<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report pursuant to Section 13 or 15(d)
of the Securities and Exchange Act of 1934
For Quarter Ended June 30, 1997
Commission File Number 0-26828
FOOD COURT ENTERTAINMENT NETWORK, INC.
(Exact name of registrant as specified in its charter)
Delaware 51-0338736
State of Incorporation Federal Identification #
220 East 42nd Street
New York, New York 10017-5806
(Address of Principal Executive Offices)
(212) 983-4500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
As of June 30, 1997, there were 7,055,396 shares of Series A Common Stock, $0.01
par value of the registrant outstanding, 1,091,168 shares of Series B Common
Stock, $0.01 par value of the registrant outstanding, 8,796,797 Class A Warrants
of the registrant outstanding, and 7,097,447 Class B Warrants of the registrant
outstanding.
<PAGE>
FOOD COURT ENTERTAINMENT NETWORK, INC.
INDEX
Part I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Condensed Balance Sheets as of Dec. 31, 1996
(audited) and June 30, 1997 (unaudited)..................... 3
Condensed Statements of Operations
for the three months and six months ended
June 30, 1996 & 1997
(unaudited)................................................. 4
Condensed Statements of Cash Flows
for the six months ended
June 30, 1996 & 1997
(unaudited)................................................. 5
Notes to Condensed Financial Statements (unaudited)......... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 7-10
Part II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 11
Item 4. Submission of Matters to a Vote of Securities
Holders..................................................... 12
Item 6. Exhibits and Reports on Form 8-K............................ 13
Signature Page....................................................... 14
<PAGE>
FOOD COURT ENTERTAINMENT NETWORK, INC.
(a development stage company)
CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30,
December 31, 1997
1996 (unaudited)
------------ ------------
<S> <C> <C>
A S S E T S
-----------
Current assets:
Cash and cash equivalents $ 6,498,864 $ 1,944,023
Other current assets 402,626 452,428
------------ ------------
Total Current Assets 6,901,490 2,396,451
Fixed Assets (Net) 2,415,115 2,715,468
Other Assets 130,215 84,757
------------ ------------
Total Assets 9,446,820 5,196,676
L I A B I L I T I E S
---------------------
Current liabilities:
Accounts payable 665,022 271,450
Accrued payroll 255,518 128,723
Other accrued expenses 178,692 137,514
Due to former employee 200,000 224,750
------------ ------------
Total liabilities 1,299,232 762,437
S T O C K H O L D E R S' E Q U I T Y
-------------------------------------
Preferred stock - 5,000,000 shares authorized,
none issued
Common stock:
Series A common stock - $.01 par value, 200,000,000
shares authorized and 7,055,396 issued and outstanding 69,135 70,553
Series B common stock - $.01 par value, 1,250,000
shares authorized, 1,091,168 issued 11,330 10,912
Additional paid-in capital 23,757,996 23,906,996
Deficit accumulated during the development stage (15,690,772) (19,554,121)
------------ ------------
T o t a l 8,147,689 4,434,340
Treasury stock (101) (101)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 8,147,588 4,434,239
------------ ------------
TOTAL $ 9,446,820 $ 5,196,676
============ ============
</TABLE>
<PAGE>
FOOD COURT ENTERTAINMENT NETWORK, INC.
(a development stage company)
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
February 12, 1992
Three month period ending Six month period ending (Inception)
June 30, June 30, Through
1996 * 1997 1996 * 1997 June 30, 1997
--------- -------- --------- -------- -----------------
<S> <C> <C> <C> <C> <C>
Advertising Revenue $ 10,000 $ 10,000 $ 122,260
----------- ---------- --------------
Operating Expenses:
Sales and Marketing 164,570 176,674 164,570 452,353 1,012,866
Programming 385,749 390,049 385,749 884,321 2,198,662
Network Costs 360,691 742,974 360,691 1,281,798 2,510,354
General and Administrative expenses 635,697 671,131 809,650 1,320,122 4,654,522
Development costs - - 1,104,316 - 8,983,551
----------- ---------- ---------- ---------- --------------
Total 1,546,707 1,980,828 2,824,976 3,938,594 $ 19,359,955
Operating (Loss) 1,536,707 1,980,828 2,814,976 3,938,594 $ (19,237,695)
Other (income) expenses:
Interest Expense - - 657,705
Interest and other (income) (38,983) (26,894) (92,452) (75,245) (341,279)
---------- ---------- ---------- ---------- --------------
NET (loss) (1,497,724) (1,953,934) (2,732,524) (3,863,349) $ (19,554,121)
========== ========== ========== ========== ==============
Net (loss) per share of common stock $ (0.34) $ (0.25) $ (0.63) $ (0.56)
========== ========== ========== ==========
Number of common share and common
share equivalents used in computation 4,387,292 6,953,557 4,335,208 6,933,557
========== ========== ========== ==========
</TABLE>
* Certain amounts have been reclassified
to conform to the presentation in the
Company's Annual Report on Form 10-KSB
<PAGE>
FOOD COURT ENTERTAINMENT NETWORK, INC.
