<PAGE>
U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OF 14(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For quarterly period ended February 27, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ____________________ to ____________________
Commission file number 0-21634
-------
Metro Global Media, Inc.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 65-0025871
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1060 Park Avenue, Cranston, Rhode Island 02910
----------------------------------------------
(Address of principal executive offices)
(401)942-7876
-------------
(Issuer's telephone number)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last year)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No __
-
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by court.
Yes ___ No ____
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 7,178,635 March 31, 1999
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Balance Sheets F-1
Statements of Income F-2
Statements of Cash Flows F-3
Notes to Consolidated Financial Statements F-5 to F-8
Item 2. Management's Discussion and Analysis or Plan of Operation
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED FEBRUARY 27, 1999 VERSUS THREE
MONTHS ENDED FEBRUARY 28, 1998
The Company had revenues of $10,932,367 for the three months ended February 27,
1999 versus revenues of $5,734,859 for the three months ended February 28, 1998,
an increase of $5,197,508 or 91%. Revenues are primarily derived from two
segments: the sale of prerecorded videocassettes, magazines, novelties,
electronic media products and related items primarily through its subsidiary
Metro, Inc. (the entertainment segment) and the sale of magazines, magazine
poster books and calendars through its subsidiary, Fanzine International, Inc.
("Fanzine"), (the publishing segment).
Revenues for the entertainment segment totaled $6,025,835 for the three months
ended February 27, 1999, as compared to $5,734,859 for the three months ended
February 28, 1998, an increase of $290,976 or 5.1%. The increase in revenue is
primarily attributable to revenues from Metro International's foreign adult
entertainment lines of approximately $248,000. During the quarter ended
February 28, 1999, the Company released 3 feature films, 29 feature
videocassettes, 50 video compilations and 18 DVDs. The Company is recognizing
increased revenues from the sale of DVD's. The Company plans on releasing 15 to
20 DVD titles per month commencing in May, 1999 in preparation for the new
interactive media centers that will be shipped to stores in late May to early
June 1999. The Company expects that the media centers will have a significant
impact on future revenues and profits as the company continues to release high
quality DVD's in both the domestic and international markets.
Revenues for Fanzine totaled $4,906,532 for the quarter ended February 28, 1999.
During the current quarter Fanzine published 48 products comprised of magazines,
magazine poster books and "How-to" digest guides. A significant portion was
distributed in the United States and Canada with the balance distributed in
Europe, South America and Australia. During the current quarter, Fanzine
successfully launched "Gym" and "Burn" magazines. Gym and Burn are currently
being published on an alternating bi-monthly basis and are health, fitness and
lifestyle magazines targeted toward the male audience ranging from 18 to 40
years old. Fanzine also published three "how to" digest guides, two dealing with
nutrition and one with gardening. Fanzine expect to publish several "how to"
digest guides throughout the year. Celebrity Style and Teen Celebrity news stand
sales continue to build and advertising contracts spanning several issues are
currently being negotiated.
In the next quarter, Fanzine will launch "Celebrity Style 101 Hairstyles" at a
special introductory promotional cover price of $1.99 which is currently one to
two dollars less than its news stand competition. 101 Hairstyles is an
oversized all color female hairstyle magazine that features celebrity's
throughout each issue and will be published on a monthly basis. Targeting the
young teen market, Fanzine will launch "Blast", which will feature the hottest
teen idols and music stars in its one hundred
2
<PAGE>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED FEBRUARY 27, 1999 VERSUS THREE
MONTHS ENDED FEBRUARY 28, 1998. (CONTINUED)
color pages of pictures and editorial. Blast will be published on a monthly
basis. Fanzine expects 101 Hairstyles and Blast, after their initial launch
periods, to generate significant revenues and become part of Fanzine's core
titles.
Cost of revenues (including amortization of film costs) for the three month
period ended February 27, 1999, increased to $6,972,910 from $3,470,100 for the
corresponding period in the prior year. Costs of revenues as a percentage of
revenues increased to 64% for the three months ended February 27, 1999, as
compared to 61% for the three months ended February 28, 1998. The increase in
the cost of revenues is due to promotional costs of launching new publications
and website development costs, of which the Company expensed approximately
$575,000 during the quarter ended February 27, 1999. As circulation of the
publications increases and revenues from website sales build, the cost of
revenues as a percentage of revenues will improve.
