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 333-42162
VHS NETWORK, INC.
(Exact name of small business issuer as specified in its charter)
FLORIDA 65-0656668
------- ----------
(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification No.)
6705 Tomken Road, Unit 12-14
Mississauga, Ontario, Canada
(Address of principal executive offices)
(905) 795-9139
(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: June 30, 2000, 18,980,260
<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
<PAGE>
VHS NETWORK, INC.
CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
<PAGE>
VHS NETWORK, INC.
Consolidated Financial Statements
June 30, 2000
C O N T E N T S
Balance Sheets 1
Statements of Operations 2-3
Statements of Shareholders' Equity 4
Statements of Cash Flows 5
Notes to Financial Statements 6-16
<PAGE>
VHS NETWORK, INC.
Consolidated Balance Sheets
As of June 30, 2000 and December 31, 1999
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash $ 218,095 $ 533
Restricted Cash 400,000 --
Inventory 559,997 559,997
----------- -----------
Total current assets 1,178,092 560,530
----------- -----------
Property and Equipment
Furniture and Equipment 18,940 --
Accumulated Depreciation (946) --
----------- -----------
17,994 --
Intangible assets, net 1,151,719 --
Other Assets
Other receivables 15,976 --
Prepaids and Deposits 67,774 67,774
----------- -----------
Total assets $ 2,431,555 $ 628,304
=========== ===========
LIABILITIES
Accounts payable $ 52,431 $ 64,867
Accrued expenses -- 37,000
----------- -----------
Total current liabilities 52,431 101,867
----------- -----------
Notes payable, related party 707,432 1,645,868
Reserve for loss contingencies 350,000 350,000
----------- -----------
1,057,432 1,995,868
----------- -----------
Total liabilities 1,109,863 2,097,735
----------- -----------
SHAREHOLDERS' EQUITY
Common stock: 100,000,000 shares authorized;
18,980,260 and 10,929,435 issued and outstanding,
respectively 18,979 10,929
Preferred stock: 25,000,000 shares authorized;
none issued or outstanding -- --
Additional paid-in-capital 4,902,986 1,651,168
Accumulated deficit (3,600,273) (3,131,528)
----------- -----------
Total shareholders' equity 1,321,692 (1,469,431)
----------- -----------
Total liabilities and shareholders' equity $ 2,431,555 $ 628,304
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
VHS NETWORK, INC.
Consolidated Statements of Operations
for the three months and six months ended June 30, 2000 and 1999, and
the year ended December 31, 1999
Three months Six months
ended ended
June 30, June 30,
2000 2000
------------ ------------
(unaudited) (unaudited)
Income:
Sales $ -- $ --
------------ ------------
Operating Expenses:
Agency fees 3,850 42,529
Consulting fees 23,686 23,686
General and administrative 21,102 31,929
Management fees 75,000 120,000
Professional fees 93,658 101,701
Office expense-China 28,637 28,637
Depreciation and amortization expense 30,004 30,477
Non-recurring expense 91,515 91,515
------------ ------------
Total operating expenses 367,452 470,474
------------ ------------
Other (Income) and Expenses:
Currency exchange (gain)/loss (902) (155)
Interest (income) (1,694) (1,792)
Interest expense 162 218
------------ ------------
Total other (income) and expense (2,434) (1,729)
------------ ------------
Net loss before taxes 365,018 468,745
------------ ------------
Income taxes -- --
------------ ------------
Net loss $ 365,018 $ 468,745
============ ============
Net loss per common share - Basic $ 0.020 $ 0.031
============ ============
Weighted average number of
common shares - Basic 18,229,824 15,052,283
============ ============
Net loss per common share - Diluted $ 0.017 $ 0.027
============ ============
Weighted average number of
common shares - Diluted 21,873,268 17,549,781
============ ============
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
VHS NETWORK, INC.
