Focus Entertainment International Inactive
Filed: 30 May 02, 12:00am
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
_____________________________________________
FORM 10-QSB
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2002
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ________ to ________
Commission File Number 000-27819
_________________________________________________
FOCUS ENTERTAINMENT INTERNATIONAL, INC.
(Exact name of small business issuer as specified in its charter)
Florida (State or other jurisdiction of incorporation or organization) | 58-2330633 (IRS Employer Identification No.) |
1739B Cheshire Bridge Rd, Atlanta, GA 30324
(Address of Principal Executive Offices)
(404) 253-1112
(Issuer''s telephone number)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 ___ No X
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer''s classes of common equity, as of the latest practicable date: 4,900,000 shares of its Common Stock, $.001 par value, as of May 14, 2002.
FOCUS ENTERTAINMENT INTERNATIONAL, INC. AND SUBSIDIARIES
FORM 10-QSB REPORT INDEX
Page No. | ||
PART I. FINANCIAL INFORMATION | ||
Item 1. Financial Statements | ||
Item 1. Financial Statements (Unaudited) | ||
Condensed Consolidated Balance Sheets as of March 31, 2002 (unaudited) and June 30, 2001 (audited) | 3 | |
Condensed Consolidated Balance Sheets as of March 31, 2002 and June 30, 2001 | 3 | |
Unaudited Condensed Consolidated Statements of Operations for the Nine Months Ended March 31, 2002 and 2001 | 5 | |
Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2002 and 2001 | 6 | |
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2002 and 2001 | 7 | |
Unaudited Condensed Consolidated Statement of Stockholders' Equity for the Nine Months Ended March 31, 2002 and 2001 | 7 | |
Unaudited Schedule of General and Administrative Expenses for the Nine Months Ended March 31, 2002 and 2001 | 8 | |
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2002 and 2001 | 8 | |
Unaudited Schedule of General and Administrative Expenses for the Nine Months Ended March 31, 2002 and 2001 | 10 | |
Notes to Condensed Consolidated Financial Statements for the Nine Months Ended March 31, 2002 | 10 | |
Notes to Condensed Consolidated Financial Statements for the Nine Months Ended March 31, 2002 | 11 | |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation | 16 | |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation | 17 | |
PART II. OTHER INFORMATION | ||
Item 1. Legal Proceedings | 20 | |
Item 1. Legal Proceedings | 22 | |
Item 2. Changes in Securities | 20 | |
Item 2. Changes in Securities | 22 | |
Item 3. Defaults on Senior Securities | 20 | |
Item 3. Defaults on Senior Securities | 22 | |
Item 4. Submission of Matters to a Vote of Security Holders | 20 | |
Item 4. Submission of Matters to a Vote of Security Holders | 22 | |
Item 5. Other Information | 20 | |
Item 5. Other Information | 22 | |
Item 6. Exhibits and Reports on Form 8-K | 20 | |
Item 6. Exhibits and Reports on Form 8-K | 22 | |
Signatures | 20 | |
Signatures | 22 | |
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
FOCUS ENTERTAINMENT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2002 (unaudited) and June 30, 2001 (audited)
ASSETS | March 31, 2002 (unaudited) | June 30, 2001 (audited) | ||||
ASSETS | March 31, 2002 | June 30, 2001 | ||||
Current Assets | ||||||
Cash and Cash Equivalents | $ 183,008 | $ 401,991 | ||||
Inventory | 3,128,436 | 2,588,957 | ||||
Accounts Receivable | - | - | ||||
Prepaid Income Taxes | - | - | ||||
Prepaid Insurance | - | - | ||||
Prepaid Rent | 88,398 | 87,942 | ||||
Total Current Assets | 3,399,842 | 3,078,890 | ||||
Land and Buildings | 279,671 | 279,671 | ||||
Computers and Software | 607,859 | 521,714 | ||||
Furniture and Fixtures | 656,558 | 652,949 | ||||
Leasehold Improvements | 1,282,037 | 1,177,291 | ||||
Store Equipment and Signage | 864,366 | 861,716 | ||||
Vehicles | 54,010 | 54,010 | ||||
3,744,501 | 3,547,351 | |||||
Accumulated Depreciation | (1,850,123) | (1,629,755) | ||||
Net Property and Equipment | 1,894,378 | 1,917,596 | ||||
Other Assets: | ||||||
Due From (To) Stockholders | (19,500) | 55,304 | ||||
Advances to Employees | 965 | 1,506 | ||||
Goodwill - Net of Amortization | 1,177,255 | 1,230,173 | ||||
Deferred Income Taxes | 25,000 | 25,000 | ||||
Deposits | 143,893 | 122,893 | ||||
Investments | 51,808 | 22,950 | ||||
Total Other Assets | 1,379,421 | 1,457,826 | ||||
TOTAL ASSETS | $ 6,673,641 | $ 6,454,312 | ||||
The accompanying notes are an integral part of these financial statements.
