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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF
SECURITIES OF SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of The Securities Exchange
Act of 1934
AVALON-BORDEN COMPANIES, INC.
(Name of Small Business Issuer in its charter)
Delaware 63-0967802
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
777 South Lawrence Street, Suite 100
Montgomery, Alabama 36104
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (334) 264 - 7747
Securities to be registered pursuant to Section 12(b) of the Act.
Title of each class Name of each exchange on which registered
None N/A
Securities to be registered pursuant to Section 12(g) of the Act.
Common Stock
(Title of Class)
<PAGE>
PART I
Item 1. Description of Business.
Business Development
Avalon-Borden Companies, Inc., a Delaware corporation ("ABCO"),
formerly named Borden Companies, Inc., was incorporated under the laws of the
State of Delaware on August 4, 1986. See Exhibit 3.1 - Articles of Incorporation
and Amendments. ABCO is the successor entity resulting from a September 24, 1986
reorganization between Borden Companies, Inc. and Amaze Incorporated, a
non-operating public corporation incorporated under the laws of the State of
Utah on May 14, 1984. A Certificate of Merger, dated September 24, 1986, was
filed with the Secretary of State of Delaware under the name of Borden
Companies, Inc. on October 6, 1986.
A Plan and Agreement of Reorganization between Borden Companies, Inc.
and Das A. Borden & Company was made December 12, 1986, and Das A. Borden &
Company became a wholly owned subsidiary of Borden Companies, Inc. See Exhibit
2.1 - Plan and Agreement of Merger. The largest secured creditor of Das A.
Borden & Company acquired the assets of the Das A. Borden & Company in 1992
through a Chapter 11 proceeding filed in 1988. The Chapter 11 proceeding was
finalized and dismissed in 1996. Das A. Borden & Company (although inactive)
continued as a wholly owned subsidiary of Borden Companies, Inc. until a reverse
stock exchange was made in 1997 removing Das A. Borden & Company as a wholly
owned subsidiary of Borden Companies, Inc. ABCO's name was changed from Borden
Companies, Inc. to Avalon-Borden Companies, Inc. pursuant to a Certificate of
Amendment of Certificate of Incorporation dated February 19, 1998. See Exhibit
3.1 - Articles of Incorporation and Amendments.
ABCO sat dormant with no business activity until February 1998. ABCO
acquired the business assets of Chattanooga Regional Interconnect, Inc. ("CRI"),
a cable advertising business located in Chattanooga, Tennessee, pursuant to an
Asset Purchase Agreement entered into on May 29, 1998. See Exhibit 10.1 - Asset
purchase Agreement. The purchase price of the CRI assets was $600,000, in the
form of $300,000 cash and a $300,000 promissory note. On June 16, 1998, ABCO
formed Avalon Media Group, Inc., a Tennessee Corporation ("AMG"), as a
wholly-owned subsidiary of ABCO, and transferred the acquired CRI assets into
AMG for the purpose of operating the cable advertising business.
ABCO also undertook the acquisition of the Reynolds Metals Company's
Alloy's Facilities located in and around Muscle Shoals, Alabama in March of
1998. The Alloys facilities consists of the Reynold's Alloys rolling mill, the
Alabama and Southern Reclamation Plants and the Sheffield coil coating facility
(collectively referred to as "Alloys Complex"). A Letter of Intent between ABCO
and Reynolds was executed on
<PAGE>
June 22, 1998 which gave ABCO the exclusive right to acquire the Alloys Complex.
See Exhibit 10.2 - Letter of Intent.
On December 2, 1998, ABCO agreed to assign the Reynolds' Letter of
Intent to Wise Metals Company in exchange for a post-acquisition equity position
in ACC, or a cash fee of at least One Million Dollars ($1,000,000), plus
reimbursement by Wise of all of ABCO's expenses relating to the acquisition of
the Alloys Complex. See Exhibit 10.3 - Memorandum of Understanding. On December
9, 1998, ABCO assigned the Reynolds' Letter of Intent to Wise Alloys, L.L.C.
pursuant to a Mutual Release Agreement entered into on April 29, 1999, ABCO
received from Wise a total cash consideration of $1,670,632.96, with $1,387,500
constituting a release fee, and $283,132.96 representing the reimbursement of
ABCO's expenses relating to the acquisition of the Alloys Complex. See Exhibit
10.5 - Mutual Release Agreement.
In May 1999 ABCO acquired certain communication's technology pursuant
to a Technology Purchase Agreement dated May 21, 1999 by and between H.G.
"Rusty" Thornhill and ABCO. See Exhibit 10.6 - Technology Purchase Agreement.
Pursuant to the Technology Purchase Agreement, ABCO acquired the sole and
exclusive title to certain digital communication technology developed by Mr.
Thornhill, including a patent on certain data transfer technology, Patent No.
5,535,229, in exchange for 2,236,000 shares of common stock of ABCO.
Also in May 1999, ABCO acquired an irrevocable, exclusive, worldwide,
fully paid up and fully transferable license in certain digital cable
ad-insertion technology pursuant to a Licensing Agreement by and between Global
Interconnect Corporation, Inc. and ABCO. See Exhibit 10.7 - Licensing Agreement.
Pursuant to the Licensing Agreement, ABCO acquired "any and all technical
know-how, patent rights and licensed products relating in any way to digital
cable ad-insertion," owned by Global Interconnect Corporation, Inc. Such
technology license includes certain software and hardware designs, developments,
programs and systems known as the Opticerter, Opticom, Opticor, Ncerter,
SiteManager and Calpro.
The principal executive offices of ABCO are located at: 777 South
Lawrence Street, Suite 100, Montgomery, Alabama 36104 and 404 Avalon Avenue,
Suite 200, Muscle Shoals, Alabama 35661. Avalon Media Group, Inc., a wholly
owned subsidiary of ABCO, has its principal offices at 5959 Shallowford Road,
Suite 4093, Chattanooga, Tennessee 37421. ABCO and its subsidiary each have
fiscal year ends on November 31.
Business of Issuer
ABCO remained dormant since its formation until 1998, at which time it
was activated to provide a corporate vehicle for acquiring certain developing
and operational companies that in the opinion of management hold potential for
profit to ABCO's shareholders. ABCO intends to pursue, identify and evaluate
business acquisition opportunities primarily in technology related fields.
Unless otherwise advisable,
<PAGE>
ABCO's strategy is to acquire each target as a wholly owned subsidiary, with
ABCO remaining a holding company of each enterprise.
ABCO intends to identify and review various acquisition targets using
both its management and certain professional advisers. ABCO's investigation and
analysis of each proposed acquisition generally encompasses all aspects of the
target's business. ABCO's management and consultant team is comprised of
professionals in all of the major business disciplines, including legal,
accounting, finance, business valuation, human resources, marketing and sales.
If ABCO determines that a target meets ABCO's acquisition criteria, efforts to
negotiate favorable terms of acquisition will proceed.
ABCO believes that opportunities to acquire certain companies exist due
to industry changes, market pressures, and the uncertainty of government
regulation and the investment community. Management has recognized, and is of
the opinion that, as the pace of business and technology grows, many promising
companies will experience significant capital and management challenges that
will exceed their internal resources and capabilities. ABCO believes that it has
the ability to develop and manage strategic plans for such business acquisition
opportunities, which are expected to enhance the market potential and
profitability of each business. ABCO also believes its acquisitions and
turnaround management abilities will create selective opportunities for
acquiring potentially profitable companies without extensive capital investment.
ABCO hopes to provide strategic planning and management in the area of
effective growth strategies, margin maximization, overhead expense control,
development of systems, economies of scale, and effective management of
utilization enabling it to develop long term, mutually beneficial relationships
with its acquired business partners. ABCO will strive to enhance the ability of
the target businesses to compete successfully in a fast changing, highly
competitive business environment.
Overview of current business operations
ABCO's first acquisition took place in May 1998 when ABCO acquired all
of the operating assets of Chattanooga Regional Interconnect ("CRI") into a
wholly owned subsidiary named Avalon Media Group, Inc. ("AMG"), a Tennessee
corporation. The purchase price of CRI was $600,000 in the form of $300,000 cash
at closing, and a $300,000 promissory note. The promissory note was guaranteed
by one of ABCO's Directors, Das A. Borden. See Exhibit 10.1 - Asset Purchase
Agreement. AMG currently has a Five (5) member Board of Directors consisting of
James M. Bohannon, Maurice Mitchell, Das Borden, William M. Keever and Peter
Waraksa. ABCO and its subsidiaries currently employ a total of eight
individuals, with an additional five independent contractors providing various
services. ABCO out-sources various work including legal, accounting and
engineering. AMG uses Electronic Systems Products, a division of Antec
Corporation in Atlanta, Georgia for much of its engineering work on its ad
insertion technology.
<PAGE>
Using the assets acquired from CRI, AMG currently operates a turnkey
cable advertising business that covers certain cable systems in eastern
Tennessee, northern Alabama and northern Georgia. The CRI business is an
established services provider company with eight years experience in contracting
with cable TV operators. The primary function of the business is to sell the
cable operator's advertising inventory ("Avails") that are provided on cable TV
network channels such as CNN, ESPN and TNT. AMG remits a predetermined contract
percentage of the advertising revenues it generates every month to each
appropriate cable operator whose inventory was sold. AMG then realizes a profit
after paying the cable operator fees and its own expenses. Revenues are
currently being generated from nine (9) cable systems that AMG contracts with
from four (4) different cable companies.
The AMG business operation currently consists of a team of account
executives in the Sales Department, a Video Production Department, and a
combined Operations and Administrations Department. AMG is lead by President and
Chief Operating Officer Peter Waraksa, who oversees each of ABCO's departments.
See Exhibit 10.10 - Employment Agreement. The Account Executives ("AE's") are
responsible for selling the cable avails to businesses and ad agencies in their
assigned territories. AE's compensation consists of a nominal monthly base or
guarantee, plus a commission incentive based on performance. AE's may also earn
commissions on sales of AMG's video production services.
The Video Production Department is responsible for creating quality
television commercials primarily for, but not limited to, AMG's advertising
clients. As part of the process of creating a television commercial, a
videographer will consult with a client to develop scripts, coordinate on-site
filming with AMG's camera and lighting equipment, and edit the recorded material
at AMG's in-house studio to achieve the final desired product. The Production
Department is also responsible for editing and encoding the commercial break
tapes containing the client's commercials to be aired on the cable inventory
they have purchased. Once the commercial advertisements are encoded as an mpeg
file, the digital file is then ready to be transferred to the appropriate
head-end using telephone, ISDN, DSL or satellite distribution.
The Operations Department is responsible for transporting the avails
mpeg files to each cable system on a weekly basis and to maintain the
ad-insertion equipment that resides in each of the cable system's head sites.
The Operations Department assists the Production Department with the
advertisement preparation and editing activities. Operations and Administration
work in tandem to manage avails scheduling and invoicing functions, known as
traffic and billing, as submitted by the AE's. Most clients are billed monthly
or immediately after the end of their purchased avails schedule, whichever
occurs first.
AMG is positioned geographically to have its AE's sell cable avails to
local businesses in each community immediately served by the cable operator, and
to regional area businesses and ad agencies that desire to target the circle of
influence offered by AMG. This model will be a significant marketing focus in
AMG's future growth plans as
<PAGE>
it expands from base of operations in the Southeast. Management intends to roll
out the AMG services geographically based on a cluster strategy. AMG will target
cable operators that are located geographically close to one another in order to
develop head-end clusters. Clustering head-ends will enable ABCO to use certain
economies of scale with a local and regional advertisement sales force,
equipment installation and maintenance, and Commercial avails production.
The Ad Insertion Industry
The U.S. cable television industry currently consists of approximately
11,000 total cable systems, known as cable head-ends, located throughout the
country. ABCO has identified the small (less than 5,000 subscribers) and medium
(less than 20,000 subscribers) U.S. Cable head-ends as a sizable opportunity for
the marketing of its digital ad-insertion turnkey service program. ABCO's
primary sources of data on the cable industry is from the Cable Advertising
Bureau, an industry supported firm dedicated to collecting and providing
essential marketing statistics, the Cable Fact Book by Warren Publishing, and
Paul Kagan Associates, Inc., a key industry market analysis company.
Research indicates that presently only 30% of the total U.S. cable
systems (or approximately 3,335 systems) are actively generating local
advertising revenue. Management notes that just one-third of the industry's
total cable systems generated over $1.9 billion in advertising revenues during
1997. In comparison, advertising revenues for cable television as a whole,
including national networks, regional sports networks and local ad insertions,
totaled more than $7.9 billion the same year. Consequently, over 7000 cable
systems, approximately 70% of all cable head-end sites, are not taking advantage
of the potentially profitable advertising spots made available on each cable
channel. Most cable companies have found cable ad insertion as either
financially or technically prohibitive.
ABCO believes the industry currently lacks a cost efficient solution
for digital ad-insertion. ABCO believes the cable industry needs a comprehensive
nationwide platform that additionally focuses on the small and medium sized
cable company market. The largest ad insertion equipment manufacturers are
generally focused on systems designed for the largest cable companies. Given
that most small and medium sized cable companies are capital constrained,
focused on core subscriber's services, and lack the personnel expertise skilled
in ad sales and insertion operations, ABCO believes this provides an opportunity
for the AMG Digital Turnkey Service Solution.
ABCO believes there are several reasons why a large number of cable
systems still have no local advertising. First, there are substantial start-up
costs in the digital insertion equipment required to perform local ad insertion.
Many of these unutilized systems serve households that are in rural areas of the
U.S. Historically, these rural areas did not always have sufficient local
businesses in which to generate a reasonable return on even the average analog
equipment investment required in establishing local ad insertion services.
Digital ad insertion equipment should resolve the issue of too few local
businesses by allowing for regional marketing of clustered rural cable systems.
<PAGE>
However, the cost for this investment as provided by industry equipment
suppliers is even higher than the analog counterparts.
Second, many of the cable operators in the rural areas of the country
have no expertise or desire to provide the resources necessary to organize these
smaller systems for local ad insertion. Operators generally state that they
realize more return on investing capital to serve more households in their areas
of operation when compared to a build from scratch ad insertion program
investment. Consequently, management believes that the majority of the cable
television ad insertion industry has remained in a state of underdevelopment,
being forced to continue operating without a vehicle to tap the markets
potential with regional cable television advertising.
This condition keeps regional and national advertisers from gaining any
advantage that might be realized if local cable advertising time were easily
accessible throughout the U.S. The major broadcast television networks (i.e.
ABC, CBS, NBC and FOX) currently profit from this advantage in their industry
with annual revenues totaling over $30 billion among the four broadcast
companies. Total cable advertising revenues for 1998 will exceed $9 billion, of
which only 24% will be attributable to the currently unorganized local spot
cable sector of the market.
Current services and operations
In May 1998, ABCO purchased Chattanooga Regional Interconnect, Inc.
(CRI). CRI was an existing Analog Cable Ad Insertion Turnkey and Production
Company, operating for almost 10 years in eastern Tennessee, northwest Georgia
and northeast Alabama. The purchase of CRI included Ad Sales, Video Production
and Operations personnel, contracts for turnkey services with four cable
companies operating nine cable television markets, and equipment for ad
insertion and ad production services. See Exhibit 10.1 - Asset Purchase
Agreement. AMG has recently converted the CRI operation to the AMG proprietary
digital advertising model, which will likely reduce costs and provide
substantial potential for increasing revenues through enhanced flexibility in
marketing cable advertising inventory at much greater spot fees.
With the acquisition of CRI, Avalon Media Group, Inc. is an established
advertising services turnkey provider with experienced industry professionals.
The primary function of the business is to sell local cable television
advertising inventory ("avails") that are provided on cable TV networks such as
CNN, ESPN and TNT for the cable operators to resell. This is generally two
minutes per hour, for twenty-four hours per day, seven days a week for each
network and is guaranteed in the broadcasting agreement with the cable company.
AMG remits a predetermined percentage of the advertising revenues it generates
every month to each appropriate cable operator whose inventory was sold. AMG
then realizes a profit after paying the cable operator fees and its own
expenses. Revenues are currently being generated from nine cable systems
currently under exclusive 3 to 5 year contracts with AMG. See Part F/S.
Although AMG has recently converted the existing cable head-ends to its
digital
<PAGE>
insertion equipment, the revenues and expenses from AMG operations are
nonetheless based on the former analog insertion equipment. ABCO believes the
digital platform should generally enhance revenues and reduce the expenses
associated with maintaining analog equipment. In fact, AMG has begun
experiencing a reduction in maintenance costs of its inserters, as well as an
increase in the average price per avail using fixed position advertisements. See
Part I, Item 3 - Management Discussion and Analysis.
The AMG business operation currently consists of a team of four account
executives in the Sales Department, a Video Production Department with two
personnel, and an Operations and Administrative Department with two employees.
The account executives are responsible for selling the cable avails to
businesses and ad agencies in their assigned territories. Compensation is
provided via a nominal monthly guarantee plus a commission incentive based on
performance. Account executives may also earn commissions on sales of AMG's
video production services to clients.
The Video Production Department is responsible for creating quality
television commercials primarily for, but not limited to, AMG clients. A
videographer will consult with a client to develop scripts, coordinate on-site
filming with AMG's camera and lighting equipment, and edit the recorded material
at AMG's in-house studio to achieve the final desired product. The Production
Department is also currently responsible for editing and encoding the
commercials to be aired on the cable inventory that has been purchased.
The Operations department is responsible for transporting the encoded
commercial files to each cable system on a weekly basis and to maintain the
digital insertion equipment that resides in each of the cable system's head
sites. Operations also assist the Production Department with the preparation and
editing of the digital advertisements. Operations and Administration work in
tandem to manage avails scheduling and invoicing functions (called "traffic and
billing" in the industry) as submitted by the account executives. Most clients
are billed monthly or immediately after the end of their purchased avails
schedule, whichever occurs first.
Business conditions
ABCO believes there is an opportunity that currently exists in the cable
advertising industry for a turnkey ad-insertion service provider. This
opportunity is identified as the 70% of the cable systems available for an ad
insertion services program and the acquisition of existing turnkey ad insertion
service companies that are under-performing due to technology constraints. AMG
plans to benefit from these opportunities by addressing the industry conditions
with the cost effective strategic use of technology and seasoned management
expertise. AMG will initially focus on demographically desirable small and
medium size cable companies without advertising insertion capabilities in
regional geographic clusters throughout the United States.
Management believes that AMG digital technology, marketed correctly inside
a services solution, can overcome certain barriers that currently exist in the
cable television
<PAGE>
ad insertion market. AMG believes its turnkey service approach is uniquely
positioned to provide a solution for digital ad insertion services with a
competitive cost basis compared to other industry providers. The AMG platform
provides proprietary digital insertion equipment and management software,
digital encoding services, regionally and locally deployed sales forces, 24 x 7
customer service with automated alarms and notification, and a referral network
for ad production in every locality served. The cable system operator provides
only the space and plugs for the equipment, with AMG providing all equipment and
personnel necessary for ad sales and insertion.
ABCO believes its digital technology will enable it to overcome many of
the barriers presently blocking the growth of the cable ad insertion industry.
