U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter period ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the transition period from
______________ to _______________.
Commission File No. 0-25896
5TH AVENUE CHANNEL CORP.
(Exact name of small business issuer as specified in its charter)
FLORIDA 59-3175814
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3957 N.E. 163RD STREET
NORTH MIAMI BEACH FLORIDA 33160
- --------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(305) 947-3010
--------------------------
(Issuer's telephone number)
Securities registered under Section 12(G) of the Exchange Act:
Common Stock, par value $.001 per share
---------------------------------------
(Title of Class)
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 and (2) has been
subject to such filing requirements for the past 90 days. YES [ ] NO [X]
As of July 31, 1999, there were 9,660,143 shares of the issuer's Common Stock
outstanding.
Transitional Small Business Disclosure Format. YES [ ] NO [X]
-i-
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INDEX
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PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS Page
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Balance Sheets as of June 30, 1999 (unaudited) and December 31, 1998 3
Unaudited Statements of Operations for the three months ended June 30, 1999 and 1998 4
Unaudited Statements of Operations for the six months ending June 30, 1999 and 1998 5
Unaudited Statements of Cash Flows for the six months ended June 30, 1999 and 1998 6
Notes to Unaudited Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 15
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES 24
ITEM 5. OTHER INFORMATION 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 25
SIGNATURES 25
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5TH AVENUE CHANNEL CORP.
CONSOLIDATED BALANCE SHEETS
ASSETS JUN.30,1999 DEC.31, 1998
------ ------------ ------------
(Unaudited)
Current Assets:
Cash and cash equivalents $ 573,949 $ 256,209
Accounts receivable, net 199,376 41,559
Inventory 466,717 --
Loans receivable, related parties 81,674 28,191
Prepaid expenses & other current assets 18,742 104,629
------------ ------------
Total Current Assets 1,340,458 430,588
Property & Equipment, Net 1,644,933 1,323,404
Licenses, Net 4,491,479 4,651,061
Deferred TV Production costs 100,151 --
Acquired Intangibles, Net 2,733,787 615,000
Other Assets, Net 99,441 87,119
------------ ------------
TOTAL ASSETS $ 10,410,249 $ 7,107,172
============ ============
LIABILITIES & STOCKHOLDERS'EQUITY
---------------------------------
Current Liabilities:
Accounts payable and accrued expenses $ 1,009,103 $ 775,417
Current portion of long-term debt 21,932 26,840
Loans & notes payable, related parties 53,831 972,529
Accrued salary, President -- 270,000
Current portion of convertible
debentures, net 584,264 390,652
------------ ------------
Total current liabilities 1,669,130 2,435,438
Convertible debenture to President -- 2,366,000
Convertible debentures, net 410,425 232,449
License fees payable 931,148 931,148
Accrued salary, President 360,000
Loan payable, related party 392,329 --
Long term debt 1,960
Loan payable, President 2,589,486
------------ ------------
Total liabilities 6,352,518 5,966,995
STOCKHOLDERS' EQUITY
Common stock 9,661 4,504
Additional paid-in capital 15,255,217 9,942,225
Accumulated deficit (11,207,147) (8,806,552)
------------ ------------
Total stockholders' equity 4,057,731 1,140,177
------------ ------------
Total Liabilities & Stockholders Equity $ 10,410,249 $ 7,107,172
============ ============
See Notes to Consolidated Financial Statements
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5TH AVENUE CHANNEL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended June 30, 1999 and 1998
1999 1998
----------- -----------
(Unaudited)
Revenue $ 569,355 $ 324,771
Direct Costs 238,381 53,130
----------- -----------
Gross Margin 330,974 271,641
Operating Expenses:
Selling, general & administrative 1,049,175 467,494
Website & product design expenses 91,323 200,032
Depreciation & amortization 313,080 150,056
----------- -----------
Operating Loss (1,122,604) (545,941)
----------- -----------
Other Income (Expense)
Accretion of debenture discount (152,739) (69,352)
Interest expense (117,067) (29,960)
----------- -----------
Total Other Expense (269,806) (99,312)
----------- -----------
Net Loss $(1,392,410) $ (645,253)
=========== ===========
Net Loss Per Share-basic and diluted $ (0.15) $ (0.10)
=========== ===========
Weighted Average Number of Shares Outstanding 9,536,532 6,405,951
=========== ===========
See Notes to Consolidated Financial Statements
4
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5TH AVENUE CHANNEL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended June 30, 1999 and 1998
1999 1998
----------- -----------
(Unaudited)
Revenue $ 1,731,996 $ 666,486
Direct Costs 796,043 101,411
----------- -----------
Gross Margin 935,953 565,075
Operating Expenses:
Selling, general & administrative 1,878,604 880,589
Website & product design expenses 327,710 266,358
Depreciation & amortization 552,941 297,949
----------- -----------
Operating Loss (1,823,302) (879,821)
----------- -----------
Other Income (Expense)
Accretion of debenture discount (note 10) (371,588) (69,352)
Interest expense (205,705) (46,143)
----------- -----------
Total Other Expense (577,293) (115,495)
----------- -----------
Net Loss $(2,400,595) $ (995,316)
=========== ===========
Net Loss Per Share-basic and diluted $ (0.25) $ (0.19)
=========== ===========
Weighted Average Number of Shares Outstanding 9,535,837 5,214,416
=========== ===========
See Notes to Consolidated Financial Statements
5
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5TH AVENUE CHANNEL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30, 1999 and 1998
1999 1998
----------- -----------
Cash Flows From Operating Activities:
Net Loss $(2,400,595) $ (995,316)
Adjustments to reconcile net loss to
net cash used in operating activities:
