U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OF 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For quarterly period ended August 26, 2000
---------------
[ ] 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
incorporation or organization) Identification No.)
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: 8,630,223 at October 6, 2000.
<PAGE>
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Consolidated Financial Statements
-----------------------------------------
Balance Sheet F-1
Statements of Income F-3
Statements of Cash Flows F-4
Notes to Financial Statements F-7 to F-12
Item 2. Management's Discussion and Analysis or Plan of Operation
------------------------------------------------------------------
Results of Continuing Operations for the three months ended August 26, 2000
versus three months ended August 28, 1999.
Metro Global Media, Inc.'s ("Metro Global") revenues from continuing
operations decreased $759,201 to $6,053,472 for the three months ended August
26, 2000. This represents a 11% decrease from revenues of $6,812,673 for the
three months ended August 28, 1999. Revenues consist principally of sales of
prerecorded videocassettes, magazines, electronic software products and related
items. The decrease in revenue is primarily attributable to the decreased sales
of videos, DVDs, magazines, and cable and foreign film rights of approximately
$733,000. The decrease in sales is attributable to a slower summer season. Metro
Global intends on increasing production on all product lines during the
remaining three-quarters, which is considered Metro Global's peak season.
Costs of revenues (including amortization of film costs) related to
continuing operations for the three month period ended August 26, 2000 decreased
to $3,798,091 from $4,466,377 for the corresponding period in the prior year.
Costs of revenues as a percentage of revenues in the first quarter of fiscal
2001 were 63% as compared to 66% in the first quarter of fiscal 2000. The
improvement in the gross margin related to continuing operations is primarily
due to the reduction of costs associated with producing and duplicating of
videos and DVD's.
Selling, general, and administrative expenses, as a percentage of revenue
in the first quarter of 2001 were 41% as compared to 37% in the first quarter of
fiscal 2000. The primary reasons for the increase in selling, general and
administrative expenses as a percent of revenues is due to a decrease in
revenues for the quarter with expenses remaining relatively constant.
Loss from continuing operations for the three month period ended August 26,
2000 was $297,643 as compared to a loss from continuing operations of $800,666
for the corresponding period in the prior year. The primary reason for the
decrease in the loss is due to the decrease in interest expense of approximately
$466,039 due to decreased borrowings and a decrease in consulting expense. Net
loss for the quarter ended August 26, 2000 was $297,643 as compared to a net
loss of $716,965 for the quarter ended August 28, 1999, resulting in a loss per
share of $0.03 for the quarter ended August 26, 2000, as compared to a loss per
share of $0.11 for the quarter ended August 28, 1999.
Liquidity and Capital Resources at August 26, 2000
Cash amounted to $103,393 at quarter-end. Net cash provided by operating
activities amounted to $372,274 for the three months ended August 26, 2000,
whereas net cash of $1,557,503 was provided by operations for the same period in
the prior fiscal year. The primary uses of cash for the quarter ended August 26,
2000 consisted of: (1) net payments on line of credit of $375,576, (2)
investments in motion pictures and other films of $641,327, (3) payment on a
note payable of $425,000, and (4) purchases of property and equipment of
$79,320. Inventory increased $588,646 due to the increase in DVD and magazine
production.
1
<PAGE>
On July 31, 1998, Metro Global entered into an 8% convertible debenture
with an unrelated party in the amount of $1,000,000, which was used in the
purchase of Fanzine. In connection with this transaction, Metro Global issued a
warrant for 75,000 shares at a price of $4.11 and a warrant for 25,000 shares at
a price of $3.29, both exercisable over two years which expired on July 31,
2000. Metro Global recorded a discount on the debenture of $157,700 for the
value of the warrants. Metro Global amortized $13,142 and $19,713 of the
discount to interest expense for quarters ending August 26, 2000 and August 28,
1999, respectively.
