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 333-42162
VHS NETWORK, INC.
(Exact name of small business issuer as specified in its charter)
FLORIDA 65-0656668
------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
301-5170 Dixie Road
Mississauga, Ontario, Canada L4W 1E3
(Address of principal executive offices)
(905) 238-9398
(Issuer's telephone number)
Copies of all communications to:
Stewart & Associates
1 First Canadian Place, P.O. Box 160
Suite 700, 100 King Street West
Toronto, Ontario, Canada
Tel: (416) 368-7881
Fax: (416) 368-7805
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: October 17, 2000, 19,535,268
<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
VHS NETWORK, INC.
Consolidated Financial Statements
September 30, 2000
C O N T E N T S
---------------
Balance Sheets F-1
Statements of Operations F-2 - F-3
Statements of Shareholders' Equity F-4
Statements of Cash Flows F-5
Notes to Financial Statements F-6 - F-16
<PAGE>
VHS NETWORK, INC.
Consolidated Balance Sheets
As of September 30, 2000 and December 31, 1999
September 30, December 31,
2000 1999
----------- -----------
(unaudited)
ASSETS
Current Assets
Cash $ 65,124 $ 533
Inventory 139,999 139,999
----------- -----------
Total current assets 205,123 140,532
----------- -----------
Property and Equipment
Furniture and Equipment 18,940 --
Accumulated Depreciation (1,419) --
----------- -----------
17,521
Intangible assets, net 1,001,103 --
Other Assets
Other receivables 11,717 --
Prepaids and deposits 67,774 67,774
----------- -----------
Total assets $ 1,303,238 $ 208,306
=========== ===========
LIABILITIES
Accounts payable $ 51,916 $ 64,867
Salaries and wages payable - officers -- 71,500
Accrued expenses -- 37,000
----------- -----------
Total current liabilities 51,916 173,367
----------- -----------
Notes payable, related party 257,027 1,645,868
Reserve for loss contingencies 350,000 350,000
----------- -----------
607,027 1,995,868
----------- -----------
Total liabilities 658,943 2,169,235
----------- -----------
SHAREHOLDERS' EQUITY
Common stock: 100,000,000
shares authorized;
19,535,268 and 10,929,435
issued and outstanding,
respectively 19,534 10,929
Preferred stock: 25,000,000
shares authorized;
none issued or outstanding -- --
Additional paid-in-capital 4,678,933 1,231,170
Accumulated deficit (4,054,172) (3,203,028)
----------- -----------
Total shareholders' equity 644,295 (1,960,929)
----------- -----------
Total liabilities and shareholders' equity $ 1,303,238 $ 208,306
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-1
<PAGE>
VHS NETWORK, INC.
Consolidated Statements of Operations for the three months
and nine months ended September 30, 2000 and 1999, and
the year ended December 31, 1999
Three months Nine months
ended ended
September 30, September 30,
2000 2000
------------ ------------
(unaudited) (unaudited)
Income:
Sales $ -- $ --
------------ ------------
Operating Expenses:
Agency fees 2,861 45,390
Consulting fees 12,815 36,501
General and administrative 725 32,654
Management fees 75,000 220,000
Professional fees 10,876 87,577
Office expense-China 10,380 39,017
Amortization of intangible assets 98,439 180,147
Depreciation and amortization expense 473 1,419
Non-recurring expense -- 216,515
------------ ------------
Total operating expenses 211,569 859,220
------------ ------------
Other (Income) and Expenses:
Currency exchange (gain)/loss 1,090 935
Interest (income) (7,724) (9,516)
Interest expense 287 505
------------ ------------
Total other (income) and expense (6,347) (8,076)
------------ ------------
Net loss before taxes 205,222 851,144
------------ ------------
Income taxes -- --
------------ ------------
Net loss $ 205,222 $ 851,144
============ ============
Net loss per common share - Basic $ 0.011 $ 0.052
============ ============
Weighted average number of
common shares - Basic 19,438,747 16,526,242
============ ============
Net loss per common share - Diluted $ 0.009 $ 0.043
============ ============
Weighted average number of
common shares - Diluted 23,550,268 19,693,755
============ ============
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
VHS NETWORK, INC.
