<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 June 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, Suite I, 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 August 10, 2000, there were 25,098,078 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 JUNE 30, 2000 (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
FINANCIAL STATEMENTS
<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 JUNE 30, 2000 (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
2000 1999
--------------- ----------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 1,651,666 $ 429,408
Accounts receivable 70,659 222,324
Prepaid expenses 254,478 8,496
Deferred license fees 4,529,000 -
--------------- ----------------
Total current assets 6,505,803 660,228
NOTE RECEIVABLE - RELATED PARTY - 400,000
NOTE RECEIVABLE 666,667 -
FURNITURE AND EQUIPMENT, net 1,641,066 419,549
DEPOSITS 162,295 26,700
DEBT ISSUANCE COSTS, net 36,812 110,000
DEFERRED FINANCING COSTS - 1,735,583
--------------- ----------------
TOTAL ASSETS $ 9,012,643 $ 3,352,060
=============== ================
</TABLE>
The accompanying 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 JUNE 30, 2000 (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
June 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 2,606,043 589,241
Accrued liabilities 49,111 299,401
Deferred revenue - 67,000
--------------- ----------------
Total current liabilities 2,655,154 3,709,737
--------------- ----------------
STOCKHOLDERS' EQUITY (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
24,563,000 (unaudited) and 12,477,500 shares issued
and outstanding 24,563 12,478
Deferred compensation (150,168) (252,685)
Additional paid-in capital 83,402,863 14,899,249
Deficit accumulated during the development stage (76,919,769) (15,016,739)
--------------- ----------------
Total stockholders' equity (deficit) 6,357,489 (357,677)
--------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT) $ 9,012,643 $ 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 SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED) AND
FOR THE PERIOD FROM APRIL 1, 1997 (INCEPTION) TO JUNE 30, 2000 (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the
Period from
For the For the April 1,
Three Months Ended Six Months Ended 1997
June 30, June 30, (Inception) to
--------------------------------- --------------------------------- June 30,
2000 1999 2000 1999 2000
--------------- --------------- ---------------- --------------- ----------------
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
REVENUE $ 43,547 $ - $ 208,568 $ - $ 476,607
OPERATING EXPENSES 6,245,233 285,515 11,902,886 1,215,667 21,014,233
--------------- --------------- ---------------- --------------- ----------------
LOSS FROM OPERATIONS (6,201,686) (285,515) (11,694,318) (1,215,667) (20,537,626)
--------------- --------------- ---------------- --------------- ----------------
OTHER EXPENSE
Interest income
(expense), net 28,716 (2,127) (135,332) (10,684) (193,526)
Loss on uncollectible
notes receivable -
related party (736,000) - (736,000) - (736,000)
Loss on disposition
of asset (546,867) - (546,867) - (546,867)
Financing costs (157,013) - (35,682,513) (4,597,000) (41,797,750)
--------------- --------------- ---------------- --------------- ----------------
Total other expense (1,411,164) (2,127) (37,100,712) (4,607,684) (43,274,143)
--------------- --------------- ---------------- --------------- ----------------
NET LOSS (7,612,850) (287,642) (48,795,030) (5,823,351) (63,811,769)
PREFERRED STOCK
DIVIDENDS - - 13,108,000 - 13,108,000
--------------- --------------- ---------------- --------------- ----------------
NET LOSS AVAILABLE
TO COMMON
STOCKHOLDERS $ (7,612,850) $ (287,642) $ (61,903,030) $ (5,823,351) $ (76,919,769)
=============== =============== ================ =============== ================
BASIC AND DILUTED
LOSS AVAILABLE
TO COMMON
STOCKHOLDERS
PER SHARE $ (0.33) $ (0.02) $ (2.57) $ (0.52) $ (9.11)
=============== =============== ================ =============== ================
WEIGHTED-AVERAGE
SHARES OUTSTANDING 23,215,312 12,200,000 18,991,513 11,227,430 8,438,551
=============== =============== ================ =============== ================
</TABLE>
The accompanying 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 THREE MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED) AND
FOR THE PERIOD FROM APRIL 1, 1997 (INCEPTION) TO JUNE 30, 2000 (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the
