SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the quarterly period ended June 30, 2000
or
[ ] Transition Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period from ___________ to ___________
000-26801
(Commission File No.)
MEGAMEDIA NETWORKS, INC.
(Name of Small Business Issuer in Its Charter)
DELAWARE 87-0633630
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
57 WEST PINE STREET, ORLANDO, FLORIDA 32801
(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number, including area code: (407) 245-3636
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 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 [ ]
As of August 14, 2000, there were 14,342,428 shares of issuer's common stock
outstanding.
Transitional small business disclosure format (check one) Yes [ ] No [X]
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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PART I. Financial Information
ITEM 1. Financial Statements...................................................................1
Condensed Consolidated Balance Sheets at June 30, 2000 (Unaudited) and
December 31, 1999............................................................1
Condensed Consolidated Statement of Operations for the Three Months and
Six Months Ended June 30, 2000 and 1999 (Unaudited)..........................2
Condensed Consolidated Statement of Stockholders' Equity for the Six
Months Ended June 30, 2000 (Unaudited).......................................3
Condensed Consolidated Statement of Cash Flows for the Six Months Ended
June 30, 2000 (Unaudited)....................................................4
Notes to Financial Statements.........................................................5
ITEM 2. Management's Discussion of Plan of Operations..........................................8
PART II. Other Information
ITEM 1. Legal Proceedings.....................................................................11
ITEM 2. Changes in Securities and Use of Proceeds.............................................11
ITEM 3. Defaults upon Senior Securities.......................................................11
ITEM 4. Submission of Matters to a Vote of Security Holders...................................11
ITEM 5. Other Information.....................................................................11
ITEM 6. Exhibits and Reports on Form 8-K......................................................11
</TABLE>
FORWARD LOOKING STATEMENTS
Except for the historical information contained herein, this Quarterly
Report may contain forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended (the "Securities Act"), and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Investors are cautioned that forward-looking statements are inherently
uncertain. Actual performance and results of operations may differ materially
from those projected or suggested in the forward-looking statements due to
certain risks and uncertainties, including, without limitation, the ability of
the Company to obtain adequate financing to continue its current operations; the
ability of the Company to successfully enter into strategic relationships and
agreements with additional suppliers; the ability of the Company to increase its
staff; risks associated with the ability to produce revenues through the sales
of advertising, pay-per-view, and subscriptions; the Company's history of
operating losses; dependence on senior management; risks inherent in the
internet industry and the Company's ability to manage growth. The
forward-looking statements contained herein represent the Company's judgment as
of the date of filing this Quarterly Report, and the Company cautions readers
not to place undue reliance on such statements.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEGAMEDIA NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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ASSETS
June 30, December 31,
2000 1999
----------- -----------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 15,046 $ 1,007,211
Accounts receivable, net 349,682 -
Prepaid expenses 365,640 -
----------- -----------
Total current assets 730,368 1,007,211
PROPERTY AND EQUIPMENT, NET 1,695,240 371,648
DEPOSITS 15,411 21,012
WEBSITE DEVELOPMENT, NET 450,473 148,281
GOODWILL, NET 1,532,692 -
----------- -----------
Total assets $ 4,424,184 $ 1,548,152
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,070,545 $ 100,587
Accrued liabilities
Salaries and benefits 201,560 -
Other 81,795 -
Notes payable 1,287,377 -
----------- -----------
Total current liabilities 2,641,277 100,587
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 50,000,000 shares authorized, 14,214,356
shares issued and outstanding, and 113,072 shares subscribed at June
30, 2000, 13,000,010 shares issued and
outstanding at December 31, 1999 143,274 130,000
Additional paid-in capital 6,934,561 2,184,814
Accumulated deficit (5,294,928) (857,249)
Stock subscription receivable - (10,000)
----------- -----------
Total stockholders' equity 1,782,907 1,447,565
----------- -----------
COMMITMENTS - -
----------- -----------
Total liabilities & stockholders' equity $ 4,424,184 $ 1,548,152
=========== ===========
</TABLE>
The Accompanying Notes Are An Integral Part
Of These Condensed Consolidated Financial Statements
1
<PAGE>
MEGAMEDIA NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $ 394,571 $ - $ 438,640 $ -
COST OF SALES 820,903 - 1,301,481 -
------------ ------------ ------------ ------------
GROSS MARGIN (426,332) - (862,841) -
------------ ------------ ------------ ------------