Selling, general and administrative (SG&A) expenses for the three months ended
February 27, 1999, increased 104% to $3,323,315 from $1,627,069 for the three
months ended February 28, 1998. Selling, general and administrative expenses,
as a percentage of revenue, increased to 30% in 1999 as compared to 28% for the
three months ended February 28, 1998.
Operating income for the three month period ended February 27, 1999 was $636,151
as compared to operating income of $637,690 for the corresponding period in the
prior year. Net income for the quarter ended February 27, 1999, was $279,204 as
compared to $316,581 for the quarter ended February 28, 1998, resulting in a
basic earning per share of $.04 for the quarter ended February 27, 1999 and $.08
for the quarter ended February 28, 1998.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED FEBRUARY 27, 1999 VERSUS NINE
MONTHS ENDED FEBRUARY 28, 1998
Revenues increased 84% or $12,103,930 to $26,486,645 for the nine months ended
February 27, 1999, as compared to $14,382,715 for the nine months ended February
28, 1998. Revenues totaled $17,095,869 for the entertainment segment and
$9,390,776 for the publishing segment for the nine months ended February 27,
1999, as compared to revenues of $14,382,715 for the entertainment segment and
no revenue for the publishing segment for the nine months ended February 28,
1998. Revenues increased in the entertainment segment due to an increase in
film, videocassette, video compilation, and DVD releases of approximately 30%
over the corresponding prior period, increased revenues of Maxstone of
approximately $380,000 and revenues of Metro International of approximately
$483,000. Overall, the Company's gross profit percentage remained decreased to
34% at February 28, 1999 as compared to 38% at February 28, 1998. The Company
expensed approximately $1,200,000 in promotional costs associated with the
publishing segment and website/mailorder development costs during the nine
months ended February 27, 1999. The gross profit margin will improve as
circulation of the new publications increase and revenues from the
website/mailorder business builds.
Selling, general and administrative expenses for the nine months ended February
27, 1999 increased 54% to $7,536,750 from $4,584,897 for the nine months ended
February 28, 1998. Selling, general and administrative expenses as a percentage
of revenues improved to 28% for the nine months ended February 27, 1999, as
compared to 31% for the nine months ended February 28, 1998.
3
<PAGE>
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED FEBRUARY 27, 1999 VERSUS NINE
MONTHS ENDED FEBRUARY 28, 1998. (CONTINUED)
Net income for the nine months ended February 27, 1999 increased to $585,162
from $360,431 in the prior year's corresponding period.
LIQUIDITY AND CAPITAL RESOURCES AT FEBRUARY 27, 1999
Cash and cash equivalents amounted to $334,677 at quarter-end. Cash provided by
operating activities amounted to $308,326 for the nine month ended February 27,
1999 and $1,934,920 for the same period in the prior fiscal year. The
Company's primary sources of cash in fiscal 1999 consisted of: (1) proceeds
from issuance of preferred stock of $1,317,000, (2) proceeds from notes payable
of $3,450,000 and (3) proceeds from issuance of convertible debentures of
$1,000,000, and (4) proceeds from the exercise of warrants of $600,000. The
primary uses of cash for the nine months ended February 27, 1999 consisted of:
(1) investments in motion pictures and other films of $2,358,315, (2)payments
on the acquisition of Fanzine for $3,000,000, (3) purchases of property and
equipment of $444,278, and (4) purchase of treasury stock of $507,500. The
Company had non-cash adjustments of $2,899,481 at February 28, 1999 primarily
from depreciation and amortization.
Working capital amounted to $2,355,883 in February, 1999 as compared to
$3,378,438 in May, 1998. The net increase in accounts receivable of $4,855,067
was primarily due to the increase of sales for the period and the inclusion of
approximately $3,341,000 of receivables of Fanzine of which there was zero at
May 31, 1998. Inventory increased $957,350 due to the increase in purchasing to
support the increase in sales, increased number of product lines carried such as
DVD's, as well as inventory held by Metro International totaling approximately
$175,000. Accounts payable and accrued expenses increased $3,011,431 due to
increased purchasing, increased spending for film production and the inclusion
of payables of Fanzine. Additionally, notes payable and short-term borrowings
increased approximately $3,475,000 due to the acquisition of Fanzine.
During 1998, notes payable totaling $300,000 were converted into 250,000 of the
Company's restricted common stock.
