UNITED STATES
SECURITIES AND EXCHANGE COMMISION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES
(XI) EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1995
Or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-24932
Merchandise Entertainment Television Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware 9504186920
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
512 Via de la Valle, Suite 100
Solana Beach, CA 92075
(Address of principal executive offices)
(619) 794-9000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days
Yes__X__ No ____
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. Common
Stock - 12,065,662 shares outstanding on May 1, 1995.
MERCHANDISE ENTERTAINMENT TELEVISION HOLDINGS, INC.
INDEX
PART 1 - FINANCIAL INFORMATION
Page No.
Item 1 Financial Statements
Condensed Consolidated Balance Sheets at 3
March 31, 1995 and December 31, 1994
Condensed Consolidated Statements of Operations - 4
Three-month periods ended March 31, 1995 and
1994 and period from July 30, 1993 (inception to
March 31, 1995
Condensed Consolidated Statements of Cash Flows - 5
Three-month periods ended March 31, 1995 and
1994 and period from July 30, 1993 (inception) to
March 31, 1995
Notes to Condensed Financial Statements 6-7
Item 2 Management's Discussion of Analysis of 8-9
Financial Condition and Results of Operations
PART II - OTHER FINANCIAL
Item 4 Submission of Matters to a Vote of Security Holders 10
Item 6 Exhibits and Reports on Form 8-K 10
2
PART 1 - FINANCIAL INFORMATION
Item 1 Financial Statements
MERCHANDISE ENTERTAINMENT TELEVISION HOLDINGS, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1995 1994
----------- ------------
Assets
Current Assets (Unaudited)
Cash and cash equivalents $2,773,519 $1,469,829
Accounts receivable 5,880 2,700
Inventory 17,500 -
Unamortized film inventory 182,310 364,674
Prepaid expenses and other 196,648 116,607
----------- ------------
Total current assets 3,175,857 1,953,810
Furniture and equipment, net of depreciation
Of $33,349 and $20,513 299,991 132,733
Deposits and other assets 58,231 86,151
------------ -----------
$3,534.079 $2,172,694
============ ===========
Liabilites and Stockholders' Equity
Current Liabilities
Notes payable (Note 2) $ 671,500 $ 471,500
Accounts payable 1,043,081 500,887
Accrued liabilities 704,772 416,628
------------ -----------
Total current liabilities 2,419,353 1,389,015
Convertible notes payable (Note 2) 134,258 301,518
Deferred lease obligation 255,000 232,000
Stockholders' equity (Note 3)
Common stock $.00001 par value-550,000,000
Shares authorized; 12,065,662 shares issued and
Outstanding (10,982,030 at December 31, 1994) 120 110
Additional paid-in capital 7,734,738 4,863,114
Deficit accumulated during development stage (7,009,390) (4,613,063)
------------- -----------
Total stockholders' equity 725,468 250,161
------------- -----------
$3,534,079 $2,172,694
============= ===========
See accompanying notes
3
MERCHANDIS ENTERTAINMENT TELEVISION HOLDINGS, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
July 30 1993
Three months Three months (inception)
Ended Ended through
March 31, March 31, March 31,
1995 1994 1995
------------ ------------ ------------
Net sales $ 75,195 $ - $ 95,290
Cost of sales 43,966 - 55,734
------------ ------------ ------------
Gross profit 31,229 - 39.556
Operating expenses
Sales and marketing 48,354 - 199,636
Programming and transmission 1,776,723 - 3,965,986
General and administration 594,985 134,758 2,302,670
Lease termination - - 525,000
---------- ----------- -----------
2,420,062 134,758 6,993,292
------------ ----------- -----------
Loss from operations (2,388,833) ( 134,758) (6,953,736)
Interest expense ( 12,987) - ( 62,489)
Interest income 5,493 - 6,835
------------ ---------- ------------
Net Loss $(2,396,327) $( 134,758) $(7,009,390)
============= =========== ============
Net loss per share $( .22) $( .03) $( 1.00)
============= =========== ============
Weighted average number of
Shares outstanding 11,059,000 4,901,000 7,007,000
============= =========== ============
See accompanying notes
4
MERCHANDISE ENTERTAINMENT TELEVISION HOLDINGS, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
July 30 1993
Three months Three months (inception)
ended ended through
March 31, March 31, March 31,
1995 1994 1995
------------ ------------ ------------
Cash flows from operating activities
Net loss $(2,396,327) $(134,758) $(7,009.390)
Adjustments to reconcile net
loss cash used in operating
activities 980,111 134,758 1,721,183
----------- ------------ ------------
Net cash used in operating
Activities (1,416,216) - 5,288,207
Cash flows from investing activities
Purchase of furniture
and equipment ( 180,094) - ( 333,340)
------------- ----------- -----------
Net cash used in operating
Activities ( 180,094) - ( 333,340)
Cash flows from financing activities
Sale of common stock 2,700,000 - 7,197,048
Capital contribution - - 30,000
Notes Payable 200,000 - 847,500
Convertible notes payable - - 496,518
Repayment of notes payable - - ( 176,000)
------------ ------------ ----------
Net cash from
financing activites 2,900,000 - 8,395,066
Net increase in cash 1,303,690 - -
Cash at beginning of period 1,469,829 100 2,773,519
------------ ------------ ----------
Cash at end of period $ 2,773,519 $ 100 $ 2,773,519
============ ============ ==========
See accompanying notes
5
MERCHANDISE ENTERTAINMENT TELEVISION HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Basis of Presentation
General. The Company is engaged primarily in the development and
operation of a 24-hour per day satellite cable channel combining home
shopping with entertainment. The Company also produces informercial
programming through an affiliate, J.E.M. Direct.