Consolidated Statements of Operations
for the three months and six months ended June 30, 2000 and 1999, and
the year ended December 31, 1999 (continued)
<TABLE>
<CAPTION>
Three months Six months
ended ended Year ended
June 30, June 30, December 31,
1999 1999 1999
----------- ----------- -----------
<S> <C> <C> <C>
Income:
Sales $ -- $ -- $ --
----------- ----------- -----------
Operating Expenses:
Agency fees 3,140 3,940 9,190
Consulting fees -- 2,087 52,833
General and administrative 88 465 686
Management fees 168,000 336,000 336,000
Professional fees -- -- 18,168
Office expense-China -- -- --
Depreciation and amortization expense -- -- --
Non-recurring expense -- -- 37,000
----------- ----------- -----------
Total operating expenses 171,228 342,492 453,877
----------- ----------- -----------
Other (Income) and Expenses:
Currency exchange (gain)/loss -- -- --
Interest (income) -- -- --
Interest expense -- -- --
----------- ----------- -----------
Total other (income) and expense -- -- --
----------- ----------- -----------
Net loss before taxes 171,228 342,492 453,877
----------- ----------- -----------
Income taxes -- -- --
----------- ----------- -----------
Net loss $ 171,228 $ 342,492 $ 453,877
=========== =========== ===========
Net loss per common share - Basic $ 0.016 $ 0.033 $ 0.044
=========== =========== ===========
Weighted average number of
common shares - Basic 10,429,435 10,429,435 10,432,175
=========== =========== ===========
Net loss per common share - Diluted $ 0.016 $ 0.031 $ 0.040
=========== =========== ===========
Weighted average number of
common shares - Diluted 10,853,348 11,112,236 11,241,517
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
VHS NETWORK, INC.
Consolidated Statements of Shareholders'
Equity for the six months ended June 30, 2000 (unaudited) and
the year ended December 31, 1999
<TABLE>
<CAPTION>
Common Preferred Additional
Stock Stock paid-in- Accumulated
Shares Amount Shares Amount capital Deficit Total
----------- ----------- ----------- ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1998 10,429,435 $ 10,429 - $ - $ 1,601,668 $ (2,677,651) $(1,065,554)
----------- ----------- ----------- ---------- ----------- ------------ ------------
Common stock issued for
services 500,000 500 - - 49,500 - 50,000
Net loss for the period - - - - - (453,877) (453,877)
----------- ----------- ----------- ---------- ----------- ------------ ------------
Balance December 31, 1999 10,929,435 10,929 - - 1,651,168 (3,131,528) (1,469,431)
----------- ----------- ----------- ---------- ----------- ------------ ------------
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 - - 3,463,196 (3,235,255) 243,460
----------- ----------- ----------- ---------- ----------- ------------ ------------
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 Corp. 500,000 500 - - (500) - -
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 - - - - - (365,018) (365,018)
----------- ----------- ----------- ---------- ----------- ------------ ------------
Balance June 30, 2000 18,980,268 $ 18,979 - $ - $ 4,902,986 $ (3,600,273)$ 1,321,692
=========== =========== =========== ========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
VHS NETWORK, INC.
Consolidated Statements of Cash Flows
for the six months ended June 30, 2000 and 1999,
and the year ended December 31, 1999
<TABLE>
<CAPTION>
Six months Six months
ended ended Year ended
June 30, June 30, December 31,
2000 1999 1999
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
Net income (loss) $ (468,745) $ (342,492) $ (453,877)
Depreciation and amortization 30,477 -- --
----------- ----------- -----------
(438,268) (342,492) (453,877)
Cash flow from operating activities:
Changes in assets and liabilities
Other receivables $ (15,976) 11,000 $ 11,000
Accounts payable (12,436) 518 24,025
Accrued expenses (15,000) -- 37,000
----------- ----------- -----------
Cash flow generated by (used in)
operating activities $ (481,680) $ (330,974) $ (381,852)
----------- ----------- -----------
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 $ 145,000 314,194 $ 314,194
Payments on notes payable -related party (217,568) -- --
Issuance of common stock for services 25,750 -- 50,000
Proceeds from exercise of warrants 105,000 -- --
Proceeds from sale of common stock 1,060,000 -- --
----------- ----------- -----------
Net cash generated by (used in)
financing activities $ 1,118,182 $ 314,194 $ 364,194
----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents 617,562 (16,780) (17,658)
Balance at beginning of period 533 18,191 18,191
----------- ----------- -----------
Balance at end of period $ 618,095 $ 1,411 $ 533
=========== =========== ===========
Supplementary disclosure:
Cash paid for interest $ 218 $ -- $ --
----------- ----------- -----------
Cash paid for taxes $ -- $ -- $ --
----------- ----------- -----------
Conversion of debt into common stock $ 22,000 $ -- $ --
----------- ----------- -----------
Conversion of notes payable -
related party into common stock $ 865,868 $ -- $ --
----------- ----------- -----------
Common stock issued for acquisitions $ 1,181,250 $ -- $ --
----------- ----------- -----------
Common stock issued for services $ 25,750 $ -- $ 50,000
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements
5
<PAGE>
VHS NETWORK, INC.
