U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1998
[ ] 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3957 N.E. 163RD STREET
NORTH MIAMI BEACH, FLORIDA 33160 33160
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(Address of principal executive office) (Zip Code)
(305) 947-3010
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(Issuer's telephone number)
Securities registered under Section 12(G) of the Exchange Act:
Common Stock, par value $.001 per share
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(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 X NO
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this Form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State issuer's revenues for the reported transition period: $_________________
As of April 15, 1999 the aggregate market value of the common stock held by
non-affiliates of the registrant was approximately $27,583,996, based on the
average of the closing bid and asked prices on that date of $7.72. As of
that date, there were 9,278,212 shares of the issuer's Common Stock outstanding.
Transitional Small Business Disclosure Format. YES NO X
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5TH AVENUE CHANNEL CORP.
FORM 10-KSB
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1998
TABLE OF CONTENTS
PAGE
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FORWARD-LOOKING STATEMENTS................................................. 1
PART I
ITEM 1. DESCRIPTION OF BUSINESS.......................................... 1
ITEM 2. DESCRIPTION OF PROPERTY.......................................... 13
ITEM 3. LEGAL PROCEEDINGS................................................ 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 14
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS......... 14
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION........ 15
ITEM 7. FINANCIAL STATEMENTS............................................. 19
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE...................................... 19
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT................ 20
ITEM 10. EXECUTIVE COMPENSATION........................................... 22
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT... 23
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 24
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K................................. 27
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FORWARD-LOOKING STATEMENTS
5th Avenue Channel Corp. (the "Company") cautions readers that certain
important factors may affect the Company's actual results and could cause such
results to differ materially from any forward-looking statements that may be
deemed to have been made in this report or that are otherwise made by or on
behalf of the Company. 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 other variations thereof or comparable terminology
are intended to identify forward-looking statements. The Company is also subject
to risks detailed herein or detailed from time to time in the Company's filings
with the Securities and Exchange Commission, including but not limited to the
Company's substantial operating losses, availability of capital resources,
ability to effectively compete, economic conditions, unanticipated difficulties
in system development, ability to gain market acceptance and market share,
ability to manage growth, Internet security risks and uncertainty relating to
the evolution of the Internet as a medium for commerce, dependence on third
party content providers, dependence on our key personnel and Year 2000 issues.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
PRINCIPAL SERVICES AND MARKETS
GENERAL
The Company was organized as a Florida corporation on May 7, 1993 under
the name Tele Consulting Corp. The Company changed its name to Tel-Com Wireless
Cable TV Corporation on February 14, 1994 and on March 17, 1999, changed its
name to 5th Avenue Channel Corp. The principal executive offices of the Company
are located at 3957 N.E. 163rd Street, North Miami Beach, Florida 33160, and its
telephone number is (305) 947-3010.
During 1998, the Company focused its efforts on implementing a business
plan intended to define its business strategy with a view towards establishing
profitable operations. Such business plan includes the establishment of the
Company's Internet site, offering business e-commerce solutions and the
continuation of the development efforts for the Company's television channel.
WEBSITE, E-COMMERCE AND TELEVISION OPERATIONS
WEBSITE. The Company developed, operates and markets
5thAvenueChannel.com, a website offering financial and other information as well
as consumer products. The website was launched in December 1998 in its initial
version. A revised version was launched in March 1999 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 plans to add
additional items.
The Company is designing its website to be a comprehensive source for
financial, success and entrepreneurship and to market high quality information,
services and products to its users. To achieve this objective, the Company has
negotiated a number of key agreements. The Company has signed an agreement with
Zacks Investment Research ("Zacks"), a major supplier of financial information
to the investment community, and various websites including those of Microsoft
Investor, Yahoo, America On-Line, Geo-Cities, Broadcast.com and others. The
agreement provides for Zacks to supply its complete package of financial
information to 5thAvenueChannel.com. The information is provided in a 24 hour
per day data stream which is being incorporated into the Company's design format
for display on 5thAvenueChannel.com. The Company's website will also integrate
other financial information and services. The agreement with Zacks also includes
the granting of exclusive worldwide rights by Zacks to the Company for the
utilization of Zacks' information on television and for the use of the Zacks'
name on television including the creation of a co-branded television channel
with the Company. The Company will also market, through retail outlets,
wholesalers, direct response, direct mail, mass merchants, catalogues,
Internet e-commerce and television, a wide variety of products from
manufacturers around the world.
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The Company has also signed a letter of intent with KeyTrade, Inc.
("KeyTrade"), which operates KeyTrade Online, a privately held new online
brokerage service that is expected to launch by June 1, 1999. KeyTrade will be
the online brokerage house featured on 5thAvenueChannel.com. The Company
believes that the addition of KeyTrade further strengthens the financial online
services offered by 5thAvenueChannel.com. The Company's agreement with KeyTrade
is subject to negotiation and execution of a definitive agreement.
The Company has 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 the Company 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 website and on
the upcoming 5th Avenue television channel.
E-COMMERCE SOLUTIONS. The Company has established a business-to-
business division that offers product-based e-commerce solutions to other web
businesses and television networks. The Company successfully tested the concept
with XOOM.com and BigPlanet.com. The Company has recently commenced commercial
sales to other websites and in some cases will be developing and/or managing
entire web businesses for other entities.
The Company has also 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 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 identical to 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.
5TH AVENUE TELEVISION CHANNEL. The 5th Avenue television channel is
currently being developed by the Company. Programming will include co-branded
Zacks/5thAvenueChannel financial programming, co-branded 5th Avenue/Nightingale
Conant success, motivation and entrepreneurship programming, and lifestyle
product programming. Initial programming has already been filmed with Ivana
Trump as host, and is currently being edited. The Company is currently exploring
and negotiating production and distribution agreements for the television
channel.
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
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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.
LACROSSE, WISCONSIN. The Company operates a wireless cable television
system in LaCrosse, Wisconsin (the "LaCrosse System"). The Company's business
began on August 24, 1993, when the Company entered into an agreement (the
"Lease-Purchase Agreement") with Grand Alliance LaCrosse (F) Partnership and
Home/Systems Joint Venture, which ultimately provided for the lease and purchase
of the LaCrosse System. The Lease-Purchase Agreement also provided for the
sublease and assignment to the Company of a 10-year lease of space on a
transmission tower. The tower lease includes the use of the tower, transmitter
building, and space for the Company's exterior concrete pad, which supports the
Company's three satellite dish receivers.
Pursuant to the Lease-Purchase Agreement, the Company made an initial
deposit of $25,000 upon signing, expended approximately $40,000 to install three
transmitters, and made a final lump-sum payment of $400,000 in August 1994.
Transmission facility construction obligations under the Lease-Purchase
Agreement were satisfied (i) by the $40,000 payment to construct the
transmitters, (ii) as part of the Company's final lump-sum payment of $400,000,
and (iii) by the construction by the Company of transmission facilities for 11
channels. Construction was funded through private financing transactions in
August and December 1994. The lessors subsequently transferred ownership of all
of the licenses to the Company and the Federal Communications Commission ("FCC")
approved such transfer in March 1996.
FCC licenses for wireless cable channels generally must be renewed
every 10 years. The channel licenses now owned by the Company expire at
different times, with the first expiring beginning in 2001. Channel licenses are
subject to non-renewal, revocation or cancellation for violations of the
Communications Act of 1934, as amended (the "Communication Act") or the FCC's
rules and policies. Although renewal of FCC licenses is not automatic, the
Company has no reason to believe the LaCrosse licenses will not be renewed. It
is very seldom, if ever, that the licenses of operators actively following their
FCC approved plan of operation and complying with the FCC's rules and procedures
are not renewed.
The Company began transmitting programming in LaCrosse in December 1994
and, as of December 31, 1998, the Company had approximately 940 subscribers in
the LaCrosse System. There are approximately 70,000 households within the
LaCrosse System's 25-mile signal pattern. The Company currently offers 22
channels in the LaCrosse System, consisting of 17 wireless cable channels and 5
local off-air (VHF/UHF) broadcast channels.
The Company has also entered into lease agreements for ITFS excess
capacity for four channels with each of the Shekinah Network and the Morningstar
Educational Network for use in the LaCrosse System. These companies have filed
applications with the FCC for rights to such channels. The terms of such leases
expire 10 years from the license grant date and provide for the negotiation of
new lease agreements upon the expiration of the initial 10-year terms. In
October 1997 the FCC granted Shekinah Network and Morningstar such licenses.
The Company must use the ITFS channels a minimum of 20 hours per week
for educational programming. The remaining "excess air time" on an ITFS channel
may be used by the Company without further restrictions (other than the right of
the ITFS license holder, at its option, to recapture up to an additional 20
hours of air time per week for educational programming). Certain programs (e.g.,
C-SPAN and The Discovery Channel which the Company currently rebroadcasts) may
qualify as
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educational and thereby permit full-time usage of an ITFS channel. Lessees of
ITFS "excess air time" generally have the right to transmit to their subscribers
the educational programming provided by the lessor at no incremental cost. FCC
regulations also permit ITFS licensees to meet all of their minimum educational
programming requirements using only one channel.
The Company could use the eight ITFS channels for the LaCrosse System
in the following manner; two of these ITFS channels could be used by the lessors
solely for educational programming, with the remaining six channels available to
the Company without restriction. The Company intends to commit $40,000 which it
believes is adequate to acquire necessary broadcast equipment to broadcast the 8
additional channels. The Company could use 6 of these 8 channels to increase the
number of premium and/or movie channels available in the LaCrosse System and/or
it could rebroadcast the local TV channels. Rebroadcasting the local channels
could significantly increase the Company's subscriber base by appealing to
households that require local channels to be part of their cable service due to
problems receiving the local channels "off air."
COSTA RICA. The Company acquired certain rights to up to 18 pay
television broadcast channels in Costa Rica in February 1996 (the "Costa Rican
System"). Three channels are UHF frequencies (Channels 56, 58 and 60); three are
"super band" frequencies (Channels 35, 37 and 39); and 12 are microwave
frequencies similar to those used in the LaCrosse System. At the time the
Company acquired these licenses, the three "super band" channels were in full
operation broadcasting a scrambled signal of pay television programming to
approximately 1,700 subscribers. The Company currently broadcasts pay television
programming over the three super band channels and the three UHF channels in the
Costa Rican System. The Company has no present plans to use the additional 12
microwave channels.
As of March 31, 1999, the Company has approximately 5,500 subscribers
in the Costa Rican System. There are approximately 750,000 line-of-site
households in the San Jose Central Valley that are reachable from the Company's
present transmission facility, and an additional approximately 150,000
households in the remaining regions of Costa Rica that the Company could service
from additional transmission facilities. All 18 of the channel licenses may be
used exclusively anywhere in the entire nation of Costa Rica.
The Costa Rica market comprises a total population of approximately
3,350,000 people in approximately 900,000 separate households. In the Central
Valley, there are presently 22 VHF and UHF broadcast channels. While most
programming is in Spanish, a number of channels offer English and other
foreign-language programs for the large number of expatriate residents of, and
foreign visitors to, Costa Rica. In addition to the country's 22 "off-air"
VHF/UHF channels, the Company currently offers six channels of pay television in
Costa Rica: HBO-Ole, Cinemax, Sony Entertainment, Warner Brothers Network, Fox
Sports International and Discovery Channel. Each subscriber receives an
addressable set-top converter and remote control, as well as an antenna which is
installed on the roof to receive the Company's television signals. Monthly
subscription fees are currently $14 to $17 per month, depending on the
programming package.
In Costa Rica, the Company emphasizes its picture quality and the
reliability of its wireless transmission. Because the Company transmits its
television signals via VHF and UHF frequencies, instead of microwave frequencies
typically used in wireless cable operations, the Costa Rican System does not
require line-of-sight between the transmission point and the subscriber. The
Company believes that it provides a high-quality, price-competitive alternative
to hard-wire cable services in Costa Rica. The Company plans to increase its
subscriber base in Costa Rica, although there can be no assurances that the
Company will be successful in such endeavor.
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RECENT DEVELOPMENTS
ACQUISITION OF 5TH AVENUE CHANNEL, INC. Pursuant to the Share Exchange
Agreement dated February 28, 1999 and effective as of December 10, 1998 (which
agreement was amended on March 17, 1999) (the "Share Exchange Agreement"), the
Company completed its acquisition of all 100 of the outstanding shares of common
stock of The 5th 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 Mel Rosen ("Rosen"), the
President, Chief Executive Officer and a director of the Company, and 10 shares
from Ivana Trump ("Ms. Trump") (IBC Partners, Rosen and Ms. Trump are
hereinafter sometimes collectively referred to as the "Fifth Avenue
Shareholders"). In exchange, the Company issued an aggregate of 335,000 shares
of its common stock, ("Common Stock"), proportionately to the Fifth Avenue
Shareholders, based on their relative share ownership in Fifth Avenue, and
agreed to issue an additional aggregate of 665,000 additional shares of is
Common Stock to the Fifth Avenue Shareholders, also based on their relative
share ownership in Fifth Avenue, 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") dated March 17, 1999 but effective as of November 5,
1998, pursuant to which 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 for Fifth Avenue in exchange for a
base fee of $10,000 per month, additional fees for personal appearances and
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 an exercise price of $8.00 per share; 200,000 shares at an
exercise price of $12.00 per share; and 100,000 shares at an exercise price of
$15.00 per share. The Consulting Agreement has an initial term expiring on
December 31, 2001 and is automatically renewable for successive additional
one-year terms unless either party provides written notice of non-renewal to the
other party not less than sixty days prior to the expiration of the then current
term.
PROPOSED ACQUISITION OF INTERNATIONAL BROADCAST CORPORATION. Effective
January 4, 1999 the Company entered into an agreement in principle to purchase
100% of the assets and operations of International Broadcast Corporation (IBC)
owned by Messrs. Lefkowitz and Rothstein. Under the terms of the agreement, the
Company will issue 300,000 shares of its Common Stock and will tender $450,000
in cash to IBC. IBC is active in the electronic media field, specializing in new
product marketing on cable TV. IBC's products are aired to TV viewers in over 43
countries in their respective languages and in 38 states in the U.S.
AMENDMENT OF ARTICLES OF INCORPORATION TO CHANGE NAME AND INCREASE
NUMBER OF AUTHORIZED SHARES OF COMMON STOCK. On March 18, 1999, the Company
filed Articles of Amendment to its Articles of Incorporation with the Florida
Department of State to change its name from Tel-Com Wireless Cable TV
Corporation to 5th Avenue Channel Corp. and to increase the number of authorized
shares of its Common Stock from 10,000,000 to 50,000,000. In addition, 5th
Avenue Channel, Inc. changed its name to 5th Avenue Television, Inc. These
actions were approved by the Company's Board of Directors on December 23, 1998,
and by a majority of the Company's shareholders at the Company's annual meeting
held on February 12, 1999.
CONVERSION OF DEBT TO EQUITY. In connection with a debt restructuring
effected in May 1997, the Company issued to Melvin Rosen, who thereupon became
the Company's President and Chief Executive Officer, a $2 million secured
convertible debenture (the "Debenture"). The Debenture was to mature in 12
months with interest accruing at 12% per annum (7% to be paid monthly and 5% at
maturity). The adjusted principal amount of the Debenture included $100,000 for
expenses owed or reimbursable to Mr. Rosen at the issue date of the Debenture.
At either the Company's or Mr. Rosen's option, $1 million of the Debenture
balance could be extended for an additional period of 12 months with interest to
accrue on such amount at 15% per annum (8% to be paid monthly in arrears and 7%
to be paid at maturity). The Seller converted the Debenture into 4,732,000
shares of Common Stock, 2,366,000 shares in January 1999 and the remaining
2,366,000 shares in March 1999.
