<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
[] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________ to _________
Commission file Number 000-24706
SELECT MEDIA COMMUNICATIONS, INC.
(Exact name of small business issuer as specified in its charter)
<TABLE>
<S> <C>
New York 13-3415331
(State or other jurisdiction of incorporation (IRS Employer Identification No.)
or organization)
</TABLE>
666 Third Avenue, New York, NY
(Address of principal executive offices)
(212) 584-1900
(Issuer's telephone number)
_____________________________________________________________________________
(Former name, former address and former fiscal year,
if changed since last report)
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 a court. Yes [ ] No[X]
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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: 13,051,592 Shares of Common Stock
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [X]
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
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<PAGE> 3
SELECT MEDIA COMMUNICATIONS INC.
AND SUBSIDIARY
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 2000 and 1999
<PAGE> 4
SELECT MEDIA COMMUNICATIONS INC.
AND SUBSIDIARY
CONTENTS
--------------------------------------------------------------------------------
Page
----
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheet 1-2
Statements of Operations 3-4
Statements of Cash Flows 5-6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 7-8
<PAGE> 5
SELECT MEDIA COMMUNICATIONS INC.
AND SUBSIDIARY
UNAUDITED CONSOLIDATED BALANCE SHEET
September 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash $ 10,248
Accounts receivable, less allowance for doubtful
accounts of $505,659 142,354
Prepaid expenses and other current assets 159,594
----------
Total Current Assets $ 312,196
----------
PROPERTY AND EQUIPMENT, Net 679,710
----------
OTHER ASSETS
Goodwill, net of accumulated amortization of $241,126 723,378
Intangibles, net of accumulated amortization of $24,305 100,695
Reorganization value, net of accumulated amortization of
$753,616 1,690,542
----------
Total Other Assets 2,514,615
----------
TOTAL ASSETS $3,506,521
==========
</TABLE>
1
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SELECT MEDIA COMMUNICATIONS INC.
AND SUBSIDIARY
UNAUDITED CONSOLIDATED BALANCE SHEET
September 30, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 1,702,404
Accrued expenses 3,036,698
Notes payable 945,474
Current portion of capital lease obligation 86,286
Reorganization liabilities, current portion 100,000
Due to stockholders 1,326,900
------------
Total Current Liabilities $ 7,197,762
------------
OTHER LIABILITIES
Capital lease obligation, net of current portion 16,198
Reorganization liabilities, net of current portion 1,384,890
------------
Total Other Liabilities 1,401,088
------------
TOTAL LIABILITIES 8,598,850
------------
COMMITMENTS
STOCKHOLDERS' DEFICIT
Common stock - $.001 par value; 35,000,000 shares authorized,
13,051,592 shares issued and outstanding 13,051
Additional paid-in capital 8,989,819
Accumulated deficit (14,095,199)
------------
TOTAL STOCKHOLDERS' DEFICIT (5,092,329)
------------
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIT $ 3,506,521
============
</TABLE>
2
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SELECT MEDIA COMMUNICATIONS INC.
AND SUBSIDIARY
UNAUDITED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Nine Months For the Three Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SALES $ 530,636 $ 2,217,821 $ 166,579 $ 174,890
COST OF SALES 318,313 1,001,699 62,671 143,018
------------ ----------- ------------ -----------
GROSS PROFIT 212,323 1,216,122 103,908 31,872
------------ ----------- ------------ -----------
OPERATING EXPENSES
Selling, general and administrative expenses 4,232,217 3,048,822 1,026,411 1,257,446
Loss on Capital Improvements receivable 98,820 --
Stock based compensation 48,000 -- 15,000 --
------------ ----------- ------------ -----------
Total operating expenses 4,379,037 3,048,822 1,041,411 1,257,446
------------ ----------- ------------ -----------
OPERATING LOSS (4,166,714) (1,832,700) (937,503) (1,225,574)
OTHER INCOME (EXPENSE)
Other income (expense) (66,740) 17,861 (92,052) 17,861
Interest expense (114,200) (229,063) (34,396) (101,842)
------------ ----------- ------------ -----------
TOTAL OTHER INCOME (EXPENSE) (180,940) (211,202) (126,448) (83,981)
------------ ----------- ------------ -----------
LOSS BEFORE INCOME TAXES (4,347,654) (2,043,902) (1,063,951) (1,309,555)
INCOME TAXES -- -- -- --
------------ ----------- ------------ -----------
NET LOSS $ (4,347,654) $(2,043,902) $ (1,063,951) $(1,309,555)
------------ ----------- ------------ -----------
PER SHARE DATA
Basic and diluted net loss per common share $ (0.37) $ (20.69) $ (0.08) $ (12.76)
============ =========== ============ ===========
Weighted Average Common Shares
Outstanding 11,653,979 98,782 13,676,918 102,592
============ =========== ============ ===========
</TABLE>
3
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SELECT MEDIA COMMUNICATIONS INC.