Amortization & depreciation 552,941 297,949
Accretion of debenture discount 371,588 69,352
Stock and options issued for services -- 108,937
Changes in operating assets and
liabilities, net of acquisitions:
Increase in accounts receivable (91,067) (31,679)
Decrease in inventory 102,080 --
(Decrease) Increase in prepaid expenses 85,887 (890)
Increase in accounts payable 203,360 20,755
Increase in accrued liabilities 100,691 116,736
----------- -----------
Net Cash Used in Operating Activities (1,075,115) (414,156)
Cash Flows From (Used In) Investing Activities:
Acquisition of equipment (532,351) (88,630)
Deferred TV program production costs (100,151) --
Net cash received in acquisition of IBC 40,381 --
Decrease (increase) in other assets 14,102 (88,870)
----------- -----------
Net Cash Used in Investing Activities (578,019) (177,500)
Cash Flows From Financing Activities:
Net change in loans from President 1,521,348 (38,375)
Repayment of loan from related party (29,776) --
Net change in loans to related parties (2,979) --
Proceeds from convertible debentures, net -- 556,082
Costs of registering common stock (10,851) (32,615)
Proceeds from sale of common stock 500,000 --
Repayment of Long-Term Debt (6,868) (3,774)
----------- -----------
Net Cash Provided By Financing Activities 1,970,874 481,318
----------- -----------
Net increase (decrease) in cash 317,740 (110,338)
Cash at beginning of period 256,209 113,207
----------- -----------
Cash at end of period $ 573,949 $ 2,869
=========== ===========
See Notes to Consolidated Financial Statements
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5TH AVENUE CHANNEL CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended June 30, 1999
(Unaudited)
Note 1 Basis of Presentation
The condensed consolidated balance sheet as of June 30, 1999, the condensed
consolidated statements of operations for the three months and six months ended
June 30, 1999 and 1998, and the condensed consolidated statements of cash flows
for the six months ended June 30, 1999 and 1998 have been prepared by the
Company. In the opinion of management, all adjustments (which include
reclassifications and normal recurring adjustments) necessary to present fairly
the financial position, results of operations and cash flows at June 30, 1999
and for all periods presented, have been made.
Certain information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed
consolidated financial statements be read in conjunction with the Company's
financial statements and notes thereto included in the Company's December 31,
1998 Form 10-KSB. The results of operations for the three and six-month periods
ended June 30, 1999 are not necessarily indicative of the operating results for
the full year.
Note 2 Supplemental Cash Flow Information
Supplemental disclosure of cash flow information for the six months ended
June 30:
1999 1998
---------- ----------
Interest paid during the period $ 10,744 $ 7,850
Non-cash investing and financing activities:
Conversion of debentures $2,366,000 --
Stock issued for acquisition of IBC $2,463,000 --
Loan payable for acquisition of IBC,net $ 450,000 --
Note 3 Property & Equipment
Leasehold improvements $ 57,281
Furniture & office equipment 206,391
Web site software and hardware 339,363
Vehicles 133,371
TV Signal Rebroadcast & receiving equipment 1,889,378
----------
Total cost 2,625,784
Less accumulated depreciation 980,851
----------
Net property & equipment $1,644,933
==========
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Note 4 Licenses
LaCrosse, Wisconsin $ 371,493
San Jose, Costa Rica 4,174,000
Stevens Point Wisconsin, net 355,625
Wausau Wisconsin, net 483,736
----------
Total cost 5,384,854
Less accumulated amortization 893,375
----------
Net licenses $4,491,479
==========
On March 28, 1996, the Federal Communications Commission (FCC) completed its
auction of authorizations to provide single channel and Multi-channel
Multi-point Distribution Service (MDS) in 493 Basic trading Areas. The Company
won bids in 3 markets: Hickory-Lenoir-Morganton, NC; Wausau-Rhinelander, WI; and
Stevens Point-Marshfield-Wisconsin Rapids, WI. The Company's total bid for these
3 markets was $3,046,212. The company made the full 10% down payment of $304,622
for all three markets but only made the second 10% down payment of $118,946 on
the 2 Wisconsin markets.
The remaining license fees payable to the FCC of $951,479 for the two Wisconsin
licenses are due quarterly over a ten year period commencing in October 1999.
The interest rate is the effective rate of ten-year US Treasury obligations plus
2-1/2%. At June 30, 1999 the company has accrued but has not paid a total of
$173,106 of interest charged by the FCC on the $951,479 licenses payable.
A provision for asset impairment of $350,000 was recorded in the 4th quarter of
1998 related to the undeveloped Wisconsin licenses obtained as a result of
the FCC auction in 1996.
On September 1, 1996, the unpaid license fee payable of $1,671,175 for the
Hickory, NC, license was defaulted. The Company will be liable to the FCC for
the difference between the Company's winning bid and a lower winning bid
received by the FCC in a subsequent auction of this license. The FCC has not yet
announced plans to re-auction the Hickory, NC, license and no liability is
recorded for the potential shortfall of a re-auction.
COSTA RICA LICENSES
In February 1996 the Company agreed to acquire three companies holding a total
of 18 frequency licenses for broadcast of pay television (i.e. "wireless cable")
services in Costa Rica together with related equipment and contracts with
subscribers. The $4,174,000 total cost of the licenses included a $2,000,000
note payable in one year with a 3.6% interest rate (see note 7).
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The entire $4,174,000 purchase price of the three Costa Rican companies was
allocated to the 18 licenses since the value of the other assets acquired was
minimal. The cost of the licenses is being amortized on a straight-line basis
over 15 years.