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MARKETING
The Company expects to use a variety of methods to drive traffic to its
website and to promote product sales. These methods include advertising banners
on other websites, listings with major search engines, advertising outside of
the World Wide Web including print and radio, affiliations with "link-share"
programs, and joint venture marketing agreements with such websites as
Zacks.com, KeyTradeOnline.com, and others. In addition, the Company plans to
aggressively promote traffic to 5thAvenueChannel.com on the Company's television
channel. The Company intends to use the home shopping channels and direct
response television advertising campaigns to drive product sales, and will be
continuing to develop its business-to-business sales activities.
The Company utilizes media advertising, telemarketing, direct mail, and
door-to-door marketing to increase its subscriber base both in the LaCrosse
System and the Costa Rican System. The Company emphasizes price-to-value,
reliability of service, quality and reliability of equipment, and picture
quality in its marketing programs.
HARDWARE
INTERNET WEBSITE. To support the development of its website/e-commerce
business, the Company has invested in hardware and software to support expected
growth. These include its own high-speed server for housing its website, the
installation of T-1 lines into its corporate offices, the purchase of such
software systems as Oracle Database, Cold Fusion, OpenSite Auction software, and
more. The Company expects to continue to add on the necessary hardware and
software as needed for operations and to support its growth.
WIRELESS CABLE TELEVISION. A number of reputable manufacturers produce
the equipment used in wireless cable systems, from transmitters to the set-top
converters which feed the signal to the television set. Because the signal is
broadcast over the air directly to a receiving antenna, wireless cable does not
experience the problems caused by amplifying signals over long distances
experienced by some hardwire cable subscribers. This is particularly the case
for a signal delivered over longer distances. Amplification of signals can lead
to greater signal noise and, accordingly, a grainy picture for some subscribers.
Also, the transmission of wireless signals is not subject to the problems caused
by deteriorating underground cables used in conventional systems. As a result,
wireless cable is sometimes more reliable than conventional cable, and picture
quality is generally equal to or better than ordinary cable. In addition,
extreme weather conditions typically do not affect wireless cable transmitters,
so customers seldom experience outages sometimes common to conventional cable.
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COMPETITION
INTERNET. The Internet business is highly competitive. New companies
are being established every day and any business set up on the Internet,
including such businesses as the Company's website and e-commerce solutions,
might face competition from a variety of existing or upcoming websites, many of
which may have greater financial, technical and marketing resources, greater
name recognition and better strategic relationships. Consequently, the Company
has been focusing on acquiring exclusive distribution rights and rights to a
variety of products not widely available on the Internet, and on signing content
agreements that allow for unique combinations of content.
TELEVISION. The television business is highly competitive. New channels
will face competition from a variety of existing television channels and
networks. Consequently, the Company has been focusing on acquiring exclusive
television rights to products and programming to help distinguish the Company's
television channel from other networks.
WIRELESS CABLE TELEVISION. The pay television industry is highly
competitive. Wireless cable television systems face or may face competition from
several sources, including established hardwire cable companies.
Wireless cable programming is transmitted through the air via microwave
frequencies that generally require a direct "line-of-sight" from the transmitter
facility to the subscriber's receiving antenna. In communities with dense
foliage, hilly terrain, tall buildings or other obstructions in the transmission
path, transmission may be blocked at certain locations or require additional
repeater equipment to circumvent such obstructions. Traditional hard-wire cable
systems deliver the signal to a subscribers location through a network of
coaxial cable and amplifiers and do not require a direct line-of-sight for
transmission and, therefore, may have a competitive advantage over the Company
in those areas where the reception of wireless cable transmissions is difficult
or impossible. In the Costa Rican System, however, the Company is not
broadcasting its 6 channels over microwave frequencies, so the Company has no
requirement for "line of sight" transmission and can reach virtually all
households within the signal pattern.
The LaCrosse System competes with two large hard-wire cable companies,
which currently offer 28 and 40 channels, respectively, to their subscribers
compared to the 22 channels the Company currently offers. The Costa Rican System
currently offers 6 pay channels and the three local hard-wire cable companies
offer from 36 to 40 channels, approximately one-third of which are the
re-broadcast of local, off-air programming. The Company believes that its 22
off-air plus 6 pay channel l line-up and its responsive service are price
competitive.
In Costa Rica, three hard-wire cable companies are the Company's
primary, direct competitors. The Company estimates that within its signal
pattern for Costa Rica, fewer than 20% of the households are hard-wire cable
subscribers and no more than an additional 10% have access to hard-wire cable
services. The three hard-wire cable companies in Costa Rica currently offer up
to 46 (11 local, 35 international), 48 (13 local, 35 international), and 36 (9
local, 27 international) channels, respectively, and charge approximately $22,
$25, and $23 per month, respectively, for basic programming (movies are
additional), and approximately $15, $23, and $23, respectively, for installation
services. None offers pay-per-view programming or addressable converters. All
three companies offer discounts for long-term contracts. The Company offers a
package of 28 channels (22 local off-air, 6 international) for a monthly fee of
approximately $15 to $17, plus installation. Based on the Company's existing
subscriber base of approximately 5,500 households that presently pay an average
of $16 per month for six channels of programming and the very limited
penetration of hard-wire cable into this market, the Company believes that it
has a competitive programming alternative to hard-wire cable.
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In addition to competition from traditional, established hard-wire
cable television systems, wireless cable television operators face competition
from a number of other sources. Premium movie services offered by cable
television systems have encountered significant competition from the home video
cassette recorder industry, a major participant in the television program
delivery industry. In addition, in areas where several off-air television
stations can be received without the benefit of cable television, cable
television systems also have experienced competition from the availability of
broadcast signals generally and have found market penetration to be more
difficult. In particular, in Costa Rica, there are over 20 broadcast channels
available in the San Jose Central Valley. In addition to the foregoing, wireless
cable systems face potential competition from emerging trends and technologies
in the cable television industry, including satellite receivers, direct
broadcast satellite, telephone companies, satellite master antenna television,
and local multi-point distribution services. Many of these newer technologies
are not available in Costa Rica and may not be available for several years
because the demand for technology in Costa Rica lags behind that of the United
States.
SOURCES OF PROGRAMMING
INTERNET. The Company is acquiring content for its website from a
variety of sources. The Company has entered into agreements with Zacks
Investment Research, Nightingale-Conant, United States Check Company, and others
for the supply of content on 5thAvenueChannel.com. The Company has also signed
agreements with a variety of product suppliers for numerous products to be
available on the Company's website. The Company is in the process of negotiating
agreements with other providers to acquire additional content and product for
its website.
TELEVISION. The Company is acquiring content for its television channel
from a variety of sources. The Company has entered into an agreement with Zacks
Investment Research that grants to the Company worldwide rights to co-branded
television programming with Zacks' name and content. The Company plans to
develop additional programming content in conjunction with Nightingale-Conant,
Ivana Trump and others.
WIRELESS CABLE TELEVISION PROGRAMMING
LACROSSE. The Company currently arranges for programming from three
sources for the LaCrosse System: (i) broadcasters of off-air (VHF/UHF) signals,
(ii) an NBC affiliate station for the retransmission of its signal, and (iii)
suppliers of programming typically broadcast over cable systems. Programming
from off-air broadcasters is negotiated on a case-by-case basis and may be
available for no charge or for a minimal royalty payment. The VHF and UHF
broadcasters in LaCrosse, Wisconsin (CBS, ABC, FOX, PBS and Channel 50) allow
the Company's customers to receive their signals through a high-grade antenna
provided by the Company without the assessment of any fee or royalty.
There is no NBC affiliate broadcasting off-air in LaCrosse, but the
Company has an agreement with the NBC affiliate in nearby Eau Claire, Wisconsin,
to allow the Company to retransmit its programming over one of the Company's
MMDS frequencies without any fee provided the Company purchases at least $500 of
advertising each year from this station.
In addition to off-air broadcasters, the Company has agreements with
program suppliers for ESPN, ESPN 2, CNN, CNN Headline News, USA, WGN, WTBS, TNT,
A&E, Nickelodeon, Discovery, TNN, the Family Channel, Lifetime, the Weather
Channel and ShowTime for broadcasting in the LaCrosse System. The program
agreements generally have three-year terms, with provisions for automatic
renewals and are subject to termination for breach of the agreement, including
non-payment. The programming agreements generally provide for royalty payments
based upon the number of Company subscribers receiving the programming each
month. Individual program prices vary from supplier to supplier, and more
favorable pricing sometimes is afforded to operators with larger subscriber
bases.
If any existing programming contracts are canceled, or not renewed upon
expiration, the Company would have to seek program material from other sources.
8
<PAGE>
COSTA RICA. The Company currently arranges for programming from two
sources in Costa Rica: (i) broadcasters of off-air signals and (ii) suppliers of
programming typically broadcast over cable systems. The VHF/UHF signals
broadcast in Costa Rica are received at no charge through a high-grade antenna.
The six pay television channels offered by the Company include HBO-Ole, Cinemax,
Sony Entertainment, Cartoon Network, Discovery Channel/Music Video, and Fox
Sports, with a late-night alternative of Spice on one channel. Movies generally
are broadcast dubbed in Spanish or in English with Spanish subtitles, and most
other programming is in Spanish. The agreements for such programming are
typically indefinite in length, provide for royalty payments based upon the
number of TelePlus subscribers receiving the programming each month, and are
terminable for non-payment. Individual program prices will vary from subscriber
to subscriber, and more favorable pricing may be available as TelePlus'
subscriber base increases.
In addition to the programming alternatives described above, the
Company may introduce a "pay-per-view" service that enables customers to order
and pay for one program at a time. Pay-per-view services have been successful
for specialty events such as wrestling, heavyweight prize fights, concerts, and
early release motion pictures. This service can also be promoted for the
purchase of movies in competition with video rental stores. Pay-per-view
requires the subscriber to have an "addressable" converter which allows the
operator to control what the subscriber watches without having to visit the
subscriber location to change equipment. All subscribers in both the LaCrosse
and Costa Rican Systems are equipped with addressable converters. In order for
customers to order pay-per-view events more conveniently, however, an "impulse"
pay-per-view converter would be desirable because it has a return line via phone
or cable to the cable operator's computer system and enables a subscriber to
order pay-per-view events by pushing a button on a remote control rather than
requiring the subscriber to make a telephone call to order an event.
GOVERNMENT REGULATION
INTERNET/E-COMMERCE. There are currently few laws or regulations that
specifically regulate communications or commerce on the Internet. However, laws
and regulations may be adopted in the future that address issues such as online
content, user privacy, pricing and characteristics and quality of products and
services. For example, although it was held unconstitutional, the Communications
Decency Act of 1996 prohibited the transmission over the Internet of certain
types of information and content. In addition, several telecommunications
carriers are seeking to have telecommunications over the Internet regulated by
the FCC in the same manner aas other telecommunications services.
The tax treatment of the Internet and e-commerce is currently
unsettled. A number of proposals have been made at the federal, state and local
level and by certain foreign governments that could impose taxes on the sale of
goods and services and certain other Internet activities. A recently-passed law
places a temporary moratorium on certain types of taxation on Internet commerce.
The Company cannot predict the effect of current attempts at taxing or
regulating commerce over the Internet. Any legislation that substantially
impairs the growth of e-commerce could have a material adverse effect on the
Company's business, financial condition and operating results.
WIRELESS CABLE TELEVISION BROADCASTING.
UNITED STATES. The wireless cable industry is subject to regulation by
the FCC pursuant to the Communications Act of 1934, as amended (the
"Communications Act"). The Communications Act empowers the FCC, among other
things: to issue, revoke, modify and renew licenses within the spectrum
available to wireless cable, to approve the assignment and/or transfer of
control over such licenses; to determine the location of wireless cable systems"
to regulate the kind, configuration and operation of equipment used by wireless
cable systems; and to impose certain equal employment opportunity requirements
on wireless cable operators. The FCC has determined that wireless cable systems
are not "cable systems" for purposes of the Communications Act. Accordingly, a
wireless cable system does not require a franchise from a local authority and is
subject to fewer local regulations than a hard-wire cable system. In addition,
utility poles and dedicated easements are not necessary.
Pursuant to the Cable Television Consumer Protection and Competition
Act of 1992 (the "Cable Act"), the FCC adopted rate regulations exclusively for
traditional hard-wire cable systems which provide for, among other things,
reductions in the basic service and equipment rates charged by most hard-wire
cable operators and FCC oversight of rates for all other services and equipment.
The Cable Act also provides for rate deregulation of a traditional hard-wire
cable operator in a particular market once there is "effective competition" in
that market. Effective competition exists, among other circumstances, when
another multi-channel video provider exceeds a 15% penetration in that market.
FCC regulations also require traditional hard-wire cable operators to undertake
various customer service improvements.
9
<PAGE>
The Company cannot predict precisely what effect these regulations or
other governmental regulations may have on traditional hard-wire cable operators
as to price and service. While current FCC regulations are intended to promote
the development of a competitive pay television industry, the rules and
regulations affecting the wireless cable industry may change, and any future
changes in FCC rules, regulations, policies and procedures could have an adverse
effect on the industry as a whole and on the Company in particular. The Company
cannot predict what impact such changes would have on the industry as a whole or
on the Company in particular.
Under the Telecommunications Act of 1996 (the "1996 Act"), Congress has
directed the FCC to eliminate cable rate regulations for "small systems," as
defined in the 1996 Act, and for large systems under certain prescribed
circumstances, and for all cable systems effective three years after enactment
of the 1996 Act. The 1996 Act could have a material impact on the wireless cable
industry and the competitive environment in which the Company operates. The 1996
Act will result in comprehensive changes to the regulatory environment for the
telecommunications industry as a whole. The legislation will, among other
things, substantially reduce regulatory authority over cable rates. Another
provision of the 1996 Act will afford hardwire cable operators greater
flexibility to offer lower rates to certain of their subscribers, and would
thereby permit cable operators to offer discounts on hard-wire cable service to
the Company's subscribers or prospective subscribers.
The legislation will also permit telephone companies to enter the video
distribution business, subject to certain conditions. The entry of telephone
companies into the video distribution business, with greater access to capital
and other resources, could provide significant competition to the wireless cable
industry, including the Company. In addition, the legislation will afford relief
to DBS by exempting DBS providers from local restrictions on reception antennas
and preempting the authority of local governments to impose certain taxes. The
Company cannot predict the substance of rules and policies to be adopted by the
FCC in implementing the provisions of the legislation.
With a wireless cable system, the signals are sent from the transmitter
to the subscriber's receiving antenna over microwave frequencies. The wireless
cable TV system programming is in a scrambled format using low-power
transmitters operating in the 2.1 to 2.7 gHz frequency range. These super high
frequency channels are allocated solely to wireless cable TV transmissions and
are licensed by the FCC. In major markets, the frequencies available for
wireless cable consist of up to 33 channels, the maximum permitted by the FCC.
Of these 33 channels, 13 can be held by wireless cable entities and used
full-time for commercial programming delivery, and 20 generally are held by
qualified educational institutions ("ITFS" channels). Commercial use of channel
licenses held by educational institutions is available only through contracts
with such educational institutions and within specifically limited guidelines.
ITFS channel licenses that are not secured by educational institutions
may, in some instances, be acquired directly by commercial broadcasters without
obligation to compensate the educational institutions. Six of the channels
currently owned by the Company in the LaCrosse System were ITFS channels that
were acquired when no educational institution applied for the rights to such
channels. These channels may be used by the Company, without restriction, for
full-time commercial programming.
Applications for renewal of licenses must be filed within a certain
period prior to expiration and there is no automatic renewal of such licenses.
Petitions to deny applications for renewal may be filed
10
<PAGE>
during certain periods following the filing of such applications. Licenses are
subject to revocation, cancellation or non-renewal for violation of the
Communications Act or the FCC's rules and policies.