For example, scheduling constraints, logistics and high maintenance costs with
existing analog ad insertion equipment, among other factors, currently impede
the cable advertising industry. Much of the analog ad insertion equipment in use
today does not provide a great deal of flexibility for scheduling advertiser's
commercials on specific programs. Many of the operators must sell advertising to
a client for a week at a time with a minimum of four commercials per day. This
limits the industry in two primary factors: the ability to sell only to clients
that have the budget to purchase a large weekly schedule and not having the
option to sell commercials in popular events, such as NFL football games, for a
premium rate.
Logistics and maintenance are a high cost factor with operating analog
ad insertion equipment. Advertiser commercials are recorded onto break tapes
that must be physically transported to and installed at each cable system's
head-end site each week. If problems with the operation of the systems are
suspected, then another trip to the site in question is required. The analog
tape players at these sites are primarily mechanical devices that demand
frequent maintenance that again requires a service technician to travel to each
site for a repair visit.
The use of ABCO's digital ad insertion equipment and software can
overcome many of the limitations sustained today by the cable television
industry. The digital equipment is personal computer based so that it can be
operated, maintained, monitored and even upgraded remotely. As with most PC's,
there is extreme ease of maintenance and service as each module is a standard
nineteen inch rack mount Personal Computer configuration, with fold down front
panel with fan filter and emergency power shutdown and a simple rear connector
panel for channel assignment and standard USB and Serial connector ports. The
entire system can be easily UPS box shipped and standard PCI/ISA motherboard
connectors provide easy maintenance and parts replacement.
Technology
ABCO received a license for the Hardware and Software designs for its
Digital Insertion Equipment and the supporting software operations in May of
1999. This technology was developed over a five-year period with upwards of
seven million dollars of capital. The license provides a global, perpetual,
exclusive, fully paid-up, royalty free license to AMG for the complete platform
for digital insertion services originally
<PAGE>
designed by Global Interconnect Corporation. Since the licensing of such
technology, AMG has completed additional design, development and manufacturing
improvements to the digital ad insertion technology. The result is an efficient,
scaleable, state-of-the-art equipment solution, already being deployed according
to AMG Business forecasts. AMG now owns all license and intellectual property
rights for its proprietary, comprehensive equipment and software solution for
meeting the needs of the ad-insertion market.
ABCO has an on-going program of technological improvement in an attempt
to revise, improve and enhance the hardware and software components of its
technology, adding features and functionality to better serve market needs. ABCO
has spent approximately $350,000 on research and development of its ad insertion
technology over the last two years. AMG utilizes Electronic System Products, an
Antec Company ("ESP"), both with enhancing its current digital insertion system,
and designing and developing new system components to address ongoing changes in
technology and the insertion industry.
ESP has assigned an engineering team lead by Vice President Eric
Berkobin to continually address design and development issues of the AMG digital
technology. The engineering team includes both software and hardware engineers.
ESP is a full service contract engineering research and development firm that
provides services on a project or program basis. ESP has provided services since
1989. ESP is divided into three departments that are technology based and
represent core competencies. These technical competencies include RF design
engineering, Digital and ASIC development services, and application and embedded
Software capabilities. ESP derives about 75% of its client base from the cable
TV industry. The balance is generated from satellite, telecommunications and
consumer electronics industries.
The costs borne by ABCO in developing its insertion technology is not
borne or passed through to its cable clients. ABCO believes such development
costs will be recouped as a result of the efficiency and flexibility of the new
digital ad insertion technology. By way of explanation, the AMG digital
insertion equipment is responsible for inserting commercial advertisements into
the video and audio data streams at the local cable head-end sites. To operate
ABCO's ad insertion system, client commercials are converted to a computer file
and then transmitted to each cable system via high-speed phone lines or
satellite, eliminating the need for weekly visits to each site. The commercials
are inserted into the video and audio stream of each cable channel pursuant to
the avails schedule using the AdPlayer(TM) digital insertion equipment.
The AdPlayer is an enhanced Pentium computer designed to interface with
cable television equipment in order to play digital Video and Audio commercial
files. The AdPlayer is currently being manufactured by Mitsuba Southeast Inc. of
4775 River Green Parkway, Duluth, GA. However, ABCO has identified and
interviewed several additional manufacturing sources. Each AdPlayer has four
separate video channels, allowing it to operate ad insertion on up to four
different cable television networks simultaneously in a remote location. Except
for the AdPlayer's proprietary technology, the unit's components are primarily
off-the-shelf devices available from a variety of
<PAGE>
manufacturers allowing for optimum sourcing from multiple vendors. A principal
component in each AdPlayer is the mpeg decoder card. The decoder card is
currently being purchased off-the-shelf from Visual Circuits Corp. in
Minneapolis, Minnosota. United Printed Circuits, Inc in Huntsville, Alabama
manufactures the printed circuit boards for the DTMF tone decoder board.
AMG used ESP to manufactured an initial thirty-eight (38) AdPlayer
systems. The costs of these systems were funded through lease financing provided
by Nationwide Funding, L.L.C. located in Chicago, Illinois. See Exhibit 10.11 -
Lease Agreement. Eighteen (18) of these AdPlayer units were used to convert the
nine (9) cable head-end sites acquired in the CRI asset purchase. The remaining
twenty (20) units are to be deployed as new cable advertising contracts are
obtained.
The AdPlayer contains two proprietary circuit boards that are used to
interface the AdPlayer module with the cable television equipment and for
detecting television network cue tones that signal the AdPlayer to engage in
commercial playback mode. The proprietary circuit boards are presently being
manufactured by Prime Technologies, Inc. in Atlanta, Georgia. ABCO has
additional sources of manufacturing for these components, including Spectral
Response, Inc, in Atlanta, Georgia, a computer component maker that has
manufactured the boards in the past for ABCO. Each module is also designed to
operate with a variety of modems to allow for high-speed communication and
operation. Multiple AdPlayers may be connected together for added channel
capacity via an ethernet cable. Space requirements and serviceability of each
unit is optimized with its standardized 19-inch wide rack mount design. There
are only two moving parts within the system, requiring minimal routine
maintenance.
Standard AdPlayer components include the following:
I. Standard 19 inch PC rack mount enclosure (with flip cover for
maintenance and front cover power control)
II. Surge protector power supply
III. PIII - ATX motherboard with Intel Pentium Processor
IV. Hard Drive (6.4 G +)
V. Network I/O PCI Card/Modem (Interface options for XDSL, Cable modem,
ISDN, Pots and Satellite & Ethernet)
VI. Video Decoder Card (4 channel)
VII. Proprietary Tone Decoder Card
VIII. Proprietary Relay PCI Card
IX. I/O Connectors (Channel Audio/Video Input/Output USB/Parallel
Serial/Keyboard connectors)
X. Software Description Summary
XI. Microsoft NT Operating System
XII. Proprietary Control and Application Software
Certain proprietary software programming allows for flexible commercial
scheduling on any available cable network time slot. All of the ad insertion
software can
<PAGE>
be remotely upgraded and serviced. ABCO's ad insertion software is contained
primarily in two proprietary software systems called CalPro(TM) and SiteMgr(TM)
The software includes the following functions:
I. Traffic and Billing
II. Multiyear Inventory Control
III. Fixed position, Run of Schedule and Make Good Scheduling
IV. Alternate Network Selection
V. Detailed Management Reporting
VI. Selectable Automatic Filler Spots
VII. Automatic Log Retrieval & Confirmation Reporting
VIII. Remote Upgrades
IX. Remote Monitoring & Repairing
X. Remote & Onsite Diagnostics
XI. Automatic Modem Initialization
XII. Automatic Alarms and Notification
XIII. Automatic Watchdog & Failsafe Functions
Sales Operations
AMG must recruit advertising sales personnel for the implementation of
its marketing plan. ABCO organizes its cable systems into regional clusters to
ease advertisement sales. AMG will deploy two distinct types of Sales Forces.
The first, the Cable Services Sales Force, will market the AMG Digital Turnkey
Services to the various Cable Companies. This is conducted with "in person"
direct sales meetings with the management and principals of the local cable
franchises. The sales force will be geographically targeted to leverage the
regional clustering of advertising spot sales. The Cable Services Sales
functions are currently performed by AMG's president and two independent
contractors.
The second sales force, the Spot Advertising Sales Force, is organized
to focus on local, regional and nationwide sales of the available advertising
spots on each of the serviced cable systems. This will include coordination with
the national distributors of advertising spots such as Cable Networks, Inc.
(CNI) and National Cable Communications (NCC), who provide 100% coverage today
for cable systems to receive national cable ad placement. ABCO's National and
Regional sales staff will concentrate their efforts on building the internet
based sales system, as well as personal sales calls on national and regional
advertisers. Finally, the local ad sales force will conduct direct sales in each
cluster's market and sale the local commercial avails. Additionally, the local
sales representatives will work with the local Video Production relationships to
create new ads for local business enterprises or local tagging on nationwide or
regional spots.
AMG is currently involved in various stages of discussion with
approximately fifty (50) additional cable systems, and projects adding at least
100 additional head-ends over the next 6 months. See Part I, Item 2 - Management
Discussion and Analysis.
<PAGE>
ABCO believes these sites will be obtained both through direct negotiation with
the cable operators and through the acquisition of existing cable systems and ad
insertion turnkey companies. AMG has recently executed four (4) additional
Advertising Insertion Agreements with cable operators in Georgia and North
Carolina. Each of these Agreements are for Five (5) year terms and require
operator fees to be paid in the amount of 24% to 25% of the gross collected
monthly revenues. See Exhibit 10.12 and 10.13 - Advertising Insertion
Agreements.
ABCO's long-term strategic plans include expanding its sales efforts to
additional ad insertion markets. Although cable television ad-insertion is a
vast market with great potential, other lucrative ad-insertion opportunities are
emerging. These will provide additional revenue potential without diminishing
cable's ad-insertion cash flow. These other markets include:
o Low power broadcast television stations
o Network broadcasting affiliates
o Local Internet providers
o Wireless cable television
o Multi-unit, private systems (hotels, apartment complexes,
condominiums, etc.)
Competition
ABCO believes it has recognized an opportunity to serve the cable
insertion market by leveraging its proprietary ad insertion technology in a
turnkey solution platform, thereby participating in shared revenues generated by
the sale and insertion of cable advertisements. AMG has chosen to provide cable
ad insertion on a full service turnkey basis, rather than simply manufacturing
and selling ad insertion equipment. ABCO believes it can competitively take and
maintain market share in several distinct ways.
First, ABCO believes the AMG platform significantly expands the number
of potential advertisements that can be operated cost effectively. The average
small and medium cable company that operates insertion systems typically only
insert advertisements on its top four channels due to hardware and operations
costs. AMG, with its cost efficient platform will plan to serve eight to sixteen
channels depending upon the revenue potential and subscriber base.
Second, the opportunity to sell a larger number of spots exists on each
of the AMG insertion channels since the digital platform can address every two
minutes (generally in four thirty second increments) per hour per day where
advertisement space is contractually open for local resale. The existing analog
systems have been historically limited by the physical constraints of the VHS
tape production and playback system used to insert advertisements. Also, in the
AMG Digital System there is no time constraint for pre-production where tapes
must be shipped overnight prior to playback. With digital encoding, files can be
sent real time for distribution and scheduled insertion. Therefore, servicing
the advertisers with a higher quality performance system to address their timing
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requirements.
All of these capabilities will be packaged to enable the Cable Company
client to share in new revenues generated without a capital commitment or
redirection by cable management resources outside of its core competencies and
critical business functions. AMG has designed the solution for generating
untapped revenues for its client base and created value via its integrated
outsource solution. Finally, as with any industry or market, new turnkey digital
insertion competitors could eventually enter the cable advertising market toward
the goal of taking market share away from AMG. However, AMG believes that by
being the first to the market with an aggressive digital turnkey approach will
result in significant brand building, thereby ensuring loyalty in the industry.
Pricing for advertising is currently based primarily on analogue
ad-insertion, and is fairly stable and rationalized for the cable industry. Fees
are a function of the network channel viewership and the number of subscribers
inside the cable operator's service area. AMG business plan assumptions are very
conservative to known industry metrics, especially given the fact that all AMG
head-end sites will contain digital instead of analogue insertion equipment.
Consequently, AMG can offer unique ad spot pricing opportunities. Given the
small incremental costs associated with the operations of placing an additional
run of an advertisement in a digital system, AMG can offer significant discounts
on unused inventory of run times, where all additional revenues are incremental
to the baseline. Thus, AMG is ensured of being competitive with any other
turnkey provider that enters the market.
However, AMG's digital platform also gives it the ability to
dramatically increase revenues through what is known as fixed position
advertising. Currently, tape-based analogue insertion can only insert ads
through what is called a run-of-schedule insertion schedule. Run-of-schedule
advertisements will air in the order in which they are played on the VHS or Beta
tape player at the head-end site. As a result, the advertiser cannot be assured
exactly when his commercial will air, thereby eliminating his ability to target
his advertisements at a certain time of day or during a certain television
program. This inability to schedule and thus target the commercial to specific
times or programs has resulted in a lower price for locally inserted television
avails. However, with state-of-the-art digital insertion equipment and
sophisticated scheduling software, AMG can perform fixed position ad-insertion,
guaranteeing the exact commercial break an advertisement will air. Consequently,
AMG can charge more for its avails that are purchased for a fixed-position.
Overall competition in the cable ad insertion industry can be viewed
from three separate perspectives. The AMG Turnkey Service indirectly competes
with the digital and analog insertion equipment manufacturers in that Cable
Companies have the option of purchasing, installing and operating their own
equipment. AMG does not intend to directly compete with ad insertion
manufacturers as ABCO will not offer AMG Digital Equipment for sale or lease,
and will only offer integrated services that include equipment and operations.
Because of the cost per channel for digital equipment, and the
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rather limited budgets of the small to medium size cable operators, there has
been little move by cable systems to acquire equipment and perform their own
insertion.
There also exist a number of regionally deployed ad insertion service
providers. Although many of the existing turnkey companies utilize analog
equipment for the AMG intended market segment, several are beginning or have
deployed digital insertion systems. The analog systems are not as cost efficient
nor as potentially lucrative as a digital insertion platform. Moreover, cable
operators generally refuse to engage a tape-based turnkey where a digital
alternative exists. In essence, the operators know digital equipment offers
lower costs with higher returns. Moreover, cable companies want more recent
digital technology in their head-ends, for no other reason than to ensure that
the cable signals, which pass through the ad inserter, will not be interfered
with and the quality will not be degraded.
The second perspective regarding competition is that AMG will compete
with all media channels for advertisement dollars, such as broadcast TV, radio,
and print media such as newspapers and local periodicals. There is a strong
infrastructure inside the cable industry that AMG will utilize, demonstrating
the value of the unique targeted advertising that cable insertion provides. The
premium value of quality video is an effective marketing tool especially when
coupled with a matched targeted audience provides the advertiser with a more
cost effective investment.
Finally, ABCO believes it can take and keep market share based on what
AMG management believes is a lead-time from any serious competition entering its
target market. This is because of the technological advancements AMG has made
with its digital insertion system, as well as AMG's continued ability to stay
off competition through its plan of over-laying its insertion services over
other new or existing insertion service providers. In sum, AMG believes it can
take market share simply because of the lack of any viable alternative, and keep
market share by using experienced management deploying the most advanced digital
equipment.
Obviously, as with any industry or market, new turnkey digital
insertion competitors could eventually enter the cable advertising market.
However, AMG believes that by being the first to the market with an aggressive
digital turnkey approach will result in significant brand building, thereby
ensuring loyalty in the industry. See Part I, Item 2 - Risk Factors.
Future Market Opportunities
Beyond the market segregation of the unserved small and medium cable
companies exist opportunities in newly emerging markets such as LMDS and MMDS
Wireless Cable franchises, local TV Satellite broadcast services and Internet
Multicasting services. Incrementally, there is the opportunity to replace
existing inefficient analog systems currently in operation for large and medium
cable companies that are already operating ad insertion services. Moreover, AMG
is further developing its CalPro(TM) software into an internet based advertising
sales system. The internet site will allow
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local, regional and national advertisers, as well as advertising and rep-firms
to access AMG's available commercial spot inventory and identify, schedule and
purchase avails directly on-line. This internet-based system already has an
auctioning feature built-in, enabling AMG to maximize the revenue generated from
its inventory of avails.
In addition to the proposed business plan, AMG will also evaluate
future opportunities for the acquisition of cable systems and existing third
party ad insertion turnkey companies, toward the goal of converting as many
cable head ends as possible to the AMG digital platform, taking advantage of the
corresponding efficiencies available from consolidating to a common digital
distribution platform.
Item 2. Management's Discussion and Analysis or Plan of Operation.
Avalon-Borden Companies, Inc. has focused its financial and management
resources on the development of Avalon Media Group, Inc., its wholly owned
subsidiary. Presently, the success of ABCO is wholly dependent on the business
of AMG. AMG has been operating since June 1, 1998, using the cable advertising
assets acquired from Chattanooga Regional Interconnect, Inc. in May 1998. AMG
operates as an outsourced turnkey solutions contractor to cable companies
managing their local cable television network advertising inventory.
AMG's fiscal operating year is currently December 1st through November
30th.
Results During Partial Fiscal Year 1998
AMG incurred a pre tax net operating profit during its first partial
fiscal year of June 1, 1998 to November 30, 1998, in the amount of $74,776 as
audited by Cade & Assoc. of Birmingham, Alabama. This net profit resulted from
$513,169 in revenues generated from operations serving 47,600 household
subscribers making the pre tax net profit equate to approximate 14.2% of
revenues. Depreciation and amortization expenses during this period totaled
approximately $54,560. The local cable television advertising industry's average
net monthly revenue per subscriber in 1997 was $2.72. AMG's performance of
average net monthly revenue per subscriber in 1998 was $1.54. When compared to
industry standards, these results illustrate that AMG was approximately 43%
below average subscriber revenues.
Results During Fiscal Year 1999
AMG incurred a pre tax net operating profit for its fiscal year
December 1, 1998 through November 30, 1999 in the amount of $31,899 as audited
by Cade & Assoc. of Birmingham, Alabama. This net profit resulted from $863,586
in revenues generated from operations making the pre tax net profit equate to
approximate 3.7% of revenues. Depreciation and amortization expenses during this
period totaled approximately $118,072. AMG's performance of average net monthly
revenue per subscriber in 1999 was $1.51.
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Results To Date in Fiscal Year 2000
AMG incurred a pre tax net operating loss for its first six months of
fiscal year December 1, 1999 through November 30, 2000 in the amount of
($18,816) as compiled by Cade & Assoc. of Birmingham, Alabama. This net loss
resulted from $443,907 in revenues generated from operations. Depreciation and
amortization expenses during this period totaled approximately $73,967. AMG's
performance of average net monthly revenue per subscriber for this period was
$1.53.
AMG is currently payroll heavy when compared to the average cable ad
sales operations of this size. This mode of operation is desirable now due to
AMG's posturing for growth in the industry. Several activities, including new
market prospecting, new market agreement sales, engineering refinements,
equipment manufacturing coordination and fund raising efforts are all being
focused on in addition to normal operations to best serve the future of the
organization.
AMG projects that it will generate annual net profits ranging from 30%
to 38% of the Net Revenues for the Fiscal Year 2000. AMG currently operates in
nine cable headend sites and projects it can add up to an additional 285 new
sites in the first year of operation after obtaining additional financing.
