FORM 10-Q-SB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended March 31, 2000
Commission File Number: 0-26699
Reliant Interactive Media Corp.
formerly Reliant Corporation
Nevada 87-0411941
(Jurisdiction of Incorporation) (I.R.S. Employer Identification No.)
2701 N. Rocky Point Dr., Suite 200, Tampa, Florida 33607
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (813) 282-1717
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: 6,345,271
Yes [X] No [ ] (Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days.)
As of March 31, 2000 the number of shares outstanding of the Registrant's Common
Stock was 6,345,271.
<PAGE>
PART I: FINANCIAL INFORMATION
Attached hereto and incorporated herein by this reference are consolidated
unaudited financial statements (under cover of Exhibit FQ1-00) for the three
months ended March 31, 2000.
ITEM 1. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
(A) PLAN OF OPERATION FOR THE NEXT TWELVE MONTHS.
CASH REQUIREMENTS AND OF NEED FOR ADDITIONAL FUNDS.
We are a development stage company with operations and revenues. We are in
the zone of marginal profitability, but have only limited capital resources.
While revenues are increasing significantly, it may be necessary for the Company
to seek additional capital over time to optimize the accomplishment of its
business plan. The following disclosure treats our interim funding for the year
now past, and our plans and arrangements for future funding. Without regard to
whether current revenues might be sufficient to maintain liquidity, new projects
must be undertaken to generate future revenues. Every media-marketing project
has a useful life, some longer or shorter than others, but all eventually run
their course. We do not consider it prudent to be passive about generating new
projects, and we have determined that significant new funds are highly
desirable, and possibly necessary to aggressively approach operations in year
2000.
The Registrant has entered into two letter agreements with Institutional
Equity Corporation ( IEC ):
First, an engagement letter for IEC to conduct a private placement for us,
to raise a minimum of $500,000 and a maximum of $2,000,000 (to be in reliance on
Regulation D, Rule 506, and section 4(2) of the Securities Act of 1933). Units
consisting of 10,000 shares each are to be sold for $20,000 each. This placement
has been opened and was to be completed by March 31, 2000, but has been extended
by a maximum of 90 additional days. IEC is to be paid a fee equal to 10% of the
proceeds and has the right to acquire up to 100,000 shares of common stock, at
$3.00 per share, for every million dollars raised, or a proportional fractional
adjustment. This right to acquire shares lasts until 18 months from the closing
of the placement. The placement is on a best efforts basis. There is no guaranty
that any shares will be placed.
Second, a firm commitment has been received from IEC to raise $10,000,000
in a registered offering of securities. The structure of this offering has not
been determined. Gross underwriting discounts of approximately 10% of the
offering price and a 2% non-accountable expense allowance is to be paid to IEC
from these offering proceeds. A $50,000 fee has been paid towards an advance of
$100,000 to be applied against the gross underwriting commissions. This $50,000
fee was funded by a loan of that amount from Oasis Entertainment's Fourth Movie
Project, Inc., a shareholder of Reliant. The loan is payable in six months from
December 1, 1999, and bears 10% interest per annum. The expenses of IEC in
connection with this offering will also be reimbursed from the offering proceeds
and are estimated to be $650,000. IEC will also receive warrants for 10% of the
securities purchased by underwriters, good for four years, at an exercise price
of 120% of the offering price.
Third, as of the date of this filing, the private placement is still open,
and at this date a total of $700,000.00 has been placed in escrow, all of which
has been received in the year 2000. A minimum of $500,000.00 was required in
order to satisfy the escrow and release funds. The funds have now been disbursed
and the 10% commission paid.
<PAGE>
We believe that our present arrangements will provide sufficient working
capital to continue operations for the next twelve months. There can be no
guaranty that unrealized funding will be realized.
SUMMARY OF PRODUCT RESEARCH AND DEVELOPMENT
The Company's product development/marketing department is the most vital
component of the Company. Kevin and Tim Harrington, along with Mel Arthur,
actively participate on a daily basis in the ongoing effort to research and
develop new products that may be suited for direct response television marketing
and subsequent marketing through non-infomercial distribution channels. This
group develops new product ideas from a variety of sources, including inventors,
suppliers, trade shows, industry conferences, strategic alliances with
manufacturing and consumer product companies and the Company's ongoing review of
new developments within its targeted product categories. As a result of
management's prominence in the infomercial and retail television industry, it
also receives unsolicited new product proposals from independent third parties.
During the evaluation phase of product development, the Company evaluates the
suitability of the product for television demonstration and explanation as well
as the anticipated perceived value of the product to consumers, determines
whether an adequate and timely supply of the product can be obtained and
analyzes whether the estimated profitability of the product satisfies the
Company's criteria.
The Company is devoting attention to the development and products
specifically targeted at markets outside of North America. The Company will
review its infomercial library on an ongoing basis to select those products
which it believes will be successful in Europe and/or Asia and/or its other
international markets. When a product which was initially sold domestically is
selected for international distribution, the infomercial is dubbed and product
literature is created in the appropriate foreign languages. In addition, a
review of the product's and the infomercial's compliance with the local laws
completed. The Company's licensed distributor then begins airing the infomercial
internationally. The Company also airs shows and distributes products of other
independent domestic infomercial companies.
