
continue as a going concern.
ITEM 7 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the attached Financial Statements
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 9 - DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the Executive Officers and Directors of the Board
for the Corporation, their ages, positions held with the Corporation and term of
service as Director of the Corporation, as of December 31, 1998.
<TABLE>
<CAPTION>
NAME AGE POSITIONS HELD WITH CORPORATION PERIODS OF SERVICE AS CORPORATION
DIRECTOR
- -------------------------------- -------- --------------------------------------- ------------------------------------
<S> <C> <C> <C>
Chairman of the Board of Directors
Charles E. Nootens 57 April 1997 to Present
President
June 1997 to Present
Geoffrey W. McGrath 26 Director March 1997 to Present
Kenneth E. Scipta 58 CEO, Secretary and Director June 1997 to Present
Peter Keefe 46 Director July, 1998 to Present
James S. Yerbic 60 Director June 1997 to February, 1999
</TABLE>
Kenneth E. Scipta was appointed CEO by the Board effective August 1,
1997. On September 10, 1997 Mr. Scipta replaced Mr. McGrath as Secretary.
Mr. James Yerbic voluntarily resigned from the Board effective February
25, 1999.
All Directors serve until the next annual meeting of stockholders and
the concurrent election of directors. All officers serve at the pleasure of the
Board of Directors. No Director holds directorships in other reporting
companies.
13
<PAGE> 16
On September 10, 1997, a stock program was approved to option 300,000
shares to each board member earned monthly over 36 months. At December 31, 1998,
566,000 shares have been issued.
BUSINESS EXPERIENCE OF NOMINEES AND EXECUTIVE OFFICERS
CHARLES E. NOOTENS - Mr. Nootens (age 57) is the Chairman of the Board,
President and a Director of FNAT. He is also President and sole director of FNFC
and a director of FNET. Prior to joining the Company, he was President and
primary stockholder of Shiloh Inc., which was engaged in a business similar to
FNFC. Prior thereto, he was President of American Energy Management, Inc., which
he founded in 1987 and sold in 1995. Mr. Nootens is a graduate of the University
of Chicago (A.B. 1963 and MBA 1964). He majored in accounting and worked as an
auditor for Arthur Andersen & Co. prior to founding American Energy Management,
Inc.
KENNETH E. SCIPTA - Mr. Scipta (age 58) is the CEO, Director, and Secretary of
FNAT. Prior to joining the Company, he was President and Board Member of
Mid-West Spring Manufacturing Company, one of the five largest spring companies
in the USA. During his twenty years with the company he served as Vice President
of Finance and Vice President of Sales & Marketing. Mr. Scipta is a CPA and
initially worked as an auditor with Ernst & Young. He is a graduate of St.
Joseph's College, Indiana (BA - 1966).
JAMES S. YERBIC - Mr. Yerbic (age 60) is a Director of FNAT. He currently is an
independent business consultant. For many years he was a senior financial
officer and business development officer for several companies, including
Duchossois Industries (1992 to 1996), Eagle Industries (1989 to 1991), Jepson
Industries (1985 to 1989) and McGraw-Edison Company (1973 to 1985). Prior to
that he was with Arthur Andersen & Co. He is a graduate of Bradley University
(BS - 1967).
GEOFFREY W. MCGRATH - Mr. McGrath (age 26) is a Director and Secretary of FNAT.
He is also a Vice President and Director of NHI, where he is responsible for
NHI's investment in FNAT as well as certain other investments in the NHI
portfolio. He is a graduate of the University of Illinois, Champaign-Urbana (BA
- - 1997).
PETER KEEFE - Mr. Keefe (age 46) is a Director of FNAT. He is the Managing
Director of Equator Entertainment. Prior to joining the company, he was
President of Peter Keefe Productions, a global television production &
merchandise licensing consulting company. Prior there to he was the Managing
Director of Zen Entertainment (1994-1996), a Managing Partner of Zodiac
Entertainment (1989-1994) and the Senior Vice President at World Events
Productions (1980-1989). He has created, produced and successfully marketed
several US & International hit children's and family entertainment series
including Voltron, which generated over 100 million dollars in earnings.
ITEM 10 - EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table summarizes the compensation paid during the last three
fiscal years to the Company's executive officers and directors.
14
<PAGE> 17
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------- ----------------------
Fiscal Other Restricted Securities
Name and Year & Annual Stock Underlying All Other
Principal Position *6 mo. Salary Compensation Awards Options/SARs(#) Compensation
- ------------------ period ------ ------------ ------ --------------- ------------
12/31/97
<S> <C> <C> <C> <C> <C> <C>
Charles E. Nootens 1997* $ 0 $1,500(a) $ 0 0 0
President 1998 $32,813 $1,000(a)
Kenneth E. Scipta 1997* $28,500 $1,160(a) $ 0 0 0
CEO, Company 1998 $85,000 $1,000(a)
Secretary
Peter Keefe 1998 $37,500 $ 500(a) $ 0 0 0
Director
</TABLE>
NOTES:
(a) Mr. Nootens received 100,000 shares and 75,000 for 1998 and 1997
respectively. Mr. Scipta received 100,000 shares and 58,000 for 1998
and 1997 respectively. Mr. Peter Keefe received 50,000 shares for 1998.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS AND STOCK HOLDINGS OF MANAGEMENT
The following table sets forth as of March 31, 1999 all persons known by the
Corporation to be a beneficial owner of more than five percent of any class of
the Corporation's voting securities and the security ownership in the
Corporation or its affiliates, directly or indirectly by all directors and
nominees, executive officers and all directors and officers of the Corporation
as a group. Unless otherwise stated, the nature of beneficial ownership is that
of sole voting power and sole investment power.
NAME AND ADDRESS OF BENEFICIAL AMOUNT AND NATURE OF PERCENT
OWNER BENEFICIAL OWNERSHIP OF CLASS1
CHARLES E. NOOTENS
477 E.BUTTERFIELD RD., 740,994(6) 4.0%
STE.
307, LOMBARD, IL 60148 23,900,000(2)
KENNETH E. SCIPTA
477 E. BUTTERFIELD RD., STE. 400,450(6) 2.2%
307, LOMBARD, IL 60148 800,000(3)
GEOFFRY MCGRATH
NIMBUS HOLDINGS, INC. 593,000 (4),(5),(6) 3.2%
943 EDGEMERE CT.
EVANSTON, IL 60202 4,300,000 (3)
PETER KEEFE
29050 WAGON RD. 200,000 (6), (7) 1.0%
AGOURA HILLS, CA 100,000 (7)
TREVOR MORGAN
221 W. JEFFERSON AVE. 100,000 (7) .5%
NAPERVILLE, IL 60540
15
<PAGE> 18
1. Calculated based upon 18,573,458 shares of Common Stock issued and
outstanding as of the Record Date of March 31, 1998. In addition to its Common
Stock, the Corporation had outstanding as of March 31, 1999, 29,100,000 Options
and Warrants to purchase one share of common stock, $0.005 par value each. None
of the holders of the Warrants are entitled to vote, receive dividends, receive
notices of meetings or to any other shareholder rights on account of the
Warrants prior to exercise thereof.
