14
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 December 31, 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 February 10, 1997 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)
December 31, 1996 1995
ASSETS
Current Assets
Cash $29,810 $616,826
Accounts receivable, net of allowance
for doubtful accounts of
$1,705,521 (1996) and $567,246 (1995) 0 383,813
Film inventory 0 407,087
Other 9,514 15,193
Total Current Assets 39,324 1,422,919
Property and equipment, net 41,470 43,653
Other Assets
Film inventory, net of accumulated
amortization of $7,913,891 (1996)
and $6,752,023 (1995) 2,648,210 3,795,117
Intangible assets, net of accumulated
amortization of $132,112 (1996)
and $186,694 (1995) and other 119,966 370,511
Total Other Assets 2,768,176 4,165,628
TOTAL ASSETS $2,848,970 $5,632,201
See accompanying notes to consolidated financial
statements.
First National Entertainment Corp.
CONSOLIDATED BALANCE SHEET
(Unaudited)
December 31, 1996 1995
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $240,921 $392,339
Accrued expenses 260,984 123,622
Obligations under capital leases 21,081 9,972
Total Current Liabilities 522,986 525,933
Obligations under Capital Leases -- 14,086
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:
16,898,458 shares 84,495 84,576
Paid in capital 26,090,608 26,090,608
Accumulated deficit (23,849,119) (21,083,002)
Total Shareholders' Equity 2,325,984 5,092,182
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $2,848,970 $5,632,201
See accompanying notes to consolidated financial statements.
First National Entertainment Corp.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the three months ended December 31, 1996 1995
TOTAL REVENUES $0 $60,000
COST OF REVENUES
Amortization of film costs 0 29,922
GROSS PROFIT (LOSS) 0 30,078
OPERATING EXPENSES
Marketing, selling & royalties 0 17,000
General and administrative 125,178 2,292,695
TOTAL OPERATING EXPENSES 125,178 2,309,695
OPERATING LOSS (125,178) (2,279,617)
OTHER INCOME (EXPENSE) 55,014 (185,688)
NET INCOME (LOSS) $(70,164) $(2,465,305)
NET LOSS PER SHARE $ (.00) $ (.21)
Weighted average shares outstanding
16,898,458 11,473,514
See accompanying notes to consolidated financialstatements.
First National Entertainment Corp.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the six months ended December 31, 1996 1995
TOTAL REVENUES $103,579 $90,000
COST OF REVENUES
Amortization of film costs 51,790 44,883
GROSS PROFIT (LOSS) 51,789 45,117
OPERATING EXPENSES
Marketing, selling & royalties 18,826 17,000
General and administrative 323,276 2,500,536
TOTAL OPERATING EXPENSES 342,102 2,517,536
OPERATING LOSS (290,313) (2,472,653)
OTHER INCOME 55,014 239,303
NET INCOME (LOSS) $(235,299) $(2,233,116)
NET LOSS PER SHARE $ (.01) $ (.19)
Weighted average shares outstanding
16,898,458 11,473,514
See accompanying notes to consolidated financial statements.
First National Entertainment Corp.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the six months ended December 31, 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(235,299) $(2,233,116)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Amortization of film costs 51,790 44,883
Stock issued for services and compensation,net -- --
Other amortization, depreciation, write-offs 129,382 62,124
Changes in operating assets and liabilities,
net (73,056) (255,597)
NET CASH (USED IN) OPERATING ACTIVITIES(127,183)(2,381,706)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment -- (13,910)
Disposition of property and equipment -- 103,527
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES -- 89,617
CASH FLOWS FROM FINANCING ACTIVITIES:
Officer Advances/(Repayments) -- --
Notes Payable/(Repayments) -- --
Common Stock Issuance/(Cancellation) -- 2,833,667
NET CASH (USED IN) FINANCING ACTIVITIES -- 2,833,667
NET INCREASE/(DECREASE) IN CASH (127,183) 541,578
CASH - BEGINNING OF PERIOD 156,993 75,248
CASH - END OF PERIOD $29,810 $616,826
See accompanying notes to consolidated financial statements.
First National Entertainment Corp.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
December 31, 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 and six month
period ended December 31, 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 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 in its financial statements.
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 during the fiscal quarter ending
December 31, 1996.
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).
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 SUBSEQUENT EVENTS
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 was budgeted at $1,000,000
and would be offered via the formation of Windy City Pictures I,
LLC ("WCPI"). The Company was to serve as executive producer of
this movie and intends to produce two to three such productions a
year in Chicago. As of the date of this filing, the Company has
chosen not to renew its written option to produce "Chicago Blues,"
but instead is in negotiations to replace this screenplay with a
new project from the dozens of submissions the Company has since
received. If optioned, this new project would be funded via WCPI.
However, no assurance can be given that the option sought will be
consummated or the funding for this project or additional movies
will be available.
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 two permanent employees at the end of December 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 continues to explore entering 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. 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 other
distributors for both TV and video rights of this property.
Additionally, the Company has been 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.
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 is currently negotiating a secured line of credit from
certain of its shareholders in an amount of up to $400,000, with
availability commencing in March 1997. If finalized, the Company
will grant a senior lien on its HEA property and accounts
receivables as collateral for this line. Additionally, these
shareholders will be issued common stock warrants as an incentive
to provide the line. Securing of this working capital line of
credit is critical for the Company to continue its operations.