The $1,000,000 debenture was to mature on July 31, 2000. Interest was
payable on a quarterly basis. The holder of the debenture was entitled to
convert the principal value into Metro Global's Common Stock at a discounted
market price as is defined in the debenture agreement. For fiscal 2000, $105,000
of convertible debentures plus accrued interest and penalties were converted
into 83,888 restricted shares of Metro Global's Common Stock. On February 25,
2000, Metro Global entered into a Forbearance and Modification Agreement with
the lender. Under the terms of the agreement, Metro Global made a payment of
$150,000 upon execution of the agreement. The remaining balance of $850,000 is
due in two installments of $425,000 each, due on July 1, 2000 and October 1,
2000. The restructured note payable is secured by 200,000 restricted shares of
New Frontier common stock owned by Metro Global. On June 30, 2000, Metro Global
made the first $425,000 payment and 125,000 shares of stock were returned by the
lender. On October 2, 2000, Metro Global made the final payment of $425,000 and
the remaining 75,000 shares were returned by the lender.
On October 28, 1998, Metro Global entered into a note payable with a third
party for $1,100,000. The note, which bears no interest, was due in quarterly
installments of $275,000 commencing December 31, 1998. In consideration of the
loan and part of an investment banking consultant agreement, Metro Global issued
the lender 150,000 restricted shares of Metro Global's Common Stock. Metro
Global used $507,500 of the proceeds to repurchase 198,242 shares of its
outstanding Common Stock from Metro Plus, a company owned by a principal
stockholder. For fiscal 1999, Metro Global made one payment of $275,000. In
September 1999, Metro Global and lender agreed to a preliminary extension of the
note. In October 1999, Metro Global made a $275,000 payment. Effective August 8,
2000, Metro Global renegotiated the terms for the final $550,000 due on the note
payable. Under the terms of the Forbearance and Modification agreement, Metro
Global must make monthly payments of $50,000. As of September 30, 2000, the
balance due on the note payable is $450,000.
On December 9, 1998, Metro Global entered into a six-month term loan
agreement with a third party. Under the terms of the agreement, Metro Global
borrowed $3,000,000 at an interest rate of 10% per year. The proceeds were used
toward the acquisition of Fanzine and to fund working capital. In connection
with this transaction, Metro Global issued warrants to purchase up to 350,000
shares of Common Stock at a price of $3.00, expiring on December 31, 2001. Metro
Global recorded interest expense of $577,000 for the valuation of the warrants.
Additionally, Metro Global issued 100,000 shares of Common Stock and recorded
$187,500 of interest expense. In September 1999, Metro Global and this lender
agreed to an extension, under which Metro Global paid $1.3 million upon closing
a financing with Reservoir Capital Corporation. In November 1999, Metro Global
paid the lender an additional $600,000 from the proceeds of the sale of Fanzine.
The final payment of $1.2 million (which includes $100,000 of interest) was paid
directly from the proceeds of the final payment from the sale of Fanzine, which
was received on September 13, 2000. In connection with the restructuring of the
two notes payable, Metro Global recognized $337,475 of extraordinary income for
the forgiveness of interest and penalties in fiscal 2000.
In September 1999, Metro Global signed a $4,000,000 Loan and Security
Agreement with Reservoir Capital Corporation. Pursuant to the terms, Metro may
borrow up to 70% of accounts receivable less than ninety day old, up to a
maximum of $3,000,000. The accounts receivable borrowing base excludes foreign
receivables and receivables where more than 50% of the balance is over ninety
2
<PAGE>
days old. Also, the borrowings on accounts receivable owned be Capital Video
Corporation ("CVC") are limited to the lesser of 30% of total accounts
receivable or $1,600,000. Additionally, Metro can borrow 40% of inventory, up to
a maximum of $1,000,000. Borrowings under this loan bear interest at prime rate
plus 3.5% per annum. Additionally, Metro must pay a service fee of .35% per
month on the average daily loan balance. Metro must pay an unused fee of .25% on
the amount of the borrowings under $2,000,000. The loan is secured by the assets
of Metro. The CVC accounts receivable are guaranteed a shareholder of CVC, who
is a significant shareholder of Metro Global. Additionally, CVC has executed a
put on the inventory of Metro in case of default. As of August 26, 2000,
borrowings under the line of credit totaled $2,747,306.