2. Of the shares beneficially owned, 200,000 of these shares represent shares
that may be purchased on existing warrants at $.05 per share (See Financial
Statements, Note 10 "Shareholders' Equity"), and an additional 22,400,000
options at $0.10 each. (See Financial Statements, Note 15 "Continuing
Operations, Acquisitions, and Subsequent Events").
3. Call pack options of Scipta (800,000) and Nimbus (3,600,000) at a cost of
$.025 each to acquire shares at $0.10 each. (See Financial Statements, Note 15
"Continuing Operations, Acquisitions, and Subsequent Events")
4. Geoffry McGrath owns 3.2% of the shares and serves as Vice President and
Director of Nimbus Holdings. Accordingly, Mr. McGrath may be deemed to
beneficially own the shares of Common Stock held by Nimbus Holdings.
5. Of the shares beneficially owned, 600,000 of these shares represent shares
that may be purchased upon exercise of warrants at $.15 per share. (See
Financial Statements, Note 11 "Shareholders' Equity").
6. Common Stock for Board Service, Nootens (175,000), McGrath-Nimbus (183,000),
and Scipta (158,000), Peter Keefe (50,000). (See Financial Statements, Note 11
"Shareholders' Equity").
7. Peter Keefe obtained 150,000 shares and Trevor Morgan obtained 100,000 shares
in the acquisition of the assets of their companies. In addition Mr. Keefe
received 100,000 warrants to obtain one common share at $.25 per share.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT
The Securities Exchange Act of 1934 requires all executive officers,
directors and 5% or greater shareholders to report any changes in their
ownership of Company common stock to the Securities and Exchange Commission,
NASDAQ and the Company.
PART IV
ITEM 13 - EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
Financial Statements and Schedules:
See Table of Contents at the beginning of attached financial
statements.
16
<PAGE> 19
Exhibits required by Item 601 of Regulation S-B.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
3.1* Articles of Incorporation as Amended on 7/1/93 approved by
shareholders on May 21, 1993 (Restated as Amended).
(Incorporated by reference to Exhibit 3.1 of the Company's
Annual Report of Form 10-K for the year ended June 30, 1993,
Commission File No. 0-18866)
3.1.1* Amendment of Articles of Incorporation approved on October 28,
1994.
3.2 * By-laws approved and adopted March 30, 1989. (Incorporated
by reference to Exhibit 3.2 of the Company's Annual Report of
Form 10-K for the year ended June 30, 1993, Commission File
No. 0-18866)
4.1 * Instruments Defining Rights of Security Holders, Class A
and Class B Common Stock Purchase Warrants. (Incorporated by
reference to the Registration Statement on Form S-18, declared
effective on 9/19/89, SEC Reg. No. 33-30153-B)
10.1 * 1993 Non-Statutory Stock Option Plan, April 1, 1993.
(Incorporated by reference to Exhibit 10.1 of the Company's
Annual Report of Form 10-K for the year ended June 30, 1993,
Commission File No. 0-18866)
10.2* 1993 Incentive Stock Option Plan, April 1, 1993.
(Incorporated by reference to Exhibit 10.2 of the Company's
Annual Report of Form 10-K for the year ended June 30, 1993,
Commission File No.
0-18866)
10.3 * Employment Agreement with Jeffrey S. Schwaber dated
March 26, 1993. (Incorporated by reference to Exhibit 10.3 of
the Company's Annual Report of Form 10-K for the year ended
June 30, 1993, Commission File No. 0-18866)
10.4 * Employment Agreement and option with Rick D. Busby dated
January 15, 1993. (Incorporated by reference to Exhibit 10.4
of the Company's Annual Report of Form 10-K for the year ended
June 30, 1993, Commission File No. 0-18866)
10.5 * Milton Verret Stock Purchase Arrangement of December 1, 1991
(Written Summary). (Incorporated by reference to Exhibit 10.5
of the Company's Annual Report of Form 10-K for the year ended
June 30, 1993, Commission File No. 0-18866)
10.6 * Continental Capital & Equity Corp. Advertising Consulting
Agreement dated March 5, 1993 and Agenda of May 11, 1993
(Incorporated by reference to Exhibit 10.6 of the Company's
Annual Report of Form 10-K for the year ended June 30, 1993,
Commission File No. 0-18866)
10.7 * Television Distribution Agreement with Technovision
Industries, Inc. dated March 16, 1993 (Incorporated by
reference to Exhibit 10.7 of the Company's Annual Report of
Form 10-K for the year ended June 30, 1993, Commission File
No. 0-18866)
10.8 * Letter Agreement and Amendment Agreement with Entertainment
Marketing & Communications International dated February 3,
1992 and June 15, 1993, respectively (Incorporated by
reference to Exhibit 10.8 of the Company's Annual Report of
Form 10-K for the year ended June 30, 1993, Commission File
No. 0-18866)
</TABLE>
17
<PAGE> 20
10.9 * Agreement with American Softworks Corporation dated
June 17, 1993. (Incorporated by reference to Exhibit 10.9 of
the Company's Annual Report of Form 10-K for the year ended
June 30, 1993, Commission File No. 0-18866)
10.10 * Agreement with Worldvision Enterprises Inc. dated July
16, 1993. (Incorporated by reference to Exhibit 10.10 of the
Company's Annual Report of Form 10-K for the year ended June
30, 1993, Commission File No. 0-18866)
10.11*+ 1994 Employee Stock Purchase Plan, dated January 22,
1994 (Incorporated by reference to Exhibit 10.11 of the
Company's Annual Report of Form 10-K for the year ended June
30, 1994, Commission File No. 0-18866)
10.12* Amendments to Worldvision Enterprises Inc. Agreement,
dated April 13, 1994 and May 23, 1994 (Incorporated by
reference to Exhibit 10.12 of the Company's Annual Report of
Form 10-K for the year ended June 30, 1994, Commission File
No. 0-18866)
10.13* Stylus Records Inc. subsidiary Founder's Agreement
dated April 15, 1994 (Incorporated by reference to Exhibit
10.13 of the Company's Annual Report of Form 10-K for the year
ended June 30, 1994, Commission File No. 0-18866)
10.14* Replacement Television Program Distribution Agreement
with Technovision Industries, Inc. dated June 10, 1994
(Incorporated by reference to Exhibit 10.14 of the Company's
Annual Report of Form 10-K for the year ended June 30, 1994,
Commission File No. 0-18866)
10.15*+ Employment Agreement with Stephen J. Denari dated May
10, 1995. (Incorporated by reference to Exhibit 10.15 of the
Company's Annual Report of Form 10-K for the year ended June
30, 1995, Commission File No. 0-18866)
10.16*+ Non-Qualified Stock Option Grant Agreement with Eugene
E. Denari, Jr. dated June 26, 1995. (Incorporated by reference
to Exhibit 10.16 of the Company's Annual Report of Form 10-K
for the year ended June 30, 1995, Commission File No. 0-18866)
10.17*+ Non-Qualified Stock Option Grant Agreement with
Stephen J. Denari dated June 26, 1995. (Incorporated by
reference to Exhibit 10.17 of the Company's Annual Report of
Form 10-K for the year ended June 30, 1995, Commission File
No. 0-18866)
10.18* Promissory Note from Milton J. Verret dated July 14, 1995.