Period from
For the April 1,
Six Months Ended 1997
June 30, (Inception) to
--------------------------------- June 30,
2000 1999 2000
---------------- --------------- ----------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (48,795,030) $ (5,823,351) $ (63,811,769)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 276,270 13,338 370,344
Loss on disposition of Assets 546,867 - 546,867
Loss on uncollectible notes receivable -
related party 736,000 - 736,000
Other non-cash charges 5,556,070 - 5,556,070
Stock options and warrants issued for
compensation 432,741 119,189 2,592,599
Financing charges 35,682,513 4,597,000 41,797,750
Stock options issued to vendors - - 578,750
Stock issued to vendors 660,000 - 713,125
(Increase) decrease in operating assets (865,912) - (1,258,432)
Increase (decrease) in operating liabilities 1,699,512 156,690 2,655,154
---------------- --------------- ----------------
Net cash used in operating activities (4,070,969) (937,134) (9,523,542)
---------------- --------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture and equipment (1,497,787) (25,544) (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 Assets (988,867) - (988,867)
Proceeds from disposition of Assets 333,333 - 333,333
---------------- --------------- ----------------
Net cash used in investing activities (3,038,321) (25,544) (3,526,974)
---------------- --------------- ----------------
</TABLE>
The accompanying 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 THREE MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED) AND
FOR THE PERIOD FROM APRIL 1, 1997 (INCEPTION) TO JUNE 30, 2000 (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the
Period from
For the April 1,
Six Months Ended 1997
June 30, (Inception) to
--------------------------------- June 30,
2000 1999 2000
---------------- --------------- ----------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short-term debt $ 9,965,000 $ 198,678 $ 12,947,875
Payments on short-term debt (1,564,095) - (2,219,095)
Payments on note payable - related party (400,000) - (400,000)
Proceeds from long-term borrowings - - 878,518
Capital contributions - - 621,600
Proceeds from private placement 3,000,000 - 5,268,175
Proceeds from execution of warrants - 731,250 731,250
Debt issuance costs (1,351,045) - (1,351,045)
Offering costs (1,318,312) (106,575) (1,775,096)
---------------- --------------- ----------------
Net cash provided by financing activities 8,331,548 823,353 14,702,182
---------------- --------------- ----------------
Net increase (decrease) in cash 1,222,258 (139,325) 1,651,666
CASH, BEGINNING OF PERIOD 429,408 200,072 -
---------------- --------------- ----------------
CASH, END OF PERIOD $ 1,651,666 $ 60,747 $ 1,651,666
================ =============== ================
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 JUNE 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 six months ended June
30, 2000 are not necessarily indicative of the results to be expected
for the full year ending 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 POLICIES
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 by Development Stage Enterprises." The Company is devoting
substantially all of its present efforts to establish a new business,
and its planned principal 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 JUNE 30, 2000 (UNAUDITED)
--------------------------------------------------------------------------------
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (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 to $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 calls 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 were
exercisable at $1 (unaudited) and were valued in the aggregate at
$488,000 (unaudited).
The Company then entered then into an agreement to sell its 90%
ownership interest in Digital Muse, LLC to Investech, Inc., an
unrelated party, for $1,000,000 (unaudited), payable in three
installments. As of June 30, 2000, the Company received $333,333
(unaudited), representing the first of the three installment payments
to be received. The payments are each due within three months of the
previous payment.
The Company recognized a loss of $546,867 (unaudited) upon disposition
of Digital Muse, LLC during the three months ended June 30, 2000.
NOTE 5 - 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.