Consolidated Statements of Operations
for the three months and nine months ended September 30, 2000
and 1999, and the year ended December 31, 1999
(continued)
Three months Nine months
ended ended Year ended
September 30, September 30, December 31,
1999 1999 1999
----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C>
Income:
Sales $ -- $ -- $ --
----------- ----------- -----------
Operating Expenses:
Agency fees 5,250 9,190 9,190
Salaries and wages payable - officers -- -- 71,500
Consulting fees 2,418 4,505 52,833
General and administrative 159 624 686
Management fees -- 336,000 336,000
Professional fees 18,168 18,168 18,168
Office expense-China -- -- --
Depreciation and amortization expense -- -- --
Non-recurring expense -- -- 37,000
----------- ----------- -----------
Total operating expenses 25,995 368,487 525,377
----------- ----------- -----------
Other (Income) and Expenses:
Currency exchange (gain)/loss -- -- --
Interest (income) -- -- --
Interest expense -- -- --
----------- ----------- -----------
Total other (income) and expense -- -- --
----------- ----------- -----------
Net loss before taxes 25,995 368,487 525,377
----------- ----------- -----------
Income taxes -- -- --
----------- ----------- -----------
Net loss $ 25,995 $ 368,487 $ 525,377
=========== =========== ===========
Net loss per common share - Basic $ 0.002 $ 0.035 $ 0.050
=========== =========== ===========
Weighted average number of
common shares - Basic 10,429,435 10,429,435 10,432,175
=========== =========== ===========
Net loss per common share - Diluted $ 0.002 $ 0.034 $ 0.048
=========== =========== ===========
Weighted average number of
common shares - Diluted 10,984,435 10,885,357 10,864,380
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
VHS NETWORK, INC.
Consolidated Statements of Shareholders' Equity
for the nine months ended September 30, 2000 (unaudited)
and the year ended December 31, 1999
Common Preferred Additional Accumulated
Stock Stock paid-in-capital Deficit Total
-------------------------- ------------------- ----------- ----------- -----------
Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1998 10,429,435 $ 10,429 -- $ -- $ 1,181,670 $(2,677,651) $(1,485,552)
----------- ----------- -- -------- ----------- ----------- -----------
Common stock issued
for services 500,000 500 -- -- 49,500 -- 50,000
Net loss for the period -- -- -- -- -- (525,377) (525,377)
----------- ----------- -- -------- ----------- ----------- -----------
Balance December 31, 1999 10,929,435 10,929 -- -- 1,231,170 (3,203,028) (1,960,929)
----------- ----------- -- -------- ----------- ----------- -----------
Sale of common stock 2,083,333 2,083 -- -- 947,917 -- 950,000
Conversion of note payables 2,500,000 2,500 -- -- 863,368 -- 865,868
Common stock issued
for services 7,500 7 -- -- 743 -- 750
Net loss for the period -- -- -- -- -- (103,727) (103,727)
----------- ----------- -- -------- ----------- ----------- -----------
Balance March 31, 2000 15,520,268 15,519 -- -- 3,043,198 (3,306,755) (248,038)
----------- ----------- -- -------- ----------- ----------- -----------
Sale of common stock 550,000 550 -- -- 109,450 -- 110,000
Acquisition of China
e-mall Corp 2,100,000 2,100 -- -- 1,179,150 -- 1,181,250
Acquisition of
Exodus Acquisition 500,000 500 -- -- 124,500 -- 125,000
Conversion of debt
into common stock 10,000 10 -- -- 21,990 -- 22,000
Common stock issued
for services 50,000 50 -- -- 24,950 -- 25,000
Exercise of warrants 250,000 250 -- -- 104,750 -- 105,000
Net loss for the period -- -- -- -- -- (542,195) (542,195)
----------- ----------- -- -------- ----------- ----------- -----------
Balance June 30, 2000 18,980,268 18,979 -- -- 4,607,988 (3,848,950) 778,017
----------- ----------- -- -------- ----------- ----------- -----------
Common stock issued
for compensation 555,000 555 -- -- 70,945 -- 71,500
Net loss for the period -- -- -- -- -- (205,222) (205,222)
----------- ----------- -- -------- ----------- ----------- -----------
Balance September 30, 2000 19,535,268 $ 19,534 -- $ -- $ 4,678,933 $(4,054,172) $ 644,295
=========== =========== == ======== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
VHS NETWORK, INC.