FOCUS ENTERTAINMENT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2002 (unaudited) and June 30, 2001 (audited)
LIABILITIES AND STOCKHOLDERS' EQUITY | March 31, 2002 (unaudited) | June 30, 2001 (audited) | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | March 31, 2001 | June 30, 2001 | ||||
Current Liabilities | ||||||
Current Portion of Long-Term Debt | $ 76,733 | $ 356,603 | ||||
Accounts Payable | 880,993 | 1,122,921 | ||||
Accrued Expenses | 240,219 | 243,889 | ||||
Income Taxes Payable | 271,267 | 36,303 | ||||
Total Current Liabilities | 1,469,212 | 1,759,716 | ||||
Long-Term Liabilities | ||||||
Long-Term Debt (Net of Current Portion) | 210,978 | 226,032 | ||||
Total Liabilities | 1,680,190 | 1,985,748 | ||||
Minority Interest | 1,254,287 | 1,049,713 | ||||
Stockholders'' Equity | ||||||
Common Stock; $.001 Par Value, 50,000,000 Shares Authorized, 4,900,000 Shares Issued and Outstanding | 4,900 | 4,900 | ||||
Additional Paid-In Capital | 254,188 | 254,188 | ||||
Retained Earnings | 3,480,076 | 3,159,763 | ||||
Total Stockholders'' Equity | 3,739,164 | 3,418,851 | ||||
TOTAL LIABILITIES and STOCKHOLDERS'' EQUITY | $ 6,673,641 | $ 6,454,312 | ||||
The accompanying notes are an integral part of these financial statements.
FOCUS ENTERTAINMENT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Nine months ended March 31, 2002 and 2001 (unaudited)
2002 | 2001 | ||||
Sales, Net of Returns and Allowances | |||||
Product Sales | $ 7,384,462 | $ 7,626,861 | |||
Service Sales | 2,278,351 | 2,434,037 | |||
Total Sales | 9,662,813 | 10,060,898 | |||
Cost of Goods Sold | 3,600,986 | 3,535,983 | |||
Gross Profit | 6,061,827 | 6,524,915 | |||
General and Administrative Expenses | 5,171,366 | 5,371,513 | |||
Income From Operations | 890,461 | 1,153,402 | |||
Other Income (Expense) | |||||
Rental Income | - | 55,612 | |||
Gain (Loss) on the Disposal of Investments | - | 49,511 | |||
Interest Income | 1,927 | 5,066 | |||
Interest Expense | (37,154) | (74,376) | |||
Other Income | 59,512 | 62,439 | |||
Total Other Income (Expense) | 24,285 | 98,252 | |||
Income Before Income Taxes | 914,746 | 1,251,654 | |||
Provision for Income Taxes | 234,964 | 405,098 | |||
Provision for Income Taxes | 234,964 | 405,098 | |||
Minority Interest | 359,469 | 406,172 | |||
Net Income | $ 320,313 | $ 440,384 | |||
Basic EPS | |||||
Earnings Per Share of Common Stock | $0.07 | $0.09 | |||
Earnings Per Share of Common Stock | $0.07 | $0.09 | |||
Average Number of Common Shares Outstanding | 4,900,000 | 4,900,000 | |||
Diluted EPS | |||||
Earnings Per Share of Common Stock | $0.07 | $0.09 | |||
Earnings Per Share of Common Stock | $0.07 | $0.09 | |||
Average Number of Common Shares Outstanding | 4,900,000 | 4,900,000 | |||
The accompanying notes are an integral part of these financial statements.
FOCUS ENTERTAINMENT INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended March 31, 2002 and 20012001 and 2000 (unaudited)
2002 | 2001 | ||||
Sales, Net of Returns and Allowances | |||||
Product Sales | $ 2,399,150 | $ 2,555,294 | |||
Service Sales | 743,699 | 869,451 | |||
Total Sales | 3,142,849 | 3,424,745 | |||
Cost of Goods Sold | 1,229,028 | 1,127,792 | |||
Gross Profit | 1,913,821 | 2,296,953 | |||
General and Administrative Expenses | 1,694,218 | 1,837,618 | |||
Income From Operations | 219,603 | 459,335 | |||
Other Income (Expense) | |||||
Rental Income | - | 14,400 | |||
Gain (Loss) on the Disposal of Investments | - | -- | |||
Interest Income | 83 | 1,394 | |||
Interest Expense | (11,064) | (17,731) | |||
Other Income | 20,688 | 16,308 | |||
|
| ||||
Total Other Income (Expense) | 9,707 | 14,371 | |||
Income Before Income Taxes | 229,310 | 473,706 | |||
Provision for Income Taxes | 24,591 | 189,208 | |||
Minority Interest | 91,072 | 126,643 | |||
Net Income | $ 113,647 | $ 157,855 | |||
Basic EPS | |||||
Earnings Per Share of Common Stock | $0.02 | $0.03 | |||
Average Number of Common Shares Outstanding | 4,900,000 | 4,900,000 | |||
Diluted EPS | |||||
Earnings Per Share of Common Stock | $0.02 | $0.03 | |||
Average Number of Common Shares Outstanding | 4,900,000 | 4,900,000 | |||
The accompanying notes are an integral part of these financial statements
FOCUS ENTERTAINMENT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
Nine months ended March 31, 2002 and 2001 (unaudited)
Additional | ||||
Common | Paid in | Retained | ||
Stock | Capital | Earnings | Total | |
Balance as of June 30, 2000 | $ 4,900 | $ 254,188 | $ 2,777,069 | $ 3,036,157 |
Net Income | 440,384 | 440,384 | ||
Balance as of March 31, 2001 | $ 4,900 | $ 254,188 | $ 3,217,453 | $ 3,476,541 |
Balance as of June 30, 2001 | $ 4,900 | $ 254,188 | $ 3,159,763 | $ 3,418,851 |
Net Income | 320,313 | 320,313 | ||
Balance as of March 31, 2002 | $ 4,900 | $ 254,188 | $ 3,480,076 | $ 3,739,164 |
The accompanying notes are an integral part of these financial statements.
