<PAGE>
UNITED STATES
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 September 30, 2000
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from__________to____________.
Commission file number 000-28327
ENTERTAINMENT BOULEVARD, INC.
(Exact Name of Registrant as Specified in its Charter)
Nevada 980182797
----------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12910 Culver Boulevard, Los Angeles, California 90066
----------------------------------------------------------
(Address of principal executive offices)
(310) 578-5404
---------------------------
(Issuer's telephone number)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for at least the past
90 days.
Yes /X/ No / /
APPLICABLE ONLY TO CORPORATE ISSUERS
As of November 9, 2000, there were 24,803,634 shares of common stock, $0.001 par
value, outstanding.
Transitional Small Business Disclosure Format (check one): Yes / / No /X/
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
ENTERTAINMENT BOULEVARD, INC. AND SUBSIDIARY,
DBA VIDNET
(A DEVELOPMENT STAGE COMPANY)
CONTENTS
DECEMBER 31, 1999 AND SEPTEMBER 30, 2000 (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS Page
<S> <C>
Condensed Consolidated Balance Sheets 2-3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5-6
Notes to Condensed Consolidated Financial Statements 7-11
</TABLE>
-1-
<PAGE>
ENTERTAINMENT BOULEVARD, INC. AND SUBSIDIARY, DBA VIDNET
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND SEPTEMBER 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
September 30, December 31,
2000 1999
-------------- --------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 355,046 $ 429,408
Accounts Receivable 115,745 222,324
Prepaid Expenses 73,217 8,496
Deposits 133,171 --
-------------- --------------
Total current assets 677,179 660,228
NOTE RECEIVABLE - RELATED PARTY -- 400,000
FURNITURE AND EQUIPMENT, NET 801,931 419,549
DEPOSITS -- 26,700
DEBT ISSUANCE, NET -- 110,000
DEFERRED FINANCING COSTS -- 1,735,583
-------------- --------------
TOTAL ASSETS $ 1,479,110 $ 3,352,060
============== ==============
</TABLE>
The accompaning notes are an integral part of these
financial statements.
-2-
<PAGE>
ENTERTAINMENT BOULEVARD, INC. AND SUBSIDIARY, DBA VIDNET
( A DEVELOPMENT STAGE COMPANY )
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND SEPTEMBER 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
September 30, December 31,
2000 1999
-------------- -------------
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Short-term debt $ -- $ 1,854,095
Note payable - related party -- 400,000
Convertible notes -- 500,000
Accounts payable 3,100,368 589,241
Accrued liabilities 1,682,380 299,401
Deferred revenues -- 67,000
-------------- -------------
Total current liabilities 4,782,748 3,709,737
-------------- -------------
STOCKHOLDERS' DEFICIT
Series A preferred stock, $0.01 par value
1,000,000 shares authorized 0 (unaudited)
and 2,000 shares issued and outstanding -- 20
Common stock, $0.001 par value
50,000,000 shares authorized
24,887,967 (unaudited) and 12,477,500 shares
issued and outstanding 24,888 12,478
Deferred compensation (29,476) (252,685)
Additional paid-in capital 83,421,976 14,899,249
Deficit accumulated during the development stage (86,721,026) (15,016,739)
-------------- -------------
Total stockholders' deficit (3,303,638) (357,677)
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 1,479,110 $ 3,352,060
============== =============
</TABLE>
The accompanying notes are an integral part of
these financial statements.
-3-
<PAGE>
ENTERTAINMENT BOULEVARD, INC. AND SUBSIDIARY, DBA VIDNET
( A DEVELOPMENT STAGE COMPANY )
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (UNAUDITED) AND
FOR THE PERIOD FROM APRIL 1, 1997 (INCEPTION) TO SEPTEMBER 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
For the Period
For the Three Months Ended For the Nine Months Ended From April 1, 1997
September 30, September 30, (Inception) to
---------------------------- --------------------------- September 30,
2000 1999 2000 1999 2000
----------- ----------- ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
REVENUE $ 110,421 $ 12,715 $ 318,989 $ 12,715 $ 587,028
OPERATING EXPENSES 4,400,612 3,036,261 16,303,498 4,251,928 25,413,882
----------- ----------- ------------ ------------ ------------
LOSS FROM OPERATIONS (4,290,191) (3,023,546) (15,984,509) (4,239,213) (24,826,854)
----------- ----------- ------------ ------------ ------------
OTHER (INCOME) EXPENSE
Interest expense 318 27,006 209,609 37,690 267,803
Interest income (14,565) -- (88,524) -- (88,524)
Loss on impairment of deferred
license fees 2,687,781 -- 2,687,781 -- 2,687,781
Lease cancellation costs 1,500,000 -- 1,500,000 -- 1,500,000
Loss on uncollectible note
receivable - related party -- 736,000 -- 736,000
Loss on uncollectible note receivable 666,667 -- 666,667 -- 666,667
Loss on disposition of asset -- -- 546,867 -- 546,867
Loss on impairment of fixed assets 671,828 -- 671,828 -- 671,828
Financing Costs -- 699,800 35,682,513 5,296,800 41,797,750
----------- ----------- ------------ ------------ ------------
Total other 5,512,029 726,806 42,612,741 5,334,490 48,786,172
----------- ----------- ------------ ------------ ------------
NET LOSS (9,802,220) (3,750,352) (58,597,250) (9,573,703) (73,613,026)
PREFERRED STOCK DIVIDENDS -- -- 13,108,000 -- 13,108,000
----------- ----------- ------------ ------------ ------------
NET LOSS AVAILABLE TO COMMON
STOCKHOLDERS $(9,802,220) $(3,750,352) $(71,705,250) $ (9,573,703) $(86,721,026)
=========== =========== ============ ============ ============