AND SUBSIDIARY
UNAUDITED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2000 and 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(4,347,654) $(2,043,964)
----------- -----------
Adjustments to reconcile net loss to net cash
provided by operating activities:
Stock-based compensation 48,000 --
Stock issued for services 225,000 39,278
Depreciation and amortization 576,001 271,566
Increase in allowance for doubtful accounts 262,545 20,156
Net increases and (decrease) in cash due to changes in assets
and liabilities:
Accounts receivable (5,182) (287,315)
Capital improvements receivable -- (7,272)
Note receivable -- 194,800
Prepaid expenses and other current assets (95,087) 244,525
Accounts payable 327,742 792,774
Accrued expenses 795,706 990,275
Reorganization liabilities (95,079) (183,056)
----------- -----------
TOTAL ADJUSTMENTS 2,039,646 2,075,731
----------- -----------
NET CASH FLOWS FROM OPERATING
ACTIVITIES (2,308,008) 31,767
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (163,133) (270,269)
Purchase of Sigma Sound Services Inc., net of cash acquired (198,600) --
Purchase of intangible assets (125,000) --
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES $ (486,733) $ (270,269)
----------- -----------
</TABLE>
4
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SELECT MEDIA COMMUNICATIONS INC.
AND SUBSIDIARY
UNAUDITED STATEMENTS OF CASH FLOWS, Continued
For the Nine Months Ended September 30, 2000 and 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
-----------------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of capital lease obligations $ (73,230) $ (8,408)
Proceeds from notes payable -- 138,000
Repayments of notes payable (22,025) --
Advances from shareholders 2,733,900 --
Repayments from shareholders 166,000 --
----------- ---------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 2,804,645 129,592
----------- ---------
NET CHANGE IN CASH 9,904 (108,910)
CASH AT BEGINNING OF PERIOD 344 118,166
----------- ---------
CASH AT END OF PERIOD $ 10,248 $ 9,256
=========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the years for:
Interest $ 31,184 $ 24,612
Noncash investing and financing activities:
Acquisition of equipment through capital leases $ 126,831
Stock issued as payment of reorganization liabilities $ 420,723
Sigma Sound Services, Inc. acquisition:
Issuance of note payable $ 400,000
Deposit applied to the purchase price $ 400,000
Stock issued in settlement of Advances from Stockholder $ 1,407,000
</TABLE>
5
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SELECT MEDIA COMMUNICATIONS INC.
AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - The Company and Basis of Presentation
The Company
Select Media Communications Inc. (the "Company") is an integrated media
company engaged in producing and distributing programming.
Basis of Presentation
The accompanying Unaudited Consolidated financial statements reflect all
adjustments, which are in the opinion of management, necessary to a fair
statement of the results of the interim periods presented. All such
adjustments are of a normal recurring nature. The financial statements
should be read in conjunction with the notes to the financial statements
and in conjunction with our audited financial statements contained in
Form 10KSBA (filed on November 16, 2000)
Basis of Consolidation
The consolidated financial statements include the accounts of Select
Media Communications ("Select"), and it wholly-owned subsidiary Sigma
Sound Services, Inc. ("Sigma"), collectively referred to as the
("Company"). All significant inter-company transactions and balances have
been eliminated in consolidation.
NOTE 2 - Acquisitions
On January 18, 2000 the Company purchased all of the issued and
outstanding common stock of Sigma Sound Services, Inc. ("Sigma") pursuant
to the terms of a stock purchase agreement (the "Agreement"). The
purchase price for Sigma's common stock was $1,000,000 with $400,000 paid
at the signing of the Agreement, $200,000 paid on January 18, 2000 and a
$400,000 10% secured note. The note is payable in two installments of
$200,000 plus accrued interest on June 30, 2000 (which has been extended
180 days) and January 3, 2001. The note is secured by all of the
Company's existing and future customer accounts, general intangibles,
equipment, goods, instruments and inventory. The transaction was
accounted for under the purchase method of accounting. The excess of the
purchase price over the fair value of assets was $964,504 and has been
attributed to Goodwill. Goodwill is being amortized over a 3 year life.