Recapitalization. On June 23, 1994, TRE Group, Inc. ("TRE"), a
Delaware corporation acquired all of the outstanding shares of LM
Network Inc. ("LM"), a Delaware corporation, in exchange for the
issuance of 4,901,184 shares of common stock. TRE, a corporation with
no operations, previously had 306,346 shares outstanding. The merger
transaction has been accounted for as a recapitalization of LM. The
accompanying consolidated financial statements reflect the operations
of LM for the year ended December 31, 1994 and from LM's inception on
July 30, 1993. TRE had no operations during these periods. In
August, 1994 the name of TRE was changed to Merchandise Entertainment
Television Holdings, Inc. (the "Company").
Basis of Accounting. The accompanying condensed consolidated
financial statements have been prepared on a going concern basis.
For the year ended December 31, 1994 the Company incurred a net loss
of approximately $4,500,000 and utilized cash for operating activities
approximately $3,900,000. Operating losses have continued in the first
quarter of 1995. These factors, among others, indicate that the
Company may be unable to continue as a going concern unless it is able
to raise additional capital and generate sufficient cash flows to meet
its obligations and sustain its operations. The consolidated financial
statements do not include any adjustments that might be necessary
should the Company be unable to continue as a going concern.
The Company has initiated efforts to raise additional capital through
the issuance of Common Stock in a Regulation S offering and has
engaged an investment banker to seek additional equity funds in a
private placement. Management believes that the proceeds expected
operations for at least the next twelve months. However, there can be
no assurance that such financings will be completed, that, if
completed, they will be on the terms currently planned by the Company,
or that the Company will ultimately attain profitable operations.
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principals and reflect, in the opinion of management,
all adjustments necessary for a fair presentation of the
information contained therein. These consolidated financial
statements should be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended December 31, 1994. The
results of operations for the three-month period ended March 31,
1995 are not necessarily indicative of results for the entire
fiscal year.
6
2. Notes payable
Notes payable at March 31, 1995 include $471,500 due to an individual,
payable on demand, plus interest at 8% per year. A second note of $200,000
is payable on demand without interest.
Convertible notes payable at March 31, 1995 consist of subscriptions
for 67,130 shares of common stock at $2.00 per share.
3. Stockholders' equity
In March 1995 the Company sold 1,000,000 shares of common stock to an
individual for $3.00 per share in a Regulation S offering. The net proceeds
to the Company were $2,700,000. The purchaser received a five-year warrant
to purchase 333,333 shares of common stock at $3.00 per share. The warrant is
subject to antidilution adjustments in certain circumstances. The purchaser
also was granted piggyback registration rights and a preemptive right to
purchase additional shares of capital stock subsequently offered by the
Company on the same terms and conditions of such proposed offer, so that the
purchaser's ownership percentage is unchanged.
In March 1995 the Company entered into a financial advisory and
consulting agreement with an investment banker. Pursuant to this agreement,
the Company issued a five-year warrant to purchase 750,000 shares of common
stock at $3.50 per share.
4. Net loss per share
Net loss per share data are based on the weighted average number of
shares outstanding during the periods.
7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation
Results of Operation
LM Network Inc. which operates as Merchandise Entertainment
Television, was organized in July 1993 and began operations in
April 1994. Financial results for the quarter ended March 31, 1994
consisted only of organizational and financing activities.