(a development stage company)
CONDENSED STATEMENTS OF CASH FLOW
(unaudited)
<TABLE>
<CAPTION>
February 12, 1992
Six month period ending (inception)
June 30, through
1996 1997 June 30, 1997
-------- -------- -----------------
<S> <C> <C> <C>
Cash Flow from Operating Activities:
Net (loss)
Adjustments to reconcile net income (loss) $ (2,722,524) $ (3,863,349) $ (19,554,121)
Cash provided by operating activities:
Depreciation and amortization 180,478 370,000 1,334,086
Write off of nonproductive asset 205,000 205,000
Loss on disposal of equipment 26,182
Write off of debt issuance costs 146,397
Value assigned to options and
warrants issued as compensation and
for guarantees of debt 108,583
Common stock issued as consideration
for programming 350,000 700,000
Common stock & warrants issued as consideration
for consulting and other compensation 150,000 188,002
Changes in operating assets and liabilities:
(Increase) in other assets (257,420) (4,344) (218,133)
(Increase) decrease in accrued expenses
and other liabilities (219,560) (536,795) 762,436
------------- ------------ -------------
Net Cash (used in) operating activities (2,669,026) (3,679,488) (16,301,568)
------------- ------------ -------------
Cash Flows from Investing Activities
Purchase of property and equipment (419,159) (875,353) (3,899,430)
Organization costs (11,336)
------------- ------------ -------------
Net Cash (used by) investing activities (419,159) (875,353) (3,910,766)
------------- ------------ -------------
Cash Flow from Financing Activities:
Net proceeds from sale of preferred and common stock 23,370,719
Redemption of preferred stock (1,146,250)
Preferred dividends paid (148,112)
Capital contributions 32,500
Proceeds from bridge loan 2,250,000
Repayment of bridge loan (2,250,000)
Deferred financing fee (65,000) (292,500)
Proceeds from director and officer loans 390,000
Repayment of director and officer loans (50,000)
Proceeds from note payable 954,572
Repayment of note payable (954,572)
------------- ------------ -------------
Net cash provided by (used in) financing activities (65,000) - 22,156,357
------------- ------------ -------------
NET INCREASE (DECREASE) IN CASH (3,153,185) (4,554,841) 1,944,023
Cash at beginning of period 5,191,897 6,498,864
------------- ------------ -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,038,712 $ 1,944,023 $ 1,944,023
============= ============ =============
Supplemental schedule of non cash financing activities:
Warrants issued in connection with bridge loan $ 225,000
Warrants issued in connection with deferred consulting 317,939
Directors and officers loans exchanged for common
and preferred stock 150,000
Directors loan contributed to capital 190,000
Supplemental disclosure of cash flow information:
Cash paid for interest 336,406
</TABLE>
<PAGE>
FOOD COURT ENTERTAINMENT, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Financial Statements
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the financial position of the Company
and its results of operations and cash flow for the interim periods presented.
Such financial statements have been condensed in accordance with the
applicable regulations of the Securities and Exchange Commission and, therefore,
do not include all disclosures required by generally accepted accounting
principles.
The results of the operations for the six months ended June 30, 1997
are not necessarily indicative of the results to be expected for the entire
fiscal year.
These financial statements should be read in conjunction with the
financial statements included in the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1996, and Quarterly Report on Form 10-QSB for the
three-month period ended March 31, 1997.
Loss Per Share of Common Stock
Net loss per share of common stock is based on the weighted average
number of shares outstanding during each period. Options and warrants have been
excluded as they are anti-dilutive. Series B common shares in escrow have also
been excluded for all periods.
Commitments
On May 12, 1997, the Company and Digital Equipment Corporation ("DEC")
terminated their technical development relationship. The Company and DEC have
agreed that no further payments will be due to DEC from the Company and DEC will
not be obligated to further develop a digital distribution system for Cafe USA.