OPERATING EXPENSES
General and administrative 1,476,303 5,311 2,246,812 5,311
Programming and production 239,701 - 433,510 -
Sales and marketing 274,488 - 626,873 -
Research and development 134,341 - 295,891 -
------------ ------------ ------------ ------------
Total operating expenses 2,124,833 5,311 3,603,086 5,311
------------ ------------ ------------ ------------
OPERATING LOSS (2,551,165) (5,311) (4,465,927) (5,311)
OTHER INCOME(EXPENSES)
Interest expense (12,019) - (12,019) -
Interest income 10,166 - 40,267 -
------------ ------------ ------------ ------------
Total other income(expenses) (1,853) - 28,248 -
------------ ------------ ------------ ------------
NET LOSS $ (2,553,018) $ (5,311) $ (4,437,679) $ (5,311)
============ ============ ============ ============
LOSS PER COMMON SHARE $ (0.18) $ (0.00) $ (0.32) $ (0.00)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING 14,277,297 2,428,450 13,953,652 1,477,467
============ ============ ============ ============
</TABLE>
The Accompanying Notes Are An Integral Part
Of These Condensed Consolidated Financial Statements
2
<PAGE>
MEGAMEDIA NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
Common Stock
------------------------------ Stock Total
Number of Par Paid-in Accumulated Subscription Stockholders'
Shares Value Capital Deficit Receivable Equity
---------- -------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1999 13,000,010 $130,000 $2,184,814 $ (857,249) $ (10,000) $ 1,447,565
Issuance of common shares
at $3.00 per share 1,044,346 10,443 3,122,595 -- -- 3,133,038
Issuance of common shares
at $5.00 per share 83,072 831 414,529 -- -- 415,360
Issuance of common shares
for acquisition 200,000 2,000 998,000 -- -- 1,000,000
Stock subscription received -- -- -- -- 10,000 10,000
Stock option compensation -- -- 214,623 -- -- 214,623
Net loss -- -- -- (4,437,679) -- (4,437,679)
---------- -------- ---------- ----------- ----------- -----------
BALANCE, June 30, 2000 14,327,428 $143,274 $6,934,561 $(5,294,928) $ -- $ 1,782,907
========== ======== ========== =========== =========== ===========
</TABLE>
The Accompanying Notes Are An Integral Part
Of These Condensed Consolidated Financial Statements
3
<PAGE>
MEGAMEDIA NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(Unaudited)
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<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(4,437,679) $ (5,311)
Adjustments to reconcile net loss to net cash
flows from operating activities:
Depreciation 197,772 -
Amortization 330,692 -
(Gain)loss on disposition of assets 7,622 -
Noncash compensation from stock options granted 214,623 -
Changes in operating assets and liabilities:
Increase in accounts receivable (349,682) -
Increase in prepaid expenses (62,138) -
Decrease in deposits 5,601 -
Increase in accounts payable 969,957 -
Increase in accrued liabilities 283,355 -
----------- -----------
Net cash flows from operating activities (2,839,877) (5,311)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (620,195) -
Payments for website development (345,504) -
Business combination (1,000,000) -
----------- -----------
Net cash flows from investing activities (1,965,699) -
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 3,549,536 26,268
Proceeds from notes payable 348,642 2,311
Principal payments of notes and debt obligations (84,767) -
----------- -----------
Net cash flows from financing activities 3,813,411 28,579
----------- -----------
NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS (992,165) 23,268
CASH AND CASH EQUIVALENTS - beginning of period 1,007,211 -
----------- -----------
CASH AND CASH EQUIVALENTS - end of period $ 15,046 $ 23,268
=========== ===========
-----------------------------------------------------------------------------------------------
NONCASH FINANCING INVESTING AND ACTIVITIES:
Note payable to finance directors and officers liability insurance $ 303,502 $ -
Note payable to finance business combination 720,000 -
Common stock issued in business combination 1,000,000 -
Common stock issued in exchange for purchase of assets 8,862 -
Compensation from stock options granted 214,623 -
</TABLE>
The Accompanying Notes Are An Integral Part
Of These Condensed Consolidated Financial Statements
4
<PAGE>
MEGAMEDIA NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A - GENERAL
MegaMedia Networks, Inc. (the "Company") was incorporated under the laws
of the state of Delaware on May 27, 1999 and is headquartered in Orlando,
Florida. The Company provides users of the Internet with an online
environment for purchasing specialized on-demand or live pay-per-view
events, music, videos, concerts and services. Through its wholly-owned
subsidiary Titan Hosting, Inc. ("Titan"), the Company also serves as an
Internet service provider and provider of bandwidth to various third
party websites.
The accompanying condensed consolidated balance sheet of MegaMedia
Networks, Inc. as of June 30, 2000, the related condensed consolidated
statement of operations for the three months and six months ended June
30, 2000 and 1999, and the related condensed consolidated statement of
stockholders' equity and statement of cash flows for the six months ended
June 30, 2000 and 1999 are unaudited. In the opinion of management, such
financial statements reflect all adjustments, consisting only of normal
recurring items, necessary to present fairly the financial position of
the Company at June 30, 2000 and the results of operations, stockholders'
equity and cash flows for the three months and six months ended June 30,
2000 and 1999.