Although renewal of FCC licenses is not automatic, the Company has no
reason to believe the LaCrosse licenses will not be renewed for several
additional 10 year periods. It is very seldom, if ever, that the licenses of
operators actively following their FCC approved plan of operation and complying
with the FCC's rules and procedures are not renewed.
COSTA RICA. Television operations in Costa Rica are regulated mainly by
the Radio and Television Law - Ley de Radio y Television, No. 1758 of June 19,
1954, as amended (the "Law"); the Regulation of Wireless Stations - Reglamento
de Estaciones Inalambricas, No. 63 of December 11, 1956, and the Broadcasting
Rule of Atlantic City and the International Agreements Regarding Broadcasting
executed in Washington, D.C., on March of 1949, which have been ratified by the
Congress of Costa Rica. According to the Law, television operations can only be
established, conducted and exploited by means of a concession granted by the
Radio Control Office ("RCO"), upon payment of the taxes and completion of all
formal requirements imposed by the Law.
Once the concession is granted, the RCO will periodically control and
supervise its operation. In order to verify that the terms and conditions of the
concession are being fulfilled, the RCO is authorized to visit and inspect the
place of business of the concessionaire at any time. If there is any incorrect
technical functioning, the licensee, within forty-eight hours, must reestablish
the concession to its original terms under penalty of cancellation of the
license. Concessions for the Company's Costa Rican System are owned by the Costa
Rican operating companies that were acquired by the Company through its wholly
owned Costa Rican subsidiary in February 1996.
Furthermore, the owner of a concession is obligated to strive to
increase the cultural level of the population. The owner of the concession is
jointly liable, together with whoever broadcasts or transmits through the
frequency, for any violations of the Law, provided there is intentional conduct
by the concessionaire. In case of negligence, the liability is subsidiary to the
direct offender's. The concessionaire is not liable in the absence of willful
participation or negligence. Any broadcast shall operate free of impurities
(espurias y armabucas) and with the frequency adjusted so that no interference
is caused to other concessionaires.
If the operating center does not meet these requirements, its
functioning will not be authorized by the RCO. Other governmental limitations or
restrictions apply, such as a prohibitions against broadcasting certain
information, whether private or official, local or international, except in
situations of emergency; false news; alarm calls without reason, the
broadcasting of programs emanating from other concessionaires without their
previous authorization, and the use of vulgar or improper language.
The Law establishes that licenses are granted for a limited time, but
they are automatically extended by payment of the corresponding dues, provided
that the functioning and installation of the station are adjusted to the
stipulations of the Law. The transfer or alienation of the right to a frequency
is permitted only with the previous authorization of the RCO, which means that a
formal request has to be submitted to the RCO on these terms. According to the
RCO's current interpretation, a frequency can be leased to a third party without
prior consent from the government. The lessor remains as the concessionaire and,
therefore, continues to be subject to all obligations related to the concession.
Article 3 of the Law requires that concessionaires have not less than
65% Costa Rican ownership. The Company has been advised by its Costa Rican
counsel that this provision is not being actively enforced and that there is a
decision from the Constitutional Court declaring a similar provision in a
11
<PAGE>
related law (Ley de Medios de Difusion y Agencias de Publicidad) to be
unconstitutional. However, based on Costa Rican counsel's recommendation, the
Company structured its ownership of these licenses to be indirect through a
tiered subsidiary structure, whereby a Costa Rican Company, wholly-owned by the
Company, owns 100% of the outstanding capital stock of the Costa Rican companies
holding the licenses. The Company believes that this structure adequately meets
the requirements of Costa Rican law. However, in the event this structure is not
acceptable to the government, an alternate ownership structure would have to be
implemented, which could have a material adverse effect on the Company.
DEVELOPMENT OF NEW TERRITORIES. On March 28, 1996, the FCC completed
its auction of authorizations to provide single channel and multi-channel
Multi-point Distribution Service ("MDS") wireless cable services in 493 Basic
Trading Areas. The Company won bids in three markets-. Hickory - Lenoir -
Morganton, North Carolina; Wausau - Rhinelander, Wisconsin; and Stevens Point -
Marshfield - Wisconsin Rapids, Wisconsin. On April 5, 1996, the Company
submitted a payment of $239,502 that, coupled with its initial deposit of
$65,120, made up the initial down payment for acquisition of these licenses. The
Company has made the second required deposit equal to 10% of its winning bid
only on the aforementioned Wisconsin licenses. These new Wisconsin territories
provide approximately 70,000 line-of-sight households and offer markets that the
Company believes are competitively equivalent to or better than that of the
LaCrosse System.
As the Company did not make the required additional 10% payment on the
North Carolina license, the Company has forfeited its right to acquire such
license. In addition, the Company may 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 License.
On July 24, 1998, the Company received written notification from the
FCC that the two Wisconsin licenses had been conditionally granted, subject to
the making of required installment payments, effective as of July 25, 1997. In
connection therewith, the Company elected to participate in the installment
payment plan, and two installment payment plan notes were entered into in the
total amount of $951,479. The terms of these notes provide for the payment of
interest only at 9.125%, aggregating $115,260, through October 31, 1998, and
thereafter $21,702 on a quarterly basis until July 31, 1999; commencing on
October 31, 1999, quarterly payments of principal and interest, aggregating
$42,211, are required through the maturity date of July 25, 2007. The Company
has granted the FCC a first lien on and security interest in all of the rights
and interest in the two Wisconsin licenses and all proceeds of any sale or other
disposition thereof.
The Company has accrued, but has not paid, the required interest
payment of $115,260 which was due on October 31, 1998 or the payment of $21,702
which was due on January 31, 1999. The Company intends to contest the
retroactive interest for the period from July 25, 1997 until receipt of
notification of the grant; however, the Company intends to offer to make the
installment payment of $115,260 by April 29, 1999, the date the Company has been
advised is the final date to make the two Wisconsin license payments without
being considered in default, provided such payments will be applied to these
Wisconsin licenses and not held to make good the Hickory default (see below).
The grant of the Wisconsin licenses is conditioned on the Company's
fully and timely meeting its quarterly payment obligations, and the development
of operating systems within 18 months of the grant of each license. The Company
owes an aggregate of approximately $160,000 for the Wisconsin licenses, due on
or before April 29, 1999, which amounts are expected to be paid by that date.
The Company estimates that the cost of developing a fully operational system in
each market would be approximately $1,200,000 per system.
To date, the Company has not taken steps to develop systems in the new
Wisconsin territories. The Company has not yet determined when these new systems
will be developed. Development of these markets and the funding of the
acquisition price for the licenses will require additional debt or equity
financing, which may not be available to the Company on acceptable terms, if at
all. The Company has made no arrangements or commitments for such future
financing, and there can be no assurance that the Company will be able to raise
such capital on acceptable terms, if at all. Failure to obtain such additional
financing could cause a forfeiture of the licenses.
In addition to the material liquidity risks associated with developing
new operating systems utilizing the Wisconsin licenses, the development of such
systems will be dependent on, among other things, successful construction of
operating systems; identification and procurement of acceptable tower sites; and
the availability of suitable management and other personnel. There can be no
assurance that the Company will be able to successfully develop operating
systems utilizing the new Wisconsin licenses.
If the Company chooses not to develop an operating system, it may
decide to attempt to lease a license or to sell a license. If the Company
decides to attempt to lease a license or to sell a license, then there is no
assurance that there will be a buyer or lessor for such license or one offering
an acceptable price when the Company attempts to sell or lease it. There is also
a risk that other license holders will
12
<PAGE>
attempt to sell or lease their licenses at the same time as the Company.
Additionally, the FCC must approve any transfer of a license.
The Company intends to focus its operations, marketing, and service in
regional markets to increase efficiencies and profitability. However, the
Company does not currently have the financial resources to develop operating
systems in the aforementioned Wisconsin markets, and there can be no assurance
that the Company will ever develop systems in such markets. To develop and
launch additional wireless cable systems in areas where the Company holds
licenses, or otherwise, the Company will need to raise additional capital. There
can be no assurance that operating revenues will be sufficient to sustain
subscriber growth or that additional financing, if required, will be available
on terms acceptable to the Company, if at all.
In Costa Rica, the Company believes it is well positioned to compete
effectively with other pay television providers in the San Jose Central Valley
area, principally hardwire cable operators. The Company also is evaluating the
possibility of directing its signals into other key metropolitan areas of Costa
Rica that aren't served by any cable or other pay television service by
establishing additional transmission sites and/or utilizing more powerful
transmitters.
EMPLOYEES
As of April 15, 1999, the Company had 55 full-time employees and no
part-time employees serving in its North Miami Beach, Florida, LaCrosse,
Wisconsin and Costa Rica offices. The Company maintains various benefit plans
and experiences good employee relations.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 4,000 square feet of office space in a
one-story building in North Miami Beach as its principal offices. The lease is
for one year beginning on September 1, 1998 and is renewable at the lessee's
option. The Company pays approximately $7,300 per month. In addition, the
Company leases about 2,000 square feet in the same building. This additional
space is currently being built out to house the Company's expanding website
development team, a small television production studio and telemarketing
personnel to handle order processing and customer service for calls generated
through its website, upcoming television channel promotions and direct response
campaigns. The Company also leases approximately 3,000 square feet of warehouse
space for inventory.
The Company leases approximately 2,000 sq. ft. of facilities in
LaCrosse, Wisconsin for its Wisconsin Wireless Cable TV operation. Approximately
one-fourth of such space is warehouse space. The rent is $1,391 per month. The
lease expires in September 1999.
13
<PAGE>
The Company also leases approximately 4,485 sq. ft. of office and
warehouse facilities in San Jose, Costa Rica for its Tele-Plus wireless cable
television operation. Approximately one-fifth of such space is warehouse space.
The rent is $1,750 per month. The lease expires in April 1999 and is renewable.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
PRICE RANGE OF COMMON STOCK. The Common Stock of the Company was listed
on The Nasdaq SmallCap Market beginning on May 3, 1995 initially under the
symbol "TCTV" and since March 25, 1999 under the symbol "FAVE." Warrants
("Warrants") to purchase Common Stock of the Company have traded on the
over-the-counter market since May 1995 under the symbol "TCTVW," and since March
25, 1999 under the symbol "FAVEW."
The following table sets forth the range of high and low bid prices for
the Company's Common Stock for each quarterly period indicated, as reported by
brokers and dealers making a market in the Common Stock. Such quotations reflect
inter-dealer prices without retail markup, markdown or commissions, and may not
necessarily represent actual transactions:
<TABLE>
<CAPTION>
COMMON STOCK($)
-----------------------------------------------
QUARTER ENDED HIGH BID LOW BID
<S> <C> <C>
December 31, 1998 17.625 1.375
September 30, 1998 5.875 2.000
June 30, 1998 6.938 2.250
March 31, 1998 2.625 1.750
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCK($)
-----------------------------------------------
QUARTER ENDED HIGH BID LOW BID
<S> <C> <C>
December 31, 1997 3.8125 1.50
September 30, 1997 3.9375 .375
June 30, 1997 1.28125 .15625
March 31, 1997 4.375 .96875
</TABLE>
RECORD HOLDERS. As of April 5, 1999, the approximate number of record
holders of the Company's Common Stock is 1,000.
14
<PAGE>
DIVIDEND POLICY. The Company has never paid cash dividends on its
Common Stock and intends to retain any future earnings for the operation and
expansion of its business.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATION
REVENUES
The Company had revenues of $1,453,000 for 1998 compared to $1,085,000
in 1997. Substantially all of these revenues were generated from the Company's
wireless cable television operations. The $368,000 increase in revenues is
entirely due to a significantly increased Costa Rican subscriber base. Revenues
from the Lacrosse system declined $25,000 in 1998 from $385,000 in 1997 to
$360,000 in 1998 due to a decline in the subscriber base. The Costa Rican System
generated approximately 75% of 1998 revenues and 64% of 1997 revenues and the
LaCrosse System generated approximately 25% of 1998 revenues and 35% of 1997
revenues.
COSTS OF SALES
Direct costs of revenues for 1998 increased $65,000 over the comparable
1997 period, due primarily to the significant increase in Costa Rican
subscribers. However, as a percent of revenues, cost of sales remained constant
at 16% in both 1998 and 1997.
OPERATING EXPENSES
Operating expenses for 1997 totaled $3,437,282, including $988,000 of
non-recurring investment banking and financial relations consulting expense
assigned to a consulting agreement dated December 31, 1996, $128,000 assigned to
a July 1997 consulting agreement with an investment banking firm, and $120,000
related to the default on the North Carolina licenses. Excluding the above
described $1,236,000 of unusual operating expenses the costs of operating the
Costa Rican and LaCrosse Systems and the corporate office in Florida totaled
approximately $2,201,000 (203% of related revenues) in 1997.
During 1998, the Company had comparable operating expenses of
approximately $3,781,000 (260% of related revenues). The $1,580,000 increase in
comparable operating expenses is due to the increased variable costs of
providing subscriber services to the significantly expanded Costa Rican System,
a provision of $350,000 for asset impairment and development costs for website
design, software development, website content, research, and product development
of approximately $697,000 in 1998.
The provision for asset impairment of $350,000 related to the
undeveloped Wisconsin licenses obtained as a result of the FCC auction in 1996.
15
<PAGE>
INTEREST EXPENSE
Interest expense for 1998 was substantially higher than 1997 because
interest expense included approximately $448,000 of debenture discount
amortization related to the issuance of 12% convertible debentures totaling
$595,000 in May 1998 and $500,000 in November 1998. An additional approximately
$472,000 of discount will be included in interest expense in 1999 related to the
same debentures.
In 1997 the Company incurred unusual charges of $188,750 related to the
debt restructuring and $266,000 of interest and conversion inducement costs
related to the $2,366,000 Debenture. No interest was accruable on such Debenture
in 1998 because of the agreement by the holder of said Debenture in November
1997 to convert the Debenture to Common Stock on May 15, 1998. The conversion of
the Debenture was delayed until 1999, when the Company increased the number of
authorized shares to 50,000,000. Prior to the increase the Company did not have
sufficient authorized but unissued shares to cover all outstanding warrant,
option and conversion agreements to issue Common Stock.
NET LOSS
The approximately $3,298,000 net loss for 1998 includes a $350,000
write down of the unused Wisconsin licenses, approximately $697,000 of
development costs related to the 5th Avenue Channel and approximately $448,000
of amortization of discount on the debentures issued in May and November of
1998. Except for the remaining approximately $472,000 of debenture discount to
be included in interest expense in 1999, the Company does not expect such large
expenses to recur in 1999. The $918,000 increase in cash used in operations in
1998, over the $406,000 used in operations in 1997, was primarily due to the
$697,000 of costs of developing the 5th Avenue television channel and the
5thAvenueChannel.com website.
The following table lists the unusual charges that affect the
comparison of 1998 and 1997 results of operations, which, except for the
aforementioned $472,000 of discount on debentures to be included in interest
expense in 1999, are not expected to recur in 1999 and future years:
<TABLE>
<CAPTION>
1998 1997
------------------- --------------------
<S> <C> <C>
Investment banking consulting services $ - $ 988,000
Other investment banking consulting services - 128,000
Loan extension and restructure costs - 455,000
Additional interest expense related to
discount on convertible debentures 448,000 -
Write-down undeveloped licenses in
Wisconsin and North Carolina 350,000 142,000
------------------- --------------------
Total of non-comparable expenses $798,000 $1,713,000
</TABLE>
With the higher number of Costa Rican subscribers in 1999 than in 1998
the Company expects to continue the trend of improved operating results in Costa
Rica.
INFLATION AND FOREIGN CURRENCY FLUCTUATION
16
<PAGE>
Costa Rica experienced a decline in the value of the Colon relative to
the U.S. dollar of approximately 1% per month in 1998. 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.