Note 5 Deferred TV Production Cost
During the second quarter of 1999, the Company incurred approximately $100,000
of TV production costs. These costs have been deferred and will be expensed over
the expected viewing life of 2-3 years.
Note 6 Acquisitions and Acquired Intangibles
ACQUISITION OF THE 5TH AVENUE CHANNEL, INC.
Effective December 10, 1998 the Company acquired 100% of the capital stock of
The Fifth Avenue Channel, Inc. ("5th Avenue") for 335,000 shares of company
common stock and agreed to issue up to 665,000 additional "performance shares"
when The 5th Avenue Channel achieves $25,000,000 of sales or $1,000,000 of net
income in any calendar quarter.
The Company's controlling shareholder owned 65% of the 5th Avenue stock and
accordingly that portion of the acquisition was recorded similar to a pooling of
that interests at the majority shareholders historical cost which was
insignificant. The portion 5th Avenue acquired from the minority shareholders
was recorded at the estimated fair value of the common stock issued. When and if
the performance shares are earned, they will be recorded at the estimated fair
value and included in acquired intangibles.
Fifth Avenue's primary assets are intangible and the $615,000 cost of acquiring
the minority shareholders' 5th Avenue stock was allocated entirely to acquired
intangibles which will be amortized over 5 years. All of 5th Avenue's operating
results were included in the Company's financial statements for 1998 and 1997.
Acquisition of IBC
In February of 1999 the Company signed a letter of intent to acquire all of the
assets and business operation of International Broadcast Consultants of America,
Inc (IBC) for $450,000 in cash and 300,000 shares of Company common stock. IBC
specializes in new product marketing on cable TV. The operations of IBC have
been integrated with the 5th Avenue Channel for the first and second quarters of
1999.
The acquisition was effective January 4, 1999 and has been recorded as a
purchase. The purchase was completed on May 12, 1999. The total consideration
exceeded the estimated fair market value of the net tangible assets acquired by
$2,256,894. The excess has been recorded as acquired intangibles and is being
amortized over 15 years.
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A SUMMARY OF THE ALLOCATION OF THE $2,913,000 PURCHASE PRICE TO THE NET ASSETS
ACQUIRED FOLLOWS:
Cash $ 40,381
Accounts receivable 66,750
Inventory 568,797
Officer loans 91,820
Equipment and leasehold improvements 44,429
Other assets 26,424
Accounts payable assumed (103,621)
Accrued Liabilities assumed (78,874)
Acquired intangibles 2,256,894
-----------
Total purchase price 2,913,000
Note 7 Loan Restructure and Conversion of Debenture
On May 19, 1997, the Company entered into an agreement with the Seller
restructuring the $2 million debt for the Costa Rican licenses into a
convertible debenture maturing in 12 months and bearing interest at 12% per
annum. The principal amount of the debenture was increased $100,000 for expenses
owed or reimbursable to Seller at the issue date of the Debenture.
As consideration for this debt structuring, the Company agreed to issue to the
Seller (i) 180,000 shares of the Company's common stock with piggy back
registration rights, (ii) a warrant to purchase 500,000 shares at $1.00 per
share, and (iii) a warrant to purchase 500,000 shares at $5.00 per share. Under
the Agreement, the Seller became the President and Chairman of the Board and
received the right to nominate two members to the Company's Board of Directors.
The Debenture was convertible by Seller into the Company's common stock at any
time after the issue date. The conversion price was equal to the lesser of (1)
$.50 per share of common stock or (2) the average of the closing "bid" for the
Company's common stock as reported on NASDAQ for the five trading days
immediately prior to the conversion date.
No interest was paid on the Debenture and the $153,033 of interest accrued from
May 19, 1997 to December 31, 1997 was added to the Debenture balance in 1997.
In November, the President notified the Company of his intention to convert the
Debenture into common stock on or before May 15, 1998. As inducement for the
early conversion and for the President foregoing all interest on the Debenture
after December 31, 1997 an additional $109,967 was added to the Debenture
principal balance. The resulting $2,366,000 Debenture balance was converted into
4,732,000 restricted common shares in the
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first quarter of 1999 after the shareholders increased the number of authorized
shares from 10,000,000 to 50,000,000.
Note 8 Preferred Stock Authorized But Unissued
The Company is authorized to issue up to 5,000,000 shares of "blank check"
preferred stock and to permit the Board of Directors, without shareholder
approval, to fix the rights, preferences and privileges including dividend
rights, conversion rights, terms of redemption or liquidation preferences.
Note 9 Private Placement of Common Stock
On June 29, 1999 the Company issued 125,000 shares of common stock in a private
placement to an accredited investor in exchange for $500,000 in cash. The
Company also agreed to issue three year warrants to purchase 15,000 shares of
common stock at $5.00 per share and 5,000 shares at $6.00 per share.
Note 10 Stock Warrants, Options and Shares Reserved
Publicly Traded Common Stock Purchase Warrants
In connection with its initial public offering on May 10, 1995, the Company sold
1,610,000 redeemable common stock purchase warrants for $.25 per warrant. Each
warrant entitles the holder to purchase, at any time before May 11, 2000, one
share of common stock at a price of $5.75 per share. The warrants are redeemable
by the Company for $.25 per warrant under certain circumstances.
Private Placement Warrants
In August 1994 and December 1, 1994, the Company issued an aggregate of 625,000
common stock warrants as part of the sale of units of its securities. The
warrants are exercisable at $5.75 per share within five years from the date of
their issuance. The warrants provide for adjustment in the number of shares
underlying the warrants upon the occurrence of certain events, such as stock
dividends, stock splits or other reclassifications of the Company's common
stock, a consolidation or merger of the Company, or a liquidating distribution
of the Company's common stock.