Certain reclassifications have been made to the condensed consolidated
balance sheet at December 31, 1999, to conform with classifications used
in the unaudited condensed consolidated balance sheet at June 30, 2000.
In addition, the Company was not required to file a Form 10-QSB for the
period ended June 30, 1999. The Company did not file a Form 10-QSB until
the period ended September 30, 1999, at which time the Company filed as
Amalgamated Entertainment, Inc. On November 29, 1999, the Company's
Certificate of Incorporation was amended to reflect a name change from
Amalgamated Entertainment, Inc. to MegaMedia Networks, Inc.
The accompanying unaudited financial statements as of June 30, 2000, and
for the three months and six months ended June 30, 2000 and 1999 should
be read in conjunction with the Company's audited financial statements
for the year ended December 31, 1999.
The accompanying unaudited financial statements have been prepared
assuming that the Company will continue operations on a going-concern
basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. However, the Company was
in the development stage until March 25, 2000 and Titan did not become
operational until April 14, 2000. On a consolidated basis, the Company
has incurred an accumulated deficit of $5,294,928 as of June 30, 2000.
The Company's ability to continue as a going concern is dependent upon
the attainment of a profitable level of operations. The Company's ability
to attain profitable operations is contingent upon its ability to raise
additional capital to continue the development of its website, acquire
content, build brand name recognition, expand the client base of Titan
and grow its business. The Company is currently soliciting additional
capital in the form of equity to fund its working capital, capital
expenditure and debt service requirements to attain such profitable
operations. However, there is no assurance that the Company will be able
to attain such equity capital and continue as a going concern. If the
Company is unable to secure additional capital, it is likely that its
operations will be impacted in an adverse manner, which would further
hinder its ability to continue as a going concern.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION: The Company's sales revenue for on-demand,
pay-per-view events, and monthly subscriptions are recorded at the time
of viewing, or for the applicable month of the subscription. Advertising
revenues are recorded at such time as the advertisements are viewed,
pursuant to data provided by the Company's own website and that of its
advertisement suppliers. Titan's sales revenue is recorded on a monthly
basis as the Internet or bandwidth service is provided.
5
<PAGE>
MEGAMEDIA NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE C - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
June 30, December 31, Estimated
Category 2000 1999 Lives
----------------------------------- ---------- --------- ---------
<S> <C> <C> <C>
Leasehold improvements $ 122,572 $ 50,531 Lease Term
Office furniture and equipment 256,243 19,309 5-7 years
Computer equipment 1,523,870 313,050 3 years
---------- ---------
Total property and equipment 1,902,685 382,890
Less: Accumulated depreciation (207,445) (11,242)
---------- ---------
Net property and equipment $1,695,240 $ 371,648
========== =========
</TABLE>
On April 14, 2000, the Company, through its wholly-owned subsidiary
Titan, acquired $899,929 of computer equipment from City-Guide ISP, Inc.
("City-Guide"), pursuant to a Purchase and Sale of Assets Agreement among
City-Guide, David Marshlack, Dan Marshlack, Bruce C. Hammil and Mark
Dolan, as shareholders of City-Guide, and the Company and Titan.
NOTE D - NOTES PAYABLE
Effective March 13, 2000, the Company entered into a Premium Finance
Agreement which financed 80% of the Company's directors' and officers'
liability insurance policy. The agreement bears an annual interest rate
of 9.5% and is payable in nine monthly installments beginning June 2,
2000. As of June 30, 2000, the Company owed $270,833 under this
agreement. As of June 30, 2000, the Company's prepaid expenses included
$315,045 related to unamortized directors' and officers' liability
insurance.
Pursuant to a Purchase and Sale of Assets Agreement, dated April 14, 2000
(see "Note C" above), the Company, through its wholly-owned subsidiary
Titan, executed a Convertible Promissory Note (the "Note") for $720,000
to City-Guide. The Note bears an interest rate equal to the lowest
interest rate per annum imputed by the Internal Revenue Service for a
note of this nature, and is payable in monthly payments of $30,000
beginning May 14, 2000. As of June 30, 2000, the Company owed $667,902
under this agreement. The Note is secured by the assets purchased
pursuant to the agreement (see "Note C" above) and six Internet service
agreements assumed by Titan, previously held by City-Guide. The Note and
accrued interest thereon is convertible at any time, at the option of the
holder into shares of common stock at a conversion price equal to $3.00
per share.