The providers of the programming that the Company rebroadcasts in
LaCrosse have increased the rates charged per subscriber when the contracts were
renewed. These increases have not been significant and, as the low cost provider
of alternative cable television, the Company believes it has the ability to
increase its rates to pass the additional programming costs onto its
subscribers.
LIQUIDITY
SOURCE AND USE OF CASH FOR 1998
During 1998 the Company received $1,055,000 of proceeds, net of
issuance expenses, from the sale of 12% convertible debentures in May and
November 1998 and $850,000 of loan proceeds from the Company's majority
shareholder, Melvin Rosen. Mr. Rosen loaned the Company $300,000 at an interest
rate of 10% in July 1998 and in addition loaned the Company $550,000 at an
interest rate of 8% in November 1998. Approximately $190,000 of the total
$850,000 has been repaid to Mr. Rosen. Approximately $230,000 of the cash was
used to purchase equipment to increase the Costa Rican subscriber base. Most of
the remaining $1,485,000 was used to fund operating losses and increase the cash
position by $143,000, from $113,000 at December 31, 1997 to $256,000 at December
31, 1998.
DEBT RESTRUCTURING AND CONVERSION OF DEBENTURE TO COMMON STOCK
See Note 6 of the Notes to the Consolidated Financial Statements
included in Part II, Item 7 describing the debt restructuring, the
contemporaneous change in control which occurred in May 1997 and the conversion
of the Company's Debenture and related interest into 4,732,000 shares of Common
Stock in the first quarter of 1999.
WORKING CAPITAL DEFICIT/ADDITIONAL DEBT OR EQUITY FINANCING REQUIRED
The accompanying financial statements reflect current liabilities of
$2,435,438 and current assets of $430,588 resulting in a working capital deficit
of $2,004,850. Approximately $1,270,000 of this working capital deficit consists
of amounts owed to Melvin Rosen, the President, CEO and majority shareholder of
the Company.
Although the Costa Rican and LaCrosse 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
and website. Increasing the subscriber base requires additional capital because
the incremental equipment and labor installation costs per subscriber exceed the
installation fees charged the subscriber. It generally takes between 6 months
and a year for the gross profit from each new subscriber to cover the
incremental costs of adding the subscriber.
The Company intends to increase its current subscriber base in the
Costa Rican System utilizing a portion of its positive cash flow from Costa
Rica. With a modest investment in additional signal transmission equipment, the
Company expects to moderately grow the LaCrosse System.
17
<PAGE>
The planned purchase of the assets and operations of International
Broadcast Company is expected to generate positive cash flow in 1999 through the
continued sale of consumer products on a variety of home shopping channels,
including Home Shopping Network, QVC, Shop at Home, and Value Vision. The
Company does not expect the aforementioned net cash flows after reinvestment to
be adequate to fund corporate overhead and fully develop the 5th Avenue
television channel and the 5thAvenueChannel.com website.
The Company believes it needs to raise an additional $1,200,000 to
$2,000,000 of debt or equity capital in 1999 to fund its corporate overhead and
develop the Fifth Avenue Channel and website. The Company is exploring various
sources of additional financing and has a commitment from Melvin Rosen, the
majority shareholder, to fund the aforementioned $1,200,000 to $2,000,000
shortfall in the form of loans to the Company, if other acceptable sources of
financing do not materialize.
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
material financial expenditures 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. Anticipated costs for system and software 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 Year 2000
compliance, this could provide a material adverse financial impact 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. Although this inquiry is not complete, the results of this inquiry to
date 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. SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information,"
establishes standards for reporting information about operating segments in
annual financial statements and requires reporting of selected information about
operating segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company has adopted the provisions of
SFAS No. 131 for the year ending December 31, 1998 as required.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be
18
<PAGE>
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement, and
requires that a company formally document, designate and assess the
effectiveness of transactions that receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15,
1999. A company may also implement the provision of SFAS No. 133 as of the
beginning of any fiscal quarter June 16, 1998 and thereafter. SFAS No. 133
cannot be applied retroactively. SFAS No. 133 must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid contracts
that were issued, acquired, or substantively modified after December 31, 1997
(and, at the Company's election, before January 1, 1998).
The Company has not entered into derivatives contracts to hedge
existing risks or for speculative purposes. Accordingly, the Company does not
expect adoption of the new standard on January 1, 2000 to affect its financial
statements.
Except for the historical information contained herein, this Item 6
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements that involve a number of risks
and uncertainties, including the risks described elsewhere in this Report and
detailed from time to time in the Company's filings with the Commission.
ITEM 7. FINANCIAL STATEMENTS
Financial Statements prepared in accordance with Regulation SB are
attached as exhibits to this report and are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company's principal accountants, BDO Seidman, LLP ("BDO Seidman")
resigned effective as of February 17, 1999, and have been replaced by the firm
of Rachlin Cohen & Holtz LLP effective as of February 23, 1999; the engagement
of Rachlin Cohen & Holtz LLP was approved by the Company's Board of Directors.
As of December 31, 1997 and during the Company's two most recent fiscal
years ending December 31, 1997 and the subsequent periods preceding the
resignation of BDO Seidman, there were no disagreements with BDO Seidman on
matters of accounting principles or practices, financial statement disclosure or
auditing scope or procedures, which disagreements, if not resolved to the
satisfaction of BDO Seidman, would have caused BDO Seidman to make reference to
the subject matter of the disagreements in connection with its reports. The
audited financial statements for the years ended December 31, 1997 and 1996
contained an explanatory paragraph which stated that the Company's significant
operating losses and negative working capital as of such date raised substantial
doubt about the Company's ability to continue as a going concern.
19
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
The following table lists certain information about the directors and
executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------- -------------- ------------------------------------------------------
<S> <C> <C>
Melvin Rosen 55 President, C.E.O. and Chairman of the Board
Samuel H. Simkin 52 Vice President, General Counsel and
Director
Eric Lefkowitz 39 Executive Vice President and Director*
Ivan D. Rothstein 55 Executive Vice President
Dennis J. Devlin 50 Director*
</TABLE>
*Member of Audit Committee
Each Director of the Company holds such position until the next annual
meeting of shareholders and until his successor is duly elected and qualified.
The officers hold office until the first meeting of the Board of Directors
following the annual meeting of shareholders and until their successors are
chosen and qualified, subject to early removal by the Board of Directors.
MELVIN ROSEN: PRESIDENT, C.E.O. AND CHAIRMAN OF THE BOARD
Melvin Rosen has served as President, Chief Executive Officer and
Chairman of the Board of the Company since May, 1997. Mr. Rosen has a wealth of
experience in a wide range of business activities including, most prominently,
satellite and cable television.
Mr. Rosen is a graduate of Loyola College, Baltimore, MD (BS, English,
1965) and an Honors Graduate of the University of Maryland School of Law (J.D.
1968). He practiced law in New York, specializing in taxation, with Proskauer,
Rose, Goetz & Mendelsohn; Finley, Kumble, Underberg, Persky & Roth; and Rosen
and Mintzer. Mr. Rosen developed an expertise in real estate finance and
development and in the 1970's became a major owner of residential housing.
During the 1980's, Mr. Rosen was a producer of motion pictures and classical
ballet, among other ventures.
In 1987, Mr. Rosen and a partner co-founded TVN Entertainment Corp., a
closely held Company which is currently the owner-operator of the largest
multi-channel pay-per-view satellite television system in the U.S. and is one of
the largest lessees of television satellite transponders in the U.S. TVN's
offerings of recent motion pictures, major sporting events (such as championship
boxing) and NFL Football's "Sunday Ticket" account for a significant percentage
of the pay-per-view revenue on C-band satellite television. TVN, based in
Burbank, CA, has in excess of 700,000 C-band satellite dish and other
20
<PAGE>
subscribers and is in the forefront of digital technology. Mr. Rosen is a major
shareholder and a director of TVN, but is not actively involved in the
operations of the Company. He resigned his directorship in TVN in 1998 in order
to devote his full attention to the operations of the Company.
For the past 11 years, Mr. Rosen has owned and operated a national
broadcast television channel in Costa Rica. From 1987 - 1996, he also owned and
operated the wireless cable subscription television system in Costa Rica which,
in February 1996, was sold to and is presently being operated by Tel-Com. During
this time, Mr. Rosen developed extensive knowledge of the wireless cable
television business in Costs Rica and other countries of Latin America.
SAMUEL H. SIMKIN: VICE PRESIDENT AND GENERAL COUNSEL
Samuel H. ("Sandy") Simkin has served as Vice President and General
Counsel and a Director of the Company since May 1997. Mr. Simkin has a
broad-based legal and business background. He is a graduate of University of
Texas at Austin (BBA, Business Honors, 1968); University of Texas School of Law
(J.D., 1970); and Georgetown University, Washington, D.C. (LL.M. 1971). He was a
practicing tax attorney in Houston, Texas from 1972 - 1996, specializing during
those years in corporate finance, real estate, mining and minerals and
entertainment law. During this period, he served as Vice President and General
Counsel of a large closely held coal-mining Company in the Midwest. During the
period 1986 - 1997, Mr. Simkin was an equity partner in and legal advisor to
several business ventures, including a music production and publishing Company
in Los Angeles, a real estate and timeshare development Company in Orlando, FL
and, most recently, an Orlando-based television production Company which
produced a series of business newsmagazine shows.
ERIC LEFKOWITZ: EXECUTIVE VICE PRESIDENT AND DIRECTOR
Eric Lefkowitz has served as Executive Vice President since January
1999 and a director of the Company since March 1998. Mr. Lefkowitz has been
President, CEO and 50% owner of International Broadcast Corporation (IBC) since
1994. Mr. Lefkowitz is a graduate of St. Joseph University, Philadelphia, PA,
(BA, Finance, 1983). Mr. Lefkowitz founded IBC in 1987. IBC is an innovator in
the electronic media field, specializing in new product marketing on cable TV.
Under Mr. Lefkowitz's guidance, IBC's products are aired to TV viewers in over
43 countries in their respective languages and in all 50 states in the US.
IVAN ROTHSTEIN: EXECUTIVE VICE PRESIDENT
Ivan Rothstein has served as Executive Vice President since January
1999. Mr. Rothstein has been Vice President and 50% owner of International
Broadcast Corporation (IBC) since 1994. Mr. Rothstein holds a B.A. degree from
Ohio State University, Columbus Ohio. From 1982 to 1995 Mr. Rothstein was Vice
President of Centuri, a major manufacturer of video and pinball machines.
DENNIS J. DEVLIN: DIRECTOR
Mr. Devlin is a founder and has served as director of the Company since
May 1993 and as Vice President from 1993 to 1998. Mr. Devlin is the founder and
has served as president of Dennis' Mobile Home Service and Supply, Inc., Wayne,
Michigan since 1979. Mobil Home Service and Supply, Inc. is engaged in the
construction of additions, roof systems and specialized products for mobile home
owners,
21
<PAGE>
including remodeling, insurance services, parts supply, and repair. Mr. Devlin
received a Bachelor of Art Education degree in 1971 from Eastern Michigan
University.
DIRECTOR'S REMUNERATION
Commencing June 1996, each non-employee director received a fee of $500
for each board and committee meeting attended. At the 1996 annual meeting of the
directors, each person then serving as a irector received a non-discretionary
grant of a stock option for 5,000 shares of Common Stock. No stock options were
granted in 1997. See "Option Grants" in Item 10 below for options granted in
1998.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The Securities and Exchange Commission has implemented a rule that
requires companies to disclose information with respect to reports that are
required to be filed pursuant to Section 16 of the Securities Exchange Act of
1934, as amended, by directors, officers and 10% shareholders of each Company,
if any of those reports are not filed timely. Based upon a review of Forms 3 and
4 and amendments thereto furnished to the Company under Rule 16a-3(e) during
1998 and Forms 5 and amendments thereto furnished to the Company with respect to
1998, Samuel H. Simkin and Eric Lefkowitz, both directors of the Company, failed
to file reports required under Section 16(a) of the Exchange Act during 1998.
Samuel H. Simkin failed to file reports for the months of July, August and
October 1998 with respect to a total of 16 transactions, and Eric Lefkowitz
failed to file reports for the months of July, August, November and December
1998 with respect to a total of 7 transactions.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth a summary of cash and non-cash
compensation awarded or paid to, or earned by, the Company's President with
respect to services rendered in 1997 and 1998 and paid to or earned by the
Company's Vice President with respect to services rendered in 1998.
<TABLE>
<CAPTION>
TOTAL COMPENSATION
---------------------------------------------------------------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS
- ------------------------------------------------------- --------- -------------- ---------- -----------------
<S> <C> <C> <C> <C>
Melvin Rosen, President and C.E.O.(1) 1998 180,000 -- --
1997 90,000 -- --
Samuel H. Simkin, V.P. & General Counsel 1998 65,000 18,000 225,000
</TABLE>
(1) First became an officer or director of the Company in May 1997.
Although the Company has accrued $270,000 of salary in current
liabilities in the financial statements, no salary has been ever been
paid to Mr. Rosen.
OPTION GRANTS
The following table sets forth information concerning individual grants
of stock options made during 1998 to the named executive officers:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
SECURITIES UNDERLYING TOTAL OPTIONS GRANTED EXERCISE OR EXPIRATION
NAME OPTIONS GRANTED TO EMPLOYEES BASE PRICE DATE
---- --------------------- --------------------- ----------- ----------
<S> <C> <C> <C> <C>
Samuel H. Simkin 225,000 225,000 $2.00 10/9/03
</TABLE>
No options were granted to any officers, directors or employees in
1997. The $2.00 exercise price of the options granted to Mr. Simkin in 1998 to
purchase 225,000 shares was based on the market price of the Company's Common
Stock on the day prior to the grant.
OPTIONS HELD AT THE END OF 1998
The following table indicates the total number and value of exercisable
and unexercisable stock options held by each named executive officer as of
December 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF
UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL YEAR END OPTIONS AT FISCAL YEAR END(1)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Samuel H. Simkin 225,000 0 $1,321,875 $0
<FN>
- ----------
(1) Based on the last sale price for the Company's Common Stock as
reported on the Nasdaq smallCap Market on December 31, 1998.
</FN>
</TABLE>
No options were exercised in 1998 or 1997, and all of the options
granted to Fernand Duquette in 1995 and 1996 expired in 1997 upon his retirement
from the Company.
22
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding beneficial
ownership of the Company's Common Stock by all persons known by the Company to
own beneficially 5% or more of the outstanding shares of the Company's Common
Stock, each director and executive officer, and all executive officers and
directors of the Company as a group, as of April 15, 1999:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE PERCENT OF
BENEFICIAL OWNER OR OF BENEFICIAL OUTSTANDING
IDENTITY OF GROUP OWNERSHIP(1) SHARES(2)
------------------- ----------------- -----------
<S> <C> <C>
Dennis J. Devlin 280,000(3) 2.9%
33451 Elm Street
Wayne, MI 48184
Eric Lefkowitz(*) 194,967(4) 2.0%
Melvin Rosen(*) 6,249,879(5) 59.3%
Ivan Rothstein(*) 191,667(4) 2.0%
Samuel H. Simkin(*) 225,000(6) 2.3%
Ivana Trump 745,000(7) 7.3%
c/o Lyman & Landy
405 Park Avenue #1703
New York, NY 10022
All officers and directors as a group 7,141,513 66.2%
(5 persons)
</TABLE>
* Address: c/o 5th Avenue Channel Corp., 3957 N.E. 163rd Street, North
Miami Beach, Florida 33160
(1) Except as otherwise indicated, all shareholders have sole voting and
investment power with respect to the shares of Common Stock set forth
opposite their respective names.