On July 1, 1998, the Company entered into a 12% convertible debenture totaling
$200,000. The note is due on July 1, 1999, in either cash or common stock, at a
conversion rate of $2.25 per share. Proceeds from the debenture were used for
working capital.
On August 1, 1998, the Company entered into notes payable totaling $400,000.
The notes, which bear interest at 8%, are due August 1, 1999. Proceeds from the
notes were used in the acquisition of Fanzine.
On July 31, 1998, the Company entered into an 8% convertible debenture with a
total offering of $7,000,000. The Company received proceeds of $1,000,000 in
August, 1998 which was used in the purchase of Fanzine. The remaining
$6,000,000 of the offering will be sold at the Company's option at calls of
$500,000 each for a period of two years following the date of this agreement.
The $1,000,000 debenture matures on July 31, 2000. Interest is payable on a
quarterly basis. The holder of the debenture is entitled to convert, after 120
days of the agreement, the principal value into the Company's common stock at a
discounted market price.
In April 1998, the Company entered into an Offshore Securities Subscription
Agreement for convertible Preferred Shares pursuant to regulation S of the U.S.
Securities Act of 1933. Under the terms of the
4
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES AT FEBRUARY 27, 1999 (CONTINUED)
agreement, the Company issued 2,175 shares of 1998 Series A Convertible
Preferred Stock ("Series A Shares") at a price of $1,000 per share with a 5%
cumulative dividend payable in common stock at conversion. For the nine months
ended February 27, 1999, the Company received proceeds of $1,317,000, net of
offering costs. The Company received proceeds of $846,500 during the quarter
ended May 30, 1998. Proceeds from such agreement were used to fund working
capital.
The Series A Shares are convertible at a rate of 100 shares plus accrued
dividends per week at 80% of the 15 day average closing bid price. These shares
are subject to a 24 month mandatory conversion feature. For the nine months
ended February 27, 1999, all 2,175 shares and accrued dividends were converted
into 982,120 shares of the Company's common stock.
In addition to the Series A Shares the Company issued 400,000 warrants to
purchase the Company's common stock at $1.50 per share commencing April 20, 1998
exercisable over 5 years. During the nine months ended February 27, 1999, the
Company received $600,000 in proceeds for the exercise of the warrants. As of
February 27, 1999, all of the Series A Shares have been converted.
On October 28, 1998, the Company entered into a note payable for $1,100,000.
The note, which bears no interest, is due in quarterly installments of $275,000
commencing December 31, 1998. In consideration of the loan and part of an
investment banking consultant aggreement, the Company issued the lender 150,000
restricted shares of the Company's common stock. The Company used $507,500 of
the proceeds to repurchase 169,167 of its outstanding common stock.
On December 9, 1998, the Company entered into a six-month term loan agreement
with a third party. Under the terms of the agreement, the Company can borrow up
to $3,000,000 at an interest rate of 10% per year. As of February 27, 1999, the
Company had borrowed $1,750,000. The proceeds were used towards the
acquisition of Fanzine and to fund working capital.
During June, 1997, Metro, Inc. entered into a line of credit agreement with a
finance company. Under the agreement, Metro, Inc. may borrow up to 75% of
assigned accounts receivable less than 90 days old, up to a maximum of
$1,000,000. The balance due under the line of credit bears interest at the
prime rate plus 5% per annum plus a collateral management fee. The outstanding
balance under the line is secured by accounts receivable of Metro, Inc and
guaranties of the Company and certain officers/shareholders. The line of credit
expires during June, 1999, but includes an option for an additional year. As of
February 27, 1999, the balance on the line of credit was $827,586.
At February 27, 1999, the Company has outstanding $4,502,586 in short-term
borrowings. The Company is actively seeking long-term financing, at rates more
beneficial to the Company, to meet its obligations as they come due. The
Company does not anticipate any problems obtaining the necessary financing.
Of Metro's total accounts receivable at February 27, 1999, $2,719,361 (28%) as
compared to $2,477,041 (49%) at May 30, 1998 is owed by Capital Video
Corporation ("CVC"), a chain of retail stores of which a former
officer/shareholder of the Company is the sole shareholder. The amount of the
receivable due from CVC has grown as CVC continues to open new retail locations.