Consolidated Statements of Cash Flows
for the six months ended September 30, 2000 and 1999,
and the year ended December 31, 1999
<TABLE>
<CAPTION>
Nine months Nine months
ended ended Year ended
September 30, September 30, December 31,
2000 1999 1999
-------------- -------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Net income (loss) $ (851,144) $ (368,487) $ (525,377)
Common stock issued for services 25,750 -- 50,000
Acquisition of Exodus Corporation 125,000 -- --
Amortization of intangible assets 180,147 -- --
Depreciation and amortization 1,419 -- --
----------- ----------- -----------
(518,828) (368,487) (475,377)
Cash flow from operating activities:
Changes in assets and liabilities
Other receivables $ (11,717) 11,000 $ 11,000
Accounts payable (12,951) 25,243 24,025
Salaries and wages payable - officers -- -- 71,500
Accrued expenses (37,000) -- 37,000
----------- ----------- -----------
Cash flow generated by (used in)
operating activities (580,496) $ (332,244) $ (331,852)
----------- ----------- -----------
Cash flow from investing activities:
Purchase of furniture and equipment $ (18,940) $ -- $ --
----------- ----------- -----------
Net cash generated by (used in)
investing activities(18,940) $ -- $ --
----------- ----------- -----------
Cash flow from financing activities:
Borrowings under notes
payable - related party $ 220,000 314,194 $ 314,194
Payments on notes
payable -related party (720,973) -- --
Proceeds from exercise of warrants 105,000 -- --
Proceeds from sale of common stock 1,060,000 -- --
----------- ----------- -----------
Net cash generated by (used in)
financing activities 664,027 $ 314,194 $ 314,194
----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents 64,591 (18,050) (17,658)
Balance at beginning of period 533 18,191 18,191
----------- ----------- -----------
Balance at end of period $ 65,124 $ 141 $ 533
=========== =========== ===========
Supplementary disclosure:
Cash paid for interest $ 505 $ -- $ --
----------- ----------- -----------
Cash paid for taxes $ -- $ -- $ --
----------- ----------- -----------
Conversion of payables into common stock $ 93,500 $ -- $ --
----------- ----------- -----------
Conversion of notes payable - related
party into common stock $ 865,868 $ -- $ --
----------- ----------- -----------
Common stock issued for acquisitions $ 1,306,250 $ -- $ --
----------- ----------- -----------
Common stock issued for services $ 25,750 $ -- $ 50,000
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-5
<PAGE>
VHS NETWORK, INC.
Notes to Financial Statements
September 30, 2000
1. NATURE OF OPERATIONS
Company History
---------------
VHS Network, Inc. (the "Company") was incorporated in the State of
Florida on December 18, 1995 as Ronden Vending Corp. On December 24,
1996, the Company incorporated a wholly owned subsidiary called Ronden
Acquisition, Inc. a Florida corporation. Ronden Acquisition, Inc. then
merged with Video Home Shopping, Inc. (a Tennessee corporation), and
Ronden Acquisition, Inc. was the surviving Florida Corporation. In
1996, Video Home Shopping, Inc. was a network marketing and
distribution company which offered a wide range of products and
services to consumers through the medium of video tape, however, after
the merger the Company decided not to continue with the network
marketing and distribution operations of Video Home Shopping, Inc. of
Tennessee.
On January 9, 1997, articles of merger were filed for the Company as
the surviving corporation of a merger between the Company and its
wholly owned subsidiary Ronden Acquisitions, Inc. This step completed
the forward triangular merger between Video Home Shopping, Inc., Ronden
Acquisition, Inc. and the Company.
On January 9, 1997, articles of amendment were filed to change the name
of the Company from Ronden Vending Corp. to VHS Network, Inc. On April
9, 1997, the Company incorporated VHS Acquisition, Inc. as a wholly
owned subsidiary.
In April 1997, the Company was restructured by way of a reverse
take-over involving its wholly owned subsidiary, VHS Acquisition, Inc.
a Florida company, and VHS Network Inc., a Manitoba and Canadian
controlled private corporation. Pursuant to the reverse take-over, the
sole shareholder of VHS Network Inc., Groupmark Canada Limited,
received 400,000 shares of the Company's common stock and a secured
promissory note for US$500,000 and became the controlling shareholder
of the Company. In 1998, the promissory note for $500,000 was converted
into 5,000,000 common shares.
