SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] Annual report under section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended June 30, 1997
[ ] Transition report under section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____ to ____
Commission file number 0-27390
JUNGLE STREET, INC.
(Name of small business issuer in its charter)
Utah 87-0368236
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
215 Yakima Street
Wenatchee, Washington 98801
(509) 664-9004
(Address and telephone number of principal executive offices)
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities 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 X No ___
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. |X|
.
The issuer's revenues for its most recent fiscal year were $2,300,000
The aggregate market value of the voting stock held by non-affiliates, based
on the closing price for the registrant's Common Stock on the Nasdaq
Electronic Bulletin Board, as of October 7, 1997, was $13,149,254.
The number of shares outstanding of the issuer's Common Stock, as of October
7, 1997 was 3,187,698 shares.
Transitional small business disclosure format (check one): Yes [ ] No X
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Part I
Preliminary Note Regarding Forward-looking Statements
The information set forth in this report in Item 1 - "Description of
Business" and in Item 6 - "Management's Discussion and Analysis or Plan of
Operation" includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and is
subject to the safe harbor created by those sections. Certain factors that
realistically could cause results to differ materially from those projected
in the forward-looking statements are set forth in Item 1 - "Considerations
Related to the Company's Business."
Item 1. Description of Business
Overview
Jungle Street, Inc. ("Jungle Street"), through its wholly owned
subsidiary, Televar, Inc. ("Televar"), provides Internet access and long
distance telecommunications services. The Company has no business operations
of its own. The principal asset of the Company is the common stock of
Televar. Unless the context indicates otherwise, Jungle Street and Televar
are collectively referred to herein as the "Company."
The Company is a provider of integrated Internet and telecommunications
services for private and commercial applications and users. Televar has been
in the telecommunications business since 1983. It was the first Internet
Service Provider ("ISP") to offer Internet access to rural areas of the
country under a distribution model that relies on local dealers ("VARs") in
each market served. As of June 30, 1997, Televar supported more than
10,000 ISP subscribers. The Company's strategy is to continue to establish
market share positions through VARs and to gain market share in urban
markets by entering into distribution relationships with computer retail
chains and through strategic acquisitions of local and regional ISP's.
Televar's long distance telecommunications can be combined and integrated
with dedicated Internet services to provide total communication solutions
for commercial businesses. The staff of Televar also provides contracted
consulting services to commercial accounts in the telecommunications, WEB
hosting and Internet application development markets.
The Company in its current form is the result of an August 1996 merger
between a wholly-owned subsidiary of Jungle Street and Televar (the
"Merger"). Prior to the Merger, Jungle Street had no active business and had
nominal assets and liabilities. Pursuant to the terms of the Merger,
Televar's shareholders received approximately 83% of the 13,968,625 shares
of the common stock of Jungle Street outstanding on the effective date of
the Merger in exchange for all of the outstanding shares of Televar's common
stock. On the effective date of the Merger, the officers and directors of
Televar became the officers and directors of the Company and Jungle Street's
existing officers and directors resigned. See "Management's Discussion and
Analysis or Plan of Operation Overview."
Televar was incorporated in Washington in 1984 as Apple Valley
Telephone, Incorporated. From 1984 until February 1995, Televar was
primarily in the business of providing telephone interconnection products
and services. In February 1995, Televar discontinued that business and
since that time has focused principally on providing Internet access and
long distance telephone services.
Jungle Street was incorporated in Utah in 1980 to pursue real estate
investment opportunities. Jungle Street purchased two real estate parcels
in Park City, Utah, which it sold at losses in 1993 and 1994. Jungle Street
was essentially inactive from August 1994 until December 1995 when it filed
a registration statement to register its common stock under Section 12(g) of
the Exchange Act.
On June 13, 1997, the Company and Pacific Aerospace & Electronics,
Inc. ("PA&E) entered into an Operations Consulting and Expense Reimbursement
Agreement (the "Interim Agreement"), whereby PA&E agreed to provide certain
consulting, management and financial assistance and support to the Company
until a proposed
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acquisition of the Company by PA&E could be completed. The parties
subsequently determined they would not proceed with the acquisition
transaction. During the period June 17 through October 9, 1997, PA&E
advanced approximately $2,626,500 to the Company under the terms of the
Interim Agreement in the form of direct payment of or reimbursements for
operating expenses of the Company and the guarantee of a line of credit with
KeyBank for $1,300,000. PA&E and the Company have not yet agreed to terms
under which the balance due PA&E under the Interim Agreement will be repaid
by the Company. See "Certain Relationships and Related Transactions." In
addition, PA&E owns and/or controls approximately 4.9% of the Company's
outstanding common stock.
The Company's headquarters are located at 215 Yakima Street, Wenatchee,
WA 98801. Its telephone number is (509) 664-9004.
Considerations Related to the Company's Business
The following factors should be considered in evaluating the Company's
business and operations:
Limited Operating History, Operating Losses
The Company has had a limited operating history in the Internet access
and long distance services industries. Although the Company has experienced
recent growth in revenues, it experienced net losses of $2,787,000, $367,000
and $106,000, respectively, in each of the fiscal years ended June 30, 1997,
1996 and June 30, 1995. The Company's current focus is on developing its
Internet subscriber base. Notwithstanding cost-saving measures that the
Company has implemented, it expects for the foreseeable future to continue
to incur net losses. See "Management's Discussion and Analysis or Plan of
Operation." There can be no assurance that revenue growth will continue or
that the Company will in the future achieve or sustain profitability or
positive cash flow from operations.
Need for Additional Capital
The success of the Company will depend in significant part on its
ability to raise additional equity or debt financing, or combination of debt
and equity financing, to pay existing obligations, to provide working
capital, and to finance operations and potential acquisitions. Under the
Interim Agreement with PA&E, the Company has borrowed directly from PA&E or
PA&E has guaranteed a total of approximately $2,626,500. The Company is
attempting to negotiate terms under which it will pay PA&E the balance due
under the Interim Agreement. See "Management's Discussion and Analysis or
Plan of Operation." The Company will be required to seek additional funding
from other sources to repay amounts borrowed from PA&E, to repay other debt
and to finance its operations. The Company's current working capital
sources are insufficient to fund its near-term operations. There is no
assurance that the Company will be able to raise additional capital on
favorable terms or, if it raises such additional capital, that such
financing will be sufficient to permit the Company to operate profitably.
Further, there can be no assurance that the Company and PA&E will agree upon
terms under which the Company will repay to PA&E the balance due and owing
under the Interim Agreement. Failure to obtain additional funding and to
negotiate favorable terms for the repayment of amounts owed PA&E under the
Interim Agreement will adversely affect the Company's operations and its
ability to continue in business.
New and Uncertain Market
The market for Internet access services and related products is in an
early stage of growth. Because this market is relatively new and because
current and future competitors are likely to continue to introduce competing
Internet connectivity and/or on-line services and products, it is difficult
to predict the rate at which the market will grow or at which new or
increased competition will result in market saturation. If demand for
Internet services fails to grow or grows more slowly than anticipated, or if
the market becomes saturated with competitors, the Company's business,
operating results and financial condition will be adversely affected.
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Dependence on Network Infrastructure
The future success of the Company's business will depend in large part
upon the capacity, reliability and security of its network infrastructure.
The Company must continue to expand and adapt its network infrastructure as
the number of users and the amount of information they wish to transfer
increases, and to meet changing customer requirements. The expansion and
adaption of the Company's network infrastructure will require substantial
financial, operational and management resources. There can be no assurance
that the Company will be able to expand or adapt its network infrastructure
to meet additional demand or its customers' changing requirements on a
timely basis, at a commercially reasonable cost, or at all, or that the
Company will be able to deploy successfully the contemplated network
expansion. Any failure of the Company to expand its network infrastructure
on a timely basis or to adapt into changing customer requirements or
evolving industry standards could have a material adverse effect on the
Company's business, financial condition and results of operations.
Competition
The market for Internet access services is extremely competitive. There
are no substantial barriers to entry, and the Company expects that
competition will intensify in the future. The Company's competitors include
other local access providers as well as many large companies that have
substantially greater market presence and financial, technical, marketing
and other resources than the Company, including (1) national and regional
commercial ISP's, such as NETCOM On-Line Communication Services, Inc.,
PSINet and UUNET Technologies, Inc.; (2) established on-line services that
offer Internet access, such as America Online, Inc. ("AOL"), CompuServe
Incorporated ("CompuServe"), Prodigy Services Company, Genie, and Delphi
Internet Services; (3) computer hardware and software and other technology
companies, such as IBM and Microsoft Corp. ("Microsoft"); (4) national long
distance carriers, such as AT&T Corp. ("AT&T"), MCI Communications
Corporation ("MCI") and Sprint Corporation ("Sprint"); (5) regional telephone
companies; (6) cable operators, such as Tele-Communications, Inc.; and (7)
nonprofit or educational ISPs. In addition, the Company believes that new
competitors, including large computer hardware and software, media and
telecommunications companies will enter the Internet access market,
resulting in even greater competition for the Company. Recently, AOL
announced it would acquire CompuServe, resulting in the largest on-line
service in the world. See "Competition."
Increased competition in the Internet services industry could result in
significant price competition, which in turn could result in substantial
pressure on the Company to reduce the price of its services. In addition,
competition could result in increased selling and marketing expenses and
related subscriber acquisition costs, which could adversely affect the
Company's future profitability. There can be no assurance that the Company
will be able to offset the effects of any such price reductions or increase
in operating costs by expanding its subscription base or by generating
higher revenue from enhanced services, reducing its overhead expenses or
otherwise. Increased competition could erode the Company's market share and
adversely affect the Company's business and results of operations. There can
be no assurance that the Company will have the financial resources,
technical expertise or marketing and support capabilities to continue to
compete successfully in the Internet connectivity market.
The long distance telecommunications industry also is intensely
competitive and is significantly affected by the introduction of new
services and the market activities of major industry participants.
Competition in the long distance industry is primarily based upon pricing,
customer service, network quality and value-added services. The Company
competes with AT&T, MCI, Sprint, and other national and regional long
distance carriers. Most of the Company's competitors have greater name
recognition, more extensive transmission networks and greater engineering
and marketing capabilities than the Company and have, or have access to,
substantially greater financial and personnel resources than those available
to the Company. See "Competition." The ability of the Company to compete
effectively in the telecommunications industry will depend upon its
continued ability to provide high quality, market-driven services at
competitive prices. There can be no assurance that the Company will be able
to compete successfully with existing or future long distance
telecommunications services providers.
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Dependence on Third-party Telecommunications Services
The Company relies on third-party suppliers for its Internet feed to
the Internet "backbone," for data communications capacity via leased lines,
and for other telecommunications services. The Company's Internet feed
currently is provided by a DS-3 feed supplied by Sprint, and the Company's
leased lines currently are provided by Northwest Microwave, Sprint, GTE, US
West, and other local exchange carriers. The Company also is highly
dependent upon suppliers from which the Company purchases network equipment
required to enhance and extend its existing network. If any of the Company's
suppliers are unable or unwilling to provide or expand their current levels
of service to the Company in the future, the Company's operations could be
materially and adversely affected. Although leased telecommunications lines
are available from several alternative suppliers, there can be no assurance
that the Company could obtain substitute services from other providers at
reasonable or comparable prices or in a timely fashion.
