<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
For Quarter Ended March 31, 1997
Quarterly Report pursuant to Section 13 or 15(d)
of the Securities and Exchange Act of 1934
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 March 31, 1997, there were 6,913,555 shares of Series A Common Stock,
$0.01 par value of the registrant outstanding, 1,133,009 shares of Series B
Common Stock, $0.01 par value of the registrant outstanding, 8,796,797 shares of
Class A Warrants of the registrant outstanding, and 7,097,447 shares of 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 December 31, 1996
(audited) and March 31, 1997 (unaudited).......................... 3
Condensed Statements of Operations
for the three months ended
March 31, 1996 & 1997
(unaudited)....................................................... 4
Condensed Statements of Cash Flows
for the three months ended
March 31, 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................................................. 11
Item 5. Other Information................................................. 12
Signature page.................................................... 13
<PAGE>
FOOD COURT ENTERTAINMENT NETWORK, INC.
(a development stage company)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
December 31, 1997
1996 (unaudited)
------------ -----------
<S> <C> <C>
A S S E T S
-----------
Current assets:
Cash and cash equivalents $ 6,498,864 $ 3,840,609
Other current assets 402,626 388,248
------------ -----------
Total current assets 6,901,490 4,228,857
Fixed Assets 2,415,115 2,969,981
Other Assets 130,215 79,492
------------ -----------
Total assets 9,446,820 7,278,330
L I A B I L I T I E S
---------------------
Current liabilities:
Accounts payable 665,022 553,921
Accrued payroll 255,518 191,223
Other Accrued Expenses 178,692 78,514
Due to former employee 200,000 216,500
------------ -----------
Total liabilities 1,299,232 1,040,158
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 6,913,555 issued and outstanding 69,135 69,135
Series B common stock - $.01 par value, 1,250,000
shares authorized, 1,133,009 issued 11,330 11,330
Additional paid-in capital 23,757,996 23,757,996
Deficit accumulated during the development stage (15,690,773) (17,600,188)
------------ -----------
Total 8,147,689 6,238,273
Treasury stock (101) (101)
------------ -----------
TOTAL STOCKHOLDERS' EQUITY 8,147,588 6,238,172
------------ -----------
TOTAL $ 9,446,820 $ 7,278,330
============ ===========
</TABLE>
<PAGE>
FOOD COURT ENTERTAINMENT NETWORK, INC.
(a development stage company)
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
February 12,1992
Three month period ending (Inception)
March 31, Through
1996 1997 March 31, 1997
---------- ---------- ----------------
<S> <C> <C> <C>
Advertising Revenue $ 122,260
Operating Expenses:
Sales and Marketing 252,596 813,109
Programming 494,273 1,808,613
Network Costs 538,824 1,767,381
General and Administrative expenses 173,953 672,074 4,006,474
Development costs 1,104,316 - 8,983,551
----------- ----------- -----------
Total 1,278,269 1,957,767 17,379,128
Other (income) expenses:
Interest Expense - 657,705
Interest and other (income) (53,469) (48,351) (314,385)
----------- ----------- -----------
NET (loss) (1,224,800) (1,909,416) 17,600,188
=========== =========== ===========
Net (loss) per share of common stock $ (0.25) $ (0.26)
=========== ===========
Number of common share and common
share equivalents used in computation 4,919,240 7,400,314
</TABLE>
<PAGE>
FOOD COURT ENTERTAINMENT NETWORK, INC.
(a development stage company)
CONDENSED STATEMENTS OF CASH FLOW
(unaudited)
<TABLE>
<CAPTION>
February 12, 1992
Three month period ending (inception)
March 31, through
1996 1997 March 31, 1997
----------- ---------- -----------------
<S> <C> <C> <C>
Cash Flow from Operating Activities:
Net (loss)
Adjustments to reconcile net income (loss) (1,224,800) (1,909,416) (17,600,188)
Cash provided by operating activities:
Depreciation and amortization 84,687 160,000 1,124,086
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 700,000
Common stock & warrants issued as consideration
for compensation 38,002
Changes in operating assets and liabilities:
(Increase) in other assets (5,178) 65,101 (148,688)
(Increase) decrease in accrued expenses
and other liabilities (330,990) (259,074) 1,040,157
----------- ---------- -----------
Net Cash (used in) operating activities (1,476,281) (1,943,389) (14,565,469)
----------- ---------- -----------
Cash Flows from Investing Activities:
Purchase of property and equipment (200,005) (714,866) (3,738,943)
Organization costs
----------- ---------- -----------
Net Cash (used by) investing activities (200,005) (714,866) (3,750,279)
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 (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 financing activities - 22,156,357
NET INCREASE IN CASH (1,676,286) (2,658,255)
Cash at beginning of period 5,191,897 6,498,864
----------- ---------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,515,611 $3,840,609 $ 3,840,609
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 period 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 three months ended March 31, 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 Companys Annual Report on Form 10-KSB for
the year ended December 31, 1996.