On April 12, 2000, the Company acquired all the outstanding common
shares of China eMall Corporation, an Ontario private company. This
represents a 100% interest in the voting stock of China eMall
Corporation.
F-6
<PAGE>
VHS NETWORK, INC.
Notes to Financial Statements
September 30, 2000
1. NATURE OF OPERATIONS (continued)
Operations
----------
During 1999, the Company has been repositioning itself to identify
technologies and market opportunities in the United States, Canada and
abroad in Internet and electronic commerce interactive media, and
SmartCARD loyalty marketing. The Company will operate and/or develop
two lines of business as follows:
China eMall Corporation ("China eMall"): Through its acquired
subsidiary, China eMall Corporation, an Ontario, Canada corporation,
the Company provides Internet marketing and information services to
facilitate trade between Chinese and western businesses. The Company's
primary focus will be to establish an on-line presence to facilitate
the export of Chinese products. Through its multi-functional portal,
Chinese suppliers can post their products and services in a format that
is easy for searching, quoting and tracking, and that gives a western
buyer access to multiple suppliers for the best quality and price, and
direct communication. Realizing the difference in business culture and
financial systems, China eMall will allocate substantial amount of
resources in assisting in the communications, export/import processing,
financial transaction and product services. China eMall's business will
make use of Internet technology to speed up the export process and
broaden the sales channels for Chinese goods and services, and more
importantly, bring customers into direct contact with Chinese producers
who can constantly upgrade their products to meet customers' needs.
China eMall has an agreement with Wangfujing Department Store Ltd., a
large Chinese retailer, as its prime product supplier.
SmartCARD: The Company is developing computer chip-based plastic access
cards that utilize proprietary SmartCARD technology, which is licensed
from Groupmark Canada Limited, a related party. This technology enables
the cards to be used for identification purposes and as debit or charge
cards. The Company intends to focus its marketing efforts on companies
that wish to distribute these cards to their customers as a reward for
their loyalty. Groupmark Canada Limited owns the registered trademark
"SmartCARD" in Canada and has a pending application in the United
States. Groupmark Canada has granted the Company a license to use the
trademark "SmartCARD." Pursuant to the terms of the license agreement,
the Company will pay to Groupmark a royalty of 5% of net sales of
products using the SmartCARD trademark and technology.
F-7
<PAGE>
VHS NETWORK, INC.
Notes to Financial Statements
September 30, 2000
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States. The
following is a summary of the significant accounting policies followed
in the preparation of these consolidated financial statements.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the
Company and all of its subsidiary companies. Intercompany accounts and
transactions have been eliminated on consolidation.
Cash and Cash Equivalents
-------------------------
Cash and cash equivalents consist of cash on hand and cash deposited
with financial institutions, including money market accounts, and
commercial paper purchased with an original maturity of three months or
less.
Concentration of Cash
---------------------
The Company at times maintains cash balances in accounts that are not
fully federally insured. Uninsured balances as of September 30, 2000
and December 31, 1999 were $65,124 and $533, respectively.
Inventories
-----------
Inventories are stated at the lower of cost (first in, first out
method) or market.
F-8
<PAGE>
VHS NETWORK, INC.
Notes to Financial Statements
September 30, 2000
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock-based Compensation
------------------------
The Company accounts for its stock-based compensation plan based on
Accounting Principles Board ("APB") Opinion No. 25. In October 1995,
the Financial Accounting Standards Board ("FASB") issued SFAS No. 123,
"Accounting for Stock-Based Compensation." The Company has determined
that it will not change to the fair value method and will continue to
use APB Opinion No. 25 for measurement and recognition of any expense
related to employee stock based transactions.
Property and Equipment
----------------------
Property and equipment are stated at cost or, in the case of leased
assets under capital leases, at the present value of future lease
payments at inception of the lease. Major improvements that materially
extend the useful life of property are capitalized. Depreciation is
calculated on a straight-line basis over the estimated useful lives of
the various assets, which range from three to seven years. Leasehold
improvements and leased assets under capital leases are amortized over
the life of the asset or the period of the respective lease using the
straight-line method, whichever is the shortest. Expenditures for
repairs and maintenance are charged to expense as incurred.