Dependence on VARs
The Company currently derives a significant percentage of its operating
revenue from the grant of exclusive sales territories to VARs pursuant to
exclusive sales agency agreements. Under these agreements, the Company
grants VARs exclusive rights to sell the Company's dial-up Internet access
service within specified territories, generally defined as the applicable
local exchange area, in return for the payment to the Company of a fixed
fee. This fee is intended to cover the costs of extending Internet services
into the new market. The failure by the Company to continue expanding its
service area by entering into relationships with new VARs could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company currently markets and distributes its Internet access
services primarily through its VAR network. The Company is highly dependent
on continuing relationships with its VARs to acquire new customer accounts,
promote its service, and provide customer support. Failure of the VARs to
perform their obligations to the Company could have a material adverse
effect on the Company's business, financial condition, and results of
operation.
Technological Change and New Services
The Internet services and telecommunications industries have been
characterized by rapidly changing technology, frequent new product and
service introductions, and evolving industry standards and customer
expectations. The Company believes that its future success will depend on
its ability to anticipate such changes and to offer on a timely basis
services that meet these evolving industry standards and customer
requirements. There can be no assurance that the Company can successfully
anticipate such changes and develop and bring new services to market in a
timely manner, or that services or technology developed by others will not
render the Company's services and technology noncompetitive or obsolete.
Dependence on Key Personnel
The Company is highly dependent on the technical and management skills
of its key employees and its ability to identify, hire and retain additional
personnel. Competition for such personnel is intense and there can be no
assurance that the Company will be able to retain existing personnel or
identify or hire additional personnel.
Government Regulation
The Company is not currently subject to regulation by the Federal
Communications Commission or any other governmental agency, other than
regulations applicable to businesses generally. Changes in the regulatory
environment relating to the Internet connectivity and telecommunications
industries, including regulatory changes that directly or indirectly affect
telecommunications costs or increase the likelihood or scope of competition
from regional telephone companies or other entities, could have an adverse
effect on the Company's business and results of operation. The Company
cannot predict the impact, if any, that future regulation or regulatory
changes may have on its business.
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Absence of Dividends
The Company has not paid or declared any cash dividends with respect to
the common stock and has no present intention of doing so in the foreseeable
future. The Company currently anticipates that it will retain all available
funds to finance its business activities.
Internet Industry Background
The Internet is a global network of thousands of interconnected
computer networks. In addition to e-mail and file transfer capability,
perhaps the most exciting commercial developments are occurring on that
portion of the Internet known as the World Wide Web (the "Web"). The Web is a
distributed hypermedia environment within the Internet, released to the
Internet community in 1991. Global hypermedia allows multimedia information
to be located on a network of servers around the world which are
interconnected, allowing the user to search and access the information by
"clicking" on hyperlinks. Any hyperlink (consisting of text, an icon or an
image in a document) can point to any document anywhere on the Internet.
The search system permits the use of user-friendly consumer-oriented
"homepages" linked by hyperlinks, simplifying the task of navigating among
the files and documents offered on the Internet, making use of software
products known as "browsers." Popular browsers include Netscape Navigator,
Mosaic, NetCruiser and Microsoft's Internet Explorer. The popularity of the
Web as a commercial medium is due, in part, to its ability to facilitate
global sharing of information and resources, as well as its potential to
provide an efficient channel for advertising, marketing, and direct sales
and distribution of certain goods and information services. With the growth
and increasing commercialization of the Internet, a large number of
companies have emerged to provide Internet access and related services and
products. ISPs vary widely in geographic coverage, customer focus, and
levels of Internet access provided to subscribers. Providers may
concentrate on certain types of subscribers, such as businesses or
individuals, which differ substantially in the type of service and support
required. Providers also may differ according to whether they provide direct
or non-direct access to the Internet. Direct access through Internet
protocols such as Serial Line Interface Protocol ("SLIP") or Point-to-Point
Protocol ("PPP") enable users to establish direct connections to other
computers on the Internet, including Web sites or other users. A number of
the major commercial on-line service providers currently offer non-direct
access to the Internet which requires users to access the Internet through a
host computer controlled by the service provider. Under this architecture,
users frequently are dependent on the service provider to determine which
Internet applications are available to them. Other regional and national
ISPs generally offer direct Internet access to customers, which enables
users to access the full range of Internet resources.
The Company and the Internet
The Company is an ISP and offers its subscribers electronic mail ("e-
mail) capability and complete Internet access. Access is made through a
personal computer, using a dial-modem and communications software available
both from the Company and most retail computer retailers. Most users elect
to use a PPP account, which allows the user to run graphical software to
access Internet information sources on the WEB. Other users may opt to use
a standard text based account, allowing the user to read and send text
files, without graphics available using the PPP. The Company maintains a
high speed, distributed client server network that allows subscribers in the
Company's coverage areas to access its network through a local telephone
call. In addition, the Company's dedicated leased-line private network
enables the Company to charge subscribers flat monthly fees without per hour
use surcharges. Dedicated lines generally as substantially faster and can
be used to configure a local area network ("LAN") as part of the Internet,
making access available to all users on a LAN without the need for separate
accounts.
The Company currently provides local access to the Internet in 28
market areas encompassing approximately 60 communities in Washington. The
aggregate population of these market areas is estimated by the Company to be
approximately 11,600 people. The smallest community has approximately 1000
inhabitants and the largest is estimated to have approximately 1,000,000.
Using the local access numbers, the subscribers to the Company's services
can dial a local number free of long-distance charges and gain access to the
Internet.
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The Company also offers electronic advertising of goods, services and
information via the Web. Electronic ads or "home pages" designed by the
Company are used by businesses and organizations to advertise on the
Internet. Home pages range in complexity from relatively simple menus to
elaborate catalogs with flashy graphics and photographs. Recently, the
Company began offering an agriculture-related "mall" known as treefruit.com,
which includes as participants the Washington Apple Commission, other
related associations and vendors of product and information pertinent to the
industry. Design and production of the home pages offered by the Company
generally is handled by the Company's in-house account teams.
Internet users worldwide can view a customer's home page on the Web.
The home pages reside on the Company's computer server. If the user does
not know the Internet address of a home page, it can be found using a Web
browser software with sophisticated search engines. From the home page, the
user can view and read information about the Company, its products and
services, and any other information the Company uses in its "infomercial"
format. Generally, a customer can order from the home page by completing an
on-line order form and sending it via e-mail, through the Company's server,
to the advertiser, who then fills the order. Payment can be made by check
or by using a credit card (through encryption).
High quality service and competitive, fixed-rate pricing are the two
most important features of the Company's services. Competition in the area
of access comes from two sources: small independent ISPs and large on-line
services such as AOL, CompuServe, Prodigy, Microsoft and AT&T. AOL and
CompuServe recently announced a business combination which will further
increase the size of AOL as the largest access provider in the world.
Access provided by many of the smaller companies often suffers in quality
due to the lack adequate telephone lines and equipment, resulting in busy
signals during peak usage periods. On the other hand, Internet access
provided by the major on-line services is usually expensive, with flat
monthly fees ranging between $4.95 and $29.95 and hourly charges ranging
between $1.95 and $2.95, plus the cost of long distance calls (if the
provider does not provide local access). In addition, in some areas, the
large services do not provide access speed in excess of 9,600 bps.
In contrast to many of its competitors, the Company uses a distributed
client server network to provide its Internet access services. Currently,
AOL and CompuServe, as well as most regional and local providers, use a
host-centric technology. The Company's configuration allows distribution of
the network with greater flexibility and recovery in the event of system
outages. For dial-up service, the Company's system is designed to operate
at speeds up to 33,600 bps, compared with speeds of between 9,600 and 28,800
bps among major commercial on-line services and many regional and local
ISPs. For the Company's subscribers, this results in connection and
navigation two to three times faster than these competitors. Even among
those competitors that operate at 28,800 bps, the Company offers its
subscribers a 20% speed advantage in those locations where a 33,600 bps
connection can be made. The Company's Sprintlink DS-3 provides significant
bandwidth, further distinguishing the Company's service from that of many of
its competitors.
Unlike some on-line services that access the telephone network on a
rated basis and pass on this hourly rate to their customers, the Company's
leased-line private network enables the Company to charge customers a flat
monthly fee, without hourly surcharges. The Company believes that its
investment in its own network will translate into a competitive advantage
over on-line service providers that base their pricing on a subscriber's
volume of use. In addition, with local access in the communities that it
serves, the Company's subscribers can dial a local number free of any long
distance charges to gain access to the Internet through the Company's
network and equipment.
In December 1995, the Company became the first ISP in the Pacific
Northwest to obtain a license to distribute Netscape Navigator on a retail
basis bundled with its own Internet access services. Unlike the retail
version of Netscape Navigator, the version licensed to the Company is
customized for use on the Company's own network and comes with a "point and
click" installation utility that installs the software and automatically
detects and configures the modem. The Company currently offers Netscape
Navigator at no charge to its annual subscribers and at a sliding discount
to its other subscribers. The Company has developed its own packaging and
installation instructions for use in the retail
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environment. The Company also distributes Microsoft Explorer under a
license from Microsoft to a portion of its subscriber base at no charge in
order to provide an alternative to Netscape Navigator.
One of the key components of the Company's business strategy is to
provide superior customer service and support, using its in-house technical
support staff and its network of VARs. The Company provides a toll-free
customer support line 12 hours a day, six days a week. In addition, the
VARs provide both face-to-face and telephonic support in their local
communities.
The Company seeks to attract and retain Internet access customers by
emphasizing reliable, high speed service, competitive pricing, user-friendly
access software, and superior customer service and support. An important
element of the Company's sales and marketing strategy has been the
development of VARs as its primary distribution channel. In exchange for a
fixed fee payable to the Company, VARs agree to market the Company's
Internet access services in their localities and are entitled to a
commission of approximately 25% on access revenues generated over the terms
of their agreements with the Company.
VARs also provide training and support to subscribers under their
agreements with the Company. The financial incentives provided by the
Company are designed to motivate the VARs to promote the Company's services
through advertising, in-store consulting and seminar programs. The Company
also has a co-op advertising program that matches VAR contributions up to a
maximum of $1,000 per month. In addition, the Company plans to develop a
comprehensive marketing plan for its VAR program that would promote the
VARs' products and services together with the Company's services. The
Company believes that the VAR program will enable it to benefit from the
name recognition, customer relationships, and general goodwill of its
distributors in their local markets.
The Company's marketing program seeks to create and enhance brand
awareness, elicit new subscriptions and retain existing subscribers.
Historically, the Company's marketing efforts have focused on targeted radio
promotion, advertising in trade journals and special interest publications,
direct mailings of promotional materials, and participation at trade shows
and seminars. Based on the limited availability of resources and the
continued growth of the Company's subscription base, media advertising has
been limited. The Company's direct sales staff handles inquiries from
prospective customers and follows up on leads generated by the VARs,
promotion programs, trade shows and other sources.