On July 6, 2000, the Company executed two Revolving Promissory Notes with
The Orlando Group Downtown LLC, one for $350,000 and one for $150,000
(the "Notes"). The Notes bear interest at a rate equal to the prime rate
announced by AmSouth Bank on the first day of each month, less one-half
of one percent, and are payable on demand. As of June 30, 2000, the
Company owed $348,642 under the first note, and accrued interest of
$1,715. The Notes are secured by all of the Company's accounts,
inventory, equipment and furniture, together with all proceeds and
products thereof, and all books and records and insurance proceeds
relating thereto. At such time as the Company's common stock begins
trading on a recognized trading system, the Notes and accrued interest
thereon are convertible at any time, in whole or in part, at the option
of the holder into shares of common stock. The conversion price is equal
to 80% of the average closing bid price of the common stock on the
principal exchange or trading mechanism on which the common stock is
traded for the three days prior to the receipt of a notice of conversion.
6
<PAGE>
MEGAMEDIA NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE E - STOCKHOLDERS' EQUITY
During the six months ended June 30, 2000, the Company conducted two
private offerings. The first offering, which commenced December 15, 1999,
produced $3,133,038 of additional equity through the private placement of
1,044,346 shares of restricted common stock for $3.00 per share. The
second offering, which commenced March 8, 2000, has produced $490,360 of
additional equity through the private placement of 98,072 shares of
restricted common stock for $5.00 per share. Of the $5.00 shares raised,
$415,360, representing 83,072 shares was received and recorded during the
three months ended June 30, 2000; $75,000, representing 15,000 shares was
received and recorded subsequent to June 30, 2000. This offering expires
September 15, 2000. The shares were included in the earnings per share
calculations as of the date cash was received, however share certificates
representing 113,072 of the shares were issued subsequent to June 30,
2000.
Pursuant to a Purchase and Sale of Assets Agreement, dated April 14, 2000
(see "Note C" above), the Company issued City-Guide 200,000 restricted
shares of common stock. The Company recorded the shares at $1,000,000
based on the $5.00 private placement offering being sold at that time.
Effective June 1, 2000, the Company's Board of Directors adopted the 2000
Stock Option Plan (the "Plan"). The Plan provides the Board of Directors
with the authority to grant to officers, directors, employees and
independent contractors of the Company non-qualified and incentive stock
options to purchase shares of the Company's common stock. The purpose of
the Plan is to advance the interests of the Company by providing an
additional incentive to attract and retain qualified and competent
persons who provide services to the Company and upon whose efforts and
judgement the success of the Company is largely dependent, through the
encouragement of stock ownership in the Company by such persons. Subject
to a few restrictions, the Board of Directors has the authority to
determine the option periods, the option prices, the number of shares of
common stock subject to options granted, and such other terms and
conditions under which options are exercised. To date, the Company has
issued 200,668 non-qualified stock options pursuant to the Plan at option
prices ranging from $2.00 to $5.00. Of the options granted, 25,000 were
exerciseable at June 30, 2000, however, no shares have been exercised.
Pursuant to Accounting Principles Board Opinion No. 25, and Statements of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," the Company is required to record $338,045 of compensation
expense pursuant to the options issued, of which $214,623 has been
recorded at June 30, 2000. The compensation expense was determined based
upon fair values at the date of grant exceeding that of certain option
prices.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION OF PLAN OF OPERATIONS
THE FOLLOWING DISCUSSION OF PLAN OF OPERATIONS SHOULD BE READ IN CONJUNCTION
WITH OUR FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE
IN THIS REPORT. THIS DISCUSSION CONTAINS FORWARD LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THE RESULTS DISCUSSED IN THE FORWARD LOOKING STATEMENTS. FACTORS THAT MIGHT
CAUSE SUCH A DIFFERENCE INCLUDE BUT ARE NOT LIMITED TO THOSE DISCUSSED BELOW AND
IN OTHER SECTIONS OF THIS REPORT.
OVERVIEW
MegaMedia Networks, Inc. is a global Internet broadcast company
specializing in on-demand delivery of high-quality movie, television, music and
sports entertainment programming to consumers via our website at
WWW.MEGACHANNELS.COM. The Company launched its site on March 25, 2000.
Additional upgraded releases of the site will follow in 2000.
Due to the fact that the Company did not start operations until late
March 2000 and the rapidly evolving nature of the Internet industry, the Company
believes that financial results are not necessarily meaningful and should not be
relied upon as an indication of future performance. To date, we have incurred
substantial costs to develop our technology. We will continue to incur costs to
develop our website, acquire content, build brand recognition and grow our
business. We may also incur significant additional costs with the possible
acquisitions of other businesses and technologies relevant to our growth
strategy. These costs may not correspond with a meaningful increase in revenues
in the short term.