-8-
<PAGE>
ENTERTAINMENT BOULEVARD, INC. AND SUBSIDIARY,
DBA VIDNET
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND JUNE 30, 2000 (UNAUDITED)
--------------------------------------------------------------------------------
NOTE 5 - LOSS ON UNCOLLECTIBLE NOTES RECEIVABLE - RELATED PARTY (CONTINUED)
Subsequent to June 30, 2000, the Company entered 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 will forgive the remaining $400,000 (unaudited).
NOTE 6 - LICENSE AGREEMENTS
During the six months ended June 30, 2000, the Company entered into a
one-year license agreement with Virgin Holdings, Inc. Pursuant to the
agreement, the Company issued 678,685 shares (unaudited) of common
stock and paid $300,000 (unaudited) in cash. The agreement also calls
for the payment of a share of the gross receipts derived from the
Company's websites. In exchange for this consideration, the Company
received the rights to broadcast certain videos on the Company's
websites. The agreement is renewable by Virgin Holdings, Inc. for
additional one-year periods.
During the six months ended June 30, 2000, the Company entered into a
one-year license agreement with Sony Music for the rights to broadcast
certain music videos on the Company's websites. The Company was
required to pay $225,000 (unaudited) in cash and issue 678,875 shares
(unaudited) of the Company's common stock. The agreement provides for
licensing fees equal to a portion of the gross revenues received by the
Company in connection with the licensed material.
Related to these two agreements, the Company has capitalized $4,529,000
(unaudited) in deferred license fees and charged $1,866,254 (unaudited)
to operations.
NOTE 7 - STOCKHOLDERS' EQUITY (DEFICIT)
During the three months ended June 30, 2000, the Company issued
1,250,000 shares (unaudited) of its $0.001 par value common stock for
$0.80 (unaudited) per share for cash totaling $1,000,000 (unaudited).
During the six months ended June 30, 2000, an officer of the Company
exercised his warrant to purchase 1,325,000 shares of common stock. The
exercise was performed on a cashless basis, whereby the Company issued
1,030,556 shares (unaudited) of its $0.001 par value common stock in
exchange for the warrant. Related to this exercise, the Company
recorded a charge of $147,224 (unaudited).
-9-
<PAGE>
ENTERTAINMENT BOULEVARD, INC. AND SUBSIDIARY,
DBA VIDNET
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND JUNE 30, 2000 (UNAUDITED)
--------------------------------------------------------------------------------
NOTE 8 - EMPLOYMENT AGREEMENTS
In April 2000, the Company executed an employment agreement with its
Chief Executive Officer. The agreement requires annual payments of
$350,000 (unaudited) and 3,000,000 options (unaudited) exercisable at
$2.75 (unaudited) per share. The Company did not record compensation
expense related to these options as the exercise price approximated the
fair market value of the Company's stock at the date of issuance. In
July 2000, the Chief Executive Officer resigned and terminated this
employment agreement.
In May 2000, the Company entered into an employment agreement with its
Chief Financial Officer. The agreement requires monthly payments of
$12,500 (unaudited) and 300,000 warrants (unaudited) exercisable at
$1.38 (unaudited) per share. The Company did not record compensation
expense related to these warrants as the exercise price approximated
the fair market value of the Company's stock at the date of issuance.
During the six months ended June 30, 2000, the Chief Financial Officer
resigned and terminated this employment agreement.
NOTE 9 - STOCK OPTIONS AND WARRANTS
During the six months ended June 30, 2000, the Company issued options
to purchase 200,000 shares (unaudited) of common stock to its attorneys
for services rendered. The options vest immediately and are exercisable
at $2.75 (unaudited) per share. The Company recognized $25,000
(unaudited) in legal fees related to the issuance of these options.
On April 20, 2000 the Company issued 300,000 stock purchase warrants to
a consulting firm for a six month contract. The warrants are
exercisable at $2.03 per share and expire in 5 years. Related to
these warrants, the Company recorded prepaid expenses of $100,000
and charged $65,000 to operations.