However, AMG has applied for certain lease financing in order to manufacture
additional AdPlayers to meet demand with Nationwide Funding, L.L.C. located in
Chicago, Illinois ("Nationwide"). Nationwide has provided lease financing for
AMG in the past. See Exhibit 10.11.
By the end of the fifth year AMG plans to be operating in a total of
1195 cable headend sites. This growth is predicted to yield total revenues of
approximately $12 million during the first year and will provide approximately
$3.6 million in pre tax income. ABCO's average revenue per subscriber at the end
of year one is projected to be $1.14, much lower than that of the 1997 industry
average of $2.72 per subscriber. Revenues for years 2 through 5 are projected as
$60.4 million, $80.3 million, $105.6 million and $123.9 million respectively.
Pre tax income for years 2 through 5 is projected to be $23.0 million, $31.2
million, $40.5 million and $46.8 million respectively. ABCO's average revenue
per subscriber in years 2 through 5 is projected to be $1.78, $2.56, $2.82 and
$2.89 respectively.
Management Discussion
The cable advertising industry measures the profitability of each cable
system's advertising program by calculating the net advertising revenue per
month being generated per subscriber to the cable system. The local cable
television advertising industry's average net monthly revenue per subscriber in
1997 was $2.72 (source: Paul Kagan Assoc. 1997). AMG's performance of average
net monthly revenue per subscriber in 1998 was $1.54 and its performance of
average net monthly revenue per subscriber for 1999 was $1.51.
<PAGE>
A recent trend in the cable television industry that may affect AMG's
short term or long term liquidity is headend site consolidation. Cable systems
are attempting to reduce costs by utilizing fewer cable signal distribution hubs
or better know as headend sites. AMG contracts with cable operators to install
proprietary computer based equipment and its sales force generates revenue from
each of these headend sites' advertising inventory that serves specific
communities. As more headend sites are considered for consolidation, AMG will
need to find new opportunities to relocate its equipment in. If AMG retains
equipment that cannot be placed in a new headend site, AMG will have trouble
liquidating this to recoup the original investment required to manufacture it.
AMG is also subject to uncertainties that may affect its short-term or
long-term liquidity in the local cable television advertising industry. This is
primarily due to AMG's plan to deploy its proprietary intellectual property in
the form of computer based hardware and software known as the Adplayer. AMG will
use the majority of its investment capital for acquiring components to produce
significant quantities of its Adplayer equipment that is key to operating and
managing the local cable television advertising inventory that it will contract
for in each market. In the event that unforeseeable changes in the industry take
place, AMG will not have any viable means of marketing or liquidating its
proprietary Adplayer equipment if it becomes useless within the cable television
or broadcast television markets. At best, AMG would be able to resell computer
hardware components and parts from its Adplayer equipment in the U.S. used
computer marketplace.
AMG currently has commitments for capital expenditures totaling
approximately $40,000 and expects to initiate additional capital expenditures
within the next 30 days totaling an additional $450,000. These expenditures are
for its proprietary Adplayer equipment, cable network cue tone detection
equipment and a central office computer server that will be used to grow ABCO
into new cable television advertising markets. The current expected source for
these funds are from Nationwide Funding, a financial institution's leasing
program that AMG has previously utilized. However, there is no guarantee that
these funds will be obtained at this time.
AMG has realized and expects to continue to realize the continuing
trend of growth in the cable television advertising industry, which has been
approximately 15% or better each year in the previous two years. This increase
in revenues however, will not be guaranteed to continue and is dependent upon
local, regional and national economic factors that are out of AMG's control.
AMG is also realizing some increases to revenues after the conversion
of its operation from third party analog ad insertion equipment to its
proprietary digital Adplayer ad insertion equipment during the fall of 1999. To
help insure that AMG may capitalize on the potential supplemental sales and
revenues available through digital insertion technology, AMG has also hired a
sales manager to lead this effort. AMG does not have any guarantees however,
that the digital insertion equipment or the new sales
<PAGE>
management will continue to increase revenues that maximize additional income to
ABCO.
ABCO is presently seeking debt financing of $7.6 Million in order to
grow the number of cable operators served by AMG (the "Financing").
Specifically, if capital funding is obtained in substantially the amount being
pursued ($7.6 million), ABCO predicts substantial growth to be obtained that
will have a significant material impact on the sales, revenues and income. Most
of the funding being sought ($5.3 Million) will be used to manufacture and
acquire equipment necessary in the operation of the digital advertising
insertion services. See Part I, Item 1 - Technology. AMG used ESP to
manufactured an initial thirty-eight (38) AdPlayer sytems. The costs of these
systems were funded through lease financing provided by Nationwide Funding,
L.L.C. located in Chicago, Illinois. See Exhibit 10.11 - Lease Agreement.
Eighteen (18) of these AdPlayer units were used to convert the nine (9) cable
head-end sites acquired in the CRI asset purchase. The remaining twenty (20)
units are to be deployed as new cable advertising contracts are obtained.
AMG currently operates in nine cable headend sites and projects it can
add up to an additional 285 new sites in the first year of operation after
obtaining financing. By the end of the fifth year AMG plans to be operating in a
total of 1195 cable headend sites. This growth is predicted to yield total
revenues of approximately $12 million during the first year and will provide
approximately $3.6 million in pre tax income. ABCO's average revenue per
subscriber at the end of year one is projected to be $1.14, much lower than that
of the 1997 industry average of $2.72 per subscriber. Revenues for years 2
through 5 are projected as $60.4 million, $80.3 million, $105.6 million and
$123.9 million respectively. Pre tax income for years 2 through 5 is projected
to be $23.0 million, $31.2 million, $40.5 million and $46.8 million
respectively. ABCO's average revenue per subscriber in years 2 through 5 is
projected to be $1.78, $2.56, $2.82 and $2.89 respectively.
Changes in line items on AMG's financial statement from one period to
another will be noticed most on the Contract Labor and Contract Labor
Engineering accounts. This is due to AMG's necessity to continue efforts on two
specific fronts; 1) AMG is utilizing the services of outside professionals to
advance its marketing efforts in order to position ABCO for rapid growth as soon
as the requested capital funding is obtained and, 2) Technology in the computer
industry is changing daily and AMG is continuing to maintain its intellectual
property edge by obtaining the engineering services of leading digital systems
design companies for continued enhancement of its systems that are crucial to
the future success of the business plan.
The seasonal nature of the cable television advertising industry is
realized each year on AMG's financial condition. In general, the periods January
through February and June through July are weaker revenue months when compared
to the average of the entire year's revenues realized. The spring and fall
months of each year are generally higher revenue months for AMG when compared
with the average of the entire year.
<PAGE>
Risk Factors
As common with new technology based service ventures there are multiple
risk factors in achieving Business Plan forecasts. Following is a summary of key
risk variables.
Limited Operating History
Although ABCO was formed in 1986, ABCO did not operate any business until
1998. Consequently, ABCO has only a limited operating history upon which
investors may base an evaluation of its performance. ABCO's prospects must be
considered in light of the risks, expenses, difficulties and delays frequently
encountered in connection with the operation and development of new and
expanding businesses which primarily include (i) difficulties in establishing
operational and financial creditability with suppliers, customers, employees and
sources of lending and other financing; (ii) lack of recognized systems and
procedures for the administration of operations, including delegation of
responsibility and supervision of personnel; (iii) the selection of suitable
personnel and integration of such persons into a cohesive organization; (iv)
absence of sufficient capital and appropriate deployment and monitoring of such
capital; and (v) lack of familiarity with specific conditions, events and
circumstances associated with the industries in which the organization operates.
ABCO is expected to experience in various degrees many of these problems and
circumstances and, while management believes that certain of the executives that
it has retained through acquisitions and otherwise have accumulated sufficient
knowledge and understanding as a result of their collective experiences, ABCO
may still be required to confront additional or comparable circumstances and
events as ABCO's operations are expanded.
Seasonal Business; Quarterly Fluctuations
The seasonal nature of the cable television advertising industry is
realized each year on AMG's financial condition. In general, the periods January
through February and June through July are weaker revenue months when compared
to the average of the entire year's revenues realized. The spring and fall
months of each year are generally higher revenue months when compared with the
average of the entire year. In addition, quarterly results may vary from year to
year due to the timing of new television promotions, new channel introductions,
orders and sales, advertising expenditures, advertising promotional periods and
such other seasonal factors such as election advertising. Accordingly,
comparisons of quarterly information of ABCO's results of operations may not be
indicative of ABCO's overall annual performance. See above Management's
Discussion and Analysis of Results of Operations and Financial Condition.
Competition
Although there is limited competition at present in the industries in
which ABCO currently operates, the market could ultimately be characterized by
intense competition,
<PAGE>
at such time as other organizations perceive the opportunities available in the
industry. In addition, there are no significant barriers to entry in the
business in which ABCO engages. For this reason, ABCO's business could be
subject to substantial future competition. Many of the competitors could be
substantially larger and have greater financial resources than ABCO. There can
be no assurances that ABCO will be able to compete profitably with such other
companies on a long-term basis.
Dependence on Key Suppliers
ABCO believes its relationships with its suppliers are satisfactory and
that alternative suppliers are available if relationships falter or existing
suppliers are unable to keep up with ABCO's requirements. See Part I, Item 1 -
Technology. However, there can be no assurance that ABCO's current or future
suppliers will be able to meet ABCO's requirements on commercially reasonable
terms or within scheduled performance times. Any interruption of ABCO's
arrangements with suppliers could cause a delay in the production of ABCO's
products for timely completion. The absence of suitable supply and service
provision arrangements would have a material adverse effect on ABCO's
operations.
Government Regulation
While ABCO is not subject to extensive levels of regulation, a greater
number of jurisdictions are broadening the scope of products and services that
come within the jurisdiction of the regulatory authorities within such states.
Consequently, the trend in regulation on a national basis is to encompass
organizations, similar to ABCO, within the gambit of state or federal regulatory
authority, the consequence of which may involve limited or greater control
relevant to the products and services provided by ABCO.
Technological Changes
ABCO's AMG subsidiary, as well as other operations and businesses that
ABCO may acquire, in common with industry in general, are subject to rapid
technological changes and obsolescence. In order for ABCO to compete
effectively, it must offer quality and cost-effective products and services
which receive customer acceptance and fulfill customer needs. To the extent that
ABCO fails to keep up with technological and other advancements and enhancements
in the manufacturing, distribution and marketing phases of its operations
comparable to and competitive with those made by others in the industry, the
marketing of ABCO's services and products may prove unsuccessful. There can be
no assurances that ABCO's services and products will not be rendered obsolete by
changing technology or that ABCO will be able to respond to advances in
manufacturing technology in a manner that will be commercially feasible.
Risks Associated with Expansion and Acquisitions
ABCO intends to expand through internal processes and acquisitions. Any
expansion of operations, facilities and product lines or acquisitions ABCO may
undertake
<PAGE>
will entail substantial risks since as it may involve specific operations,
activities, services and products that may be unfamiliar to ABCO's management.
At the present time, ABCO has various skilled but only limited management and
operating personnel. Consequently, investors must assume the risk that ABCO (i)
may develop or acquire operations for which ABCO does not possess sufficient
managerial background to administer effectively, (ii) such expansion or
acquisitions may ultimately involve expenditure of funds beyond the resources
that will be available to ABCO at that time, and (iii) management of such
expanded or acquired operations may divert management's attention and resources
away from its existing operations, all of which factors may have a material
adverse effect on ABCO's present and prospective activities.
Limited Marketing Activity, Uncertainty of Market Acceptance/Penetration
Developing market acceptance for ABCO's existing and proposed products
and services will require substantial marketing and sales efforts and the
expenditure of a significant amount of funds to inform potential customers of
the benefits and advantages of its products and services and achieve name
recognition. There can be no assurance that ABCO will be able to penetrate
existing markets on a wide scale basis or position its products and services to
appeal to customers, or that any marketing efforts undertaken by ABCO will
result in increased demand for or market acceptance of ABCO's existing and
proposed products and services. There can be no assurance that ABCO will be able
to successfully market ABCO's products or services or that the efforts will
result in any significant increase in revenues.
Lack of Diversification
The size of ABCO makes it unlikely that ABCO will be able to commit its
funds to diversify the business until it has a proven track record, and ABCO may
not be able to achieve the same level of diversification as larger entities
engaged in this type of business. Consequently, the success of ABCO is wholly
dependent on the business of its subsidiary in the cable advertising industry.
Reliance on Key Management
ABCO's success is dependent on its key management listed and described in
Part I, Item 5 herein, the loss of whose services could significantly impede the
achievement of ABCO's planned development objectives. ABCO currently does not
maintain key man life insurance on any of its management. In addition, none of
the officers or directors, or any of the other key personnel, except for Mr.
Waraksa, has any employment agreement with ABCO. Therefore, there can be no
assurance that these personnel will remain employed by ABCO. The success of
ABCO's business objectives will require substantial additional expertise in such
areas as finance, digital technology, cable television advertising sales,
manufacturing and marketing, among others. Competition for qualified personnel
among cable television related companies is intense, and the loss of key
personnel, or the inability to attract and retain the additional, highly skilled
personnel required for the expansion of ABCO's activities, could have a material
adverse effect on
<PAGE>
ABCO's business and results of operations. In addition, all decisions with
respect to the management of ABCO will be made exclusively by the officers and
directors of ABCO. Investors will only have rights associated with minority
ownership interest to make decisions which effect ABCO. The success of ABCO, to
a large extent, will depend on the quality of the directors and officers of
ABCO.
Concentration of Share Ownership; Control of ABCO by Officers and Directors
On the date hereof, the voting power of ABCO is concentrated in a small
number of existing stockholders. See Part I, Item 4. In addition, Avalon-Borden
Companies, Inc. owns 100% of Common Stock of Avalon Media Group, Inc. and has
the power to elect all directors and approve or veto all matters requiring
stockholder approval of ABCO. ABCO's officers and directors beneficially own
approximately 45.60% of the outstanding shares of ABCO's common stock. As a
result, such persons, acting together, have the ability to exercise significant
influence over all matters requiring stockholder approval. Accordingly, it could
be difficult for the investors hereunder to effectuate control over the affairs
of ABCO. Therefore, it should be assumed that the officers, directors, and
principal common shareholders who control the majority of voting rights will be
able, by virtue of their stock holdings, to control the affairs and policies of
ABCO.
Indemnification of Directors and Officers
The Bylaws of ABCO include provisions to the effect that ABCO may, to the
maximum extent permitted from time to time under applicable law, indemnify any
director, officer, employee or agent to the extent that such indemnification and
advancement of expense is permitted under such law, as it may from time to time
be in effect. Any indemnification of directors, officer, or employees, could
result in substantial expenditures being made by ABCO in covering any liability
of such persons or in indemnifying them.
Conflicts of Interest
The officers and directors have other interests to which they devote
time, either individually or through partnerships and corporations in which they
have an interest, hold an office, or serve on boards of directors, and each will
continue to do so notwithstanding the fact that management time may be necessary
to the business of ABCO. As a result, certain conflicts of interest may exist
between ABCO and its officers and/or directors which may not be susceptible to
resolution. In addition, conflicts of interest may arise in the area of
corporate opportunities which cannot be resolved through arm's length
negotiations. All of the potential conflicts of interest will be resolved only
through exercise by the directors of such judgment as is consistent with their
fiduciary duties to ABCO. It is the intention of management, so as to minimize
any potential conflicts of interest, to present first to the Board of Directors
to ABCO, any proposed investments for its evaluation.
<PAGE>
No Assurance of Continued Public Trading Market; Risk of Low Priced Securities.
Since April 14, 2000, there has been only a limited public market for the
common stock of ABCO. The common stock of ABCO is currently quoted on the Over
the Counter - Pink Sheets. As a result, an investor may find it difficult to
dispose of, or to obtain accurate quotations as to the market value of ABCO's
securities. In addition, the common stock is subject to the low-priced security
or so called "penny stock" rules that impose additional sales practice
requirements on broker-dealers who sell such securities. The Securities
Enforcement and Penny Stock Reform Act of 1990 ("Reform Act") requires
additional disclosure in connection with any trades involving a stock defined as
a penny stock (generally, according to recent regulations adopted by the U.S.
Securities and Exchange Commission, any equity security that has a market price
of less than $5.00 per share, subject to certain exceptions), including the
delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated therewith. The
regulations governing low-priced or penny stocks sometimes limit the ability of
broker-dealers to sell ABCO's common stock and thus, ultimately, the ability of
the investors to sell their securities in the secondary Market.
Effects of Failure to Maintain Market Makers
If ABCO is unable to maintain a National Association of Securities
Dealers, Inc. member broker/dealers as market makers, the liquidity of the
common stock could be impaired, not only in the number of shares of common stock
which could be bought and sold, but also through possible delays in the timing
of transactions, and lower prices for the common stock than might otherwise
prevail. Furthermore, the lack of market makers would result in persons being
unable to buy or sell shares of the common stock on any secondary market. There
can be no assurance ABCO will be able to maintain such market makers.
Cash Dividends Unlikely
ABCO has never declared or paid dividends on its common stock and
currently does not anticipate or intend to pay cash dividends on its common
stock in the future. The payment of any such cash dividends in the future will
be subject to available retained earnings and will be at the discretion of the
Board of Directors.
Forward-Looking Statements
This Registration Statement contains "forward looking statements",
including statements regarding, among other items, ABCO's business strategies,
continued growth in ABCO's markets, projections, and anticipated trends in
ABCO's business and the industry in which it operates. The Words "believe",
"expect", "anticipate", "intends", forecast", "project", and similar expressions
identify forward-looking statements. These forward-looking statements are based
largely on ABCO's expectations and are subject to
<PAGE>
a number of risks and uncertainties, certain of which are beyond ABCO's control.
ABCO cautions that these statements are further qualified by important factors
that could cause actual results to differ materially from those in the forward
looking statements, including those factors described under "Risk Factors" and
elsewhere herein. In light of these risks and uncertainties, there can be no
assurance that the forward-looking information contained in this Form 10-SB will
in fact transpire or prove to be accurate. All subsequent written
forward-looking statements attributable to ABCO or persons acting on its behalf
are expressly qualified in their entirety by this section.
Item 3. Description of Property.
ABCO leases approximately 500 square feet of office space in
Montgomery, Alabama and approximately 1,800 square feet of office space in
Muscle Shoals, Alabama. ABCO's subsidiary, AMG, leases approximately 1,300
square feet of office space in Chattanooga, Tennessee for the operation of its
business. See Exhibit 10.9 - Office Lease. The lease in Montgomery, Alabama is
with Carmichael, Carmichael and Mitchell on a month-to-month basis at a lease
rate of $1,500 per month. Carmichael, Carmichael & Mitchell is an appraisal firm
owned by three shareholders of ABCO, and managed by ABCO's President, Maurice C.
Mitchell. It is expected that the rent-free lease will convert to a fair market
lease when ABCO either raises additional capital or reaches a point of
profitability that could warrant the additional office space. The lease in
Muscle Shoals, Alabama is month to month at a rate of $900 per month. The AMG
lease in Chattanooga, Tennessee is for a lease term of three years, and a
monthly lease rate of $1,000 for year one, and $1,100 in years two and three.
Consequently, the total monthly expense for leased facilities for both ABCO and
its subsidiaries is currently $3,500.