On September 30, 1999, Metro Global sold Fanzine for $4,500,000, payable in
four installments. During the year ended May 27, 2000, Metro Global received
payments of $2,000,000. The remaining balance was paid in two installments, one
on July 31, 2000 in the amount of $1,000,000 and the second on September 13,
2000 of $1,500,000.
Of Metro's total accounts receivable at August 26, 2000, $2,351,879 (47%),
as compared to $2,723,875 (30%) at August 28, 1999, is owed by CVC, a chain of
retail stores, which is partially-owned by a principal shareholder of Metro
Global. This percentage has increased due to the exclusion of accounts
receivable from Fanzine due to the disposition. 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 are within terms given by
Metro, and are maintained within 60 to 90 days. Accordingly, no allowance for
related party receivables and no related party bad debt expense has been
recorded in Metro Global's financial statements.
In fiscal 2001, Metro invested $641,327 in new feature films and videos.
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 in the first quarter ended August 26, 2000 amounted to
$79,320 as compared to $96,532 for the quarter ended August 28, 1999.
Management believes that funds provided by operations and existing 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.
Investment in securities
On July 21, 1999, Metro Global entered into a seven year Licensing
Agreement with New Frontier Media, Inc. ("New Frontier"). Metro Global received
500,000 restricted shares of New Frontier common stock plus warrants to purchase
an additional 100,000 shares of New Frontier common stock per year for five
years. Metro Global valued the common stock and warrants at $4,787,474. The
deferred revenue is being amortized over seven years. Metro accounts for the
stock received as securities available for sale, in accordance with SFAS 115. At
August 26, 2000, Metro Global recorded a comprehensive loss of $914,954 on the
investment. Both the stock and the warrants are periodically reviewed for
permanent impairment.
3
<PAGE>
As part of the Licensing Agreement, in consideration of certain services,
Metro Global issued New Frontier 250,000 restricted shares of its Common Stock
and warrants to purchase 50,000 shares of Common Stock per year for five years.
Metro Global valued the Common Stock and warrants at $716,752. The deferred
expense is being amortized over five years.
4
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AUGUST 26, 2000 (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets
------
Current Assets
--------------
<S> <C>
Cash $ 103,393
Accounts receivable, less allowance for doubtful accounts
of $182,991 2,602,182
Accounts receivable, related party 2,351,879
Note Receivable 1,500,000
Inventory 5,497,536
Recoverable income tax 155,564
Prepaid expenses and other current assets 454,044
------------
Total Current Assets 12,664,598
-------------------- ------------
Motion pictures and other films at cost, less accumulated
amortization of $11,603,255 5,519,154
Property and equipment at cost, less accumulated
depreciation of $3,023,850 2,031,105
Investment in securities 3,577,474
Deferred Taxes 900,000
Other assets 176,624
------------
Total Assets $ 24,868,955
------------ ============
</TABLE>
See Notes to Consolidated Financial Statements
F-1
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AUGUST 26, 2000 (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities
-------------------
<S> <C>
Current portion of capital lease obligations $ 314,661
Short-term borrowings 4,928,877
Accounts payable and accrued expenses 6,431,940
Income taxes payable 946,289
------------
Total current liabilities 12,621,767
-------------------------
Deferred Revenue 4,046,556
Capital lease obligations, less current portion 237,830
------------
Total liabilities 16,906,153
----------------- ------------
Minority interest (56,044)
Commitments and Contingencies
Shareholders' equity
--------------------
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 8,828,465 shares and outstanding,
8,630,223 shares 883
Additional paid in capital 16,701,540
Accumulated deficit (6,978,075)
Accumulated other comprehensive loss (1,198,002)
------------
8,526,346
Less cost of Treasury Stock (198,242 common shares) (507,500)
------------
Total shareholders' equity 8,018,846
-------------------------- ------------
Total liabilities and shareholders' equity $ 24,868,955
------------------------------------------ ============
</TABLE>