The Company obtains the rights to new products created by third parties
through various licensing arrangements generally involving royalties related to
sales of the product. The amount of the royalty is negotiated and generally
depends upon the level of involvement of the third party in the development and
marketing of the product. The Company generally pays the smallest royalty to a
third party that only provides a product concept. A somewhat higher royalty to a
third party that has fully developed and manufactured a product. The Company
also obtains the rights to sell products which have already been developed,
manufactured and marketed through infomercials produced by other companies. In
such cases, the Company generally pays a higher royalty rate to the third party
because of the relatively small amount of the Company's resources required to
develop the product. The Company generally seeks exclusive worldwide rights to
all products in all means of distribution. In some cases, the Company does not
obtain all marketing and distribution rights, but seeks to receive a royalty on
sales made by the licensor pursuant to the rights retained by the licensor.
EXPECTED PURCHASE OR SALE OF PLANT AND SIGNIFICANT EQUIPMENT. None.
EXPECTED SIGNIFICANT CHANGE IN THE NUMBER OF EMPLOYEES. None.
(B) DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
During the final quarter of 1999, sales continued to grow from projects in
place, led by those developed in the previous quarters and the new computer
infomercial. In the first quarter of the current year 2000, the increase in
revenues and profitability has been demonstrated.
<PAGE>
RESULTS OF OPERATIONS. Sales in the first quarter of 1999 were $352,477,
rising to $20,131,204 in the current quarter. In 1998, costs of sales were
66,664, and gross profit was 53,580. Quarterly comparisons for 1999/1998
quarters show the following:
<TABLE>
<CAPTION>
<S> <C> <C>
March 31 1999 2000
- ---------- --------- ----------
Net Sales 352,477 20,131,204
Cost of 284,523 16,354,755
--------- ----------
Sales
Gross 67,954 3,785,449
========== ========= ==========
Profit
Operating 699,101 3,663,584
--------- ----------
Expenses
Result of (631,147) 121,865
Operations
==========
</TABLE>
It is apparent that the cost of sales has remained virtually constant at
81% of sales, and that a 19% margin of gross profit has been maintained. It is
also apparent that operating expenses have improved from 198% of sales in the
1999 quarter down to 18% in the current quarter, with resulting profitability
indicated.
Management believes that revenues and growth will continue to increase,
but to achieve the continued growth of the Company's business, advertising,
promotional and production expenses will remain significant. While the upside
potential from successful infomercial marketing is tremendous, the risk of
failure is always present. Some of the projects may fail, or all may fail. If
some are successful, the success may offset the losses from others significantly
or may not. Accordingly, there can be no assurance that substantial
profitability will be sustained in the next twelve months in proportion to the
rate of growth achieved in by this quarterly comparison.
A cautionary note is indicated by these calculations in that the current
81% of sales for cost of sales, and the current 18% of sales for operating
expenses accumulates to 99% of net sales, indicating that this business has not
achieved a sufficient momentum of successes to assure future profitability. One
very successful program may defer the expenses of several failures. The number
of attempts is therefore material to the probability of significant improvement
in the ultimate margin of profitability. This analysis leads to conclusion that
this corporation will require supplemental capital to maintain and increase the
number of its projects, in order to continue its improvement beyond its present
marginal profitability, or that the Company will have to find ways to increase
its margin of profitability.
Revenues have improved in every quarter of operations in 1999. We expect
them to continue to improve in the next twelve months. Although certain
expenses, such as production and media costs are related to revenue creation and
would rise in some proportion to revenues, there are other expenses that are not
expected to rise proportionally. General and administrative expenses would not
rise proportionally as projects increase and revenues improve. This has been
borne out by this quarterly comparison. For the 1999 quarter G&A was 135% of
sales, while currently only 14% of sales.
We are able to generate increasing revenues without significant increase
in employees, as production and fulfillment activities are generally
out-sourced. The Company has new products to sell each period, in additions to
others, so that the number of products increase from period to period. On QVC we
are beginning to sell some products in the traditional short-form live segments
that are seen on television shopping networks. These new revenues are
insubstantial as of the end of 1999, and currently, but are expected to become a
significant component of total revenues as more products are sold and exposure
increases in future quarters.
<PAGE>
Product sales are expected to increase in direct proportion to our ability
to acquire media time to promote them. Promotional advertising drives sales in
our business. It is for this reason that increasing revenues do not provide
assurance that markets have been saturated with as much advertising as would be
productive. For this reason, additional capital, whether or not necessary for
fundamental survival, is desired and important for optimum growth. Management is
of the opinion that additional internal capital would relieve the burden of
debt service and materially improve profitability.
Cost of goods sold included the total cost of acquiring actual products
acquired for resale and costs and expenses related to sales. Returns and
allowances are deducted from sales.