BASIC AND DILUTED LOSS AVAILABLE TO
COMMON STOCKHOLDERS PER SHARE $ (0.40) $ (0.31) $ (3.40) $ (0.82) $ (9.11)
=========== =========== ============ ============ ============
WEIGHTED-AVERAGE SHARES
OUTSTANDING 24,745,110 12,230,907 21,094,780 11,687,086 9,517,332
=========== =========== ============ ============ ============
</TABLE>
The accompaning notes are an integral
part of these financial statements
-4-
<PAGE>
ENTERTAINMENT BOULEVARD, INC. AND SUBSIDIARY, DBA VIDNET
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (UNAUDITED) AND
FOR THE PERIOD FROM APRIL 1, 1997 (INCEPTION) TO SEPTEMBER 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
For the
Period from
April 1,
For the 1997
Nine Months Ended (Inception) to
September 30, September 30,
2000 1999 2000
----------------- ----------- ---------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(58,597,250) $ (9,573,703) $(73,613,989)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 424,349 31,038 518,423
Loss on impairment of deferred license fees 2,687,781 -- 2,687,781
Loss on disposition of asset 546,867 -- 546,867
Loss on uncollectible notes receivable, related party 736,000 -- 736,000
Loss on impairment of fixed assets 671,828 -- 671,828
Loss on uncollectible notes receivable 666,667 -- 666,667
Lease cancellation costs 1,500,000 -- 1,500,000
Amortization of deferred licensing fees 5,027,097 -- 5,027,097
Other non-cash charges 634,669 8,656 634,669
Stock options and warrants issued for
compensation 457,897 1,884,207 2,617,755
Financing charges 35,682,513 5,296,800 41,797,750
Stock options issued to vendors -- -- 578,750
Stock issued to vendors 731,500 196,250 784,625
(Increase) decrease in operating assets (64,613) (12,715) (457,133)
Increase (decrease) in operating liabilities 3,527,106 138,928 4,482,748
------------ ------------ -----------
Net cash provided by operating activities (5,367,589) (2,030,539) (10,820,162)
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture and equipment (1,497,787) (217,448) (1,976,440)
Purchase of mineral rights -- -- (10,000)
Purchase of license agreement (550,000) -- (550,000)
Payments to related party (335,000) -- (335,000)
Purchase of Digital Muse (988,867) -- (988,867)
Proceeds from sale of Digital Muse 333,333 -- 333,333
------------ ------------ -----------
Net cash used in investing activities (3,038,321) (217,448) (3,526,974)
------------ ------------ -----------
</TABLE>
The accompaning notes are an integral part of these financial statements.
-5-
<PAGE>
ENTERTAINMENT BOULEVARD, INC. AND SUBSIDIARY, DBA VIDNET
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (UNAUDITED) AND
FOR THE PERIOD FROM APRIL 1, 1997 (INCEPTION) TO SEPTEMBER 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
For the
Period from
April 1,
For the 1997
Nine Months Ended (Inception) to
September 30, September 30,
2000 1999 2000
----------------- ----------- ---------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short-term debt 9,965,000 -- 12,947,875
Payments on short-term debt (1,564,095) -- (2,219,095)
Payments on related party note payable (400,000) -- (400,000)
Proceeds from long-term borrowings -- 254,355 878,518
Capital contributions -- -- 621,600
Proceeds from private placements 3,000,000 1,722,558 5,268,175
Proceeds from execution of warrants -- 624,675 731,250
Debt issuance costs (1,351,045) -- (1,351,045)
Offering costs (1,318,312) -- (1,775,096)
------------ ------------ -----------
Net cash provided by financing activities 8,331,548 2,601,588 14,702,182
------------ ------------ -----------
Net increase in cash (74,362) 353,601 355,046
CASH, BEGINNING OF YEAR 429,408 200,072 --
------------ ------------ -----------
CASH, END OF YEAR $ 355,046 $ 553,673 $ 355,046
============ ============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
INTEREST PAID $ 31,572 $ -- $ 35,738
============ ============ ===========
INCOME TAXES PAID $ -- $ -- $ --
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-6-
<PAGE>
ENTERTAINMENT BOULEVARD, INC. AND SUBSIDIARY , DBA VIDNET
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND SEPTEMBER 30, 2000 (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements have been
prepared by Entertainment Boulevard, Inc. and subsidiary, dba Vidnet
(collectively, the "Company") pursuant to the rules and regulations of
the Securities and Exchange Commission. The information furnished
herein reflects all adjustments (consisting of normal recurring
accruals and adjustments) which are, in the opinion of management,
necessary to fairly present the operating results for the respective
periods. Certain information and footnote disclosures normally present
in annual consolidated financial statements prepared in accordance
with generally accepted accounting principles have been omitted
pursuant to such rules and regulations. The results of the nine months
ended September 30, 2000 are not necessarily indicative of the results
to be expected for the full year ended December 31, 2000.
NOTE 2 - GOING CONCERN ISSUES
The Company has received a report from its independent auditors that
includes an explanatory paragraph describing the Company's uncertainty
to continue as a going concern. These consolidated financial
statements contemplate the ability to continue as such and do not
include any adjustments that might result from this uncertainty.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of
Entertainment Boulevard, Inc. and its wholly owned subsidiary. All
significant intercompany accounts have been eliminated.