(Incorporated by reference to Exhibit 10.18 of the Company's
Annual Report of Form 10-K for the year ended June 30, 1995,
Commission File No. 0-18866)
10.19* Distribution Agreement with SeaGull Entertainment ,
Inc. dated October 4, 1995. (Incorporated by reference to
Exhibit 10.19 of the Company's Annual Report of Form 10-K for
the year ended June 30, 1995, Commission File No. 0-18866)
10.20* Amendment to Promissory Note and Collateral Agreement
with Milton Verret, dated July 14, 1995. (Incorporated by
reference to Exhibit 10.20 of the Company's Annual Report of
Form 10-K for the year ended June 30, 1995, Commission File
No. 0-18866)
10.21* Option Agreement with Vivienne Crowe dated September 14, 1996.
16.1* Letter from former accountant regarding concurrence with
registrant's statements in report regarding dismissal as
registrant's principal accountant, dated June 30, 1994
(Incorporated by reference to Exhibit 16.1 of the Company's
Annual Report of Form 10-K for the year ended June 30, 1994,
Commission File No. 0-18866)
21.1* Subsidiaries of the Registrant, as amended on April 15,
1994 (Incorporated by reference to Exhibit 21.1 of the
Company's Annual Report of Form 10-K for the year ended June
30, 1994, Commission File No. 0-18866)
18
<PAGE> 21
* Previously filed with the Commission.
+ Constitutes agreement or plan relating to employment or employee benefits.
REPORTS ON FORM 8-K DURING THE LAST QUARTER
On February 4, 1999 the Company filed on Form 8-K, that the Board of
Directors approved the purchase of the assets and name of Prairie Business
Credit, Inc. a new subsidiary of the wholly owned First National Finance Corp.
FNAT also created a new subsidiary, Equator Entertainment, Inc. (EEI)
and has acquired the assets of P.K. Productions located in the Los Angeles area.
The Board has approved the addition of Mr. Peter Keefe to the Board of
Directors retroactive to July 1, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
Dated: March 31, 1999
FIRST NATIONAL ENTERTAINMENT CORP.
By: /s/ Charles E. Nootens
------------------------------
Charles E. Nootens
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S><C>
SIGNATURE TITLE DATE
/s/ Charles E. Nootens CHAIRMAN, PRESIDENT, March 31, 1999
- ----------------------
CHARLES E. NOOTENS
/s/ Kenneth E. Scipta CHIEF EXECUTIVE OFFICER, DIRECTOR March 31, 1999
- ---------------------
Kenneth E. Scipta
</TABLE>
19
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Comment
- ----------- ----------- -------
<S> <C> <C>
3.1 * Articles of Incorporation, as amended Restated as Amended
3.1.1 * Articles of Amendment to the Articles of Incorporation Adopted October 28, 1994 (Filed concurrently)
3.2 * By-laws By-laws see Note 1
4.1 *** Instruments Defining Rights of Security Holders Class A & B Warrants
10.1 * Non-Statutory Stock Option Plan April 1, 1993
10.2 * Incentive Stock Option Plan April 1, 1993
10.3 * Employment Agreement with Jeffrey Schwaber March 26, 1993
10.4 * Employment Agreement with Rick Busby January 15, 1993
10.5 * Stock Purchase Agreement with Milton Verret December 1, 1991
10.6 * Continental Capital & Equity Agreement March 5, 1993 and Addenda May 11, 1993
10.7 * Technovision Agreement March 16, 1993
10.8 * Entertainment Marketing & Communications Agreement February 3, 1992 and June 15, 1993
10.9 * American Softworks Agreement June 17, 1993
10.10 * Worldvision Agreement July 16, 1993
10.11** Employee Stock Purchase Plan January 22, 1994
10.12** Worldvision Agreement, as amended April 13, 1994 and May 23, 1994
10.13** Stylus Records Founder's Agreement April 15, 1994
10.14** Technovision Agreement, as amended June 10, 1994
10.15 **** Employment Agreement with Stephen J. Denari May 10, 1995 (Filed concurrently)
10.16**** Non-Qualified Stock Option Grant Agreement with June 26, 1995 (Filed concurrently)
Eugene E. Denari, Jr.
10.17**** Non-Qualified Stock Option Grant Agreement with June 26, 1995 (Filed concurrently)
Stephen J. Denari
10.18**** Promissory Note from Milton J. Verret July 14, 1995 (Filed concurrently)
10.19**** Distribution Agreement with SeaGull Entertainment , Inc. October 4, 1995 (Filed concurrently)
10.20**** Amendment to Promissory Note and Collateral Agreement with July 14, 1995
Milton Verret
10.21 * Option agreement with Viviene Crowe September 14, 1996
16.1** Letter from previous auditor June 30, 1994
21.1** Subsidiaries of the Registrant, as amended Restated as Amended
</TABLE>
* Incorporated by reference to Annual Report on Form 10-KSB-A1 filed on November
18, 1993.
**Incorporated by reference to Annual Report on Form 10-KSB-A1 filed on
September 27, 1994.
***Incorporated by reference to the Registration Statement on Form S-18,
declared effective on 9/19/89, SEC Reg. No. 33-30153-B
**** Incorporated by reference to Annual Report on Form 10-KSB filed on
October 28, 1995.
20
<PAGE> 23
FIRST NATIONAL ENTERTAINMENT CORP.
AND SUBSIDIARIES
Lombard, Illinois
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
<PAGE> 24
FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
Lombard, Illinois
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
REPORT OF INDEPENDENT AUDITORS............................................ 1
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS.......................................... 2
CONSOLIDATED STATEMENTS OF OPERATIONS................................ 3
CONSOLIDATED STATEMENTS OF CASH FLOWS................................ 4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)............ 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS........................... 7
</TABLE>
<PAGE> 25
[LOGO OF CROWE CHIZEK]
REPORT OF INDEPENDENT AUDITORS
Board of Directors
First National Entertainment Corp.
and Subsidiaries
Lombard, Illinois
We have audited the accompanying consolidated balance sheets of First National
Entertainment Corp. and Subsidiaries as of December 31, 1998 and 1997 and the
consolidated statements of operations, cash flows, and shareholders' equity
(deficit) for the year ended December 31, 1998, the six-month period ended
December 31, 1997, and the year ended June 30, 1997. 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 audit 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
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 National
Entertainment Corp. and Subsidiaries at December 31, 1998 and 1997 and the
results of their operations and their cash flows for the year ended December 31,
1998, the six-month period ended December 31, 1997, and the year ended June 30,
1997, in conformity with generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
----------------------------------
Crowe, Chizek and Company LLP
Oak Brook, Illinois
March 1, 1999
1.