See Notes to Consolidated Financial Statements
F-2
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED AUGUST 26, 2000 AND AUGUST 28, 1999 (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999
2000 as restated
---- -----------
<S> <C> <C>
Revenues $ 6,053,472 $ 6,812,673
Cost of revenues, including amortization of
motion pictures and other films of
$578,814 and $535,352, respectively 3,798,091 4,466,377
----------- -----------
2,255,381 2,346,296
Selling, general and administrative expenses 2,451,942 2,537,763
----------- -----------
(196,561) (191,467)
----------- -----------
Other income and (expenses)
Interest expense (167,563) (633,602)
Interest income 57,904 -0-
Other income 8,577 24,403
----------- -----------
(101,082) (609,199)
----------- -----------
Loss from continuing operations (297,643) (800,666)
Income from discontinued operations (net of taxes) -0- 83,701
----------- -----------
Net loss $ (297,643) $ (716,965)
=========== ===========
Comprehensive Loss
------------------
Net loss $ (297,643) $ (716,965)
Other comprehensive loss (914,954) (1,035)
----------- -----------
Net other comprehensive loss $(1,212,597) $ (718,000)
============ ===========
Loss Per Share:
Loss from continuing operations:
Basic and Diluted $ (0.03) $ (0.12)
Income from discontinued operations:
Basic and Diluted $ 0.00 $ 0.01
Net loss:
Basic and Diluted $ (0.03) $ (0.11)
Weighted average number of shares:
Basic and Diluted 8,630,223 6,448,889
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED AUGUST 26, 2000 AND AUGUST 28, 1999 (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (297,643) $ (716,965)
---------- ----------
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation Expense 173,639 160,841
Amortization of motion pictures and other films 578,814 535,352
Amortization of deferred rent (3,503) (3,503)
Amortization of unearned compensation 500 77,512
Amortization of goodwill -0- 109,222
Amortization of discount on debenture 13,142 19,712
Amortization of deferred revenue (170,981) (56,944)
Amortization of deferred expense 54,356 11,946
Accrued interest and penalties added to note
payable principal -0- 68,000
Allowance for doubtful accounts 45,000 113,426
Common Stock issued for consulting services -0- 12,815
Issuance of warrants -0- 175,844
Minority interest -0- 8,133
Foreign exchange 31,296 1,035
(Increase) decrease in assets:
Accounts receivable 432,544 (1,393,039)
Inventory (588,646) (263,672)
Prepaid expenses and other current assets (89,019) 56,832
Other assets (27,568) (66,639)
Recoverable income tax 183,436 -0-
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 36,907 2,652,421
Income taxes payable -0- 55,174
---------- ----------
Total adjustments 669,917 2,274,468
----------------- ---------- ----------
Net cash provided by operating activities 372,274 1,557,503
----------------------------------------- ---------- ----------
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE THREE MONTHS ENDED AUGUST 26, 2000 AND AUGUST 28, 1999 (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
---- ----
Cash flows from investing activities:
<S> <C> <C>
Notes Receivable 965,649 -0-
Investments in motion pictures and other films (641,327) (643,364)
Purchase of property and equipment (79,320) (96,532)
---------- ----------
Net cash provided by (used in) investing activities 245,002 (739,896)
--------------------------------------------------- ---------- ----------
Cash flows from financing activities:
Payments on line of credit (375,576) (142,254)
Proceeds on notes payable -0- 30,000
Principal payments on notes payable (425,000) -0-
Principal payments on capital lease obligations (74,846) (88,007)
---------- ----------
Net cash used in financing activities (875,422) (200,261)
------------------------------------- ---------- ----------
Net increase (decrease) in cash (258,146) 617,346
Cash, beginning of period 361,539 144,288
---------- ----------
Cash, end of period $ 103,393 $ 761,634
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 147,831 $ 66,401
========== ==========
Income taxes $ -0- $ -0-
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE THREE MONTHS ENDED AUGUST 26, 2000 AND AUGUST 28, 1999 (UNAUDITED)
--------------------------------------------------------------------------------
Supplemental schedule of non-cash investing and financing activities:
Capital lease obligations of $411,799 were incurred during the three months
ended August 28, 1999, when Metro Global entered into capitalized leases for
office equipment and machinery and equipment.