In that effort, on April 14, 2000, the Company, through its wholly-owned
subsidiary Titan Hosting Inc., acquired certain assets of City-Guide ISP, Inc.,
pursuant to a Purchase and Sale of Assets Agreement (the "Purchase Agreement"),
among City-Guide, David Marshlack, Dan Marshlack, Bruce C. Hammil and Mark
Dolan, as shareholders of City-Guide (the "Shareholders" and, collectively with
City-Guide, the "Seller"), and the Company and Titan. Pursuant to the Purchase
Agreement, as consideration for the acquisition of the assets described below,
the Company delivered the following to the Seller on April 14, 2000: (i)
$1,000,000 cash, which the Company paid out of its working capital, (ii) a
convertible promissory note issued by Titan in favor of City-Guide in the
principal amount of $720,000, bearing interest at the lowest rate per annum
imputed by the Internal Revenue Service for a note of this nature, payable at
$30,000 per month including interest, and the outstanding principal balance of
which shall be convertible at any time by the Seller into shares of common stock
of the Company at a conversion rate of $3.00 per share (the "Note"), and (iii)
200,000 restricted shares of common stock of the Company. Titan's obligations
under the Note are secured by (a) a security agreement entered into between
Titan and City-Guide, pursuant to which Titan grants City-Guide a security
interest in certain of the assets acquired under the Purchase Agreement, and (b)
an unconditional corporate guaranty of the Company, pursuant to which the
Company guarantees the obligations of Titan under the Note. The Company also
entered into a registration rights agreement with the Shareholders providing for
certain piggy-back registration rights for the 200,000 shares of common stock
referred to in clause (iii) above.
In addition, pursuant to the Purchase Agreement, as further
consideration for the acquisition of the assets, Titan (i) subleased from the
Seller an office lease comprised of approximately 3,586 square feet of office
space, with such lease expiring October 31, 2001 and having monthly lease
payments of $3,828, and (ii) assumed certain obligations of the Seller with
respect to certain equipment leases.
The assets acquired by Titan are comprised of customer contracts and
computer and related equipment, the value of which were determined by mutual
agreement of the Company and the Seller with reliance on, among other
considerations, an independent appraisal of the assets effective March 27, 2000.
Mark. R. Dolan, former General Counsel and Secretary of the Company, is
the Secretary of City-Guide and, as of the date of the Purchase Agreement, was a
principal shareholder of City-Guide.
8
<PAGE>
OVERVIEW (CONTINUED)
Over the next 12 months, the Company is focused on finalizing strategic
relationships for additional content, improving website appeal and utility,
increasing advertising rates, expanding the client base of Titan and developing
strategic alliance partners. Management is currently building staff as needed to
accommodate the anticipated growth. Content acquisition will be pursued through
acquisitions, partnerships, marketing/distribution agreements and license
agreements with studios and independent owners. Site development is an ongoing
activity that incorporates consumer feedback, site performance and technical
development to refine and improve the consumer experience. Improved sales tools,
customer data history and an expanded sales force are the focus of efforts to
drive higher advertising rates and expand the client base of Titan. Strategic
partnerships with key suppliers, consumer marketers and others will be developed
to lower costs, increase revenue and bolster brand stature. Development of
cost-effective network capacity will continue to ensure quality delivery of
content to the consumer.
The ability of the Company to realize its plans over the next 12 months
involves numerous risks and uncertainties, some of which are the Company's
ability to obtain additional financing; the ability of the Company to attract
and retain technical, marketing and other personnel; the Company's ability to
manage growth effectively; the Company's ability to effectively compete against
competitors who have more resources; and the Company's ability to successfully
enter into strategic relationships with additional suppliers (including studios
and independent film companies).
RESULTS OF OPERATIONS
Three Months Ended June 30, 2000 and 1999
OVERVIEW. For the second quarter of 2000, the Company incurred a net
loss of $2,553,000. The Company was not in operations during the second quarter
of 1999, and therefore only incurred corporate general and administrative costs
totaling $5,311.
SALES. Sales for the second quarter were $395,000. The revenue consists
primarily of advertising revenues and Titan's bandwidth service revenues.
COST OF SALES. Cost of sales for the second quarter of 2000 were
$821,000. These expenses are made up of bandwidth expense, Internet traffic
expense and advertising sales commissions. The Company has an exclusive
arrangement with Nexttraffic, Inc., an aggregator of Internet traffic, which
acts as a "collection conduit" of traffic from high profile Internet websites
from around the globe to deliver visitors to the Company's portal. However, the
Company only pays for such traffic if it is successfully delivered to the
MegaChannels.com website.
OPERATING EXPENSES. Operating expenses, which consist primarily of
salaries and related personnel expenses, rent, travel, depreciation,
amortization and marketing expenses, were $2,125,000 for the second quarter of
2000.