Income Taxes
------------
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Income taxes are provided for the tax
effects of transactions reported in the consolidated financial
statements and consist of deferred taxes related to differences between
the basis of assets and liabilities for financial and income tax
reporting. The deferred tax assets and liabilities represent the future
tax return consequences of those differences, which will be either
taxable or deductible when the assets and liabilities are recovered or
settled. Deferred taxes are also recognized for operating losses that
are available to offset future taxable income.
Foreign Currency Translation
----------------------------
Transactions are translated into the functional currency at the
exchange rates in effect at the time the transactions occur. Exchange
gains and losses arising on translation are included in the operating
results for the year.
F-9
<PAGE>
VHS NETWORK, INC.
Notes to Financial Statements
September 30, 2000
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue
Sales are recorded for products upon shipment of product to customers
and transfer of title under standard commercial terms.
Comprehensive Income
--------------------
In 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income and its components in a full set
of financial statements. Comprehensive income consists of net income
and unrealized gains (losses) on available for sale marketable
securities and is presented in the consolidated statements of
shareholders' equity and comprehensive income. SFAS No. 130 requires
only additional disclosures in the consolidated financial statements
and does not affect the Company's financial position or results of
operations. The Company does not have elements of comprehensive income
for the three and nine months ended September 30, 2000 and for the year
ended December 31, 1999.
Income (loss) per common share
------------------------------
Income (loss) per common share is computed on the weighted average
number of common or common and common equivalent shares outstanding
during each year. Basic Earnings-per-Share ("EPS") is computed as net
income (loss) applicable to common stockholders' divided by the
weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur from
common shares issuable through stock options, warrants, and other
convertible securities when the effect would be dilutive.
Long-lived assets
-----------------
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121, the Company reviews the carrying value of its long-lived
assets and identifiable intangibles for possible impairment whenever
events or changes in circumstances indicate the carrying amount of
assets to be held and used may not be recoverable.
F-10
<PAGE>
VHS NETWORK, INC.
Notes to Financial Statements
September 30, 2000
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Use of Estimates
----------------
The preparation of the financial statements in conformity with
generally accepted accounting principles necessarily requires
management to make estimates and assumptions that effect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting periods.
Actual results could significantly differ from those estimates.
Advertising Costs
-----------------
The Company expenses advertising costs as they are incurred.
Advertising costs for the three and nine month period ending September
30, 2000 were $44,231 and $45,390, respectively. The Company did not
incur any advertising costs during the year ended December 31, 1999.
Recently Issued Accounting Pronouncements
-----------------------------------------
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires recognition
of all derivative financial instruments as either assets or liabilities
in consolidated balance sheets at fair value and determines the
method(s) of gain/loss recognition. The FASB issued SFAS No. 137,
"Deferral of the Effective Date of FASB Statement No. 133" in June 1999
to defer the effective date of SFAS No. 133 to fiscal years beginning
after June 15, 2000. The Company did not have any derivative
instruments or engage in hedging activities during the nine month
period ended September 30, 2000.
Goodwill and Other Intangibles
------------------------------
Intangible assets are recorded at cost. Goodwill associated with the
purchase of China eMall is amortized on a straight-line basis over a
period of 3 years.
F-11
<PAGE>
VHS NETWORK, INC.
Notes to Financial Statements
September 30, 2000
3. INVENTORIES
On April 29, 1998, the Company acquired approximately 32,000 sets of
printed art reproductions. Each set consists of four full-color
lithograph prints from "The Andover Series" by artist Jim Perleberg.
Each image has a title narrative printed in the margin and is
re-signed, in the plate, by the artist. The management of the Company
have evaluated the market value of the prints and determined that the
market value of the prints is not below their acquisition. The prints
are by a noted artist, and the original Andover Series S/N Limited
Edition lithographs were fully sold.
The Company acquired these sets of prints in exchange for 1,399,992
shares of its common stock valued at $139,999. The Company will be
offering these prints for sale through its own web site and other
Internet web sites.
4. INCOME TAXES
No provision for federal and state taxes has been recorded for the
three and nine month period ending September 30, 2000 or for the year
ended December 31, 1999, since the Company incurred net operating
losses for these periods. Due to the uncertainty surrounding the
realization of deferred tax assets, the Company has recorded a
valuation allowance against its net deferred tax asset.