FOCUS ENTERTAINMENT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended March 31, 2002 and 2001 (unaudited)
2002 | 2001 | ||
Cash Flows from Operating Activities: | |||
Net Income | $ 320,313 | $ 440,384 | |
Adjustments to Reconcile Net Income to Net Cash | |||
Provided by Operating Activities: | |||
Depreciation | 220,369 | 236,487 | |
Depreciation | 220,368 | 236,487 | |
Amortization | 52,918 | 52,462 | |
Minority Interest | 359,469 | 406,172 | |
Changes in Operating Assets and Liabilities: | |||
Accounts Receivable | - | 7,482 | |
Inventory | (539,479) | (330,285) | |
Advances to Employees | 541 | (1,918) | |
Prepaids and Other Assets | (21,456) | 76,870 | |
Accounts Payable and Accrued Expenses | (245,598) | 241,917 | |
Accounts Payable and Accrued Expenses | (245,598) | 241,917 | |
Income Taxes | 234,964 | 75,837 | |
Net Cash Provided by Operating Activities | 382,041 | 1,148,569 | |
Net Cash Provided by Operating Activities | 382,041 | 1,148,569 | |
Cash flows from Investing Activities | |||
Purchase of Property and Equipment | (197,151) | (306,866) | |
Repurchase of Shares from Minority Interests | - | (168,353) | |
Investments in Non-Related LLCs | (28,858) | 8,715 | |
Net Cash Used for Investing Activities | (226,009) | (466,504) | |
Net Cash Used for Investing Activities | (226,009) | (466,504) |
The accompanying notes are an integral part of these financial statements.
FOCUS ENTERTAINMENT INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Nine months ended March 31, 2002 and 2001 (unaudited)
2002 | 2001 | ||
Cash Flows from Financing Activities | |||
Advances From (To) Stockholder | 74,804 | (56,839) | |
Payments on Long-Term Debt | (294,924) | (448,084) | |
Payments on Long-Term Debt | (294,924) | (448,084) | |
Minority Interest Contributions | -- | -- | |
Minority Interest Distributions | (154,895) | (305,821) | |
Minority Interest Distributions | (154,895) | (305,821) | |
Net Cash Used for Financing Activities | (375,015) | (753,905) | |
Net Cash Provided Used for Financing Activities | (375,015) | (753,905) | |
|
|
| |
Net Increase (Decrease) in Cash | (218,983) | (71,840) | |
Cash and Cash Equivalents, Beginning of Period | 401,991 | 373,661 | |
Cash and Cash Equivalents, End of Period | $ 183,008 | $ 301,821 | |
Supplemental Disclosures of Cash Flow Information: | |||
Cash Payments During the Period for: | |||
Interest on Debt Obligations | $ 37,154 | $ 74,376 | |
Income Taxes | - | 210,000 |
The accompanying notes are an integral part of these financial statements.