Competition
A number of large organizations, including large communications
carriers such as AT&T, Cable & Wireless, MCI, Sprint and the regional Bell
operating companies, are offering or have announced plans to offer Internet
or on-line services. The Company also faces significant competition from
the on-line services industry. Major on-line competitors presently include
AOL, CompuServe, Delphi, Genie, Prodigy, and the Microsoft Network. The
Company believes that additional new competitors, which may include computer
software and services, telephone, media, publishing, cable television and
other companies, are likely to enter the on-line services market.
The ability of some of the Company's competitors to bundle Internet
access services with other popular products and services could give those
competitors an advantage over the Company. For example, Microsoft Network
offers access to the Internet as a standard integrated feature of its
Windows 95 operating system.
Most of the Company's competitors, including each of those identified
above, possess financial resources significantly greater than those of the
Company and, accordingly, could initiate and support prolonged price
competition to gain market share. For example, the communications carriers
could significantly undercut the Company's pricing for dial-up and other
services due to their existing investment in telecommunications
infrastructure. If significant price competition were to develop, the
Company likely would be forced to lower its prices, possibly for protracted
period(s), which would have a material adverse effect on its financial
condition and results of operations and could threaten its economic
viability. In addition, the Company believes that the Internet access and
on-line services business is likely to encounter consolidation in the near
future, which could result in increased price and other
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competition in the industry and consequently have an adverse impact on the
Company's business, financial condition and results of operations.
The Company believes that the primary competitive factors for the
provision of Internet services are price, technical expertise and quality of
services, ease of use, variety of value-added services, reliability,
customer support, experience of the supplier and geographic coverage. The
Company's success in this market will depend heavily upon its ability to
provide high quality Internet connectivity and value-added Internet
services. Other factors that will affect the Company's success in this
market include the Company's continued ability to attract additional
experienced marketing, sales and management talent, and the expansion of
worldwide support, training and field service capabilities.
Proprietary Rights
The Company's success and ability to compete is dependent in part upon
its network technology, although the Company believes that its success is
more dependent upon its technical expertise and service orientation than its
proprietary rights. The Company relies on a combination of copyright,
trademark and trade secret laws and contractual restrictions to establish
and protect its technology. The Company's policy is to require employees
and consultants and, when obtainable, suppliers to execute confidentiality
agreements upon the commencement of their relationships with the Company.
These agreements provide that confidential information developed or made
known during the course of a relationship with the Company is to be kept
confidential and not disclosed to third parties except in specific
circumstances. There can be no assurance that the steps taken by the
Company will be adequate to prevent misappropriation of its technology or
that the Company's competitors will not independently develop technologies
that are substantially equivalent or superior to the Company's technology.
Employees
The Company currently has 23 full time employees, including 13
employees in customer service, 3 in sales and marketing, 3 in network
operations, and 5 in management and administrative functions. The Company
also employs 2 individuals on a part-time basis, both of whom work in
customer service. The Company believes that its relations with its
employees are good.
Item 2. Description of Property
The Company leases a 3,800 square foot facility in Wenatchee,
Washington, for use as its headquarters office and operations center. This
facility, which previously was used as a telephone operator services center
for Pacific Northwest Bell, is located near a GTE central office. Because
of its prior use, the building has significant conduit running between it
and the GTE central office. Accordingly, the Company has been able to
connect its telephone and Internet equipment inexpensively via T-1 lines
with the GTE central office for the Company's Internet and long distance
voice and data communications services. Although the Company plans to
retain this facility as its operations center and believes that this space
is adequate to meet its near-term requirements, the Company may move its
administrative, sales, and management personnel to another location at some
future date.
Item 3. Legal Proceedings
There are no material legal proceedings to report at this time.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
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Part II
Item 5. Market for the Registrant's Common Stock and Related Shareholder
Matters.
Until February 13, 1996, there was no public market for the Company's
common stock. From that date, the common stock has been listed on the
Nasdaq Electronic Bulletin Board. Until April, 1997, the stock was traded
under the symbol "JUNS". In April, 1997, the Company approved and
implemented a 4 for one reverse split of its common stock, reducing the
number of issued and outstanding shares of its common stock from 14,460,745
to 3,615,186 shares. Since April 1997, the Company's common stock has
traded under the symbol "JNGS." The prices indicated in the following chart
reflect this reverse split.
The following table shows the range of high and low bids for the common
stock as reported by Nasdaq for each period in the fiscal years shown below.
Period High Low
----------------- --------- -----------
1996
Third Quarter
(from February 13, 1996) No Quotes Entered
Fourth Quarter No Quotes Entered
1997
First Quarter $1.8125 $0.625
Second Quarter 1.250 0.750
Third Quarter 1.750 0.750
Fourth Quarter 6.875 1.625
1998
First Quarter $5.625 $3.750
These quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not represent actual transactions. As of
October 7, 1997, there were 425 holders of record of 3,718,428 shares of
common stock issued and outstanding.
The Company has never declared or paid cash dividends on the common
stock. The Company currently anticipates that it will retain all future
earnings to fund the operation of its business and does not anticipate
paying dividends on the common stock in the foreseeable future.
Recent Sales of Unregistered Securities
During the past three years, the Company has sold the following
securities without registration of such securities under the Securities Act
of 1933, as amended.
In fiscal year 1997, the Company issued 1,125,000 shares of common
stock to consultants who were shareholders of Jungle Street prior to the
Merger and who provided financial and other services to that entity. The
Company also agreed to reserve 750,000 shares of its Common Stock as a
commission to a consulting firm which is owned and managed by shareholders
of the Company.
Page 10 of 21
<PAGE>
Item 6. Management's Discussion and Analysis or Plan of Operation
Overview
On August 30, 1996, the Company effected the Merger between a wholly
owned subsidiary formed for that purpose and Televar. The shareholders of
Televar received 11,818,325 shares of the Company's common stock in the
Merger, resulting in the shareholders of Televar owning an aggregate of 83%
of the 13,515,745 shares of Jungle Street common stock outstanding on the
effective date of the Merger. As a result of the Merger, Televar became a
wholly-owned subsidiary of the Company. The Televar capital stock that was
converted into Jungle Street common stock was converted based on a
five-for-one conversion ratio, which was determined pursuant to arms-length
negotiations between the Company and the management of Televar. In
connection with the Merger, the Company also issued an aggregate of
1,125,000 shares of common stock (approximately 8% of the outstanding common
stock on a post-merger basis) to certain consultants as compensation for
services rendered to the Company prior to the Merger.
Prior to the Merger, the Company was inactive and had only nominal
assets and liabilities. See "Description of Business". The financial
statements included in this report include the activity of both Televar and
Jungle Street retroactively restated to the beginning of the periods covered
by the financial statements.
On March 24, 1997, the Company effected a 1 share for 4 shares reverse
split of the Company's 14,640,745 shares of the then outstanding common
stock, retaining the authorized number of shares at 50,000,000 and the par
value at $0.001 per share.
Results of Operations
Revenues for the year ended June 30, 1997 were approximately
$2,303,000. Of these revenues, approximately 84% represented Internet
access charges, approximately 13% represented long distance services and
approximately 3% represented other goods and services. Comparatively,
revenues for the year ended June 30, 1996 were approximately $1,697,000. Of
these revenues, approximately 59% represented Internet access and VAR fee
revenues, approximately 38% represented long distance service and
approximately 3% represented cellular services. Internet access revenues
increased in 1997 due to the Company's marketing efforts. Also, 1997
represents a full year in the Internet access business which began in fiscal
year 1996. Management adopted the accounting policy in 1997 of deferring
VAR revenues until certainty of collection has been historically
demonstrated. Long distance revenues are significantly lower in 1997
because the Company discontinued its relationship with its long distance
provider. The Company is currently reviewing its vendor options to reenter
the market as a long distance reseller.
Cost of sales for the year ended June 30, 1997 were approximately
$2,301,000, compared to cost of sales for the year ended June 30, 1996 of
$1,454,000. Cost of sales consists primarily of software license fees,
commissions and network operating cost, including leased line and local
access charges. Cost of sales increased as a percentage of revenues from
approximately 86% in 1996 to 99% in 1997. This increase can be attributed
to expanding the Company network, including the installation of additional
lines in advance of anticipated growth in the Company's subscription base.
Sales, general and administrative expenses consist of primarily
personnel and marketing expenses. Sales, general and administrative
expenses were $2,635,000 for the year ended June 30, 1997, compared to
$579,000 for the year ended June 30, 1996. The increase in expenses during
the 1997 period were primarily attributed to higher personnel, marketing and
administrative costs.
Liquidity
At June 30, 1997, the Company's total current assets were $482,000 and
its total current liabilities were $4,385,000 for a net working capital
deficit of $3,903,000.
Page 11 of 21
<PAGE>
The Company has met some of its cash requirements through a combination
of cash flow from operations and borrowings from banks and other third
parties. During the year ended June 30, 1997, the Company borrowed
$1,919,000 from third parties at interest rates ranging from 8% to 18%. The
Company made payments during the year of approximately $250,000 under these
loan arrangements. In certain cases, the Company issued common stock and
common stock purchase warrants for forgiveness of debt and in consideration
of services rendered to the Company.
The Company is currently in default with respect to payments due to a
third party under a promissory note with an original balance of $87,000 that
the Company issued in February 1996. The remaining unpaid balance is
approximately $70,000 as of June 30, 1997. Management is in the process of
negotiating a settlement or repayment plan to satisfy this note. The
Company is also currently in default with respect to payments due to a third
party under a $42,000 promissory note that the Company issued in November
1996. The principal and interest was due in March 1997.
The Company has a $1,300,000 line of credit in place with a commercial
lender that was executed in July 1997. This line of credit is guaranteed by
PA&E under the terms of the Interim Agreement. The line has been fully
utilized and is not available for additional borrowing.
The proceeds from borrowings, together with cash from operations, are
insufficient to fund budgeted operations for the near term. The Company
will require additional financing in order to fund its operating plan and
budget and is in discussions with several potential equity financing
sources. There is no assurance, however, that these discussions will result
in additional equity capital on terms that are favorable to the Company or
that additional financing will be available to the Company from other
sources. If the Company is unable to raise additional capital, the
Company's ability to continue operations may be adversely affected. See
Note 16 to Notes to the Financial Statements.
Item 7. Financial Statements
The consolidated financial statements of the Company follow and are a part
of this report.
Index to Financial Statements
Page
------
Independent Auditor's Report 1
Balance Sheet, June 30, 1996 2 - 3
Statements of Operations for the Years Ended June 30, 1996
and June 30, 1997 4
Statements of Stockholders' Deficit for the Years Ended
June 30, 1996 and June 30, 1997 5 - 6
Statements of Cash Flows for the Years Ended June 30, 1996
and June 30, 1997 7 - 8
Notes to Financial Statements 9 - 20
Page 12 of 21
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not Applicable.
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Directors and Executive Officers
The following table sets forth information as of September 30, 1997
regarding the directors and executive officers of the Company.