Because of the amount of this receivable and the concentration of business with
CVC, this receivable is monitored very closely. All amounts due from CVC is
maintained within 60 to 90 day terms. Metro has the personal guaranty of its
one shareholder. Accordingly, no allowance for related party receivables and no
related party bad debt
5
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES AT FEBRUARY 27, 1999 (CONTINUED)
expense has been recorded in the Company's financial statements.
For the nine months ended February 27, 1999, the Company invested approximately
$2,360,000 in new feature films and video. The company estimates it will invest
approximately $700,000 to $800,000 in additional monies during the last quarter
of fiscal year 1999. Financing for these activities has been and will continue
to be generated through operating cash flows as well as funds received from its
line of credit.
Capital Expenditures: Capital expenditures for the nine months ended February
27, 1999, amounted to $444,278 as compared to $56,979 for the nine months ended
February 28, 1998. The Company anticipates that its capital expenditures for
1999 will be approximately $700,000 to $1,000,000 primarily used for computer
equipment, a new convention booth, and interactive media center units. The
Company currently negotiated a $1,000,000 lease line for its use which
management believes will be sufficient.
Management believes that funds provided by operations, existing and new line of
credit, are adequate to meet the anticipated short-term and long-term capital
needs. Management believes that inflation has not had a material effect on its
operations.
Forward Looking Statements
This Form 10-QSB Report contains "forward-looking statements," including
statements in "Management's Discussion and Analysis of Financial Condition and
Results of Operations," as to expectations, beliefs, plans, objectives and
future financial performance, and assumptions underlying or concerning the
foregoing. Such forward-looking statements involve risks and uncertainties
which could cause actual results or outcomes to differ materially from those
expressed in the forward-looking statements. One such factor that could cause
actual results or outcomes to differ materially from those discussed in the
forward-looking statements would be government actions or initiatives, such as
attempts to limit or otherwise regulate the sale of adult-oriented materials,
including print, video and online materials.
Year 2000 Compliance
As the year 2000 approaches, an issue has emerged regarding how existing
application software programs and operating systems can accommodate this date
value. Failure to adequately address this issue could have potentially serious
repercussions. The Company has begun to identify, evaluate and implement
changes to its existing computerized business systems. In addition, the Company
is communicating with its vendors and other service providers to ensure that
their products and business systems will be Year 2000 compliant. If
modifications and conversions by the Company and those it conducts business with
were not made in a timely manner, the Year 2000 problem could have a material
adverse affect on the Company's business, financial condition and results of
operations. Most of the systems of the Company have already been identified as
Year 2000 compliant, including most financial applications. Although the
Company is still quantifying the impact, the Company does not expect to expend
more than $50,000 to $100,000. These costs are being expensed as incurred.
As a contingency plan for the most reasonably likely worst case scenario,
the company has addressed all major elements related to this issue. The Company
believes its technology systems will be ready for the Year 2000, but the Company
may experience isolated incidences of non-compliance. The Company plans to
allocate internal resources and retain consultants and vendor representatives to
be
6
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES AT FEBRUARY 27, 1999 (CONTINUED)
ready to take action if these events occur. Although the Company values its
established relationships with key vendors and other service providers, if
certain vendors are unable to perform on a timely basis due to their own Year
2000 issues, the Company believes that substitute products or services are
obtainable from other vendors. The Company also recognizes the risks if other
key suppliers in utilities, communications, transportation, banking and
government are not ready for the Year 2000, and is approaching this issue in the
same manner.
Restatements
The SEC has recommended that the Company restate its Forms 10-QSB for the
quarters ended August 29, 1998 and November 28, 1998 to consider the embedded
beneficial conversion feature of the Series A Preferred Stock of $1,194,375 and
the embedded beneficial conversion feature of the convertible debentures of
$218,093. The Company is currently reviewing the recommendations and will file
the amended forms within the next 2 to 3 weeks.