FOCUS ENTERTAINMENT INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED SCHEDULE OF GENERAL AND ADMINISTRATIVE EXPENSES
For the Nine Months Ended March 31, 2002 and 2001
2002 | 2001 | ||
Advertising | $ 172,227 | $ 170,474 | |
Amortization | 52,918 | 52,462 | |
Auto Leases | 10,211 | 13,128 | |
Auto and Truck Expense | 13,236 | 13,786 | |
Bad Debt Expense | - | - | |
Bank Charges | 36,117 | 30,962 | |
Computer Expenses | 26,855 | 45,018 | |
Contract Services | 50,950 | 101,553 | |
Contributions | 750 | 3,926 | |
Depreciation | 220,368 | 236,487 | |
Dues and Subscriptions | 580 | 5,727 | |
Insurance - General | 121,949 | 100,027 | |
Insurance - Group | 114,540 | 46,759 | |
Legal and Professional | 193,085 | 149,289 | |
Office Expenses | 128,335 | 110,509 | |
Payroll Fees | 2,674 | 12,130 | |
Penalties and Fines | 4,375 | 34,183 | |
Rental - Buildings | 854,530 | 796,730 | |
Rental - Equipment | 12,796 | 8,443 | |
Repairs and Maintenance | 163,551 | 151,309 | |
Salaries and Wages | 2,223,820 | 2,517,708 | |
Consulting Fees | 69,868 | - | |
Special Promotions | 10,370 | 23,816 | |
Taxes and Licenses | 74,584 | 83,378 | |
Taxes - Payroll | 156,410 | 190,020 | |
Telephone | 120,908 | 132,668 | |
Travel and Entertainment | 178,128 | 186,642 | |
Utilities | 157,231 | 154,379 | |
| |||
Total General and Administrative Expense | $ 5,171,366 | $ 5,371,513 |
FOCUS ENTERTAINMENT INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002 (Unaudited)
Note 1 - Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited financial statements have been prepared by Focus Entertainment International, Inc. (the ""Company"" or ""Focus"") pursuant to the rules and regulations of the U. S. Securities and Exchange Commission. Certain information and disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments and disclosures necessary for a fair presentation of these financial statements have been included. Such adjustments consist of normal recurring adjustments. This Form 10-QSB Report should be read in conjunction with the Company''s Form 10K-SB, which contains audited financial statements for the Company for the fiscal year ended June 30, 2001, as filed with the U. S. Securities and Exchange Commission.
The results of operations for the period ended March 31, 2002 are not indicative of the results that may be expected for the full year.
Company''s Activities
Focus and its subsidiaries operate Adult Fantasy Stores which rent adult videos and retail in adult videos, marital aids, lotions, novelties, magazines, provocative clothing, lingerie, tobacco, tobacco related products, and adult viewing booths. The stores operate under the trade names of Inserection, Heaven, New York Video, Cupid''s Arrow and Water Pipe World and are located in the metropolitan Atlanta, Georgia area in Fulton, Cobb, and DeKalb counties and in Myrtle Beach, South Carolina, in Horry County. The Company has also promoted boxing events under the name ""Boxing in Buckhead"".
Principles of Consolidation
The Company wholly owns Midtown Visuals, Inc. and Morrison Distributors, Ltd. Midtown owns controlling interest in Unique Visuals, LLC, Exciting Visuals, LLC, Creative Visuals, LLC, Fantastic Visuals, LLC, Northside Visuals, LLC, Cheshire Visuals, LLC, New York Video, Innovative Visuals, LLC, 1690 Cobb, LLC, Snellville Visuals, LLC, and Myrtle Beach Visuals, LLC. The financial statements of these subsidiaries have been consolidated. Minority interests acquired over time have been recorded using the purchase method. Goodwill was recorded for the excess of the purchase price over the proportionate share of the fair value of net assets acquired. Significant inter-company balances and transactions have been eliminated in consolidation.
Estimates
Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were used.
Inventory
Inventory is stated at the lower of cost or market. Cost of video inventory is determined on the average cost method. All other inventory is valued by the first-in, first-out (FIFO) method.
Prepaid Rent
Rent paid in advance on building leases has been reported as a prepaid.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided over the estimated useful lives of the assets by accelerated and straight-line methods. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation expense charged to operations amounted to $220,368 and $236,487 for the nine months ended March 31, 2002 and 2001, respectively.
Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Amounts provided for deferred income taxes relate principally to depreciation.
Cash and Cash Equivalents
The Company considers instruments with maturity of three months or less to be cash equivalents for purposes of the statements of cash flows.
Intangible and Long-lived Assets
Goodwill is recognized for financial statement purposes as the excess of the purchase price of interests in subsidiaries from minority investors and the book value of those interests. Goodwill originating from the purchase of the Myrtle Beach store is recognized as the excess of the purchase price of the assets purchased over the fair market value of those assets. Goodwill is being amortized over 240 months.
Goodwill originating in transactions with the majority stockholder is measured using the basis of the majority stockholder established in transactions with outside partners. Amounts paid to the majority stockholder in excess of the basis are charged to retained earnings.
The Company evaluates the impairment of goodwill and long-lived assets on an ongoing basis in relation to the undiscounted cash flows of the related assets. No adjustments for impairment have been made.
Amortization expense charged to operations amounted to $52,918 and $52,462 for the nine months ended March 31, 2002 and 2001, respectively.
Investments
Investments of less than 20 percent in investees where the Company does not have significant influence are carried at cost.
Advertising Costs
Advertising costs are charged to operations when the advertising first takes place. Advertising expense was $172,227 and $170,474 for the nine months ended March 31, 2002 and 2001, respectively.
Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, ""Accounting for Derivative Instruments and Hedging Activities"". This statement addresses the accounting for derivative instruments, including some types of derivative instruments imbedded in other contracts, and hedging activities. SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. The Company did not purchase any derivative instruments or enter into any derivative contracts or hedging activities for the quarterly periods ended March 31, 2002 and 2001.September 30, 2001 and 2000.