NAME Age Position with Company
- -------------------- ------- -----------------------------------
Roger P. Vallo 62 President, Chief Executive Officer,
Director
Donald Cotton 59 Director
Michael Hendrickson 52 Director
William F. Davis 65 Director
Douglas H. Ebstyne 55 Director
_________________________
Roger P. Vallo has been a director of the Company since August 1996 and
the President and CEO of the Company since April 15, 1997. Prior to that
time, he was a director of Televar. He has been a director of PA&E, and its
predecessors since May 1994. Mr. Vallo served as a director of Pacific Coast
Technologies, Inc., from February 1991 to November 1995 and as Secretary of
that company from July 1993 to October 1994. From 1990, he served as a
director of the predecessor of Pacific Coast Technologies, Inc., and
subsequently as a director of Pacific Coast Technologies, Inc. Mr. Vallo
also is the President and Chief Executive Officer of Prudential Preferred
Properties in Everett, Washington.
Donald B. Cotton has been a director of the Company since August 1996.
Prior to that time, he was a director of Televar. He has been a director of
PA&E since February 1995 and with its predecessors from 1993 to 1995. Mr.
Cotton retired from GTE in 1993, where he served most recently as a vice
president. He is currently self-employed as a software consultant.
Michael Hendrickson has been a director of the Company since April 4,
1997. Mr. Hendrickson has over 25 years of experience in the insurance
business with Prudential Insurance. He spent 22 years in management, most
recently as V.P. of Regional Marketing in the Pacific Northwest. Mr.
Hendrickson has been involved in real estate investing and realty operations
since the late 1970's. He is currently on the board of directors of
Robodyne Corporation (Minneapolis, MN), Hendrickson Mining & Exploration
(Anchorage, AK), Advantage Video Productions (Everett, WA), and West Coast
Management Production & Capital (Bellevue, WA). Mr. Hendrickson currently
works as a private consultant for major life insurance companies in the U.S.
William F. Davis has been a director of the Company since June 19,
1997. He is President and CEO of Digital Network Associates, Inc., a
company which designs, implements and manages data delivery networks for the
health care industry. Prior to forming Digital Network Associates, Inc.,
Mr. Davis was the President of Selectel Corp., a co-marketing partner of
AT&T. From 1987 to 1992 he was founder and President of Value Added
Communications, a company which pioneered the automated operator process for
operator calls originating from public calling venues. He also served as a
Vice President - Operations, for Telematic Products, Inc., which developed,
manufactured and marketed a line of billing computers, primarily for the
Bell Operating Company market. From 1955 to 1983, Mr.
Page 13 of 21
<PAGE>
Davis held a variety of executive positions with GTE, a major world-wide
provider of telecommunications equipment and services. Mr. Davis holds a BS
degree from UCLA and an MBA from the University of Connecticut.
Douglas H. Ebstyne has been a director since June 19, 1997, and
president of Televar since September 1997. He is President and CEO of
Peregrine Venture Management, a company that develops business plans for
Internet content companies. Before forming Peregrine, Mr. Ebstyne was
President of Interactive Realty Television. He has also held senior
management positions at Davox Corporation and Digital Systems International.
From 1972 to 1990, Mr. Ebstyne was employed with Illinois Bell and AT&T in
director and vice president-level positions. He holds a BSEE degree from
the University of New Hampshire and an MBA from Roosevelt University. He
has completed the Wharton Advanced Marketing Program and is a visiting
scholar at Northwestern University.
Directors of the Company hold office until the next annual meeting of
shareholders and until their successors have been elected and duly
qualified. Non-employee directors receive no salary for their services and
receive no fee from the Company for their participation in meetings,
although all directors are reimbursed for reasonable travel and other
out-of-pocket expenses in attending meetings of the Board. Executive
officers are elected by the Board of Directors of the Company at the first
meeting after each annual meeting of shareholders and hold office until
their successors are elected and duly qualified.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely on a review of the copies of the forms provided to the
Company, or written representations that no other filing of forms was
required, the Company believes that during the fiscal year ended June 30,
1996, all Section 16(a) filing requirements applicable to such reporting
persons were complied with.
Item 10. Executive Compensation
The following table sets forth the annual compensation of each person
serving the Company as Chief Executive Officer and President in all
capacities to the Company during the past three fiscal years.
Annual Compensation
<TABLE>
<CAPTION>
Other Annual
Fiscal Salary Bonus Compensation
Name and Principal Position Year(1) ($) ($) ($)
- ------------------------------ --------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Roger Vallo (1) 1997 $25,000
President and
Chief Executive Officer
__________________
</TABLE>
(1) Mr. Vallo became the Chief Executive Officer and President of the
Company on April 15, 1997.
1996 STOCK INCENTIVE PLAN
The Company's 1996 Stock Incentive Plan (the "Plan") provides for the
award of incentive stock options ("ISOs") to key employees and the award of
non-qualified stock options ("NSOs"), stock appreciation rights ("SARs"),
bonus rights, and other incentive grants to employees and certain
non-employees (other than non-employee directors) who have important
relationships with the Company or its subsidiaries. The Plan has been
adopted by the Board of Directors but has not been submitted to the
shareholders for approval. No options or other incentive awards have been
granted under the Plan.
Page 14 of 21
<PAGE>
Administration. The Plan may be administered by the Board of Directors
or by a committee of directors or officers of the Company. The Board of
Directors has designated an Option Committee to administer the Plan. The
Option Committee determines and designates the individuals to whom awards
under the Plan should be made and the amount and terms and conditions of the
awards, except that if officers of the Company serve on the Option Committee
it may not grant options to such officers. The Option Committee may adopt
and amend rules relating to the administration of the Plan, but only the
Board of Directors may amend or terminate the Plan. The Plan is administered
in accordance with Rule 16b-3 adopted under the Exchange Act.
Eligibility. Awards under the Plan may be made to employees, including
employee directors, of the Company and its subsidiaries, and to nonemployee
agents, consultants, advisors, and other persons (but not including
non-employee directors) that the Option Committee believes have made or will
make an important contribution to the Company or any subsidiary thereof.
Shares Available. Subject to adjustment as provided in the Plan, a
maximum of 3,000,000 shares of Common Stock are reserved for issuance
thereunder. The maximum number of shares with respect to which options may
be granted to any person during any fiscal year is 1,000,000. If an option,
SAR or performance unit granted under the Plan expires or is terminated or
canceled, the unissued shares subject to such option, SAR or performance
unit are again available under the Plan. In addition, if shares sold or
awarded as a bonus under the Plan are forfeited to the Company or
repurchased thereby, the number of shares forfeited or repurchased are again
available under the Plan.
Term. Unless earlier terminated by the Board, the Plan will continue in
effect until the earlier of: (i) ten years from the date on which the Plan
is adopted by the Board, and (ii) the date on which all shares available for
issuance under the Plan have been issued and all restrictions on such shares
have lapsed. The Board may suspend or terminate the Plan at any time except
with respect to options, performance units, and shares subject to
restrictions then outstanding under the Plan.
Stock Option Grants. The Option Committee may grant ISOs and NSOs under
the Plan. With respect to each option grant, the Option Committee determines
the number of shares subject to the option, the option price, the period of
the option, the time or times at which the option may be exercised
(including whether the option will be subject to any vesting requirements
and whether there will be any conditions precedent to exercise of the
option), and the other terms and conditions of the option.
ISOs are subject to special terms and conditions. The aggregate fair
market value, on the date of the grant, of the Common Stock for which an ISO
is exercisable for the first time by the optionee during any calendar year,
may not exceed $100,000. An ISO may not be granted to an employee who
possesses more than 10% of the total voting power of the Company's stock
unless the option price is at least 110% of the fair market value of the
Common Stock subject to the option on the date it is granted and the option
is not exercisable five years after the date of grant. No ISO may be
exercisable after ten years from the date of grant. The option price may not
be less than 100% of the fair market value of the Common Stock covered by
the option at the date of grant.
In general, no vested option may be exercised unless at the time of
such exercise the optionee is employed by or in the service of the Company
or any subsidiary thereof, within 12 months following termination of
employment by reason of death or disability, or within three months
following termination for any other reason except for cause. Options are
nonassignable and nontransferable by the optionee except by will or by the
laws of descent and distribution at the time of the optionee's death. No
shares may be issued pursuant to the exercise of an option until full
payment therefor has been made. Upon the exercise of an option, the number
of shares reserved for issuance under the Plan will be reduced by the number
of shares issued upon exercise of the option. As of September 30, 1996, no
options to purchase shares of Common Stock have been granted under the Plan.
Stock Appreciation Rights. The Option Committee may grant SARs under
the Plan. Each SAR entitles the holder, upon exercise, to receive from the
Company an amount equal to the excess of the fair market value on the date
of exercise of one share of Common Stock of the Company over its fair market
value on the date of grant (or, in the
Page 15 of 21
<PAGE>
case of a SAR granted in connection with an option, the excess of the fair
market value of one share of Common Stock of the Company over the option
price per share under the option to which the SAR relates), multiplied by
the number of shares covered by the SAR or the option. Payment by the
Company upon exercise of a SAR may be made in Common Stock, in cash, or by a
combination of Common Stock and cash.
If a SAR is granted in connection with an option, the following rules
shall apply: (i) the SAR shall be exercisable only to the extent and on the
same conditions that the related option could be exercised; (ii) the SAR
shall be exercisable only when the fair market value of the stock exceeds
the option price of the related option; (iii) the SAR shall be for no more
than 100% of the excess of the fair market value of the stock at the time of
exercise over the option price; (iv) upon exercise of the SAR, the option or
portion thereof to which the SAR relates terminates; and (v) upon exercise
of the option, the related SAR or portion thereof terminates.
Each SAR is nonassignable and nontransferable by the holder except by
will or by the laws of descent and distribution at the time of the holder's
death. Upon the exercise of a SAR for shares, the number of shares reserved
for issuance under the Plan will be reduced by the number of shares issued.
Cash payments of SARs will not reduce the number of shares of Common Stock
reserved for issuance under the Plan. No SARs have been granted under the
Plan.
Restricted Stock. The Option Committee may issue shares of Common Stock
under the Plan subject to the terms, conditions, and restrictions determined
thereby. Upon the issuance of restricted stock, the number of shares
reserved for issuance under the Plan shall be reduced by the number of
shares issued. No restricted shares have been granted under the Plan.
Stock Bonus Awards. The Option Committee may award shares of Common
Stock as a stock bonus under the Plan. The Option Committee may determine
the recipients of the awards, the number of shares to be awarded, and the
time of the award. Stock received as a stock bonus is subject to the terms,
conditions, and restrictions determined by the Option Committee at the time
the stock is awarded. No stock bonus awards have been granted under the
Plan.
Cash Bonus Rights. The Option Committee may grant cash bonus rights
under the Plan in connection with (i) options granted or previously granted,
(ii) SARs granted or previously granted, (iii) stock bonuses awarded or
previously awarded, and (iv) shares issued under the Plan. Bonus rights
granted in connection with options entitle the optionee to a cash bonus if
and when the related option is exercised. The amount of the bonus is
determined by multiplying the excess of the total fair market value of the
shares acquired upon the exercise over the total option price for the shares
by the applicable bonus percentage. The bonus rights granted in connection
with a SAR entitle the holder to a cash bonus when the SAR is exercised. The
amount of the bonus is determined by multiplying the total fair market value
of the shares or cash received pursuant to the exercise of the SAR by the
applicable percentage. The bonus percentage applicable to any bonus right is
determined by the Option Committee but may in no event exceed 75%. Bonus
rights granted in connection with stock bonuses entitle the recipient to a
cash bonus, in an amount determined by the Option Committee, when the stock
is awarded or purchased or any restrictions to which the stock is subject
lapse. No bonus rights have been granted under the Plan.