Item 4. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth information regarding the beneficial
ownership of shares of common stock as of May 31, 2000 by (i) all stockholders
known to ABCO to be beneficial owners of more than 5% of the outstanding common
stock; and (ii) all officers and directors of ABCO (each person has sole voting
power and sole dispositive power as to all of the shares shown as beneficially
owned by them):
================================================================================
Amount and
Name and address of nature of
Title of class beneficial owner beneficial Percent of class
ownership
================================================================================
Avalon Group, L.L.C.
404 Avalon Avenue, 12,350,000
Common Suite 200 Shares(1) 51.70%
================================================================================
----------------
(1) Avalon Group, L.L.C. is beneficially owned by DAs A. Borden and Tina Borden.
DAs A. Borden is a Director of ABCO.
<PAGE>
================================================================================
Muscle Shoals,
AL 35661
================================================================================
James M. Bohannon,
Chairman and C.E.O. 1,000,000
Common 105 Ocala Drive Shares 4.18%
Montgomery, Alabama 36117
================================================================================
Maurice C. Mitchell, 825,000
President & Director shares
777 S. Lawrence Street, 3.45%
Common Suite 100
Montgomery, Alabama 36104
================================================================================
H. G. "Rusty" Thornhill 2,236,000
113 Apple Circle shares
Common Crossville, Tennessee 9.36%
38555
================================================================================
Sarah G. Wallace, Secretary 50,000
716 Sweet Ridge Road shares
Prattville, Alabama 36066 0.209%
Common
================================================================================
Item 5. Directors and Executive Officers, Promoters and Control Persons.
The names, ages, and respective positions of the directors, officers,
and key employees of ABCO are set forth below. There are no other persons which
can be classified as a promoter or controlling person of ABCO.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
James M. Bohannon 61 Chairman of the Board & Chief Executive
Officer
Das A. Borden 62 Director
Maurice C. Mitchell 47 Director, President & Chief Financial
Officer
Peter Waraksa 42 President of AMG
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Sarah C. Wallace 49 Secretary
</TABLE>
James M. Bohannon - Mr. Bohannon has served as Chairman & C.E.O. of ABCO for
approximately two years, and a director of ABCO since 1996. Prior to joining
ABCO in December 1996, has for the past 25 years served in management and
director positions with banks and real estate holding companies. Since 1991, Mr.
Bohannon has owned a proprietary consulting firm engaged in international
banking and business consulting functions. Between 1985 and the present, Mr.
Bohannon has also served as President of proprietary companies, Retail
Information Systems, Inc., Real Estate Insurance Services and Fairmont Realty.
These companies are engaged in providing information system software,
construction and management services for real estate development, insurance and
effectuation of residential and commercial real estate transactions. Between
1987 and 1991, Mr. Bohannon was President and owner of Ballard Companies, Inc.
which is engaged in various land development activities. Mr. Bohannon has served
as a Board member with Multi-Point, Inc., ARIX Corporation, Colonial BankGroup,
Inc. and affiliated companies and with various Alabama Regional Banking
Institutions. Upon successful completion of the offering, Mr. Bohannon is
expected to devote approximately 50-75 % of his time to the business affairs of
ABCO.
Das A. Borden - Director. Mr. Borden has been with ABCO in differing capacities
since its inception in 1986. With extensive background in the venture capital
community, Mr. Borden set into action ABCO's aggressive business plan. In 1972
he formed Das A. Borden Company, a real estate development and management firm,
which syndicated over 65 limited partnerships throughout the Southeast and
Southwest with total asset value in excess of $350,000,000. In September, 1987,
Mr. Borden sold the assets of Das A. Borden & Company to a Dallas, Texas firm
and as a result of their default on the purchase price in 1988, he filed Das A.
Borden & Company into Chapter 11 for reorganization and converted the
involuntary Chapter 7 petition in bankruptcy, which had been filed against him,
to a Chapter 11 reorganization proceeding. Four years later Das Borden joined
the small percentage nationwide to emerge successfully from Chapter 11
reorganization. Das A. Borden & Company's Chapter 11 proceeding was dismissed in
December, 1996. Prior to formation of ABCO, Mr. Borden was engaged full time in
general business and real estate development in Alabama. He is currently Chief
Executive Officer and President of Avalon Investment & Securities Group, Inc., a
member firm of the National Association of Securities Dealers ("NASD"). He is a
registered NASD principal and served on the NASD District Business Committee for
District No. 5 as Vice Chairman. He has served in various capacities with state
and local real estate boards, is a licensed real estate broker and past
president of the Home Builders Association of Alabama. He maintains membership
in numerous professional organizations.
Maurice C. Mitchell, CPA, MAI - Mr. Mitchell has served as President, Chief
Financial Officer and Director of ABCO for over three years. He is currently a
shareholder in
<PAGE>
Carmichael, Carmichael & Mitchell, L.L.C., a valuation and financial consulting
firm located in Montgomery, Alabama. Mr. Mitchell is a certified public
accountant with over twenty-five years experience in accounting, finance and
valuation in the real estate and healthcare industries. He served in various
capacities from 1977 to 1987 with Das A. Borden and Company, a real state
development and management company, located in Muscle Shoals, Alabama, including
Vice President of Finance and Director. He served as President and Chief
Financial Officer from 1987 to 1990 of Phillips Development Company in Denver,
Colorado, which was involved in asset management and real estate development in
various states. He served as Chief Financial Officer of a 250 bed general
hospital owned by Columbia HCA. He has been an owner of Carmichael, Carmichael &
Mitchell, L.L.C. since 1992. He is a member of various professional
organizations such as the American Institute of Certified Public Accountants and
the Appraisal Institute.
Peter Waraksa - President & Chief Operating Officer of AMG since its inception
in June 1998. Mr. Waraksa has been in the cable advertising business for over
fourteen (14) years, having formerly owned and operated his own cable
ad-insertion company in Tennessee. Mr. Waraksa has served in several other
management positions, including Branch and Marketing Manager for Ingram
Distribution Group. Mr. Waraksa received his B.S. degree in Recording Industry
Management from the Middle Tennessee State University, with Minors in Marketing
Management and Mass Communications.
Sarah C. Wallace - Secretary of ABCO since 1996. Ms. Wallace has a broad range
of managerial experience, and has held key positions in companies as varied as
advertising, manufacturing and tax services. She held the position of Consumer
Information Manager at a manufacturing company and Director of Client Services
at an advertising agency. As Director of Client Services she simultaneously
managed a fulfillment company which was a division of the advertising agency.
Ms. Wallace has also managed a tax service.
Item 6. Executive Compensation.
ABCO currently has only one officer, director or executive employee
that is being compensated for services. Peter Waraksa, President of AMG, is
currently under an Employment Agreement with ABCO's subsidiary, AMG, which
commenced on June 1, 1999 and terminates on June 1, 2002, with automatic
extensions on a month-to-month basis without further action by either party,
unless either party shall have served written notice to the other party at least
Thirty (30) days prior to the contemplated termination date.
The Waraksa Employment Agreement has the following material terms: 1)
Base Annual Salary. Employer will pay to Employee during the Period of
Employment a base annual salary of Eighty Thousand Dollars ($80,000), payable in
substantially equal bi-monthly (twice monthly) installments during each calendar
year, or portion of a year, of the Period of Employment; provided, however, that
ABCO will review annually, and in light of such review may, in the sole
discretion of the Board of Directors, increase such base annual salary taking
into account such things as Employee's then responsibilities,
<PAGE>
profitability of ABCO, increases in the cost of living, increases in
compensation of other executives of ABCO and its subsidiaries, and other
pertinent factors; and 2) Bonus. During the Period of Employment, Mr. Waraksa
may be entitled to certain quarterly bonuses based on his performance and other
factors; provided, however, that such bonuses cannot exceed Ten Thousand Dollars
($10,000) each quarter or Forty Thousand Dollars ($40,000) annually for each
year of Mr. Waraksa's services; and 3) Stock Incentives. Mr. Waraksa was granted
certain options to purchase shares of ABCO's common stock according to the
following vesting schedule:
Vesting Date No. of Shares Exercise Price
------------ ------------- --------------
June 1, 2000 50,000 $1.00 per share
June 1, 2001 50,000 $2.00 per share
June 1, 2002 50,000 $3.00 per share
No shares may be purchased under this option before June 1, 2000. In
addition, any and all stock options that have not been exercised, whether or not
such options have vested, as of the termination of this Agreement, whether such
termination is with or without cause, shall terminate, expire and become void
entirely at such termination.
Item 7. Certain Relationships and Related Transactions.
Except as described herein, there are no relationships, transactions, or
proposed transactions to which the registrant was or is to be a party, in which
any of the named persons set forth in Item 4 or Item 5 had or is to have a
direct or indirect material interest.
Item 8. Description of Securities.
The authorized capital stock of ABCO consists of 50,000,000 shares of
common stock, par value $.001 per share, of which there are 23,886,000 shares
issued and outstanding. The following statements relating to the capital stock
set forth the material terms of ABCO's securities; however, reference is made to
the more detailed provisions of, and such statements are qualified in their
entirety by reference to, the Certificate of Incorporation and the By-laws,
copies of which are filed as exhibits to this registration statement.
Description of Common Stock.
Except as otherwise stated, ABCO has only one class of equity
securities, Common Stock, authorized and issued, and no classes of debt
securities issued and outstanding. The Articles of Incorporation authorize the
issuance of 50,000,000 shares of common stock, with a par value of $0.001. As of
the date of this Form 10-SB, ABCO had 23,886,000 shares of common stock issued
and outstanding. The holders of the Shares: (a) have equal ratable rights to
dividends from funds legally available therefore, when, as, and if declared by
the Board of Directors of ABCO; (b) are entitled to share
<PAGE>
ratably in all of the assets of ABCO available for distribution upon winding up
of the affairs of ABCO; and (c) are entitled to one non-cumulative vote per
share on all matters on which shareholders may vote at all meetings of
shareholders. These securities do not have any of the following rights: (a)
special voting rights; (b) preference as to dividends or interest; (c)
preemptive rights to purchase in new issues of Shares; (d) preference upon
liquidation; or (e) any other special rights or preferences. In addition, the
Shares are not convertible into any other security. There are no restrictions on
dividends under any loan other financing arrangements or otherwise. See a copy
of the Articles of Incorporation, and amendments thereto, and Bylaws of ABCO,
attached as Exhibits to this Form.
Dividends
Dividends, if any, will be contingent upon ABCO's revenues and
earnings, if any, capital requirements and financial conditions. The payment of
dividends, if any, will be within the discretion of ABCO's Board of Directors.
ABCO presently intends to retain all earnings, if any, for use in its business
operations and accordingly, the Board of Directors does not anticipate declaring
any dividends prior to any future business combination transaction.
Transfer Agent.
American Stock Transfer & Trust Company, 40 Wall Street, New York,
New York 10005, serves as ABCO's transfer agent and registrar and has served in
such capacity for approximately ten years.
<PAGE>
PART II
Item 1. Market Price of and Dividends on the Registrant's Common Equity and
Related Stockholder Matters.
Market Information
The authorized capital stock of ABCO consists of 50,000,000 shares of
common stock, par value $.001 per share, of which there are 23,886,000 shares
issued and outstanding. ABCO filed a Form 211 with the NASD that was cleared on
April 7, 2000 for quotation on the "Pink Sheets." ABCO's stock is currently
trading in the "pink sheets" published by the National Quotation Bureau, Inc.
under the symbol "AVBD." ABCO has one market maker, EquiTrade Securties
Corporation, located at 23736 Birtcher Drive, Lake Forest, CA 92630-1771. ABCO's
Shares have traded on the "Pink Sheets" for less than ninety (90) days, and have
had very limited trades. All trades to date in ABCO's stock have been at an
asking high/low price of $3.25. ABCO's stock quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
ABCO plans to apply for quotation of its securities on the NASD OTC
Bulletin Board. To have its securities quoted on the NASD OTC Bulletin Board a
company must: (1) be a company that reports its current financial information to
the Securities and Exchange Commission, banking regulators or insurance
regulators; (2) has at least one market maker who completes and files a Form 211
with NASD Regulation, Inc. The NASD OTC Bulletin Board is a dealer-driven
quotation service. Unlike the Nasdaq Stock Market, companies cannot directly
apply to be quoted on the NASD OTC Bulletin Board, only market makers can
initiate quotes, and quoted companies do not have to meet any quantitative
financial requirements. Any equity security of a reporting company not listed on
the Nasdaq Stock Market or on a national securities exchange is eligible. In
general there is greatest liquidity for traded securities on the Nasdaq SmallCap
Market, less on the NASD OTC Bulletin Board, and least through quotation by the
National Quotation Bureau, Inc. on the "pink sheets". It is not possible to
predict whether ABCO's securities will ever trade on NASD OTC Bulletin Board or
Nasdaq SmallCap.
Holders
ABCO has only one class of equity securities, Common Stock, authorized
and issued, and no classes of debt securities issued and outstanding. The
Articles of Incorporation authorize the issuance of 50,000,000 shares of common
stock, with a par value of $0.001. As of the date of this Form 10-SB, ABCO has
23,886,000 shares of common stock issued and outstanding and 131 shareholders of
record of its Common Stock.
<PAGE>
Dividends
ABCO has never declared any dividend on its stock. Dividends, if any,
will be contingent upon ABCO's revenues and earnings, if any, capital
requirements and financial conditions. The payment of dividends, if any, will be
within the discretion of ABCO's Board of Directors. ABCO presently intends to
retain all earnings, if any, for use in its business operations and accordingly,
the Board of Directors does not anticipate declaring any dividends prior to any
future business combination transaction.
Item 2. Legal Proceedings.
ABCO is not a party to any pending legal proceedings.
Item 3. Changes in and Disagreements with Accountants.
During ABCO's two most recent fiscal years and during fiscal year 2000,
the principal independent accountant of ABCO neither resigned (or declined to
stand for re-election) or was dismissed. The independent accountant for ABCO is
Cade & Associates, P.C., 2100 SouthBridge Parkway, Suite 460, Birmingham,
Alabama 35209.
<PAGE>
Item 4. Recent Sales of Unregistered Securities.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
Shareholder - Name/Address Certificate No. No. of Shares Date Issued Exemption Consideration
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
James M. Bohannon A553 900,000 12/1/97 Rule 701 Services - Director
Common & CEO
105 Ocala Drive
Montgomery, AL 36117
William J. Bohannon A545 50,000 Common 12/1/97 Rule 701 Services - Consultant
602 Holland Ct., SW
Decatur, AL 35601
Michael W. Butler A535 500,000 Common 2/2/98 Rule 701 Services - Consultant
462 Ridgecliff Drive
Florence, AL 35634 A539 100,000 Common 12/1/97 Rule 701 Services - Consultant
Ken Cantrell A551 12,500 Common 12/1/97 Rule 701 Services - Contractor
300 W 1st Street
Tuscumbia, AL 35674
Stephen Michael Hust A543 25,000 Common 12/1/97 Rule 701 Services - Consultant
103 Longer Drive
Peachtree City, GA 30269
Bobby E. Irons A536 500,000 Common 2/2/98 Rule 701 Services - Consultant
212 Woodstock Drive A538 100,000 Common 12/1/97 Rule 701 Services - Consultant
Florence, AL 35630
William M. Keever A544 25,000 Common 12/1/97 Rule 701 Services - Legal
4825 Winnebago Drive
Birmingham, AL 35233
Jesse Keller A546 600,000 Common 12/1/97 Rule 701 Services - Legal
534 Riverbend Place
Florence, AL 35630
Neil Morris A552 12,500 Common 12/1/97 Rule 701 Services - Consultant
850 Neil Morris Road
Tuscumbia, AL 357674
Clyde Roberts A537 500,000 Common 2/2/98 Rule 701 Services - Consultant
274 Indian Springs Drive A540 100,000 Common 12/1/97 Rule 701 Services - Consultant
Florence, AL 35634
Kirk Sanders A550 25,000 Common 12/1/97 Rule 701 Services - Consultant
1511 14th Avenuye, SE
Decatur, AL 35601
Walter R. Sims A541 300,000 Common 12/1/97 Rule 701 Services - Employee
1704 Plantation Way
Athens, AL 35613
Jane Springer A547 200,000 Common 12/1/97 Rule 701 Services - Consultant
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
214 Woodstock Drive
Florence, AL 35630
H. G. "Rusty" Thornhill A512 2,236,000 Common 5/21/99 4(2) Technology License(2)
113 Apple Circle
Crossville, TN 38555
Rich Tusing A548 450,000 Common 12/1/97 Rule 701 Services - Consultant
7256 Spring Side Way
McLean, VA 22101
Sarah G. Wallace A549 50,000 Common 12/1/97 Rule 701 Services - Employee
716 Sweet Ridge Road
Prattville, AL 36066
Peter Waraksa A532 100,000 Common 10/2/98 Rule 701 Services - Employee
214 Lakeview Lane
Oak Ridge, TN 37830
White Oak LLC A542 650,000 Common 12/1/97 Rule 701 Services - Consultant
4663 Valleydale Road, Suite
169
Birmingham, AL 35244
</TABLE>
------------
(2) The Technology Purchase Agreement is enclosed in Exhibit _____. ABCO paid
Mr. Thornhill 2,236,000 shares of ABCO's common stock valued at $2.00 per
share.
<PAGE>
Item 5. Indemnification of Directors and Officers.
Article VIII of ABCO's Bylaws provides for certain indemnification of
the directors and officers of ABCO. With regards to Non-Derivative Suits, ABCO
may indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation) by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
The officers and directors of ABCO are accountable to ABCO as
fiduciaries, which means they are required to exercise good faith and fairness
in all dealings affecting ABCO. In the event that a shareholder believes the
officers and/or directors have violated their fiduciary duties to ABCO, the
shareholder may, subject to applicable rules of civil procedure, be able to
bring a class action or derivative suit to enforce the shareholder's rights,
including rights under certain federal and state securities laws and regulations
to recover damages from and require an accounting by management. Shareholders
who have suffered losses in connection with the purchase or sale of their
interest in ABCO in connection with such sale or purchase, including the
misapplication by any such officer or director of the proceeds from the sale of
these securities, may be able to recover such losses from ABCO.
With regards to Derivative Suits, ABCO's Bylaws provide that ABCO may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to
<PAGE>
indemnity for such expenses which the Court of chancery or such other court
shall deem proper.
Additionally, the Bylaws provide that the expenses incurred by an
officer or director in defending a civil or criminal action, suit or proceeding
may be paid by the corporation in advance of the final disposition of such
action, suit or proceeding upon receipt of an undertaking by or on behalf of
such director or officer to repay such amount if it shall ultimately be
determined that he is not entitled to be indemnified by the corporation as
authorized in this section.
<PAGE>
PART F/S
See Following
Company's Financials for Fiscal Year 2000 through
May 31, 2000
Company's Audited Financials for Fiscal Year 1999
Company's Audited Financials for Fiscal Year 1998
<PAGE>
AVALON-BORDEN COMPANIES, INC.