7
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Assets
February 27, May 30,
1999 1998
(Unaudited) (Audited)
----------- ---------
<S> <C> <C>
Current assets
- --------------
Cash $ 334,677 $ 184,995
Accounts receivable, less allowance for doubtful accounts of
$253,677 and $163,030, respectively 9,857,322 5,092,255
Inventory 4,684,313 3,726,963
Deferred income taxes 248,500 248,500
Prepaid expenses and other current assets 815,036 78,751
----------- -----------
Total current assets 15,939,848 9,331,464
--------------------
Motion pictures and other films at cost, less accumulated
amortization of $7,964,678 and $6,575,623, respectively 5,112,239 4,142,979
Property and equipment at cost, less accumulated depreciation and
amortization of $2,035,605 and $1,681,138, respectively 1,984,894 1,479,426
Goodwill, net of accumulated amortization of $275,342 7,224,658 -
Other assets 472,370 483,472
----------- -----------
Total assets $30,734,009 $15,437,341
------------ =========== ===========
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
Liabilities and Shareholders' Equity
------------------------------------
February 27, May 30,
1999 1998
(Unaudited) (Audited)
----------- ---------
<S> <C> <C>
Current liabilities
- -------------------
Due to Fanzine shareholders $ 1,000,000 $ -
Current portion of capital lease obligations 335,659 363,956
Short-term borrowings 4,502,586 1,030,272
Accounts payable and accrued expenses 6,940,832 4,232,679
Income taxes payable 804,888 326,119
------------ ------------
Total current liabilities 13,583,965 5,953,026
-------------------------
Convertible debentures 1,000,000 -
Capital lease obligations, less current portion 194,976 351,538
Deferred income taxes 59,300 59,300
------------ ------------
Total liabilities 14,838,241 6,363,864
----------------- ------------ ------------
Minority interest 40,926 18,220
Redeemable common stock, issued and outstanding 1,000,000
shares 3,500,000 -
Commitments and contingencies - -
------------ ------------
Shareholders' equity
- --------------------
Series A 5% cumulative convertible preferred stock, $.0001 par
value, $1,000 stated value, authorized 2,175, issued and out-
standing 0 and 2,175 shares less 1,320 shares outstanding
subscriptions, respectively - 857,979
Preferred stock, no par value; authorized 2,000,000 shares; issued
and outstanding, none - -
Common stock, $.0001 par value; authorized 10,000,000 shares;
issued and outstanding, 6,178,635 and 4,245,193 shares,
respectively 617 424
Additional paid in capital 11,730,355 6,546,580
Retained earnings 1,133,260 1,712,774
Foreign exchange (1,890) -
------------ ------------
12,862,342 9,117,757
Unearned compensation - (62,500)
Less cost of Treasury Stock (169,167 common shares) (507,500) -
------------ ------------
Total shareholders' equity 12,354,842 9,055,257
-------------------------- ------------ ------------
Total liabilities and shareholders' equity $30,734,009 $15,437,341
------------------------------------------ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Nine Three Nine
months months months months
ended ended ended ended
February February February February
27, 1999 27, 1999 27, 1998 27, 1998
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $10,932,367 $26,486,645 $5,734,859 $14,382,715
Costs of revenues, including amortization of
motion pictures and other films 6,972,901 17,385,092 3,470,100 8,909,753
----------- ----------- ----------- -----------
3,959,466 9,101,553 2,264,759 5,472,962
Selling, general and administrative expenses 3,323,315 7,536,750 1,627,069 4,584,897
----------- ----------- ----------- -----------
Income from operations 636,151 1,564,803 637,690 888,065
----------------------
Other income (expense), net (128,508) (500,873) (95,441) (287,346)
----------- ----------- ----------- -----------
Income before income taxes 507,643 1,063,930 542,249 600,719
--------------------------
Income tax expense 228,439 478,768 225,668 240,288
----------- ----------- ----------- -----------
Net income $ 279,204 $ 585,162 $ 316,581 $ 360,431
---------- =========== =========== =========== ===========
Basic earnings (loss) per common share $ .04 $ (.09) $ .08 $ .10
Diluted earning (loss) per common share $ .04 $ (.09) $ .08 $ .09
Weighted average number of shares outstanding
Basic 6,958,390 6,165,186 3,884,423 3,686,663
Diluted 7,725,683 6,932,479 4,084,423 3,886,663
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
February 27, February 28,
1999 1998
(Unaudited) (Unaudited)
--------- ---------
<S> <C> <C>
Cash flows from (used by) operating activities:
- ----------------------------------------------
Net income $ 585,162 $ 360,431
-------------- ------------
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation expense 354,467 278,585
Amortization of motion pictures and other films 1,389,055 1,122,102
Amortization of deferred rent (10,508) (10,508)
Amortization of unearned compensation 62,500 57,189
Bad debt expense 90,000 90,000
Amortization of goodwill 275,342 -
Embedded interest on convertible debentures 218,093 -
Common stock issued for consulting services 499,716 157,999