Performance Units. The Option Committee may grant performance units
consisting of monetary units which may be earned if the Company achieves
certain goals established by the Committee over a designated period of time.
The goals established by the Option Committee may include earnings per
share, return on shareholders' equity, return on invested capital, and
similar benchmarks. Payment of an award earned may be in cash or in Common
Stock or partly in both, and may be made when earned, or vested and
deferred, as the Option Committee determines. Each performance unit will be
nonassignable and nontransferable by the holder except by will or by the
laws of descent and distribution at the time of the holder's death. The
number of shares reserved for issuance under the Plan shall be reduced by
the number of shares issued upon payment of an award. No performance units
have been granted under the Plan.
Changes in Capital Structure. The Plan provides that if the outstanding
Common Stock of the Company is increased or decreased or changed into or
exchanged for a different number or kind of shares or other securities of
the
Page 16 of 21
<PAGE>
Company or of another corporation by reason of any recapitalization, stock
split or certain other transactions, appropriate adjustment will be made by
the Option Committee in the number and kind of shares available for grants
under the Plan. In addition, the Option Committee will make appropriate
adjustments in the number and kind of shares as to which outstanding options
will be exercisable. In the event of a merger, consolidation or other
fundamental corporate transformation, the Board may, in its sole discretion,
permit outstanding options to remain in effect in accordance with their
terms; to be converted into options to purchase stock in the surviving or
acquiring corporation in the transaction; or to be exercised, to the extent
then exercisable, during a 30-day period prior to the consummation of the
transaction.
Certain Tax Considerations Related to Executive Compensation
As a result of Section 162(m) of the Internal Revenue Code of 1986, as
amended, in the event that compensation paid by the Company to a "covered
employee" (the chief executive officer and the next four highest paid
employees) in a year were to exceed an aggregate of $1,000,000, the
Company's deduction for such compensation could be limited to $1,000,000.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table shows, to the best of the Company's knowledge based
on the records of the Company's transfer agent and the Company's records on
issuances of shares, as adjusted to reflect changes in ownership documented
in filings with the Securities and Exchange Commission made by certain
shareholders and provided to the Company pursuant to Section 16 of the
Exchange Act, and statements provided to the Company by certain
shareholders, Common Stock ownership as of October 11, 1997, by (i) each
person known by the Company to own beneficially more than 5% of the
Company's outstanding common stock ("Principal Shareholder"), (ii) each of
the Company's directors, and (iii) all executive officers and directors of
the Company as a group.
<TABLE>
<CAPTION>
Name/Address of Number of Shares Percentage of
Beneficial Owner Beneficially Owned(1) Shares Outstanding(2)
- -------------------------- ---------------------- -----------------------
<S> <C> <C>
Donald A. Wright
150 Manhattan Square 809,116 21.8%
East Wenatchee, WA
Estate of Robert Smith
2008 Grand Ave., #201 229,740 *
Everett, WA 98201
Cede & Co.
P.O. Box 222 445,312 12.2%
Bowling Green Street
New York, NY 10274
Nick A. Gerde (3)
1906 Rocklund Drive 446,614 12.0%
Wenatchee, WA
Jensen Services, Inc.
1787 E. Fort 106 Union #106 217,405 5.8%
Salt Lake City, UT 84121
Robert A. Schwiesow
200 Airport Way 237,500 6.4%
East Wenatchee, WA
Page 17 of 21
<PAGE>
Allen Dahl
7300 Madrona Drive N.E. 344,947 9.3%
Bainbridge Island, WA
Donald B. Cotton
538 Timber Ridge Drive 259,115 7.0%
Trophy Club, TX
Roger P. Vallo
12821 127th Avenue, SE 259,115 7.0%
Snohomish, WA
Mike Hendrickson
12510 198 Dr. N.E. 12,500 *
Woodinville, WA 98072
Officers and Directors
as a group (6 persons) 530,730 14.2%
__________________________
</TABLE>
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. To the Company's knowledge, each
person or entity has sole voting and sole investment power with
respect to the shares beneficially owned except as noted in Footnote
(3) below, subject to community property laws, where applicable.
(2) Rounded to the nearest 1/10th of one percent, based on 3,718,698
shares of common stock outstanding on October 7, 1997.
(3) Includes 390,364 shares owned in joint tenancy with Mr. Gerde's
spouse, and an aggregate of 56,250 shares owned by Mr. Gerde's
children residing at his home.
Item 12. Certain Relationships and Related Transactions
On October 2, 1996, the Company loaned its former President $12,000.
The unsecured loan bears interest at 10% per annum, payable in 26 equal
semi-monthly installments of $515, commencing October 15, 1996, until paid
in full. There is no prepayment penalty.
On September 25, 1996, the Chairman and the President provided personal
guaranties of the Company's obligations under a $500,000 bridge loan. The
loan was subsequently repaid. In addition to the forgoing, the Company
executed a Common Stock Purchase Warrant, entitling the lender to purchase
65,000 shares of common stock at an exercise price of $1.81 per share. The
warrant may be exercised, in whole or in part, at any time through September
25, 2001. The lender has certain registration rights with respect to the
shares.
On August 29, 1996, Televar merged with Jungle Street, Inc, a
Washington corporation and wholly owned subsidiary of Jungle Street, a Utah
corporation. The Washington corporation subsidiary was the surviving
corporation in the Merger, and it changed its name to Televar, Inc. Each
common share of Televar outstanding at the time of the Merger was converted
to five shares of common stock in Jungle Street. At the time of the
Merger, the Company had 2,363,655 shares issued and outstanding, which
became 11,818,325 shares in the Merger.
Page 18 of 21
<PAGE>
In conjunction with the Merger of Televar and the Company in August
1996, the Company issued 1,125,000 shares to consultants, who were
shareholders of Company prior to the Merger and who provided financial and
other services to the Company. The Company also agreed to reserve 750,000
shares of its common stock to be issued as commission to a consulting firm,
which is owned and managed by shareholders of the Company, along with a
payment of $50,000 cash, in the event capital raising services performed by
the consulting firm result in net proceeds to the Company of at least
$1,000,000.
In June 1997, the Company and PA&E executed a letter of intent pursuant
to which PA&E agreed to purchase newly issued shares of common stock of the
Company equal to 60% of the Company's outstanding shares for a total
purchase price of $1,500,000. In order to provide operation capital prior
to the closing of the private placement of the Company's common stock to
PA&E, the Company and PA&E entered into the Interim Agreement. The Interim
Agreement terminates on the earlier of December 13, 1997, the closing of the
private placement, that date on which PA&E determines, based upon its due
diligence investigation, that it will not acquire shares of the Company's
common stock, or the date the Company breaches the Interim Agreement. If
the Interim Agreement terminates because of a breach by the Company, the
Company will be obligated to pay PA&E a $100,000 expense reimbursement fee,
in addition to other amounts described below. Within 60 days of
termination, all amounts owed to PA&E under the Interim Agreement are due
and payable in full. In September 1997, PA&E determined that it would not
acquire any shares of the Company's common stock under the terms of the
letter of intent. PA&E and the Company are presently negotiating the
circumstances and terms under which the Company will pay PA&E the balance
due under the promissory notes executed in connection with the Interim
Agreement.
During fiscal year 1997 and subsequent to year-end, pursuant to the
terms of the Interim Agreement, the Company executed a series of demand
notes payable to PA&E, a company which shares common members of the board of
directors and certain shareholders of the Company and which also owns 49% of
the Company's issued and outstanding common stock. Each demand note bears
interest at the rate of 12%. The total principal amount of such notes is
$1,809,500. In addition, PA&E agreed to guarantee a line of credit with a
bank. Amounts drawn under the line total $1,300,000. No additional amounts
are available under the line.
In February 1997, several members of the Company's board of directors,
acting as individuals, entered into loan agreements with a financial
institution. The proceeds from such loans, totaling $600,000 at June 30,
1997, were loaned to the Company and used for operating expenses. As
partial consideration for the use of the funds, the Company agreed to make
all interest payments when due under the provisions of the several loan
agreements. In July 1997, the Company obtained additional financing and
used a portion of the proceeds to repay the principal and interest amounts
due under these loans.
During fiscal 1997, the Company paid $284,270, primarily for consulting
services, to a company whose president was simultaneously the president of a
VAR company and the president of Televar.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description
3.1 Articles of Incorporation of Jungle Street, Inc., as filed
with the Secretary of State of the State of Utah on July
10, 1980. (Previously filed)
3.2 Articles of Amendment to the Articles of Incorporation of
Jungle Street, Inc., filed with the Secretary of State of
the State of Utah on July 20, 1995. (Previously filed)
3.3 Bylaws of Jungle Street, Inc. (Previously filed)
Page 19 of 21
<PAGE>
27 Financial Data Schedule
(b) Reports on Form 8-K.
On June 27, 1997, the Company filed a report on Form 8-K to report the
resignation of two of its directors and the appointment of two directors to
fill the vacancies created by those resignations.
Page 20 of 21
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
JUNGLE STREET, INC.
Date: October 14, 1997 By /s/ Roger P. Vallo
---------------------------
President
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the following
capacities on October 14, 1997.
Signature Title
- ---------------------------- ---------------------------------------
/s/ Roger P. Vallo Chief Executive Officer, and Chairman of
- -------------------------- the Board (Principal Executive Officer)
Roger P. Vallo
/s/ Donald B. Cotton Director
- --------------------------
Donald B. Cotton
/s/ William F. Davis Director
- ---------------------------
William F. Davis
Director
- ---------------------------
Michael Hendrickson
Director
- ---------------------------
Douglas H. Ebstyne
/s/ Casey F. Seremek Principal Accounting Officer
- ---------------------------
Casey F. Seremek
<PAGE>
JUNGLE STREET, INC.
including the accounts of its wholly-owned subsidiary
Televar, Inc.
Independent Auditors' Report
and
Financial Statements
June 30, 1997
<PAGE>
JUNGLE STREET, INC.
including the accounts of its wholly-owned subsidiary
Televar, Inc.
TABLE OF CONTENTS
Page
Independent Auditors' Report 1
Balance Sheet, June 30, 1997 2 - 3
Statements of Operations for the Years Ended June 30, 1997
and June 30,1996 4
Statements of Stockholders' Deficit for the Years Ended
June 30, 1997 and June 30, 1996 5 - 6
Statements of Cash Flows for the Years Ended June 30,
1997 and June 30, 1996 7 - 8
Notes to Financial Statements 9 - 20
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Directors
Jungle Street, Inc.