Stock Options
As of December 31, 1998 the Company had outstanding stock options to purchase a
total of 1,018,000 shares at prices ranging from $2 to $15. Approximately
1,000,000 of the options were granted in 1998 to employees, consultants and non
employee celebrities.
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Underwriter Stock Warrants
In connection with the public offering, the Company sold 240,000 Underwriter's
stock warrants for $.001 per warrant. They consisted of 100,000 warrants to
purchase 100,000 shares of common stock at $7.50 per share and 140,000 warrants
to purchases 140,000 warrants at $.375 each entitling the underwriter to
purchase 140,000 shares of common stock at $5.75 per share. The warrants are
exercisable through May 10, 2000.
Consulting Agreement
As part of a July 1997 consulting agreement, the Company granted 200,000 one
year warrants and 100,000 three year warrants to purchase common stock at $2.50
per share. The 200,000 warrants were extended for an additional year in August
1998.
Warrants Issued to Seller of Costa Rican Licenses
See Note 6 for warrants to purchase 1,000,000 shares issued to the President in
the restructuring of the $2,000,000 debt.
Shares Reserved
At June 30, 1999 the Company has reserved 6,420,500 shares of common stock for
future issuance pursuant to the aforementioned stock warrant, option and
debenture conversion agreements.
Note 11. 12% Convertible Debentures
In early May 1998 the Company completed a private offering of $595,000 of 12%
Convertible Subordinated Debentures (the "May Debentures") to accredited
investors. The May Debentures are convertible into shares of common stock at $2
per share. Interest is payable monthly and the May debentures mature on October
31, 1999.
In November 1998 the Company completed a private offering of $500,000 of 12%
Convertible Subordinated Debentures (the "November Debenture") to an accredited
investor. The November Debenture is convertible into shares of common stock at
$2.50 per share. Up to 50 % of the Debentures can be converted after July 31,
1999 and the remaining 50% can be converted after December 31, 1999 unless
redeemed earlier by the Company. Notwithstanding the early redemption by the
Company, holders may convert no less than 50% of Debenture into common stock.
Interest is payable monthly and the Debenture matures on April 30, 2000.
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The Company recorded Additional Paid in Capital totaling $595,000 for the
difference between the closing price of the Company's stock on the date the
debenture proceeds were received and the $2 conversion price for the May
Debentures. Approximately 50% of the $595,000 total discount was amortized as
additional interest expense over the period from receipt of the May Debenture
proceeds to February 28, 1999, the earliest potential conversion date for 50% of
the May Debentures. The remaining 50% of $595,000 is being amortized ratably
over the 14 months ending July 31, 1999.
The company recorded Additional Paid in Capital totaling $325,000 for the
difference between the closing price of the Company's stock on the date the
debenture proceeds were received and the $2.50 conversion price for the November
debentures. Approximately 50% of the $325,000 total discount is being amortized
as additional interest expense over the period from receipt of Debenture
proceeds to July 31, 1999, the earliest potential conversion date for 50% of the
Debentures. The remaining 50% of the $325,000 is being amortized ratably over
the 14 months ending December 31, 1999.
A total of $371,588 of the discount was amortized as additional interest expense
in the first six months of 1999. The $100,000 remaining balance of the Discount
is included as a reduction of the convertible debenture balance and will be
fully accreted by December 31, 1999.
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Note 12. Segment Information
The Company currently operates in two segments, wireless cable TV services and
the resale of products through electronic mediums including cable TV and the
Internet. In 1998 the company only had the wireless cable TV operations in Costa
Rica and Wisconsin. Information regarding the companies two business segments
and the geographic business units follows (in thousands):
Operating Deprecia- Amorti-
Revenues Income (Loss) tion zation
------- ------- ------- -------
Second Quarter-1999
Product Sales $ 190 $ (308) $ 16 $ 0
Wireless cable:
Costa Rica 305 (25) 55 73
Wisconsin 74 (55) 45 7
Corporate 0 (734) 21 96
------- ------- ------- -------
Total 569 (1,122) 137 176
======= ======= ======= =======
Second Quarter-1998
Wireless cable:
Costa Rica 241 (88) 46 73
Wisconsin 84 (50) 23 7
Corporate 0 (408) 1 0
------- ------- ------- -------
Total $ 325 $ (546) $ 70 $ 80
======= ======= ======= =======
Year to Date-1999
Product Sales $ 936 $ (248) $ 24 $ 0
Wireless cable:
Costa Rica 647 (16) 110 146
Wisconsin 149 (121) 88 14
Corporate 0 (1,438) 33 138
------- ------- ------- -------
Total 1,732 (1,823) 255 298
======= ======= ======= =======
Year to Date-1998
Wireless cable:
Costa Rica 497 (127) 78 146
Wisconsin 169 (69) 53 14
Corporate 0 (684) 7 0
------- ------- ------- -------
Total $ 666 $ (880) $ 138 $ 160
======= ======= ======= =======
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MANAGEMENTS DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & OPERATING RESULTS
The following discussion contains, in addition to historical
information, "forward-looking statements" with respect to the Company which
represent the Company's expectations or beliefs, including, but not limited to,
statements concerning industry performance, the Company's operations,
performance, financial condition, growth, acquisition and divestiture
strategies, margins, future ventures and expansion plans. For this purpose, any
statements contained in this report that are not statements of historical fact
may be deemed to be forward-looking statements. Without limiting the generality
of the foregoing, words such as "may," "except," "believe," "anticipate,"
"intend," "could," "estimate," or "continue" or the negative or other variations
thereof or comparable terminology are intended to identify forward-looking
statements. These statements by their nature involve substantial risks and
uncertainties, certain of which are beyond the Company's control, for example:
the Company's limited availability of cash and working capital; operating losses
and accumulated deficit; limited operating history; management; ability to gain
market acceptance and market share; ability to manage growth; Internet security
risks; uncertainty relating to the evolution of the Internet as a medium for
commerce; dependence on third party content providers; dependence on a
continuing subscriber base and license rights; risks of international
operations; Year 2000 problems; and other factors discussed in the Company's
filings with the Securities and Exchange Commission ("SEC"). Actual results may
differ from the forward-looking statements.