Compensation for common stock - 6,850
Minority interest 22,706 -
Foreign exchange (1,890)
----------- -----------
Total non-cash adjustments 2,899,481 1,702,217
----------- -----------
(Increase) decrease in assets:
Accounts receivable (4,855,067) 436,920
Inventory (957,350) (246,509)
Prepaid expenses and other current assets (511,285) (64,746)
Other assets (342,815) 37,170
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 3,011,431 (430,700)
Income taxes payable 478,769 140,137
----------- -----------
Total adjustments (276,836) 1,574,489
----------------- ----------- -----------
Net cash provided by operating activities 308,326 1,934,920
----------------------------------------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
February 27, February 28,
1999 1998
(Unaudited) (Unaudited )
--------- ----------
<S> <C> <C>
Cash flows used by investing activities:
- ---------------------------------------
Investments in motion pictures and other films $(2,358,315) $(1,484,097)
Purchase of property and equipment (444,278) (56,979)
Acquisition of Fanzine (2,000,000) -
Purchase of treasury stock (507,500) -
----------- -----------
Net cash used by investing activities (5,310,093) (1,541,076)
-------------------------------------- ----------- -----------
Cash flows from (used by) financing activities:
- ----------------------------------------------
Proceeds from issuance of Series A Convertible preferred stock 1,317,000 -
Payments on capital leases (246,599) (198,806)
Net proceeds from line of credit 297,314 (479,869)
Proceeds from notes payable 3,450,000 -
Payments on notes payable (275,000) -
Proceeds from issuance of common stock 8,734 300,000
Proceeds from exercise of warrants 600,000 -
Proceeds from issuance of convertible debentures 1,000,000 -
Payments to Fanzine Shareholders (1,000,000) -
----------- -----------
Net cash from (used by) financing activities 5,151,449 (378,675)
-------------------------------------------- ----------- -----------
Increase in cash 149,682 15,169
----------------
Cash, beginning of period 184,995 57,724
----------- -----------
Cash, end of period $ 334,677 $ 72,893
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
Six months ended
February 27, February 28,
1999 1998
---- ----
<S> <C> <C>
Supplemental disclosures of cash flow information:
- ----------------------------------------------------
Cash paid during the period for:
Interest $382,054 $226,295
======== ========
Income taxes
$ 18,973 $ 86,823
======== ========
</TABLE>
Supplemental schedule of non-cash investing and financing activities:
- --------------------------------------------------------------------
During the nine months ended February 27, 1999, a note payable of $300,000 was
converted into 250,000 restricted shares of the Company's common stock.
During the nine months ended February 27, 1999, 2,175 shares of Series A
preferred stock plus accrued dividends of $35,247 were converted into 982,120
shares of the Company's common stock. The Company recognized total dividends of
$1,194,375 relative to the beneficial conversion feature of this stock. As of
February 27, 1999 all shares have now been converted
Property and equipment under capital lease obligations of $61,740 were incurred
for the nine months ended February 27, 1999.
On July 31, 1998, the Company acquired 100% of the outstanding stock of Fanzine
International, Inc for a preliminary purchase price of $7,500,000. The Company
paid cash of $2,000,000, issued 1,000,000 shares of stock valued at $3,500,000.
The remaining payment of $2,000,000 is due in 2 installments, of which
$1,000,000 was paid during the quarter ended February 27, 1999 and the final
$1,000,000 will be paid during the quarter ended May 29, 1999.
See notes to consolidated financial statements.
F-6
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 27, 1999 AND FEBRUARY 28, 1998
(Unaudited)
1. Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of Metro Global
Media, Inc. ("Metro Global") and its wholly-owned subsidiaries (collectively the
"Company"). All intercompany balances and transactions have been eliminated in
consolidation.
Financial Statements
The interim financial statements are prepared pursuant to the requirements for
reporting on Form 10-QSB. The May 30, 1998 balance sheet data was derived from
audited financial statements but does not include all disclosures required by
generally accepted accounting principles. The interim financial information
included herein is unaudited; however, such information reflects all adjustments
(consisting solely of normal recurring adjustments) that are, in the opinion of
management, necessary to a fair presentation of the financial position, results
of operation, and changes in financial position for the interim periods. The
interim financial statements and notes thereto should be read in conjunction
with the financial statements and notes included in the Company's latest annual
report. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The current period results of
operations are not necessarily indicative of results which ultimately will be
reported for the full year ending May 29, 1999.