DEVELOPMENT STAGE ENTERPRISE
The Company is a development stage company as defined in Statement of
Financial Accounting Standards ("SFAS") No. 7, "Accounting and
Reporting be Development Stage Enterprises." The Company is devoting
substantially all of its present efforts to establish a new business,
and its planned principle operations have not yet commenced. All
losses accumulated since inception have been considered as part of the
Company's development stage activities.
-7-
<PAGE>
ENTERTAINMENT BOULEVARD, INC. AND SUBSIDIARY, DBA VIDNET
( A DEVELOPMENT STAGE COMPANY )
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND SEPTEMBER 30, 2000 (UNAUDITED)
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
NET LOSS PER SHARE
The Company utilizes SFAS No. 128, "Earnings per Share." SFAS No. 128
replaced the previously reported primary and fully diluted loss per
share with basic and diluted loss per share. Unlike primary loss per
share, basic loss per share excludes any dilutive effects of options,
warrants, and convertible securities. Diluted loss per share is very
similar to the previously reported fully diluted loss per share. Basic
loss per share is computed using the weighted-average number of common
shares outstanding during the period. Common equivalent shares are
excluded from the computation if their effect is anti-dilutive. As
such, basic and diluted loss per share are the same.
NOTE 4 - ACQUISITION AND SALE OF ASSET
During the six months ended June 30, 2000, the Company made unsecured
advances to Digital Muse, LLC, an unrelated, digital production
company, aggregating $988,867 (unaudited).
During the three months ended June 30, 2000, the Company entered into
an agreement to acquire a 90% ownership interest in Digital Muse, LLC.
In exchange for the ownership interest, the Company agreed to forgive
the advances to Digital Muse, LLC. The agreement also called for the
payment of $70,000 and the issuance of 155,000 stock purchase warrants
to two of the existing members of Digital Muse, LLC. The warrants are
exercisable at $1 (unaudited) and were valued in the aggregate at
$488,000 (unaudited).
The Company then entered into an agreement to sell its 90% ownership
interest in Digital Muse, LLC to Investec, Inc., an unrelated party,
for $1,000,000 (unaudited). As of June 30, 2000, the Company received
$333,333 (unaudited), representing the first of three installment
payments to be received.
The Company recognized a loss of $546,867 (unaudited) upon disposition
of Digital Muse, LLC during the three months ended June 30,2000.
-8-
<PAGE>
ENTERTAINMENT BOULEVARD, INC. AND SUBSIDIARY, DBA VIDNET
( A DEVELOPMENT STAGE COMPANY )
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND SEPTEMBER 30, 2000 (UNAUDITED)
NOTE 4 - ACQUISITION AND SALE OF ASSET (CONTINUED)
The second installment payment for the Company's sale of its 90%
ownership interest in Digital Muse, LLC was due on August 29, 2000,
and was not received. Although the Company is in continuing
discussions with the buyer of Digital Muse, LLC, for collection of the
balance of the installment payments, the Company does not believe that
the collection will be likely in the foreseeable future. Accordingly,
the Company recorded a loss of $666,667 (unaudited) on these
installment payments during the three months ended September 30, 2000.
NOTE 5 - LIABILITY ON SALE OF ASSET
In connection with the acquisition and sale by the Company of Digital
Muse, LLC, the Company learned that a former officer of the Company
had signed an equipment lease on behalf of the Company for Digital
Muse, LLC. The equipment lease, for approximately $1,500,000
(unaudited), is now in default, and on July 20, 2000 the leasing
company filed a lawsuit naming, among others, the Company, alleging
breach of lease and failure to make lease payments. The Company is
currently in negotiations with the leasing company to settle the
lawsuit. The Company has recorded a liability of $1,500,000
(unaudited) in connection with this lawsuit, and believes the matter
may be settled in the near future.
NOTE 6 - LOSS ON UNCOLLECTIBLE NOTES RECEIVABLE - RELATED PARTY
During the three months ended June 30, 2000, the Company recorded a
loss on certain notes receivable due from a former officer of the
Company. Although the Company is still attempting to collect the
notes, management does not believe their realization to be likely.
These notes aggregated to $736,000 (unaudited) at June 30, 2000.
During the quarter ended September 30, 2000, the Company proposed
to enter into a new note receivable agreement totaling $736,000
(unaudited) with the former officer, canceling the original notes
receivable, with the new agreement containing a condition that in
the event a total of $336,000 (unaudited) plus interest, is paid
according to the payment schedule, the Company would forgive the
remaining $400,000 (unaudited).
-9-
<PAGE>
ENTERTAINMENT BOULEVARD, INC. AND SUBSIDIARY, DBA VIDNET
( A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND SEPTEMBER 30, 2000 (UNAUDITED)
NOTE 6 - LOSS ON UNCOLLECTED NOTES RECEIVABLE - RELATED PARTY (CONTINUED)
The former officer did not deliver an executed copy of this new note
receivable, and no payments have been received. On August 21, 2000 the
Company filed suit against the former officer for $585,000
(unaudited). The Company cannot currently predict the outcome of the
suit.
NOTE 7 - MANAGEMENT SERVICES AGREEMENT
On October 30, 2000, the Company entered into a two year Management
Services Agreement (the "Agreement") with FMiTV Networks, Inc.
("FMiTV"), which was reported in the Company's filings with the
Securities and Exchange Commission. The Agreement gives FMiTV
effective control over the operations of the Company's web site,
Vidnet.com, while retaining ownership of all Company property,
including all Company trademarks, intellectual property rights,
original web site content, artwork, and hardware. In accordance to the
Agreement, the Company is to advance to FMiTV $400,000 (unaudited) in
equal installments of $133,333 (unaudited) during the first three
months of the Agreement to cover operating expenses of the web site.