Notes to Financial Statements
June 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.
6
<PAGE>
VHS NETWORK, INC.
Notes to Financial Statements
June 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.
7
<PAGE>
VHS NETWORK, INC.
Notes to Financial Statements
June 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 June 30, 2000 and
December 31, 1999 were $618,095 and $533, respectively.
Restricted Cash
---------------
Restricted cash consists of funds (certificate of deposit with a
financial institution) assigned to Groupmark Canada Limited
("Groupmark"), a related party, to reduce the liability to Groupmark.
The funds will be released on July 5, 2000.
Inventories
-----------
Inventories are stated at the lower of cost (first in, first out
method) or market.
8
<PAGE>
VHS NETWORK, INC.
Notes to Financial Statements
June 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.
9
<PAGE>
VHS NETWORK, INC.
Notes to Financial Statements
June 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 six months ended June 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.
10
<PAGE>
VHS NETWORK, INC.
Notes to Financial Statements
June 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 six month period ending June 30,
2000 were $1,159 and $1,159, 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 six month period ended June 30, 2000.
Goodwill and Other Intangibles
------------------------------
Intangible assets are recorded at cost. Goodwill is amortized on a
straight-line basis over a period of 10 years. Other intangibles are
amortized on a straight-line basis over a period of 10 years.
11
<PAGE>
VHS NETWORK, INC.
Notes to Financial Statements
June 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 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 Company acquired these sets of prints in exchange for 1,399,992
shares of its common stock valued at $559,997. Starting in May 2000,
the Company is 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 six month period ending June 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 June 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 excerise terms of the warrants.
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.
12
<PAGE>
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
$145,000 in management fees during the six-month period ending June 30,
2000.
Amounts due Groupmark pursuant to this management service agreement as
of June 30, 2000 and December 31, 1999 are $707,432 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.
13
<PAGE>
VHS NETWORK, INC.
Notes to Financial Statements
June 30, 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.
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.
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.
14
<PAGE>
VHS NETWORK, INC.
Notes to Financial Statements
June 30, 2000
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
---------
The intangible assets are being amortized over 10 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 for all the
outstanding shares of Exodus Acquisition Corporation. The acquisition
was accounted for using the pooling 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.
15
<PAGE>
VHS NETWORK, INC.
Notes to Financial Statements
June 30, 2000
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 (29,531)
-----------
$1,151,719
Amortization expense for the three and six months ending June 30, 2000
was $29,531 and $29,531, respectively.
11. Subsequent Events
On July 10, 2000, the Company filed a Registration Statement, Form
SB-2, pertaining to the sale of 10,365,834 shares of its common stock,
of which 4,392,500 shares are issued and outstanding, and 5,973,334
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.
16
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation.
Summary
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.
Through the recent acquisition of China eMall Corporation and successful
financings in the first five months of 2000, the Registrant is continuing to
position itself to identify market opportunities in the United States and Canada
in Internet e-commerce and smartCARD loyalty marketing.
The Registrant'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. The
Registrant is committed to becoming a well diversified, globally integrated
e-commerce based solutions provider. To achieve its goals, the Registrant is
identifying prospective companies from which it can acquire technology and
proven financial performance through acquisitions or joint ventures.
Results of Operations
Results of three months ended June 30, 2000. Revenues for the three months ended
June 30, 2000 were $0. Operating Expenses for the three months ended June 30,
2000 were $367,452 and Operating Expenses for the six months ended June 30, 2000
were $470,474. During the six months ended June 30, 2000 the Registrant had a
non-recurring expense related to the acquisition of Exodus Acquisition
Corporation of $90,000. During the six months ended June 30, 2000 the Registrant
also incurred an expense of $28,637 for the China eMall office expense.
Results of three months ended June 30, 1999. Revenues for the three months ended
June 30, 1999 were $0. Operating Expenses for the three months ended June 30,
1999 were $171,228 and Operating Expenses for the six months ended June 30, 1999
were $342,492.
Liquidity and Capital Resources
The Registrant achieved no revenues from operations in either the 1999 fiscal
year or during the three months ended June 30, 2000. During the six months ended
June 30, 2000 the Registrant 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.