Earnings Per Share
During the year ended May 30, 1998, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share", which replaces primary and
fully diluted earnings per share with basic and diluted earnings per share.
Under the new requirements the dilutive effect of certain common stock
equivalents is excluded from the computation of basic earnings per share.
Diluted earnings per share is calculated similarly to fully diluted earnings per
share as required under APB 15. All prior period earnings per share data
presented have been restated to conform to the provisions of this statement.
Basic earnings per share is computed by dividing net income available to common
stockholders (net income less preferred stock dividends) divided by the weighted
average number of shares outstanding during the year in August, 1998, the
Company recognized preferred stock dividends of $1,164,676 on the Series A
Shares. Diluted earnings per share is consistent with basic earnings per share
while giving effect to all dilutive potential common shares that would have been
outstanding if the dilutive potential common shares had been issued, while
adding back to income any preferred dividend or interest expense on convertible
securities.
Uses of Estimates
The preparation of financial statements in conformity with general accepted
accounting principles requires management to make estimates and assumptions that
affect the amount reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Accounts Receivable
Accounts receivable for the publishing segment are recorded net of estimated
returns of magazines, credits and allowances. Retail sellers of magazines
retain the right to return magazines for a number of months after the date the
magazine is "off-sale," accordingly, the allowance for returns is normally a
high percentage of the gross receivables in the magazine publishing industry.
When actual returns are received or documented, the corresponding receivable and
allowance are reduced. The allowance for returns at February 27, 1999 totals
$11,368,348.
F-7
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 27, 1999 AND FEBRUARY 28, 1998
(Unaudited)
2. Acquisition
On July 31, 1998, the Company acquired 100% of the stock of Fanzine
International, Inc. ("Fanzine") for a preliminary purchase price of $7,500,000.
Fanzine, which began operations on August 1, 1997, publishes event driven,
mainstream magazines translated into seven languages and distributed worldwide.
The acquisition price consists of $4,000,000 cash, and 1,000,000 restricted
shares of the Company's common stock with put option rights at $8.00 per share
to be exercised by the selling shareholder's during the second year on a
quarterly basis, if certain minimum earnings, as defined, are met. However,
during Fanzines' first year of operations, the Company has the right to call the
shares at the greater of $6.00 per share or 75% of the market price. The
acquisition agreement, also, provides for a reduction in purchase price if
Fanzine's results of operations do not meet certain minimum earnings. The
shares issued under this agreement will be reported on the Consolidated Balance
sheet as redeemable common stock outside of share holders equity.
Management obtained an independent valuation estimating the purchase price of
$7,500,000. The Company's right to redeem its shares during the first year and
the selling shareholders' right to put the shares to the Company in the second
year could result in an estimated increase in purchase price ranging from
$2,500,000 to $4,500,000.
The acquisition was accounted for as a purchase. The excess of the purchase
price over the fair market values of net assets acquired, which include, among
others, licences, trademarks, and distribution rights, was allocated to goodwill
and is being amortized over fifteen years.
The cash portion of $4,000,000 is being financed by a long-term convertible
debenture and other short-term borrowings. Management anticipates financing the
additional consideration to be paid in the near future, (if any), with Fanzine's
cash flow resulting from profitable operations.
As the consolidated financial statements of the Company only include seven
months of operations, the following selected unaudited pro-forma information is
being provided to present a summary of the continued results of the Company and
Fanzine as if the acquisition had occurred on August 1, 1997:
Pro-Forma information (Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED FEBRUARY 28, 1998 (ONLY)
---------------------------------------------
<S> <C>
Revenues $8,393
Net Income 455
Basic Earnings per Common Share .09
<CAPTION>
SEVEN MONTHS ENDED FEBRUARY 28, 1998 (ONLY)
---------------------------------------------
<S> <C>
Revenues $20,585
Net Income 696
Basic Earnings per Common Share .15
</TABLE>
F-8
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 27, 1999 AND FEBRUARY 28, 1998
(Unaudited)
3. Notes Payable
During June, 1997, Metro, Inc. entered into a line of credit agreement with
Finova (formerly United Credit Corporation). Under the agreement, Metro, Inc.
may borrow up to 75% of assigned accounts receivable less than 90 days old, up
to a maximum of $1,000,000. The balance due under the line of credit bears
interest at the prime rate plus 5% per annum plus a collateral management fee.