- --------------------------------------------------------------------------------
PART II: OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
There are no proceedings, legal, enforcement or administrative, pending,
threatened or anticipated involving or affecting this Issuer, except as
disclosed herein. The Registrant had been named as a defendant in California
state court action seeking damages for rent based upon an oral lease/agreement.
Management has cross-complained against certain third parties believed to be
responsible. Management has settled the claim against it for the nominal sum of
$4,750. As of this date our cross-complaint is still pending. As of this date,
this matter is not deemed to have any material impact upon us or our financial
condition.
ITEM 2. CHANGE IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
We have not changed Auditors, but our Auditors have changed the name of
their firm, from Jones & Jensen to HJ & Associates, LLC. There has been no
disagreement with any auditor as to any item or matter relating to our audit or
audit procedure.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
EXHIBIT INDEX
FINANCIAL STATEMENTS
Attached hereto and incorporated herein by this reference are
consolidated unaudited financial statements (under cover of Exhibit FQ1-00 for
the three months ended March 31, 2000, and the year ended December 31, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10-Q Report for the Quarter ended March 31, 2000 has been signed below by
the following persons on behalf of the Registrant and in the capacity and on the
date indicated.
Dated: March 31, 2000
RELIANT INTERACTIVE MEDIA CORP.
formerly Reliant Corporation
by
/s/ /s/
Kevin Harrington Tim Harrington
chairman and ceo/director president and coo/director
/s/ /s/
Mel Arthur Karl E. Rodriguez
executive vice president/director secretary/director
<PAGE>
EXHIBIT FQ1-00
UN-AUDITED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
<PAGE>
RELIANT INTERACTIVE MEDIA CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND DECEMBER 31, 1999
<PAGE>
C O N T E N T S
Independent Accountants Review Report 8
Consolidated Balance Sheet 9
Consolidated Statements of Operations 11
Consolidated Statements of Stockholders Equity 12
Consolidated Statements of Cash Flows 13
Notes to the Consolidated Financial Statements 15
<PAGE>
INDEPENDENT ACCOUNTANTS REVIEW REPORT
-------------------------------------
Board of Directors
Reliant Interactive Media Corporation
and Subsidiaries
Tampa, Florida
We have reviewed the accompanying consolidated balance sheet of Reliant
Interactive Media Corporation and Subsidiaries as of March 31, 2000 and the
related statements of operations, stockholders equity and cash flows for the
periods ended March 31, 2000 and 1999. These consolidated financial statements
are the responsibility of the Company s management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
consolidated financial information consists principally of applying analytical
procedures to financial data, and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an
audit conducted in accordance with generally accepted auditing standards, which
will be performed for the full year with the objective of expressing an opinion
regarding the consolidated financial statements taken as a whole. Accordingly,
we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements referred
to above for them to be in conformity with accounting principles generally
accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of Reliant
Interactive Media Corporation and Subsidiaries as of December 31, 1999, and the
related statements of operations, stockholders equity, and cash flows for the
year then ended (not presented herein) and in our report dated April 7, 2000, we
expressed an unqualified opinion on those consolidated financial statements.
/s/
HJ & Associates, LLC
Salt Lake City, Utah
May 12, 2000
<PAGE>
RELIANT INTERACTIVE MEDIA CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
ASSETS
March 31, December 31,
2000 1999
- --------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents (Note 1) $ 76,400 $ 26,404
Restricted cash (Note 1) 1,112,715 983,795
Receivables - other (Note 4) 1,348,523 800,076
Inventory (Note 1) 51,441 57,762
Employee advances 10,880 10,923
Prepaid expenses 229,128 229,128
Total Current Assets 2,829,087 2,108,088
PROPERTY AND EQUIPMENT (Note 1)
Machinery and equipment 36,625 36,625
Office furniture and equipment 45,292 45,292
Leasehold improvements 37,239 0
Total Property and Equipment 119,156 81,917
Less: Accumulated depreciation (28,577) (24,092)
Net Property and Equipment 90,579 57,825
OTHER ASSETS
Deferred stock offering costs (Note 1) 50,000 50,000
Deposits 79,885 12,773
Prepaid advertising (Note 1) 836,041 607,166
Patent costs (Note 1) 26,668 26,668
- --------------------------------------------------------------------------------
Total Other Assets 992,594 696,607
================================================================================
TOTAL ASSETS $ 3,912,260 $ 2,862,520
See Accountants Review Report and the accompanying notes to the
reviewed financial statements.
<PAGE>
RELIANT INTERACTIVE MEDIA CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets (Continued)
LIABILITIES AND STOCKHOLDERS EQUITY
-----------------------------------
March 31, December 31,
2000 1999
- --------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable $ 1,852,762 $ 944,926
Accrued expenses 166,505 166,793
Allowance for sales returns (Note 1) 707,799 462,677
Notes payable - current portion (Note 7) 112,439 112,439
Notes payable - related parties (Note 6) 360,156 360,156
Line of credit (Note 8) 0 132,148
Total Liabilities 3,199,661 2,179,139
- --------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 3 and 11)
STOCKHOLDERS EQUITY
Common stock: 50,000,000 shares authorized of $0.001
par value, 6,345,271 and 6,310,271 shares issued
and outstanding, respectively 6,345 6,310
Additional paid-in capital 3,164,264 3,245,049
Accumulated deficit (2,458,010) (2,567,978)
================================================================================
Total Stockholders Equity 712,599 683,381
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $3,912,260 $2,862,520
See Accountants Review Report and the accompanying notes to the
reviewed financial statements.
