13
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark one)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal quarter ended September 30, 1996
Commission file No. 0-18866
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
First National Entertainment Corp.
(Exact name of small business issuer as specified in its charter)
Colorado 93-1004651
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
600 Enterprise Drive, Suite 109, Oak Brook, Illinois 60521
(Address of principal executive offices)
(630) 573-8209
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $0.005 Par Value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
YES [ X ] NO [ ]
As of November 10 1996 the registrant had outstanding 16,898,458
shares of its $.005 par value Common Stock.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
First National Entertainment Corp.
CONSOLIDATED BALANCE SHEET
(unaudited)
September 30, 1996 1995
ASSETS
Current Assets
Cash $38,967 $154,059
Accounts receivable,
net of allowance for
doubtful accounts of
$1,705,521 (1996) and
$567,246 (1995) 26,945 332,963
Film inventory 0 405,987
Other 9,514 24,514
Total Current Assets 75,426 917,523
Property and equipment, net 41,470 32,343
Other Assets
Film inventory, net of
accumulated amortization
of $7,913,891 (1996) and
$6,737,062 (1995) 2,648,210 3,825,039
Intangible assets, net of
accumulated amortization
of $119,508 (1996)
and $159,093 (1995) and other 132,570 398,115
Total Other Assets 2,822,250 4,223,154
TOTAL ASSETS $2,897,676 $5,173,020
See accompanying notes to consolidated financial
statements.
First National Entertainment Corp.
CONSOLIDATED BALANCE SHEET
(unaudited)
September 30, 1996 1995
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $245,037 $262,084
Accrued expenses 235,410 156,759
Obligations under
capital leases 21,081 9,972
Total Current Liabilities 501,528 428,815
Shareholders' Equity
Preferred stock, $.0001 par value,
authorized 10,000,000 shares,
no shares issued and outstanding -- --
Common stock, $.005 par value,
authorized 100,000,000 shares,
issued and outstanding:
1996,16,898,458 shares, and
1995,11,293,631 shares 84,495 56,468
Paid in capital 26,090,608 23,285,049
Accumulated deficit (23,778,955) (18,617,695)
Total Shareholders' Equity 2,396,148 4,723,822
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $2,897,676 $4,893,544
See accompanying notes to consolidated financial
statements.
First National Entertainment Corp.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the three months ended September 30, 1996 1995
TOTAL REVENUES $103,579 $30,000
COST OF REVENUES
Amortization of film costs 51,790 14,961
GROSS PROFIT (LOSS) 51,789 15,039
OPERATING EXPENSES
Marketing, selling & royalties 18,826 5,453
General and administrative 198,098 202,388
TOTAL OPERATING EXPENSES 216,924 207,841
OPERATING LOSS (165,135) (192,802)
OTHER INCOME -- 424,993
NET INCOME (LOSS) $(165,135) $232,191
NET LOSS PER SHARE $ (.01) $ .02
Weighted average shares outstanding 16,898,458 11,293,631
See accompanying notes to consolidated financial
statements.
First National Entertainment Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended September 30, 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(165,135) $232,191
Adjustments to reconcile net loss to net
cash provided by operating activities:
Amortization of film costs 51,790 14,961
Stock issued for services
and compensation, net -- --
Other amortization, depreciation,
write-offs 116,778 27,604
Changes in operating assets
and liabilities, net (121,458) (299,472)
NET CASH (USED IN)
OPERATING ACTIVITIES (118,025) (24,716)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment -- --
Disposition of property and equipment -- 103,527
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES -- 103,527
CASH FLOWS FROM FINANCING ACTIVITIES:
Officer Advances/(Repayments) -- --
Notes Payable/(Repayments) -- --
Common Stock Issuance/(Cancellation) -- --
NET CASH (USED IN) FINANCING ACTIVITIES -- --
NET INCREASE/(DECREASE) IN CASH (118,025) 78,811
CASH - BEGINNING OF PERIOD 156,993 75,248
CASH - END OF PERIOD $38,968 $154,059
See accompanying notes to consolidated financial
statements.
First National Entertainment Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)\
September 30, 1996
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-QSB. Accordingly, they do not include all
of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments considered necessary for a
fair presentation of the interim financial statements have been
included. Operating results for the three-month period ended
September 30, 1996 are not necessarily indicative of the results
that may be expected for the year ending June 30, 1997. For further
information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form
10-KSB for the year ended June 30, 1996.