(2) Based on 9,535,143 shares of Common Stock, which includes 9,235,143
issued and outstanding shares as of April 21, 1999 plus 300,000
shares issuable to International Broadcast Corporation under the
proposed Asset Purchase Agreement to be effective as of January 4,
1999. For each of the above parties who is a holder of an option or
warrant which is exercisable within 60 days from and after April 21,
1999, the total amount of his or her options or warrants are added to
the total of 9,535,143 shares in order to calculate that holder's
percent of outstanding shares.
(3) Includes warrants to purchase 10,000 shares of Common Stock and
currently exercisable stock options to purchase 20,000 shares of Common
Stock.
(4) Includes, for each of Messrs. Lefkowitz and Rothstein, 41,667 shares of
Common Stock from the sale to the Company of their joint 25% interest
in The 5th Avenue Channel, Inc. now named 5th Avenue Television, Inc.
to the Company in December 1998, and a beneficial interest in 50% of
the 300,000 shares to be issued in the proposed sale of the assets of
IBC to the Company effective January 4, 1999.
23
<PAGE>
(5) Consists of 5,249,879 shares of Common Stock held by Mr. Rosen
(including 4,732,000 shares of Common Stock issued upon conversion of
the Debenture in 1999 and 216,667 shares of Common Stock
issued to him in connection with the sale of his 65% interest in The
5th Avenue Channel, Inc., now called 5th Avenue Television, Inc.,
500,000 shares of Common Stock issuable upon exercise of a warrant
having an exercise price of $5.00 per share and 500,000 shares of
Common Stock issuable upon exercise of a warrant having an exercise
price of $1.00 per share.
(6) Consists of an option to purchase 225,000 shares of Common Stock
at an exercise price of $2.00 per share granted in 1998.
(7) Consists of 10,000 shares of Common Stock held by Ms. Trump, 35,000
shares of Common Stock issued to her in connection with the sale of her
10% interest in The 5th Avenue Channel, Inc., now called 5th Avenue
Television, Inc., and options to purchase an aggregate of 700,000
shares of Common Stock having exercise prices ranging from $5.00 per
share to $15.00 per share.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LOANS TO THE COMPANY. On February 24, 1997, Mr. Duquette and Mr. Devlin
each loaned to the Company the sum of $25,000 ($50,000 in the aggregate) which
the Company used to pay Mr. Rosen for extension of the indebtedness due to Mr.
Rosen described below. The Company has accrued interest on these loans at 9%. No
repayment terms were specified.
DEBT RESTRUCTURING AGREEMENT AND DEBENTURE. In February 1997, the
Company and Melvin Rosen ("Rosen") entered into an agreement to restructure the
$2.0 million note (the "Note") issued to Rosen for a portion of the acquisition
of the Costa Rican operations. The restructuring agreement required the Company
to pay $625,000 of the principal balance on or before March 7, 1997. The
remaining $1,375,000 principal balance, plus accrued interest thereon, was due
on February 23, 1998; however, with an additional payment of $100,000, the
Company could extend the maturity date for an additional six months. The Company
paid Rosen $50,000 of the $100,000 on February 24, 1997. The Company failed to
pay the $625,000 by March 7, 1997 and Rosen retained the $50,000. In April 1997
Rosen declared the Note to be in default.
On May 19, 1997, the Company entered into an agreement with Mr. Rosen
restructuring the Note into a convertible debenture (the "Debenture") maturing
in 12 months with interest at 12% per annum (7% to be paid monthly and 5% at
maturity). The principal amount of the Debenture was increased by $100,000 for
expenses owed or reimbursable to Mr. Rosen at the May 19 issue date of said
Debenture.
As consideration for this debt restructuring, the Company agreed to
issue to Mr. Rosen (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 of Common Stock at $5.00
per share. Mr. Rosen received the right to nominate two members to the Company's
Board of Directors until such time as he exercised the conversion rights under
the Debenture and the Company released Rosen from any liability in connection
with the Costa Rican acquisition. Upon consummation of the debt restructuring,
Fernand Duquette and J. Richard Crowley resigned from their positions as
directors of the Company, and Fernand Duquette additionally resigned as the
Company's President and Chief Executive Officer. Melvin Rosen and his designee,
Samuel H. Simkin, were appointed to the Company's Board of Directors and Mr.
Rosen was appointed the Company's President and Chief Executive Officer. As a
result, a change in control of the Company is deemed to have taken place.
The Debenture was convertible by Rosen into the Company's Common Stock
at any time prior to payment of the Debenture on at least 30 days notice. The
conversion price was 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 SmallCap Market for the five trading days immediately prior to the
conversion date.
24
<PAGE>
The Company paid $12,000 of interest on the original Rosen Note in
early 1997. No interest was paid on the Debenture in 1997 and the $156,033 of
interest accrued from May 19, 1997 to December 31, 1997 was added to the
Debenture balance.
In November 1997, Mr. Rosen notified the Company of his intention to
convert the Debenture into shares of Common Stock on or before May 15, 1998. As
consideration for the early conversion and for Mr. Rosen forgoing 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
agreed to be converted at $.50 per share into 4,732,000 shares of Common Stock.
Mr. Rosen converted half of the Debenture in January 1999 and the remaining half
of the Debenture in March 1999.
25
<PAGE>
OTHER RELATED TRANSACTIONS. Effective January 4, 1999 the Company
entered into an agreement in principle to purchase 100% of the assets and
operations of International Broadcast Corporation (IBC) owned by Messrs.
Lefkowitz and Rothstein. Under the terms of the agreement, the Company will
issue 300,000 shares of Common Stock and will tender $450,000 in cash to IBC.
IBC is active in the electronic media field, specializing in new product
marketing on cable television. IBC's products are aired to television viewers in
over 43 countries in their respective languages and in 38 states in the U.S. See
"Recent Developments" in Item 1.
AFFILIATED TRANSACTIONS POLICY. The Board of Directors of the Company
has adopted a policy regarding transactions between the Company and any officer,
director or affiliate, including loan transactions, requiring that all such
transactions be approved by a majority of the independent and disinterested
members of the Board of Directors and that all such transactions be for a bona
fide business purpose and be entered into on terms at least as favorable to the
Company as could be obtained from unaffiliated independent third parties.
26
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
2.1 Share Exchange Agreement by and among the Registrant,
IBC Partners, Melvin Rosen and Ivana Trump effective
December 10, 1998, dated February 28, 1999 as amended
March 17, 1999 (1)
2.2 Amendment to Share Exchange Agreement by and among
the Registrant, IBC Partners, Melvin Rosen and Ivana
Trump dated March 8, 1999 but executed March 17, 1999
(1)
3.1 Amended and Restated Articles of Incorporation.*
3.2 By-Laws(2)
10.1 Debt Restructuring Agreement (3)
10.2 Secured Convertible Debenture(4)
10.3 Agreement to Convert the Secured Convertible
Debenture(5)
10.4 Consulting Agreement between the Registrant,
Ivana Trump and Melvin Rosen, effective November
5, 1998 dated February 28, 1999 (1)
16.1 Letter on Change in Certifying Accountants(6)
21.1 Subsidiaries of the Registrant.*
27.1 Financial Data (for Commission use only)*
*Filed herewith.
(1) Incorporated by reference to the Registrant's Current Report on Form
8-K dated March 25, 1999.
(2) Incorporated by reference to Exhibit 3.2 of the Registrant's
Registration Statement on Form SB-2 (SEC File No. 33-89042), filed with
the Securities and Exchange Commission on January 26, 1995, declared
effective September 24, 1991.
(3) Incorporated by reference to the Registrant's Current Report on Form
8-K, dated May 29, 1997.
(4) Incorporated by reference to Exhibit 2.2 of the Registrant's Current
Report on Form 8-K dated May 29, 1997.
(5) Incorporated by reference to Exhibit 10.4 of the Registrant's Form
10-KSB for the Fiscal Year ended December 31, 1997, dated April 15,
1998.
(6) Incorporated by reference to Exhibit 16.1 of the Registrant's Current
Report on Form 8-K dated February 25, 1999.
(b) Reports on Form 8-K:
None.
27
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused its Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1998 to be signed on its behalf by the undersigned, thereunto duly
authorized.
5TH AVENUE CHANNEL CORP.
Dated: April 22, 1999 By: /s/ Melvin Rosen
---------------------------------
Melvin Rosen
Chairman of the Board,
President and C.E.O.
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------------------- ---------------------------------------------- --------------------------
<S> <C> <C>
Chairman of the Board, April 22, 1999
/s/ Melvin Rosen President and C.E.O.
- -------------------------------------
Melvin Rosen
/s/ Samuel H. Simkin Vice President, Director April 22, 1999
- ------------------------------------- And Principal Accounting Officer
Samuel H. Simkin
Director April 22, 1999
- -------------------------------------
Dennis Devlin
/s/ Eric Lefkowtiz Director April 22, 1999
- -------------------------------------
Eric Lefkowitz
</TABLE>
28
<PAGE>
5TH AVENUE CHANNEL CORP.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1 TO F-2
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheet F-3
Statements of Operations F-4
Statements of Stockholders' Equity F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7 TO F-31
29
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
5th Avenue Channel Corp.
North Miami Beach, Florida
We have audited the accompanying consolidated balance sheet of 5th Avenue
Channel Corp. as of December 31, 1998 and the related consolidated statements of
operations, stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of 5th Avenue Channel
Corp. as of December 31,1998, and the results of their operations and their cash
flows for the year then ended in conformity with generally accepted accounting
principles.
As more fully described in Note 2, the Company is subject to certain liquidity
and profitability considerations. The Company's plans with respect to these
matters are also described in Note 2.
RACHLIN COHEN & HOLTZ LLP
Miami, Florida
April 20, 1999
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
5th Avenue Channel Corp. (formerly known as
Tel-Com Wireless Cable TV Corporation)
Miami, Florida
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of 5th Avenue Channel Corp. (formerly known
as Tel-Com Wireless Cable TV Corporation) for the year ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
5th Avenue Channel Corp. (formerly known as Tel-Com Wireless Cable TV
Corporation) for the year ended December 31, 1997 in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As described in Note 2 to the
financial statements, the Company has experienced significant operating losses
and has negative cash flows from operations for the year ended December 31,
1997. These conditions raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
described in Note 2 to the financial statements. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
BDO SEIDMAN, LLP
Miami, Florida
March 27, 1998
F-2
<PAGE>
5TH AVENUE CHANNEL CORP.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<CAPTION>
Pro
Historical Forma
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 256,209 $ 256,209
Accounts receivable, net of allowance for doubtful
accounts of $186,000 41,559 41,559
Loans receivable, related parties 28,191 28,191
Prepaid expenses and other current assets 104,629 104,629
--------- -----------
Total current assets 430,588 430,588
Property and Equipment 1,323,404 1,323,404
Licenses 4,651,061 4,651,061
Goodwill 615,000 615,000
Other Assets 87,119 87,119
----------- -----------
$ 7,107,172 $ 7,107,172
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 775,417 $ 775,417
Accrued payroll, President/Chairman of the Board 270,000 270,000
Current portion of long-term debt 417,492 417,492
Loans and notes payable, related parties 972,529 972,529
---------- -----------
Total current liabilities 2,435,438 2,435,438
---------- -----------
Long-Term Debt:
Convertible debenture payable to President/Chairman of
the Board 2,366,000 -
License installment payment plan notes 951,479 951,479
Convertible subordinated debentures, net of unamortized discount 623,101 623,101
Other long-term debt 8,469 8,469
---------- -----------
3,949,049 1,583,049
Less current portion 417,492 417,492
----------- -----------
3,531,557 1,165,557
----------- -----------
Commitments, Contingencies, Subsequent Events, and Other Matters - -
Stockholders' Equity:
Preferred stock, $.001 par value, 5,000,000 shares authorized;
500 shares designated as Series A; none issued and outstanding;
1,500 shares designated as Series B; none issued and outstanding - -
Common stock, $.001 par value, 50,000,000 shares authorized;
issued and outstanding 4,503,143 shares (historical) and
9,235,143 shares (pro forma) 4,504 9,236
Additional paid-in capital 9,942,225 12,303,493
Deficit (8,806,522) (8,806,552)
--------- -----------
1,140,177 3,506,177
--------- -----------
$7,107,172 $ 7,107,172
========== ===========
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
5TH AVENUE CHANNEL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Revenue $ 1,453,033 $ 1,085,149
Direct Costs 235,367 170,614
----------- -----------
Gross Margin 1,217,666 914,535
----------- -----------
Operating Expenses:
Selling, general and administrative 2,734,473 3,437,282
Website and product development 696,762 -
Provision for asset impairment 350,000 -
----------- -----------
3,781,235 3,437,282
----------- -----------
Loss from Operations (2,563,569) (2,522,747)
----------- -----------
Other Income (Expense):
Interest income 2,377 6,179
Interest expense (736,749) (545,396)
----------- -----------
(734,372) (539,217)
----------- -----------
Net Loss $(3,297,941) $(3,061,964)
============ ============
Net Loss Per Common Share - Basic and Diluted $ (0.81) $ (1.17)
=========== ===========
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
5TH AVENUE CHANNEL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance, January 1, 1997 2,196,212 $ 2,196 500 $1
Year Ended December 31, 1997
Partial payment of subscriptions receivable for preferred stock - - - -
Cancellation of subscriptions receivable for preferred stock - - (300) -
Sale of preferred stock - - 100 -
Issuance of common stock in debt restructuring 180,000 180 - -
Issuance of warrants in debt restructuring - - - -
Issuance of warrants in payment of consulting fees - - - -
Conversion of preferred stock to common stock 1,183,431 1,184 (300) (1)
Exercise of warrants for common stock 450,000 450 - -
Preferred stock dividends - - - -
Net loss - - - -
---------- -------- ----- ---
Balance, December 31, 1997 4,009,643 4,010 - -
Year Ended December 31, 1998
Issuance of common stock in payment of consulting fees 26,000 26 - -
Issuance of common stock in settlement of debt 82,500 83 - -
Exercise of warrants 50,000 50 - -
Issuance of common stock in connection with
acquisition of The 5th Avenue Channel, Inc. 335,000 335 - -
Discount on subordinated convertible debentures - - - -
Net loss - - - -
---------- -------- ----- ---
Balance, December 31, 1998 4,503,143 $ 4,504 - $-
========== ======== ===== ===
<CAPTION>
ADDITIONAL STOCK TOTAL
PAID-IN SUBSCRIPTION STOCKHOLDERS'
CAPITAL DEFICIT RECEIVABLE EQUITY
------- ------- ---------- ------
<S> <C> <C> <C> <C>
Balance, January 1, 1997 $7,544,720 $(2,284,847) $(400,000) $ 4,862,070
Year Ended December 31, 1997
Partial payment of subscriptions receivable for preferred stock - - 100,000 100,000
Cancellation of subscriptions receivable for preferred stock (300,000) - 300,000 -
Sale of preferred stock 100,000 - - 100,000
Issuance of common stock in debt restructuring 78,570 - - 78,750
Issuance of warrants in debt restructuring 10,000 - - 10,000
Issuance of warrants in payment of consulting fees 128,000 - - 128,000
Conversion of preferred stock to common stock (1,183) - - -
Exercise of warrants for common stock 449,550 - - 450,000
Preferred stock dividends 161,800 (161,800) - -
Net loss - (3,061,964) - (3,061,964)
---------- ------------ --------- -----------
Balance, December 31, 1997 8,171,457 (5,508,611) - 2,666,856
Year Ended December 31, 1998
Issuance of common stock in payment of consulting fees 86,600 - - 86,626
Issuance of common stock in settlement of debt 99,553 - - 99,636
Exercise of warrants 49,950 - - 50,000
Issuance of common stock in connection with
acquisition of 5th Avenue Channel 614,665 - - 615,000
Discount on subordinated convertible debentures 920,000 - - 920,000
Net loss - (3,297,941) - (3,297,941)
---------- ------------ --------- -----------
Balance, December 31, 1998 $9,942,225 $ (8,806,552) $ - $ 1,140,177
=========== ============ ========= ===========
</TABLE>
F-5
<PAGE>
5TH AVENUE CHANNEL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $(3,297,941) $(3,061,964)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 605,652 532,113
Amortization of discount on convertible subordinated debentures 448,101 -
Write-off of prepaid consulting fees - 988,000
Provision for asset impairment and equipment write-off 431,632 -
Inducement costs and interest accrued to debenture balance - 266,000
Warrants and stock compensation and other expenses
incurred in connection with debt restructure - 188,750
Compensation in form of common stock and warrants issued
to consultants 86,626 128,000
Write-off of deposit - 120,142
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable 4,710 (34,080)
(Increase) decrease in prepaid expenses and other current assets (83,868) 23,791
Increase in accrued payroll, President/Chairman of the Board 180,000 -
Increase in accounts payable and accrued liabilities 301,421 443,569
---------- ----------
Net cash used in operating activities (1,323,667) (405,679)
---------- ----------
Cash Flows from Investing Activities:
Purchase of property and equipment (229,462) (315,921)
Increase in other assets (33,229) (1,277)
Decrease in restricted cash - 346,400
Loans to related parties (28,191) -
---------- ----------
Net cash provided by (used in) investing activities (290,882) 29,202
---------- ----------
Cash Flows from Financing Activities:
Net proceeds from convertible subordinated debentures 1,055,330 -
Proceeds from exercise of warrants 50,000 450,000
Proceeds from subscription receivable - 100,000
Proceeds from sale of preferred stock - 100,000
Proceeds from loans from stockholders 935,394 255,979
Payment of loans from stockholders (275,344) (75,500)
Payment of notes payable - (361,000)
Payment of long-term debt (7,829) (6,413)
---------- ----------
Net cash provided by financing activities 1,757,551 463,066
---------- ----------
Net Increase in Cash and Cash Equivalents 143,002 86,589
Cash and Cash Equivalents, Beginning 113,207 26,618
---------- ----------
Cash and Cash Equivalents, End $ 256,209 $ 113,207
========== ==========
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND CAPITALIZATION
The Company was organized as a Florida corporation on May 7, 1993
under the name Tele Consulting Corp. The Company changed its name
to Tel-Com Wireless Cable TV Corporation on February 14, 1994. On
March 8, 1999, the Company's Articles of Incorporation were amended
to change the Company's name to 5th Avenue Channel Corp. and to
increase the authorized number of shares of $0.001 par value common
stock from 10,000,000 to 50,000,000 shares. All references to the
name of the Company and the number of shares of common stock in the
accompanying financial statements have been retroactively restated.