<PAGE>
RELIANT INTERACTIVE MEDIA CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
For the Three Months Ended
March 31,
2000 1999
- --------------------------------------------------------------------------------
NET SALES $20,131,204 $352,477
COST OF SALES 16,345,755 284,523
GROSS PROFIT 3,785,449 67,954
OPERATING EXPENSES
Depreciation 4,485 2,676
General and administrative 1,938,293 476,124
Selling and marketing 1,473,979 202,596
Royalties 214,615 0
Rent 32,212 12,951
Total Operating Expenses 3,663,584 699,101
OPERATING INCOME (LOSS) 121,865 (631,147)
OTHER INCOME (EXPENSES)
Interest expense (12,067) (5,120)
Interest income 170 0
Total Other Income (Expenses) (11,897) (5,120)
INCOME (LOSS) BEFORE INCOME TAXES 109,968 (636,267)
INCOME TAXES 0 0
NET INCOME (LOSS) $109,968 $(636,267)
BASIC INCOME (LOSS) PER SHARE (Note 11) $ 0.02 $ (0.18)
================================================================================
FULLY DILUTED INCOME (LOSS) PER SHARE (Note 11) $0.02 $(0.18)
See Accountants Review Report and the accompanying notes to the
reviewed financial statements.
<PAGE>
RELIANT INTERACTIVE MEDIA CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Stockholders Equity
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit
- --------------------------------------------------------------------------------
Balance,
December 31, 1998 3,373,570 $3,374 $1,359,985 $(1,234,168)
Common stock
issued for cash 1,098,000 1,098 938,902 0
Common stock issued
for services 338,700 338 197,662 0
Fractional shares issued in the
reverse stock split 1 0 0 0
Common stock issued for
acquisition of TPH Marketing, Inc.
1,500,000 1,500 748,500 0
Net loss for the year ended
December 31, 1999 0 0 0 (1,333,810)
Balance,
December 31, 1999 6,310,271 6,310 3,245,049 (2,567,978)
Capital withdrawals 0 0 (138,500) 0
Common stock issued
for services 35,000 35 57,715 0
Net income for the three months
ended March 31, 2000 0- 0 0 109,968
Balance, March 31, 2000 6,345,271 $ 6,345 $3,164,264 $(2,458,010)
================================================================================
See Accountants Review Report and the accompanying notes to the
reviewed financial statements.
<PAGE>
RELIANT INTERACTIVE MEDIA CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Three Months Ended
March 31,
2000 1999
- -------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 109,968 $ (636,267)
Adjustments to reconcile net income (loss) to
net cash provided (used) in operating activities:
Depreciation 4,485 2,676
Amortization of prepaid advertising 194,610 0
Allowance for sales returns 245,122 0
Common stock issued for services 57,750 47,750
Changes in assets and liabilities:
Restricted cash (128,920) 0
Receivables (548,447) (265,230)
Inventory 6,321 27,342
Deposits (67,112) 12,773
Prepaids and advances 43 (21,446)
Prepaid advertising (423,485) 11,937
Accounts payable 907,836 78,375
Accrued expenses (288) 38,800
Net Cash Provided (Used) in
Operating Activities 357,883 (703,290)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (37,239) 0
Net Cash Used in Investing Activities (37,239) 0
CASH FLOWS FROM FINANCING ACTIVITIES
Capital withdrawals (138,500) 0
Proceeds from notes payable-related parties 0 247,177
Payments on line of credit (132,148) 0
Proceeds from issuance of common stock 0 390,000
Net Cash Provided (Used) by
Financing Activities $ (270,648) $637,177
See Accountants Review Report and the accompanying notes to the
reviewed financial statements.
<PAGE>
RELIANT INTERACTIVE MEDIA CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
For the Three Months Ended
March 31,
2000 1999
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS $ 49,996 $(66,113)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 26,404 122,257
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 76,400 $ 56,144
================================================================================
Cash payments for:
Income taxes $ 0 $ 0
Interest $ 12,067 $ 5,120
Non-cash financing activities:
Common stock issued for services $ 57,750 $ 47,750
See Accountants Review Report and the accompanying notes to the
reviewed financial statements.
<PAGE>
RELIANT INTERACTIVE MEDIA CORPORATION
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 2000 and December 31, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
------------
Reliant Interactive Media Corporation (formerly Reliant Corporation) (the
Company) was organized under the laws of the State of Utah on July 30, 1984.