OTHER INCOME AND EXPENSES. Other expense for the three months ended June
30, 2000 was $2,000, representing interest income earned on overnight deposits
of $12,000, offset by interest expense of $10,000.
Six Months Ended June 30, 2000 and 1999
OVERVIEW. For the first six months of 2000, the Company incurred a net
loss of $4,438,000. However, the Company was in the development stage until
March 25, 2000, when it launched its website, and Titan had no operations until
the purchase of the City-Guide assets on April, 14, 2000. The Company was not in
operations during the first six months 1999, and therefore only incurred
corporate general and administrative costs totaling $5,311.
SALES. Sales for the first six months of 2000 were $439,000, however,
the Company did not begin incurring revenue until March 25, 2000 when it
launched its website, and Titan did not become active until April 14, 2000, as
discussed above. The revenue consists primarily of advertising revenues and
Titan's bandwidth service revenues.
9
<PAGE>
RESULTS OF OPERATIONS (CONTINUED)
COST OF SALES. Cost of sales for the first six months of 2000 were
$1,301,000. These expenses are made up of bandwidth expense, Internet traffic
expense and advertising sales commissions. Although the Company did not
officially launch its website until March 25, 2000, the site was operational
during February and March, therefore the Company was incurring expense for both
bandwidth and Internet traffic during this time. The Company has an exclusive
arrangement with Nexttraffic, Inc., an aggregator of Internet traffic, which
acts as a "collection conduit" of traffic from high profile Internet websites
from around the globe to deliver visitors to the Company's portal. However, the
Company only pays for such traffic if it is successfully delivered to the
MegaChannels.com website.
OPERATING EXPENSES. Operating expenses, which consist primarily of
salaries and related personnel expenses, rent, travel, depreciation,
amortization and marketing expenses, were $3,603,000 for the first six months of
2000.
OTHER INCOME AND EXPENSES. Other income for the six months ended June 30,
2000 was $28,000, representing interest income earned on overnight deposits of
$40,000, offset by interest expense of $12,000.
INCOME TAXES. For the six months ended June 30, 2000, the Company had an
operating loss, therefore, there has been no provision made for income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements have been significant. Since its
inception, the Company has financed development and operations through the sale
of stock in the form of private placements. As of August 14, 2000, the Company
had raised a total of approximately $5,938,000 primarily in the form of three
private placement offerings since May 27, 1999. In addition, beginning in the
second quarter of 2000, the Company has financed its operations through the
extension of credit from The Orlando Group Downtown LLC (see "Note D" above). At
August 14, 2000, they have extended the Company $595,000 by extending the
Company an additional line of credit of $100,000 subsequent to June 30, 2000.
The Company scaled back its operations during the second quarter of 2000 in an
effort to conserve cash, without jeopardizing its long-term growth and ability
to attain profitable operations. In addition, the Company continues to pursue
additional capital to fund its working capital, capital expenditure, and debt
service requirements. However, there can be no assurance that we will be able to
obtain additional funding through the issuance of additional equity securities
through private placement offerings, the continued extension of credit from The
Orlando Group Downtown LLC, or through other means, or that the Company will be
able to continue its operations as a going concern.
YEAR 2000
As of August 14, 2000, the Company had not experienced any immediate
adverse impact on our operations from the transition to the Year 2000. The
Company cannot make any assurances, however, that our operations have not been
affected in a manner that is not yet apparent or in a manner that will arise in
the future. In addition, certain computer programs that were date sensitive to
the Year 2000 may not have been programmed to process the Year 2000 as a leap
year, and negative effects from this remain unknown. As a result, the Company
will continue to monitor our Year 2000 compliance and the Year 2000 compliance
of our suppliers and customers. However, the Company does not anticipate any
Year 2000 problems that are reasonably likely to have a material adverse effect
on our operations.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to, nor is it aware of, any legal
proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three months ended June 30, 2000, the Company issued
23,667 shares of common stock to 2 accredited investors in a
private placement at $3.00 per share for gross proceeds of
$71,003. The Company also sold 83,072 shares of common stock to 8
accredited investors in a private placement at $5.00 per share for
gross proceeds of $415,630. The shares were issued in reliance
upon an exemption from registration under Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act") and/or
Rule 506 of Regulation D promulgated under the Securities Act. The
investors were provided information about the Company or such
information was made available to them, and they were afforded
opportunities to ask questions of representatives of the Company
regarding the information provided or made available. The
investors confirmed in writing their investment intent, and the
certificates for the securities bear a legend accordingly. The
offers and sales were made by officers and directors of the
Company without compensation for same.