NOTE 2 SUBSEQUENT EVENTS
On October 6, 1996 the Company's Board of Directors approved and
issued an Extension and Optional New Pricing Offer to the holders
of Warrants from its Private Placement of 1,260,000 of the
Company's common stock in December 1995. These 1,260,000 Warrants
originally entitled the holders to purchase an additional share
each of the Company's common stock at a price of $1.00 through an
expiration date of December 15, 1997. The Extension and Optional
New Pricing Offer allows an extension at the same price until
December 31, 1998 for no additional consideration OR an extension
until December 31, 1999 at a share price of $.15 for additional
consideration of $.05 per Warrant OR an extension until December
31, 2000 at a share price of $.05 for additional consideration of
$.10 per Warrant.
NOTE 34 CONTINGENCIES
The Company received notice from the Screen Actors Guild that
supplemental residuals of 4.5% of the first $1,000,000 and 5.4% of
all remaining gross producer receipts are due them. The Company's
entertainment counsel is researching the matter to determine if the
Company has a liability related to this matter. As of the date of
this filing there has been no determination and the Company
believes that if any residuals are due they should be the
responsibility of Lou Scheimer and Filmation (the original producer
of the film).
On May 18, 1995, the Company received notice from Della Miles,
Stylus Record's feature artist, that Stylus was in material breach
of its contract with her. After several meetings with Ms. Miles
and her counsel, the Company placed the entire advanced royalty
receivable amount relating to this contract in its reserve for
doubtful accounts.
The Founders' Agreement of Stylus Records calls for certain actions
by the Company if the Company's common stock price is not equal to
$5 or greater on March 31, 1996 (the stock price on April 1, 1996
was $.25). These actions relate to 60,000 shares of a total of
160,000 issued in April 1994 in exchange for the Company's 80%
interest in Stylus Records. Per the Agreement, the Company would
be required to make up any shortfall in value, either in cash or
via the issuance of additional shares. The Company has submitted
the Agreement to its legal counsel to determine if it is indeed
obligated to take such actions.
NOTE 4 ACCOUNTS RECEIVABLE
On August 16, 1994 the Company received an accounting statement
from Republic Pictures ("Republic"), its film distributor, that
reported video sales and collection results for Happily Ever After
through June 30, 1994. This statement reflected a lower producer
royalty payment than the Company had anticipated because of certain
assumptions, used by Republic in the accounting statement, that the
Company believes were inconsistent with its distribution agreement
with Republic. The Company communicated these issues to Republic
and conducted a comprehensive third-party special audit of all
reported video results. Republic subsequently agreed to revise the
August 16, 1994 accounting statement for the number of videos
shipped, and on September 26, 1994 delivered payment to the Company
for this revised accounting statement, plus interest. However,
according to the special auditor's report, Republic owes the
Company a producer's bonus of 5% of the first one million units
sold, which approximates $256,000, in addition to amounts owed the
Company for foreign currency adjustments and excess units held in
reserve of $184,000. In the fiscal year ending June 30, 1996,
Republic reported units sold of 389,000 units but, because of
certain cost assumptions used by Republic in submitting its
accounting for these sold units, informed the Company that they
have no liability for producer royalty payments. The Company
maintains that under the terms of the Distributor Agreement they
are entitled to a specific amount for each unit sold or
approximately $1,150,000 for 1996. The Company intends to
vigorously pursue collection efforts with respect to these
receivables, however, due to the uncertainty of the results of the
collection efforts, the Company has provided an allowance for the
entire outstanding amount due at June 30, 1996. On November 14,
1996, Republic submitted its final accounting statement (covered
under the three year distribution agreement commenced in 1993),
reporting a total of approximately 35,000 units sold during the
Company's first fiscal quarter ending September 30, 1996. Like its
year end report, Republic continues to deny any financial liability
to the Company. Based on this, the Company has again provided for
an allowance for the entire amount of its calculated revenues from
Republic for the quarter in its financial statements for this
period.
During the third quarter of fiscal 1995 the Company shared in the
net profits from the sale of approximately 15,000 Happily Ever
After video games manufactured and distributed by American
Softworks Corporation ("ASC"). The Company recorded a receivable
from ASC for $175,000 (less the amount paid by ASC) representing
advances made to ASC for the developing of the video game. ASC
disputed amounts owed under the contract. The amount of net
receivables (after costs of collection) due from American Softworks
Corporation at September 30, 1996, in the amount of $26,945,
represents the agreed upon settlement between the parties, and has
been received by the Company subsequent to September 30, 1996.
NOTE 5 CONTINUING OPERATIONS
The Company has historically incurred operating losses, and to date
has an accumulated deficit of approximately $23.8 million. Since
new management was installed at the end of fiscal year 1995, the
Company has substantially reduced its operating overhead by
reducing full time staff from 14 permanent and 15 temporary
employees to 3 full time professional staff at the end of September
1996. Additionally, the Company's move from over 7,000 square feet
of office facility in Austin to under 1,000 square feet in the
Chicago area has substantially reduced administrative costs.