The Company subsequently ceased its original business activity in 1993 and was
not engaged in any business activity but was seeking potential investments or
business acquisitions and consequently was considered a development stage
company as defined in SFAS No. 7 until January 1, 1999. At the time of the
acquisition, the Company was a non-operating public shell with nominal assets.
The Company changed its name from Reliant Corporation to Reliant Interactive
Media Corporation (Reliant) in August 7, 1998.
Kevin Harrington Enterprises, Inc. (KHE) was organized under the laws of the
State of Florida on June 15, 1995.
Cigar Television Network, Inc. (CTN) was organized under the laws of the State
of Florida on April 1, 1998.
On July 21, 1998, the Company completed an agreement and plan of reorganization
whereby Reliant issued 11,848,000 shares of its common stock in exchange for all
of the outstanding common stock of KHE and CTN. Kevin Harrington, Chairman and
CEO of the Company, was the controlling shareholder of both KHE and CTN at the
time of the reorganization. Immediately prior to the agreement and plan of
reorganization, the Company had 2,852,000 shares of common stock issued and
outstanding. The reorganization was accounted for as a recapitalization of KHE
and CTN because the shareholders of KHE and CTN controlled the Company
immediately after the acquisition. Therefore, KHE and CTN are treated as the
acquiring entities. Accordingly, there was no adjustment to the carrying value
of the assets or liabilities of KHE and CTN. Reliant is the acquiring entity
for legal purposes and KHE and CTN are the surviving entities for accounting
purposes. On August 7, 1998, the shareholders of the Company authorized a
reverse stock split of 1-for-5 prior to the agreement and plan of
reorganization. All references to shares of common stock have been
retroactively restated.
New Accounting Pronouncement
------------------------------
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities which requires companies to record
derivatives as assets and liabilities, measured at fair market value. Gains or
losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. The key criterion for hedge accounting is that the
hedging relationship must be highly effective in achieving offsetting changes in
fair value or cash flows. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. The adoption of this statement had
no material impact on the Company s financial statements.
<PAGE>
RELIANT INTERACTIVE MEDIA CORPORATION
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 2000 and December 31, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounting Method
------------------
The Company s financial statements are prepared using the accrual method of
accounting. The Company has elected a December 31 year end.
Cash and Cash Equivalents
----------------------------
For purposes of financial statement presentation, the Company considers all
highly liquid investments with a maturity of three months or less, from the date
of purchase, to be cash equivalents.
Inventory
---------
Inventory is stated at the lower of cost or market determined by the first-in,
first-out method or market. Inventory is made up of finished goods held for
sale by the Company.
Property and Equipment
------------------------
Property and equipment are stated at cost less accumulated depreciation.
Expenditures for small tools, ordinary maintenance and repairs are charged to
operations as incurred. Major additions and improvements are capitalized.
Depreciation is computed using the straight-line method over estimated useful
lives as follows:
Leasehold improvement 5 years
Office furniture and equipment 5 to 7 years
Machinery and equipment 5 to 7 years
Depreciation expense for the three months ended March 31, 2000 and 1999 was
$4,485 and $2,676, respectively.
Patent Costs
-------------
These costs will be amortized on the straight-line method over their remaining
lives beginning when the patents are received in 2000.
<PAGE>
RELIANT INTERACTIVE MEDIA CORPORATION
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 2000 and December 31, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Prepaid Advertising
--------------------
Prepaid advertising consisted of the following:
March 31, December 31,
2000 1999
- --------------------------------------------------------------------------------
Production costs of infomercials $ 1,234,464 $ 810,979
Production costs of tv shows 52,430 52,430
------ ------
Subtotal 1,286,894 863,404
Less: accumulated amortization (450,853) (256,243)
-------- --------
Net prepaid advertising $ 836,041 $ 607,166
================================================================================
These advertising costs are amortized over the useful life of the infomercials
and tv shows which is estimated at 18 months. The production costs begin
amortizing when they begin broadcasting. Each product that has production costs
is evaluated at year end for the recoverability of those costs. Production
costs of products that are no longer being sold are fully expensed in the year
that sales cease. Amortization expense relating to prepaid advertising was
$194,610 for the three months ended March 31, 2000 and is included in selling
and marketing expense.
Credit Risks
-------------
The Company maintains its cash accounts primarily in one bank in Florida. The
Federal Deposit Insurance Corporation insures accounts to $100,000. The Company
s accounts occasionally exceed the insured amount.
Estimates
---------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Principles of Consolidation
-----------------------------
The consolidated financial statements include the accounts of Reliant
Interactive Media Corporation (Reliant), Kevin Harrington Enterprises, Inc.
(KHE) (a wholly-owed subsidiary), TPH Marketing, Inc. (TPH) (a wholly-owned
subsidiary), and Cigar Television Network, Inc. (CTN) (a wholly-owned
subsidiary). All significant intercompany accounts and transactions have been
eliminated in the consolidation.
<PAGE>
RELIANT INTERACTIVE MEDIA CORPORATION
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 2000 and December 31, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
-------------
Under the provisions of SFAS No. 109, the Company s policy is to provide
deferred income taxes related to property and equipment, inventories, net
operating losses and other items that result in differences between the
financial reporting and tax basis of assets and liabilities.