On July 21, 1999, Metro Global entered into a seven year Licensing
Agreement with New Frontier Media, Inc. Metro Global received 500,000 restricted
shares of New Frontier Common Stock plus warrants to purchase 100,000 shares of
Common Stock per year for five years. Metro Global valued the Common Stock and
warrants at $4,787,474. The deferred revenue is being amortized over seven
years.
As part of the Licensing Agreement, in consideration of certain services,
Metro Global issued New Frontier 250,000 restricted shares of its Common Stock
and warrants to purchase 50,000 shares of Common Stock per year for five years.
Metro Global valued the Common Stock and warrants at $716,752. The deferred
expense is being amortized over five years.
During the three months ended August 28, 1999, $60,000 of convertible
debentures and accrued interest and penalties of $17,630 were converted into
43,962 restricted shares of Common Stock.
See notes to consolidated financial statements.
F-6
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED AUGUST 26, 2000 AND AUGUST 28, 1999 (UNAUDITED)
--------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of Metro Global
and its majority owned and controlled subsidiaries. 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 interim financial information included herein
is unaudited; however, such information reflects all adjustments that are, in
the opinion of management, necessary to a fair presentation of the financial
position, results of operations, 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 Metro
Global'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 26, 2001.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates based on
management's knowledge and experience. Due to their prospective nature, it is
reasonable to expect actual results to differ from those estimates.
2. Dispositions
Fanzine International, Inc.
On August 3, 1998, Metro Global acquired 100% of the stock of Fanzine for a
cash purchase price of $4,000,000, plus contingent consideration. Fanzine, which
began operations on August 1, 1997, publishes event driven, mainstream magazines
translated into seven languages and distributed worldwide. The contingent
consideration consisted of 1,000,000 restricted shares of Metro Global'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. During Fanzine's first year of operations, Metro
Global had the right to call the shares at the greater of $6.00 per share or 75%
of the market price. Metro Global did not call the shares. The acquisition
agreement also provided for a reduction in purchase price if Fanzine's results
of operations did not meet certain minimum earnings.
The acquisition was accounted for as a purchase. The excess of the purchase
price over the fair market values of net assets acquired, which included, among
others, licenses, trademarks, and distribution rights, was allocated to goodwill
and amortized over ten years. The cash portion of $4,000,000 was financed by a
long-term convertible debenture and other short-term borrowings. On September
29, 1999, Metro Global sold Fanzine's stock back to the selling shareholders
(see note 3).
F-7
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED AUGUST 26, 2000 AND AUGUST 28, 1999 (UNAUDITED)
--------------------------------------------------------------------------------
3. Discontinued Operations
In September 1999, Metro Global adopted a plan of disposition for Fanzine,
which was sold on September 29, 1999 for approximately $4,500,000 in notes
payable and the return of 1,000,000 shares of Metro Global's Common Stock. The
following table is a summary of the results of discontinued operations of
Fanzine and Maxstone Media Group, LLC for the period ended August 28, 1999:
<TABLE>
<CAPTION>
1999
----
<S> <C>
Revenues $4,873,001
Cost of revenues 4,242,603
----------
630,398
Other expenses 491,523
----------
Income before income taxes 138,875
Income taxes (55,174)
----------
Income from discontinued operations $ 83,701
==========
</TABLE>
Income from discontinued operations before income taxes does not include an
allocation of corporate interest expense or amortization of goodwill.
4. Debt
On October 28, 1998, Metro Global entered into a note payable with an
unrelated third party for $1,100,000. The note, which bears no interest, was due
in quarterly installments of $275,000 commencing December 31, 1998. In
consideration of the loan and part of an investment banking consultant
agreement, Metro Global issued the lender 150,000 restricted shares of Metro
Global's Common Stock. Metro Global recorded interest expense of $243,412 in
1999 in connection with the issuance of the restricted stock. Metro Global used
$507,500 of the proceeds to repurchase 198,242 shares of its outstanding Common
Stock from Metro Plus, a company partially owned by a significant shareholder.