Amortization expense for the nine months ended September 30, 2000 was
$241,126.
On March 8, 2000 the Company purchased certain contracts of After Hours
Productions, Inc ("AHP") pursuant to the terms of an asset purchase
agreement (the "AHP Agreement"). The purchase price was $125,000 with
$25,000 paid as a deposit on the purchase at the signing of the AHP
Agreement and $100,000 paid on March 8, 2000. The Company recorded an
intangible asset of $125,000 as a result of the purchase. The intangible
asset is being amortized over 3 years and amortization expense for the
nine months ended September 30, 2000 was $24,306.
6
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SELECT MEDIA COMMUNICATIONS INC.
AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 3 - Funding Agreement
On January 15, 2000 the Company entered into an agreement with an
Investment Bank to sell shares of the Company's common stock. In exchange
for funding up to $2,000,000 in the aggregate, the Investment Bank's
investors can receive up to 4,000,000 shares of the Company's common
stock at a price of $ .50 per share. At September 30, 2000 the amount due
to the Investment Bank/Stockholder was $1,326,900.
On April 13, 2000 the Company issued 2,814,000 shares of common stock to
the Investment Bank in settlement of advances made to the Company in the
amount of $1,407,000.
NOTE 4 - Stockholders Equity
On June 30, 2000 the Company issued 450,000 shares of common stock to
Consultants for services provided to the Company. The fair market values
of these services which is $225,000 has been recorded.
On August 16, 2000 the Company issued 30,000 shares of common stock to a
former employee for past services. As a result of the issuance, the
Company recorded$15,000 ($0.50 per share) of stock based compensation
expense.
NOTE 5 - Commitments
Employment Agreements
On January 1, 2000 the Company entered into two employment agreements.
One of the employees was terminated and the Company entered into a
separation and release agreement on April 28, 2000. Pursuant to the
employment and separation and release agreements, the employees were
issued 100,000 and 50,000, respectively, of restricted shares for past
services performed. As a result of these issuances, the Company
recognized $33,000 ($0.22 per share) of stock based compensation expense.
Future minimum payments under these agreements are $125,000 for the year
ended December 31, 2000 and $100,000 for the years ended December 31,
2001 and 2002.
NOTE 6 - Related Party Transaction
In January 2000, the Company reimbursed one of its officers/shareholders
$100,000 for amounts previously contributed by him pursuant to the
Company's Plan of Reorganization.
7
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SELECT MEDIA COMMUNICATIONS INC.
AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 7 - Litigation
During November 2000 the Company has vacated its office space located at
666 Third Avenue, New York NY. The Company is currently involved in
litigation with its former landlord. The outcome of this litigation is
uncertain, however, if the Company obtains an adverse judgment, it may
have a material impact to the financial statements. The Company has
accrued all unpaid rent through September 30 2000 and has accrued costs
incurred in renovating the office space of approximately $700,000.
8
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of financial condition and results of
Operations may be deemed to include forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, that involve risk and
uncertainty, including financial, regulatory environment and trend projections,
estimated costs to complete or possible future revenues from the Company's
expansion plans, the likelihood of successful completion of such plans, as well
as any statements preceded by, followed by, or that include the words "intends,"
"estimates," "believes," "expects," "anticipates," "should," "could," or similar
expressions; and other statements contained herein regarding matters that are
not historical facts. Although the Company believes that its expectations are
based on reasonable assumptions, it can give no assurance that its expectations
will be achieved. The important factors that could cause actual results to
differ materially from those in the forward-looking statements below (the
"Cautionary Statements") include, without limitation: (1) the ability of the
Company to continue its national rollout of its service bureaus; (2) the ability
of the Company to market its suite of telecommunications connectivity services
to small and medium size businesses in its service areas; (3) the effects of
vigorous competition in the markets in which the Company operates; (4) the
impact of technological change on the Company's businesses, new entrants and
alternative technologies in the Company's business; (5) regulatory risks,
including the impact of the Telecommunications Act of 1996; (6) the impact of
competitive services and pricing; (7) risks associated with debt service
requirements and interest rate fluctuations; and (8) other risks referenced from
time to time in the Company's filings with the SEC, including the Form 10-KSB
for the year ended December 31, 1999. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by the Cautionary Statements.