No provision for federal income taxes has been made at March 31, 2000 due to
accumulated operating losses. The Company has accumulated approximately
$2,000,000 of net operating losses as of March 31, 2000, which may be used to
reduce taxable income and income taxes in future years. The use of these losses
to reduce future income taxes will depend on the generation of sufficient
taxable income prior to the expiration of the net operation loss carryforwards.
Accordingly, a valuation allowance has been provided for the net operating
losses in full. The carryforwards expire in 2019. KHE and CTN operated as S
corporations prior to their acquisition in 1998. The results of their
operations since acquisition have been included in the net operating income at
March 31, 2000.
Revenue Recognition
--------------------
Revenue is recognized upon shipment of goods to the customer. The Company has
adopted a returns policy whereby the customer can return any goods received
within 30 days of receipt for a full refund. The Company makes an allowance for
returns based on past history and experience. At March 31, 2000 and December
31, 1999, the allowance was $707,799 and $462,677, respectively.
Restricted Cash
----------------
The Company uses the services of an independent fulfillment center (the Center)
to receive and process orders for the Company. The Center collects payments
from charge cards or checks. The Center has set up a cash reserve for potential
charge card chargebacks and returns of product for refund. The chargeback
reserve is 3% of all charge card sales and any chargebacks are credited out of
this reserve. The reserve for returns is 7% on all sales and any returns are
refunded out of this reserve. The total cash reserved at March 31, 2000 and
December 31, 1999 was $1,112,715 and $983,795, respectively, and has been
classified as restricted cash.
Deferred Stock Offering Costs
--------------------------------
Deferred stock offering costs are recorded at cost. The costs will be charged
to paid-in capital upon completion of the offering.
NOTE 2 - REVERSE STOCK SPLIT
On March 23, 1999, the Company completed a reverse stock split on a 1 share for
5 share basis. No shareholder was reduced to less than 100 shares. All
references to shares issued and outstanding have been restated to reflect the
reverse stock split.
<PAGE>
RELIANT INTERACTIVE MEDIA CORPORATION
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 2000 and December 31, 1999
NOTE 3 - COMMITMENTS AND CONTINGENCIES
Employment Agreements
----------------------
The Company has entered into an employment agreement with Kevin Harrington, CEO
of the Company. Mr. Harrington will receive an annual salary of $120,000 and it
will increase by $12,000 each year over the life of the agreement. In addition,
Mr. Harrington shall receive 100,000 shares of the Company s common stock for
each $10,000,000 in gross revenues of the Company with a maximum of 3,000,000
shares to be issued. No shares have been issued at March 31, 2000 as a result
of this revenue performance bonus. The employment agreement ends on December 1,
2003.
The Company has entered into an employment agreement with Tim Harrington,
President of the Company. Mr. Harrington will receive an annual salary of
$120,000 and it will increase by $12,000 each year over the life of the
agreement. In addition, Mr. Harrington shall receive 100,000 shares of the
Company s common stock for each $10,000,000 in gross revenues of the Company
with a maximum of 2,000,000 shares to be issued. No shares have been issued at
March 31, 2000 as a result of this revenue performance bonus. The employment
agreement ends on December 1, 2003.
The Company has entered into an employment agreement with Mel Arthur, Executive
Vice President of the Company. Mr. Arthur will receive an annual salary of
$120,000. In addition, Mr. Arthur shall receive 100,000 shares of the Company s
common stock for each $10,000,000 in gross revenues of the Company with a
maximum of 900,000 shares to be issued. No shares have been issued at March 31,
2000 as a result of this revenue performance bonus. The employment agreement
ends on December 31, 2003.
Office Lease
-------------
The Company entered into a five (5) year non-cancelable office lease beginning
March 1, 2000. Payments are currently $13,422 per month through August 2000 and
increase to $14,902 in September 2000. Future minimum lease payments under the
lease are as follows:
Year ending Operating
December 31, Lease
- --------------------------------------------------------------------------------
2000 $ 140,143
2001 185,304
2002 193,079
2003 200,854
2004 208,629
2005 and thereafter 34,988
================================================================================
Total lease payments $ 962,997
================================================================================
<PAGE>
RELIANT INTERACTIVE MEDIA CORPORATION
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 2000 and December 31, 1999
NOTE 4 - RECEIVABLES - OTHER
The Company uses the services of a fulfillment center (Center) located in
Dallas, Texas. The Center receives, processes and ships orders on behalf of the
Company. The Center also collects payment on the products it sells for the
Company. At March 31, 2000 and December 31, 1999, the Center owed the Company
$1,348,523 and $800,076, respectively, resulting from payments received less
amounts due the Center for the services it rendered to the Company.
NOTE 5 - EQUITY TRANSACTIONS
During the first quarter of 1999, the Company sold 248,000 post-split shares of
its common stock for $390,000 or an average price of $1.57 per share. The
Company also issued 38,200 post-split shares of its common stock for services
rendered, valued at $47,750 or $1.25 per share. The shares were valued at the
market price of the stock at the time of issuance.