During the six months ended June 30, 2000, the Company repriced
250,000, 100,000, and 250,000 warrants (unaudited) issued to two
employees and a consultant, respectively. The new exercise prices are
$1.25 (unaudited), $1.25 (unaudited), and $0.80 (unaudited),
respectively. In relation to this repricing, the Company recorded
compensation expense totaling $158,000. In accordance with generally
accepted accounting principles, the employee stock option awards that
were re-priced will be accounted for as variable awards from the date
of the re-pricing to the date the options are exercised, forfeited or
expire.
-10-
<PAGE>
ENTERTAINMENT BOULEVARD, INC. AND SUBSIDIARY,
DBA VIDNET
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND JUNE 30, 2000 (UNAUDITED)
--------------------------------------------------------------------------------
NOTE 10 - SUBSEQUENT EVENTS (UNAUDITED)
In July 2000, the Company issued 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
shares vest immediately, 525,000 shares vest after one year, and
525,000 shares 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.
Management does not believe the Company will incur significant
charges from the granting of these options.
In July 2000, the Board authorized the Company to settle a dispute with
a stockholder by issuing 325,000 shares of the Company's common stock.
In July 2000, the Board authorized the Company to settle a dispute with
a consulting firm by entering into a new consulting agreement with an
initial payment of 150,000 shares of common stock and an additional
50,000 shares to be issued per month during the term of the agreement
between the Company and the consulting firm. The Company has the right
to terminate the consulting agreement at any time and for any reason
upon 30 days' notice.
Subsequent to June 30, 2000, the Company repriced 200,000 warrants
issued to an attorney. The new exercise price is $0.38 per share.
Management does not believe charges associated with the repricing
will be significant.
-11-
<PAGE>
MD&A
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations:
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 affect," "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 is 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 volatile and competitive nature of the
Internet and entertainment industries, (ii) changes in domestic and foreign
economic and market conditions, (iii) the effect of federal, state, and foreign
regulation on the Company's business, (iv) failure of the Company, its vendors,
or other third parties to achieve Year 2000 compliance, and (v) the effect of
any future acquisitions. All such forward-looking statements are current only as
of 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, recording a loss on the transaction
of $546,867.
In April, 2000, the Company entered into employment agreements with its Chief
Executive Officer and its Chief Financial Officer, both of whom have
subsequently left the Company. Those employment agreements required annual
payments of $350,000 and $150,000 respectively. In addition, those agreements
issued 3,000,000 options
-12-
<PAGE>
exercisable at $2.75 per share and 300,000 warrants exercisable at $1.38 per
share. Those employment agreements have been terminated by mutual consent, and
there are no new employment agreements between the Company and its executive
management.
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 entered 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.
During the six months ended June 30, 2000, an officer of the Company exercised
his warrant to purchase 1,325,000 shares of common stock. The exercise was
performed on a cashless basis, whereby the Company issued 1,030,556 shares of
its common stock in exchange for the warrant. Related to this exercise, the
Company recorded a charge of $147,224.
Stock Options and Warrants
During the six months ended June 30, 2000, the Company issued options to
purchase 200,000 shares of common stock to its attorneys for services rendered.
The options vest immediately and are exercisable at $2.75 per share. The Company
recognized $25,000 in legal fees related to the issuance of these options.
During the six months ended June 30, 2000, the Company repriced 250,000, 100,000
and 250,000 warrants issued to two employees and a consultant, respectively. The
new exercise prices are $1.25, $1.25, and $0.80, respectively. In relation to
this repricing, the Company recorded compensation expense totaling $158,000.
During the six months ended June 30, 2000 the Company issued 300,000 options
to a consultant and recorded prepaid expenses of $100,000 and charged $65,000
to operations.
Subsequent Events: Other Equity Related Transactions
In July, 2000, the Company issued 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 after five years from the date of issuance.
In July, 2000, the Board authorized the Company to settle a dispute with a
stockholder by issuing 325,000 shares of the Company's common stock.