AND SUBSIDIARY
Consolidated Financial Statements
and Consolidating Schedules
May 31, 2000
<PAGE>
AVALON-BORDEN COMPANIES, INC. & SUBSIDIARY
Consolidated Balance Sheet
May 31, 2000
<TABLE>
<CAPTION>
<S> <C>
CURRENT ASSETS:
Cash $ 57,065
Certificate of Deposit 300,000
Accounts Receivable 196,895
-----------
Total Current Assets 553,960
-----------
FIXED ASSETS:
Fixed Assets 502,302
Accumulated Depreciation (56,548)
-----------
Fixed Assets, Net 445,754
-----------
OTHER ASSETS:
Digital Technology and License 4,621,756
Goodwill, Net 285,000
Deferred Tax Asset 14,212
Operator Fee Deposit - Helicon 10,000
-----------
Total Other Assets 4,930,968
-----------
TOTAL ASSETS $ 5,930,682
===========
</TABLE>
<PAGE>
AVALON-BORDEN COMPANIES, INC. & SUBSIDIARY
Consolidated Balance Sheet
May 31, 2000
<TABLE>
<CAPTION>
<S> <C>
CURRENT LIABILITIES:
Accounts Payable $ 196,016
Notes Payable 614,000
Notes Payable - Related Parties 49,000
Accrued Income Taxes 97,077
Accrued Expenses 19,953
Current Portion - Long-Term Debt 69,936
Current Portion - Capital Lease Obligations 45,777
-----------
Total Current Liabilities 1,091,759
-----------
LONG-TERM LIABILITIES:
Long-Term Debt 9,223
Capital Lease Obligations 203,503
-----------
Total Long-Term Liabilities 212,726
-----------
TOTAL LIABILITIES 1,304,485
-----------
STOCKHOLDERS' EQUITY:
Common Stock 23,886
Additional Paid-In Capital 4,505,358
Retained Earnings 96,953
-----------
Total Stockholders' Equity 4,626,197
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,930,682
===========
</TABLE>
<PAGE>
AVALON-BORDEN COMPANIES, INC. & SUBSIDIARY
Consolidated Statement of Income and Retained Earnings (Deficit)
Six Months Ended May 31, 2000
<TABLE>
<CAPTION>
<S> <C>
REVENUES:
Ad-Insertion Income $ 443,907
COST OF REVENUES 297,044
--------
GROSS PROFIT 146,863
OPERATING EXPENSES 262,571
--------
INCOME FROM OPERATIONS (115,708)
--------
OTHER INCOME (EXPENSES):
Other Income 12,743
Interest Expense (39,822)
--------
Other Income (Expenses), Net (27,079)
--------
INCOME BEFORE PROVISION FOR INCOME TAXES (142,787)
PROVISION FOR INCOME TAXES (42,960)
--------
NET INCOME (99,827)
RETAINED EARNINGS - DECEMBER 1, 1999 196,780
--------
RETAINED EARNINGS - MAY 31, 2000 $ 96,953
========
</TABLE>
<PAGE>
AVALON-BORDEN COMPANIES, INC. & SUBSIDIARY
Consolidated Statement of Changes in Stockholders' Equity
Six Months Ended May 31, 2000
<TABLE>
<CAPTION>
Additional Retained
Common Stock Paid-In Earnings
Shares Amount Capital (Deficit) Total
---------- -------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE -
DECEMBER 1, 1999 23,886,000 $ 23,886 $ 4,505,358 $ 196,780 $ 4,726,024
Net Loss - - - (99,827) (99,827)
---------- -------- ----------- --------- -----------
BALANCE -
MAY 31, 2000 23,886,000 $ 23,886 $ 4,505,358 $ 96,953 $ 4,626,197
========== ======== =========== ======== ===========
</TABLE>
<PAGE>
AVALON-BORDEN COMPANIES, INC. & SUBSIDIARY
Consolidated Statement of Cash Flows
Six Months Ended May 31, 2000
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash Received from Customers and Fees $ 459,989
Cash Paid to Suppliers and Employees (457,167)
Interest Income 6,868
Interest Paid (43,329)
Income Taxes Paid (2,900)
--------
Net Cash from Operating Activities (36,539)
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Fixed Assets (26,224)
--------
Net Cash from Investing Activities (26,224)
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Note Payable - Related Parties 49,000
Proceeds from Notes Payable 14,000
Repayment of Long-Term Debt (120,539)
Repayment of Capital Lease Obligations (22,792)
--------
Net Cash from Financing Activities (80,331)
--------
NET CHANGE IN CASH (143,094)
CASH - DECEMBER 1, 1999 200,159
--------
CASH - MAY 31, 2000 $ 57,065
========
</TABLE>
<PAGE>
AVALON-BORDEN COMPANIES, INC. & SUBSIDIARY
Consolidated Statement of Cash Flows (Continued)
Six Months Ended May 31, 2000
<TABLE>
<CAPTION>
<S> <C>
RECONCILIATION OF NET INCOME TO
NET CASH FROM OPERATING ACTIVITIES:
NET INCOME $ (99,827)
Adjustments:
Depreciation 26,178
Amortization 48,167
(Increase) Decrease in:
Accounts Receivable 10,208
Increase (Decrease) in:
Accounts Payable 30,425
Payroll Tax Liabilities (1,357)
Accrued Income Taxes (45,860)
Accrued Expenses (4,473)
---------
NET CASH FROM OPERATING ACTIVITIES $ (36,539)
=========
</TABLE>
<PAGE>
AVALON-BORDEN COMPANIES, INC. & SUBSIDIARY
Notes to Financial Statements
May 31, 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Business - Avalon-Borden Companies, Inc. (the Company) is a
holding company actively pursuing investment in profitable businesses
in the Southeast, primarily. At May 31, 2000, the Company had one
wholly owned subsidiary and had completed the purchase of digital
technology and license from a company in Tennessee.
The Company's wholly owned subsidiary, Avalon Media Group, Inc. (the
Subsidiary), operates an ad-insertion business for local cable
companies in southeastern Tennessee and northeastern Alabama markets.
The Subsidiary purchased the assets of a company in that same business
at the end of May 1998.
Consolidation Policy - The accompanying consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiary. Inter-company transactions and balances have been
eliminated in consolidation.
Basis of Accounting - The Company uses the accrual basis of accounting.
Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles require management to make
estimates and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those
estimates.
Bad Debts - The Company uses the allowance method for uncollectible
accounts.
Fixed Assets - Fixed assets are presented at cost. The cost is
depreciated over the estimated useful lives of the related assets.
Depreciation is computed on the straight-line method for financial
reporting purposes and on the modified accelerated cost recovery system
for income tax purposes.
Goodwill - Goodwill, which represents the excess of the cost of
purchased companies over the fair value of their net assets at the date
of acquisition, is being amortized on the straight-line method over
five years. Amortization expense charged to operations related to
goodwill was $ 47,500.
<PAGE>
AVALON-BORDEN COMPANIES, INC. & SUBSIDIARY
Notes to Financial Statements (Continued)
May 31, 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
Revenue Recognition - The Subsidiary recognizes revenue in the month
the advertising "runs" on the various cable systems. Cost of revenue is
recognized based upon the contractual percentage charged by the various
cable operators. Payment of the cost is due upon collection of the fees
from the advertisers. The Subsidiary uses a five- percent reduction of
revenue to allow for uncollectible accounts in the calculation of the
cost of revenue.
Income Taxes - Income tax expense includes federal and state taxes
currently payable and deferred taxes arising from temporary differences
between income for financial reporting and income tax purposes. These
differences result principally from differences in accounting for
depreciation, amortization, bad debts, and accrued interest payable to
cash basis taxpayers.
NOTE 2 - ACCOUNTS RECEIVABLE:
Accounts receivables are presented net of the allowance for doubtful
accounts. At May 31, 2000, the allowance for doubtful accounts is
$6,500.
NOTE 3 - FIXED ASSETS:
At May 31, 2000, Fixed Assets consist of:
Ad Insertion Equipment $ 367,774
Production Equipment 89,623
Vehicles 19,366
Equipment 17,038
Computer Equipment and Software 7,555
Furniture and Fixtures 946
---------
Total $ 502,302
=========
NOTE 4 - NOTES PAYABLE:
The Company has several notes payable maturing within one year of May
31, 2000. The notes have interest rates ranging from 4.5% to 15%.
Security for the notes ranged from unsecured to real and personal
property provided by related parties. One note is secured by specific
shares of the Company's stock.
<PAGE>
AVALON-BORDEN COMPANIES, INC. & SUBSIDIARY
Notes to Financial Statements (Continued)
May 31, 2000
NOTE 5 - LONG-TERM DEBT:
The following is a summary of long-term debt at May 31, 2000:
Note payable related to acquisition of subsidiary,
principal and interest payable quarterly beginning
September 1, 1998 with final payment due September
1, 2000, bearing interest at prime plus 2%,
unsecured, guaranteed by related parties $ 66,667
Note payable to a bank, payable in 59 installments
of $ 339 with any unpaid balance plus accrued
interest due November 15, 2003, bearing interest at
7.25%, secured by automotive equipment 12,492
--------
79,159
Less current portion 69,936
--------
Long-term Portion $ 9,223
========
The following are maturities of long-term debt for each of the next
four fiscal years ending May 31:
2001 $ 69,936
2002 3,514
2003 3,777
2003 1,932
--------
$ 79,159
========
NOTE 6 - CAPITAL LEASES:
The Company is the lessee of ad-insertion equipment under capital
leases expiring in 2004. This equipment is recorded at the lower of the
present value of the minimum lease payments or the fair value of the
asset. This equipment is amortized over the lower of their related
lease terms or their estimated production lives. Amortization of assets
under capital leases is included in depreciation expense.
The amount capitalized relative to the capital leases was $291,134.
<PAGE>
AVALON-BORDEN COMPANIES, INC. & SUBSIDIARY
Notes to Financial Statements (Continued)
May 31, 2000
NOTE 6 - CAPITAL LEASES (Continued):
Minimum future lease payments under capital leases as of May 31, 2000
for each of the next five years and in the aggregate are:
Years Ending May 31: Amount
-------------------- -------------
2000 $ 73,844
2001 73,057
2002 71,482
2003 71,482
2004 21,232
-------------
311,097
Less Amount Representing Interest 61,817
-------------
Present Value of Net Minimum Lease Payments $ 249,280
=============
NOTE 7 - INCOME TAXES:
The Company and its subsidiary file a consolidated federal income tax
return. The Company and its subsidiary file separate state income tax
returns.
Deferred income tax expense in the consolidating income statement has
been allocated based upon each component company's federal taxable
income compared to the federal taxable income for the consolidated
group.
NOTE 8 - RETIREMENT PLAN:
The Subsidiary has established a "Savings Incentive Match Plan for
Employees of Small Employers (SIMPLE)" that covers all employees. All
contributions made under this plan are fully vested and
non-forfeitable. The plan was effective July 1, 1998. The plan
requires the Subsidiary to make a matching contribution up to a limit
of 2% of participating employees' compensation.
<PAGE>
AVALON-BORDEN COMPANIES, INC. & SUBSIDIARY
Consolidating Balance Sheets
May 31, 2000
<TABLE>
<CAPTION>
Avalon-
Borden Avalon
Companies, Media
Inc. Group, Inc. Eliminations Consolidated
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 7,448 $ 49,617 $ - $ 57,065
Certificate of Deposit 300,000 - - 300,000
Accounts Receivable - 196,895 - 196,895
Accounts Receivable - Related Party 122,317 85,903 (208,220) -
----------- ----------- ----------- -----------
Total Current Assets 429,765 332,415 (208,220) 553,960
----------- ----------- ----------- -----------
FIXED ASSETS:
Fixed Assets 6,043 496,259 - 502,302
Accumulated Depreciation (724) (55,824) - (56,548)
----------- ----------- ----------- -----------
Fixed Assets, Net 5,319 440,435 - 445,754
----------- ----------- ----------- -----------
OTHER ASSETS:
Investment in Subsidiary 5,232,610 - (5,232,610) -
Digital Technology and License - 4,621,756 - 4,621,756
Goodwill, Net - 285,000 - 285,000
Deferred Tax Asset 7,364 6,848 - 14,212
Operator Fee Deposit - Helicon - 10,000 - 10,000
----------- ----------- ----------- -----------
Total Other Assets 5,239,974 4,923,604 (5,232,610) 4,930,968
----------- ----------- ----------- -----------
TOTAL ASSETS $ 5,675,058 $ 5,696,454 $(5,440,830) $ 5,930,682
=========== =========== =========== ===========
</TABLE>
<PAGE>
AVALON-BORDEN COMPANIES, INC.
Consolidating Balance Sheets
May 31, 2000
<TABLE>
<CAPTION>
Avalon-
Borden Avalon
Companies, Media
Inc. Group, Inc. Eliminations Consolidated
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
LIABILITIES
CURRENT LIABILITIES:
Accounts Payable $ 137,705 $ 58,311 $ - $ 196,016
Accounts Payable - Related Party 85,903 122,317 (208,220) -
Notes Payable 600,000 14,000 - 614,000
Notes Payable - Related Parties 49,000 - - 49,000
Accrued Income Taxes 89,633 7,444 - 97,077
Accrued Expenses 19,953 - - 19,953
Current Portion - Long-Term Debt 66,667 3,269 - 69,936
Current Portion - Capital Lease
Obligations - 45,777 - 45,777
----------- ----------- ----------- -----------
Total Current Liabilities 1,048,861 251,118 (208,220) 1,091,759
----------- ----------- ----------- -----------
LONG-TERM LIABILITIES:
Long-Term Debt - 9,223 - 9,223
Capital Lease Obligations - 203,503 - 203,503
----------- ----------- ----------- -----------
Total Long-Term Liabilities - 212,726 - 212,726
----------- ----------- ----------- -----------
TOTAL LIABILITIES 1,048,861 463,844 (208,220) 1,304,485
----------- ----------- ----------- -----------
STOCKHOLDERS' EQUITY:
Common Stock 23,886 10 (10) 23,886
Additional Paid-In Capital 4,505,358 5,183,548 (5,183,548) 4,505,358
Retained Earnings (Deficit) 96,953 49,052 (49,052) 96,953
----------- ----------- ----------- -----------
Total Stockholders' Equity 4,626,197 5,232,610 (5,232,610) 4,626,197
----------- ----------- ----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 5,675,058 $ 5,696,454 $(5,440,830) $ 5,930,682
=========== =========== =========== ===========
</TABLE>
<PAGE>
AVALON-BORDEN COMPANIES, INC. & SUBSIDIARY
Consolidating Statements of Income and Retained Earnings
Six Months Ended May 31, 2000
<TABLE>
<CAPTION>
Avalon-
Borden Avalon
Companies, Media
Inc. Group, Inc. Eliminations Consolidated
-------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Ad-Insertion Income $ - $ 443,907 $ - $ 443,907
COST OF REVENUES - 297,044 - 297,044
-------- ----------- ------------ ------------
GROSS PROFIT - 146,863 - 146,863
OPERATING EXPENSES 107,034 155,537 - 262,571
-------- ----------- ------------ ------------
INCOME FROM OPERATIONS (107,034) (8,674) - (115,708)
-------- ----------- ------------ ------------
OTHER INCOME (EXPENSES):
Subsidiary Income (Loss) (13,539) - 13,539 -
Other Income 6,868 5,875 - 12,743
Interest Expense (23,805) (16,017) - (39,822)
-------- ----------- ------------ ------------
Other Income (Expenses), Net (30,476) (10,142) 13,539 (27,079)
-------- ----------- ------------ ------------
INCOME BEFORE INCOME TAXES (137,510) (18,816) 13,539 (142,787)
-------- ----------- ------------ ------------
INCOME TAXES:
Current (37,921) (6,484) - (44,405)
Deferred 238 1,207 - 1,445
-------- ----------- ------------ ------------
Total Income Taxes (37,683) (5,277) - (42,960)
-------- ----------- ------------ ------------
NET INCOME (99,827) (13,539) 13,539 (99,827)
RETAINED EARNINGS -
DECEMBER 1, 1999 196,780 62,591 (62,591) 196,780
-------- ----------- ------------ ------------
RETAINED EARNINGS -
MAY 31, 2000 $ 96,953 $ 49,052 $ (49,052) $ 96,953
======== =========== ============ ============
</TABLE>
<PAGE>
AVALON-BORDEN COMPANIES, INC. & SUBSIDIARY
Consolidating Statements of Changes in Stockholders' Equity
Six Months Ended May 31, 2000
<TABLE>
<CAPTION>
Avalon- Avalon
Borden Media
Companies, Group,
Inc. Inc. Eliminations Consolidated
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
COMMON STOCK:
Beginning Balance $ 23,886 $ 10 $ (10) $ 23,886
No Activity - - - -
----------- ----------- ----------- -----------
Ending Balance $ 23,886 $ 10 $ (10) $ 23,886
=========== =========== =========== ===========
ADDITIONAL PAID-IN CAPITAL:
Beginning Balance $ 4,505,358 $ 5,183,548 $(5,183,548) $ 4,505,358
No Activity - - - -
----------- ----------- ----------- -----------
Ending Balance $ 4,505,358 $ 5,183,548 $(5,183,548) $ 4,505,358
=========== =========== =========== ===========
RETAINED EARNINGS:
Beginning Balance $ 196,780 $ 62,591 $ (62,591) $ 196,780
Net Loss (99,827) (13,539) 13,539 (99,827)
----------- ----------- ----------- -----------
Ending Balance $ 96,953 $ 49,052 $ (49,052) $ 96,953
=========== =========== =========== ===========
</TABLE>
<PAGE>
AVALON-BORDEN COMPANIES, INC. & SUBSIDIARY
CONSOLIDATING STATEMENTS OF CASH FLOWS
Six Months Ended May 31, 2000
<TABLE>
<CAPTION>
Avalon- Avalon
Borden Media
Companies, Group,
Inc. Inc. Eliminations Consolidated
--------- --------- ------------ ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Cash Received from Customers and Fees $ - $ 459,989 $ - $ 459,989
Cash Paid to Suppliers and Employees (52,758) (404,409) - (457,167)
Interest Income 6,868 - - 6,868
Interest Paid (27,312) (16,017) - (43,329)
Income Taxes Paid - (2,900) (2,900)
--------- --------- ---- ---------
Net Cash from Operating Activities (73,202) 36,663 - (36,539)
--------- --------- ---- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of Fixed Assets - (26,224) - (26,224)
--------- --------- ---- ---------
Net Cash from Investing Activities - (26,224) - (26,224)
--------- --------- ---- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Change in Related Party
Receivable/Payable 88,060 (39,060) - 49,000
Proceeds from Notes Payable - 14,000 - 14,000
Repayment of Long-Term Debt (114,666) (5,873) - (120,539)
Repayment of Capital Lease Obligations - (22,792) - (22,792)
--------- --------- ---- ---------
Net Cash from Financing Activities (26,606) (53,725) - (80,331)
--------- --------- ---- ---------
NET CHANGE IN CASH (99,808) (43,286) - (143,094)
CASH - DECEMBER 1, 1999 107,256 92,903 - 200,159
--------- --------- ---- ---------
CASH - MAY 31, 2000 $ 7,448 $ 49,617 $ - $ 57,065
========= ========= ==== =========
</TABLE>
<PAGE>
AVALON-BORDEN COMPANIES, INC. & SUBSIDIARY
CONSOLIDATING STATEMENTS OF CASH FLOWS
Six Months Ended May 31, 2000
<TABLE>
<CAPTION>
Avalon- Avalon
Borden Media
Companies, Group,
Inc. Inc. Eliminations Consolidated
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
RECONCILIATION OF NET INCOME (LOSS) TO
NET CASH FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ (99,827) $ (13,539) $ 13,539 $ (99,827)
Adjustments:
Depreciation 378 25,800 - 26,178
Amortization - 48,167 - 48,167
Income from Subsidiaries 13,539 - (13,539) -
(Increase) Decrease in:
Accounts Receivable - 10,208 - 10,208
Increase (Decrease) in:
Accounts Payable 53,897 (23,472) - 30,425
Payroll Tax Liabilities - (1,357) - (1,357)
Accrued Income Taxes (37,683) (8,177) - (45,860)
Accrued Expenses (3,506) (967) - (4,473)
--------- --------- -------- ---------
NET CASH FROM OPERATING
ACTIVITIES $ (73,202) $ 36,663 $ - $ (36,539)
========= ========= ======== =========
</TABLE>
<PAGE>
AVALON-BORDEN COMPANIES, INC.