Introduction
The Company was organized as a Florida corporation on May 7, 1993 under
the name Tele Consulting Corp. On February 14, 1994 the Company changed its name
to Tel-Com Wireless Cable TV Corporation and on March 17, 1999, the Company
changed its name to 5th Avenue Channel Corp.
During the first and second quarters of 1999, the Company focused on
refining and implementing its Internet/Television strategy of offering financial
and entrepreneurial information, products and services. The Company also
enhanced its sales division and continued building an infrastructure to design
the content for the coming convergence of television and the Internet.
Website, E-Commerce and Television Operations
WEBSITE AND TELEVISION CHANNEL DIVISION. The Company developed
5THAVENUECHANNEL.COM, its website offering financial and other information as
well as consumer products. The website was
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originally launched in December 1998. In March 1999 the website was revised with
sections devoted to products, personal success and motivational information,
financial resources, and links to other sites. In April 1999, the website
launched its auction section, with collectible items in a number of categories
including automobiles, antique furniture, antique bicycles, and clocks.
The Company is currently re-designing its website to be a comprehensive
source of information, products and services for those interested in investment,
success and entrepreneurship. The website is being designed to directly
coordinate with the content and products on the Company's planned television
channel, and the redesign is expected to be launched at the same time as the
channel. Promotional and advertising efforts will also be coordinated. To
achieve this objective, the Company has negotiated a number of key content,
product and service agreements.
The Company has signed an agreement with Zacks Investment Research
("Zacks"), a major supplier of financial information to the investment community
and many websites including those of, Yahoo, America On-Line, Geo-Cities,
Broadcast.com and others. The agreement with Zacks grants to the Company
exclusive worldwide rights for the utilization of Zacks' name and content on
television including the creation of co-branded television programming and live
broadcasting from Zacks' headquarters. The agreement also provides for Zacks to
supply its complete package of financial information on 5THAVENUECHANNEL.COM.
The information is provided in a 24-hour per day data stream which is being
incorporated into the Company's website design. The Company's website will also
integrate other financial information and services. .
The Company has signed an agreement with KeyTrade, Inc. ("KeyTrade"),
which operates KeyTrade Online, a privately held online brokerage service that
is expected to launch in September 1999, for KeyTrade to be the online brokerage
featured on 5THAVENUECHANNEL.COM. Under the agreement with KeyTrade, the Company
will receive 62,500 shares of KeyTrade's stock each quarter over the next two
years to be the exclusive online trading firm on the Company's website and
television channel for a six month period and for the ongoing marketing and
promotion of KeyTrade by the Company.
To enhance its product content, the Company also entered into an
agreement with Nightingale-Conant Corporation, a large supplier of success and
motivation books and tapes. The Company has added Nightingale-Conant's products
to its 5thAvenueChannel.com product offerings and is developing a variety of
informational programs including online multi-cast seminars, chats, and excerpts
from Nightingale authors. Such programming will be on the Company's
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website and on the upcoming 5th Avenue television channel. The Company has also
signed an agreement with Nightingale-Conant for infomercial and direct response
marketing of two authors the Company has under contract, Kimberly Kassner, and
Gary Null.
5TH AVENUE TELEVISION CHANNEL. The Company has signed an agreement with
Fastv.com for the digitization and carriage of the Company's television
programming on the Internet. The programs are designed to be digitized and are
indexed and searchable by category and keyword. Initial programming with Ivana
Trump has been completed and is currently available at Fastv.com, and is being
integrated into the Company's new website design which is expected to launch in
conjunction with the full launch of the channel. The Company is currently
negotiating agreements with various satellite and cable partners for carriage of
its signal. New programming will focus on high quality, financial and
entrepreneurial information, which will include co-branded
Zacks/5thAvenueChannel financial programming.
SALES DIVISION. The Company recently employed new management in retail
and wholesale product sales and distribution to manage the Company's expansion
of the marketing of its products and services to the mass market and other
retail chains, home shopping channels and other websites.
The Company entered into an agreement with United States Check Company,
Inc., a provider of transaction document image processing and authentication
technology to the financial services industry. The agreement grants to the
Company certain exclusive rights to a patent pending system for allowing a
customer to purchase, through charging to a credit card, a negotiable buying
certificate on the Internet and to either print it out directly or
17
<PAGE>
to email it to a gift recipient for printing. In contrast to coupon programs,
these buying certificates are not discounts off of products but are like gift
certificates purchased in a store. The certificates will be redeemable at a
variety of retail and direct response outlets throughout the United States as
well as through 5thAvenueChannel.com and other websites that sign up for the
program.
WIRELESS CABLE TELEVISION OPERATIONS. The Company is also a developer,
owner and operator of wireless cable television systems in Costa Rica and
LaCrosse, Wisconsin. Wireless cable television is provided to subscribers by
transmitting designated frequencies over the air to a small receiving antenna at
each subscriber's location. The Company provides television and related cable
services for multiple dwelling units, commercial locations and single family
residences. Since wireless cable systems do not require an extensive network of
coaxial cable and amplifiers, their capital cost per installed subscriber is
significantly less than that for hard-wire cable systems. In addition, operating
costs of wireless cable systems are generally lower than those of comparable
hard-wire cable systems due to lower network maintenance. As a result of lower
capital and operating costs, the Company is generally able to charge less for
its standard cable packages than the amount charged for comparable service
provided by its hard-wire cable competition. The Company has received tentative
offers for the sale of its Wisconsin licenses, which it is in the process of
reviewing.