5. STOCKHOLDERS' EQUITY
Common Stock
------------
In December 1999, the Company commenced a private placement of its
common shares under Rule 504 of Regulation D promulgated under the
Securities Act of 1933 and section 203 (t) of the Pennsylvania
Securities Act of 1972. As of September 30, 2000, the Company has sold
2,583,333 shares for $1,000,000, completing the full offering.
On April 12, 2000, the Company sold 550,000 shares of its common stock
for $110,000, which included warrants to purchase 1,225,000 shares of
its common stock at exercise prices ranging from $0.35 to $0.95. All
warrants expire on or before 180 days from the date of issuance. On May
3, 2000, the Company issued 250,000 shares of its common stock for
$105,000 pursuant to the exercise terms of the warrants.
F-12
<PAGE>
VHS NETWORK, INC.
Notes to Financial Statements
September 30, 2000
The Company has issued 57,500 shares of its common stock in lieu of
cash payments for the settlement of liabilities and services rendered
to the Company by various consultants.
6. STOCK OPTIONS
In 1997, the Company granted stock options to two executive officers.
The options were granted at the fair market value of the stock as
determined by the Board of Directors. Stock options were granted to
purchase 750,000 common shares at $0.30 per share. The options are
immediately vested and expire on December 31, 2001.
In 1998, the Company granted stock options to two executive officers
and a member of the board. The stock options were non-qualified stock
options. The options were granted at the fair market value of the stock
as determined by the Board of Directors. Stock options were granted to
purchase a total of 1,250,000 common shares at $0.40 per share. The
options are immediately vested and expire on December 31, 2002.
7. RELATED PARTY TRANSACTIONS
Groupmark Canada Limited
------------------------
In 1997, the Company entered into a management service agreement with
Groupmark Canada Limited ("Groupmark"), of which the Chairman and Chief
Executive Officer of the Company is the sole shareholder. Under this
agreement, Groupmark provides the Company all management, daily
administrative functions, financial and business advisory services.
Groupmark was also contracted to assist in the technological
development of the "SmartCARD." Contractually, charges for these
services are not to exceed $56,000 per month. The Company has incurred
$220,000 in management fees during the nine-month period ending
September 30, 2000.
Amounts due Groupmark pursuant to this management service agreement as
of September 30, 2000 and December 31, 1999 are $257,027 and
$1,645,868, respectively. Groupmark has the option to accept payment by
way of the Company's common stock at fair market value in lieu of cash.
In March 2000, Groupmark converted $865,868 of the amounts due it under
the management service agreement into 2,500,000 shares of the Company's
common stock.
F-13
<PAGE>
VHS NETWORK, INC.
Notes to Financial Statements
September 30, 2000
Transactions with Corporate Officers and Directors
--------------------------------------------------
On October 13, 1999 the Board of Directors approved issuance of 370,000
and 185,000 shares of the Company's common stock to the Chief Executive
Officer and Chief Financial Officer, respectively. The grants of common
stock were made in lieu of cash compensation. The total market value of
the common stock on the date of grant was $71,500. The shares were
issued to these two individuals in July 2000.
8. COMMITMENTS AND CONTINGENCIES
Legal
-----
The Company is not currently aware of any legal proceedings or claims
that the Company believes will have, individually or in the aggregate,
a material adverse effect on the Company's financial position or
results of operations.
Video Home Shopping, Inc., a Tennessee Corporation
--------------------------------------------------
In December 1996, the Company merged Video Home Shopping, Inc., a
Tennessee corporation. Subsequent to the merger, the new management of
the Company decided not to continue with the business operations of
Video Home Shopping, Inc. In consideration of the closure of Video Home
Shopping, Inc., the Company continues to maintain a reserve for
potential loss contingencies from these operations of $350,000.
The loss reserve is primarily for payroll tax liabilities incurred by
Video Home Shopping, Inc. before its merger VHS Network, Inc. The
Company may be contingently liable for amounts withheld by Video Home
Shopping, Inc. from employees' wages for income taxes, which were not
remunerated to the Internal Revenue Service.