17
<PAGE>
Revenues are projected to commence during the current fiscal year ending
December 31, 2000. Changes in Financial Position Total assets increased to
$2,431,555 on June 30, 2000 compared with total assets of $628,304 on December
31, 1999. This increase in total assets is largely due to an increase in cash
and restricted cash from $533 on December 31, 1999 to $618,095 on June 30, 2000.
During the six month period ended June 30, 2000 the Registrant raised additional
capital of $1,165,000 which accounted for the increase in cash. Total
liabilities decreased to $1,109,863 on June 30, 2000 compared with total
liabilities of $2,097,735 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 $707,432 on June 30, 2000. The number of
issued common shares of the Registrant increased from 10,929,435 on December 31,
1999 to 18,980,260 on June 30, 2000. Shareholders' equity increased from
($1,469,431) to $1,321,692 during the first six months of 2000.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities/Recent Sales of Unregistered Securities.
On April 12, 2000 pursuant to a share exchange agreement for the acquisition of
China eMall Corporation, the Registrant issued 2,100,000 common shares and
further allotted 4,015,000 common shares for issuance on exchange of the Class B
Special Shares of China eMall for common shares of the Registrant. The holders
of the Class B Special Shares can exchange any or all of their Class B Special
Shares for common shares of the Registrant at any time however if any Class B
Special Shares remain issued and outstanding after the expiration of the earlier
of (A) three years from the date on which a Form SB-2 or similar filing has been
filed with the SEC with respect to the common shares of the Registrant and the
SEC has reach a position of no further comment, and (B) five years after which
such Exchangeable Shares were issued, then China eMall Corporation may redeem
the Class B Special Shares on payment of one common share of the Registrant for
each Class B Special Share. The 2,100,000 shares were issued in reliance upon
the exemption from registration under Regulation S as follows:
Purchaser Number of Shares
--------- ----------------
Gang Chai 350,000
Qin Lu Chai 350,000
Qing Wang 350,000
Tai Xue Shi 350,000
Forte Management Corp. 700,000
18
<PAGE>
The 4,015,000 Class B Special Shares were issued as follows:
Purchaser Number of Shares
--------- ----------------
Gang Chai 698,502
Qin Lu Chai 698,498
Qing Wang 672,000
Tai Xue Shi 672,000
Charles He 1,274,000
In April, 2000 the Registrant issued 50,000 common shares to Alexander Stewart
for the provision of legal services. The shares were valued at $0.50 and were
issued in reliance upon the exemption from registration under Regulation S.
In April, 2000 the Registrant completed a private placement with Forte
Management Corp. a non-US investor operating outside the United States for the
issuance of 550,000 common shares and 1,225,000 share purchase warrants for
proceeds of $110,000. The warrants have the following expirations dates and
exercise prices.
Number of Warrants Expiration Date Exercise Price
------------------ --------------- --------------
400,000 June 12, 2000 $0.35
500,000 July 11, 2000 $0.50
200,00 August 10, 2000 $0.60
125,000 October 9, 2000 $0.95
As of the date hereof 250,000 warrants have been exercised for proceeds of
$105,000 to the Registrant.
On May 6, 2000 the Registrant acquired all the issued and outstanding shares of
Exodus Acquisition Corporation pursuant to an Agreement of Plan of
Reorganization wherein the shareholders of Exodus, BAC Consulting Corporation,
received 500,000 common shares of the Registrant. The Registrant relied upon the
exemption from registration under Rule 145 promulgated under the Securities Act
of 1933, as amended.
19
<PAGE>
During this second quarter the registrant also issued 10,000 common shares to
David Johnston in settlement of outstanding debt.
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.
On May 15, 2000, May 16, 2000 and June 20, 2000, the Registrant filed Forms
8-K, 8-K/A and 8-K/A, respectively, reporting the acquisition of all the
issued and outstanding common shares of Exodus Acquisition Corporation
("Exodus"). Upon effectiveness of the acquisition, pursuant to rule
12g-3(a) of the General Rules and Regulations of the Securities and
Exchange Commission, the Registrant became the successor issuer to Exodus
for reporting purposes under the Securities and Exchange Act of 1934 (the
"Act") and elected to report under the Act effective May 12, 2000. The
Registrant filed audited financial statements for the year ended December
31, 1999 and unaudited financial statements for the three months ended
March 31, 2000.
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: August 14, 2000 By: /s/ Elwin Cathcart
--------------------- ----------------------
Elwin Cathcart, Chief Executive Officer
(principal financial and accounting officer and
duly authorized signing officer)