The Company does not undertake any obligation to release publicly any revisions
to such forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
The following discussion and analysis relates to the financial condition and
results of operations of the Company for the three and nine months ended
September 30, 2000, and 1999. The information should be read in conjunction with
the "Management's Discussion and Analysis" and consolidated financial statements
and notes thereto contained herein and in the Form 10-KSB for the year ended
December 31, 1999.
OVERVIEW
Select Media is a New York corporation whose common stock is currently traded in
the "pink sheets" under the symbol "SMTV.OB." Select Media began in the business
of producing and distributing "vignettes," which are short-form (thirty-second)
informational programs distributed by
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<PAGE> 14
particular sponsors for viewing during regular programming. In 1998, Select
Media hired personnel to provide services to worldwide news broadcasters and act
as a television news agency under the name "Select International Television
Network" ("SITN") to produce and distribute news segments for sale to local and
foreign news broadcasters. Because of an inability to use studio space in a new
facility, SITN's business is now limited to distributing news segments produced
by others. In general, in the period covered by this report, the Company's
sources of revenues consisted of revenues from the distribution of video news
releases, from its international news division and from the operations of the
Company's Sigma subsidiary. Resale of advertising airtime has never constituted
a major source of the Company's revenues.
In the period from the Company's bankruptcy filing in October 1996 until
September 1998, the Company was essentially dormant. In 1999, the Company was
dependent upon one major customer (General Motors Corporation) for over 35% of
its revenues, most of which were received in the first six months of the year.
Beginning in the fall of 1999, the Company began its restructuring and moved its
offices. In the quarter ended September 30, 2000, the Company has not been
dependent on any major customers, and does not reasonably foresee any such
dependence for the balance of the current year.
In January 2000, Select Media repositioned itself as the owner of entertainment
content providers whose product can be marketed through traditional media and
over the Internet. In January 2000, Select Media purchased all the outstanding
stock of Sigma Sound Services, Inc. ("Sigma"). Sigma is a full service recording
studio that provides services to record companies, independent artists and
record producers. In March 2000, Select Media purchased contracts and other
assets of After Hours Productions, Inc. ("AHP"), along with the AHP name (the
"AHP Acquisition"). AHP creates custom music and video products. The Sigma
acquisition was accounted for as a purchase and the AHP Acquisition was
accounted for as a purchase of contracts. See Financial Statements and notes to
Financial Statements.
COMPETITION
Select Media faces competition from some of the largest entertainment companies
in the United States. It is difficult to estimate the size of the vignette
market. The Company is not aware of any other reporting companies involved in
the vignette business. The Company believes that competition in its business
comes not from other producers of vignettes, but from other users of scarce
airtime. One of the most significant developments in the broadcast television
industry in the 1990's has been the growth of alternative broadcast networks,
such as Fox, WB and UPN. Before this development, television stations that were
not affiliates of the three major television networks (CBS, NBC and ABC) were
independent local stations, each of which had substantial amounts of airtime to
sell to the Company and its customers. Today, most formerly independent stations
are affiliated with one of the new networks. As a result, the network, in
exchange for providing programming, gets to sell a significant portion of the
affiliate's broadcast airtime. Therefore, the affiliate has less airtime to sell
itself. Scarcity of a commodity tends to increase the price. As a result, the
cost of airtime has dramatically increased.
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<PAGE> 15
The entertainment market is rapidly evolving and intensely competitive.
Increased competition is likely to result in price reductions, reduced gross
margins and loss of market share, any of which could seriously harm Select
Media's net sales and results of operations. Select Media expects competition to
intensify in the future as additional distribution channels for entertainment
product are opened. In particular, Select Media believes that the use of the
Internet for distribution of entertainment product is both an opportunity and a
challenge. With so many entertainment choices, Select Media faces the challenge
of adapting its core business to Internet entertainment. Select Media expects
that its acquisition of content providers will enable it to adapt to the
Internet entertainment challenge, because Select Media believes that Internet
technology is developing faster than content can be produced. Although the
technology exists to provide a rich entertainment experience via the Internet,
Select Media believes that there is not sufficient high quality content
available for users. Select media intends to provide that content.
In line with this strategy, in 2000 Select Media acquired Sigma and AHP. Select
Media has also signed a letter of intent to purchase all the assets and
liabilities of Betelgeuse Productions, LLC. Betelgeuse has the ability to create
entertainment content for broadcast, cable and Internet and to adapt existing
product for use as Internet content.