Prior to June 30, 2001, we adopted Statement of Financial Accounting Standards No. 131, ""Disclosures about Segments of an Enterprise and Related Information."" SFAS No. 131 requires the presentation of descriptive information about reportable segments consistent with information our management uses to assess performance. Additionally, SFAS No. 131 requires disclosure of certain information by geographic region. The adoption of the provision of SFAS No. 131 has not significantly impacted our financial reporting because the Company operates in one business segment and geographic region.
In June 2001, the Financial Accounting Standards Board issued two Statements of Financial Accounting Standards, No. 141,Business Combinations (SFAS No. 141), and No. 142,Goodwill and Other Intangible Assets (SFAS No. 142). SFAS No. 141 addresses financial accounting and reporting for business combinations and supersedes APB Opinion No. 16,Business Combinations, and FASB Statement No. 38,Accounting for Preacquisition Contingencies of Purchased Enterprises. All business combinations in the scope of SFAS No. 141 are to be accounted for using one method, the purchase method. The provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method for those business combinations is prohibited. The provisions of SFAS No. 141 also apply to all business combinations accounted for by the purchase method for which the date of acquisition is July 1, 2001, or later.
SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17,Intangible Assets. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. SFAS No. 142 also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Under SFAS No. 142, goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment. Intangible assets that have finite useful lives will continue to be amortized over their useful lives, but without the constraint of the 40-year maximum life required by SFAS No. 142. The provisions of SFAS No. 142 are required to be applied starting with fiscal years begin ning after December 15, 2001.
The Company plans to adoptadopted the provisions of SFAS No. 142 effective July 1, 2002. The Company is in the process of determining the impact the adoption of the provisions of SFAS No. 142 will have on financial position and results of operations of the Company.
Note 2 - Disclosure about Fair Value of Financial Instruments
Cash and Cash Equivalents
The Company estimates that the fair value of cash equivalents approximates the carrying value due to the relatively short maturity of these instruments.
Notes Payable
The Company estimates that the fair value of notes payable approximates the carrying value based upon its effective borrowing rate for issuance of debt with similar terms and remaining maturities.
Note 3 - Inventory
Inventory consisted of:
March 31, 2002 | June 30, 2001 | |
Retail Video Tapes | $ 1,139,180 | $ 1,394,184 |
Retail Product | 1,984,107 | 1,191,041 |
Bar Inventory | 5,149 | 3,732 |
$ 3,128,436 | $ 2,588,957 |
Both videos and product are held for sale. Videos are also available for rental. Rental videos are generally sold within one year. Therefore, all videos are classified as a current asset and are not amortized.
Note 4 - Long-term debt
Long-term debt consists of:
March 31,2002 | June 30, 2001 | |
Mortgage note payable to individuals in monthly installments of $2,045, including interest at 10 percent. The note is collateralized by a deed to secure debt on land and building. |
$ 213,997 |
$ 217,915 |
Mortgage note payable to individuals in monthly installments of $2,045, including interest at 10 percent. The note is collateralized by a deed to secure debt on land and building. | $ 213,997 | $ 217,915 |
Note payable to company in 12 monthly installments of $1,752, including interest at 8 percent. The note is collateralized by certain equipment. |
8,612 |
18,499 |
Note payable to company in 12 monthly installments of $1,752, including interest at 8 percent. The note is collateralized by certain equipment. | 8,612 | 18,499 |
Note payable to finance company in monthly installments of $695. Including interest at 9.755% per annum. The note is collateralized by a vehicle. |
- | 3,151 |
Note payable to finance company in monthly installments of $695. Including interest at 9.755% per annum. The note is collateralized by a vehicle. | - | 3,151 |
Note payable to limited partnership in monthly installments of $11,768, including interest at 12 percent. The note is collateralized by a guarantee from the majority stockholder. |
13,594 |
79,180 |
Note payable to limited partnership in monthly installments of $11,768, including interest at 12 percent. The note is collateralized by a guarantee from the majority stockholder. | 13,594 | 79,180 |
Note payable to company in monthly installments of $10,833 including interest at 8 percent. The note is collateralized by minority interests in various subsidiaries. |
7,616 |
134,470 |
Note payable to company in monthly installments of $10,833 including interest at 8 percent. The note is collateralized by minority interests in various subsidiaries. | 7,616 | 134,470 |
Note payable to company in monthly installments of $16,667, including interest at 8 percent. The note is collateralized by a subsidiary. | 43,892 | 129,420 |
Note payable to company in monthly installments of $16,667, including interest at 8 percent. The note is collateralized by a subsidiary. | 43,892 | 129,420 |
287,711 | 582,635 | |
Less: current portion | 76,733 | 356,603 |
Net long-term debt | $ 210,978 | $ 226,032 |
Interest expense of $37,154 and $74,376 for 2002 and 2001, respectively, is included in the accompanying consolidated statements of operations.