-13-
<PAGE>
In July, 2000, the Board authorized the Company to settle a dispute with a
consulting firm by entering into a new consulting agreement with an initial
payment of 150,000 shares of common stock and an additional 50,000 shares to be
issued per month during the term of the agreement between the Company and the
consulting firm. The Company has the right to terminate the consulting agreement
at any time and for any reason upon 30 days' notice.
Subsequent to June 30, 2000, the Company repriced 200,000 warrants issued to an
attorney. The new exercise price is $0.38 per share.
Finance Related
On January 14, 2000, the Company raised $200,000 with a convertible promissory
note bearing interest at 10% per annum and five year warrants to purchase 50,000
shares of the Company's stock at $1.00 per share. On March 15, 2000, the note
plus accrued interest of $3,389 converted into 203,389 shares of the Company's
common stock.
On January 28, 2000, the Company raised $9,765,000 in promissory notes due 90
days from issuance, bearing interest at 10% per annum, and five year warrants to
purchase 40,000 shares of common stock at $1.00 per share for each $100,000
note. Outstanding promissory notes totaling $750,000 at December 31, 1999 rolled
into the financing on January 28, 2000, increasing the total of the debt
outstanding to $10,515,000. The Company issued 4,206,000 warrants to purchase
common stock at $1.00 per share in connection with the financing. On March 16,
2000, $9,875,000 of the outstanding debt plus accrued interest converted into
5,005,087 shares of common stock and 1,975,000 warrants to purchase shares of
the Company's common stock at $4.00 per share. The remaining $640,000 in
promissory notes and accrued interest of $16,000 was paid off in cash on April
28, 2000.
On March 15, 2000, notes payable outstanding at December 31, 1999 in the amount
of $500,000 plus accrued interest of $17,084 converted into 258,542 shares of
common stock.
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, netformercials
and other special events and programming. The Company also provides video
encoding services to third party companies and also hosts videos for a number of
third party Internet sites through the use of a co-branded pop-up player. 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
-14-
<PAGE>
rights in Tooele County, Utah. The Company currently operates a website at
www.vidnet.com through our wholly-owned subsidiary, International Net
Broadcasting, which the Company acquired in January, 1999.
RESULTS OF OPERATIONS
Revenues:
Revenues for the six months ended June 30, 2000 were $208,568, increasing from
$0 for the six months ended June 30, 1999. Revenues for the three months ended
June 30, 2000 were $43,547 compared to $0 for the three months ended June 30,
1999.The increase in revenues was attributable primarily to advertising revenues
and web development revenues.
Advertising Revenues
Advertising revenues during the six months ended June 30, 2000 were $112,341,
increasing from $0 for the six months ended June 30, 1999. Advertising revenues
for the three months ended June 30, 2000 were $14,981, increasing from $0 for
the three months ended June 30, 1999. The Company increased advertising revenues
primarily by increasing the inventory of impressions and unique users on the
Company's web site.
Web Site Development Revenues
Web site development revenues during the six months ended June 30, 2000 were
$67,661, increasing from $0 for the six months ended June 30, 1999. Web site
development revenues increased due to work performed on a third party web site
development in the three months ended March 31, 2000, and there were no web site
development revenues in the three months ended June 30, 2000. The Company does
not expect to generate significant revenues from web site development in the
future.
Operating Expenses:
General and Administrative Expenses
General and administrative expenses for the six month and three month periods
ended June 30, 2000 were $4,102,152 and $3,184,354 respectively, compared to
$1,202,329 and $0 for the corresponding six and three month periods ended June
30, 1999. Payroll and payroll related expenses were $1,588,939 and $790,974 for
such six and three month periods ended June 30, 2000 compared to $323,900 and $0
for the corresponding six and three month periods ended June 30, 1999. Rent
expense for the Company's facility was $198,258 and $103,417 for the six and
three month periods ended June 30, 2000 compared to $19,400 and $0 for the
corresponding six and three month periods ended June 30, 1999.