<PAGE> 26
FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
---------December 31,--------
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash $ 183,983 $ 218,798
Cash escrow account -- 500,000
Loans receivable, less allowance for loan losses of
$150,000 and $37,000 at December 31, 1998 and
1997, respectively 3,068,845 1,985,398
Inventories 117,333 --
Notes receivable 909,380 --
Interest receivable 87,582 147,005
Real estate held for development 9,000 550,000
Leasehold improvements and equipment, net 128,381 77,647
Other assets 63,374 212,004
------------ -----------
$ 4,567,878 $ 3,690,852
============ ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Liabilities
Short-term debt $ 2,415,651 $ 273,696
Accounts payable 171,884 534,899
Accrued expenses 342,711 507,417
------------ -----------
Total liabilities 2,930,246 1,316,012
Minority interest in consolidated subsidiary (entitled
in liquidation to $3.5 million) 2,788,968 2,788,968
Shareholders' deficit
Preferred stock, $.0001 par value, authorized
10,000,000 shares, no shares issued and outstanding
Common stock, $.005 par value; authorized,
100,000,000 shares 92,690 93,365
Paid-in capital 27,258,241 27,271,566
Accumulated deficit (28,502,267) (27,779,059)
------------ -----------
Total shareholders' deficit (1,151,336) (414,128)
------------ -----------
$ 4,567,878 $ 3,690,852
============ ===========
</TABLE>
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
2.
<PAGE> 27
FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Six Months
Year Ended Ended Year Ended
December 31, December 31, June 30,
1998 1997 1997
---- ---- ----
<S> <C> <C> <C>
Operating revenues
Interest and fees on loans $ 813,374 $ 301,434 $ -
Sales and rentals of videocassette tapes
and related products 1,060,138 - -
-------------- -------------- --------------
1,873,512 301,434 -
Cost of revenues
Cost of videocassette tape sales and rentals 338,465 - -
-------------- -------------- --------------
NET OPERATING REVENUE 1,535,047 301,434 -
Operating expenses
Marketing, selling, and royalties 2,356 6,343 103,542
General and administrative 1,465,239 206,242 357,769
Write-off film inventory costs - 490,000 2,200,000
Write-off goodwill and organization costs - 52,517 145,174
Loss on real estate held for development 216,000 - -
Other 89,127 - -
-------------- -------------- --------------
Total operating expenses 1,772,722 755,102 2,806,485
-------------- -------------- --------------
OPERATING LOSS (237,675) (453,668) (2,806,485)
Other income (expense)
Other 44,294 102,707 (173,303)
Interest expense (133,282) (33,874) (3,924)
-------------- -------------- --------------
(88,988) 68,833 (177,227)
LOSS FROM CONTINUING OPERATIONS (326,663) (384,835) (2,983,712)
-------------- -------------- --------------
Discontinued operations
Loss from discontinued operations (Note 15) - (731,692) -
Gain on disposal 5,700 - -
-------------- -------------- --------------
Net loss $ (320,963) $ (1,116,527) $ (2,983,712)
============== ============== ==============
Weighted average shares outstanding 18,413,020 17,899,955 16,898,458
============== ============== ==============
Net loss per share
Loss from continuing operations $ (.02) $ (.02) $ (.18)
Discontinued operations - (.04) -
-------------- -------------- --------------
Net loss $ (.02) $ (.06) $ (.18)
============== ============== ==============
</TABLE>
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
3.
<PAGE> 28
FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Six Months
Year Ended Ended Year Ended
December 31, December 31, June 30,
1998 1997 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (320,963) $ (1,116,527) $ (2,983,712)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities
Gain on disposal of subsidiaries (5,700) - -
Loss on disposal of furniture and equipment 18,000 - 9,022
Loss on real estate held for development 216,000 - -
Write down of film inventory to net realizable value - 490,000 2,200,000
Write down of organization costs of Swiss subsidiary - 521,299 -
Stock issued for services and compensation, net 6,000 5,480 -
Provision for loan losses 113,000 12,000 -
Other amortization and depreciation 27,361 1,772 148,070
Increase (decrease) in cash caused by change in assets
and liabilities, net of effects from acquisitions and
divestitures
Loans receivable (1,196,447) 188,917 -
Videocassette rental inventory (117,333) - -
Interest receivable 59,423 (94,352) -
Accounts payable (301,331) 119,642 88,462
Other assets (42,371) - 150,034
Other liabilities 37,123 75,107 26,945
------------- ------------- -------------
Net cash provided by (used in) operating activities (1,507,238) 203,338 (361,179)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property, plant, and equipment (162,907) (28,387) (3,542)
Cash received from escrow 500,000 - -
Cash received from acquisition of Swiss company - 197,879 -
Purchase of license agreement - (150,000) -
Notes receivable (783,380) - -
Cash received from sale of real estate held
for development 208,000 - -
Cash paid for real estate development property (9,000) - -
------------- ------------- -------------
Net cash provided by (used in) investing activities (247,287) 19,492 (3,542)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance (cancellation) of warrants (20,000) 60,000 60,000
Loans (payments) from/to shareholder 700,288 (66,304) 200,000
Proceeds from borrowings on notes 1,500,000 - -
Principal payments on notes (58,333) - -
Dividends paid on preferred stock of subsidiary (402,245) (50,000) -
------------- ------------- -------------
Net cash provided by (used in) financing activities 1,719,710 (56,304) 260,000
------------- ------------- -------------
Increase (decrease) in cash (34,815) 166,526 (104,721)
Cash and cash equivalents at beginning of period 218,798 52,272 156,993
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 183,983 $ 218,798 $ 52,272
============= ============= =============
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
4.
<PAGE> 29
FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Six Months
Year Ended Ended Year Ended
December 31, December 31, June 30,
1998 1997 1997
---- ---- ----
<S> <C> <C> <C>
Supplemental schedule of noncash investing and
financing activities
During the year ended June 30, 1997, First National Finance Corp. (FNFC)
acquired certain assets from corporations owned by the Chairman of the
Board of Directors in exchange for $3,500,000, principal amount, of FNFC
preferred stock and warrants to acquire 20,000,000 shares of First
National Entertainment Corp. common stock
Loans receivable $ 2,186,315
Interest receivable 52,653
Real estate held for development 550,000
Cash escrow account 500,000
Preferred stock (2,788,968)
Additional paid-in capital (500,000)
During the six-month period ended December 31, 1997, FNAT Umwelttechnik AG
acquired certain assets and liabilities from a Swiss company in exchange
for 1,500,000 shares of the parent's common stock
Fair value of assets acquired $ 746,805
Common stock issued (7,500)
Contributed capital by nonshareholders (416,848)
Contributed note (268,947)
-----------
Liabilities assumed $ 53,510
===========
Note received in exchange for sale of real estate
held for development $126,000
========
Supplemental schedules of cash flow information
Interest paid $102,348 $ 32,074 $ 3,924
</TABLE>
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
5.