Note 5 - Concentrations
The Company operated nine of thirteen retail locations in 2002 and nine of twelve locations in 2001 in Fulton County, Georgia. The Company operates in an industry that is the subject of substantial litigation and adverse public and political opinion. The Company has successfully defended its right to operate this business and feels it will be able to continue to defend this right. The Company is actively pursuing additional locations in other legal jurisdictions in an attempt to diversify the concentration of one legal jurisdiction.
Note 4 - Minority Interest
The Company has formed Limited Liability Companies (LLCs) to operate its locations. Profits and losses of each location is allocated to the investors based on formulas set forth in the operating agreements of the LLCs. Distributions are made to the investors based on formulas set forth in the operating agreements.
Subsidiary | Minority Earnings Fiscal 2002 | Minority Distributions Fiscal 2002 | Minority Ownership March 31, 2002 | Minority Equity March 31, 2002 |
Unique Visuals, LLC | $ - | $ - | 0.00% | $ - |
Creative Visuals, LLC | - | - | 0.00% | - |
Exciting Visuals, LLC | 119,808 | 55,041 | 25.00% | 408,626 |
Exciting Visuals, LLC | 119,808 | 47,041 | 25.00% | 416,626 |
Fantastic Visuals, LLC | 176,836 | 85,241 | 48.75% | 664,040 |
Fantastic Visuals, LLC | 176,836 | 75,523 | 48.75% | 673,758 |
Northside Visuals, LLC | (1,308) | 675 | 4.17% | 8,473 |
Northside Visuals, LLC | (1,308) | 761 | 4.17% | 8,387 |
Cheshire Visuals, LLC | - | - | 0.00% | - |
New York Video, LLC | 54,646 | 11,602 | 29.95% | 145,689 |
New York Video, LLC | 54,646 | 12,002 | 29.95% | 145,289 |
Innovative Visuals, LLC | 8,090 | 2,336 | 29.90% | 32,324 |
Innovative Visuals, LLC | 8,090 | 2,481 | 29.90% | 32,179 |
1690 Cobb, LLC | - | - | 0.00% | - |
Snellville Visuals, LLC | 1,397 | - | 9.00% | (4,865) |
Snellville Visuals, LLC | 1,397 | 23 | 9.00% | (4,888) |
Myrtle Beach Visuals, LLC | - | - | 0.00% | - |
Total | $ 359,469 | $ 154,895 | $ 1,254,287 | |
Total | $ 359,469 | $ 137,831 | $ 1,271,351 |
Subsidiary | Minority Earnings Fiscal 2001 | Minority Distributions Fiscal 2001 | Minority Ownership March 31, 2001 | Equity March 31, 2001 |
Unique Visuals, LLC | $ - | $ - | 0.00% | $ - |
Creative Visuals, LLC | - | - | 0.00% | - |
Exciting Visuals, LLC | 134,417 | 77,187 | 25.00% | 281,159 |
Fantastic Visuals, LLC | 261,136 | 169,601 | 49.47% | 557,042 |
Northside Visuals, LLC | 3,009 | 3,208 | 4.17% | 13,285 |
Cheshire Visuals, LLC | - | - | 0.00% | - |
New York Video, LLC | 30,986 | 6,616 | 29.95% | 122,698 |
Innovative Visuals, LLC | 14,621 | 49,209 | 29.90% | 87,683 |
1690 Cobb, LLC | - | - | 0.00% | - |
Snellville Visuals, LLC | (3,785) | - | 9.00% | (15,826) |
Myrtle Beach Visuals, LLC | - | - | 0.00% | - |
Total | $ 406,172 | $ 305,821 | $ 1,046,041 |
Note 5 - Repurchase of Minority Interests
On September 30, 2000, the Company purchased a 4.38 percent interest in Northside Visuals, LLC from two minority investors for $26,923. The book value of the interest purchased was $15,103. This transaction resulted in the recognition of $11,820 in goodwill, and increased the Company''s ownership to 95.83 percent.
On December 31, 2000, the Company purchased a 5.00 percent interest in Federal Visuals, LLC from a minority investor for $1. The book value of the interest purchased was $500. This transaction resulted in the recognition of ($499) in goodwill, and increased the Company''s ownership to 100.00 percent.
On January 30, 2001, the Company purchased a 4.00 percent interest in Snellville Visuals from a minority investor for $22,000. The book value of the interest purchased was $14,529 resulting in the recognition of $7,471 in goodwill.
Item 2. Management''s Discussion and Analysis of Financial Condition and Results of Operations.
Certain statements in this Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2002 on Form 10-QSB, may constitute ""forward-looking statements"" within the meaning of the Private Securities Litigation Reform Act of 1995 (the ""Reform Act""). Such forward-looking statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements, expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed herein.
The words ""believe"", ""expect"", ""anticipate"", ""seek"" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made.