As a result of such termination, the Company has written off $205,000 of fixed
assets.
6
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
Results of Operations
The following discussion and analysis should be read in conjunction
with the financial statements and notes thereto appearing elsewhere in this
report. The Company is in its development stage through June 30, 1997. The
Company's development activities to date have consisted of designing, developing
and producing Cafe USA programming, producing and evaluating three market tests
of Cafe USA to evaluate its acceptance in the marketplace, developing and
refining an end-to-end distribution system for the delivery and management of
Cafe USA programming into Food Courts, attracting and engaging management,
employees, consultants and advisers for marketing operations and implementation
of the Cafe USA network, establishing contracts and entering into agreements
with advertisers and mall operators and installing and operating Cafe USA in 20
Food Courts to date. The Company has received only limited revenues. The
Company's principal expenses from inception through June 30, 1997 have been
salaries and payments to consultants ($6,212,400), production costs for Cafe USA
programming ($4,286,600) and advertising and marketing expenses ($1,545,200).
Additionally, the Company invested $3,665,000 in capital equipment through June
30, 1997. Accordingly, as of June 30, 1997, the Company had a deficit
accumulated in the development stage of $19,554,000 and a net worth of
$4,434,000. The Company continues to incur substantial losses. For the
foreseeable future, and until significant advertising sales occur, the Company
expects losses to continue and will be entirely dependent on public or private
financing or a strategic alliance.
During the three months ended March 31, 1996, principally all expenses
incurred by the Company were charged to development costs. As such, the
components of operating expenses cannot be compared for the six month periods
ended June 30, 1996 and 1997. Total operating expenses for the six months ended
June 30, 1997, increased to $3,938,594 from $2,824,976 for the comparable period
from the previous year. Such increase was principally due to the Company's
expansion into additional malls. Total operating expenses increased to
$1,980,828 for the three month period ended June 30, 1997 from $1,546,707 for
the comparable period from the previous year. This was principally due to an
increase in network costs to $742,974 from $360,691 and an increase in general
and administrative expenses to $671,131, from $635,697. Such increases were
principally due to the Company's expansion into additional malls.
7
<PAGE>
Liquidity and Capital Resources
On November 14, 1996, the Company closed on a private placement of 90
private units (the "Private Units"), each Private Unit consisting of 31,746
units identical to the units offered in the Company's October 16, 1995 public
offering, which consist of one share of Series A Common Stock, one Class A
Warrant and one Class B Warrant (the "Private Offering"). The net proceeds are
being used for mall installations and operations, and working capital including
salaries of service management and technical and administrative staff,
advertising, sales and research expenses, programming and production expenses,
professional fees and office and administrative expenses. The Company has
utilized and will continue to utilize the remainder of the proceeds to fund its
operations and continue mall installations.
As of June 30, 1997, the Company had a working capital of $1,634,000.
The Company has financed its operation to date almost exclusively through three
private placements of securities, bank loans and its public offering, including
net proceeds of approximately $2,000,000 through a Preferred Stock Unit
Offering, net proceeds of approximately $2,000,000 from the private placement of
notes with warrants, bank loans of approximately $1,086,000, net proceeds of
approximately $12,900,000 from a public offering and net proceeds from the
Private Offering in November, 1996, of approximately $7,800,000.
The Company has employment contracts with five officers which provide
for aggregate salaries for the remainder of 1997 in the amount of $337,500. The
Company's lease agreement for its offices provides for monthly payments of
approximately $10,700.
Pursuant to employment agreements with two former executive officers,
the Company is obligated to make severance payments aggregating $62,550 for the
period from July 1, 1997, through September 30, 1997, on which date such
severance payments shall terminate.
The Company has entered into a settlement agreement for $200,000 with a
former director and officer of the Company dated October 12, 1993, regarding any
claims he had or may have had with respect to continued employment with the
Company and his rights to acquire additional securities of the Company. Payments
under such settlement agreement will be made from 25% of "Excess Cash Flow" (as
defined below) of the Company, if any. However, the entire remaining unpaid
balance of the $200,000 shall be due and payable regardless of the Company's
cash flow no later than December 1, 1997. Commencing January 1, 1996 interest
has begun to be accrued on such obligation, at the prime rate. "Excess Cash
Flow" is defined in the agreement as follows: for any fiscal quarter (i)
net income before taxes of the Company for such fiscal quarter, plus (ii)
amortization and other non-cash charges during such fiscal quarter (to the
extent deducted in computing net income), minus (iii) capital expenditures made
or accrued during such fiscal quarter. Dividends and redemptions shall not be
treated as expenses in determining the Company's net income. In addition to the
above, the settlement agreement provided for the purchase by the former director
and officer from the Company of 11,259 shares of the Company's Class B
8
<PAGE>
Common Stock at a price of $.01 per share and the payment of consulting fees for
services provided at the request of the Company.