The Company also issued 200,000 restricted shares of common stock
to City-Guide ISP, Inc. ("City-Guide"), pursuant to a Purchase and
Sale of Assets Agreement, dated April 14, 2000, between the
Company, its wholly-owned subsidiary Titan Hosting, Inc.,
City-Guide, and David Marshlack, Dan Marshlack, Bruce C. Hammil
and Mark Dolan, as shareholders of City-Guide. The Company
executed a registration rights agreement providing for certain
piggy-back registration rights for the 200,000 shares of common
stock. The shares were issued in reliance upon an exemption from
registration under Section 4(2) of the Securities Act and/or Rule
506 of Regulation D promulgated under the Securities Act. The
investors were provided information about the Company or such
information was made available to them, and they were afforded
opportunities to ask questions of representatives of the Company
regarding the information provided or made available. The
investors confirmed in writing their investment intent, and the
certificates for the securities bear a legend accordingly.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the
Company during the period covered by this report.
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
On April 3, 2000, the Company filed a Form 8-K/A dated October 7,
1999 to restate its financial statements for the period ended
September 30, 1999 to reflect corrected valuation of 7,500 chares
of common stock issued by the Company.
On April 21, 2000, the Company filed a Form 8-K dated April 17,
2000, and two Forms 8-K/A on May 3, 2000 and May 11, 2000,
regarding a change in the Company's certifying accountant.
On April 27, 2000, the Company filed a Form 8-K dated April 14,
2000 reporting the acquisition by the Company's wholly-owned
subsidiary, Titan Hosting, Inc., a Delaware corporation, of
certain assets of City-Guide ISP, Inc.
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6(A). EXHIBITS
EXHIBIT DESCRIPTION
2.1 Agreement and Plan of Reorganization, dated October 6, 1999, among the
Company, MegaMedia-Nevada and MegaMedia-Nevada stockholders. (1)
3.1 Articles of Incorporation of ACE Investments, Inc., a Utah corporation,
filed March 26, 1985. (2)
3.2 By-Laws of the Company. (2)
3.3 Articles of Amendment to the Articles of Incorporation changing the
Company's name to "Matlock Communications, Inc.," filed August 28,
1986. (2)
3.4 Articles of Amendment to the Articles of Incorporation changing the
Company's name to "Persimmon Corporation," filed June 28, 1989. (2)
3.5 Certificate of Incorporation of Amalgamated Entertainment, Inc., a
Delaware corporation, filed December 20, 1991. (2)
3.6 Articles of Merger of Persimmon Corporation into Amalgamated
Entertainment, Inc., filed January 29, 1992. (2)
3.7 Certificate of Amendment to the Company's Certificate of Incorporation
with respect to a 30-1 reverse stock split, filed April 6, 1999. (2)
3.8 Certificate of Amendment to the Company's Certificate of Incorporation
with respect to a 2.5-1 stock split, filed September 13, 1999. (3)
3.9 Certificate of Amendment to the Company's Certificate of Incorporation
to change the Company's name to "MegaMedia Networks, Inc. filed
November 29, 1999. (4)
4.1 Stock Option Agreement, dated June 24, 1999, between the Company and
John P. Chambers. (4)
4.2 Stock Option Agreement, dated July 5, 1999, between the Company and
Mark R. Dolan. (4)
4.3 Stock Option Agreement, dated January 5, 2000, between the Company and
William A. Mobley, Jr. (4)
4.4 Stock Option Agreement, dated January 5, 2000, between the Company and
Mark R. Dolan. (4)
4.5 MegaMedia Networks, Inc. 2000 Stock Option Plan, effective June 1,
2000 *
10.1 Lease Agreement, dated June 14, 1999, between Kyung Park and Bang Park,
landlords, and the Company. (4)
10.1.1 Addendum to Lease Agreement, dated October 6, 1999. (4)
10.2 Product Development Agreement, dated January 7, 2000, between the
Company and Nextelligent, Inc. (4)
10.3 Internet Traffic Agreement dated January 7, 2000 between the Company
and NextTraffic, Inc. (4)
10.4 Consulting Agreement, dated January 7, 2000, between the Company and
William A. Mobley, Jr. (4)
10.5 Employment Agreement, dated June 24, 1999, between the Company and John
P. Chambers, Jr. (4)
10.6 Escrow Agreement, dated as of December 29, 1999, among the Company,
certain stockholders of the Company and Christopher P. Flannery, as
escrow agent ("Flannery"). (4)
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EXHIBIT DESCRIPTION
10.7 Purchase and Sale of Assets Agreement, dated April 14, 2000, among
City-Guide ISP, Inc., David Marshlack, Dan Marshlack, Bruce C. Hammil,
Mark R. Dolan and Titan Hosting, Inc. and MegaMedia Networks, Inc. (5)
10.8 Convertible Promissory Note, dated April 14, 2000, issued by Titan
Hosting, Inc. in favor of City-Guide ISP, Inc. in the principal amount
of $720,000. (5)