Settlement of the SEC investigation with no financial penalties at
the end of fiscal year 1995 and the shareholder class action suit
for primarily Company issued equity in fiscal 1996 leaves the
Company with no litigation pending as of this report.
In August 1995, the Company announced plans to begin a
diversification plan into the retail video store industry. Several
acquisition transactions were closed during the first half of
fiscal year 1996, however, these acquisitions were later unwound
due to the unavailability of debt financing during the second half
of fiscal year 1996.
The Company still intends to enter the retail video store industry
and continues to hold discussions with video store chain owners who
desire to work with the Company to build a new publicly held chain.
The Company is reevaluating its pricing model as well as seeking
alternative financing for its acquisition plans, taking into
account the current conditions in the retail video store industry.
The Company is currently in negotiations to acquire a new platform
video store chain to serve as a base for its video store
operations. Of course, no assurance can be given as to the
ultimate acceptance of the Company's acquisition strategy and
financing structure by the market place.
The Company's distribution agreement with Republic Pictures
covering Happily Ever After (HEA) expired in October 1996. The
television distribution agreement of HEA previously reported with
Seagull Entertainment was canceled as of June 30, 1996 for lack of
performance. The Company is currently in negotiations with another
distributor for both TV and video rights of this property.
Additionally, the Company is currently in negotiations to produce
several new animated features similar to HEA for direct to video
release. However, these productions will call for the Company to
raise significant additional capital, the availability of which
cannot be assured.
In September 1996, the Company announced that it had exclusively
optioned the screenplay "Chicago Blues" from a local screenwriter.
Financing for this live action feature is budgeted at $1,000,000
and will be offered via the formation of Windy City Pictures I,
LLC. The Company will serve as executive producer of this movie
and intends to produce two to three such productions a year in
Chicago. However, no assurance can be given that the funding for
this project or additional movies will be available.
The Company continues to aggressively seek additional opportunities
in the animation, live action movies and retail video store arenas.
Item 2.
First National Entertainment Corp.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Overview
First National Film Corp. was founded to pursue the
acquisition, distribution, and marketing of high quality
entertainment properties targeted at the family market in all forms
of media. The Company left the development stage and entered the
operational stage in 1993 concurrent with the national theatrical
release of its animated motion picture Happily Ever After and the
resultant generation of revenues.
The Company initiates the recognition of revenues from its
entertainment properties when it releases them for sale into their
primary and/or secondary markets. Revenue recognition often
precedes revenue collection due to substantial collection cycles,
which are common for the entertainment industry. Extended
collection periods could adversely affect the Company's liquidity.
Revenues and results of operations for any period are significantly
dependent upon the public acceptance of the Company's entertainment
properties and products, and, as such, may materially fluctuate
from period to period, and may not be indicative of results in
future periods.
For theatrical, video, merchandising, television, and other
film-related revenues, the Company uses the individual-film-
forecast computation method as promulgated under Statement of
Financial Accounting Standards No. 53, Financial Reporting by
Producers and Distributors of Motion Picture Films. Under this
method, film costs for each period are amortized in proportion to
the revenue earned in the current period, relative to management's
estimate of the total revenue to be realized from all markets for a
given film over its commercial life. Film costs include acquisition
costs, distribution costs, print and certain advertising costs, and
all other related exploitation costs which benefit future periods.
Management reviews its total revenue estimates for its film
properties on a regular basis, which may result in changes of
projections of film revenues, costs, and rate of cost amortization.
Net income for any period may therefore be affected by the
Company's revenue projections and amortization of film costs.
The Company's unamortized film costs associated with Happily
Ever After totaled approximately $2.65 million at September 30,
1996. To date, the Company has amortized over 75% of its total
capitalized costs for this film, the majority of which have been
matched against home video producer royalties earned from the
Company's Republic contract.
For future album, soundtrack, merchandising, publishing, music
video, and mechanical revenues, the Company will use the accounting
standards provided for in FAS 50. Under these standards, the
Company will recognize license fee revenues when the earning
process is complete and minimum guaranteed revenues are earned. The
Company will record advance royalty payments to its recording
artists as an asset when paid and as an expense when actually
earned by the artists, provided it is reasonable to consider these
costs will be recoupable by the Company. The cost of record masters
which are reasonably considered to be recoupable will be treated as
an asset of the Company.
Results of Operations
The Company recorded revenues of $103,579 from operations during
its first fiscal quarter of 1996 ended September 30, 1996, as
compared to $30,000 in the comparable period of the prior fiscal
year. Both current year and prior year sales were derived from
sales of the Company's home video version of its feature film
property Happily Ever After. Current year and prior sales were
estimated based on information from Republic Pictures. Since no
accounting statements were furnished to the Company from Republic
Pictures for the prior year (as required by the distribution
agreement), the Company has had to make its estimates based on
verbal conversations with Republic Pictures. Current quarter
revenue figures are based only on the units sold reports provided
by Republic (See Note 4 - Accounts Receivable.)