In the event that the Company fails to pay the full amount of the
advance, the Company is to issue to FMiTV common stock in an
additional amount equal to twice the operating shortfall funded by
FMiTV divided by 70% of the market price of the Company's common stock
on the date on which the Company failed to make payment.
As partial consideration for FMiTV's services under this Agreement,
FMiTV is to be issued shares of the Company's Series B Convertible
Preferred Stock ("preferred stock"), which upon conversion is to be
equal to 20% ("target percentage") of the outstanding shares of the
Company's common stock. The target percentage is subject to certain
revisions. In the event that the Company issues any shares of common
or preferred stock, FMiTV should be issued additional shares of
preferred stock so that upon conversion, FMiTV will still retain the
target percentage.
In accordance with the agreement, the Company is to convert existing
accounts payable of $407,000 (unaudited) owed to FMiTV into shares of
the Company's preferred stock. The Company will recognize the excess
of the fair market value of the preferred stock over the converted
accounts payable as an expense at the time of the conversion.
Additionally, the Company is to issue to FMiTV 1,000 additional
shares (unaudited) of preferred stock in accordance with this
agreement and an additional 1,000 shares (unaudited) of preferred
stock upon the achievement of certain benchmarks.
At the start of each month during the term of this agreement, FMiTV
will deposit into a bank account funds equal to the difference between
the budget for that month ( a budget reflecting operating expense and
projected revenues) and the amount in the bank account ("FMiTV's
advances").
After retaining 20% of the net revenues generated during the quarter
as a reserve for future operating expenses and paying to FMiTV an
amount equal to the dollar amount, if any, by which FMiTV's advances
exceed $400,000 (unaudited) to the extent not previously recouped,
the balance of the net revenues for such quarter, if any, will be
distributed one-half to FMiTV as its management fees and one-half to
the Company.
FMiTV has the option to renew this agreement for an additional
one-year term if there have been gross revenues of at least $5,000,000
(unaudited) for the second year of this Agreement.
-10-
<PAGE>
ENTERTAINMENT BOULEVARD, INC. AND SUBSIDIARY, DBA VIDNET
( A DEVELOPMENT STAGE COMPANY )
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND SEPTEMBER 30, 2000 (UNAUDITED)
NOTE 8 - LICENSE AGREEMENTS
During the six months ended June 30, 2000, the Company entered into
one year license agreements with various content providers. Related to
those agreements, during the six months ended June 30, 2000, the
Company capitalized $4,529,000 (unaudited) in deferred license fees
and charged $1,866,254 (unaudited) to operations.
The Management Services Agreement with FMiTV Networks, Inc. allows for
renegotiation of these licensing agreements. The Company has recorded
an impairment loss on these deferred licensing fees of
$2,687,781 (unaudited) during the three months ended September 30,
2000.
NOTE 9 - CONTINGENCIES
During the three months ended September 30, 2000, various actions and
claims were filed against the Company related to non-payment of fees
and breach of contracts. The Company is currently contesting these
complaints, and has not recorded any liability related to them, as
they are not considered likely and the associated losses cannot be
determined.
NOTE 10 - WRITE-OFF OF LEASEHOLD IMPROVEMENTS
During the three months ended September 30, 2000, the Company entered
into an agreement with the Lessor of the Company's facilities located
at 12910 Culver Boulevard, Los Angeles, CA. The agreement allows the
Company to vacate these facilities with no further lease liability.
The Company recorded a loss on disposition of fixed assets (leasehold
improvements) of $213,685 (unaudited).
NOTE 11 - STOCKHOLDERS' DEFICIT
In July 2000, the Company settled a dispute with a stockholder by
issuing 325,000 shares (unaudited) of the Company's common stock. In
relation to this transaction, the Company recorded a settlement
expense of $71,500 (unaudited).
In July 2000, the Company issued an aggregate of 1,400,000 stock
options (unaudited) to employees as compensation. The stock options
have an exercise price of $0.38 per share. Of the stock options
issued, 350,000 shares vest immediately, 525,000 shares (unaudited)
vest after one year, and 525,000 shares (unaudited) vest after two
years, provided that the optionee is employed by the Company at the
time the shares become exercisable. The options expire after five
years from the date of issuance. Since the grant of these options,
certain of these optionees have terminated their employment with
the Company, canceling in the aggregate 1,000,000 (unaudited) of
these options. The Company recognized $25,156 (unaudited) in
compensation expense and $15,813 (unaudited) in deferred
compensation related to the issuance of these options.
During the six months ended June 30, 2000, the Company issued warrants
to purchase 200,000 shares (unaudited) of common stock to its
attorneys for services rendered. The warrants vest immediately and
were exercisable at $2.75 (unaudited) per share. In July 2000, the
Company repriced these 200,000 warrants (unaudited) to a new exercise
price of $0.38 per share. No additional charge was recorded in
association with the repricing.
NOTE 12 - SUBSEQUENT EVENTS: SALE OF NON-CORE ASSETS.
As part of the Management Services Agreement, dated October 30,
2000, with FMiTV Networks, Inc., the Company transferred certain
assets to the offices of FMiTV. Other fixed assets, which were
considered by management to be non-critical in the operations of
the Company's web site, were written down to net realizable value.
During the three months ended September 30, 2000, the Company
recorded an impairment loss on the write-down of these non-critical
assets of $458,143 (unaudited).
-11-
<PAGE>
Item 2. Management's Discussion and Analysis of or Plan of Operation.