Results of Operations
THREE MONTHS ENDED JUNE 30, 1999 ("Q2-99") AS COMPARED TO THREE MONTHS ENDED
JUNE 30, 1998 ("Q2-98').
REVENUES. The Company had revenues of $569,000 for Q2-99 compared to
$325,000 in Q2-98. Approximately 33% of the revenues are from sales of product
and 67% from providing wireless cable TV services. All of the Company's revenues
in Q2-98 were generated from the wireless cable television operations. The
$244,000 increase in revenues is primarily due to the purchase of the assets of
IBC and product sales through electronic mediums. Wireless cable contributed
$54,000 of the increase as Costa Rican revenues increased 27% from 241,000 to
305,000 from an increased subscriber base. Revenues from the Lacrosse system
declined $10,000 in Q2-99 from $ 84,000 in Q2-98 to $74,000 due to a decline in
the subscriber base.
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<PAGE>
DIRECT COSTS AND GROSS MARGIN. Direct costs of revenues for Q2-99
increased $185,000 to $238,000 compared to $53,000 in the Q2-98 period, due
primarily to the sale of products. The gross profit margin varies on each
product. Also, new products are added and different products are promoted each
quarter. The direct costs of the wireless cable operations vary in direct
proportion to the revenue change as programming costs are generally paid per
subscriber. The Company expects its gross margin to increase as the Company
offers more products and services over Company controlled electronic mediums.
OPERATING EXPENSES. For the first 3 months of 1999, selling, general
and administrative expenses increased from $467,000 in 1998 to $1,049,000 in
1999. These increases were primarily due to the acquisition of the overhead,
expenses and personnel of International Broadcast Corporation and increased
personnel and expenses for the development of the Company's planned television
channel. Operating expenses for Q2-99 also included significant costs of
designing products and services to be offered on the 5th avenue Channel and on
the Company's website. All promotional costs to establish a venue to sell
products over electronic mediums are being expensed as incurred. Only software
and hardware costs to design the website and to process product orders are being
deferred and amortized over a 3 to 5 year period. TV program production costs
are also deferred and will be expensed over the expected viewing life of 2 to 3
years.
In Q2-99 a total of $91,000 of costs associated with developing the 5th
Avenue Channel and the related website were expensed in 1999 compared with
$200,000 in Q2-98. Additionally, $100,000 were capitalized in TV production
costs, while no such amounts were spent in 1998.
Costa Rica's operating expenses as a percent of revenues declined in
Q2-99 as its fixed operating expenses were spread over a larger subscriber base.
OTHER EXPENSE. Other expense for Q2-99 included $153,000 of debenture
discount accretion compared with $65,000 in Q2-98. The discount is related to
the issuance of 12% convertible debentures totaling $595,000 in May 1998 and
$500,000 in November 1998 (see Note 11 to the Consolidated financial
statements).
Interest expense in Q2-99 includes $52,000 on loans from the President,
$22,000 on the license fees payable to the FCC for the undeveloped Wisconsin
licenses and $28,000 of interest on the 12% convertible debentures in Q2-99.
Q2-98 contained $13,000 of interest on loans from the President, no interest on
the FCC license fees payable and only $11,000 of interest on the convertible
debentures. Interest expense in Q2-99 also included $13,000 on the loan issued
in conjunction with the purchase of IBC in 1999.
SIX MONTHS ENDED JUNE 30, 1999 ("YTD-99") AS COMPARED TO THREE MONTHS ENDED JUNE
30, 1998 ("YTD-98').
REVENUES. The Company had revenues of $1,732,000 for YTD-99 compared to
$666,000 in YTD-98. Approximately 54% of the revenues are from sales of product
and 46% from providing wireless cable TV
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<PAGE>
services. All of the Company's revenues in YTD-98 were generated from the
wireless cable television operations. The $1,066,000 increase in revenues is
primarily due to the purchase of the assets of IBC and product sales through
electronic mediums. Wireless cable TV contributed $130,000 of the increase as
Costa Rican revenues increased 30% from $497,000 to $647,000 from an increased
subscriber base. Revenues from the Lacrosse system declined $20,000 in YTD-99
from $ 169,000 in YTD-98 to $149,000 due to a decline in the subscriber base.
DIRECT COSTS AND GROSS MARGIN. Direct costs of revenues for YTD-99
increased $695,000 to $796,000 compared to $101,000 in the YTD-98 period, due
primarily to the sale of products. The gross profit margin varies on each
product. The direct costs of the wireless cable operations vary in direct
proportion to the revenue change as programming costs are generally paid per
subscriber. The company expects its gross margin to increase significantly as
the company offers more products and services over Company controlled electronic
mediums.
OPERATING EXPENSES. For the first 6 months of 1999, selling, general
and administrative expenses increased from $666,486 to $1,731,996. These
increases were due to the acquisition of the overhead, expenses and personnel of
International Broadcast Corporation and increased personnel and expenses for the
development of the Company's planned television channel. Operating expenses for
YTD-99 also included significant costs of negotiating and coordinating
fulfillment of products and services to be offered on the 5th Avenue Channel and
website and preparing for the launch of the 5th Avenue Channel. The Company has
added several executives in 1999 with experience selling products and services
using electronic media. All promotional costs to establish a venue to sell
products over electronic mediums are being expensed as incurred. Only TV program
production costs and website related computer software costs are being deferred.