For the year ended May 29, 1999, Metro Global made one payment of $275,000. As a
result, default interest at 11% per annum has been accrued on this note. In
September 1999, Metro Global and the lender agreed to a preliminary extension of
the note. Metro Global made a payment of $275,000 in October 1999. Effective
August 8, 2000, Metro Global, renegotiated the terms for the final $550,000 due
on the note payable. Under the terms of the Forbearance and Modification
agreement, Metro Global must make monthly payments of $50,000. As of September
30, 2000, the balance due on the note payable is $450,000.
On December 9, 1998, Metro Global entered into a six-month term loan
agreement with an unrelated third party. Under the terms of the agreement, Metro
Global borrowed $3,000,000 at an interest rate of 10% per year. The proceeds
were used toward the acquisition of Fanzine and to fund working capital. In
connection with this transaction, Metro Global issued warrants to purchase up to
350,000 shares of Common Stock at a price of $3.00, expiring on December 31,
2001. Metro Global recorded interest expense of
F-8
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED AUGUST 26, 2000 AND AUGUST 28, 1999 (UNAUDITED)
--------------------------------------------------------------------------------
4. Debt (continued)
$577,000 in connection with the issuance of the warrants during 1999.
Additionally, Metro Global issued 100,000 shares of Common Stock and recorded
$187,500 of interest expense relating to the issuance of these shares during
1999. In September 1999, Metro Global and the lender agreed to an extension.
Under the terms of the extension, Metro Global paid $1.3 million upon the
closing of the financing with Reservoir Capital Corporation, a new unrelated
third party lender. In November 1999, Metro Global paid the lender an additional
$600,000 from the proceeds of the sale of Fanzine. The final payment of $1.2
million (which includes $100,000 of interest) was paid directly from the
proceeds of the final payment from the sale of Fanzine in September 2000. In
connection with the restructuring of the two notes payable, Metro Global
recognized $337,475 of extraordinary income on the forgiveness of interest and
penalties in Fiscal 2000.
5. Convertible Debentures
On July 31, 1998, Metro Global entered into an 8% convertible debenture
with an unrelated party in the amount of $1,000,000, which was used in the
purchase of Fanzine. In connection with this transaction, Metro Global issued a
warrant for 75,000 shares at a price of $4.11 and a warrant for 25,000 shares at
a price of $3.29, both exercisable over two years. Both warrants expired on July
31, 2000. Metro Global recorded a discount on the debenture of $157,700 for the
value of the warrants. Metro Global amortized $13,142 and $19,713 of the
discount to interest expense for quarters ending August 26, 2000 and August 28,
1999, respectively.
The $1,000,000 debenture was to mature on July 31, 2000. Interest is
payable on a quarterly basis. The holder of the debenture is entitled to convert
the principal value into Metro Global's Common Stock at a discounted market
price as is defined in the debenture agreement. During fiscal 2000, $105,000 of
convertible debentures plus accrued interest and penalties were converted into
83,888 restricted shares of Metro Global's Common Stock. On February 25, 2000,
Metro Global entered into a Forbearance and Modification Agreement with the
lender. Under the terms of the agreement, Metro Global made a payment of
$150,000 upon execution of the agreement. The remaining balance of $850,000 is
due in two installments of $425,000 each, due on July 1, 2000 and October 1,
2000. The restructured note payable is secured by 200,000 restricted shares of
New Frontier common stock owned by Metro Global. On June 30, 2000, Metro Global
made the first $425,000 payment and 125,000 shares were returned by the lender.
On October 2, 2000, Metro Global made the final payment of $425,000 and the
remaining 75,000 shares were returned by the lender.