The Company has included in this filing certain "forward looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995
concerning the Company's business, operations and financial condition. The words
or phrases "can be," "expects," "may effect," "may depend," "believes,"
"estimates," "projects," and similar words and phrases are intended to identify
such forward looking statements. Such forward looking statements are subject to
various known and unknown risks and uncertainties, and the Company cautions that
any forward looking statements provided by or on behalf of the Company are not a
guarantee of future performance. Actual results could differ materially from
those anticipated in such forward looking statements due to a number of factors,
some of which are beyond the Company's control, in addition to those discussed
in the Company's other public filings, press releases, and statements by the
Company's management, including: (i) the ability to obtain additional financing,
(ii) the volatile and competitive nature of the Internet and entertainment
industries, and (iii) the effect of federal, state, and foreign regulation on
the Company's business. All such forward looking statements are current only on
the date on which such statements were made. The Company does not undertake any
obligation to publicly update any forward looking statement to reflect events or
circumstances after the date on which such statement is made, or to reflect the
occurrence of unanticipated events.
The Company's fiscal year ends on December 31 of each calendar year.
RECENT EVENTS
Business Related
During the three months ended March 31, 2000, the Company made unsecured
advances to an unrelated digital production company. During the three months
ended June 30, 2000, the Company acquired a 90% interest in this digital
production company. The agreement also called for the payment of $70,000 and the
issuance of 155,000 stock purchase warrants to two of the existing members of
the digital production company. The warrants were exercisable at $1.00 and were
valued in the aggregate at $488,000. The Company subsequently sold its 90%
interest in this digital production company for $1,000,000, recording a loss on
the transaction of $546,867.
The Company received a $333,333 installment payment for the above referenced
$1,000,000 sale, and was to receive an equal installment within three months of
the initial installment payment, and was to receive the third and final
installment payment within six months of the initial installment payment.
-12-
<PAGE>
The second installment payment, due August 29, 2000, was not received. Although
the Company is currently in discussions with the buyer of the digital production
company for collection of the balance of the installment payments, management
does not believe that the collection will be likely in the foreseeable future.
Accordingly, the Company recorded a loss of $666,667 on these installment
payments during the quarter ended September 30, 2000.
In connection with the purchase of the digital production company, the
Company learned that a former officer of the Company signed an equipment
lease on behalf of the Company for the digital production company. The
equipment lease, for approximately $1,500,000, is now in default, and the
leasing company has filed a lawsuit, naming, among others, the Company. The
Company is currently in negotiations with the leasing company to settle the
lawsuit. The Company has recorded a liability of $1,500,000 in connection
with this lawsuit, and believes that the matter may be settled in the near
future.
On November 2, 2000, the Company announced that it had formed a strategic
agreement with FMiTV Networks, Inc. (FMiTV). This management services
agreement gives FMiTV effective control over the operations of the Company's
web site, Vidnet.com. In connection with the FMiTV agreement, the Company has
reduced its staff to one full time employee, and has moved its web site
communications and computer hardware, and additional fixed assets, to the
offices of FMiTV. Additional details of this agreement are contained in the
Company's Current Report on Form 8-K filed with the Securities and Exchange
Commission on November 2, 2000.
The management services agreement with FMiTV allows for renegotiation of certain
licensing contracts with the Company's content providers. The Company has
recorded an impairment loss on deferred licensing fees of $2,687,781 during the
quarter ended September 30, 2000.
Related Transactions
During the three months ended June 30, 2000, The Company recorded a loss on
certain notes receivable from a former officer of the Company. Although the
Company is attempting to collect the notes, management does not believe their
realization to be likely. These notes aggregated $736,000 at June 30, 2000.
Subsequent to June 30, 2000, the Company proposed to enter into a new note
receivable agreement totaling $736,000 with the former officer, canceling the
original notes receivable, with the new agreement containing a condition that
in the event a total of $336,000, plus interest, is paid according to the
payment schedule, the Company will forgive the remaining $400,000.
The former officer did not deliver an executed copy of this new note to the
Company, and the matter is now being litigated.
-13-
<PAGE>
Stock Options and Warrants
During the three months ended September 30, 2000, the Company granted an
aggregate of 1,400,000 stock options to employees as compensation. The stock
options have an exercise price of $0.38 per share. Of the stock options issued,
350,000 vest immediately, 525,000 vest after one year, and 525,000 vest after
two years, provided that the optionee is employed by the Company at the time the
options become exercisable. The options expire five years after date of
issuance.
Since the grant of these 1,400,000 stock options, certain of these optionees
have terminated their employment with the Company, canceling in the aggregate
1,000,000 of these options. The remaining 400,000 options vest as follows:
100,000 immediately, 150,000 one year after issuance, and 150,000 two years
after issuance, provided the optionee is employed by the Company at the time the
options become exercisable.
During the three months ended September 30, 2000, the Company repriced 200,000
warrants issued to an attorney. The new exercise price is $0.38 per share.
Other Equity Related Transactions
During the three months ended September 30, 2000, the Company settled a dispute
with a stockholder by issuing 325,000 shares of the Company's common stock.
The Company previously erroneously reported that it had issued shares of
common stock in settlement of a dispute with a consulting firm. No shares
were issued to the consulting firm and the Company did not enter into a new
consulting agreement.
OVERVIEW
Entertainment Boulevard is an Internet broadcasting company that provides video
entertainment in an on-line, on-demand environment. The Company's current
content library includes music videos, live concert events, archived concert
events, movie trailers, extreme sports clips, interview clips, informercials and
other special events and programming. The on-line, on-demand video entertainment
is delivered on the Internet primarily at WWW.VIDNET.COM.