We have audited the balance sheet of Jungle Street, Inc., including the
accounts of its wholly-owned subsidiary, Televar, Inc., as of June 30, 1997
and the related statements of operations, stockholders' deficit, and cash
flows for the years ended June 30, 1997 and June 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Jungle Street, Inc.,
including the accounts of its wholly-owned subsidiary Televar, Inc., as of
June 30, 1997, and the results of its operations and its cash flows for the
years ended June 30, 1997 and June 30, 1996, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that
Jungle Street, Inc., and its wholly-owned subsidiary Televar, Inc., will
continue as a going concern. As discussed in Note 16 to the financial
statements, the Company has accumulated losses, a net working capital
deficit, and a net capital deficit as of June 30, 1997, which raise
substantial doubt about the ability of the Company to continue as a going
concern. Management's plans in regard to these matters are also described
in Note 16. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Mantyla, McReynolds and Associates
/s/ MANTYLA, McREYNOLDS AND ASSOCIATES
Salt Lake City, Utah
September 27, 1997
<PAGE>
JUNGLE STREET, INC.
including the accounts of its wholly-owned subsidiary
Televar, Inc.
Balance Sheet
June 30, 1997
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current Assets
Accounts receivable, net of allowance for doubtful accounts of
$306,000 $ 233,714
Notes receivable - Note 6 105,861
Loans receivable, net of allowance for doubtful accounts of
$65,062 - Note 8 33,641
Deferred expenses - Note 5 70,556
---------------
Total Current Assets 443,772
Property and Equipment - Notes 1 & 4
Property and equipment 1,094,573
Less: accumulated depreciation (268,160)
---------------
Net Property and Equipment 826,413
Other Assets
Goodwill - Note 7 116,855
Notes receivable, less current portion of $105,861 - Note 6 38,148
Deposits 72,246
---------------
Total Other Assets 227,249
---------------
TOTAL ASSETS $ 1,497,434
===============
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
JUNGLE STREET, INC.
including the accounts of its wholly-owned subsidiary
Televar, Inc.
Balance Sheet
June 30, 1997
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
<S> <C>
Current Liabilities
Bank overdraft $ 19,789
Accounts payable 1,394,528
Negotiated settlements payable - Note 9 300,000
Accrued expenses 206,406
Unearned fees -Note 5 190,691
Deferred revenues - Note 6 144,009
Payroll taxes payable 129,579
Notes payable - related parties - Note 3 1,737,000
Notes payable - other - Note 10 171,742
Current portion long-term liabilities 91,274
--------------
Total Current Liabilities 4,385,018
Long-Term Liabilities - Note 11
Notes payable 52,021
Capital leases payable 192,885
Less: current portion long-term liabilities (91,274)
--------------
Total Long-Term Liabilities 153,632
--------------
Total Liabilities 4,538,650
Stockholders' Deficit - Notes 1,3, 9, 12, 14 & 18
Common stock -- 50,000,000 shares authorized
$0.001 par; 3,705,573 shares issued and outstanding 3,705
Additional paid-in capital 419,048
Stock held in trust (70,000)
Accumulated deficit (3,393,969)
--------------
Total Stockholders' Deficit (3,041,216)
--------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 1,497,434
==============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
JUNGLE STREET, INC.
including the accounts of it wholly-owned subsidiary
Televar, Inc.
Statements of Operations
For the Years Ended June 30, 1997 and June 30, 1996
<TABLE>
<CAPTION>
1997 1996
---------------- -----------------
<S> <C> <C>
Revenues - Note 2 $ 2,302,913 $ 1,697,104
Cost of sales 2,301,124 1,453,733
---------------- -----------------
Gross profit 1,789 243,371
Selling, general & administrative expenses 2,635,290 578,600
---------------- -----------------
Net loss from operations (2,633,501) (335,229)
Other Income/(Expense):
Interest income 1,233 -0-
Interest expense (155,650) (53,690)
Other income 590 21,655
---------------- -----------------
Total other income/(expense) (153,827) (32,035)
---------------- -----------------
Net loss $ (2,787,328) $ (367,264)
================ =================
Loss per share $ (.89) $ (1.37)
================ =================
Weighted average shares outstanding 3,121,819 267,315
================ =================
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
JUNGLE STREET, INC.
including the accounts of its wholly-owned subsidiary
Televar, Inc.
Statements of Stockholders' Deficit
For the Years Ended June 30, 1997 and June 30, 1996
<TABLE>
<CAPTION>
Additional Stock Total
Common Common Paid-in Held in Accumulated Stockholders'
Shares Stock Capital Trust Deficit Deficit
- ------------------------------ -------------- -------------- -------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1995 500,300 $ 500 $ 99,031 $ -0- $ (239,377) $ (139,846)
Issued shares to officers &
shareholders for services 150,418 15 1,489 1,504
Issued shares to employees
for services 49,000 5 485 490
Purchase of shares to be
held in trust as security
for a note payable (70,000) (70,000)
Issued shares in exchange
for services 752,250 75 9,175 9,250
Issued shares for
retirement of debt 511,665 51 306,927 306,978
Issued shares in exchange
for personal guaranty 150,000 15 (15) -0-
Issued shares for cash 30,000 3 29,997 30,000
Redemption of shares to
retire a receivable (326,667) (33) (69,967) (70,000)
Net loss for the year ended
June 30, 1996 (367,264) (367,264)
Adjustment to reflect the
retroactive restatement of
capital resulting from the
merger of Jungle Street,
Inc. with Televar, Inc. (1,316,666) (131) 31 -0-
Issued shares of Jungle
Street, Inc. common stock
for services 1,197,120 1,197 (1,197) -0-
- ------------------------------ -------------- -------------- -------------- -------------- ------------- -------------
Balance, June 30, 1996 1,697,420 $ 1,697 $ 376,056 $ (70,000) $ (606,641) $ (298,888)
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
JUNGLE STREET, INC.
including the accounts of its wholly-owned subsidiary
Televar, Inc.
Statements of Stockholders' Deficit
For the Years Ended June 30, 1997 and June 30, 1996
<TABLE>
<CAPTION>
Additional Stock Total
Common Common Paid-in Held in Accumulated Stockholders'
Shares Stock Capital Trust Deficit Deficit
- ------------------------------ -------------- -------------- -------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Adjustment to reflect the
restatement of capital
resulting from the merger
of Jungle Street, Inc. with
Televar, Inc. 11,818,325 11,818 (11,818) -0-
Issued shares of Jungle
Street, Inc. common stock
for services in
conjunction with the
merger of Jungle Street,
Inc. with Televar, Inc. 1,125,000 1,125 (1,125) -0-
One-for-four reverse split (10,980,172) (10,980) 10,980 -0-
Issued shares of Jungle
Street, Inc. common
stock as partial repayment
of debt 45,000 45 44,955 45,000
Net loss for the year ended
June 30, 1997 (2,787,328) (2,787,328)
- ------------------------------ -------------- -------------- -------------- --------------- ------------- -------------
Balance, June 30, 1997 3,705,573 $ 3,705 $ 419,048 $ (70,000) $(3,393,969) $(3,041,216)
============================== ============== ============== ============== =============== ============= =============
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
JUNGLE STREET, INC.
including the accounts of its wholly-owned subsidiary
Televar, Inc.
Statements of Cash Flows
For the Years Ended June 30, 1997 and June 30, 1996
<TABLE>
<CAPTION>
1997 1996
----------------- ------------------
<S> <C> <C>
CASH FLOWS PROVIDED/(USED) BY OPERATING ACTIVITIES
Net loss $ (2,787,328) $ (367,264)
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation and amortization 204,018 75,137
Issued common stock in exchange for services and interest -0- 41,104
VAR notes received for territorial rights (128,709) (131,000)
Redeemed shares of common stock to retire receivable -0- (70,000)
Allowance for bad debt 443,420 28,027
Loss/(gain) on sales of assets -0- (344)
Negotiated settlements 157,172 -0-
(Increase)/decrease in:
Accounts receivable (402,940) (71,207)
Employee advances 667 (667)
Prepaid insurance 4,275 (2,744)
Deferred expenses (19,740) (50,816)
Deposits (51,022) (19,000)
(Decrease)/increase in:
Accounts payable 825,627 506,232
Deferred revenues from VAR notes 144,009 -0-
Payroll taxes payable 88,462 37,134
Payable to banks 19,789 -0-
Wages payable (26,608) 25,133
Accrued expense 6,781 -0-
Accrued commissions 181,092 4,125
Unearned fees 53,350 137,341
Accrued interest payable 10,584 3,498
----------------- ------------------
NET CASH PROVIDED/(USED) BY OPERATING ACTIVITIES $ (1,277,101) $ 144,689
CASH FLOWS PROVIDED/(USED) BY INVESTING ACTIVITIES
Purchases of equipment $ (306,525) $ (399,052)
Purchases of vehicles -0- (61,031)
Purchases of leasehold improvements (350) (5,456)
Proceeds from disposal of assets -0- 24,340
Loans made (98,703) -0-
Collections on loans 4,701 4,379
Goodwill -0- (128,255)
----------------- ------------------
NET CASH PROVIDED/(USED) BY INVESTING ACTIVITIES $ (400,877) $ (565,075)
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
JUNGLE STREET, INC.
including the accounts of its wholly-owned subsidiary
Televar, Inc.
Statements of Cash Flows
For the Years Ended June 30, 1997 and June 30, 1996
<TABLE>
<CAPTION>
1997 1996
----------------- ------------------
<S> <C> <C>
CASH FLOWS PROVIDED/(USED) BY FINANCING ACTIVITIES
New borrowings $ 1,919,000 $ 558,994
Debt reductions (250,457) (100,609)
Purchase of treasury stock -0- (70,000)
Issued shares of common stock for cash -0- 30,000
----------------- ------------------
NET CASH PROVIDED/(USED) BY FINANCING ACTIVITIES 1,668,543 418,385
----------------- ------------------
NET DECREASE IN CASH (9,435) (2,001)
CASH AT BEGINNING OF YEAR 9,435 11,436
----------------- ------------------
CASH AT END OF YEAR $ -0- $ 9,435
================= ==================
Supplemental Disclosures
Noncash investing and financing transactions:
Acquired equipment by capital lease $ 189,679 $ -0-
Issued shares of stock in settlement of debt $ 45,000 $ 277,118
Interest paid $ 145,067 $ 50,191
Income taxes paid $ -0- $ -0-
</TABLE>
See accompanying notes to financial statements
8
<PAGE>
JUNGLE STREET, INC.
including the accounts of its wholly-owned subsidiary
Televar, Inc.
Notes to Financial Statements
June 30, 1997
NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the Company conform with
generally accepted accounting principles. The following information
summarizes the organization and significant accounting policies of
the Company.
Organization/Consolidation
Jungle Street, Inc. incorporated July 10, 1980, under the laws of the
state of Utah. In August, 1980, Jungle Street, Inc. acquired Utah
real estate using the proceeds of a limited public offering conducted
in Utah. From inception, Jungle Street, Inc. suffered losses from
its real estate operations, and, in 1993, sold all of its Utah real
estate and became an inactive corporation.
On August 29, 1996, Jungle Street, Inc. merged with Televar
Northwest, Inc., a Washington corporation. The merger was
accomplished through Jungle Street, Inc.'s wholly-owned subsidiary, a
recently formed Washington corporation with the same name. Jungle
Street, Inc. is the surviving corporation under this merger.