6. Short-Term Borrowings
In September 1999, Metro Global signed a $4,000,000 Loan and Security
Agreement with Reservoir Capital Corporation. Pursuant to the terms, Metro may
borrow up to 70% of accounts receivable less than ninety days old, up to a
maximum of $3,000,000. The accounts receivable borrowing base excludes foreign
receivables and receivables where more than 50% of the balance is over ninety
days old. The borrowings on accounts receivable from CVC, a related party, are
limited to the lesser of 30% of total accounts receivable or $1,600,000.
Additionally, Metro can borrow 40% of inventory, up to a maximum of $1,000,000.
Borrowings under this loan bear interest at prime rate plus 3.5% per annum.
Additionally, Metro must pay a service fee of .35% per month on the average
daily loan
F-9
<PAGE>
METRO GLOBAL MEDIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED AUGUST 26, 2000 AND AUGUST 28, 1999 (UNAUDITED)
--------------------------------------------------------------------------------
6. Short-Term Borrowings (continued)
balance. Metro must pay an unused fee of .25% on the amount of the borrowings
under $2,000,000. The loan is secured by the assets of Metro. The CVC accounts
receivable are guaranteed to the lender a shareholder of CVC, who is a
significant shareholder of Metro Global. Additionally, CVC has executed a put on
the inventory of Metro in case of default. As of August 26, 2000, borrowings
under the line of credit totaled $2,747,306.
7. Investment in securities
On July 21, 1999, Metro Global entered into a seven year Licensing
Agreement with New Frontier Media, Inc. ("New Frontier"). Metro Global received
500,000 restricted shares of New Frontier common stock plus warrants to purchase
an additional 100,000 shares of New Frontier common stock per year for five
years. Metro Global valued the common stock and warrants at $4,787,474. The
deferred revenue is being amortized over seven years. Metro accounts for the
stock received as securities available for sale, in accordance with SFAS 115. At
August 26, 2000, Metro Global recorded a comprehensive loss of $914,954 on the
investment. Both the stock and the warrants are periodically reviewed for
permanent impairment.
As part of the Licensing Agreement, in consideration of certain services,
Metro Global issued New Frontier 250,000 restricted shares of its Common Stock
and warrants to purchase 50,000 shares of Common Stock per year for five years.
Metro Global valued the Common Stock and warrants at $716,752. The deferred
expense is being amortized over five years.
F-10
<PAGE>
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
-------------------------
George Kinney v. Metro Global Media, Inc., et al. C.A. No. 99-579
(U.S.D.C.,D.R.I.)
On November 22, 1999, George Kinney, on behalf of himself and all
other similarly situated, commenced a putative class action in the
United States District Court for the District of Rhode Island against
Metro Global and certain of its present or former officers and
directors. Plaintiff seeks to represent a class of all person who
acquired securities of Metro Global between September 13, 1996 and
September 13, 1999. The Complaint alleges claim based on alleged
violations of section 10(b) of the Securities Exchange Act of 1934.
Plaintiff alleges that the defendants made a series of false and
misleading statements concerning Metro Global's reported financial
results during the class period that violated generally accepted
accounting principles and ultimately caused Metro Global to restate
certain financial statements. On March 15, 2000, Metro Global and
certain defendants filed a motion to dismiss the complaint. The
plaintiffs filed an amended complaint dated May 15, 2000 and Metro
Global moved to dismiss the amended complaint on July 5, 2000.
Plaintiffs filed an opposition to Metro Global's motion to dismiss on
August 15, 2000. Metro Global replied to the plaintiffs' opposition on
September 1, 2000. Metro Global believes it has meritorious defenses and
intends to vigorously defend this action.
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
27.1 Financial Data Schedule filed herewith.
(b) Reports on Form 8-K
None
F-11
<PAGE>
SIGNATURE
In accordance with 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, thereunto duly authorized.
METRO GLOBAL MEDIA, INC.
By: /s/ Gregory N. Alves
------------------------
Gregory N. Alves
President
By: /s/ Janet M. Hoey
---------------------
Janet M. Hoey
Treasurer (principal financial
and accounting Officer), Secretary
and Director
F-12