A total of $328,000 of costs associated with developing programming for
the 5th Avenue Channel and the related website were expensed in YTD-99 compared
with $266,000 in YTD-98.
Costa Rica's operating expenses as a percent of revenues declined as
its fixed operating expenses were spread over a larger subscriber base in YTD-99
compared to YTD-98. However, the significant improvement in operating results in
Costa Rica were partially offset by the deterioration in Wisconsin's results.
OTHER EXPENSE. Other expense in YTD-99 includes $372,000 of debenture
discount accretion compared with $69,000 in YTD-98. The discount is related to
the issuance of 12% convertible debentures totaling $595,000 in May 1998 and
$500,000 in November 1998.
Interest expense was substantially higher in YTD-99 because of $68,000
of interest on loans from the President, $43,000 on the license fees payable to
the FCC for the undeveloped Wisconsin licenses and $78,000 on the 12%
convertible debentures. YTD-98
20
<PAGE>
contained $26,000 of interest on loans from the President, no interest on the
FCC license fees payable and only $11,000 on the convertible debentures.
Interest expense in YTD-99 also included $13,000 on the loan issued in
conjunction with the purchase of IBC in 1999.
NET LOSS. The $2,401,000 net loss for YTD-99 includes $327,000 of
website and product design costs related to the 5th Avenue Channel compared with
$266,000 of similar costs in YTD-98. The YTD-99 loss also includes $372,000 of
accretion of discount on the May and November 1998 compared to $69,000 in
YTD-98.
The following table lists the unusual charges that affect the comparison of
YTD-99 and YTD-98:
YTD-99 YTD-98
-------- --------
Website and 5th Avenue channel product design expense $328,000 $266,000
--------
Interest on 12% Convertible debentures 78,000 11,000
--------
Accretion of discount on convertible debentures 372,000 69,000
Total of non-comparable expenses $778,000 $346,000
-------- --------
INFLATION AND FOREIGN CURRENCY FLUCTUATION. Costa Rica continues to
experience a decline in the value of the Colon relative to the US dollar of
approximately 1% per month. The government of Costa Rica mandates minimum salary
increases on July 1 and January 1 of each year. The Company has been able to
increase its prices to cover the wage increases and the effects of the currency
decline in Costa Rica and believes that it will be able to continue to do so
without significant effect on its subscriber base.
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<PAGE>
Liquidity
SOURCE AND USE OF CASH FOR 1999. In 1999 the Company received
$1,521,000 of loan proceeds, net of repayments, from the President and majority
shareholder, Melvin Rosen. Approximately $532,000 of the cash was used to
purchase equipment and software for the website and $100,000 was used to produce
TV programs. The remainder combined with $256,000 of the cash on hand at the
beginning of the year was used to fund operating losses. On June 29, 1999 the
Company received $500,000 in a private placement of 125,000 shares of common
stock to an accredited investor.
CONVERSION OF DEBT TO EQUITY. In 1999, the Company's President and
holder of the $2,366,000 convertible debenture converted the debenture into
4,732,000 shares of the Company's common stock.
The Company has made an offer to those people who hold Debentures that
mature on October 31, 1999 to convert 50% at $2.00 and 50% at $6.00. To date,
Debenture holders representing 75% of the outstanding Debentures have elected to
convert at either the new offer or the original terms of the Debenture.
COMPLETION OF ACQUISITION OF THE FIFTH AVENUE CHANNEL, INC. In March
1999, the Company completed its acquisition of all 100 of the outstanding shares
of common stock of The Fifth Avenue Channel, Inc. ("Fifth Avenue") as follows:
25 shares from IBC Partners, a Florida general partnership of which Eric
Lefkowitz, a director of the Company, is a partner; 65 shares from Melvin Rosen,
the President and Chairman of the board of the Company; and 10 shares from Ivana
Trump. In exchange, the Company issued an aggregate of 335,000 shares of its
common stock, in proportion to their relative share ownership in Fifth Avenue.
The Company also agreed to issue an aggregate of 665,000 additional shares of
its common stock as follows: 332,500 shares if Fifth Avenue achieves gross
revenues in excess of $10,000,000 for any calendar quarter and the remaining
332,500 shares if Fifth Avenue achieves either gross revenues in excess of
$25,000,000 for any calendar quarter or net income in excess of $1,000,000 for
any calendar quarter.
Additionally, the Company and Ms. Trump finalized an agreement (the
"Consulting Agreement") whereby Ms. Trump will act as the hostess of The 5th
Avenue Channel television channel and of 5thAvenueChannel.com and will provide
certain other consulting and promotional services. Under the Consulting
Agreement Ms. Trump is being paid a base fee of $10,000 per month and will
receive additional fees for personal appearances. Ms. Trump also received
three-year options to purchase an aggregate of 700,000 shares of the Company's
Common Stock as follows: 200,000 shares at an exercise price of $5.00 per share;
200,000 shares at $8.00 per share; 200,000 shares at 12.00 per share; and
100,000 shares at $15.00 per share. The Consulting Agreement runs through
December 31, 2001 and is automatically renewable for successive additional
one-year terms unless terminated by either party with 60 days written notice.
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<PAGE>
ACQUISITION OF INTERNATIONAL BROADCAST CORPORATION OF AMERICA,
INC.(IBC). Effective January 4, 1999 the Company entered into an agreement in
principle to purchase 100% of the assets and operations of IBC owned by Eric
Lefkowitz and Ivan Rothstein directors of the Company. The Company issued
300,000 shares of its common stock and agreed to pay $450,000 in cash to
purchase the assets and operations of IBC. IBC specializes in new product
marketing on TV.