Sales and Marketing Expenses
-15-
<PAGE>
Sales and marketing expenses during the six and three month periods ended June
30, 2000 were $2,896,486 and $1,404,895, increasing from $0 and $0 for the
corresponding six and three month periods ended June 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. The Company
expects sales and marketing expenses to increase as the Company pursues
additional marketing campaigns, and to build an in-house sales and marketing
team.
Other operating expenses during the six and three month periods ended June 30,
2000 were $3,185,878 and $2,072,504, increasing from $0 and $0 for the
corresponding six and three month periods ended June 30, 1999. These expenses
related to license fees for web site content.
Depreciation and Amortization Expenses
Depreciation expense for the six months ended June 30, 2000 was $276,270,
increasing from $13,338 for the six months ended June 30, 1999. For the three
months ended June 30, 2000, depreciation expense was $153,425, compared to
$5,458 for the three months ended June 30, 1999. The increase is primarily
attributable to depreciation of new office furniture and equipment purchased
during the current fiscal year.
Amortization expense for the six months ended June 30, 2000, was $1,391,500,
increasing from $0 for the six months ended June 30, 1999. For the three months
ended June 30, 2000 amortization expense was $27,318 compared to $0 for the
three months ended June 30, 1999.
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 six months ended June 30, 2000 was $135,332 compared to
$0 interest expense for the six months ended June 30, 1999. Net interest income
for the three months ended June 30, 2000 was $28,716 compared to net interest
expense of $0 for the three months ended June 30, 1999.
Financing Costs
Financing costs for the six months ended June 30, 2000 of $35,682,513 increasing
from $4,597,000 during the six months ended June 30, 1999, consisted 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 financings
during the period. Financing costs for the three months ended June 30, 2000 of
$157,013 increasing from $0 during the three months ended June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
-16-
<PAGE>
Since the Company's inception, operations have been financed primarily through
loans and private sales of the Company's equity securities. As of June 30, 2000,
the Company had on hand approximately $1,651,666 in cash, cash equivalents, and
short-term investments.
The Company has no commercial bank credit facility.
For the six months ended June 30, 2000, operating activities used net cash of
approximately $4,070,969, primarily from a net loss from operations of
approximately $48,213,390 which was partially offset by depreciation and
amortization of $276,270, other non-cash charges of $5,491,070, stock options
and warrants issued for compensation of $102,517, financing charges of
$35,682,513, and stock issued to vendors of $660,000.
For the six months ended June 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
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
issuances 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'S ABILITY TO CONTINUE OPERATIONS WILL DEPEND ON THE COMPANY'S
ABILITY TO RAISE ADDITIONAL CAPITAL WITHIN THE NEXT SIXTY DAYS.
The Company will need to raise additional funds to:
- Continue the operations of the Company
- Be prepared for unanticipated opportunities, including:
- The development of an in-house advertising sales team;
- The acquisition of complementary businesses; and
- The development of new products.
- To react to unforeseen difficulties, including:
-17-
<PAGE>
- Loss of key personnel
- Rejection by users of the Company's web site
- Other competitive pressures
If the Company raises additional funds through the issuance of equity
securities, the percentage ownership of the Company's then existing stockholders
will be reduced. Moreover, stockholders may experience additional and
significant dilution and such equity 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, the ability to develop its encoding solutions business
and to generate significant encoding contracts and alliances, and its ability to
develop an in-house e-commerce store and generate sales in that endeavor. 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 encoding
solutions and 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 recently begun to market its services to derive revenues by
encoding video media into digital format that allows distribution of the encoded
media over the Internet. Revenues from encoding services are recognized upon
delivery of the encoded media, provided the Company has no significant
obligations remaining and collection of the related receivable is deemed
probable.
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 expects to continue to enter into such arrangements.
The Company has incurred significant net losses and negative cash flows from
operations since its inception. As of June 30, 2000, the Company had an
accumulated deficit of approximately $76,853,796. 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, and that such losses and negative
cash flows will increase for at least the next year. To achieve profitability,
the Company needs to increase the size of its audience and its revenues from
advertising, encoding services and e-commerce sales.