The Company was incorporated in December, 1997. Prior to February 2, 1999, the
Company operated under the name Sedmet Exploration, Inc. and acquired certain
mining rights in Tooele County, Utah. The Company currently operates a web site
at WWW.VIDNET.COM through our wholly owned subsidiary, International Net
Broadcasting, which the Company acquired in January, 1999.
-14-
<PAGE>
On November 2, 2000, the Company entered into a management services agreement
with FMiTV, which was reported in the Company's filings with the Securities
and Exchange Commission. This agreement gives FMiTV effective control over
the operations of the Company's web site at WWW.VIDNET.COM.
RESULTS OF OPERATIONS
Revenues:
Revenues for the nine months ended September 30, 2000 were $318,989, increasing
from $12,715 for the nine months ended September 30, 1999. Revenues for the
three months ended September 30, 2000 were $110,421, compared to $12,715 for the
three months ended September 30, 1999. The increase was attributable to $67,661
in web site development revenues recorded in the three months ended March 31,
2000, and to advertising revenues. The Company does not expect to generate
revenues from web site development in the future.
The Company increased advertising revenues primarily by increasing the inventory
of impressions and unique users on the Company's web site.
Operating Expenses:
General and Administrative Expenses
General and administrative expenses for the nine month and three month periods
ended September 30, 2000 were $9,577,875 and $5,475,723 respectively, compared
to $4,220,515 and $3,018,186 for the corresponding nine and three month periods
ended September 30, 1999. Payroll and payroll related expenses were $2,134,583
and $545,644 for such nine and three month periods ended September 30, 2000
respectively, compared to $2,274,792 and $1,950,892 for the corresponding nine
and three month periods ended September 30, 1999. Rent expense for the Company's
facility was $263,151 and $64,893 for the nine and three month periods ended
September 30, 2000 respectively, compared to $54,932 and $35,532 for the
corresponding nine and three month periods ended September 30, 1999.
Sales and Marketing Expenses
Sales and marketing expenses during the nine and three month periods ended
September 30, 2000 were $3,332,211 and $435,725 respectively, compared to $0
and $0 for the corresponding nine and three month periods ended September 30,
1999. Sales and marketing expenses increased as a result of the cost to
acquire new users on the Vidnet.com web site. Costs included web site
advertising, radio advertising, print advertising, live events, sponsorships
and conferences.
Other operating expenses during the nine and three month periods ended September
30, 2000 were $7,714,878 and $4,529,000 respectively, compared to $0 and
-15-
<PAGE>
$0 for the corresponding nine and three month periods ended September 30,
1999. These expenses related to license fees for web site content, including
impairment loss recorded during the three month period ended September 30,
2000 of $2,687,781.
Depreciation and Amortization Expenses
Depreciation expense for the nine and three month periods ended September 30,
2000 was $424,349 and $148,079 respectively, compared to $31,038 and $17,700 for
the corresponding nine and three month periods ended September 30, 1999. The
increase is primarily attributable to depreciation of new equipment and office
furniture purchased during the current fiscal year.
Amortization expense for the nine and three month periods ended September 30,
2000 was $1,391,500 and $0 respectively, compared to $375 and $375 for the
corresponding nine and three month periods ended September 30, 1999.
Write-Down of Non-Core Assets
During the quarter ended September 30, 2000, the Company significantly
reduced its staffing levels. On November 2, 2000 the Company announced a
management services agreement with FMiTV, whereby FMiTV would take effective
control of the day-to-day operations of the Company's web site, Vidnet.com.
As part of the FMiTV agreement, the company transferred certain fixed assets,
including communications and computer equipment to the offices of FMiTV, and
disposed of other, non-core assets to an unrelated third party. During the
quarter ended September 30, 2000, the Company recorded a write-down of
non-core assets to net realizable value of $458,143.
Write-Off of Leasehold Improvements
Because of the reduction in staffing levels experienced during the quarter ended
September 30, 2000, the Company entered into an agreement with the Lessor of the
Company's premises at 12910 Culver Boulevard, Los Angeles, to vacate the
premises on or before November 12, 2000. In anticipation of vacating the
premises at 12910 Culver Boulevard, Los Angeles, the Company eliminated the
balance of leasehold improvements recorded on the Company's balance sheet,
recording an additional charge for the quarter ended September 30, 2000, of
$213,685.
Interest Expense
Net interest expense consists of interest earned on cash and cash equivalents
and short-term investments, offset by interest expense on borrowings. Net
interest expense for the nine months ended September 30, 2000 was $121,085
compared to $37,690 interest expense for the nine months ended September 30,
1999. Net interest income for the three months ended September 30, 2000 was
$14,247 compared to net interest expense of $27,006 for the three months ended
September 30, 1999.
Financing Costs
-16-
<PAGE>
Financing costs for the nine and three month periods ended September 30, 2000
were $35,682,513 and $0 respectively, consisting primarily of $25,734,000 from
the conversion of debt financing into the Company's common stock, and $9,300,930
related to warrants issued in connection with financing during the period. This
compares to $5,296,800 and $699,800 for the corresponding nine and three month
periods ended September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Since the Company's inception, operations have been financed primarily
through loans and private sales of the Company's equity securities. As of
September 30, 2000, the Company had on hand $355,046 in cash, cash
equivalents, and short-term investments.
The Company has no commercial bank credit facility.
For the nine months ended September 30, 2000, operating activities used net
cash of approximately $5,367,589, primarily from a net loss from operations
of approximately $58,597,250 which was partially offset by depreciation and
amortization of approximately $457,897, other non-cash charges of
$12,470,909, stock options and warrants issued for compensation and
settlements of $457,897, financing charges of $35,682,513, and stock issued
to vendors of $731,500.