Results of Operations
Revenues
For the nine months ended March 31, 2002, the Company had net sales of $9,662,813, as compared to net sales in the nine months ended March 31, 2001 of $10,060,898, a decrease of $398,085, or 3.96%. A comparison of revenues by type in fiscal 2002 to fiscal 2001 is set forth below:
FY2002 | FY2001 | |
Product Sales | $ 4,702,696 | $ 4,564,893 |
Video Sales | 2,787,276 | 3,190,348 |
Video Rentals | 1,758,066 | 1,885,113 |
Booth Revenues | 520,942 | 503,499 |
Boxing Revenues | - | - |
Misc. Sales | (657) | 45,425 |
Sales and Credit Card Discounts | (105,510) | (128,380) |
Totals | $ 9,662,813 | $ 10,060,898 |
For the three months ended March 31, 2002, the Company had net sales of $3,142,849, as compared to net sales in the three months ended March 31, 2001 of $3,424,745, a decrease of $281,896, or 8.23%. A comparison of revenues by type for the three-month periods in fiscal 2002 and fiscal 2001 is set forth below:
FY2002 | FY2001 | |
Product Sales | $ 1,483,079 | $ 1,551,621 |
Video Sales | 915,353 | 1,080,590 |
Video Rentals | 580,563 | 646,160 |
Booth Revenues | 163,793 | 177,866 |
Boxing Revenues | - | - |
Misc. Sales | (657) | 8,946 |
Sales and Credit Card Discounts | 718 | (40,438) |
Totals | $ 3,142,849 | $ 3,424,745 |
In June 2001, the Company opened a new store in Gwinnett County, Georgia. The new store had revenues of $51,817 for the nine months ended March 31, 2002. The Company was subsequently sued by the landowner on the grounds that the original purchase agreement included a clause that did not permit the sale of adult material. The court issued a ruling in favor of the landowner in October 2001, which caused the Company to close the location in November 2001. The Company has retained a law firm and is threatening litigation against the former owners if they do not repay the amounts expended on the location (see Part II, Item 1., Legal Proceedings).
Revenues from existing locations were down slightly in the third quarter of fiscal 2002 as the events of September 11 impacted the retail sector. The Company operates in the metropolitan Atlanta, Georgia area where Delta Airlines is one of the areas major employers. Immediately after the September 11 incident, Delta Airlines laid off approximately 6,000 employees. Delta''s reduction in force affected other businesses and caused the economy to take a downward turn in the metropolitan Atlanta area. Even though Delta has since rehired most of its work force, the metropolitan Atlanta area, like the rest of the country, is still in an economic downturn. In response to the slower economy, the Company reduced its general and administrative expenses to help compensate for the drop in revenue. If the economy doesn''t recover, the Company could experience lower than expected profits from lower revenues if it cannot reduce expenses to match the revenue loss.
Cost of Goods Sold
For the nine months ended March 31, 2002, cost of goods sold were $3,600,986, as compared to cost of goods sold in the nine months ended March 31, 2001 of $3,535,983, an increase of $65,003, or 1.8%. As a percentage of net sales, cost of goods sold increased from 35.1% to 37.3% from fiscal 20012002 to fiscal 2002.2001. Cost of goods sold as a percentage of net sales increased as a result of increased price competition from discount stores located in close proximity to the Company''s locations. Additionally, the sales mix contains more product sales ($137,803) forduring the first nine months of fiscal 2002 as compared to the same period in fiscal 2001. Product sales are generally less profitable than the Company''s other business lines.
A comparison of cost of goods sold by type in fiscal 2002 to fiscal 2001 is set forth below:
FY2002 | FY2001 | |||
Cost of Goods Sold | % of Revenues | Cost of Goods Sold | % of Revenues | |
Product Sales | $ 2,419,181 | 51.4% | $ 2,175,880 | 47.7% |
Video Sales | 1,181,805 | 42.4% | 1,360,103 | 42.6% |
Video Rentals | - | - | - | - |
Booth Revenues | - | - | - | - |
Boxing Revenues | - | - | - | - |
Misc. Sales | - | - | - | - |
Totals | $ 3,600,986 | 37.3% | $ 3,535,983 | 35.1% |
For the three months ended March 31, 2002, cost of goods sold were $1,229,028, as compared to $1,127,792 in the similar period for 2001, an increase of $101,326, or 9.0%. The increase in the quarterly comparison is primarily attributable to the sale of lower margin products in the 2002 period, including a trend toward the sale of DVD''s, which have a higher cost than traditional VCR tapes.