First Quarter of 1995
Net sales for the three months ended March 31, 1995 were
$75,195. This was an increase of $55,100 (274%) over the net sales
recorded in the final quarter of 1994, which marked the Company's
initial revenues from its home shopping activities. The cost of
sales in the first quarter of 1995 was $43,966. The gross margin
of $31,229 represented 41.5% of net sales, almost unchanged from
the 41.4% recorded in the fourth quarter of 1994.
Sales and marketing expenses in the three months ended
March 1, 1995 were $45,354 consisting primarily of contracted
operator services and media advertising. Programming and
transmission costs were $1,776,723. These costs include satellite
transponder rental, studio wages and rent, outside production
costs, and payments to cable systems to carry the Company's
programming. Production costs increased from the prior quarter
because of expenses associated with broadcasts of Continental
Basketball Association games. Also included in programming and
transmission costs is approximately $182,000 of amortization of
capitalized film inventory.
General and administrative expenses in the first quarter of
1995 were $594,985. Staffing levels were largely unchanged during
the quarter.
Interest expense was $12,987 and interest income on
invested cash balances was $5,493 during the first quarter of 1995.
The net loss for the quarter ended March 31, 1995 was
$2,396,327 or ($.22) per share, compared to a net loss of $134,758
or ($.03) per share in the corresponding quarter of 1994. The
average number of shares outstanding increased substantially from
the 1994 period.
Liquidity and Capital Resources
The Company operated on limited cash resources during much
of 1994. Initial funding was provided by loans of $647,500. In
July 1994, following the reverse acquisition resulting in public
ownership, the Company initiated several equity financing
transactions. A total of $4,347,000 was raised in the second half
of the year from the sale of common stock, and an additional
$496,000 was raised from notes convertible into common stock.
For the year ended December 31, 1994 the Company incurred a
net loss of approximately $4,500,000 and utilized cash for
operating activities of approximately $3,900,000. Operating losses
have continued in the first quarter of 1995. These factors, among
others, indicated that the Company may be unable to continue as a
going concern unless it is able to raise additional capital and
generate sufficient cash flows to meet its obligations and sustain
its operations. In March 1995 the Company sold 1,000,000 shares of
8
its common stock in a Regulation S offering at $3.00 per share (plus
five-year warrants to purchase 333,333 shares of common stock at $3.00 per
share) with net proceeds of $2,700,000.
The Company is continuing its efforts to raise additional
capital through the issuance of common stock to non-U.S. investors.
The Company also has engaged an investment banker to seek
additional equity funds of up to $10,000,000 in a private
placement. Management believes that the proceeds expected to be
generated by such financing will be sufficient to finance the
Cmpany's planned principal operations for at least the next twelve
months. However, there can be no assurance that such financing
will be completed, that, if completed, they will be on the terms
currently planned by the Company, or that the Company will
ultimately attain profitable operations.
Impact of Inflation
Inflation has not had any significant effect on the
Company's operating costs.
9
PART II - OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on
April 28, 1995. The following individuals were elected to serve as
directors for the ensuing year. Edward Litwak, Thomas L. Reichman,
Frank Carney and V. T. Murray, Jr. The vote for each director was
6,846,353 shares in favor and 16,927 shares withheld, with a total
of 1,030,237 non-votes.
The Company's Certificate of Incorporation was amended to
reduce the number of shares of Common and Preferred Stock
authorized for issuance from 550,000,000 and 100,000,000,
respectively, to 35,000,000 and 2,000,000, respectively. This
amendment was approved by a vote of 7,011,085 shares in favor and
149 shares against, with 18,132 shares abstaining and 864,151 non-
votes.
The Company's 1994 Stock Option Plan was approved by the
stockholders by a vote of 5,197,943 shares in favor and 1,813,199
shares against, with 18,222 shares abstaining and 864,151 non-
votes.
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
- ------ -----------
10 1 Addendum to Subscription Agreement dated March 31,
1995 between the Company and Cash & Shares Financial Trust.
10 2 Letter agreement dated March 29,1995 between the
Company and Sands Brothers & Co. Ltd.
(b) Reports on Form 8-K
On January 5, 1995 the Company reported a change in its
independent accountants.
10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned hereunto duly authorized.
Merchandise Entertainment Television Holdings, Inc.
(Registrant)
Date May 10, 1995
-------------
/s/ James L. Russell
---------------------
James L. Russell
Vice President and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
11