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 establish such preferred stock in
one or more series and to fix the rights, preferences, privileges
and restriction thereof, including dividend rights, conversion
rights, terms of redemption, liquidation preferences and the number
of shares constituting any series or the designation of such
series.
During 1996, the Company designated 500 shares as Series A
Convertible Preferred Stock. The stock is convertible at the option
of the holder or automatically converted on the effective date of
registration statement filed by the Company with the Securities and
Exchange Commission (SEC). The conversion rate is the lesser of
$3.25 or 65% of the average bid for the Company's common stock for
the five trading days prior to the conversion. The holders of these
shares are preferentially entitled to receive upon voluntary or
involuntary liquidation $1,000 per share plus all declared and
unpaid dividends. As of December 31, 1998, the Company had no
Series A convertible preferred stock issued and outstanding.
During 1997, the Company designated 1,500 shares as Series B
Convertible Preferred Stock. The stock is convertible at the option
of the holder at a rate of the lesser of $1.00 or 65% of the
average bid for the Company's common stock for the five trading
days prior to the conversion. The holders of these shares are
preferentially entitled to receive upon voluntary or involuntary
liquidation $1,000 per share plus all declared and unpaid
dividends. As of December 31, 1998, the Company had no Series B
convertible preferred stock issued and outstanding.
BUSINESS
Until the end of 1997, the Company's primary business was the
operation 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.
The Company rebroadcasts 17 channels of cable programs to
approximately 940 residential and commercial subscribers in a 25
mile radius of its tower in LaCrosse. In Costa Rica, the Company
rebroadcasts various channels of cable programs and off-air
channels to approximately 5,500 residential and commercial
subscribers in a 100 mile radius of the 11,000 foot Mt. Irazu in
the center of Costa Rica.
F-7
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
BUSINESS (Continued)
During the fourth quarter of 1998, the Company acquired The 5th
Avenue Channel, Inc. (see Note 3). With this acquisition, the
Company intends to move forward as a multi-media Internet company,
combining electronic commerce with programming and other content on
television and the Internet. Future Company revenues are projected
to be primarily derived from the electronic sale of premium goods
and services on the Internet, through retail outlets and on
television.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of 5th
Avenue Channel Corp. and its wholly-owned subsidiaries (the
Company), after elimination of intercompany accounts and
transactions.
USE OF ESTIMATES
The accompanying consolidated financial statements have been
prepared in conformity with generally accepted accounting
principles. In preparing the financial statements, management is
required to make estimates and assumptions that affect the reported
amounts of assets and liabilities as of the date of the balance
sheet and operations for the period. Material estimates as to which
it is reasonably possible that a change in the estimate could occur
in the near term primarily consist of the allowance for impairment
of certain licenses. Although these estimates are based on
management's knowledge of current events and actions it may
undertake in the future, they may ultimately differ from actual
results.
CASH AND CASH EQUIVALENTS
For financial presentation purposes, the Company considers those
short-term, highly liquid investments with original maturities of
three months or less to be cash and cash equivalents.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and
accounts receivable.
CASH
At various times during the year, the Company had deposits in
financial institutions in excess of federally insured limits. At
December 31,1998, the Company had deposits in excess of federally
insured limits of approximately $175,000. The Company maintains its
cash with high quality financial institutions which the Company
believes limits these risks.
F-8
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
ACCOUNTS RECEIVABLE
The Company conducts business and extends credit based on an
evaluation of the customers' financial condition generally without
requiring collateral. Exposure to losses on receivables is expected
to vary by customer due to the financial condition of each
customer. The Company monitors exposure to credit losses and
maintains allowances for anticipated losses considered necessary
under the circumstances.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for major
betterments and additions are charged to the asset accounts, while
replacement, maintenance and repairs which do not extend the lives
of the respective assets are charged to expense currently. Gain or
loss on disposition of assets are recognized currently.
Depreciation expense is provided using the straight-line method for
financial statement purposes and accelerated methods for federal
income tax purposes over the estimated useful lives of the various
assets, generally 5 to 10 years.
LICENSES
Costs incurred to acquire or develop wireless cable channel
licenses are capitalized and amortized on a straight-line basis
over their expected useful lives (life of the license and expected
renewal period), generally 15 years. Amortization of the licenses
begins upon the commencement of operations. The Company continually
evaluates the carrying value of the licenses. Impairments are
recognized when the expected future undiscounted operating cash
flows to be derived from such intangible assets are less than their
carrying values.
ORGANIZATIONAL COSTS
Organizational costs are stated at cost less accumulated
amortization. Amortization expense is provided using the
straight-line method over a five year period.
GOODWILL
Goodwill primarily relates to the acquisition of the minority
stockholder interest of 5th Avenue Channel, Inc. and is amortized
on a straight-line basis over a five year period. Amortization will
commence on January 1, 1999. The Company will periodically evaluate
whether changes have occurred that would require revision of the
remaining estimated useful life of the assigned goodwill or render
the goodwill not recoverable. If such circumstances arise, the
Company would use an estimate of the undiscounted value of expected
future operating cash flows to determine whether the goodwill is
recoverable.
F-9
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and
cash equivalents, accounts receivable, loans receivable, accounts
payable, accrued liabilities, debentures payable, loans and notes
payable and long-term debt. The carrying amounts of such financial
instruments, as reflected in the consolidated balance sheet,
approximate their estimated fair value as of December 31, 1998. The
estimated fair value is not necessarily indicative of the amounts
the Company could realize in a current market exchange or of future
earnings or cash flows.
WEBSITE AND PRODUCT DEVELOPMENT COSTS
Website and product development costs include expenses incurred by
the Company to develop, enhance, manage, monitor and operate the
Company's website, and are comprised primarily of compensation for
product development staff and payments to outside contractors.
Website and product development costs are expensed as incurred.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees ("APB No.
25"), and related interpretations, in accounting for its employee
stock options rather than the alternative fair value accounting
allowed by SFAS No. 123, Accounting for Stock-Based Compensation.
APB No. 25 provides that the compensation expense relative to the
Company's employee stock options is measured based on the intrinsic
value of the stock option. SFAS No. 123 requires companies that
continue to follow APB No. 25 to provide a pro-forma disclosure of
the impact of applying the fair value method of SFAS No. 123.
NET LOSS PER COMMON SHARE
The Company computes earnings (loss) per share in accordance with
SFAS No. 128, "EARNINGS PER SHARE", which was adopted in 1997. This
standard requires dual presentation of basic and diluted earnings
per share on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the
numerator and denominator of the diluted earnings per share
computation.
Net loss per common share (basic and diluted) is based on the net
loss divided by the weighted average number of common shares
outstanding during the year.
The Company's potentially issuable shares of common stock pursuant
to outstanding stock purchase options, performance shares related
to the acquisition of 5th Avenue Channel, Inc., and warrants and
convertible preferred stock and debentures are excluded from the
Company's diluted computation as their effect would be
anti-dilutive.
F-10
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
INCOME TAXES
The Company accounts for income taxes using Statement of Financial
Accounting Standards (SFAS) No. 109, "ACCOUNTING FOR INCOME TAXES",
which requires recognition of deferred tax liabilities and assets
for expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on
the difference between the financial statement and tax bases of
assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to reverse.
FOREIGN CURRENCY TRANSLATION
Foreign currency denominated assets and liabilities of subsidiaries
with local functional currencies are translated to United States
dollars at year end exchange rates. The effects of translation were
not material at December 31, 1998. Subsidiaries with a United
States dollar functional currency remeasure monetary assets and
liabilities at year end exchange rates and non-monetary assets and
liabilities at historical exchange rates. The effects of
remeasurement are included in income.
Exchange gains and losses arising from transactions denominated in
foreign currencies are translated at average exchange rates. The
effects of these exchange adjustments are included in income and
amounted to $700 and $7,049 in 1998 and 1997, respectively.
SEGMENT INFORMATION
The Company follows the provisions of SFAS No. 131, "DISCLOSURES
ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION". This
standard requires that companies disclose operating segments based
on the manner in which management disaggregates the Company in
making internal operating decisions.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising costs
incurred for 1998 and 1997 were not material.
CERTAIN RISKS AND UNCERTAINTIES
Operations in the United States are regulated by the U.S. Federal
Communications Commission and may be subject to non-renewal,
revocation or cancellation for violations of the Communications Act
of 1934 that may occur.
F-11
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
CERTAIN RISKS AND UNCERTAINTIES (Continued)
In connection with the Company's Costa Rican operations (see Note
5), its operations are regulated mainly by the Radio and Television
Law - Ley de Radio y Television, No. 1758 of June 19, 1954, as
amended, and the Regulation of Wireless Stations Regulamenta de
Estaciones Inalimbrieds, No. 63 of December 11, 1956 and the
Broadcasting Rule of Atlantic City and the International Agreements
Regarding Broadcasting executed in Washington, D.C. in 1949.
The pay television industry is highly competitive. Wireless cable
television systems face or may face competition from several
sources, including traditional and established hard-wire cable
companies.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS
No. 130, "REPORTING COMPREHENSIVE INCOME" and No. 131, "DISCLOSURES
ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION". SFAS No.
130 establishes standards for reporting and displaying
comprehensive income, its components and accumulated balances. SFAS
No. 131 establishes standards for the way that public companies
report information about operating segments in annual financial
statements and requires reporting of selected information about
operating segments in interim financial statements issued to the
public. Both SFAS No. 130 and SFAS No. 131 are effective for
periods beginning after December 15,1997. The Company adopted these
new accounting standards in 1998, and their adoption had no effect
on the Company's financial statements and disclosures.
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES". SFAS No. 133 requires companies to recognize all
derivatives contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain
conditions are met, a derivative may be specifically designated as
a hedge, the objective of which is to match the timing of the gain
or loss recognition on the hedging derivative with the recognition
of (i) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (ii) the
earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss
is recognized in income in the period of change. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after
June 15, 1999.
Historically, the Company has not entered into derivatives
contracts to hedge existing risks or for speculative purposes.
Accordingly, the Company does not expect adoption of the new
standard on January 1, 2000 to affect its financial statements.
F-12
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 2. LIQUIDITY AND PROFITABILITY CONSIDERATIONS
During 1997, 1998, and continuing in early 1999, the Company
experienced, and continues to experience, certain cash flow problems
and has, from time to time, experienced difficulties meeting its
obligations as they become due. In addition, the Company has negotiated
several settlement agreements with its creditors to settle its
outstanding obligations through the issuance of stock. As reflected in
the consolidated financial statements, the Company has incurred net
losses of approximately $3,298,000 in 1998 and $3,062,000 in 1997, and
as of December 31, 1998, the Company's consolidated financial position
reflects a working capital deficiency of approximately $2,000,000.
Management's plans with regard to these matters encompass the following
actions:
LIQUIDITY
1. FINANCING BY MAJOR STOCKHOLDER
The major stockholder has provided the Company a commitment
that, in the event and to the extent that the Company is unable
to obtain at least $2,000,000 in debt or equity financing from
third party sources (see below) during the twelve month period
ending April 30, 2000 and the Company experiences a cash
shortfall during this period, the major stockholder is to
advance funds to the Company, on a debt or equity basis or a
combination thereof, as agreed to by the Board of Directors, in
an amount equal to the difference between $2,000,000 and such
third party funding.
2. FINANCING FROM THIRD PARTY SOURCES
Management is currently involved in various discussions with
other third party sources, seeking to raise debt or equity
financing. Management anticipates that these discussions should
ultimately result in financing to meet the Company's needs,
together with the financing commitment provided by the major
stockholder (see above).
3. CONVERSION OF OUTSTANDING WARRANTS
As more fully described in Note 15, the Company presently has
outstanding warrants to purchase an aggregate of 2,475,000
shares of common stock as follows:
Publicly traded common stock purchase warrants 1,610,000
Private placement warrants 625,000
Underwriter stock warrants 240,000
----------
2,475,000
=========
F-13
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 2. LIQUIDITY AND PROFITABILITY CONSIDERATIONS (Continued)
LIQUIDITY (Continued)
3. CONVERSION OF OUTSTANDING WARRANTS (Continued)
These warrants provide for an exercise price of $5.75 per share
and expire from August 1999 to May 2000. However, the warrants
are redeemable and may be called by the Company prior to the
expiration dates if the common stock trades above $6.90 for a
period of 20 consecutive trading days and the underlying shares
are registered. The Company expects to complete the filing of a
registration statement regarding such underlying shares no later
than the third quarter of 1999. If the Company were then to call
the warrants at their stipulated redemption price and, as a
result, all of the warrants were exercised, the gross proceeds
to the Company would amount to approximately $14,000,000.
PROFITABILITY
1. BUSINESS PLAN
The Company has formulated, and is in the process of
implementing, a business plan intended to define the Company's
strategy for the return of the Company to profitability, which
plan includes the following:
/bullet/ Expansion of the retail, television and other sales of
products and services of IBC, and the maximization of the
contractual relationships developed and to be developed by
IBC (see Note 23);
/bullet/ Increase in Internet commerce, with e-commerce sales to
both consumers as well as other Internet sites which market
to consumers;
/bullet/ Development of a secure gift and buying certificate program
for the Company's Internet customers, including business-
to-business customers;
/bullet/ Launch of the 5th Avenue Television Channel, including
co-branded programming with Zacks Investment Research and
Nightingale-Conant, among other participants.