A comparison of cost of goods sold by type in fiscal 2002 to fiscal 2001 is set forth below:
FY2002 | FY2001 | |||
Cost of Goods Sold | % of Revenues | Cost of Goods Sold | % of Revenues | |
Product Sales | $ 679,652 | 45.8% | $ 632,690 | 40.8% |
Product Sales | $ 679,652 | 55.3% | $ 632,690 | 51.5% |
Video Sales | 549,376 | 60.0% | 495,102 | 45.8% |
Video Sales | 549,376 | 44.7% | 495,102 | 41.0% |
Video Rentals | - | - | - | - |
Booth Revenues | - | - | - | - |
Boxing Revenues | - | - | - | - |
Misc. Sales | - | - | - | - |
Totals | $ 1,229,028 | 39.1% | $ 1,127,792 | 32.9% |
General and Administrative Expenses
For the nine-month and three-month periods ended March 31, 2002, general and administrative expenses were $5,171,366 and $1,694,218, as compared to $5,371,513 and $1,837,618 for the similar periods ended March 31, 2001, respectively. General and administrative expenses decreased by $200,147, or 3.7%, for the nine months ended March 31, 2002 as compared to March 31, 2001, and decreased by $143,400, or 7.8%, for the three months ended March 31, 2002 when compared to the similar period in 2001. As previously stated, the Company enacted some cost-cutting measures in the third quarter of fiscal 2002 in response to the downturn in the economy, primarily due to the events of September 11, 2001. The decreases were primarily in contract services, reduced itsreductions in the workforce and cutreduced travel and entertainment expenses. These reductions were partially offsetprimarily by increases in general liability and group health insurance premiums and building rents.
Other Income (Expense)
For the nine-month and three-month periods ended March 31, 2002, other income decreased by $73,967 and $4,664, respectively, as compared to the same periods in the prior fiscal year. This is primarily attributable to an increase in payment discounts and decreases in rental income of $55,612, and a gain on the disposal of investments of $49,511, which was partially offset by a decrease in interest expense of $37,222 and reduced interest income ($3,139) from fewer investments and lower interest rates.
Income Taxes
The Company incurred income tax expense of $234,964 and $24,591, as compared to income tax expense of $405,098 and $189,208 for the nine-month and three-month periods ended March 31, 2002 and March 31, 2001, respectively. The decrease in income tax expense is primarily attributable to a decrease in taxable income attributable to lower sales and the shift in sales mix to products versesinstead of services (products and videos verses video viewing booths), which was partially offset by an increase in nondeductible expenses. As of March 31, 2002 and 2001, the Company had deferred income taxes of $25,000. Statement of Financial Accounting Standards No. 109 requires a valuation allowance to be recorded when it is more likely than not that some or all of the deferred tax assets of a company will not be realized. At March 31, 2002, no valuation allowance was recorded against the deferred tax asset because the Company determined from its projections that it is more likely than not that future taxable incom e will be sufficient to realize the deferred tax asset.
Net Income
For the nine-month and three-month periods ended March 31, 2002, the Company had net income of $320,313 and $113,647, compared to net income of $440,384 and $157,855 for the similar periods of the prior year. Net income decreasedincreased in the three months ended March 31, 2002, as compared to the prior year''s period
period, despite the drop in operating income due to a $73,643 decrease in minority interest expense resulting from the Company's repurchase of minority interests in operating subsidiaries. A decrease in minority interest expense of $295,124 in the nine-month period also substantially offset a decline in operating income in that period.
Liquidity and Capital Resources
As of March 31, 2002, the Company had cash and cash equivalents of $183,008, as compared to cash of $401,991 as of June 30, 2002.2001. As of March 31, 2002, the Company''s net working capital was $1,930,630, as compared to net working capital of $1,319,174 as of June 30, 2001, an increase of $611,456 during the nine-month period. The increase is primarily the result of a build-up of inventory in anticipation of a much busier holiday season than what was actually realized and payments on long-term debt, which was partially offset by decreases in cash and accruals for income tax liabilities. As of March 31, 2002, long-term debt was $210,978, as compared to $226,032 as of June 30, 2002,2001, a decrease of $15,054 during the nine-month period. As of March 31, 2002, current portion of long-term debt was $356,603, as compared to $76,733 as of June 30, 2001, a decrease of $279,870 during the nine-month period.
During the nine months ended March 31, 2002, the Company continued to concentrate on improving and consolidating its long-term financial position. The improvements in the Company''s balance sheet in fiscal 2002 should improve the long-term profitability of the Company''s current operations and position the Company for future sustained growth.
The Company funds its short-term working capital needs, including the purchase of video and other inventory, primarily through cash from operations. The Company expects that cash from operations and extended vendor terms will be sufficient to fund future video and other inventory purchases and other working capital needs for its existing locations. As a part of its growth strategy, however, the Company requires greater working capital to fund the costs of new store openings. There can be no assurance that cash from operations and extended vendor terms will be sufficient to fund future video and other inventory purchases and other working capital to sustain the continued growth of the Company.
The Company''s primary long-term capital needs are for opening and acquiring new locations. The Company expects to fund such needs through cash flows from operations, bank credit facilities, trade credit, and equipment leases.
Quantitative and Qualitative Disclosure about Market Risk
The Company''s market risk sensitive instruments do not subject it to material risk exposures. The carrying value of the Company''s debt approximates fair value at March 31, 2002 and June 30, 2001.
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 Security Holders.
Not Applicable.
Item 5. Other Information.
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
None.
(b) Reports on Form 8-K.
Not Applicable.
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FOCUS ENTERTAINMENT INTERNATIONAL, INC. | |
Date: May 30, 2002 | /s/ David Krolik |
Date: May 30, 2002 | /s/ David Krolik |
By: David Krolik, Chief Financial Officer |