For the nine months ended September 30, 2000, investing activities used net cash
of approximately $3,038,321, primarily from the purchase of furniture and
equipment of $1,497,787, the funding of licensing agreements for $550,000,
payments to a related party of $335,000, the purchase of Digital Muse, LLC for
$988,867, and were partially offset by proceeds from the disposition of Digital
Muse, LLC of $333,333.
In addition, financing activities provided net cash of approximately
$8,331,548, primarily from proceeds from short-term debt of $9,965,000 and
proceeds from private placements of $3,000,000, partially offset by payments
on short-term debt of $1,564,095, payments on notes payable to a related
party of $400,000, debt issuance costs of $1,351,045 and offering costs of
$1,318,312.
RISKS THAT MAY AFFECT RESULTS
The Company has experienced a substantial increase in its content acquisition
costs, marketing costs, capital expenditures, compensation expenses, and other
operating costs. The Company expects that its present cash balance and revenues
from operations will not be sufficient to meet its anticipated needs for working
capital and capital expenditures.
THE COMPANY WILL NEED ADDITIONAL FINANCING WITHIN THE NEXT 60 DAYS TO MAINTAIN
ITS BUSINESS AND OPERATIONS
-17-
<PAGE>
The Company will need to raise additional funds to:
- Continue the operations of the Company
- To react to unforeseen difficulties, including:
- Loss of key personnel;
- Rejection by users of the Company's web site, and
- Other competitive pressures.
The Company expects to incur losses for the foreseeable future. If the Company
raises additional funds through the issuance of capital stock, either directly
or upon conversion of debt securities, the percentage ownership of the Company's
then existing stockholders will be reduced. Moreover, stockholders may
experience additional and significant dilution and such new securities may have
rights, preferences or privileges senior to those of the Company's common stock.
Additional financing may not be available on terms acceptable to the Company, or
at all. If the Company is unable to obtain sufficient funds on a timely basis,
it may be unable to implement the Company's business plan, which could have a
material adverse affect on the Company's business, prospects, financial
condition and results of operations.
The Company anticipates that its business will incur significant operating
losses for the foreseeable future. At this time, the Company believes that its
survival and success depends upon its ability to obtain meaningful advertising
and sponsorship revenues. To date, the Company has not generated significant
revenues, and the Company's ability to do so in the future is substantially
uncertain.
The Company's prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in their early stage of
development, particularly companies which rely on Internet advertising and
promotions and are involved with rapidly evolving technologies such as Internet
commerce. Such risks include, but are not limited to, an evolving and
unpredictable business environment and the management of growth. To address
those risks, the Company must, among other things:
- grow and maintain its audience;
- implement and successfully execute its business and marketing
strategy;
- continue to develop and upgrade its technology;
- improve its web site;
- respond to competitive developments, and
- attract, retain, and motivate qualified personnel.
The Company may not be successful in addressing those risks and the failure to
do so could have a material adverse affect on the Company's business, prospects,
financial condition and results of operations. Furthermore, the Company's lack
of an operating history makes predictions of future operating results difficult
to ascertain. The Company believes that its future Internet commerce and
advertising revenue depends largely on increasing the Vidnet.com audience.
-18-
<PAGE>
The Company has entered into various license arrangements and strategic
alliances in order to build its audience, provide content, generate additional
online traffic, and establish additional potential sources of revenue.
The Company has incurred significant net losses and negative cash flows from
operations since its inception. As of September 30, 2000, the Company had an
accumulated deficit of approximately $86,721,026. The Company expects to
continue to make significant financial investments in marketing and
promotion, content, technology and infrastructure development. As a result,
the Company believes that it will continue to incur operating losses and
negative cash flows from operations for the foreseeable future. To achieve
profitabity, the Company needs to increase the size of its audience and its
revenues from advertising and e-commerce sales.
THE COMPANY IS DEPENDENT ON FMiTV AND ITS EMPLOYEES TO MAINTAIN, OPERATE,
PROMOTE, AND PROVIDE DATA AND SYSTEMS SERVICES TO THE COMPANY'S WEBSITE, AND
FMiTV'S EMPLOYEES MAY NOT DEVOTE SUFFICIENT RESOURCES TO THIS TASK TO ENSURE THE
COMPANY'S VIABILITY.
Under the terms of the FMiTV Agreement, FMiTV's employees will maintain,
operate, promote and provide data and systems services to the Company's web
site. In addition, FMiTV will have the right, subject to the Company's approval,
to renegotiate the Company's material contracts and to enter into new content
and distribution alliances. The Company believes that its future and success
will depend upon FMiTV. If FMiTV were to reduce its efforts with respect to the
Company's products and services or were to fail to devote the resources
necessary to provide effective sales and marketing, technical or other support
of the Company's products and services, there would be a material adverse effect
upon the Company's business, financial condition, and results of operations.
THE COMPANY IS A DEFENDANT IN NUMEROUS LAWSUITS, THE ADVERSE OUTCOME OF WHICH
WOULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY.
The Company is involved in certain litigation incidental to its business. The
Company believes that the adverse outcome of such litigation would, individually
or in the aggregate, have a material adverse effect on its business, financial
condition and results of operations. See "Legal Proceedings."
YEAR 2000
The Company has completed a comprehensive review of its computer systems to
identify the systems that could be affected by ongoing Year 2000 problems.
Upgrades to systems judged critical to business operations have been
successfully installed. To date, no significant costs have been incurred in the
Company's systems related to Year 2000.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
-19-
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
The Company currently and from time to time is involved in litigation in
the ordinary course of its business. The Company believes that it is involved in
litigation, including the proceedings described below, that may, individually or
in the aggregate, have a material adverse effect on its financial condition,
results of operation and cash flow.