2. IMPROVEMENT IN OPERATIONAL COSTS
Management is continuing in its efforts to improve controls over
operating costs, enhance controls of overhead expenses and
improve profit margins.
F-14
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3. ACQUISITION OF THE 5TH AVENUE CHANNEL, INC.
SHARE EXCHANGE AGREEMENT
In the Share Exchange Agreement dated February 28, 1999 effective
December 10, 1998, the Company completed the acquisition of The 5th
Avenue Channel, Inc. (5th Avenue Channel). Under the agreement, the
Company exchanged 335,000 shares of the Company's stock in exchange
for 100% of the outstanding common stock of 5th Avenue Channel and
agreed to issue up to 665,000 additional "performance shares" of
the Company's common stock. 332,500 shares will be earned when 5th
Avenue Channel achieves or exceeds $10,000,000 in revenue in any
calendar quarter and another 332,500 shares can be earned if 5th
Avenue Channel achieves or exceeds $25,000,000 of gross sales or
$1,000,000 of net income in any one calendar quarter. In a March
17, 1999 amendment to the agreement, if 5th Avenue Channel achieves
$25,000,000 of sales or $1,000,000 in net income in any calendar
quarter, all 665,000 of the performance shares will be earned.
The controlling stockholder of the Company owned 65% of 5th Avenue
Channel common stock and, accordingly, that portion of the
acquisition has been accounted in a manner similar to the pooling
of interests method, at the majority stockholder's historical cost,
which was insignificant. The portion of the acquisition acquired
from minority stockholders was recorded at estimated fair value of
the common stock issued. When and if the performance shares are
earned, they will be recorded at estimated fair value.
5th Avenue Channel's primary asset is its Internet concept, which
is primarily an intangible asset. The Company allocated the
purchase price to this asset, which will be amortized over a five
year period commencing January 1, 1999.
5th Avenue Channel commenced limited operations in December 1998.
$696,762 of website and product development costs were included in
the Company's consolidated statements for 5th Avenue Channel in
1998 and $57,453 included in other operating expenses in 1997.
There were no significant revenues generated in 1998 or 1997 by 5th
Avenue Channel. Accordingly, substantially all of 5th Avenue
Channel's operating results have been included in the Company's
consolidated financial statements for 1998 and 1997.
F-15
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3. ACQUISITION OF 5TH AVENUE CHANNEL, INC. (Continued)
CONSULTING AGREEMENT
As an integral part of the acquisition of 5th Avenue Channel, the
Company entered into a consulting agreement with Ivana Trump for
"on air" marketing and other promotional services. Ms. Trump is
Chairman of one of the Company's subsidiaries and was a minority
stockholder of 5th Avenue Channel prior to its acquisition. Ms.
Trump will receive $10,000 per month and additional remuneration
based upon appearances. In addition, she received options to
purchase up to 700,000 shares at various exercise prices ranging
from $5 to $15 per share. The options expire in December 2001. The
agreement has an initial term expiring on December 31, 2001 and is
renewable for successive additional one-year terms unless either
party provides specified written notice of non-renewal.
NOTE 4. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
ESTIMATED USEFUL
LIVES (YEARS)
<S> <C> <C>
Leasehold improvements 7-10 $ 24,439
Furniture, fixtures and office equipment 7 118,399
TV signal equipment 5-10 1,772,794
Vehicles 5 133,372
----------
2,049,004
Less accumulated depreciation 725,600
----------
$1,323,404
==========
</TABLE>
Depreciation expense was $286,488 and $219,094 for 1998 and 1997,
respectively. In 1998, the Company wrote off approximately $82,000 of
converter boxes which were no longer operational.
NOTE 5. LICENSES
<TABLE>
<CAPTION>
LOCATION OF LICENSE
<S> <C>
United States:
LaCrosse, Wisconsin $ 371,493
Stevens Point and Wausau, Wisconsin, net of $350,000 allowance for impairment 839,361
----------
1,210,854
Costa Rica:
San Jose, Costa Rica 4,174,000
----------
5,384,854
Less accumulated amortization 733,793
----------
$4,651,061
==========
</TABLE>
Amortization expense was $319,697 and $312,219 for 1998 and 1997,
respectively.
F-16
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 5. LICENSES (Continued)
UNITED STATES LICENSES
During 1993, the Company entered into agreements for the lease and
purchase of certain channel licenses and for the lease and purchase
of transmitting equipment and tower site usage in LaCrosse,
Wisconsin. Pursuant to the agreements, the Company incurred
$371,493 of costs related to the channel licenses.
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 three markets:
Hickory-Lenoir-Morganton, NC; Wausau-Rhinelander, WI; and Stevens
Point-Marchfield-Wisconsin Rapids, WI. The Company's total bid for
these three 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 two Wisconsin markets.
On July 24, 1998, the Company received written notification from
the FCC that the two Wisconsin licenses had been conditionally
granted, subject to the making of required installment payments,
effective as of July 25, 1997. In connection therewith, the Company
elected to participate in the installment payment plan, and two
installment payment plan notes were entered into in the total
amount of $951,479. The terms of these notes provide for the
payment of interest only at 9.125%, aggregating $115,260, through
October 31, 1998, and thereafter $21,702 on a quarterly basis until
July 31, 1999; commencing on October 31, 1999, quarterly payments
of principal and interest, aggregating $42,211, are required
through the maturity date of July 25, 2007. The Company has granted
the FCC a first lien on and security interest in all of the rights
and interest in the two Wisconsin licenses and all proceeds of any
sale or other disposition thereof.
The Company has accrued, but has not paid, the required interest
payment of $115,260 which was due on October 31, 1998 or the
payment of $21,702 which was due on January 31, 1999. The Company
intends to contest the retroactive interest for the period from
July 25, 1997 until receipt of notification of the grant; however,
the Company intends to offer to make the installment payment of
$115,260 by April 29, 1999, the date the Company has been advised
is the final date to make the two Wisconsin license payments
without being considered in default, provided such payments will be
applied to these Wisconsin licenses and not held to make good the
Hickory default (see below).
Future required principal payments are as follows:
Year ending December 31:
1999 $ 20,331
2000 86,586
2001 94,999
2002 103,969
2003 113,786
Thereafter 531,808
-------
$951,479
========
F-17
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 5. LICENSES (Continued)
UNITED STATES LICENSES (Continued)
In 1998, the Company recorded a $350,000 impairment allowance
relating to the Stevens Point and Wausau, Wisconsin licenses. The
Company believes the value of these licenses declined by the
estimated allowance recorded. At December 31, 1998, these licenses
have not been placed in service.
On September 1, 1996, the unpaid license fee payable of $1,671,175
for the Hickory, NC license was defaulted. According to Section
21.959 in the FCC MDA Audit Information Package, a maximum default
payment of 3% of the defaulting bidder's bid amount was due to the
FCC. This amount, $65,544, was charged to operations in 1996. The
remaining $120,142 of the deposit submitted to the FCC for Hickory,
NC was charged to operations in the fourth quarter of 1997.
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 reauction of this license. The FCC has not yet
announced plans to reauction the Hickory, NC license and no
liability is recorded for the potential shortfall of a reauction.
COSTA RICA LICENSES
In February 1996, the Company acquired 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. These companies
were acquired from the person who, as the result of the loan
restructure described in Note 7, subsequently came to be the
present major stockholder of the Company.
In the first acquisition, the Company acquired 100% of Televisora
Canal Diecineuve, S.A. ("Canal 19"), for $1 million cash and $2
million due one year later with interest at 3.6% per annum. The $2
million note payable was secured by the stock of Canal 19 and of
Grupo Masteri, discussed below.
In the second acquisition, the Company acquired all of the common
stock of Grupo Masteri, S.A. ("Grupo") for 121,212 restricted
shares of the Company's common stock valued at $8.25 per share.
The third acquisition was of TelePlus, S.A. ("TelePlus"). As
consideration for the purchase of TelePlus, the Company agreed to
pay the Seller $50 times the increase in subscribers for the one
year period after TelePlus had six pay television channels
broadcasting to the public. In October 1996, TelePlus began
broadcasting six pay television channels to 760 subscribers. Over
the next year, TelePlus added 3,480 subscribers. As a result,
$174,000 was added to licenses and notes payable to stockholders.
F-18
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 5. LICENSES (Continued)
COSTA RICA LICENSES (Continued)
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 considered minimal.
NOTE 6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
<TABLE>
<S> <C>
Accounts payable $166,866
Accrued interest, including approximately $80,000 to related parties 236,177
Sales taxes payable 53,888
Other accrued liabilities 318,486
-------
$775,417
========
</TABLE>
NOTE 7. LOAN RESTRUCTURE
In February 1997, the Company entered into an agreement to restructure
the $2 million note incurred as part of the acquisition of Canal 19
(Note 5). The restructure agreement required the Company to pay
$625,000 of the principal balance of the note on or before March 7,
1997. The remaining $1,375,000 principal balance, plus accrued interest
thereon, was due on or before February 23, 1998. However, with an
additional payment of $100,000, the Company could extend the maturity
date for an additional six months.
The Company paid $50,000 of the $100,000 on February 24, 1997. The
Company failed to pay the $625,000 by March 7, 1997 and the $50,000 was
retained by the seller as a penalty. In April 1997, the Seller declared
the note to be in default.
On May 19, 1997, the Company entered into an agreement with the Seller
restructuring the $2 million note issued in the acquisition of Canal 19
into a convertible debenture maturing in 12 months and bearing interest
at 12% per annum. The principal amount of the debenture was increased
by $100,000 for expenses owed or reimbursable to Seller at the issue
date of the debenture.
As consideration for this debt restructuring, 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 until such time as the
President exercised the conversion rights under the debenture. A value
of $78,750 was assigned to the aforementioned stock and $10,000 to the
warrants issued.
F-19
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 7. LOAN RESTRUCTURE (Continued)
The debenture is convertible by the Seller into the Company's common
stock at any time after the issue date prior to payment of the
debenture on at least 30 days advance notice. 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. At either the President's or the Company's option, $1 million of
this amount could have been extended for an additional period of 12
months with interest at 15% per annum.
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 November 1997, the President notified the Company of his intention
to convert the debenture into common stock. As inducement for the early
conversion and for the President/Chairman of the Board foregoing all
interest on the debenture after December 31, 1997, an additional
$109,967 was added to the debenture principal balance in 1997.
The resulting $2,366,000 debenture balance was to be converted into
4,732,000 restricted shares of common stock as soon as the Company's
articles of incorporation were amended to increase the number of
authorized shares. On March 8, 1999, the Company's Articles of
Incorporation were amended to increase the number of shares authorized
from 10,000,000 to 50,000,000. In January 1999, 2,366,000 shares were
issued pursuant to conversion of one-half of the debenture and in March
1999, the remaining 2,366,000 shares were issued in the conversion of
the remaining one-half of the debenture. See Note 21 regarding pro
forma presentation of the issuance of the shares of common stock.
The $238,750 total cost of extending and restructuring the debt and the
$109,967 early conversion inducement were recorded as interest expense
in 1997.
NOTE 8. LOANS RECEIVABLE, RELATED PARTIES
At December 31, 1998, the Company had a loan receivable of
approximately $28,000 due from a director. The loan was settled in
early 1999 in exchange of services performed by the director in 1999.
Imputed interest on the loan for 1998 was not material.
F-20
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. LOANS AND NOTES PAYABLE, RELATED PARTIES
<TABLE>
<S> <C>
Loans payable to the President/Chairman of the Board, interest at 18%, no
specified maturity date. $ 79,079
Loan payable to former CEO and director, interest at 10%, no specified maturity date. 18,450
Loan payable to current director, interest at 10%, no specified maturity date. 25,000
Note payable to the President/Chairman of the Board, bearing interest at 8%,
due November 16, 1999. 550,000
Note payable to the President/Chairman of the Board, bearing interest at 10%,
due July 3, 1999. 300,000
--------
$972,529
========
</TABLE>
Interest expense on the related party loans and notes payable amounted
to approximately $63,000 during 1998 and accrued interest amounted to
approximately $80,000 (approximately $70,000 due to the President) at
December 31, 1998.
NOTE 10. OTHER LONG-TERM DEBT
Other long-term debt consists of two loans, principal and interest at
9.70% and 9.25%, payable monthly through August 2000, collateralized by
vehicles. Future required principal payments under these loans are
$6,509 for 1999 and $1,960 for 2000.
NOTE 11. COMMITMENTS
LEASE COMMITMENTS
The Company leases its offices, certain operating facilities and
equipment under several operating leases with terms expiring
through 2003.
Future minimum lease payments under these operating leases are
approximately as follows:
1999 $93,000
2000 86,000
2001 92,000
2002 98,000
2003 34,000
--------
Total $403,000
========
F-21
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 11. COMMITMENTS (Continued)
LEASE COMMITMENTS (Continued)
The Company also rents office space in Costa Rica from the
President/Chairman of the Board. There is no formal agreement
regarding the rental of the Cost Rica property and, accordingly,
these arrangements are on a month-to-month basis.
Rent expense was approximately $118,000 and $84,000 for 1998 and
1997, respectively. The rent paid by the Company to the
President/Chairman of the Board for the Costa Rica property lease
was approximately $20,000 for 1998.
The Company has also entered into lease agreements for ITFS excess
capacity for four channels with each of the Shekinah Network and
the Morningstar Educational Network for use in the LaCrosse System.
In October 1997, the FCC granted Shekinah Network and Morningstar
such licenses. The terms of such leases expire 10 years from the
license grant date and provide for the negotiation of new lease
agreements upon the expiration of the initial 10-year terms. The
Company is required to pay a monthly subscriber royalty fee based
on the number of subscribers.
JOINT MARKETING AGREEMENT
The Company entered into a joint marketing agreement with a company
to fulfill certain sales to customers for select merchandise. The
Company will advance certain costs to the fulfillment company and
share portions of the earned gross margin on each item on a
scheduled basis. The higher the gross margin, the greater
percentage of gross margin earned by the Company.
NOTE 12. PREFERRED STOCK
On November 25, 1996, the Company accepted a Subscription Agreement
from Amber Capital Corporation and Investor Resource Services, Inc.
(the "Buyers") for a total of 500 shares of its Series A Convertible
Preferred Stock at a price of $1,000 per share (the "Preferred
Shares"), for a total subscription price of $500,000. The Buyers
delivered $100,000 and promissory notes for $400,000, at closing. The
Buyers paid an additional $100,000 against the Notes on January 8,
1997. The $300,000 remaining balance on the Notes, which was due on
January 31, 1997, was not paid, and the Company and the Buyers agreed
to terminate the balance of the Subscription Agreements, cancel the
Notes and revert 300 shares of the preferred stock back to the Company.
On March 14, 1997, Aurora Capital purchased 100 shares of the Company's
Series B Convertible Preferred Stock for $100,000. The 300 aggregate
shares of Series A and Series B Convertible Preferred Stock were
converted into 1,183,431 shares of common stock on September 16, 1997.
During 1997, the Company recorded a preferred stock dividend of
$161,800 which represented the discounted portion of the conversion
rate into common stock determined at the time of issuance.
F-22
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 13. CONVERTIBLE SUBORDINATED DEBENTURES
In April 1998, the Company completed a private offering of 12%
Convertible Subordinated Debentures (the "May Debentures") due on
October 31, 1999. Interest is payable monthly. The May Debentures are
convertible into shares of common stock at $2 per share. Debenture
holders have the option to convert up to 50% of the principal amount of
the Debentures in the event that the Company has not exercised its
redemption rights at any time prior to February 28, 1999. If the
Company does not offer to redeem the debentures by that date, Debenture
holders have the right to convert the remaining 50% of the principal
amount after July 31, 1999.