<PAGE> 30
FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
---------Common Stock-------
Number Additional
of Paid-in Accumulated
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1996 16,898,458 $ 84,495 $ 26,090,608 $ (23,613,820) $ 2,561,283
Issuance of warrants - - 560,000 - 560,000
Net loss - - - (2,983,712) (2,983,712)
-------------- ----------- -------------- -------------- -------------
Balance at June 30, 1997 16,898,458 84,495 26,650,608 (26,597,532) 137,571
Issuance of common stock
for professional fees 274,000 1,370 4,110 - 5,480
Issuance of warrants - - 200,000 - 200,000
Cash dividends on
preferred stock of
subsidiary - - - (65,000) (65,000)
Net loss - - - (1,116,527) (1,116,527)
Issuance of common
stock for acquisition
of subsidiary 1,500,000 7,500 416,848 - 424,348
-------------- ----------- -------------- -------------- -------------
Balance at December 31, 1997 18,672,458 93,365 27,271,566 (27,779,059) (414,128)
Issuance of common stock
for professional fees and
employee compensation 600,000 3,000 3,000 - 6,000
Cancellation of warrants
and return of cash - - (20,000) - (20,000)
Cash dividends on
preferred stock of
subsidiary - - - (402,245) (402,245)
Net loss - - - (320,963) (320,963)
Cancellation of stock related
to disposal of subsidiaries (735,000) (3,675) 3,675 - -
-------------- ----------- -------------- -------------- -------------
Balance at December 31, 1998 18,537,458 $ 92,690 $ 27,258,241 $ (28,502,267) $ (1,151,336)
============== =========== ============== ============== =============
</TABLE>
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
6.
<PAGE> 31
FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 1 - BUSINESS DESCRIPTION
The Company's business has historically been the acquisition, distribution, and
marketing of high-quality entertainment properties targeted at the family market
in film and other media. Beginning in May 1997, the Company embarked on a
diversification program.
First National Finance Corp. was formed for the purpose of extending credit
primarily to developers and redevelopers of real estate and to producers,
inventors, authors, and syndicators of media software and similar entertainment
and intellectual properties in the form of short-term, high-yield bridge loans
(typically in the range of $25,000 to $100,000) (see Note 2).
On April 28, 1998, First National Video Corp. was established when the Company
acquired all of the assets and operating rights to six retail video stores in
the Chicago area. The transaction was accounted for as a purchase. The Company's
primary business is the sale and rental of videocassettes and games. The video
stores also sell various retail merchandise including blank videocassette tapes,
beverages, and snacks.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the
accounts of First National Entertainment Corp. (a Colorado corporation) and its
subsidiaries, Equator Entertainment, First National Finance Corp., and First
National Video Corp. (collectively referred to as the "Company"). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Fiscal Year Change: Effective January 1, 1998, the Company changed its fiscal
year-end of June 30 to a year-end of December 31. The six-month transition
period bridges the gap between the Company's old and new fiscal year end.
Inventories: Inventories, consisting primarily of prerecorded videocassettes,
concessions, and other accessories held for resale, are stated at the lower of
cost or market. Cost of sales is determined on a first-in, first-out basis
("FIFO"). Videocassette rental inventory, which includes video games, is stated
at cost and amortized over its estimated useful life to a $4 per videocassette
salvage value. See Note 4 for discussion of the amortization policy applied to
videocassette rental inventory.
- -------------------------------------------------------------------------------
(Continued)
7.
<PAGE> 32
FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash and Cash Equivalents: For purposes of the statement of cash flows, the
Company considers all investments with maturities of three months or less, when
purchased, to be cash equivalents.
Loans Receivable: Loans are stated net of the allowance for loan losses and
unearned discount. Interest on loans is included in operating revenues over the
term of the loan based upon the principal balance outstanding. Where serious
doubt exists as to the collectibility of a loan, the accrual of interest is
discontinued. Loan fees and direct loan origination costs are deferred and
amortized over the term of the loan as a yield adjustment.
The Company has a reserve for unfunded restoration costs which it holds in
escrow. Payments are made from time to time as work is completed and
documentation is presented to a title company for approval. Funds are disbursed
upon a directive from the title company.
Allowance for Loan Losses: An allowance for loan losses has been established to
provide for those loans which may not be repaid in their entirety. The allowance
is increased by provisions for loan losses charged to expense and decreased by
charge-offs, net of recoveries. Although a loan is charged off by management
when deemed uncollectible, collection efforts may continue and future recoveries
may occur.
The allowance is maintained by management at a level considered adequate to
cover losses that are currently anticipated based on past loss experience,
general economic conditions, information about specific borrower situations
(including their financial position and collateral values) and other factors and
estimates which are subject to change over time. Estimating the risk of loss and
the amount of loss on any loan is necessarily subjective and ultimate losses may
vary from current estimates. These estimates are reviewed periodically, and as
adjustments become necessary, they are reported in earnings in the periods in
which they become known.
Loans are considered impaired if full principal or interest payments are not
anticipated. Each impaired loan is carried at the present value of expected cash
flows discounted at the loan's effective interest rate or at the fair value of
the collateral if the loan is collateral dependent. A portion of the allowance
for loan losses is allocated to an impaired loan if the present value of cash
flows or collateral value indicate the need for an allowance.
For impaired loans and other loans, accrual of interest is discontinued on a
loan when management believes, after considering collection efforts and other
factors, that the borrower's financial condition is such that collection of
interest is doubtful. Cash collections on impaired loans are credited to the
loan receivable balance, and no interest income is recognized on those loans
until the principal balance has been collected.
- -------------------------------------------------------------------------------
(Continued)
8.
<PAGE> 33
FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property, Plant, and Equipment: Property, plant, and equipment are recorded at
cost. Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally 3 to 7 years.
Financial Instruments: The Company's financial instruments consist principally
of loans receivable and notes payable and are carried at amounts which
approximate fair value.
Stock-Based Compensation: On October 23, 1995, the Financial Accounting
Standards Board (the "FASB") issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 encourages, but does not require, the recognition of
compensation expense for grants of stock, stock options, and other equity
instruments to employees based on a fair value method of accounting. Companies
are permitted to continue to apply the existing accounting rules contained in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APBO No. 25"); however, companies that choose to retain this method
of accounting are required to provide expanded disclosures of pro forma net
income and earnings per share in the notes to financial statements as if the new
fair value method of accounting had been adopted. The Company has elected to
continue to apply the accounting principles contained in APBO No. 25.
Income Taxes: The Company accounts for income taxes using the deferred asset and
liability method as required by SFAS No. 109, "Accounting for Income Taxes."
Deferred income taxes are provided as temporary differences arise between the
basis of asset and liabilities for financial reporting and income tax reporting.
Earnings/(Loss) Per Share: Earnings per common share ("EPS") is computed under
the provisions of Statement of Financial Accounting Standards No. 128, "Earnings
Per Share," which was adopted retroactively by the Company at December 31, 1997.
Basic earnings/(loss) per common share is computed by dividing net income/(loss)
available to common shareholders by the weighted average number of common shares
outstanding during the period. Since the Company has experienced net operating
losses, the outstanding options and warrants to purchase common stock have an
anti-dilutive effect. Therefore, options and warrants were not included in
computing dilutive earnings/(loss) per share.
Reclassification: Certain amounts in the financial statements for the six-month
period ended December 31, 1997 and the year ended June 30, 1997 have been
reclassified to conform to the 1998 presentation.
- -------------------------------------------------------------------------------
(Continued)
9.