ADDITIONAL DEBT OR EQUITY FINANCING REQUIRED. In the six months ended
June 30, 1999, the Company used $1,075,000 of cash in its operating activities.
The accompanying Consolidated Balance Sheet reflects current assets of $
1,340,000 and current liabilities of $1,669,000 resulting in working capital
deficiency of $329,000. Although the Costa Rican operations generate positive
cash flow, the cash flow does not cover the corporate overhead or the costs
associated with developing the products and services of the 5th Avenue Channel
website and television channel.
The Company needs additional financing for its ongoing operations
including but not limited to its website and planned television operations. The
Company intends to sell equity, debt or convertible debt to affiliates and other
third parties. However, no assurances can be given that the Company will be
successful in its financing activities.
YEAR 2000 ISSUES. Many existing computer programs use only two digits
to identify a year in the date field. These programs were designed and developed
without considering the impact of the upcoming change in the century. If not
corrected, many computer applications could fail or create erroneous results by
or at the Year 2000 (the "Year 2000 Issue"). The accounting software used by the
Company is Year 2000 compliant (meaning it recognizes dates in the Year 2000 and
beyond) at most subsidiary operations. The Company does not anticipate a
material financial impact as a result of the Year 2000 Issue nor does it
anticipate any material financial expenditure to remedy the Year 2000 date
change within its own software. The Company's expenditures to date on
investigating and remedying Year 2000 issues have been insignificant.
The Company has nearly completed an internal audit of its computer
systems and software to determine what issues, if any, exist. Upon completion of
its internal audit, the Company will evaluate the full scope of issues, related
costs, and available remedies to insure the Company's systems continue to meet
its internal needs. Any costs for system modifications will be expensed as
incurred.
However, the Company has no control over Year 2000 compliance by
vendors of the Company. If the Company's vendors are not in
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<PAGE>
Year 2000 compliance, this could have a material adverse effect to the Company.
The Company has made inquiry to all of its major customers and suppliers in an
attempt to assess the Year 2000 readiness of its major suppliers. The results of
this inquiry have not revealed any issues that the Company believes can have a
material adverse effect on the financial condition of the Company.
RECENT ACCOUNTING PRONOUNCEMENTS. The Company does not expect SFAS 130,
which establishes standards for reporting and displaying comprehensive income,
its components and accumulated balances to have any effect on the company's
financial statements.
The Company has adopted the provisions of SFAS No. 131 which
establishes standards for reporting information about operating segments,
geographic areas and major customers in annual and interim financial reports
issued to shareholders.
The Company does not expect SFAS 133, which establishes standards for
accounting for derivative instruments and hedging activities, to affect its
financial statements because the Company has not entered into derivatives
contracts.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
SHARES OF COMMON STOCK ISSUED IN PRIVATE PLACEMENT. On June 29, 1999
the Company issued 125,000 shares of common stock in a private placement to an
accredited investor in exchange for $500,000 in cash. The Company also agreed to
issue three year warrants to purchase 15,000 shares of common stock at $5.00 per
share and 5,000 shares at $6.00 per share.
The foregoing securities were issued without registration under the
Securities Act of 1933 as amended by reason of the exemption from registration
afforded by the provisions of Section 4(2) thereof, as transactions by an issuer
not involving a public offering, such recipient of securities having delivered
appropriate investment representations to the Company with respect thereto and
having consented to the imposition of restrictive legends upon the certificates
evidencing such securities.
ITEM 5. OTHER INFORMATION
INVESTIGATION BY THE U.S. SECURITIES AND EXCHANGE COMMISSION (SEC). On June 9,
1999 the SEC issued an order directing an investigation of certain activities of
the Company and other persons. The investigation focuses on whether the Company
and other persons misrepresented certain of the Company's affairs in press
releases and public filings. The commencement of an SEC investigation is part of
the SEC's routine surveillance and
24
<PAGE>
enforcement program and, as expressed by the SEC, should not be construed as an
adverse reflection on the Company and does not necessarily mean that any
wrongdoing has occurred. The Company believes that it has not engaged in any
conduct that would warrant the institution of legal proceedings against it by
the SEC and is cooperating fully with the SEC staff.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
27.1 Financial Data Schedule (for Commission use only)
(b) REPORTS ON FORM 8-K:
1.Current Report on Form 8-K dated May 27, 1999, reporting the
completion of the acquisition of the assets and operations of
International Broadcast Consultants, Inc.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
5TH AVENUE CHANNEL CORP.
By: /S/ MELVIN ROSEN
Melvin Rosen, President and Chief Executive Officer
By: /S/ SAMUEL SIMKIN
Samuel Simkin, Vice President
(Principal Financial and Accounting Officer)
25
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27.1 Financial data schedule
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
5TH AVENUE CHANNEL
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 573,949
<SECURITIES> 0
<RECEIVABLES> 199,376
<ALLOWANCES> 0
<INVENTORY> 466,717
<CURRENT-ASSETS> 1,340,458
<PP&E> 2,625,784
<DEPRECIATION> 980,851
<TOTAL-ASSETS> 10,410,249
<CURRENT-LIABILITIES> 1,669,130
<BONDS> 0
0
0
<COMMON> 9,661
<OTHER-SE> 4,048,070
<TOTAL-LIABILITY-AND-EQUITY> 10,410,249
<SALES> 1,731,996
<TOTAL-REVENUES> 1,731,996
<CGS> 796,043
<TOTAL-COSTS> 796,043
<OTHER-EXPENSES> 1,823,302
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 577,293
<INCOME-PRETAX> (2,400,595)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,400,595)
<EPS-BASIC> (.25)
<EPS-DILUTED> (.25)
</TABLE>