However, since Jungle Street, Inc.'s assets, liabilities and
operations are nominal, these financial statements include the
activity of both Televar Northwest, Inc. and Jungle Street, Inc.,
retroactively restated to the beginning of the periods covered
herein. The name of the newly combined entity , which previously
consisted of Televar Northwest, Inc. and Jungle Street, Inc. a
Washington corporation, became Televar, Inc. The two companies
exchanged shares on the basis of five shares of common stock in
Jungle Street, Inc. for one share of Televar Northwest, Inc. Unless
otherwise specifically stated, the combined companies will hereafter
collectively be referred to as the "Company".
All significant intercompany accounts and transactions have been
eliminated in consolidation.
The Company is in the business of providing Internet access and long
distance telephone service. The Company markets its services
primarily through a network of Value Added Resellers [VAR] in the
geographical region of the northwestern United States. The VARs are
assigned a specific territory from which they market the Company's
services.
Cash
Cash consists of cash on hand and on deposit in commercial banks.
The Company reported a bank overdraft balance as of June 30, 1997.
Property and Equipment
Property and equipment are reported at cost. Depreciation is
provided using the straight-line basis over the useful lives of the
related assets. The amounts reported as depreciation expense and
accumulated depreciation include the amortization expense and
accumulated amortization of equipment acquired under capital lease
agreements. Expenditures for maintenance and repairs are charged to
expense as incurred.
9
<PAGE>
JUNGLE STREET, INC.
including the accounts of its wholly-owned subsidiary
Televar, Inc.
Notes to Financial Statements
June 30, 1997
NOTE 1
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[Continued]
Loss per Share
Loss per common share is based on the weighted-average number of
shares outstanding. Common stock equivalents have not been included
in the computation as their effect would be antidilutive.
Additional Paid-in Capital
The amount shown on the financial statements as additional paid-in
capital consists of proceeds from the sale or issuance of common
stock in excess of its par value, reduced by any direct expenses of
such sales or issuances.
Stock Held in Trust
The Company repurchased 326,667 shares of its common stock from a
founding shareholder. The consideration given for the shares was
$70,000. These shares are held in escrow as collateral for the
repayment of a note, the proceeds of which were used to purchase the
shares [see Note 9].
NOTE 2 SIGNIFICANT CONCENTRATIONS OF RISK
Credit Risk
The Company's primary operations are currently in the geographical
region of the northwestern United States. Customers of the Company
consist primarily of individuals who utilize the Internet access
capabilities offered by the Company. The accounts receivable of the
Company are unsecured.
Revenue/Supplier Risk
Revenues for the years ended June 30, 1997, and 1996 were from the
following sources:
June 30, 1997 June 30, 1996
---------------- -----------------
Long distance 316,724 646,884
Internet access 1,944,472 549,563
Value added resellers 13,641 447,940
Cellular Access 28,076 43,724
Other 0 8,993
---------------- -----------------
$ 2,302,913 $ 1,697,104
10
<PAGE>
JUNGLE STREET, INC.
including the accounts of its wholly-owned subsidiary
Televar, Inc.
Notes to Financial Statements
June 30, 1997
NOTE 2 SIGNIFICANT CONCENTRATIONS OF RISK [Continued]
The Company's long distance business is dependent on its supplier of
wholesale long distance hook-ups. Should the supplier terminate the
Company's hook-up capability, the Company would be forced to seek
another supplier.
In addition, the Company has attracted Value Added Resellers [VAR] to
market its Internet access in various geographical territories, the
exclusive rights for which are purchased by the VAR. The Company
allows the rights in exchange for notes from the VAR, to be repaid
over varying terms. The Company defers recognizing the revenues from
the sale of the rights until the notes are paid.
NOTE 3 RELATED-PARTY TRANSACTIONS
Notes Payable
During the year and subsequent to year end, the Company executed a
series of demand notes payable to Pacific Aerospace & Electronics,
Inc.[PA&E], a company which shares common members of the board of
directors and certain shareholders of the Company. Each demand note
bears interest at the rate of twelve percent [12%]. Below is a
summary of those notes [also see Note 19].
Notes payable as of June 30, 1997 $ 1,137,000
Additional notes through August 31, 1997 672,500
--------------
Total notes $ 1,809,500
==============
Board Loans
In February, 1997, several of the members of the Company's board of
directors, acting as individuals, entered into loan agreements with a
financial institution. The proceeds from the loans, which totaled
$600,000 at June 30, 1997, were loaned to the Company and used for
operating expenses. As partial consideration for the use of the
funds, the Company agreed to make all interest payments when due
under the provisions of the loan agreements. In July, 1997,
subsequent to year end, the Company obtained additional financing and
used a portion of the proceeds to repay the principal and interest
amounts due on the loans.
11
<PAGE>
JUNGLE STREET, INC.
including the accounts of its wholly-owned subsidiary
Televar, Inc.
Notes to Financial Statements
June 30, 1997
NOTE 3 RELATED-PARTY TRANSACTIONS [Continued]
Consulting Fees
The Company paid $284,270, primarily for consulting services, to a
company whose president was simultaneously president of a VAR company
and president of Televar, Inc.
Issuance of Common Shares for Merger-Related Services
In conjunction with the merger of Televar Northwest, Inc. and Jungle
Street, Inc., the Company issued 1,125,000 shares of common stock to
consultants who were shareholders of Jungle Street, Inc. prior to the
merger and who provided financial and other services to Jungle
Street, Inc. The Company also agreed to reserve 750,000 shares of
its common stock as commission to a consulting firm which is owned
and managed by shareholders of the Company.
NOTE 4 PROPERTY AND EQUIPMENT
The major classes of assets as of the balance sheet date are as
follows:
<TABLE>
<CAPTION>
Accumulated
Asset Class Cost Depreciation Method/Life
------------------------------ --------------- --------------------- -----------------
<S> <C> <C> <C>
Equipment and furniture $ 747,251 $ (169,779) SL/5 & 10 years
Equipment under capital lease 273,919 (78,703) SL/5 years
Vehicles 61,031 (16,769) SL/5 years
Leasehold improvements 12,372 (2,909) SL/Life of lease
--------------- ---------------------
Total $ 1,094,573 $ (268,160)
=============== =====================
</TABLE>
NOTE 5 DEFERRED EXPENSE/UNEARNED FEES
Deferred Expenses
The Company is obligated to pay commissions to its VARs at the time
monthly, quarterly, or annual fees are received from customers
located in each respective VAR's assigned territory. These
commissions are subject to offset if the underlying customers
terminate Internet access service during a quarter or year for which
the customer has prepaid and a refund is due. The deferred expenses
account consists of those commissions still subject to offset. The
Company recognizes the commission expense when the commissions are no
longer subject to offset. Since all commissions are to be paid
within one year, the amount is classified as a current asset.
12
<PAGE>
JUNGLE STREET, INC.
including the accounts of its wholly-owned subsidiary
Televar, Inc.
Notes to Financial Statements
June 30, 1997
NOTE 5 DEFERRED EXPENSE/UNEARNED FEES [Continued]
Unearned Fees
The Company collects fees for its Internet access service under
monthly, quarterly and annual billing programs. The Company has
established an unearned fees account for recording the advanced
payments, which are amortized into earnings on a monthly basis as the
services are provided.
NOTE 6 NOTES RECEIVABLE FROM VARs/DEFERRED REVENUES FROM VAR NOTES
The Company reports notes receivable from VARs who have purchased
rights to various territories. The notes have terms of 12 to 36
months and interest rates of 0% to 18%. Due to the arbitrary
repayment practices of the VARs, the Company has established an
offsetting deferred revenue. Earnings from the sale of territorial
rights are reflected as payments are received.
NOTE 7 GOODWILL
In February, 1996, the Company entered into an agreement to purchase
certain assets, primarily computer equipment, telephone equipment and
customer lists for the purchase price of $147,125, with $18,870 of
the price allocated to tangible assets and the remaining $128,255 to
intangible assets [Goodwill]. More specifically, goodwill represents
the customer base purchased by the Company as a part of the
transaction. The Company estimates the useful life of the goodwill
at 15 years, with amortization calculated on a straight-line basis.
The remaining unamortized balance as of June 30, 1997 is $116,855.
The Company paid a cash down payment of $60,000 at the closing and
signed a note for the remaining $87,125 to be repaid over a thirty-
six month period with interest at nine percent [9%] [See Note 10].
NOTE 8 LOANS RECEIVABLE
The Company has advanced funds under varying conditions to two
outside parties. Advances to the first party totaled $40,000 through
June 30, 1997, with net reductions of $6,359, leaving a remaining
balance due of $33,641 at June 30, 1997. The advances are repayable
on demand and bear interest at the rate of twelve percent [12%].
Additional advances have been made to the same party subsequent to
year end.
The Company made several advances to a second party based on a series
of 180-day notes bearing interest at the rate of twelve percent
[12%]. Advances through June 30, 1997 totaled $65,062, which
remained outstanding as of June 30, 1997. Additional advances of
$85,251 have been made to the same party subsequent to year end. The
Company has determined that the party may not have sufficient
resources available to repay the loans and has established an
allowance for doubtful accounts for the full amount of advances made
to date.
13
<PAGE>
JUNGLE STREET, INC.
including the accounts of its wholly-owned subsidiary
Televar, Inc.
Notes to Financial Statements
June 30, 1997
NOTE 9 NEGOTIATED SETTLEMENTS PAYABLE
Rental Agreement
In July, 1993, the Company entered into a seven year lease for office
space. The Company relocated its offices prior to the expiration of
the lease term. In June, 1997, the Company reached an agreement with
the landlord to settle the amounts due under the provisions of the
lease for $100,000; $47,500 to be paid in cash and the balance in
13,125 shares of common stock at $4.00 per share.
Notes Payable/Stock Certificate Agreement
In June, 1993, the Company executed an $85,000 promissory note in
favor of two individuals. In November, 1995, the Company executed a
$63,000 promissory note in favor of the same two individuals. Both
notes were subsequently assigned to a third party. The notes and a
Company stock certificate have been the subject of several agreements
among the parties. The parties entered into an agreement to settle
and resolve all matters relating to ownership of the stock and
amounts due under the promissory notes whereby the Company would pay
the third party $200,000 in exchange for ownership of the stock and
release the Company and all individual guarantors from any other
obligations related to the transactions involving the notes and stock
certificate. The agreement was signed and dated August 29, 1997.
The full amount was paid September 3, 1997.
NOTE 10 NOTES PAYABLE -- OTHER
Individual
The Company issued a note on April 25, 1996, in the principal amount
of $20,000, bearing interest at the rate of eighteen percent [18%],
with the entire principal and interest due on October 26, 1996. The
Company paid the note in full July 22, 1997.
Agreement to Acquire Certain Assets
In February, 1996, the Company issued a note payable to a company in
the original amount of $87,125, bearing interest at the rate of nine
percent [9%], and partially secured by certain assets acquired under
the agreement. The note provided for monthly payments of $2,771 for
a 36-month period commencing June 10, 1996 and continuing through May
10, 1999. The outstanding balance at June 30, 1997, was $69,742.