MARKET STRATEGY
Select Media markets its remaining vignette products to large advertisers
directly to the marketing departments of these companies. Select Media uses its
own internal staff for such marketing. Select Media is developing vignettes for
radio, and is developing a form of vignette for on-line advertising. The cost of
advertising airtime has the greatest impact on whether the Company can sell its
vignette product. For each airing of a vignette, the customer has to purchase
sufficient airtime to broadcast both the vignette and the customer's own
advertisement. The greater the cost of airtime, the higher the cost to the
customer. The Company only resells airtime to its vignette customers to air
vignettes. The Company is not in the business of reselling airtime to third
parties.
Sigma markets its services directly through its principals. Sigma and AHP have
also produced compilation albums sold through home shopping channels, direct
response television and direct mail.
Select Media intends to create its own web site on the Internet for sale of
Select Media, Sigma and AHP custom product. The website development is in the
planning stage and completion of this project is contingent upon available
funding.
The Company has its Internet distribution system under development. The Company
is in discussion with another entity for sales of compact disks ("CDs") directly
over the Internet to consumers, but has not entered into any firm agreement or
understandings as of yet. However, the Company does not intend implement any
downloadable music distribution strategy until issues of copyright protection
and payment are standardized in the industry.
Select Media has 11 full time and 2 part time employees and during the period
covered by this report,
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<PAGE> 16
operated a facility at 666 Third Avenue, New York, New York, which was used as
the principal corporate office and the site of its studio facilities. As a
result of the Sigma acquisition, Select Media also leases a sound recording
studio facility at North 12th Street in Philadelphia, Pennsylvania.
RESULTS OF OPERATIONS
REVENUES
The following table sets forth certain items from the Registrant's consolidated
statements of operations as a percentage of net revenues for the periods
indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------- --------------------------------
1999 2000 1999
-------------------- ---------------------------------
<S> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0%
Cost of revenues 56.1% 60.0% 45.2%
Gross profit (Loss) 43.9% 40.0% 54.8%
Operating expenses:
Selling, General and administrative 201.2% 797.5% 137.5%
Nonrecurring costs 62.3% 27.7% 0%
Total operating expenses 263.5% 825.2% 137.5%
Operating income (loss) (219.4)% (785.2)% (82.6)%
Other income and expense, net (14.1)% (34.1)% (9.5)%
Income (loss) before income taxes (233.6)% (819.3)% (92.2)%
Provision for (benefit from)
income taxes 0 % 0% 0%
Net income (loss) (233.6)% (819.3)% (92.2)%
----- ------ -----
Net Revenues (233.6)% (819.3)% (92.2)%
</TABLE>
Before the Sigma acquisition, the Registrant's net revenues were derived mainly
from the sales of vignettes, video press releases and SITN. Sigma's revenues
consist of sales of sound recording studio services, editing and post-production
work on recorded musical works. In the nine months ended September 30, 2000, net
revenues decreased by $1,687,185, or 76.1%, to $530,636 from $2,217,821 in the
nine months ended September 30, 1999. The decrease in net revenues during the
first nine months of 2000 was primarily attributable to the end of the Company's
video press release contract with General Motors Corporation, the Company's
focusing on the Sigma and AHP acquisitions and a significant decline in revenues
from its international news operations because of
-6-
<PAGE> 17
an inability to use studio space in its new facility. The Registrant expects
SITN and video press release revenues in the coming year to be significantly
lower than 1999 levels.
GROSS PROFIT
Cost of revenues consists primarily of costs associated with studio time and
transmission of signal for SITN and with producing vignettes and video press
releases and marketing the finished product, including scriptwriting, filming,
salaries and post-production processing and editing. For Sigma, cost of revenues
include studio personnel salaries, rent on the facility and post-production
processing and editing. The resulting gross profit fluctuates based on factors
such as salary expense, editing and marketing. Gross margin decreased to 40.0 %
in the nine months ended September 30, 2000, compared to 54.8% in the nine
months ended September 30, 1999. The decrease during the nine months ended
September 30, 2000 was primarily due to the Company's inability to use the
studio space in its new facility, plus costs of integrating the Sigma
acquisition and the AHP acquisition. The Registrant currently expects gross
margins during 2000 to be lower than the 1999 levels as a result of SITN
revenues being significantly lower than the 1999 levels. In the current year,
the Registrant expects the Sigma and AHP acquisitions to have a positive effect
on both revenues and gross margin.