YEAR 2000 COMPLIANCE
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 the Year 2000.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
-19-
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
On June 8, 2000, the Company issued 1,250,000 shares of common stock to one
accredited investor at a price per share of $0.80 for an aggregate of
$1,000,000. The investor was, prior to the sale of the Company's securities to
him, fully informed and advised about the Company's business, financial and
other matters. No underwriters were used in connection with the issuance of
these shares and no commissions were paid to any person. The issuance of shares
described above was exempt from the registration provisions of the Securities
Act of 1933, as amended (the "Act") pursuant to Section 4(2) of the Act.
On May 10, 2000, the Company granted warrants to purchase a total of
400,000 shares of common stock at an exercise price of $1.38 per share to two
employees. The warrants were exercisable immediately and expire 5 years from the
grant date. The grant of warrants described above was exempt from the
registration provisions of the Act pursuant to Section 4(2) thereof.
On April 20, 2000, the Company granted warrants to purchase 300,000
shares of common stock to a consultant at an exercise price of $2.03 in
exchange for certain consulting services rendered. The warrants were
exercisable with respect to 75,000 shares immediately, vesting monthly at a
rate of 45,000 shares per month and expire 5 years from the grant date. The
grant of warrants described above was exempt from the registration provisions
of the Act pursuant to Section 4(2) thereof.
On April 11, 2000, the Company granted warrants to purchase 3,000,000
shares of common stock to its Chief Executive Officer at an exercise price of
$2.75. The warrants were exercisable immediately and expire 5 years from the
grant date. The grant of warrants described above was exempt from the
registration provisions of the Act pursuant to Section 4(2) thereof.
On April 7, 2000, the Company granted a warrant to purchase 4,375 shares of
common stock at an exercise price of $1.00 per share to a consultant in exchange
for services rendered. The warrants were exercisable immediately and expire on
March 24, 2005. The grant of warrants described above was exempt from the
registration provisions of the Act pursuant to Section 4(2) thereof.
On April 5, 2000, the Company issued 678,685 shares of common stock to Sony
Music in connection with a license agreement between the parties. Sony Music
was, prior to the sale of the Company's securities to it, fully informed and
advised about the Company's business, financial and other matters. The issuance
of shares described above was exempt from the registration provisions of the Act
pursuant to Section 4(2) thereof.
On April 5, 2000, the Company issued 678,686 shares of common stock to
Virgin Holdings in connection with a license agreement between the parties.
Virgin Holdings was, prior to the sale of the Company's securities to it, fully
informed and advised about the Company's business, financial and other matters.
The issuance of shares described above was exempt from the registration
provisions of the Act pursuant to Section 4(2) thereof.
On April 4, 2000, the Company's Chief Executive Officer exercised his
warrant to purchase 1,030,552 shares of common stock with a cashless exercise at
an effective price of $1.00 per share. The exercise of the warrant and the
issuance of shares underlying the warrant described above was exempt from the
registration provisions of the Act pursuant to Section 4(2) thereof.
-20-
<PAGE>
On April 4, 2000, the Company granted warrants to purchase 200,000 shares
at an exercise price of $2.75 per share to a law firm in connection with certain
services rendered. The exercise price was subsequently adjusted to $0.38 per
share. The warrants were immediately exercisable and expire 5 years from the
grant date. The grant of warrants described above was exempt from the
registration provisions of the Act pursuant to Section 4(2) thereof.
On April 1, 2000, the Company granted a warrant to purchase 130,000 shares
at an exercise price of $1.00 to one individual in connection with the
acquisition of a digital production company. The warrant was exercisable
immediately and expires in three years from the grant date. The grant of warrant
described above was exempt from the registration provisions of the Act pursuant
to Section 4(2) thereof.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) EXHIBITS:
(27) Financial Data Schedule
(b) REPORTS ON FORM 8-K:
None.
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: August 14, 2000 By: /s/ PAUL SULLIVAN
----------------------------------------
Paul Sullivan, Chief Financial Officer
-21-