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 June 28, 1996 the Company issued a purchase order to Digital
Equipment Corporation ("DEC") to develop for the Company software applications
and the hardware necessary to deliver the Cafe USA program digitally through
telecommunication networks into malls nationwide (the "Purchase Order"). The
Purchase Order was conditioned upon six material criteria being met by DEC. In
the Company's view, DEC has failed to address or meet at least three of the
conditions. As a result, the Company and DEC are negotiating the terms of
terminating their relationship, including ownership of the data rights,
potential royalties to the Company and payment responsibilities for development
costs. As of March 31, 1997, the Company has paid DEC $150,000. The total cost
of the development to date is estimated to be approximately $950,000. Should
this relationship be terminated, the Company may be required to write off
$205,000 of fixed assets.
6
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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. 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 18 Food
Courts through March 31, 1997 (and 20 Food Courts as of the date of this
report). The Company has received only limited revenues. The Company's principal
expenses from inception through March 31, 1997 have been salaries and payments
to consultants ($5,464,000), production costs for Cafe USA programming
($3,968,000) and advertising/marketing expenses ($1,480,000). Additionally, the
Company invested approximately $3,739,000 in capital equipment through March 31,
1997. Accordingly, as of March 31, 1997, the Company had a deficit accumulated
in the development stage of approximately $17,600,000 and a net worth of
approximately $6,238,000. 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.
Prior to April of 1996, the majority of expenses incurred by the
Company were charged to development costs. Total operating expenses increased to
$1,957,767 for the three months ended March 31, 1997, from $1,278,269 for the
comparable period from the previous year. Such increase was principally due to
the Company's expansion into additional malls.
Charge to Income in the Event of Release of Escrow Shares
In connection with a private offering which began in November, 1993,
and terminated 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 shares 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.
7
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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 until such time as it begins to
receive revenues from operations.
As of March 31, 1997, the Company had a working capital of
approximately $3,189,000. The Company has financed its operation to date almost
exclusively through three private placements of securities, bank loans and its
public offering, including $2,292,500 through a Preferred Stock Unit Offering,
$2,250,000 from the issuance of notes with warrants, bank loans of approximately
$1,086,000, a public offering of approximately $16,800,000 and the Private
Offering in November, 1996, of $9,000,000.
The Company has employment contracts with six executive officers and
employees which provide for aggregate salaries in 1997 in the amount of
approximately $803,000. The Companys lease agreement for its offices provides
for monthly payments of approximately $10,500.
Pursuant to employment agreements with two former executive officers,
the Company is obligated to make severance payments totaling $125,000 for the
period from April 1, 1997, through September 30, 1997.
The Company has entered into a settlement agreement 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 for $200,000.
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. Interest will accrue on such
obligation at the prime rate commencing January 1, 1996, and will be paid
quarterly thereafter. "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 Companys 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 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 Underwriter during the five year
8
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period from the consummation of the Pivate 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 e 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).
Plan of Operation
The Company is currently (as of May 8, 1997) broadcasting in 20 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.
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.
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. Simultaneously, the Company is
investigating other methods of raising capital to finance its operations and
expansion plans. If the Company is unable to obtain additional funding or
resources in a timely manner, either through strategic alliances or a financing,
the Company may be forced to cease operations.
In January, 1997, the Company entered into a six-year exclusive
advertising sales representative agreement with ABC. The agreement provides that
ABC will be the exclusive advertising representative for the Company and will
use the ABC sales force to seek advertisers for the Company's programming. ABC
has the right to terminate the 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 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 first quarter
of 1997, the Company had no paid advertisers. Without a significant number of
paid advertisers, the Company may be unable to complete its plan and may be
forced to cease operations.
9
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While the Company remains committed to delivery of its programming
through a digital telecommunications network, current plans call for the
completion of such a delivery system by the end of 1997 or beginning of 1998.
Since the arrangement with DEC is terminating, the Company is investigating
other options and methods for broadcasting its programming and other digital
systems.
10
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Securities Holders
Not applicable
Item 5. Other Information
Resignation of Chief Financial Officer
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(none)
(b) Reports on Form 8-K
(none)
11
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ITEM 5 - OTHER INFORMATION
Resignation of Chief Financial Officer
The Company has received notice that, effective as of May 16, 1997,
Darren Sardoff will resign as Chief Financial Officer, Treasurer and Secretary
of the Company.
12
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SIGNATURES
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)
May 15, 1997 By: /s/ James N. Perkins
- ------------ -------------------------------------
(Date) James N. Perkins, President
May 15, 1997 By: /s/ Robert H. Lenz
- ------------ -------------------------------------
(Date) Robert H. Lenz, Chairman
13
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EXHIBIT INDEX
Exhibit Page
Number Document Number
- ------- -------- ------
27 Financial Data Schedule 14
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,840,609
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,228,857
<PP&E> 2,969,981
<DEPRECIATION> 160,000
<TOTAL-ASSETS> 7,278,330
<CURRENT-LIABILITIES> 823,658
<BONDS> 0
0
0
<COMMON> 80,465
<OTHER-SE> 6,157,707
<TOTAL-LIABILITY-AND-EQUITY> 7,278,330
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 1,957,767
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (48,351)
<INCOME-PRETAX> (1,909,416)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,909,416)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,909,416)
<EPS-PRIMARY> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