EXPENSES
Selling, general and administrative expenses were $4,232,217 in the nine months
ended September 30, 2000 compared with $3,048,822 in the nine months ended
September 30, 1999, for an increase of $1,183,395, or 38.8%. This increase was
attributable to expenses for the expansion of the Registrant's business and
costs of relocation of the Registrant's offices, as well as the costs associated
with the Sigma and AHP acquisitions and operations, including payroll and
professional fees. The Registrant's expenses in the nine months ended September
30, 2000 also include a non- recurring stock based compensation expense of
$48,000 and a loss on capital improvement receivable of $98,820, which had an
impact on expenses for the nine months ended September 30, 2000.
LOSSES
The Registrant incurred losses from operations of $(4,166,714) in the nine
months ended September 30, 2000 compared to $(1,832,700) in the nine months
ended September 30, 1999, for an increase of $(2,334,014) or 127.3%. The
substantial increase in losses was due primarily to the decrease in SITN
business caused by its inability to use its studio space in its new facility,
the expenses of the Sigma and AHP acquisitions and operations and the
non-recurring stock based compensation expense of $48,000 and loss on capital
improvement receivable of 98,820 in the nine months ended September 30, 2000.
Net other income and expenses were $(180,940) in the nine months ended September
30, 2000 and $(211,202) in the nine months ended September 30, 1999, for a
decrease of $(30,262) or (14.3%).
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<PAGE> 18
LIQUIDITY AND CAPITAL RESOURCES
The Registrant has significant capital needs, which to date the Registrant has
met through private sales of its equity and loans. The Registrant will continue
to need substantial infusions of capital, which it expects to continue to fund
primarily from private sales of its equity and loans, or by a public offering of
its equity or debt securities. In the nine months ended September 30, 2000, the
Registrant has received from Lloyds Bahamas Securities, LTD over $2 million in
additional financing, of which $1,326,900 consists of convertible notes
outstanding and $1,407,000 in convertible notes that were converted into
2,814,000 shares of restricted common stock at $0.50 per share. The Registrant
is continuing in efforts to increase its capital resources.
Sales of common stock by the Company at less than the current trading price
could tend to depress prices in the pink sheet market. Together with anticipated
revenue, the Company estimates that this funding will be sufficient to fund the
Company's business plan until March 2001. The Company has received a separate
commitment from Lloyds for an additional $2 million in financing once the
Company's common stock is relisted on the OTC Bulletin Board.
The Company has also received a non-binding letter of intent from Bryn Mawr
Investment Group, Inc. to provide up to $10 million in financing to the Company
through private or public offerings of securities, to be used for working
capital and acquisitions.
The Company anticipates that its sales plus the $2,000,000 in financing will
enable the Company to operate for the next twelve (12) months. None of the
Company's committed or proposed financing is contingent on removing the "going
concern" language from the Company's audit report.
PART II-OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In November, 1999, 405 Lexington, L.L.C. (the "Landlord") began an action in New
York City Landlord-Tenant Court alleging that Select Media had breached its
lease and seeking the payment of use and occupancy. The Landlord is seeking up
to $600,000 in additional payments based on an alleged breach of the lease. The
Company is defending this action and believes the allegations of the Landlord
are without merit. On a motion by the Company, this action has been consolidated
with the Supreme Court Action discussed in the following paragraph.
In May, 2000, Select Media began an action in New York Supreme Court against the
Landlord seeking an injunction to permit completion of the build-out of the
studios to be used for SITN and surrounding space in its leased premises, the
release of $706,880 of Landlord's contributions toward build-out already
completed and for damages in excess of $10 million for loss of the
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SITN business. On a motion by Select Media, the Court has consolidated this
action with the Landlord-Tenant Court action. The Court has ordered discovery in
this action beginning November 20, 2000.
ITEM 2. CHANGES IN SECURITIES.
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable
ITEM 5. OTHER INFORMATION.
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibits
Exhibit 27.1 - Financial Data Schedule
Reports on Form 8-K
On November 6, 2000, the Company filed a Form 8-K regarding its change
of independent certified public accountants, which occurred
February 1, 2000.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf of the undersigned, thereunto duly
authorized.
SELECT MEDIA COMMUNICATIONS, INC.
---------------------------------
(Registrant)
Date: November 20, 2000 /s/ Mitch Gutkowski
-------------------------- ----------------------------------------
MITCH GUTKOWSKI, Chief Executive Officer
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