<PAGE> 34
FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 3 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses for the year ended December 31, 1998
and the six-month period ended December 31, 1997 consisted of:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Balance, beginning of year $ 37,000 $25,000
Provision for losses 113,000 12,000
-------- -------
Balance, end of year $150,000 $37,000
======== =======
</TABLE>
At December 31, 1998, there were approximately $732,000 of impaired loans with
an allowance of approximately $127,000 allocated to these loans. Loans on which
the accrual of interest has been discontinued or reduced amounted to
approximately $638,000 at December 31, 1998. Interest income recognized on
impaired loans was immaterial in 1998. There were no impaired loans in 1997.
NOTE 4 - NOTES RECEIVABLE
<TABLE>
<CAPTION>
-----December 31,-----
------------
1998 1997
---- ----
<S> <C> <C>
Advances to a factoring company, which are convertible to an equity
interest in 1999. The note is collaterized by the assignment of certain
accounts receivable under a factoring agreement. $658,380 $ -
10% note due January 1, 2000, convertible to a 21% ownership in a travel
company at the option of the Company's management. 125,000 -
10% note due November 1, 1999. Note is secured by real estate. 126,000 -
-------- ----------
$909,380 $ -
======== ==========
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
10.
<PAGE> 35
FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 5 - VIDEOCASSETTE RENTAL INVENTORY
The Company amortizes its videocassette rental inventory on an accelerated
method. Under this method, videocassette rental inventory, which includes video
games, is stated at cost and amortized, beginning on the date the videocassettes
are placed into service, to its salvage value ($4 per videocassette) over an
estimated useful life of 36 months. All copies of new release videocassettes are
amortized on an accelerated basis during their first three months to an average
net book value of $8 and then on a straight-line basis to their salvage value of
$4 over the next 33 months.
NOTE 6 - AMORTIZATION OF FILM INVENTORY
Amortization of capitalized film property costs is computed using the
individual-film-forecast computation method as promulgated under SFAS No. 53,
"Financial Reporting by Producers and Distributors of Motion Picture Films." At
June 30, 1996, the Company intended to amortize the remaining unamortized film
costs for its Happily Ever After property over the next five years, subject to
future market conditions altering this accounting estimate. The Company's
computation of net realizable value as of June 30, 1997 resulted in a
significant change in the amount of unamortized costs permitted to be charged to
future operations. Accordingly, a charge of $2,200,000 is reflected in the
statement of operations for the year ended June 30, 1997 to reflect the
writedown of film property costs to their estimated net realizable value. At
December 31, 1997, an additional review and analysis of the film's net
realizable value resulted in a charge to income of $490,000.
NOTE 7 - LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Leasehold improvements and equipment consisted of the following at December 31,
1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Leasehold improvements $ 76,769 $ -
Office equipment 58,488 32,434
Furniture and fixtures 27,377 13,680
Automobile - 38,425
-------- -------
162,634 84,539
Less accumulated depreciation 34,253 6,892
-------- -------
Net property and equipment $128,381 $77,647
======== =======
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
11.
<PAGE> 36
FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 8 - SHORT-TERM DEBT
Short-term debt consisted of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
7.75% term note, due on March 1, 1999. Collateralized by substantially all
the Company's assets, other than First National Video Corp. $1,100,000 $ -
7.75% term note, due on March 1, 1999. Collateralized by substantially all
the First National Video Corp.'s assets. 341,667 -
Subordinated 18% demand note payable to shareholder. Collateralized by
substantially all of the Company's assets. 973,984 273,696
---------- --------
$2,415,651 $273,696
========== ========
</TABLE>
NOTE 9 - MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY
The minority interest in consolidated subsidiary includes shares of $1 par
value, variable rate, cumulative, preferred stock issued by First National
Finance Corp. At December 31, 1998, 3,500,000 shares had been issued at
approximately $.80 a share. The liquidation preference of these shares is
$3,500,000.
NOTE 10 - INCOME TAXES
The Company had cumulative tax operating loss carryforwards of approximately
$23.5 million at December 31, 1998. Approximately $400,000 of the operating loss
carryforwards expire between 2000 and 2006. The remainder of the net operating
loss carryforwards expire as follows:
2007 $1,700,000
2008 6,600,000
2009 4,800,000
2010 4,700,000
2011 2,600,000
2012 2,500,000
2018 200,000
- -------------------------------------------------------------------------------
(Continued)
12.
<PAGE> 37
FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 10 - INCOME TAXES (Continued)
Due to changes in the Company's ownership, the annual utilization of the net
operating loss carryforwards arising prior to the ownership changes may be
limited. Generally, the amount of those carryforwards available for annual
utilization is based on the value of the Company at the time of the ownership
change multiplied by a rate specified by the Internal Revenue Service.
The provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------ June 30,
1998 1997 1997
---- ---- ----
<S> <C> <C> <C>
Benefit of net operating loss $(71,000) $ 16,000 $ (950,000)
Deferred taxes (38,127) (173,000) (64,000)
Change in valuation allowance 109,127 157,000 1,014,000
-------- --------- ----------
$ - $ - $ -
======== ========= ==========
</TABLE>
A reconciliation of the provision for income taxes at the statutory federal
income tax rate is as follows:
<TABLE>
<CAPTION>
Year
Ended Six Months
December 31, Ended
------------ June 30,
1998 1997 1997
---- ---- ----
<S> <C> <C> <C>
Tax benefit at statutory rate $(109,127) $ (380,000) $(1,014,000)
Foreign losses - 223,000 -
Valuation allowance 109,127 157,000 1,014,000
--------- ----------- -----------
$ - $ - $ -
========= =========== ===========
</TABLE>
Significant components of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards $8,005,000 $7,934,000
Reserves and allowances 311,000 273,000
---------- ----------
8,316,000 8,207,000
Valuation allowance 8,316,000 8,207,000
---------- ----------
Net deferred taxes $ - $ -
========== ==========
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
13.
<PAGE> 38
FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 10 - INCOME TAXES (Continued)
A valuation allowance has been established by the Company due to the
uncertainties of the realization of deferred tax assets based on the Company's
prior history of tax losses. The valuation allowance decreased approximately
$47,000 for the year ended December 31, 1998 due to the decrease in net deferred
tax assets. Management will continue to re-evaluate the appropriateness of the
valuation allowance in future years.
There were no income tax payments in the periods ended December 31, 1998 and
1997 and June 30, 1997.
NOTE 11 - SHAREHOLDERS' EQUITY
Preferred Stock: The Company has authorized the issuance of 10,000,000 shares of
$.0001 par value preferred stock. At December 31, 1998, the Company had not
issued any preferred shares.
Common Stock: During the periods ended December 31, 1998 and 1997, respectively,
the Company issued 600,000 and 274,000 shares for employee compensation and
professional fees valued at $6,000 and $5,480.