During the second quarter of 1999, the Company sold 600,000 shares of its common
stock for $300,000 or $0.50 per share. In addition, the Company sold 250,000
shares of its common stock to a related company for $250,000 or $1.00 per share.
The Company also issued 25,500 shares of its common stock for services rendered,
valued at $12,750 or $0.50 per share, the market price of the stock at the time
of issuance.
During the third quarter of 1999, the Company issued 100,000 shares of its
common stock for services rendered, valued at $50,000 or $0.50 per share, the
market price of the stock at the time of issuance.
During the fourth quarter of 1999, the Company issued 175,000 shares of its
common stock for services rendered, valued at $87,500 or $0.50 per share, the
market price of the stock at the time of issuance.
On May 3, 1999, the Company acquired TPH Marketing, Inc. (TPH). TPH s two (2)
shareholders are the Company s CEO and his brother, making this a related party
transaction. The Company acquired 100% of TPH and TPH became a wholly-owned
subsidiary. The Company issued 1,500,000 post-split shares of its common stock
in the acquisition. The shares were valued at $750,000 or $0.50 per share, the
market price of the stock at the time of the acquisition. TPH had no financial
statements or assets and liabilities at the time of acquisition. The essence of
the arrangement was to provide Kevin Harrington and Tim Harrington additional
compensation in the form of common stock through the purchase of TPH. As a
result, the shares are being shown as issued for compensation expense with a
charge to operating expenses in the amount of $750,000.
<PAGE>
RELIANT INTERACTIVE MEDIA CORPORATION
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 2000 and December 31, 1999
NOTE 5 - EQUITY TRANSACTIONS (Continued)
During the first quarter of 2000, the Company issued 35,000 shares of its common
stock for services rendered, valued at $57,750 or $1.65 per share, the market
price of the stock at the time of issuance. In addition, three shareholders of
the Company withdrew $138,500 against capital previously contributed by them to
the Company. The original contributions were recorded as additional paid-in
capital and the withdrawals are a reduction in the same account.
NOTE 6 - NOTES PAYABLE - RELATED PARTIES
Notes payable - related parties consisted of the following:
March 31, December 31,
2000 1999
- --------------------------------------------------------------------------------
Note payable to a shareholder, unsecured,
interest at 8.0%, interest payments due quarterly
beginning March 31, 1999, principal balance due
December 31, 2000. $ 35,156 $ 35,156
Note payable to a shareholder, unsecured, interest
at 8.0%, interest payments due quarterly beginning
March 31, 1999, principal balance due December
31, 2000. 50,000 50,000
Note payable to a related company, unsecured,
interest at 10%, principal and interest balance
due on demand. 125,000 125,000
Note payable to a related company, unsecured,
interest at 10%, principal and interest balance
due on demand. 100,000 100,000
Note payable to a related company, unsecured,
interest at 10%, principal and interest balance
due June 1, 2000. 50,000 50,000
Total notes payable - related parties 360,156 360,156
Less: current portion (360,156) (360,156)
Long-term notes payable-related parties $ 0 $ 0
Maturities of notes payable - related parties are as follows:
Year Ending
March 31,
- --------------------------------------------------------------------------------
2001 $ 360,156
Thereafter 0
- --------------------------------------------------------------------------------
Total $ 360,156
<PAGE>
RELIANT INTERACTIVE MEDIA CORPORATION
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 2000 and December 31, 1999
NOTE 7 - NOTES PAYABLE
Notes payable consisted of the following:
March 31, December 31,
2000 1999
- --------------------------------------------------------------------------------
Note payable to Nations Bank, secured by stock,
interest at 10%, interest payments due monthly,
principal balance due on demand. $ 39,724 $ 39,724
Note payable to a company, unsecured, interest
at 8.0%, interest payments due monthly, principal
balance due July 8, 2000. 72,715 72,715
Total notes payable 112,439 112,439
Less: current portion (112,439) (112,439)
Long-term notes payable $ 0 $ 0
Maturities of notes payable are as follows:
Year Ending
March 31,
- --------------------------------------------------------------------------------
2001 $ 112,439
Thereafter 0
Total $ 112,439
NOTE 8 - LINE OF CREDIT
The Company has a line of credit with Nations Bank of $150,000. As of March 31,
2000 and December 31, 1999, the balance owed was $-0- and $132,148,
respectively. Borrowings under the line of credit are guaranteed by the Company
and bear interest at 9.5%.
NOTE 9 - FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 (SFAS 107), Disclosures
About Fair Value of Financial Instruments requires disclosure of the fair value
of financial instruments held by the Company. SFAS 107 defines the fair value
of a financial instruments as the amount at which the instrument could be
exchanged in a current transaction between willing parties. The following
methods and assumptions were used to estimate fair value:
The carrying amount of cash equivalents, accounts receivable and accounts
payable approximate fair value due to their short-term nature. The carrying
amount of long-term debt approximates fair value based on the borrowing rate
(10.0%) currently held by the Company for a bank loan.