AND SUBSIDIARY
Consolidated Financial Statements
and Consolidating Schedules
November 30, 1999
<PAGE>
AVALON-BORDEN COMPANIES, INC.
AND SUBSIDIARY
Table of Contents
November 30, 1999
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditor's Report 1
Consolidated Balance Sheet 2-3
Consolidated Statement of Income and Retained Earnings (Deficit) 4
Consolidated Statement of Changes in Stockholders' Equity (Deficit) 5
Consolidated Statement of Cash Flows 6-7
Notes to Financial Statements 8-13
Consolidating Balance Sheets 14-15
Consolidating Statements of Income and Retained Earnings 16
Consolidating Statements of Changes in Stockholders' Equity 17
Consolidating Statements of Cash Flows 18-19
</TABLE>
<PAGE>
CADE & ASSOCIATES, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
2100 SOUTHBRIDGE PARKWAY - SUITE 460
BIRMINGHAM, ALABAMA 35209
A. CATLIN CADE, IV, CPA TELEPHONE (205) 871-8600
F. EUGENE DUNCAN, CPA FACSIMILE (205) 871-8676
NANCY K. WILSON, CPA WATS 1-800-356-6403
GILBERT L. CRENSHAW, JR., CPA
C. RANDY HAMMOND, CPA
BENTON B. RAMEY
DAVID L. LeGRAND
KEVIN A. ANDREWS
To the Board of Directors and Stockholders
of Avalon-Borden Companies, Inc.
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying consolidated balance sheet of Avalon-Borden
Companies, Inc. (a Delaware corporation) and subsidiary as of November 30, 1999,
and the related consolidated statements of income and retained earnings,
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Avalon-Borden
Companies, Inc. and subsidiary as of November 30, 1999, and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the consolidated
financial statements taken as a whole. The consolidating information is
presented for purposes of additional analysis of the consolidated financial
statements rather than to present the financial position and results of
operations of the individual companies. The consolidating information has been
subjected to the auditing procedures applied in the audit of the consolidated
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the consolidated financial statements taken as a whole.
/s/ Cade & Associates, P.C.
Birmingham, Alabama
April 10, 2000
<PAGE>
AVALON-BORDEN COMPANIES, INC. & SUBSIDIARY
Consolidated Balance Sheet
November 30, 1999
<TABLE>
<CAPTION>
<S> <C>
CURRENT ASSETS:
Cash $ 200,159
Certificate of Deposit 300,000
Accounts Receivable 207,103
-----------
Total Current Assets 707,262
-----------
FIXED ASSETS:
Fixed Assets 476,078
Accumulated Depreciation (30,369)
-----------
Fixed Assets, Net 445,709
-----------
OTHER ASSETS:
Digital Technology and License 4,622,423
Goodwill, Net 332,500
Deferred Tax Asset 14,212
Operator Fee Deposit - Helicon 10,000
-----------
Total Other Assets 4,979,135
-----------
TOTAL ASSETS $ 6,132,106
===========
</TABLE>
The accompanying notes and independent auditor's report
are an integral part of these financial statements.
2
<PAGE>
AVALON-BORDEN COMPANIES, INC. & SUBSIDIARY
Consolidated Balance Sheet
November 30, 1999
<TABLE>
<CAPTION>
<S> <C>
CURRENT LIABILITIES:
Accounts Payable $ 165,591
Notes Payable 648,000
Accrued Income Taxes 142,937
Payroll Tax Liabilities 1,356
Accrued Expenses 24,427
Current Portion - Long-Term Debt 136,486
Current Portion - Capital Lease Obligations 48,835
-----------
Total Current Liabilities 1,167,632
-----------
LONG-TERM LIABILITIES:
Long-Term Debt 10,887
Capital Lease Obligations 227,563
-----------
Total Long-Term Liabilities 238,450
-----------
TOTAL LIABILITIES 1,406,082
-----------
STOCKHOLDERS' EQUITY:
Common Stock 23,886
Additional Paid-In Capital 4,505,358
Retained Earnings 196,780
-----------
Total Stockholders' Equity 4,726,024
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,132,106
===========
</TABLE>
The accompanying notes and independent auditor's report
are an integral part of these financial statements.
3
<PAGE>
AVALON-BORDEN COMPANIES, INC. & SUBSIDIARY
Consolidated Statement of Income and Retained Earnings (Deficit)
Year Ended November 30, 1999
<TABLE>
<CAPTION>
<S> <C>
REVENUES:
Financing Fee $ 1,387,000
Ad-Insertion Income 863,586
-----------
Total Revenues 2,250,586
COST OF REVENUES 317,628
-----------
GROSS PROFIT 1,932,958
OPERATING EXPENSES 829,374
-----------
INCOME FROM OPERATIONS 1,103,584
-----------
OTHER INCOME (EXPENSES):
Reimbursed Expenses 180,515
Interest Income 6,957
Interest Expense (98,872)
-----------
Other Income (Expenses), Net 88,600
-----------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,192,184
PROVISION FOR INCOME TAXES 135,487
-----------
NET INCOME 1,056,697
RETAINED EARNINGS (DEFICIT) - DECEMBER 1, 1998 (859,917)
-----------
RETAINED EARNINGS - NOVEMBER 30, 1999 $ 196,780
=========
</TABLE>
The accompanying notes and independent auditor's report
are an integral part of these financial statements.
4
<PAGE>
AVALON-BORDEN COMPANIES, INC. & SUBSIDIARY
Consolidated Statement of Changes in Stockholders' Equity (Deficit)
Year Ended November 30, 1999
<TABLE>
<CAPTION>
Additional Retained
Common Stock Paid-In Earnings
Shares Amount Capital (Deficit) Total
---------- -------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE -
DECEMBER 1, 1998 21,950,000 $ 21,950 $ 35,294 $ (859,917) $ (802,673)
Correction of Error (300,000) (300) 300 - -
Issuance of Shares 2,236,000 2,236 4,469,764 - 4,472,000
Net Income for the Year - - - 1,056,697 1,056,697
---------- -------- ----------- --------- -----------
BALANCE -
NOVEMBER 30, 1999 23,886,000 $ 23,886 $ 4,505,358 $ 196,780 $ 4,726,024
========== ======== =========== ========= ===========
</TABLE>
The accompanying notes and independent auditor's report
are an integral part of these financial statements.
5
<PAGE>
AVALON-BORDEN COMPANIES, INC. & SUBSIDIARY
Consolidated Statement of Cash Flows
Year Ended November 30, 1999
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash Received from Customers and Fees $ 2,422,858
Cash Paid to Suppliers and Employees (1,318,394)
Interest Income 6,957
Interest Paid (201,330)
Income Taxes Paid (12,802)
-----------
Net Cash from Operating Activities 897,289
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Certificate of Deposit (300,000)
Investment in Digital Technology (22,976)
Acquisition of Fixed Assets (339,293)
-----------
Net Cash from Investing Activities (662,269)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Long-Term Debt 106,131
Proceeds from Capital Lease Obligations 285,003
Repayment of Long-Term Debt (485,109)
Repayment of Capital Lease Obligations (12,931)
-----------
Net Cash from Financing Activities (106,906)
-----------
NET CHANGE IN CASH 128,114
CASH - DECEMBER 1, 1998 72,045
-----------
CASH - NOVEMBER 30, 1999 $ 200,159
===========
</TABLE>
The accompanying notes and independent auditor's report
are an integral part of these financial statements.
6
<PAGE>
AVALON-BORDEN COMPANIES, INC. & SUBSIDIARY
Consolidated Statement of Cash Flows (Continued)
Year Ended November 30, 1999
<TABLE>
<CAPTION>
<S> <C>
RECONCILIATION OF NET INCOME TO
NET CASH FROM OPERATING ACTIVITIES:
NET INCOME $ 1,056,696
Adjustments:
Depreciation 23,238
Amortization 124,241
(Increase) Decrease in:
Accounts Receivable (8,244)
Prepaids 2,001
Deferred Tax Asset (14,212)
Increase (Decrease) in:
Cash Overdraft (55,387)
Accounts Payable (251,491)
Payroll Tax Liabilities (9,711)
Accrued Income Taxes 136,897
Accrued Expenses (106,739)
---------
NET CASH FROM OPERATING ACTIVITIES $ 897,289
=========
SUMMARY OF NON-CASH TRANSACTIONS:
Stockholders'
Assets Equity
----------- ------------
Acquisition of Digital Technology $ 4,472,000 $ 4,472,000
=========== ===========
</TABLE>
The accompanying notes and independent auditor's report
are an integral part of these financial statements.
7
<PAGE>
AVALON-BORDEN COMPANIES, INC. & SUBSIDIARY
Notes to Financial Statements
November 30, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Business - Avalon-Borden Companies, Inc. (the Company)
is a holding company actively pursuing investment in profitable
businesses in the Southeast, primarily. At May 31, 2000, the
Company had one wholly owned subsidiary and had completed the
purchase of digital technology and license from a company in
Tennessee. The Company had also completed its involvement in the
purchase of a large aluminum plant in the Muscle Shoals area of
northwestern Alabama. The Company has no ownership in the aluminum
plant, but did receive a fee and reimbursement of expenses related
to its involvement.
The Company's wholly owned subsidiary, Avalon Media Group, Inc.
(the Subsidiary), operates an ad-insertion business for local
cable companies in southeastern Tennessee and northeastern Alabama
markets. The Subsidiary purchased the assets of a company in that
same business at the end of May 1998.
Consolidation Policy - The accompanying consolidated financial
statements include the accounts of the Company and its wholly
owned subsidiary. Inter-company transactions and balances have
been eliminated in consolidation.
Basis of Accounting - The Company uses the accrual basis of
accounting.
Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles require management
to make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results could differ
from those estimates.
Bad Debts - The Company uses the allowance method for
uncollectible accounts. Bad debt expense charged to the
Subsidiary's operations was $3,272.
Fixed Assets - Fixed assets are presented at cost. The cost is
depreciated over the estimated useful lives of the related assets.
Depreciation is computed on the straight-line method for financial
reporting purposes and on the modified accelerated cost recovery
system for income tax purposes. Depreciation expense charged to
operations for the year was $23,238.
Goodwill - Goodwill, which represents the excess of the cost of
purchased companies over the fair value of their net assets at the
date of acquisition, is being amortized on the straight-line
method over five years. Amortization expense charged to operations
related to goodwill was $95,000.
8
<PAGE>
AVALON-BORDEN COMPANIES, INC. & SUBSIDIARY
Notes to Financial Statements (Continued)
November 30, 1999
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
Revenue Recognition - The Subsidiary recognizes revenue in the
month the advertising "runs" on the various cable systems. Cost of
revenue is recognized based upon the contractual percentage
charged by the various cable operators. Payment of the cost is due
upon collection of the fees from the advertisers. The Subsidiary
uses a five- percent reduction of revenue to allow for
uncollectible accounts in the calculation of the cost of revenue.
Income Taxes - Income tax expense includes federal and state taxes
currently payable and deferred taxes arising from temporary
differences between income for financial reporting and income tax
purposes. These differences result principally from differences in
accounting for depreciation, amortization, bad debts, and accrued
interest payable to cash basis taxpayers.
NOTE 2 - ACCOUNTS RECEIVABLE:
Accounts receivables are presented net of the allowance for
doubtful accounts. At May 31, 2000, the allowance for doubtful
accounts is $6,500.
NOTE 3 - FIXED ASSETS:
At May 31, 2000, Fixed Assets consist of:
Ad Insertion Equipment $ 360,723
Production Equipment 72,330
Vehicles 19,366
Equipment 15,158
Computer Equipment and Software 7,555
Furniture and Fixtures 946
------------
Total $ 476,078
============
NOTE 4 - ORGANIZATION COST:
Organization Cost relates to the Company's initial organization.
The cost was amortized over five years. The original cost was $
139,220 and accumulated amortization at May 31, 2000 was $139,220.
Amortization of organization costs charged to operations for the
year was $29,129.
9
<PAGE>
AVALON-BORDEN COMPANIES, INC. & SUBSIDIARY
Notes to Financial Statements (Continued)
November 30, 1999
NOTE 5 - LOAN COSTS:
Loan costs were amortized over the term of the associated debt.
The original cost was $2,569. Accumulated amortization at May 31,
2000 was $2,569. Amortization of loan costs charged to operations
for the year was $1,285.
NOTE 6 - CONSULTING AGREEMENT:
Included in Accounts Payable at November 1998 was a payable
related to a consulting contract for the drafting, revision and
publication of a possible acquisition's business plan including a
five-year financial projection. The consultant was also
responsible for management of the possible acquisition's
technology development and deployment. The agreement stated that
the consultant would be paid at a rate of $150 per hour if an
equity offering of the possible acquisition was successful. The
agreement had a clause whereby the consultant hourly rate would be
$38 per hour if the equity offering was unsuccessful for any
reason. At May 31, 2000, the accounts payable related to this
agreement was reduced to $38 per hour or $49,096. The Company
acquired the digital technology owned by the possible acquisition
and a license to use that technology without an equity offering
related to the acquisition. The Company is in negotiations with
the consultant regarding settlement of the agreement and the
possibility exists that the settlement amount could exceed the
recorded payable.
NOTE 7 - NOTES PAYABLE:
The Company has several notes payable maturing within one year of
May 31, 2000. The notes have interest rates ranging from 4.5% to
15%. Security for the notes ranged from unsecured to real and
personal property provided by related parties. One note is secured
by specific shares of the Company's stock.
NOTE 8 - LONG-TERM DEBT:
The following is a summary of long-term debt at May 31, 2000:
Note payable related to acquisition of subsidiary, principal and
interest payable quarterly beginning September 1, 1998 with final
payment due September 1, 2000, bearing interest at prime plus 2%,
unsecured, guaranteed by related parties
$ 133,333
10
<PAGE>
AVALON-BORDEN COMPANIES, INC. & SUBSIDIARY
Notes to Financial Statements (Continued)
November 30, 1999
NOTE 8 - LONG-TERM DEBT: (Continued)
Note payable to a bank, payable in 59
installments of $ 339 with any unpaid balance
plus accrued interest due November 15, 2003,
bearing interest at 7.25%, secured by
automotive equipment $ 14,040
-------------
147,373
Less current portion 136,486
-------------
$ 10,887
=============
The following are maturities of long-term debt for each of the
next four fiscal years ending November 30:
2001 $ 136,486
2002 3,389
2003 3,643
3,855
-------------
$ 147,373
=============
NOTE 9 - CAPITAL LEASES:
The Company is the lessee of ad-insertion equipment under capital
leases expiring in 2004. This equipment is recorded at the lower
of the present value of the minimum lease payments or the fair
value of the asset. This equipment is amortized over the lower of
their related lease terms or their estimated production lives.
Amortization of assets under capital leases is included in
depreciation expense.
The amount capitalized relative to the capital leases was
$291,134.
Minimum future lease payments under capital leases as of May 31,
2000 for each of the next five years and in the aggregate are:
Years Ending November 30: Amount
------------------------- ------
2000 $ 73,844
2001 73,844
2002 71,876
2003 71,482
2004 56,973
-------
348,019
Less Amount Representing Interest 71,621
-------------
Present Value of Net Minimum Lease Payments $ 276,398
=============
11
<PAGE>
AVALON-BORDEN COMPANIES, INC. & SUBSIDIARY
Notes to Financial Statements (Continued)
November 30, 1999
NOTE 10 - INCOME TAXES:
The Company and its subsidiary file a consolidated federal
income tax return. The Company and its subsidiary file separate
state income tax returns.
Deferred income tax expense in the consolidating income
statement has been allocated based upon each component company's
federal taxable income compared to the federal taxable income
for the consolidated group.
NOTE 11 - RELATED PARTY TRANSACTIONS:
At May 31, 2000, the Company has eliminated all inter-company
balances from its consolidated financial statements. Several
notes payable are secured by related parties' real and personal
property. One note payable is guaranteed by one of the Company's
stockholders.
NOTE 12 - RETIREMENT PLAN:
The Subsidiary has established a "Savings Incentive Match Plan
for Employees of Small Employers (SIMPLE)" that covers all
employees. All contributions made under this plan are fully
vested and non-forfeitable. The plan was effective July 1, 1998.
The plan requires the Subsidiary to make a matching contribution
up to a limit of 2% of participating employees' compensation.
NOTE 13 - FINANCING FEE:
The Company had been involved in the acquisition of a large
aluminum plant in the Muscle Shoals area of northwest Alabama. As
a result of their involvement, an unrelated company acquired this
plant. The Company had a memorandum of understanding with the
unrelated company that states the Company would be reimbursed for
. . . "its documented, direct expenses incurred through
closing . . . " involving the acquisition. Also, the memorandum
gave the Company the option of a 2% ownership in the LLC that was
the acquirer or a fee of $1,000,000. The memorandum states the
reimbursement of expenses will occur on the date of closing and
if the Company elects to receive the $1,000,000 fee, it will be
paid in equal installments on the 1st and 2nd anniversary dates
of the closing.
As a result of a settlement, the Company agreed to receive a
"financing fee" payable immediately in the amount of $1,387,000.
In addition, the Company received $284,181 in reimbursed
expenses. Certain expenses shown on the consolidated income
statement are presented net of $103,666 in reimbursed expenses
incurred in the year ended November 30, 1999.
12
<PAGE>
AVALON-BORDEN COMPANIES, INC. & SUBSIDIARY
Notes to Financial Statements (Continued)
November 30, 1999
NOTE 14 - NON-MONETARY TRANSACTION:
In May 1999, the Company acquired certain digital technology
related to its ad-insertion business. The technology included
patents, intellectual property and other related intangible
assets. The digital technology was acquired through the issuance
of 2,236,000 shares of the Company's common stock. The
acquisition was valued at $2 per share or a total of $4,472,000.
The $2 per share value was based upon the most recent arms-length
sale of the Company's common stock.
Also, as part of the above transaction, the Company paid $20,000
for a license to use the technology in perpetuity without
restriction.
The Company had previously acquired assets related to this
technology and those amounts in addition to the above are
presented on the Company's balance sheet as "Digital Technology
and License."