In the second quarter of 1996, the Company initiated an equity restructuring
program in which the Company issued 1,260,000 shares of its common stock (par
value $.005) along with warrants to purchase an additional 1,260,000 shares of
its common stock (par value $.005) at $1/share. Total proceeds from the offering
amounted to $830,000. On October 6, 1996, the Company's Board of Directors
approved and issued an Extension and Optional New Pricing Offer to the holders
of these warrants. These 1,260,000 warrants originally entitled the holders to
purchase an additional share each of the Company's common stock at a price of $1
through an expiration date of December 15, 1997. The Extension and Optional New
Pricing Offer allows an extension until December 31, 1999, at a share price of
$.15 for additional consideration of $.05 per warrant or an extension until
December 31, 2000, at a share price of $.05 for additional consideration of $.10
per warrant. During the year ended June 30, 1997, warrants for 800,000 shares
were extended to December 31, 1999 and warrants for 200,000 shares were extended
to December 31, 2000. Additional paid-in capital of $60,000 was received from
these transactions for the period ended June 30, 1997. During 1998, certain
warrants previously issued in the six-month period ended December 31, 1998 were
cancelled and cash of $20,000 was returned. During 1998, 100,000 warrants were
issued as part of a compensation agreement. The warrants are convertible to
common stock at twenty-five cents a share. There were 13,660,000 warrants
outstanding at December 31, 1998.
- -------------------------------------------------------------------------------
(Continued)
14.
<PAGE> 39
FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 11 - SHAREHOLDERS' EQUITY (Continued)
Rentrak, Inc. of Portland, Oregon is a large distributor of videocassettes on a
pay-per-view basis nationally. On December 22, 1995, the Company and Rentrak
entered into a ten-year agreement whereby Rentrak purchased 357,143 shares of
common stock for $200,000. Rentrak has also agreed to acquire an additional
$10,000 of common stock for each new non-Rentrak video store acquired by the
Company. No new stores have been acquired as of December 31, 1998.
Stock Options: On May 21, 1993, shareholders approved an incentive stock plan
which reserved 3,500,000 shares of the Company's common stock for issuance under
the 1993 Incentive Stock Option Plan ("ISO") and the 1993 Non-Qualified Stock
Option Plan ("NQSO") (collectively referred to as the "1993 Plan"). The 1993
Plan provides incentives to officers, directors, employees, consultants, and
advisors in the form of stock options, subject to certain restrictions. The
Company's Board of Directors determines the granting of options under the 1993
Plan, including the exercise period, contingencies, vesting periods, and
employee qualifications. Options to be issued under the ISO are intended to
qualify as "incentive stock options" under Section 422 of the 1986 Internal
Revenue Code (the "Code"), as amended. Options granted under the NQSO are
subject to fewer restrictions than the ISO and are considered "Non-Statutory
Stock Options" as defined in the Code. As of December 31, 1997, 25,000 options
had been issued under the 1993 Plan. These options were issued in August 1993 at
the exercise price of $1.53 per share. All of the outstanding options were
exercisable at December 31, 1998. No options were exercised during the year
ended December 31, 1998, the six months ended December 31, 1997, or the year
ended June 30, 1997.
Employee Stock Purchase Plan: The Company implemented an Employee Stock Purchase
Plan in 1994 which permits substantially all employees to acquire Company common
stock. Participating employees may acquire stock at the end of each six-month
period (June 30 and December 31 of each year) at a purchase price of 85% of the
lower of fair market value at the beginning or end of the period. Employees may
designate up to 10% of their base compensation for the purchase of stock under
this plan. There are no charges to income in connection with this plan.
NOTE 12 - STYLUS RECORDS
In April 1994, the Company acquired a majority ownership in Stylus Records, a
Delaware Corporation, for 160,000 shares of common stock and the assumption of
$105,000 in liabilities. The Founders' Agreement calls for the Company to
guarantee certain stock values for 60,000 of these issued shares relative to
their market price as of March 31, 1996. The Company had the option to issue
additional shares to the extent of any difference between the market price and
the guarantee price. The Company was dissolved during 1998 and $40,000 was paid
in full
- -------------------------------------------------------------------------------
(Continued)
15.
<PAGE> 40
FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 12 - STYLUS RECORDS (Continued)
settlement of the shares held under the Founder's Agreement and all shares of
Stylus Records were returned.
NOTE 13 - LEASES
The Company occupies certain office facilities and video stores under operating
lease arrangements. Under terms of the leases, the Company is responsible for
real estate taxes, insurance, and maintenance costs on the facilities. Total
rent expense under such arrangements was approximately $278,000, $35,000, and
$17,000 for the year ended December 31, 1998, the six months ended December 31,
1997, and the year ended June 30, 1997, respectively. The leases expire from
1999 through 2003.
Future minimum payments under noncancelable leases as of December 31, 1998 are
as follows:
1999 $ 308,870
2000 264,751
2001 251,142
2002 214,440
2003 180,870
--------------
$ 1,220,073
==============
NOTE 14 - COMMITMENTS AND CONTINGENCIES
The Company received notice from the Screen Actors Guild that supplemental
residuals of 4.5% of the first $1,000,000 and 5.4% of all remaining gross
producer receipts are due them. The Company's entertainment counsel is
researching the matter to determine if the Company has a liability related to
this matter. As of December 31, 1998, management has determined there is no
liability to the Company and believes that if any residuals are due, they are
the responsibility of Lou Scheimer and Filmation (the original producer of the
film) or its successor in interest.
Contingent Liabilities Against Future Revenues: The Company has agreed to pay
compensation to various parties based on gross revenues from the film Happily
Ever After as follows:
- -------------------------------------------------------------------------------
(Continued)
16.
<PAGE> 41
FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 14 - COMMITMENTS AND CONTINGENCIES (Continued)
Mr. Lou Schemer, creator and original owner of Happily Ever After:
<TABLE>
<CAPTION>
<S> <C>
Home Video - Forty cents ($.40) for each videocassette unit
sold, up to two million units; thereafter,
twenty-five cents ($.25) for each additional
home video unit sold in excess of two million
units;
Video Disc - 15% of producer's gross;
Merchandising - 45% of gross revenue received by the Company
after deductions of licensing commissions and
fees.
Technovision Industries, Inc., marketing consultant for Happily Ever After:
Home Video - 5% of net Company collection proceeds from
Republic after partial deductions for Scheimer
royalties.
American Softworks Corp. for Happily Ever After:
Video Games - 50% of net proceeds to the Company after
deductions for manufacturing, marketing, and
distribution by the distributor.
</TABLE>
No payments have been made to any of the above parties for the year ended
December 31, 1998, six-months ended December 31, 1997, or year ended June 30,
1997.
NOTE 15 - CONTINUING OPERATIONS, ACQUISITIONS, AND SUBSEQUENT EVENTS
The Company has historically incurred operating losses and, at December 31,
1998, has an accumulated deficit of approximately $28.0 million.
Effective June 30, 1997, the Company acquired certain assets from corporations
owned by Mr. Charles E. Nootens, Chairman of the Company's Board of Directors,
through First National Finance Corp. (FNFC), a newly-formed wholly owned
subsidiary of the Company. The new venture is an active business, previously
operated by Mr. Nootens, to extend credit to real estate developers and others
at rates substantially higher than conventional real estate and commercial
loans. See Note 1.