However, since the Company is in default with respect to payments due
under the note, management is in the process of negotiating a
settlement to satisfy the remaining balance. Pursuant to the default
provisions of the note, the entire amount remaining due as of June
30, 1997, has been classified as a current liability.
14
<PAGE>
JUNGLE STREET, INC.
including the accounts of its wholly-owned subsidiary
Televar, Inc.
Notes to Financial Statements
June 30, 1997
NOTE 10 NOTES PAYABLE -- OTHER [Continued]
Other Notes Payable
The Company executed two promissory notes with a corporation. The
first note, dated November 11, 1996, in the original principal amount
of $42,000, bearing interest at the rate of twelve percent [12%]
through the maturity date of March 11, 1997, and a default rate of
fifteen percent [15%] after the maturity date of the loan. The
Company is in default with respect to payments due under the note.
The second note, dated November 20, 1996, had an original principal
balance of $40,000, bearing interest at the rate of eight percent
[8%], but did not provide for a specific maturity date. The entire
amount, plus any interest due, is payable on demand.
NOTE 11 LONG-TERM LIABILITIES
Notes Payable
The Company has two outstanding loans to a finance company secured by
Company-owned vehicles. The terms of the notes are as follows:
<TABLE>
<CAPTION>
Note 1 Note 2
<S> <C> <C>
Original date: March, 1996 March, 1996
Original amount: $ 30,375 $ 30,370
Interest rate: 10.90% 11.00%
Terms: 72 monthly payments 72 monthly payments
$578.58 $580.78
Maturity date: March 15, 2002 March 15, 2002
Outstanding balance, June 30, 1997: $ 26,149 $ 25,872
</TABLE>
15
<PAGE>
JUNGLE STREET, INC.
including the accounts of its wholly-owned subsidiary
Televar, Inc.
Notes to Financial Statements
June 30, 1997
NOTE 11
LONG-TERM LIABILITIES [Continued]
Notes Payable [Continued]
The following table outlines the Company's principal obligations on
the notes payable over the remaining life of the loans:
Year Principal
1997-1998 $ 8,941
1998-1999 9,671
1999-2000 10,785
2000-2001 12,027
2001-2002 10,597
-------------
Total $ 52,021
=============
Capital Leases Payable
The Company has five capital leases which were used for the
acquisition of computer and telephone equipment used in the Company's
operations. The terms of the leases are as follows:
<TABLE>
<CAPTION>
Lease 1 Lease 2 Lease 3 Lease 4 Lease 5
<S> <C> <C> <C> <C> <C>
Inception date: 04/15/95 06/30/95 01/31/95 07/15/96 07/29/96
Monthly payment: $ 491 $ 1,243 $ 628 $ 3,707 $ 2,915
Purchase option: $ 1 $ 4,281 $ 1,800 $ 4,884 $ 7,796
Equipment under lease: $ 19,637 $ 46,193 $ 18,048 $ 105,846 $ 84,195
Remaining principal due: $ 13,108 $ 27,454 $ 6,523 $ 79,423 $ 66,377
</TABLE>
16
<PAGE>
JUNGLE STREET, INC.
including the accounts of its wholly-owned subsidiary
Televar, Inc.
Notes to Financial Statements
June 30, 1997
NOTE 11 LONG-TERM LIABILITIES [Continued]
Capital Leases Payable [Continued]
The following table outlines by years the future minimum lease
payments due under the capital lease agreements and the present value
of the net minimum lease payments as of June 30, 1997:
Year
1997-1998 $ 107,169
1998-1999 99,018
1999-2000 23,981
-------------
Total minimum lease payments 230,168
Less: Amount representing interest (37,283)
-------------
Present value of net minimum lease payments $ 192,885
=============
NOTE 12 TELEVAR NORTHWEST, INC. MERGER WITH JUNGLE STREET, INC.
On August 29, 1996, Televar Northwest, Inc. merged with Jungle
Street, Inc., a Washington corporation and wholly-owned subsidiary of
Jungle Street, Inc., a Utah corporation. [Both of the Jungle Street,
Inc. corporations are hereafter collectively referred to as "Jungle
Street, Inc." in this note.] Jungle Street, Inc. is the surviving
corporation under the merger agreement. However, Jungle Street,
Inc.'s assets, liabilities and operations were nominal at the time of
the merger. The name of the newly combined entity, which previously
consisted of Televar Northwest, Inc. and with Jungle Street, Inc., a
Washington corporation, is Televar, Inc.
Each common share of Televar Northwest, Inc. outstanding at the time
of the merger was converted to five shares of Jungle Street, Inc.
common stock. Televar Northwest, Inc. had 2,363,655 shares issued
and outstanding which converted to 11,818,325 of Jungle Street, Inc.
common stock in the exchange.
In conjunction with the merger, Jungle Street, Inc. issued 1,125,000
shares of common stock to consultants who were shareholders of Jungle
Street, Inc. prior to the merger and who provided financial and other
services to Jungle Street, Inc. The Company also agreed to reserve
750,000 shares of common stock to be issued as commissions to a
consulting firm, which is owned and managed by shareholders of the
Company, along with a payment of $50,000 cash, in the event capital-
raising services performed by the consulting firm result in net
proceeds to the Company of at least $1,000,000. Through the date of
the audit, the capital-raising efforts have not been successful and
the shares of common stock have not been issued.
17
<PAGE>
JUNGLE STREET, INC.
including the accounts of its wholly-owned subsidiary
Televar, Inc.
Notes to Financial Statements
June 30, 1997
NOTE 13 SHORT-TERM BANK LINE OF CREDIT
On July 1, 1996, the Company received a $200,000 line of credit from
a commercial bank with an original maturity date of January 5, 1997.
The line of credit provisions included variable rate interest at two
percent [2%] over the bank's index rate, which was 8.25% at the time
of the loan closing. Collateral for the line of credit included all
tangible and intangible assets of the Company. Concurrently, the
Company received an additional $60,000 loan from the same bank, the
proceeds of which were used to repay previous borrowings of the
Company to a different bank. The line of credit and additional loan
were paid in full from the proceeds of the "bridge" loan described
below.
NOTE 14 "BRIDGE" LOAN
On September 25, 1996, the Company entered into a loan agreement with
a company for $500,000 in "bridge" financing. The loan agreement
included provisions for interest at the rate of eighteen percent
[18%] and collateral in the form of all assets, tangible and
intangible, including trade secrets now owned or hereafter acquired,
of the Company. Additional security for the loan included any
existing or hereafter arising rights of the Company to receive money.
Personal guarantees were provided by the then Chief Executive
Officer/Chairman of the Board and the then President of the Company.
Repayment provisions of the loan agreement included an original
maturity date of January 1, 1997, with the possibility of extensions.
In addition to the provisions described above, the Company executed a
Common Stock Purchase Warrant, entitling the lender to purchase
65,000 shares of common stock at an exercise price of $1.81 per
share. The warrant may be exercised, in whole or in part, at any
time through September 25, 2001. The lender has certain registration
rights with respect to the shares. No warrants have been exercised
to date.
On June 26, 1997, the Company repaid the "bridge" loan.
NOTE 15 PROMISSORY NOTE
The Company received a $100,000 loan from an individual on September
1, 1996. Terms of the note included a provision for interest at the
rate of eighteen percent [18%], due and payable on the first day of
each month, beginning October 1, 1996, with an original maturity date
of January 31, 1997. The lender also obtained the right to purchase
common stock of the Company at the price of $1.00 per share,
exercisable until June 30, 1997. No shares were issued as a result
of the agreement. The Company repaid the note amount in full on
February 13, 1997.
18
<PAGE>
JUNGLE STREET, INC.
including the accounts of its wholly-owned subsidiary
Televar, Inc.
Notes to Financial Statements
June 30, 1997
NOTE 16 LIQUIDITY
The Company has incurred substantial losses, has a net working
capital deficit of $3,941,246 and has a net capital deficit of
$3,041,216 as of June 30, 1997. Financing for the Company's
operations to date has been primarily from the sale of common stock
and borrowings. The Company's ability to achieve a level of
profitable operations and/or additional financing may impact the
Company's ability to continue as it is presently organized.
Resolution of the issue is dependent on the success of management's
plans to raise funds through the sale of its equity securities in a
private placement or public offering.
NOTE 17 ACCOUNTING FOR INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 [Statement], which is
effective for fiscal years beginning after December 15, 1992. The
Statement requires the recognition of deferred tax assets and
liabilities for the temporary differences between the financial
reporting basis and tax basis of the Company's assets and liabilities
at enacted tax rates expected to be in effect when such amounts are
realized or settled. For the year ended June 30, 1997, the Company
had no significant income taxes due to operating losses incurred.
Any deferred tax benefit arising from the operating losses carried
forward would be offset entirely by a valuation allowance since, at
the current time, it is less than likely that the Company will be
sufficiently profitable in the future to take advantage of the losses
carried forward.
NOTE 18 REVERSE STOCK SPLIT
On March 24, 1997, the Company effected a 1 share for 4 shares
reverse split of the Company's 14,460,745 shares of the then
outstanding common stock, retaining the authorized number of shares
at 50,000,000 and the par value at $0.001 per share.
NOTE 19 SUBSEQUENT EVENTS
Demand Promissory Note
On July 8, 1997, the Company executed a demand promissory note in the
principal amount of $350,000, bearing interest at the rate of twelve
percent [12%], payable to PA&E [see Note 3]. PA&E has also advanced
additional funds since that time.
19
<PAGE>
JUNGLE STREET, INC.
including the accounts of its wholly-owned subsidiary
Televar, Inc.
Notes to Financial Statements
June 30, 1997
NOTE 19 SUBSEQUENT EVENTS [Continued]
Line of Credit -- Commercial Bank
On July 16, 1997, the Company executed a promissory note and related
documents to a commercial bank for a line of credit in the maximum
principal amount of $1,300,000, bearing interest at a variable rate
based on the bank's "index" rate [initial rate: 8.500%], payable on
demand, or, if no demand, on January 15, 1998. The Company pledged
all inventory and equipment as collateral for the line of credit. In
addition, the related-party company, PA&E, executed a commercial
guaranty in favor of the commercial bank as additional consideration
for granting the line of credit. As of the date of this report the
maximum principal amount had been borrowed by the Company.
20
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 645,575
<ALLOWANCES> 306,000
<INVENTORY> 0
<CURRENT-ASSETS> 443,772
<PP&E> 1,094,573
<DEPRECIATION> 268,160
<TOTAL-ASSETS> 1,497,434
<CURRENT-LIABILITIES> 4,385,018
<BONDS> 0
0
0
<COMMON> 3,705
<OTHER-SE> (3,044,921)
<TOTAL-LIABILITY-AND-EQUITY> 1,497,434
<SALES> 2,302,913
<TOTAL-REVENUES> 2,302,913
<CGS> 0
<TOTAL-COSTS> 2,301,124
<OTHER-EXPENSES> 2,635,290
<LOSS-PROVISION> 413,800
<INTEREST-EXPENSE> 155,650
<INCOME-PRETAX> (2,633,501)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,787,328)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,787,328)
<EPS-PRIMARY> (0.89)
<EPS-DILUTED> (0.89)
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