13
<PAGE>
AVALON-BORDEN COMPANIES, INC. & SUBSIDIARY
Consolidating Balance Sheets
November 30, 1999
<TABLE>
<CAPTION>
Avalon-
Borden Avalon
Companies, Media
Inc. Group, Inc. Eliminations Consolidated
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 107,256 $ 92,903 $ - $ 200,159
Certificate of Deposit 300,000 - - 300,000
Accounts Receivable - 207,103 - 207,103
Accounts Receivable - Related Party 106,316 30,843 (137,159) -
----------- ----------- ----------- -----------
Total Current Assets 513,572 330,849 (137,159) 707,262
----------- ----------- ----------- -----------
FIXED ASSETS:
Fixed Assets 6,043 470,035 - 476,078
Accumulated Depreciation (345) (30,024) - (30,369)
----------- ----------- ----------- -----------
Fixed Assets, Net 5,698 440,011 - 445,709
----------- ----------- ----------- -----------
OTHER ASSETS:
Investment in Subsidiary 5,246,149 - (5,246,149) -
Digital Technology and License - 4,622,423 - 4,622,423
Goodwill, Net - 332,500 - 332,500
Organization Cost, Net - - - -
Deferred Tax Asset 7,364 6,848 - 14,212
Operator Fee Deposit - Helicon - 10,000 - 10,000
----------- ----------- ----------- -----------
Total Other Assets 5,253,513 4,971,771 (5,246,149) 4,979,135
----------- ----------- ----------- -----------
TOTAL ASSETS $ 5,772,783 $ 5,742,631 $(5,383,308) $ 6,132,106
=========== =========== =========== ===========
</TABLE>
The accompanying notes and independent auditor's report are
an integral part of these schedules to the financial statements.
14
<PAGE>
AVALON-BORDEN COMPANIES, INC.
Consolidating Balance Sheets
November 30, 1999
<TABLE>
<CAPTION>
Avalon-
Borden Avalon
Companies, Media
Inc. Group, Inc. Eliminations Consolidated
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
LIABILITIES
CURRENT LIABILITIES:
Accounts Payable $ 83,808 $ 81,783 $ - $ 165,591
Accounts Payable - Related Party 30,843 106,316 (137,159) -
Notes Payable 648,000 - - 648,000
Accrued Income Taxes 127,316 15,621 - 142,937
Payroll Tax Liabilities - 1,356 - 1,356
Accrued Expenses 23,459 968 - 24,427
Current Portion - Long-Term Debt 133,333 3,153 - 136,486
Current Portion - Capital Lease
Obligations - 48,835 - 48,835
----------- ----------- ----------- -----------
Total Current Liabilities 1,046,759 258,032 (137,159) 1,167,632
----------- ----------- ----------- -----------
LONG-TERM LIABILITIES:
Long-Term Debt - 10,887 - 10,887
Capital Lease Obligations - 227,563 - 227,563
----------- ----------- ----------- -----------
Total Long-Term Liabilities - 238,450 - 238,450
----------- ----------- ----------- -----------
TOTAL LIABILITIES 1,046,759 496,482 (137,159) 1,406,082
----------- ----------- ----------- -----------
STOCKHOLDERS' EQUITY:
Common Stock 23,886 10 (10) 23,886
Additional Paid-In Capital 4,505,358 5,183,548 (5,183,548) 4,505,358
Retained Earnings (Deficit) 196,780 62,591 (62,591) 196,780
----------- ----------- ----------- -----------
Total Stockholders' Equity 4,726,024 5,246,149 (5,246,149) 4,726,024
----------- ----------- ----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 5,772,783 $ 5,742,631 $(5,383,308) $ 6,132,106
=========== =========== =========== ===========
</TABLE>
The accompanying notes and independent auditor's report are
an integral part of these schedules to the financial statements.
15
<PAGE>
AVALON-BORDEN COMPANIES, INC. & SUBSIDIARY
Consolidating Statements of Income and Retained Earnings
Year Ended November 30, 1999
<TABLE>
<CAPTION>
Avalon-
Borden Avalon
Companies, Media
Inc. Group, Inc. Eliminations Consolidated
----------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Financing Fee $ 1,387,000 $ - $ - $ 1,387,000
Ad-Insertion Income - 863,586 - 863,586
----------- --------- --------- ---------
Total Revenues 1,387,000 863,586 - 2,250,586
COST OF REVENUES - 317,628 - 317,628
----------- --------- --------- ---------
GROSS PROFIT 1,387,000 545,958 - 1,932,958
OPERATING EXPENSES 318,216 511,158 - 829,374
----------- --------- --------- ---------
INCOME FROM OPERATIONS 1,068,784 34,800 - 1,103,584
----------- --------- --------- ---------
OTHER INCOME (EXPENSES):
Subsidiary Income 16,364 - (16,364) -
Reimbursed Expenses 180,515 - - 180,515
Interest Income 6,957 - 6,957
Interest Expense (95,971) (2,901) - (98,872)
----------- --------- --------- ---------
Other Income (Expenses), Net 107,865 (2,901) (16,364) 88,600
----------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 1,176,649 31,899 (16,364) 1,192,184
----------- --------- --------- ---------
INCOME TAXES:
Current 127,316 22,383 - 149,699
Deferred (7,364) (6,848) - (14,212)
----------- --------- --------- ---------
Total Income Taxes 119,952 15,535 - 135,487
----------- --------- --------- ---------
NET INCOME 1,056,697 16,364 (16,364) 1,056,697
RETAINED EARNINGS -
DECEMBER 1, 1998 (859,917) 46,227 (46,227) (859,917)
----------- --------- --------- ---------
RETAINED EARNINGS -
NOVEMBER 30, 1999 $ 196,780 $ 62,591 $ (62,591) $ 196,780
=========== ========= ========= =========
</TABLE>
The accompanying notes and independent auditor's report are
an integral part of these schedules to the financial statements.
16
<PAGE>
AVALON-BORDEN COMPANIES, INC. & SUBSIDIARY
Consolidating Statements of Changes in Stockholders' Equity
Year Ended November 30, 1999
<TABLE>
<CAPTION>
Avalon- Avalon
Borden Media
Companies, Group,
Inc. Inc. Eliminations Consolidated
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
COMMON STOCK:
Beginning Balance $ 21,950 $ 10 $ (10) $ 21,950
Correction of Error (300) - - (300)
Issuance of Stock - Purchase of
Digital Technology and License 2,236 - - 2,236
----------- ---------- ---------- -----------
Ending Balance $ 23,886 $ 10 $ (10) $ 23,886
=========== =========== =========== ===========
ADDITIONAL PAID-IN CAPITAL:
Beginning Balance $ 35,294 $ 599,990 $ (599,990) $ 35,294
Correction of Error 300 - - 300
Issuance of Stock - Purchase of
Digital Technology and License 4,469,764 - - 4,469,764
Transfer of Digital Technology
and License to Subsidiary - 4,583,558 (4,583,558) -
----------- ---------- ---------- -----------
Ending Balance $ 4,505,358 $ 5,183,548 $(5,183,548) $ 4,505,358
=========== =========== =========== ===========
RETAINED EARNINGS:
Beginning Balance $ (859,917) $ 46,227 $ (46,227) $ (859,917)
Net Income 1,056,697 16,364 (16,364) 1,056,697
----------- ---------- ---------- -----------
Ending Balance $ 196,780 $ 62,591 $ (62,591) $ 196,780
=========== =========== =========== ===========
</TABLE>
The accompanying notes and independent auditor's report are
an integral part of these schedules to the financial statements.
17
<PAGE>
AVALON-BORDEN COMPANIES, INC. & SUBSIDIARY
CONSOLIDATING STATEMENTS OF CASH FLOWS
Year Ended November 30, 1999
<TABLE>
<CAPTION>
Avalon- Avalon
Borden Media
Companies, Group,
Inc. Inc. Eliminations Consolidated
----------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Cash Received from Customers and Fees $ 1,567,515 $ 855,343 $ - $ 2,422,858
Cash Paid to Suppliers and Employees (545,392) (773,002) - (1,318,394)
Interest Income 6,957 - - 6,957
Interest Paid (198,429) (2,901) - (201,330)
Income Taxes Paid - (12,802) (12,802)
--------- -------- ---- ---------
Net Cash from Operating Activities 830,651 66,638 - 897,289
--------- -------- ---- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Investment in Certificate of Deposit (300,000) - - (300,000)
Investment in Digital Technology (22,976) - - (22,976)
Acquisition of Fixed Assets (4,414) (334,879) - (339,293)
--------- -------- ---- ---------
Net Cash from Investing Activities (327,390) (334,879) - (662,269)
--------- -------- ---- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Change in Related Party
Receivable/Payable (63,586) 63,586 - -
Proceeds from Long-Term Debt 100,000 6,131 - 106,131
Proceeds from Capital Lease Obligations - 285,003 - 285,003
Repayment of Long-Term Debt (480,406) (4,703) - (485,109)
Repayment of Capital Lease Obligations - (12,931) - (12,931)
--------- -------- ---- ---------
Net Cash from Financing Activities (443,992) 337,086 - (106,906)
--------- -------- ---- ---------
NET CHANGE IN CASH 59,269 68,845 - 128,114
CASH - DECEMBER 1, 1998 47,988 24,057 - 72,045
--------- -------- ---- ---------
CASH - NOVEMBER 30, 1999 $ 107,257 $ 92,902 $ - $ 200,159
========= ======== == =========
</TABLE>
The accompanying notes and independent auditor's report are
an integral part of these schedules to the financial statements.
18
<PAGE>
AVALON-BORDEN COMPANIES, INC. & SUBSIDIARY
CONSOLIDATING STATEMENTS OF CASH FLOWS
Year Ended November 30, 1999
<TABLE>
<CAPTION>
Avalon- Avalon
Borden Media
Companies, Group,
Inc. Inc. Eliminations Consolidated
----------- -------- ------------ ------------
<S> <C> <C> <C> <C>
INCOME (LOSS) TO
NET CASH FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ 1,056,696 $ 16,364 $ (16,364) $ 1,056,696
Adjustments:
Depreciation 277 22,961 - 23,238
Amortization 29,130 95,111 - 124,241
Income from Subsidiaries (16,364) - 16,364 -
(Increase) Decrease in:
Accounts Receivable - (8,244) - (8,244)
Prepaids - 2,001 - 2,001
Deferred Tax Asset (7,364) (6,848) (14,212)
Increase (Decrease) in:
Cash Overdraft (55,387) - - (55,387)
Accounts Payable (197,837) (53,654) - (251,491)
Payroll Tax Liabilities (3,358) (6,353) - (9,711)
Accrued Income Taxes 127,316 9,581 - 136,897
Accrued Expenses (102,458) (4,281) - (106,739)
----------- -------- --------- -----------
NET CASH FROM OPERATING
ACTIVITIES $ 830,651 $ 66,638 $ - $ 897,289
=========== ======== ========= ===========
</TABLE>
The accompanying notes and independent auditor's report are
an integral part of these schedules to the financial statements.
19
<PAGE>
AVALON-BORDEN COMPANIES, INC.
AND SUBSIDIARY
Consolidated Financial Statements
and Consolidating Schedules
November 30, 1998
<PAGE>
CADE & ASSOCIATES, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
2100 SOUTHBRIDGE PARKWAY - SUITE 460
BIRMINGHAM, ALABAMA 35209
A. CATLIN CADE, IV, CPA TELEPHONE (205) 871-8600
F. EUGENE DUNCAN, CPA FACSIMILE (205) 871-8676
NANCY K. WILSON, CPA WATS 1-800-356-6403
BRADLEY D HUDSON, CPA
TERRI D SELMAN
BENTON B. RAMEY
GILBERT L. CRENSHAW, JR., CPA
To the Board of Directors and Stockholders
of Avalon-Borden Companies, Inc.
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying consolidated balance sheet of Avalon-Borden
Companies, Inc. (a Delaware corporation) and subsidiary as of November 30, 1998,
and the related consolidated statements of income and retained earnings,
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Avalon-Borden
Companies, Inc. and subsidiary as of November 30, 1998, and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the consolidated
financial statements taken as a whole. The consolidating information is
presented for purposes of additional analysis of the consolidated financial
statements rather than to present the financial position and results of
operations of the individual companies. The consolidating information has been
subjected to the auditing procedures applied in the audit of the consolidated
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the consolidated financial statements taken as a whole.
/s/ Cade & Associates, PC
Birmingham, Alabama
March 9, 1999
1
<PAGE>
AVALON-BORDEN COMPANIES, INC. & SUBSIDIARY
Consolidated Balance Sheet
November 30, 1998
<TABLE>
<CAPTION>
<S> <C>
CURRENT ASSETS:
Cash $ 72,046
Accounts Receivable 198,859
Prepaid Items 1,940
Deposits 64,263
-----------
Total Current Assets 337,108
-----------
FIXED ASSETS:
Fixed Assets 136,786
Accumulated Depreciation (7,131)
-----------
Fixed Assets, Net 129,655
-----------
OTHER ASSETS:
Other Investments 88,582
Goodwill, Net 427,500
Organization Cost, Net 27,844
Loan Closing Costs, Net 1,285
Operator Fee Deposit - Helicon 10,000
-----------
Total Other Assets 555,211
-----------
TOTAL ASSETS $ 1,021,974
===========
</TABLE>
The accompanying notes and independent auditor's report
are an integral part of these financial statements.
2
<PAGE>
AVALON-BORDEN COMPANIES, INC. & SUBSIDIARY
Consolidated Balance Sheet
November 30, 1998
<TABLE>
<CAPTION>
<S> <C>
CURRENT LIABILITIES:
Cash Overdraft $ 55,387
Accounts Payable 442,310
Notes Payable 838,000
Notes Payable - Related Party 57,073
Accrued Income Taxes 6,040
Payroll Tax Liabilities 11,067
Accrued Expenses 33,678
Accrued Expenses - Related Party 97,488
Current Portion - Long-Term Debt 136,229
----------
Total Current Liabilities 1,677,272
LONG-TERM LIABILITIES:
Long-Term Debt 147,375
----------
TOTAL LIABILITIES 1,824,647
----------
STOCKHOLDERS' EQUITY (DEFICIT):
Common Stock 21,950
Additional Paid-In Capital 35,294
Retained Earnings (Deficit) (859,917)
----------
Total Stockholders' Equity (802,673)
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 1,021,974
===========
</TABLE>
The accompanying notes and independent auditor's report
are an integral part of these financial statements.
3
<PAGE>
AVALON-BORDEN COMPANIES, INC. & SUBSIDIARY
Consolidated Statement of Income and Retained Earnings (Deficit)
Year Ended November 30, 1998
<TABLE>
<CAPTION>
<S> <C>
REVENUES $ 513,170
COST OF REVENUES 201,491
---------
GROSS PROFIT 311,679
OPERATING EXPENSES 854,036
---------
INCOME (LOSS) FROM OPERATIONS (542,357)
---------
OTHER INCOME (EXPENSES):
Loss on Investment (50,000)
Interest Expense (61,216)
---------
Other Income (Expenses), Net (111,216)
---------
INCOME (LOSS) BEFORE TAXES (653,573)
CURRENT INCOME TAXES 6,040
---------
NET INCOME (659,613)
RETAINED EARNINGS (DEFICIT) - DECEMBER 1, 1997 (200,304)
---------
RETAINED EARNINGS (DEFICIT) - NOVEMBER 30, 1998 $ (859,917)
==========
</TABLE>
The accompanying notes and independent auditor's report
are an integral part of these financial statements.
4
<PAGE>
AVALON-BORDEN COMPANIES, INC. & SUBSIDIARY
Consolidated Statement of Changes in Stockholders' Equity (Deficit)
Year Ended November 30,1998
<TABLE>
<CAPTION>
Additional Retained
Common Stock Paid-In Earnings
Shares Amount Capital (Deficit) Total
---------- -------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE -
DECEMBER 1, 1997 15,050,000 $ 15,050 $ 42,194 $(200,304) $ (143,060)
Issuance of Shares 6,900,000 6,900 (6,900) - -
Net Loss for the Year - - - (659,613) (659,613)
---------- -------- ----------- --------- -----------
BALANCE -
NOVEMBER 30, 1998 21,950,000 $ 21,950 $ 35,294 $(859,917) $ (802,673)
========== ======== =========== ========= ===========
</TABLE>
The accompanying notes and independent auditor's report
are an integral part of these financial statements.
5
<PAGE>
AVALON-BORDEN COMPANIES, INC. & SUBSIDIARY
Consolidated Statement of Cash Flows
Year Ended November 30, 1998
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash Received from Customers $ 307,810
Cash Paid to Suppliers and Employees (531,059)
---------
Net Cash from Operating Activities (223,249)
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments (88,582)
Acquisition of Fixed Assets (201,049)
Operator Fee Deposit (10,000)
Goodwill (475,000)
Loan Closing Costs (2,569)
---------
Net Cash from Investing Activities (777,200)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Notes Payable 1,144,887
Repayment of Long-Term Debt (77,333)
---------
Net Cash from Financing Activities 1,067,554
---------
NET CHANGE IN CASH 67,105
CASH AT BEGINNING OF YEAR 4,941
---------
CASH AT END OF YEAR $ 72,046
=========
</TABLE>
The accompanying notes and independent auditor's report
are an integral part of these financial statements.
6
<PAGE>
AVALON-BORDEN COMPANIES, INC. & SUBSIDIARY
Consolidated Statement of Cash Flows
Year Ended November 30, 1998
<TABLE>
<CAPTION>
<S> <C>
RECONCILIATION OF NET LOSS TO
NET CASH FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ (659,613)
Adjustments:
Allowance for Bad Debts 6,500
Depreciation 7,131
Amortization 76,629
(Increase) Decrease in:
Accounts Receivable (205,359)
Prepaids (1,940)
Increase (Decrease) in:
Cash Overdraft 55,387
Accounts Payable 438,193
Payroll Tax Liabilities 11,067
Accrued Income Taxes 6,040
Accrued Expenses 42,716
----------
NET CASH FROM OPERATING ACTIVITIES $ (223,249)
==========
</TABLE>
The accompanying notes and independent auditor's report
are an integral part of these financial statements.
7
<PAGE>
AVALON-BORDEN COMPANIES, INC. & SUBSIDIARY
Notes to Financial Statements
November 30, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Business - Avalon-Borden Companies, Inc. (the Company) is a holding
company actively pursuing investment in profitable businesses in the Southeast,
primarily. At November 30, 1998, the Company had one wholly owned subsidiary and
was involved in the purchase of a large aluminum plant in the Muscle Shoals area
of northwestern Alabama. The Company was also involved in acquisition
negotiations with a business in Tennessee.
The Company's wholly owned subsidiary, Avalon Media Group, Inc. (the Subsidiary)
operates an ad-insertion business for local cable companies in southeastern
Tennessee and northwestern Alabama markets. The Subsidiary purchased the assets
of a company in that same business at the end of May 1998. These financial
statements covered the Subsidiary's operations from that acquisition to November
30, 1998.
Consolidation Policy - The accompanying consolidated financial statements
include the accounts of the Company and its wholly owned subsidiary.
Intercompany transactions and balances have been eliminated in consolidation.
Basis of Accounting - The Company uses the accrual basis of accounting.
Estimates - The preparation of financial statements in conformity with generally
accepted accounting principles require management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
Bad Debts - The Company uses the allowance method for uncollectible accounts.
Bad debt expense charged to the Subsidiary's operations was $6,500.
Fixed Assets - Fixed assets are presented at cost. The cost is depreciated over
the estimated useful lives of the related assets. Depreciation is computed on
the straight-line method for financial reporting purposes and on the modified
accelerated cost recovery system for income tax purposes. Depreciation expense
charged to operations for the period was $7,131.