In connection with the underwriting agreement for the Private Offering,
the Company entered into an agreement with the Placement Agent that provides for
a finder's fee to be paid to the Placement Agent if it consummates a merger,
acquisition, joint venture, or other similar transaction with a party introduced
by the Placement Agent during the five year period from the consummation of the
Private Offering. The fee is based on a percentage of the consideration paid in
the transaction ranging from 7% of the first $1,000,000 to 2-1/2% of any
consideration in excess of $9,000,000.
The Company has agreed not to solicit warrant exercises other than
through the Placement Agent. Upon any exercise of the Class A or Class B
Warrants the Company will pay the Placement Agent a fee of 5% of the aggregate
exercise price, if (i) the market price of the Company's Series A Common Stock
on the date the warrant is exercised is greater than the then exercise price of
the warrants; (ii) the exercise of the warrant was solicited by a member of the
National Association of Securities Dealers, Inc.; (iii) the warrantholder
designates in writing that the exercise of the Warrant was solicited by a member
of the National Association of Securities Dealers, Inc. and designates in
writing the broker-dealer to receive compensation for such exercise; (iv) the
Warrant is not held in a discretionary account; (v) disclosure of compensation
arrangements was made both at the time of the Private Offering and at the time
of exercise of the warrants; and (vi) the solicitation of exercise of the
warrant was not in violation of Rule 10b-6 promulgated under the Exchange Act.
In connection with the Private Offering, D.H. Blair Investment Banking
Corp. was granted a five-year right of refusal to act as underwriter for any
public or private offerings by the Company or any holder of 5% or more of the
Company's Series B Common Stock (with certain exceptions).
The Company has entered into a Shareholder/Broker Relations Agreement
with Brokers Resource Group ("BRG"), for a term of eight months, commencing May
28, 1997. As part of its compensation, the Company issued 100,000 shares of the
Company's Series A Common Stock to BRG's principal, Frank Marra. The common
stock is subject to a lock-up agreement which provides that beginning on
September 1, 1997, a maximum of 20,000 shares per calendar month may be
liquidated to the public market.
Plan of Operation
The Company is actively seeking strategic alliances with appropriate
corporate partners to provide the Company with the necessary capital to carry
out its plan and continue the mall expansion.
9
<PAGE>
Simultaneously, the Company is investigating other methods of raising capital to
finance its operations and expansion plans.
In January, 1997, the Company entered into a six-year exclusive
advertising sales representative agreement with ABC (the "ABC Agreement"). In
accordance with the ABC Agreement, the Company was obligated to pay a minimum
$100,000 guaranteed commission to ABC in 1997, the first year of the ABC
Agreement. Such amount has been pre-paid and will be amortized over the course
of the year. The ABC Agreement provides that ABC will be the exclusive
advertising representative for the Company and will use the ABC New Media sales
force to seek advertisers for the Company's programming. ABC has the right to
terminate the ABC Agreement upon 90 days written notice for a period of 30 days
after the end of the second contract year and each contract year thereafter. The
Company has the right to terminate the ABC Agreement upon 30 days written
notice, after the second and fourth contract years, if certain minimum
advertising sales benchmarks have not been met. During the second quarter of
1997, the Company had no paid advertisers.
As of June 30, 1997, the Company is broadcasting in 20 mall Food
Courts. The Company's current plan to proceed with additional mall expansion is
predicated upon the Company obtaining substantial additional capital (either
through additional financing or strategic alliances), commitments from
advertisers and installation and operating agreements with mall operators. The
Company is aggressively pursuing all such relationships. However, without
substantial additional funds, advertiser commitments and mall operating
agreements, the Company will be unable to carry out its plan and may be forced
to cease operations.