However, no assurance can be given that the line will be
successfully negotiated or that the Company will have the funding
to continue its operations.
The Company continues to seek additional opportunities in the
animation, live action movies and retail video store arenas, in
addition to non-entertainment acquisitions.
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 December 31,
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 no revenues from operations during its second
fiscal quarter of 1996 ended December 31, 1996, as compared to
$60,000 in the comparable period of the prior fiscal year.
Revenues of $103,579 were recorded for the first six months of this
fiscal year as compared to $90,000 in the comparable period of the
prior fiscal year. Both current period and prior period sales were
derived from sales of the Company's home video version of its
feature film property Happily Ever After. Current period and prior
period 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 period revenue figures are based only on the units sold
reports provided by Republic (See Note 2 - Accounts Receivable.)
Amortized film costs and marketing, selling and royalty expense
associated with the second quarter's revenues were zero as compared
to $29,922 and $17,000 respectively in the comparable period of the
last fiscal year. For the first six months of the current fiscal
year as compared to the same period last year, amortized film costs
and marketing, selling and royalty expense were $51,790 and $18,826
respectively versus $44,883 and $17,000 respectively. Amortized
costs related to the aforementioned revenues were earned via 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 $125,178 during the first quarter, as
compared to $2,309,695 in the comparable quarter of the prior
fiscal year. Operating expenses for the first six months of the
current fiscal year were $342,102 as compared to $2,517,536 during
the comparable period of the prior fiscal year. General and
administrative (G&A) expenses totaled $125,178 during the second
quarter, as compared to $2,292,695 in the comparable quarter of the
prior fiscal year. G&A expenses for the first six months of the
current fiscal year were $323,276 as compared to $2,517,536 during
the comparable period of the prior fiscal year. The largest
component of the current quarter's and six month period's G&A
expenses was based on a full provision for doubtful accounts of the
entire amount of each period's revenue. The previous year's
quarterly and six month period's G&A expenses consisted mostly of
the settlement of the shareholders' class action litigation. (See
Note 5 - Continuing Operations.)
The Company had a net loss of ($70,164) or ($.00) per share during
the second quarter ended December 31, 1996, as compared to net loss
of ($2,465,305) or ($.21) per share in the comparable quarter of
the previous fiscal year. A net loss of ($235,299) or ($.01) per
share was incurred for the first six months of the fiscal year as
compared to a loss of ($2,233,116) or ($.19) per share for the
comparable period of the prior fiscal year. During the six month
period of the current fiscal year, the Company received about
$55,000 of non-operating income, substantially all of which was due
to a buydown and extension of stock warrants (See "Liquidity and
Capital Resources" below), as compared to the comparable six month
period of the prior year, when the Company 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 December 31, 1996, the Company had cash and cash equivalents of
$29,810 and no net accounts receivable. 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 2 - Accounts Receivable.)
The Company had $2,848,970 in total assets and $522,986 in total
liabilities at the end of its second 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 is currently negotiating a secured line of credit from
certain of its shareholders in an amount of up to $400,000, with
availability commencing in March 1997. If finalized, the Company
will grant a senior lien on its HEA property and accounts
receivables as collateral for this line. Additionally, these
shareholders will be issued common stock warrants as an incentive
to provide the line. Securing of this working capital line of
credit is critical for the Company to continue its operations.
However, no assurance can be given that the line will be
successfully negotiated or that the Company will have the funding
to continue its 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
On January 14, 1997 the Company filed an 8-K report stating
that on December 31, 1996, the board of directors of the Company
authorized the issuance as an additional incentive to Windy City
Pictures I, LLC (WCPI) investors one million warrants to purchase
the common stock of the Company at the current market value as of
December 31, 1996, which is one sixteenth of a dollar; such
warrants to be issued on a pro rata basis to the amount of the
investment made only upon the full $1 million dollar funding and
expiring on December 31, 1997. The Company will have the right,
but not the obligation to repurchase any shares bought under said
warrants for a period of two years from the date of purchase of
said shares at a price of two and one sixteenth dollars.
On January 14, 1997 the Company filed an 8-K report stating
that Joanne K. Fabere, resigned as a member of the board of
directors and officer of First National Entertainment Corp. on
December 31, 1996.
Item 6.
Exhibit 27
Financial Data Schedule
December 31, 1996
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FIRST NATIONAL ENTERTAINMENT CORP'S BALANCE SHEET AT DECEMBER 31,
1996 AND STATEMENTS OF OPERATIONS FOR SIX MONTHS ENDED DECEMBER 31,
1996.
Six Months
(Unaudited)
Article 5
Period-Type 6 mos.
Fiscal-Year-End Jun-30-1997
Period-End Dec-31-1996
Cash 29,810
Securities ---
Receivables ---
Allowances ---
Inventory ---
Current-Assets 39,324
PP&E 41,470
Depreciation ---
Total-Assets 2,848,970
Current Liabilities 522,986
Bonds ---
Preferred-Mandatory ---
Preferred ---
Common 84,495
Other-Securities ---
Total Liabilities and 2,848,970
Equity
Sales
Total Revenue 103,579
CGS 51,790
Total Costs 342,102
Other-Expenses ---
Loss Provision ---
Interest-Expense ---
Income-Pretax ---
Income-Tax ---
Income-Continuing ---
Discontinued ---
Extraordinary ---
Changes ---
Net Income (235,299)
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: March 4, 1997 /s/ Stephen J.Denari
Stephen J. Denari
President