Amortized film costs and marketing, selling and royalty expense
associated with the first quarter's revenues were $51,790 and
$18,826 respectively as compared to $14,961 and $5,453 respectively
in the comparable period of fiscal 1995. Amortized costs are
related to the aforementioned revenues earned in the first fiscal
quarter of 1996 and 1995 of the home video release of Happily Ever
After. To date, the Company has amortized approximately $7.9
million or 75% of its total capitalized costs of Happily Ever
After.
Operating expenses totaled $216,924 during the first quarter, as
compared to $207,841 in the comparable quarter of the prior fiscal
year. General and administrative (G&A) expenses decreased to
$198,098 in the current quarter from $202,388 in the comparable
quarter of the prior fiscal year. The majority of the current
quarter's G&A expenses were due to a full provision for doubtful
accounts of the entire amount of the period's revenue. The
previous year's quarterly G&A expenses consisted mostly of payroll
costs, legal fees and other professional fees.
The Company had a net loss of ($165,135) or ($.01) per share during
the first quarter ended September 30, 1996, as compared to net
income of $ 232,191 or $.02 per share in the comparable quarter of
the previous fiscal year. However, during the comparable quarter
of the prior year, the Company had sold its office furnishings and
fixtures as well as its office equipment to a former officer of the
Company for $550,000 and recognized a gain on the sale of
approximately $450,000.
Liquidity and Capital Resources
At September 30, 1996, the Company had cash and cash equivalents of
$38,967 and net accounts receivable of $26,945. Accounts
receivable are comprised of amounts due from American Softworks
Corporation for Happily Ever After video game sales. The Company
had additional accounts receivable of $1,705,521 which are totally
reserved for by an allowance for doubtful accounts related to its
distribution agreement with Republic. (See Note 4 - Accounts
Receivable.)
The Company had $2,897,676 in total assets and $501,528 in total
liabilities at the end of its first fiscal quarter of 1996. The
majority of the Company's assets are comprised of capitalized
inventory costs for Happily Ever After. The Company plans to
amortize its capitalized inventory costs against future revenues
from this property, although there can be no assurance that the
Company will be able to generate sufficient revenues to realize its
complete investment in this property.
On October 6, 1996 the Company's Board of Directors approved and
issued an Extension and Optional New Pricing Offer to the holders
of Warrants from its Private Placement of 1,260,000 of the
Company's common stock in December 1995. These 1,260,000 Warrants
originally entitled the holders to purchase an additional share
each of the Company's common stock at a price of $1.00 through an
expiration date of December 15, 1997. The Extension and Optional
New Pricing Offer allows an extension at the same price until
December 31, 1998 for no additional consideration OR an extension
until December 31, 1999 at a share price of $.15 for additional
consideration of $.05 per Warrant OR an extension until December
31, 2000 at a share price of $.05 for additional consideration of
$.10 per Warrant.
The Company contiues to seek additional funding in order to provide
for its operating expenses as well as capital needed for the
various projects it is pursuing (See Note 5 - Continuing
Operations.)
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
quarter ended September 30, 1996.
Item 6.
Exhibit 27
Financial Data Schedule
September 30, 1996
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FIRST NATIONAL ENTERTAINMENT CORP'S., BALANCE SHEET AT SEPTEMBER
30, 1996 AND STATEMENTS OF OPERATIONS FOR THREE MONTHS ENDED
SEPTEMBER 30, 1996.
Three Months
(Unaudited)
Article 5
Period-Type 3 mos.
Fiscal-Year-End Jun-30-1997
Period-End Sep-30-1996
Cash 38,967
Securities ---
Receivables 26,945
Allowances ---
Inventory ---
Current-Assets 75,426
PP&E 41,470
Depreciation 594
Total-Assets 2,822,250
Current Liabilities 501,528
Bonds ---
Preferred-Mandatory ---
Preferred ---
Common 84,495
Other-Securities ---
Total Liabilities and 2,897,676
Equity
Sales 103,579
Total Revenue 103,579
CGS 51,790
Total Costs 268,714
Other-Expenses ---
Loss Provision ---
Interest-Expense ---
Income-Pretax ---
Income-Tax ---
Income-Continuing ---
Discontinued ---
Extraordinary ---
Changes ---
Net Income (165,135)
EPS-Primary (.01)
EPS-Diluted (.01)
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
First National Entertainment Corp.
Dated: November 22, 1996
/s/ Stephen J. Denari
Stephen J. Denari
President
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
First National Entertainment Corp.
Dated: November 22, 1996 By:
_____________________________
Stephen J. Denari
President