The outstanding balance under the line is secured by accounts receivable of
Metro, Inc and guaranties of the Company and certain officers/shareholders. The
line of credit expires during June, 1999, but includes an option for an
additional year. As of February 27, 1999, the balance on the line of credit was
$827,586.
On March 23, 1998, the Company entered into two 12% convertible debentures
totaling $500,000. Both notes are due on March 23, 1999, in either cash or
common stock, at a conversion rate of $2.25 per share. Proceeds from the
debentures were used for working capital. In March, 1999, the debentures were
extended until March 23, 2000.
On July 1, 1998, the Company entered into an 12% convertible debenture totaling
$200,000. The note is due on July 1, 1999, in either cash or common stock, at a
conversion rate of $2.25 per share. Proceeds from the debenture were used for
working capital.
On August 1, 1998, the Company entered into notes payable totaling $400,000.
The notes, which bear interest at 8%, are due August 1, 1999. Proceeds from the
notes were used in the acquisition of Fanzine.
On October 28, 1998, the Company entered into a note payable with a third party
for $1,100,000. The note, which bears no interest, is due in quarterly
installments of $275,000 commencing December 31, 1998. In consideration of the
loan and part of an investment banking consultant agreement, the Company issued
the lender 150,000 restricted shares of the Company's common stock. The Company
used $507,500 of the proceeds to repurchase 169,167 of its outstanding common
stock.
On December 9, 1998, the Company entered into a six-month term loan agreement
with a third party. Under the terms of the agreement, the Company can borrow up
to $3,000,000 at an interest rate of 10% per year. As of February 27,1999, the
Company had borrowed $1,750,000. The proceeds were used toward the acquisition
of Fanzine and to fund working capital.
4. Convertible Debentures
On July 31, 1998, the Company entered into an 8% convertible debenture with a
total offering of $7,000,000. The Company received proceeds of $1,000,000 in
August, 1998 which was used in the purchase of Fanzine. The remaining
$6,000,000 of the offering will be sold at the Company's option at calls of
$500,000 each for a period of two years following the date of this agreement.
The $1,000,000 debenture matures on July 31, 2000. Interest is payable on a
quarterly basis. The holder of the debenture is entitled to convert after 120
days of the agreement, the principal value into the Company's common stock at a
discounted market price as is defined in the agreement. The Company has
recorded $218,093 of interest expense relative to the embedded beneficial
conversion feature.
F-9
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 27, 1999 AND FEBRUARY 27, 1998
(Unaudited)
5. Series A Convertible Preferred Stock
During 1998, the Company entered into an Offshore Securities Subscription
Agreement for convertible Preferred Shares pursuant to regulation S of the U.S.
Securities Act of 1933. Under the terms of the agreement, the Company issued
2,175 shares of 1998 Series A Convertible Preferred Stock ("Series A Shares") at
a price of $1,000 per share with a 5% cumulative dividend payable in common
stock at conversion.
The Series A Shares are convertible, commencing 41 days after issuance, at a
rate of 100 shares plus accrued dividends per week at 80% of the 15 day average
closing bid price. These Shares are subject to a 24 month mandatory conversion
feature. During the nine months ended February 27, 1999, the 2,175 shares plus
accrued dividends of $35,247 were converted into 982,120 shares of the Company's
common stock.
In addition to the Series A Shares the Company issued 400,000 warrants to
purchase the Company's common stock at $1.50 per share commencing April 20, 1998
exercisable over 5 years. The warrants were exercised in October, 1998. The
Company recognized preferred dividends of $1,194,375 relative to the beneficial
conversion feature of the stock and warrants. As of February 27, 1999, all of
the Series A shares have been converted.
F-10
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Not applicable
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults upon Senior Securities
-------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
None
(b) Reports of Form 8-K
None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be singed on its behalf by the
undersigned, thereunto duly authorized.
METRO GLOBAL MEDIA, INC.
/s/ Janet Hoey
By:______________________________
Janet Hoey, Treasurer
(duly authorized, principal financial
and chief accounting officer)
F-11