On July 20, 2000, Terminal Marketing filed a lawsuit against the Company in
Los Angeles County Superior Court, California alleging a breach of lease and
failure to make lease rental payments for certain equipment. Digital Muse, LLC
(now in control of the equipment at-issue) was also named in the complaint.
Terminal Marketing obtained a writ of possession for the equipment, but has
stayed enforcing the writ to allow the parties to resolve the dispute. Terminal
Marketing is seeking approximately $1.4 million in damages. The Company has not
yet answered the complaint, and the parties are currently in settlement
negotiations.
On August 21, 2000, the Company filed suit against Steven Brown, the
Company's former Chief Executive Officer, in Los Angeles County Superior Court,
California for breach of written and oral agreements, breach of fiduciary duty,
conversion, interference with existing and prospective business relationships,
breach of trust, implied indemnity and accounting. The Company's complaint
sought a minimum of $585,000 for money owed by Mr. Brown to the Company and
further damages for his tortuous activities. Mr. Brown failed to answer the
Company's complaint and his default was entered by the Court on October 5, 2000.
On October 6, 2000, Creditors Adjustment Bureau, Inc., filed suit
against the Company in Los Angeles County Superior Court, California alleging
that Company breached a contract and seeking common counts arising from a
debt incurred by the Company to Alladvantage.com. Creditors Adjustment Bureau
is the Assignor of the debt and the complaint sought $132,792.42 in damages.
The Company filed an answer to the complaint but no trial dates or other
pre-trial deadlines have been set yet.
On October 3, 2000, Eugene G. Heller (dba Silverman Heller Associates)
filed suit against the Company in Los Angeles County Superior Court, California
alleging breach of contract with respect to certain financial and corporate
communication services. The complaint sought damages of $75,647.98. The Company
has not yet filed a response to the complaint and no trial date or other
pre-trial deadlines have been set.
On July 21, 2000, Juliette and James Productions, Inc. (dba Blue Sky
Radio) filed suit against the Company in Los Angeles County Superior Court,
California alleging that the Company breached an oral agreement to be the
Title Sponsor of the Jim Rome World Tour Stop Number 21 and seeking damages
of $67,500. The Company filed an answer to the complaint. The trial date has
been set for
-20-
<PAGE>
July 16, 2001. Blue Sky Radio has propounded written discovery which the
Company has not yet responded to.
On May 3, 2000, Select Appointments, Inc., filed suit against the Company
in Los Angeles County Superior Court, California alleging breach of contract and
common counts arising from the placement of an accountant at the Company. A
default judgment was entered against the Company on June 20, 2000 in the amount
of $13,265.13. Select Appointments has refused to stipulate to vacate the entry
of default judgment and therefore the Company is currently evaluating settlement
versus a motion to set aside the default judgment.
On July 13, 2000, International Venture Associates, Inc., filed suit
against the Company in San Mateo County Superior Court, California alleging
breach of contract with respect to certain consulting services in the United
Kingdom. International's complaint sought $25,000 in damages plus 4,375 shares
of the Company's common stock (or its equivalent in cash). The Company filed an
answer to the complaint and responded to written discovery. Currently, no trial
date has been set.
On October 8, 1999, Stepp & Beuchap, LLP filed suit against the Company
with the Orange County Bar Association, California seeking legal fees in the
amount of $10,246. A non-binding mediation is scheduled for December 11,
2000. No arbitration date has been set as of yet.
On June 20, 2000, Rossini Video Group filed suit against the Company in
Burbank Municipal Court, California alleging a breach of contract and common
counts for video equipment and merchandise purchased by Digital Muse, LLC. The
complaint sought damages of $8,833.39. The Company has responded to the
complaint and no trial date has been set as of yet.
ITEM 2 CHANGES IN SECURITIES
(a) On September 28 , 2000, the Company's shareholders approved an
amendment to the Articles of Incorporation increasing the Company's authorized
common stock from 50,000,000 shares to 250,000,000 shares.
(c) On July 25, 2000, the Company granted options to purchase a total of
1,400,000 shares of its common stock to a limited number of employees. Options
to purchase a total of 350,000 vested immediately with the 525,000 and 525,000
vesting on the first anniversary and second anniversary of the date of issuance,
respectively; provided, however, that the optionee is employed by the Company at
the time such options become exercisable. The options are exercisable at a price
of $0.38 per share and expire five years after the date of issuance. The grant
of such options was exempt from the registration provisions of the Securities
Act of 1933, as amended (the "1933 Act"), pursuant to Section 4(2) thereof.
On July 25, 2000, the Company issued 325,000 shares of its common stock to
one investor in settlement of a dispute. The issuance of such shares was exempt
from the registration provisions of the 1933 Act pursuant to Section 4(2)
thereof.
-21-
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
On September 28, 2000, at a special meeting of the shareholders,
shareholders of the Company approved an amendment to the Articles of
Incorporation increasing the number of authorized shares of common stock from
50,000,000 to 250,000,000. Of the 20,989,837 shares voting at the meeting,
16,312,747 shares voted in favor of the amendment, 4,671,040 voted against and
6,050 abstained.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) 27.1 Financial Data Schedule
(b) On November 2, 2000, the Company filed a Current Report on Form 8-K
in connection with the closing of a management services agreement
with FMiTV Networks, Inc.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: November 13, 2000 By: /s/ PAUL SULLIVAN
----------------------------------------
Paul Sullivan, Chief Financial Officer