Goodwill - Goodwill, which represents the excess of the cost of purchased
companies over the fair value of their net assets at the date of acquisition, is
being amortized on the straight-line method over five years. Amortization
expense charged to operations related to goodwill was $47,500.
8
<PAGE>
AVALON-BORDEN COMPANIES, INC. AND SUBSIDIARY
Notes to Financial Statements (Continued)
November 30, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
Revenue Recognition - The Subsidiary recognizes revenue in the month the
advertising "runs" on the various cable systems. Cost of revenue based upon the
contractual percentage charged by the various cable operators. Payment of the
cost is due upon collection of the fees from the advertisers. The Subsidiary
uses a five percent reduction of revenue to allow for uncollectible accounts in
the calculation of the cost of revenue.
Income Taxes - Income tax expense includes federal and state taxes currently
payable and deferred taxes arising from temporary differences between income for
financial reporting and income tax purposes. These differences result
principally from differences in accounting for depreciation, amortization, bad
debts, and accrued interest payable to cash basis taxpayers.
NOTE 2 - ACCOUNTS RECEIVABLE:
Accounts receivable are presented net of the allowance for doubtful accounts. At
November 30, 1998, the allowance for doubtful accounts is $6,500.
NOTE 3 - DEPOSITS:
Deposits represents payments on conversion of the Subsidiary's insertion
business to digital technology. Upon being placed in service, the balance in
this account will be transferred to the fixed assets category and subject to
depreciation at that time.
NOTE 4 - FIXED ASSETS:
At November 30, 1998, Fixed Assets consists of:
Production Equipment $ 71,500
Ad Insertion Equipment 43,947
Vehicles 19,366
Computer Equipment 1,629
Other 344
--------
Total $136,786
========
9
<PAGE>
AVALON-BORDEN COMPANIES, INC. AND SUBSIDIARY
Notes to Financial Statements (Continued)
November 30, 1998
NOTE 5 - OTHER INVESTMENTS:
The balance in this account represents costs associated with the Company's
negotiations with a possible acquisition. The Company has capitalized these
costs in anticipation of finalizing the acquisition. The Company will expense
these costs at the time it is evident the planned acquisition will not occur.
NOTE 6 - ORGANIZATION COST:
Organization Cost relates to the Company's initial organization. The cost is
being amortized over five years. The original cost was $139,220 and accumulated
amortization at November 30, 1998 was $111,376. Amortization of organization
costs charged to operations for the year was $27,844.
NOTE 7 - LOAN COSTS:
Loan costs is being amortized over the term of the associated debt. The original
costs was $2,569. Accumulated amortization at November 30, 1998 was $1,284.
Amortization of loan costs charged to operations for the year was $1,284.
NOTE 8 - CONSULTING AGREEMENT:
Included in Accounts Payable at November 1998 is a payable related to a
consulting contract for the drafting, revision and publication of a possible
acquisition's business plan including a five year financial projection. The
consultant was also responsible for management of the possible acquisition's
technology development and deployment. The agreement states that the consultant
would be paid at a rate of $150 per hour prior to completion of an equity
offering of the possible acquisition. The agreement has a clause whereby the
consultant hourly rate will be reduced to $38 per hour if the equity offering is
unsuccessful for any reason. At November 30, 1998, the account payable related
to this agreement is $193,800. This amount is recorded at the $150 per hour rate
as the equity offering is still a possibility. If the offering is not
accomplished, the payable will be revalued at $49,096.
10
<PAGE>
AVALON-BORDEN COMPANIES, INC. AND SUBSIDIARY
Notes to Financial Statements (Continued)
November 30, 1998
NOTE 9 - NOTES PAYABLE:
The Company has several notes payable with maturities within one year of the
fiscal year-end of November 30, 1998. The notes had interest rates ranging from
4.5% to 15%. Security for the notes ranged from unsecured to real and personal
property provided by related parties. One note is secured by specific shares of
the Company's stock.
NOTE 10 - NOTE PAYABLE - RELATED PARTY:
At November 30, 1998, the Company had a $57,073 note payable to a related
party. The note has no stated due date and is unsecured. The note bears an
interest rate of 10%. Transactions related to this note for the year consisted
of advances of $60,000 and payments of $104,000, resulting in a net payment of
the note of $44,000 for the year. The Company specified that all payments be
applied to principal only. The Company has made no payments on the accrued
interest on this note since inception. The balance of accrued interest at
November 30, 1998 was $97,488 and is also unsecured.
NOTE 11 - LONG-TERM DEBT:
Following is a summary of long-term debt at November 30, 1998:
Note payable related to acquisition of subsidiary,
principal and interest payable quarterly beginning
September 1, 1998 with final payment due
September 1, 2000, bearing interest at prime plus
2%, unsecured, guaranteed by related party $ 266,667
Note payable to a bank, payable in 59 installments
of $339 with any unpaid balance plus accrued
interest due November 15, 2003, bearing interest
at 7.25%, secured by automotive equipment 16,937
---------
$ 283,604
Less current portion 136,229
---------
Long-Term Portion $ 147,375
=========
11
<PAGE>
AVALON-BORDEN COMPANIES, INC. AND SUBSIDIARY
Notes to Financial Statements (Continued)
November 30, 1998
NOTE 11 - LONG-TERM DEBT (Continued):
Following are maturities of long-term debt for each of the next five fiscal
years ending November 30:
1999 $ 136,299
2000 136,487
2001 3,389
2002 3,643
2003 3,856
---------
$ 283,604
=========
NOTE 12 - INCOME TAXES:
The Company and its subsidiary file a consolidated federal income tax return.
The Company and its subsidiary file separate state income tax returns. The
current tax expense relates to accrued state income taxes. No deferred income
tax is presented because the Company has sufficient net operating losses to
offset federal taxable income.
Deferred income tax expense in the consolidating income statement has been
allocated based upon each component company's federal taxable income compared to
the federal taxable income for the consolidated group. The Company has
available at November 30, 1998, approximately $733,000 of unused net operating
loss carryforwards that may be applied against future taxable income and that
expire in various years from 2010 to 2013.
NOTE 13 - RELATED PARTY TRANSACTIONS:
At November 30, 1998, the Company has eliminated all intercompany balances from
its consolidated financial statements. Several notes payable are secured by
related parties' real and personal property. One note payable is guaranteed by
one of the Company's stockholders.
12
<PAGE>
AVALON-BORDEN COMPANIES, INC. AND SUBSIDIARY
Notes to Financial Statements (Continued)
November 30, 1998
NOTE 14 - RETIREMENT PLAN:
The Subsidiary has established a "Savings Incentive Match Plan for Employees of
Small Employers (SIMPLE)" that covers all employees. All contributions made
under this plan are fully vested and nonforfeitable. The plan was effective July
1, 1998. For the calendar year 1998, the Subsidiary will make a matching
contribution up to a limit of 2% of participating employee's compensation. At
November 30, 1998, the Subsidiary has accrued $1,000 as its matching
contribution.
NOTE 15 - LOSS ON INVESTMENT:
During the year the Company acquired 100% of the outstanding stock of a
Birmingham, Alabama business that operated in the area of corporate temporary
housing in a stock-for-stock swap. The Company subsequently invested $50,000 in
the subsidiary. Due to business reasons, the Company and the acquired company
jointly agreed to rescind the original agreement effective on the date of
acquisition with the provision that the acquired company not be required to
repay the $50,000 investment.
NOTE 16 - CONTINGENCIES:
The Company has been involved in the acquisition of a large aluminum plant in
the Muscle Shoals area of northwest Alabama. As a result of their involvement,
an unrelated company is current negotiating to acquire this plant. The Company
has a memorandum of understanding with the unrelated company that states the
Company will be reimbursed for "...its documented, direct expenses incurred
through closing..." involving the acquisition. Also, the memorandum gives the
Company the option of a 2% ownership in the LLC that is the acquirer or a fee of
$1,000,000. The memorandum states the reimbursement of expenses will occur on
the date of closing and if the Company elects to receive the $1,000,000 fee, it
will be paid in equal installments on the 1st and 2nd anniversary dates of the
closing.
The above ownership interests or receipt of fees and reimbursement of expenses
are dependent upon the "consummation of the purchase." Because of this
contingency, the Company has elected not to record any receivables or reduction
in expenses in this fiscal year. If the reimbursement or receipt of the fee
occurs, the Company will record those as income in the fiscal year the purchase
is closed. The Company has not yet decided if it will choose the 2% ownership
position in the LLC or the $1,000,000 fee if the purchase is closed. The Company
further believes that if the purchase is closed, then the reimbursement of
expenses described above will be approximately $500,000. The Company is not
responsible for all of the expected $500,000 in reimbursable expenses and in the
event the purchase is closed, it anticipates it will expend a portion of the
reimbursement to other parties.
13
<PAGE>
AVALON-BORDEN COMPANIES, INC. & SUBSIDIARY
Consolidating Balance Sheets
November 30, 1998
<TABLE>
<CAPTION>
Avalon-
Borden Avalon
Companies, Media
Inc. Group, Inc. Eliminations Consolidated
--------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 47,988 $ 24,058 $ - $ 72,046
Accounts Receivable - 198,859 - 198,859
Prepaid Items - 1,940 - 1,940
Deposits - 64,263 - 64,263
--------- --------- ---------- -----------
Total Current Assets 47,988 289,120 - 337,108
--------- --------- ---------- -----------
FIXED ASSETS:
Fixed Assets 1,629 135,157 - 136,786
Accumulated Depreciation (68) (7,063) - (7,131)
--------- --------- ---------- -----------
Fixed Assets, Net 1,561 128,094 - 129,655
--------- --------- ---------- -----------
OTHER ASSETS:
Investment in Subsidiaries 646,227 - (646,227) -
Other Investments 88,582 - - 88,582
Goodwill, Net - 427,500 - 427,500
Organization Cost, Net 27,844 - - 27,844
Loan Closing Costs, Net 1,285 - - 1,285
Accounts Receivable - Related Party 39,231 27,343 (66,574) -
Operator Fee Deposit - Helicon - 10,000 - 10,000
--------- --------- ---------- -----------
Total Other Assets 803,169 464,843 (712,801) 555,211
--------- --------- ---------- -----------
TOTAL ASSETS $ 852,718 $ 882,057 $ (712,801) $ 1,021,974
========= ========= ========== ===========
</TABLE>
The accompanying notes and independent auditor's report
are an integral part of these financial statements.
14
<PAGE>
AVALON-BORDEN COMPANIES, INC.
Consolidating Balance Sheets
November 30, 1998
<TABLE>
<CAPTION>
Avalon-
Borden Avalon
Companies, Media
Inc. Group, Inc. Eliminations Consolidated
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
LIABILITIES
CURRENT LIABILITIES:
Cash Overdraft $ 55,387 $ - $ - $ 55,387
Accounts Payable 281,646 160,664 - 442,310
Accounts Payable - Related Party 27,343 39,231 (66,574) -
Notes Payable 838,000 - - 838,000
Notes Payable - Related Parties 57,073 - - 57,073
Accrued Income Taxes - 6,040 - 6,040
Payroll Tax Liabilities 3,358 7,709 - 11,067
Accrued Expenses 28,429 5,249 - 33,678
Accrued Expenses - Related Party 97,488 - - 97,488
Current Portion - Long Term Debt 133,333 2,896 - 136,229
----------- ----------- ----------- -----------
Total Current Liabilities 1,522,057 221,789 (66,574) 1,677,272
----------- ----------- ----------- -----------
LONG-TERM LIABILITIES:
Long-Term Debt 133,334 14,041 - 147,375
----------- ----------- ----------- -----------
TOTAL LIABILITIES 1,655,391 235,830 (66,574) 1,824,647
----------- ----------- ----------- -----------
STOCKHOLDERS' EQUITY:
Common Stock 21,950 10 (10) 21,950
Additional Paid-In Capital 32,294 599,990 (599,990) 32,294
Retained Earnings (Deficit) (859,917) 46,227 (46,227) (859,917)
----------- ----------- ----------- -----------
Total Stockholders' Equity (802,673) 646,227 (646,227) (802,673)
----------- ----------- ----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 852,718 $ 882,057 $ (712,801) $ 1,021,974
=========== =========== =========== ===========
</TABLE>
The accompanying notes and independent auditor's report
are an integral part of these financial statements.
15
<PAGE>
AVALON-BORDEN COMPANIES, INC. & SUBSIDIARY
Consolidating Statements of Income and Retained Earnings (Deficit)
Year Ended November 30, 1998
<TABLE>
<CAPTION>
Avalon-
Borden Avalon
Companies, Media
Inc. Group, Inc. Eliminations Consolidated
---------- -------- --------- ----------
<S> <C> <C> <C> <C>
REVENUES $ - $ 513,170 $ - $ 513,170
COST OF REVENUES - 201,491 - 201,491
---------- -------- --------- ----------
GROSS PROFIT - 311,679 - 311,679
OPERATING EXPENSES 617,133 236,903 - 854,036
---------- -------- --------- ----------
INCOME (LOSS) FROM
OPERATIONS (617,133) 74,776 - (542,357)
---------- -------- --------- ----------
OTHER INCOME (EXPENSES):
Income from Subsidiary 46,227 - (46,227) -
Loss on Investment (50,000) - - (50,000)
Interest Expense (61,216) - - (61,216)
---------- -------- --------- ----------
Other Income (Expenses), Net (64,989) - (46,227) (111,216)
---------- -------- --------- ----------
INCOME (LOSS) BEFORE
INCOME TAXES (682,122) 74,776 (46,227) (653,573)
---------- -------- --------- ----------
INCOME TAXES:
Current - 6,040 - 6,040
Deferred (22,509) 22,509 - -
---------- -------- --------- ----------
Total Income Taxes (22,509) 28,549 - 6,040
---------- -------- --------- ----------
NET INCOME (659,613) 46,227 (46,227) (659,613)
RETAINED EARNINGS -
BEGINNING OF YEAR (200,304) - - (200,304)
---------- -------- --------- ----------
RETAINED EARNINGS -
END OF YEAR $ (859,917) $ 46,227 $ (46,227) $ (859,917)
========== ======== ========= ==========
</TABLE>
The accompanying notes and independent auditor's report
are an integral part of these financial statements.
16
<PAGE>
AVALON-BORDEN COMPANIES, INC. & SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
Year Ended November 30, 1998
<TABLE>
<CAPTION>
Avalon- Avalon
Borden Media
Companies, Group,
Inc. Inc. Eliminations Consolidated
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
COMMON STOCK:
Beginning Balance $ 15,050 $ 0 $ - $ 15,050
Incorporation of Subsidiary - 10 (10) -
Issuance of Stock - Services
Provided 6,900 - - 6,900
----------- ----------- ----------- -----------
Ending Balance $ 21,950 $ 10 $ (10) $ 21,950
=========== =========== =========== ===========
ADDITIONAL PAID-IN CAPITAL:
Beginning Balance $ 42,194 $ - $ - $ 42,194
Incorporation of Subsidiary - 599,990 (599,990) -
Issuance of Stock - Services
Provided $ (6,900) $ - $ - $ (6,900)
----------- ----------- ----------- -----------
Ending Balance $ 35,294 $599,990 $(599,990) $ 35,294
=========== =========== =========== ===========
RETAINED EARNINGS:
Beginning Balance $(200,304) $ - $ - $(200,304)
Net Income (Loss) (659,613) 46,277 (46,227) (659,613)
----------- ----------- ----------- -----------
Ending Balance $(859,917) $46,227 $ (46,227) $(859,917)
=========== =========== =========== ===========
</TABLE>
The accompanying notes and independent auditor's report
are an integral part of these financial statements.
17
<PAGE>
AVALON-BORDEN COMPANIES, INC. & SUBSIDIARY
CONSOLIDATING STATEMENTS OF CASH FLOWS
Year Ended November 30, 1998
<TABLE>
<CAPTION>
Avalon- Avalon
Borden Media
Companies, Group,
Inc. Inc. Eliminations Consolidated
-------- -------- --------- --------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Cash Received from Customers $ - $ 307,810 $ - $ 307,810
Cash Paid to Suppliers and Employees (325,411) (205,648) - (531,059)
-------- -------- --------- --------
Net Cash from Operating Activities (325,411) 102,162 - (223,249)
-------- -------- --------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Investment In Subsidiaries (600,000) - 600,000 -
Investments (88,582) - - (88,582)
Acquisition of Fixed Assets (1,629) (199,420) - (201,049)
Operator Fee Deposit - (10,000) - (10,000)
Goodwill - (475,000) - (475,000)
Loan Closing Costs (2,569) - - (2,569)
Change in Common Stock - 10 (10) -
Change in Additional Paid-In Capital - 599,990 (599,990) -
-------- -------- --------- --------
Net Cash from Investing Activities (692,780) (84,420) - (777,200)
-------- -------- --------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Change in Related Party
Receivable/Payable 10,621 (10,621) - -
Proceeds from Notes Payable 1,127,950 16,937 - 1,144,887
Repayment of Long-Term Debt (77,333) - - (77,333)
-------- -------- --------- --------
Net Cash from Financing Activities 1,061,238 6,316 - 1,067,554
-------- -------- --------- --------
NET CHANGE IN CASH 43,047 24,058 - 67,105
CASH AT BEGINNING OF YEAR 4,941 - - 4,941
-------- -------- --------- --------
CASH AT END OF YEAR $ 47,988 $ 24,058 $ - $ 72,046
======== ======== ========= ========
</TABLE>
The accompanying notes and independent auditor's report
are an integral part of these financial statements.
18
<PAGE>
BORDEN COMPANIES, INC.
CONSOLIDATING STATEMENTS OF CASH FLOWS
Year Ended November 30, 1998
<TABLE>
<CAPTION>
Avalon- Avalon
Borden Media
Companies, Group,
Inc. Inc. Eliminations Consolidated
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
RECONCILIATION OF NET LOSS TO
NET CASH FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $(659,613) $ 46,227 $ (46,227) $(659,613)
Adjustments:
Allowance for Bad Debts - 6,500 - 6,500
Depreciation 68 7,063 - 7,131
Amortization 29,129 47,500 - 76,629
Deferred Income Taxes (22,509) 22,509 - -
Income from Subsidiaries (46,227) - 46,227 -
(Increase) Decrease in:
Accounts Receivable - (205,359) - (205,359)
Prepaids - (1,940) - (1,940)
Increase (Decrease) in:
Cash Overdraft 55,387 - - 55,387
Accounts Payable 277,529 160,664 - 438,193
Payroll Tax Liabilities 3,358 7,709 - 11,067
Accrued Income Taxes - 6,040 - 6,040
Accrued Expenses 37,467 5,249 - 42,716
--------- --------- -------- ---------
NET CASH FROM OPERATING
ACTIVITIES $(325,411) $ 102,162 $ - $(223,249)
========= ========= ======== =========
</TABLE>
The accompanying notes and independent auditor's report
are an integral part of these financial statements.
19
<PAGE>
PART III
ITEMS 1 and 2. INDEX TO EXHIBITS; DESCRIPTION OF EXHIBITS.
The Exhibits required by Item 601 of Regulation S-B, and an index
thereto, are attached to this Form 10-SB.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
AVALON-BORDEN COMPANIES, INC.
(Registrant)
By: Mr. James M. Bohannon
Date: 10/11/2000 -------------------------
---------------------- Mr. James M. Bohannon
Its Chief Executive Officer