<PAGE>
RELIANT INTERACTIVE MEDIA CORPORATION
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 2000 and December 31, 1999
NOTE 10 - OUTSTANDING STOCK OPTIONS
The Company applies Accounting Principles Board ( APB ) Option 25, Accounting
for Stock Issued to Employees, and related Interpretations in accounting for
all stock option plans. Under APB Option 25, compensation cost is recognized
for stock options granted to employees when the option price is less than the
market price of the underlying common stock on the date of grant.
FASB Statement 123, Accounting for Stock-Based Compensation ( SFAS No. 123 ),
requires the Company to provide proforma information regarding net income and
net income per share as if compensation costs for the Company s stock option
plans and other stock awards had been determined in accordance with the fair
value based method prescribed in SFAS No. 123. The Company estimates the fair
value of each stock award at the grant date by using the Black-Scholes option
pricing model with the following weighted average assumptions used for grants,
respectively; dividend yield of zero percent for all years; expected volatility
of 32 percent for all years; risk-free interest rates of 10.0 percent and
expected lives of 4.25 years.
Under the accounting provisions of SFAS No. 123, the Company s net income (loss)
would have been changed by the pro forma amounts indicated below:
March 31,
2000 1999
- --------------------------------------------------------------------------------
Net income (loss):
As reported $ 109,968 $ (636,267)
Pro forma (48,666) (636,267)
Basic income (loss) per share:
As reported $ 0.02 $ (0.18)
Pro forma (0.01) (0.18)
During the initial phase-in period of SFAS 123, the effect on pro forma results
are not likely to be representative of the effects on pro forma results in
future years since options vest over several years and additional awards could
be made each year.
A summary of the status of the Company s stock option plans as of March 31, 2000
and changes during the year is presented below:
March 31,
2000
Weighted
Average
Shares Exercise Price
- --------------------------------------------------------------------------------
Outstanding, beginning of period
420,000 $ 5.00
Granted 0 0
Canceled 0 0
Exercised 0 0
0 0
Outstanding, end of period 420,000 $ 5.00
Exercisable, end of period 105,000 $ 2.50
Weighted average fair value of options $ 2.12
<PAGE>
RELIANT INTERACTIVE MEDIA CORPORATION
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 2000 and December 31, 1999
NOTE 10 - OUTSTANDING STOCK OPTIONS (Continued)
- --------------------------------------------------------------------------------
Outstanding Exercisable
Weighted
Average Number Weighted
Number Remaining Excersisable Average
Outstanding Contractual at 3/31/00 Excercise
Exercise Prices Life Price
- --------------------------------------------------------------------------------
$2.50 105,000 4.50 $ 2.50 105,000 $2.50
4.00 105,000 4.50 4.00 0 0
6.00 105,000 4.50 6.00 0 0
7.50 105,000 4.50 7.50 0 0
$2.50-7.50 420,000 4.50 $5.00 105,000 $2.50
The options were granted as compensation and additional bonuses to certain
officers of the Company. These options were issued with an exercise price above
the market value of the stock at the date of issuance.
Additional stock options are available to Kevin Harrington, Tim Harrington and
Mel Arthur based on the stock trading performance of the Company s common stock.
If the Company s shares are trading at a price of $15.00 per share, 256,500
options will be granted at an exercise price of $7.50 per share. If the Company
s shares are trading at a price of $20.00 per share, 256,500 options will be
granted at an exercise price of $7.50 per share. If the Company s shares are
trading at a price of $25.00 per share, 327,000 options will be granted at an
exercise price of $7.50 per share. As of March 31, 2000, the Company s common
stock has not reached any of the performance measurements mentioned above.
<PAGE>
RELIANT INTERACTIVE MEDIA CORPORATION
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
March 31, 2000 and December 31, 1999
NOTE 11 - BASIC AND DILUTED EARNINGS PER SHARE
The computation of basic and diluted income per share of common stock is based
on the weighted average number of shares outstanding during the period of the
financial statements as follows:
For the Three Months Ended For the Three Months Ended
March 31, 2000 March 31, 1999
- --------------------------------------------------------------------------------
Income Shares Per-Share Loss Shares Per-Share
(Numerator(Denominator) Amount (Numerator)(Denominator) Amount
Basic Earnings (Loss) Per Share
Income available to
common stockholders
$109,968 6,314,160 $0.02 $(636,267) 3,500,518 $(0,18)
Effect of Dilutive Securities
Common stock options 0 420,000 0 0 0
Diluted Earnings (Loss) Per Share
Income available to
common stockholders
plus assumed conversions
$ 109,968 6,810,560 $0.02 $(636,267) 3,500,518 $(0.18)
Options to purchase 420,000 shares of common stock were outstanding at March 31,
2000 (see Note 10). These options expire on June 30, 2004 and were issued with
an exercise price equal to or above the market value of the stock at the date of
issuance and have been included in the computation of diluted earnings per
share.
<PAGE>