Going Concern Uncertainties
---------------------------
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern. However, the Company
has experienced recurring operating losses and negative cash flows from
operations. The Company's continued existence is dependent upon its
ability to increase operating revenues and/or raise additional equity
financing.
F-14
<PAGE>
VHS NETWORK, INC.
Notes to Financial Statements
September 30, 2000
In view of these matters, management believes that actions presently
being taken to expand the Company's operations and to continue its
web-site development activity provide the opportunity for the Company
to return to profitability. The continued focus on strategic
technological investments will improve the Company's cash flow,
profitability, and ability to raise additional capital so that it can
meet its strategic objectives.
Management raised additional capital, $1,165,000 during the six months
ended June 30, 2000, and is currently in the process of negotiating
additional equity financing with potential investors. The financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
9. Acquisitions
Acquisition of China eMall Corporation
--------------------------------------
On April 12, 2000, the Company completed the acquisition of all
outstanding common shares of China eMall Corporation, ("eMall") an
e-commerce company, through the issuance of 2,100,000 shares of the
Company's common stock, which had a market value of $1,181,250. eMall
has Preferred Stock outstanding that is convertible into 4,015,000
shares of the Company's common stock. The Company has a 100% interest
in the voting stock of China eMall because of this transaction. The
Preferred Stock of eMall is non-voting, and it is convertible into the
Company's common stock at the discretion of the holders of eMall
Preferred Stock. The eMall Preferred Stock can be redeemed by the
Company at the earlier of: (a) three years from the date on which a
registration statement for the Common shares of the Company is filed
with the Securities and Exchange Commission in the US; or (b) five
years from the date of issue, (April 12, 2000). The historical
operations of eMall before the date of the acquisition were deminimis.
The transaction has been accounted for as a purchase and, the purchase
price has been allocated to the intangible assets acquired, including
domain-name, acquired work-force, and goodwill. The purchase price was
allocated as follows:
Intangible assets
Domain name $ 75,000
Workforce 25,000
Goodwill 1,081,250
---------
Total $ 1,181,250
---------
F-15
<PAGE>
VHS NETWORK, INC.
Notes to Financial Statements
September 30, 2000
The intangible assets are being amortized over 3 years on a
straight-line basis.
Acquisition of Exodus Acquisition Corporation
In May 2000, the Company merged with Exodus Acquisition Corporation, a
California corporation, and a fully reporting company under regulation
12(g) of the Securities Exchange Act of 1934. Exodus has no material
assets or liabilities. Under terms of the acquisition, The Company
issued 500,000 shares of the Company's common stock, (having a market
value of $125,000) for all the outstanding shares of Exodus Acquisition
Corporation. The acquisition was accounted for using the purchase
method of accounting. To conclude this transaction, the Company
incurred $90,070 in acquisition related expenses. The historical
operations of Exodus before the date of acquisition were deminimis.
10. Intangible Assets
Intangible assets at June 30, 2000 consist of the following:
Domain name $ 75,000
Workforce 25,000
Goodwill 1,081,250
---------
$1,181,250
Less: Accumulated amortization (180,147)
---------
$1,001,103
Amortization expense for the three and nine months ending September 30,
2000 was $98,439 and $180,147, respectively.
11. Registration Statement
On October 26, 2000, the Company filed an amended Registration
Statement, Form SB-2, pertaining to the sale of 9,657,000 shares of its
common stock, of which 4,392,500 shares are issued and outstanding, and
5,265,000 shares are issuable upon exercise of options, warrants and
other conversion privileges to acquire common stock. The shares were
issued, or are issuable upon conversion or exercise of securities,
which were issued, by the Company in private placement transactions.
The Securities and Exchange Commission is currently reviewing the
Registration Statement filing.
F-16
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation.
General
The information in this section should be read together with the consolidated,
unaudited, interim financial statements that are included elsewhere in this Form
10-QSB.
VHSN's goals and objectives are centered on the ability to identify technologies
and market opportunities in the United States, Canada and abroad in internet and
interactive media e-commerce and smartCARD loyalty marketing.
To achieve its goals, VHSN is developing its supplier base and its web site,
www.china-emall.com, so that it will be in a position to attract purchasing and
revenues. It is at the same time investigating companies from which it can
acquire technology with proven financial performance, where joint ventures or
acquisitions may also be possible.