FNFC issued $3,500,000, principal amount, of preferred stock and 50 call pack
options, at $10,000 each, to purchase 20,000,000 shares of First National
Entertainment Corp. common stock at 10 cents a share in exchange for the assets
of Mr. Nootens' business. The acquisition was treated as a purchase and recorded
at the fair market value of the assets received.
- -------------------------------------------------------------------------------
(Continued)
17.
<PAGE> 42
FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 15 - CONTINUING OPERATIONS, ACQUISITIONS, AND SUBSEQUENT EVENTS
(Continued)
In the future, FNFC expects to continue making real estate bridge loans and also
to make bridge loans for completion of theatrical and movie productions,
acquisition of distribution rights for entertainment products, completion of
interactive games, and acquisition or financing of various forms of intellectual
media and software entertainment.
In September 1997, the Company acquired a Swiss management company having the
rights to certain ultraviolet light technology and additional capital
contributed by the selling shareholders in exchange for 1,500,000 shares of
common stock. Consolidated net loss includes approximately $680,000 attributable
to operations of the Swiss company. On July 31, 1998, the Company entered into
an agreement to shut down the Swiss operations and transferred ownership to a
new company formed by two of the three Swiss shareholders. The two Swiss
shareholders returned all their shares and any outstanding warrants to the
Company. The net effect of this transaction was to recognize a gain on disposal
of approximately $5,700. In addition, the Company received a $270,000 note
conditional upon the new company meeting certain performance measurements.
As of June 30, 1997, FNFC had issued additional call pack options to purchase an
aggregate of 8,000,000 of the Company's common shares. These calls were issued
for a consideration of 2-1/2 cents per share and entitle the holder to purchase
shares at 10 cents per share or an aggregate of $800,000. During the six-month
period ended December 31, 1997, 20 call pack options were purchased for
$200,000.
On April 28, 1998, the Company acquired certain assets of Alpine Investment,
Inc. through First National Video Corp. (FNVC), a newly formed wholly-owned
subsidiary of the Company. The new venture operates six video stores in the
Chicagoland area. Income is derived from the sale and rental of videocassettes
and games and other various merchandise. FNVC acquired the assets for $337,000.
The acquisition was treated as a purchase and recorded at the fair market value
of the assets received.
During June of 1998, the Company formed a new subsidiary, Equator Entertainment,
Inc. (EEI), and hired Mr. Peter Keefe as president. EEI's main business is the
creation, production, and distribution of a children's television program
series.
On February 4, 1999, the Company purchased all the assets and the rights to the
name of the Prairie Business Credit, Inc. by converting the advance described in
Note 4, issuance of 100,000 shares of common stock, and other consideration for
a total purchase price of $1,037,000. The transaction was treated as a purchase
and recorded at the fair market value of the assets received. The new business
was established as a wholly-owned subsidiary of FNFC and will operate under the
name of Prairie Business Credit, Inc. This new entity is engaged in factoring
accounts receivable.
- -------------------------------------------------------------------------------
(Continued)
18.
<PAGE> 43
FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 16 - SEGMENT INFORMATION
The Company has reportable segments: finance, video, and entertainment. The
finance segment derives its revenues from short-term, high-yield bridge loans.
The video segment derives its revenues from the sale and rental of
videocassettes and games. The entertainment segment operates in the acquisition,
distribution, and marketing of high-quality family entertainment.
The accounting policies for the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on profit or loss from continuing operations.
The Company's reportable segments are strategic business units that offer
different products and services. Segment disclosures are on a performance basis
consistent with internal management reporting. The cost of some corporate
functions and the cost of certain employee benefits are sold to segments at
predetermined rates which approximate cost. Remaining costs, if any, are not
allocated to revenue segments. The following segment information has been
prepared in accordance with the internal accounting policies of the Company, as
described above, and may not be presented in accordance with generally accepted
accounting principles. The finance segment commenced operations on June 30,
1997. Summarized financial information concerning the industry segments in which
the Company operated for the periods ended December 31, 1998, December 31, 1997,
and June 30, 1997 are as follows:
<TABLE>
<CAPTION>
Enter-
Finance Video tainment Totals
------- ----- -------- ------
<S> <C> <C> <C> <C>
December 31, 1998
Revenues from external customers $ 813,374 $1,060,138 $ - $ 1,873,512
Intersegment revenues 58,561 - 138,000 196,561
Segment profit (loss) 123,806 (346,118) 326,139 103,827
Nonrecurring gains (expenses)
Loss on sales of real estate held for development (216,000) - - -
Segment assets 5,179,155 323,941 692,000 6,195,096
December 31, 1997
Revenues from external customers 301,434 - - 301,434
Intersegment revenues - - 42,000 42,000
Segment profit (loss) 206,046 - (511,860) (305,814)
Nonrecurring gains (expenses)
Write-off film inventory costs - - (490,000) (490,000)
Write-off goodwill and organizational costs - - (52,517) (52,517)
Segment assets 4,078,502 - 653,362 4,731,864
June 30, 1997
Segment profit (loss) - - (2,983,712) (2,983,712)
Nonrecurring gains (expenses)
Write-off film inventory costs - - (2,200,000) (2,200,000)
Write-off goodwill and organizational costs - - (145,174) (145,174)
Segment assets 3,289,969 - 1,072,028 4,361,997
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
19.
<PAGE> 44
FIRST NATIONAL ENTERTAINMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 16 - SEGMENT INFORMATION (Continued)
<TABLE>
<CAPTION>
Six Months
Year Ended Ended Year Ended
December 31, December 31, June 30,
1998 1997 1997
---- ---- ----
<S> <C> <C> <C>
Segment profit (loss)
Total profit or loss for
reportable segments $ 103,827 $ (305,814) $ (2,983,712)
Elimination of intersegment
revenues 36,931 - -
Unallocated expenses (467,421) (79,021) -
----------- ----------- ------------
$ (326,663) $ (384,835) $ (2,983,712)
=========== =========== ============
Identifiable assets
Total identifiable assets for
reportable segments $ 6,195,096 $ 4,731,864 $ 4,361,997
Elimination of intersegment assets (1,675,879) (2,225,178) (503,267)
Assets from disposed subsidiaries - 1,087,051 -
Unallocated assets 48,661 97,115 -
----------- ----------- ------------
$ 4,567,878 $ 3,690,852 $ 3,858,730
=========== =========== ============
</TABLE>
- -------------------------------------------------------------------------------
20.
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 183,983
<SECURITIES> 0
<RECEIVABLES> 4,178,807
<ALLOWANCES> 113,000
<INVENTORY> 0
<CURRENT-ASSETS> 189,707
<PP&E> 162,634
<DEPRECIATION> 34,253
<TOTAL-ASSETS> 4,567,878
<CURRENT-LIABILITIES> 2,930,246
<BONDS> 0
0
0
<COMMON> 92,690
<OTHER-SE> 1,544,942
<TOTAL-LIABILITY-AND-EQUITY> 4,567,878
<SALES> 1,060,138
<TOTAL-REVENUES> 1,873,512
<CGS> 338,465
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,722,728
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (133,282)
<INCOME-PRETAX> (320,963)
<INCOME-TAX> 0
<INCOME-CONTINUING> (320,963)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (320,963)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