Charge to Income in the Event of Release of Escrow Shares
In connection with a private offering, which began in November, 1993,
and terminated in July, 1994, of units of Series A Common Stock and Series A
Redeemable Preferred Stock (the "Preferred Stock Unit Offering"), 750,000 shares
of Series B Common Stock were placed in escrow of which 103,750 have been
canceled effective as of July 5, 1994. In the event the Company attains any of
the earnings thresholds or the Company's Series A Common Stock meets certain
minimum purchase prices required for the release of the Escrow Shares, such
release will require the Company to recognize additional compensation expense
for fair value of the shares which are held by current and former officers and
directors. Such charges could substantially increase the loss or reduce or
eliminate the Company's net income, if any, for financial reporting purposes for
the period in which the Escrow Shares are released or are probable of being
released. Although the amount of compensation expense recognized by the Company
will not affect the Company's total stockholders' equity or its working capital,
it may have a depressive effect on the market price of the Company's securities.
If neither the required earnings or sale price are attained by December 31,
1998, the Escrow Shares as well as any dividends or other distributions made
with respect thereto, will be contributed to the capital of the Company.
10
<PAGE>
PART II
OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Sarah Purcell v. Food Court Entertainment Network, Inc., Robert Lenz and
Marc Chalom
On June 30, 1997, Sarah Purcell, the former host of Cafe USA, filed
suit against the Company in the United States District Court, Southern District
of New York. The suit is for an alleged breach of contract, alleged fraudulent
inducement and alleged quantum meruit. The aggregate relief sought is
approximately $225,000. The Company did not offer Ms. Purcell a new contract and
the parties did not enter into any written agreement. Therefore, it is the
Company's opinion, and the opinion of the Company's counsel, that the suit is
without merit.
11
<PAGE>
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
The Company's Annual Meeting of Stockholders was held on Wednesday, June 4,
1997, at 9:00 a.m., at the Company's corporate offices, pursuant to written
notice. At that meeting:
1. Robert H. Lenz, James N. Perkins, Gary D. Penisten, Howard H.
Phillips, Robert J. Wussler, Benjamin Frank and James E. Galton were elected to
the Board of Directors by the Company's Stockholders, for a term of one year, by
the following votes:
Director For Withheld
-------- --- --------
Robert H. Lenz 6,002,021 64,787
James N. Perkins 6,009,958 56,850
Gary D. Penisten 6,009,958 56,850
Howard W. Phillips 6,009,958 56,850
Robert J. Wussler 6,009,958 56,850
Benjamin Frank 6,009,958 56,850
James E. Galton 6,009,958 56,850
2. The appointment by the Company's Board of Directors of Richard A.
Eisner & Company as the Company's Independent Auditors for the fiscal year
ending December 31, 1997, was ratified by the Company's Stockholders, by a vote
of 6,014,502 for and 33,600 against, with 18,706 abstaining and 159,836 broker
non-votes.
12
<PAGE>
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended and Restated Certificate of Incorporation of the
Company (Incorporated by reference from Exhibit 3.1 to the
Company's Annual Report on form 10-KSB for the fiscal year
ended December 31, 1996).
3.2 Bylaws of the Company (Incorporated by reference from
Exhibit 3.2 to the Company's Registration Statement on Form
SB-2 [File No. 33-91054])
27 Financial Data Schedule
(b) Reports on Form 8-K
(none)
13
<PAGE>
SIGNATURE PAGE
In accordance with the requirements of the Securities Exchange of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Food Court Entertainment Network, Inc.
--------------------------------------
(Registrant)
8/12/97 By: /s/ James N. Perkins
------------- ----------------------------------
(Date) James N. Perkins
President, Chief Executive
Officer & Principal Accounting
Officer
14
<PAGE>
EXHIBIT INDEX
Exhibit
Number Document
- ------ --------
3.1 Amended and Restated
Certificate of Incorporation
of the Company (Incorporated
by reference from Exhibit 3.1
to the Company's Annual Report
on form 10-KSB for the fiscal
year ended December 31, 1996).
3.2 Bylaws of the Company
(Incorporated by reference
from Exhibit 3.2 to the
Company's Registration
Statement on Form SB-2 [File
No. 33-91054])
27 Financial Data Schedule
15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,944,023
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,396,451
<PP&E> 3,085,468
<DEPRECIATION> 370,000
<TOTAL-ASSETS> 5,196,676
<CURRENT-LIABILITIES> 762,437
<BONDS> 0
0
0
<COMMON> 81,465
<OTHER-SE> 4,352,774
<TOTAL-LIABILITY-AND-EQUITY> 5,196,676
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 1,980,828
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (26,894)
<INCOME-PRETAX> (1,953,934)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,953,934)
<EPS-PRIMARY> (0.25)
<EPS-DILUTED> (0.25)
</TABLE>