Results of Operations
Results of three months ended September 30, 2000. For the three months ended
September 30, 2000 and the three months ended September 30, 1999, VHSN had no
revenues. Operating Expenses for the three months ended September 30, 2000 were
$211,569 compared with Operating Expenses of $25,995 for the three months ended
September 30, 1999. The difference in Operating Expenses is attributed to an
increase in consulting fees, management fees and the China office expense. The
increase in Operation Expenses also includes an amount of $98,439 for the
amortization of intangible assets. In August, 2000, VHSN and G.C. Consulting and
Investment Corp. decided that it was in VHSN's best interest to terminate the
consulting agreement which provided for the services of Dr. Gang Chai. It was
determined that the services of Dr. Chai were not required on a full time basis
however the parties agreed that an arrangement would be made to compensate Dr.
Chai for his services that may be required from time to time by VHSN. Dr. Gang
remains a director of VHSN.
Results of nine months ended September 30, 2000. For the nine months ended
September 30, 2000 and the nine months ended September 30, 1999, VHSN had no
revenues. Operating Expenses for the nine months ended September 30, 2000 were
$859,220 compared with Operating Expenses of $368,487 for the nine months ended
September 30, 1999. During the nine months ended September 30, 1999 the
Operating Expenses were mainly composed of management fees of $336,000 that
<PAGE>
accrued under the management agreement with Groupmark Canada Limited (the
"Management Agreement"). During the nine months ended September 30, 2000
management fees under the Management Agreement decreased to $220,000 however
consulting fees, general and administrative expenses, professional fees
increased. Operating Expenses for the nine months ended September 30, 2000 also
included China office expenses of $39,017, amortization of intangible assets of
$180,147 and a non-recurring expense of $216,515.
Liquidity and Capital
Resources VHSN achieved no revenues from operations in either the 1999 fiscal
year or during the nine months ended September 30, 2000. During the nine months
ended June 30, 2000 VHSN received an aggregate of approximately $1,165,000 from
investors through the sale of common shares made pursuant to offerings exempt
from registration including the exercise of outstanding warrants.
The continued existence and ability of VHSN to continue as a going concern are
dependent upon its ability to obtain revenues and capital funding as required to
fund its operations.
Revenues are projected to commence during the current fiscal year ending
December 31, 2000.
Changes in Financial Position
Total assets increased to $1,303,238 on September 30, 2000 compared with total
assets of $208,306 on December 31, 1999. This increase in total assets is
largely due to net intangible assets of $1,001,103 on September 30, 2000.
Intangible assets of $1,181,250 were acquired on April 12, 2000 through the
acquisition of all the issued and outstanding common shares of China eMall
Corporation which was accounted for as a purchase. The intangible assets
acquired included goodwill of $1,081,250.
Total liabilities decreased to $658,943 on September 30, 2000 compared with
total liabilities of $2,169,235 on December 31, 1999. The decrease in
liabilities is largely due to the decrease in the note payable to Groupmark
Canada Limited from $1,645,868 on December 31, 1999 to $257,027 on September 30,
2000. During the nine months ended September 30, 2000 Groupmark accrued $220,000
in management fees. Groupmark converted $865,868 of the amounts due it under the
Management Agreement into 2,500,000 shares of VHSN in March, 2000 and received
$720,973 in cash during the nine months ended September 30, 2000.
The number of issued common shares of VHSN increased from 10,929,435 on December
31, 1999 to 19,535,268 on September 30, 2000. Shareholders' equity increased
from ($1,960,929) to $644,295 during the first nine months of 2000. This
increase in shareholders' equity in largely due to net intangible assets of
$1,001,103 and the decrease in the amount owing to Groupmark under the
Management Agreement.
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities/Recent Sales of Unregistered Securities.
On July 11, 2000 the Registrant issued 370,000 common shares to Elwin Cathcart,
Chief Financial Officer and a director of the Registrant 185,000 common shares
to David Smelskey, a director and officer of the Registrant, in lieu of salary.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
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 caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
VHS NETWORK, INC.
(the "Registrant")
Date: November 20, 2000 By: /s/ Elwin Cathcart
----------------------- ----------------------
Elwin Cathcart
Chief Executive Officer
(principal financial and
accounting officer and duly authorized
signing officer)