10.9 Security Agreement, dated April 14, 2000, between Titan Hosting, Inc.
and City-Guide ISP, Inc. (5)
10.10 Unconditional Corporate Guaranty, dated April 14, 2000, executed by
MegaMedia Networks, Inc. 5)
10.11 Subscription and Registration Rights Agreement, dated April 14, 2000,
between MegaMedia Networks, Inc. and City-Guide ISP, Inc. (5)
10.12 Employment Agreement, dated January 10, 2000, between the Company and
David A. Gust, and exhibits thereto. (7)
10.13 Employment Agreement, dated February 7, 2000, between the Company and
Steven H. Noble, III, and Stock Option Agreements as exhibits thereto.
(7)
10.14 Employment Agreement, dated March 1, 2000, between the Company and Paul
J. Turcotte, and exhibits thereto. (7)
10.15 Addendum (Amendment) to Employment Agreement, dated January 10, 2000,
between the Company and David A. Gust, and exhibits thereto, dated June
9, 2000. *
10.16 Addendum (Amendment) to Employment Agreement, dated February 7, 2000,
between the Company and Steven H. Noble, III, and Stock Option
Agreements as exhibits thereto, dated June 21, 2000. *
10.17 Revolving Promissory Note, dated July 6, 2000, between the Company and
The Orlando Group Downtown LLC *
10.18 Security Agreement, dated July 6, 2000, between the Company and The
Orlando Group Downtown LLC *
10.19 Revolving Promissory Note, dated July 6, 2000, between the Company and
The Orlando Group Downtown LLC *
10.20 Security Agreement, dated July 6, 2000, between the Company and The
Orlando Group Downtown LLC *
16.1 Letter on unaudited interim financial information (6)
21.1 List of Subsidiaries. (4)
27.1 Financial Data Schedule.*
-------------------------
(1) Incorporated by reference and filed as an exhibit to the Company's
Current Report on Form 8-K, filed with the Securities and Exchange
Commission on October 26, 1999.
(2) Incorporated by reference and filed as an exhibit to the Company's
Registration Statement on Form 10SB, filed with the Securities and
Exchange Commission on July 22, 1999.
(3) Incorporated by reference and filed as an exhibit to the Company's
Quarterly Report on Form 10QSB, filed with the Securities and Exchange
Commission on October 12, 1999.
(4) Incorporated by reference and filed as an exhibit to the Company's Annual
Report on Form 10KSB, filed with the Securities and Exchange Commission
on April 14, 2000.
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(5) Incorporated by reference and filed as an exhibit to the Company's
Current Report on Form 8-K, filed with the Securities and Exchange
Commission on April 27, 2000.
(6) Incorporated by reference and filed as an exhibit to the Company's
amended Current Report on Form 8-K/A filed with the Securities and
Exchange Commission on May 11,2000.
(7) Incorporated by reference and filed as an exhibit to the Company's
Quarterly Report on Form 10QSB, filed with the Securities and Exchange
Commission on June 2, 2000.
* Filed herewith.
6(B). REPORTS ON FORM 8-K
The Company did not file a Current Report on Form 8-K in the quarter
ended June 30, 2000.
14
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
MEGAMEDIA NETWORKS, INC.
(Registrant)
Date: August 14, 2000 BY: /s/ DAVID A. GUST
--------------------------------------
David A. Gust,
Chief Executive Officer
Date: August 14, 2000 BY: /s/ STEPHEN H. NOBLE, III
--------------------------------------
Stephen H. Noble, III,
Chief Financial Officer
(Principal Financial and Accounting
Officer)
15
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EXHIBIT INDEX
EXHIBIT DESCRIPTION
4.5 MegaMedia Networks, Inc. 2000 Stock Option Plan, effective June 1,
2000
10.15 Addendum (Amendment) to Employment Agreement, dated January 10, 2000,
between the Company and David A. Gust, and exhibits thereto, dated June
9, 2000
10.16 Addendum (Amendment) to Employment Agreement, dated February 7, 2000,
between the Company and Steven H. Noble, III, and Stock Option
Agreements as exhibits thereto, dated June 21, 2000
10.17 Revolving Promissory Note, dated July 6, 2000, between the Company and
The Orlando Group Downtown LLC
10.18 Security Agreement, dated July 6, 2000, between the Company and The
Orlando Group Downtown LLC
10.19 Revolving Promissory Note, dated July 6, 2000, between the Company and
The Orlando Group Downtown LLC
10.20 Security Agreement, dated July 6, 2000, between the Company and The
Orlando Group Downtown LLC