The Company received net proceeds of $555,330 ($595,000 less issuance
costs of $39,670). At the time of issuance of the debentures, the
market price of the Company's common stock was higher than the
conversion rate, resulting in a beneficial conversion feature which was
limited to the amount of the proceeds received ($595,000). This amount
was treated as deferred interest expense and recorded as a reduction of
the convertible debenture liability with a corresponding credit to
additional paid-in capital. 50% of this amount is being amortized into
interest expense from the issuance dates through February 28,1999 (the
first conversion date) and the remaining 50% is being amortized to
interest expense from the issuance dates through July 31, 1999 (the
second conversion date). A total of $390,652 was amortized as interest
expense during 1998. The unamortized discount has been presented as a
reduction of the convertible subordinated debenture balance.
In November 1998, the Company completed a private offering of a 12%
Convertible Subordinated Debenture (the "November Debenture") due on
April 30, 2000. Interest is payable quarterly from January 30, 1999, to
April 30, 2000. The November Debenture is convertible into shares of
common stock at $2.50 per share. The Debenture holder has the option to
convert up to 50% of the principal amount of the Debenture in the event
that the Company has not exercised its redemption rights at any time
prior to July 30, 1999. If the Company does not offer to redeem the
debentures by that date, the Debenture holder has the right to convert
the remaining 50% of the principal amount after December 31, 1999.
The Company received net proceeds of $500,000 in connection with the
November Debenture. At the time of issuance of the debenture, the
market price of the Company's common stock was higher than the
conversion rate, resulting in a beneficial conversion feature of
$325,000. This amount was treated as deferred interest expense and
recorded as a reduction of the convertible debenture liability with a
corresponding credit to additional paid-in capital. 50% of this amount
is being amortized into interest expense from the issuance date through
July 30, 1999 (the first conversion date) and the remaining 50% is
being amortized to interest expense from the issuance date through
December 31, 1999 (the second conversion date). A total of $57,449 was
amortized as interest expense during 1998. The unamortized discount has
been presented as a reduction of the convertible subordinated debenture
balance.
MAY DEBENTURES
--------------
Unpaid principal balance $ 595,000
Less unamortized discount (204,348)
--------
Convertible debenture, net 390,652
--------
F-23
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 13. CONVERTIBLE SUBORDINATED DEBENTURES (Continued)
NOVEMBER DEBENTURE
------------------
Unpaid principal balance 500,000
Less unamortized discount (267,551)
--------
Convertible debenture, net 232,449
--------
Total $ 623,101
========
NOTE 14. COMMON STOCK
COMMON STOCK FOR SERVICES
During 1998, the Company issued a total of 26,000 shares of common
stock for services rendered in 1998 on behalf of 5th Avenue Channel
and issued 7,500 shares in payment of legal services included in
accounts payable at December 31, 1997. The issuance of the 33,500
shares was recorded at the closing price on the day preceding the
issuance of the shares totaling $126,939.
CONVERSION OF DEBT INTO COMMON STOCK
During 1998, the holder of a note payable converted the note into
common stock. The note, amounting to $50,000, plus accrued
interest, was converted into 75,000 shares.
NOTE 15. STOCK WARRANTS, CONSULTING AGREEMENTS 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 at
a price of $.25 per warrant. Each warrant entitled the holder to
purchase, at any time from the date of the offering through the
fifth anniversary date (May 10, 2000), one share of common stock at
a price of $5.75 per share. The warrants are redeemable at a price
of $.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. Such warrants may be exercised within five
years from the date of their issuance at an exercise price of $5.75
per share. 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.
F-24
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 15. STOCK WARRANTS, CONSULTING AGREEMENTS AND SHARES RESERVED
(Continued)
UNDERWRITER STOCK WARRANTS
In connection with the public offering , the Company sold
Underwriter's stock warrants, at a price of $.001 per warrant.
Warrants to purchase 100,000 shares of common stock and warrants to
purchase an additional 140,000 warrants were sold. The
underwriter's stock warrants are exercisable at a price of $7.50
per share, and the underwriter's warrants are exercisable at a
price of $.375 per warrant through May 10, 2000. Each warrant
underlying the underwriter's warrants is exercisable for one share
of common stock at an exercise price of $5.75 per share.
CONSULTING AGREEMENTS
On December 23, 1996, the Company engaged four individuals (the
"Consultants") to provide financial and public relations services
to the Company. The Company issued a total of 200,000 shares of its
common stock valued at $988,000 (fair value) to the Consultants as
compensation for the services to be provided by the Consultants. No
costs were expensed as of December 31, 1996 as no services had been
performed under the agreements. The $988,000 was charged to
operating expenses in 1997.
In July 1997, the Company entered into a two year consulting
agreement with an investment banking firm (the "Consultant').
Pursuant thereto, the Company granted the Consultant 500,000 one
year warrants exercisable at $1.00 per share, 200,000 one year
warrants exercisable at $2.50 per share and 100,000 three year
warrants exercisable at $2.50 per share.
A value of $128,000 was assigned to the warrants and was charged to
operating expenses in the second half of 1997. In October 1997,
assignees of the Consultant exercised 450,000 of the one year
warrants at $1 per share and the Company received $450,000. In July
1998, the exercise date for the remaining 50,000 one year warrants
was extended and, in September 1998, the assignee of these 50,000
warrants exercised the warrants at $1.00 per share, for proceeds of
$50,000. See Note 7 for warrants issued to the President/Chairman
of the Board in the restructuring of the $2,000,000 debt.
SHARES RESERVED
As of December 31, 1998, the Company has reserved a total of
10,777,500 shares of common stock for future issuances pursuant to
stock warrant, stock option and convertible debt agreements,
including the 4,732,000 shares issued in 1999 for conversion of the
convertible debenture (see Note 7), and performance shares. This
total includes 177,000 shares reserved under the stock option plan
for options that have not been granted at December 31, 1998.
F-25
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 16. STOCK OPTION PLAN
In January 1995, the Company adopted a stock option plan (the "SOP"),
pursuant to which officers, directors, key employees and consultants of
the Company are eligible to receive incentive and/or non-qualified
stock options. The SOP covers 200,000 shares of the Company's common
stock, $.001 par value. The SOP is administered by the Board of
Directors and will expire in 2005. Incentive stock options granted
under the SOP are exercisable for a period of up to ten years from the
date of grant at an exercise price which is not less than the fair
market value of the common stock on the date of grant, except that the
terms of an incentive stock option granted under the SOP to a
stockholder owning more than 10% of the outstanding common stock may
not exceed five years and its exercise price may not be less than 110%
of the fair market value of the common stock on the date of grant.
The Company has also issued stock options to certain consultants and
non-employee celebrities. The Company has issued 995,000 stock options
to the above consultants. The options are at various exercise prices
from $2 to $15 and expire over three to five year periods.
The Company applies APB Opinion 25, "ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES" and related interpretations in accounting for options issued
to employees and consultants. Compensation cost for stock options is
measured as the market price of the Company's common stock at the date
of grant, or agreement in principle to grant the option, if earlier,
over the amount the recipient must pay to acquire the common stock.
Compensation expense of $100,000 was recognized in 1998.
Statement of Financial Accounting Standards No. 123 (SFAS 123),
"ACCOUNTING FOR STOCK-BASED COMPENSATION", requires the Company to
provide pro forma information regarding net income and earnings per
share as if compensation cost for the Company's employee stock options
has been determined in accordance with the fair value based method
prescribed in SFAS 123.
The Company estimates the fair value of each stock option at the grant
date by using the Black-Sholes option-pricing model with the following
weighted-average assumptions used for grants in 1998 (no options were
granted in 1997); no dividend yield; an expected life of three to five
years; 130% expected volatility, and 5.07% risk free interest rate.
The option valuation model was developed for use in estimating the fair
value of traded options which have no vesting restrictions and are
fully transferable. In addition, valuation models require the input of
highly subjective assumptions including the expected price volatility.
Since the Company's stock options have characteristics significantly
different from those of traded options, and since variations in the
subjective input assumptions can materially affect the fair value
estimate, the actual results can vary significantly from estimated
results.
Under the accounting provisions of SFAS 123, the Company's net loss and
loss per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net loss:
As reported $(3,297,941) $(3,223,764)
Pro forma (4,781,915) (3,223,764)
Loss per share - basic and diluted:
As reported $ (0.81) $ (1.17)
Pro forma (1.18) (1.17)
</TABLE>
F-26
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 16. STOCK OPTION PLAN (Continued)
A summary of the status of options under this plan and additional
options, granted outside of the plan as of December 31, 1998 and 1997
and changes during the year ended on that date are presented below:
<TABLE>
<CAPTION>
1998 1997
---- ----
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------ ----- ------ -----
<S> <C> <C> <C> <C>
Balance at beginning of year 23,000 $7.64 77,000 $7.37
Options granted 995,000 7.14 - -
Options exercised - - - -
Options expired - - (54,000) 7.04
------------- ------ ------- ----
Balance at end of year 1,018,000 $7.15 23,000 $7.64
========= ==== ====== ====
Options granted during the year at exercise
prices which exceed market price of stock at
date of grant:
Weighted average exercise price 935,000 $7.45 - -
Weighted average fair value 935,000 4.17 - -
Options granted during the year at exercise
prices which equal market price of stock at
date of grant:
Weighted average exercise price 60,000 2.25 - -
Weighted average fair value 60,000 3.78 - -
</TABLE>
Note: No options were granted during 1997.
The following table summarizes information about options under the plan
and those issued outside of the plan which are outstanding at December
31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
NUMBER WEIGHTED NUMBER
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED
RANGE OF AT REMAINING AVERAGE AT AVERAGE
EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
PRICES 1998 LIFE PRICE 1998 PRICE
------ ---- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C>
$2.00 - $2.25 295,000 4.3 $ 2.05 295,000 $ 2.05
5.00 - 5.85 209,000 3.0 5.03 209,000 5.03
8.00 - 8.25 205,000 2.9 8.01 205,000 8.01
9.25 - 9.35 9,000 8.0 9.32 9,000 9.32
12.00 200,000 3.0 12.00 200,000 12.00
15.00 100,000 3.0 15.00 100,000 15.00
---------- --- ----- ---------- -----
1,018,000 4.0 $ 7.15 1,018,000 $ 7.15
========= === ====== ========= ======
</TABLE>
F-27
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 17. INCOME TAXES
No credit for income taxes has been reflected in the accompanying
financial statements for 1998 and 1997 because of the significant
uncertainty that exists regarding the realization of such income tax
credits (see below).
As of December 31, 1998, the Company had several temporary differences
primarily related to accrued compensation and interest between
financial reporting and income tax reporting. The components of the
deferred tax asset as of December 31, 1998 were approximately as
follows:
Deferred income tax assets:
Net operating loss carryforwards $3,044,000
Cost associated with conversion of debt 175,000
Other 195,000
----------
Gross deferred tax asset 3,414,000
Valuation allowance (3,414,000)
----------
$ -
==========
As of December 31, 1998, the Company estimates that it has net
operating loss carryforwards of approximately $7,800,000 which expire
in various years through 2018; however, the utilization of the benefits
of such carryforwards may be limited, as more fully discussed below.
Sufficient uncertainty exists regarding the realization of these
operating loss carryforwards, and, accordingly, a valuation allowance
of $3,414,000, which related to the net operating losses, and other
temporary differences, has been established.
The Company is delinquent in the filing of various federal, state and
local income and other tax returns. The ultimate determination of the
Company's taxable income, including the amount and expiration dates of
net operating loss carryforwards, is subject to, among other things,
certain restrictions as a result of the late filing of the various tax
returns. The Company may also be subject to possible review and
examination of such tax returns by the appropriate taxing authorities.
Additional income taxes, including penalties for non-compliance and
interest, if any, that may be assessed will be charged to operations
when determined.
In accordance with certain provisions of the Tax Reform Act of 1986, a
change in ownership of greater than 50% of a corporation within a three
year period will place an annual limitation on the corporation's
ability to utilize its existing tax benefit carryforwards. Under such
circumstances, the potential benefits from utilization of the tax loss
carryforwards as of that date may be substantially limited or reduced
on an annual basis. To the extent that net operating loss
carryforwards, when realized, relate to stock option deductions, the
resulting benefits will be credited to stockholders' equity.
F-28
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 18. LOSS PER SHARE
The following table sets forth the computation of basic and diluted
loss per share for the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Numerator for basic and diluted earnings (loss) per share -
net loss $(3,297,941) $(3,061,964)
Preferred stock dividends - 161,800
---------- ----------
Net loss available to common stockholders $(3,297,941) $(3,223,764)
========= =========
Denominator for basic and diluted earnings (loss) per share -
weighted average shares 4,080,242 2,758,112
========= =========
Basic and diluted loss per share $(0.81) $(1.17)
==== ====
</TABLE>
All convertible instruments, which are convertible into shares of
common stock, were excluded in the computation of diluted loss per
share because their effect would be anti-dilutive.
NOTE 19. SUPPLEMENTAL CASH FLOW INFORMATION
Certain supplemental disclosure of cash flow information and non-cash
investing and financing activities for the years ended December 31,
1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash paid during the year for:
Interest $ 73,774 $ 69,344
Non-cash investing and financing activities:
Cancellation of subscription receivable - 300,000
Additional debt incurred for Costa Rica licenses - 174,000
Preferred stock dividends - 161,800
Common stock issued for acquisition 615,000 -
Common stock issued in settlement of debt 99,636 -
</TABLE>
NOTE 20. SEGMENT INFORMATION
OPERATING SEGMENTS, GEOGRAPHIC AND CUSTOMER INFORMATION
During 1998 and 1997, the Company operated in a single industry
segment. The operations of the Company's subsidiaries consist of
wireless cable television systems.
F-29
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 20. SEGMENT INFORMATION (Continued)
OPERATING SEGMENTS, GEOGRAPHIC AND CUSTOMER INFORMATION (Continued)
The Company uses operating income before depreciation, amortization
of licenses and interest to manage its geographic business units.
Cost of developing new businesses is included in corporate until
the new business units generate sufficient revenue to be stand
alone operations. Only licenses in use in Wisconsin are included in
Wisconsin assets. The costs of undeveloped licenses at Stevens
Point and Wausau, Wisconsin are included in corporate assets.
Information regarding the Company's geographic business units
follows:
<TABLE>
<CAPTION>
CORPORATE COSTA RICA WISCONSIN TOTAL
--------- ---------- --------- -----
(IN THOUSANDS)
--------------
<S> <C> <C> <C> <C>
December 31, 1998 and the year then ended:
Revenue $ - $1,093 $ 360 $ 1,453
Operating income (loss) before
depreciation and amortization (2,120) 149 12 (1,959)
Depreciation (14) (162) (110) (288)
Amortization of licenses - (292) (27) (319)
--------- ------ ----- -------
Operating loss $(2,134) $ (305) $(125) $(2,564)
====== ====== ==== ======
Identifiable assets $ 2,015 $4,220 $ 872 $ 7,107
====== ===== ==== ======
Capital expenditures $ 22 $ 203 $ 4 $ 229
======== ====== ====== =======
December 31, 1997 and the year then ended:
Revenue $ - $ 700 $ 385 $ 1,085
Operating income (loss) before
depreciation and amortization (2,074) 52 30 (1,992)
Depreciation (8) (129) (82) (219)
Amortization of licenses - (285) (27) (312)
--------- ------ ----- -------
Operating loss $(2,082) $ (362) $ (79) $(2,523)
====== ====== ====== ======
Identifiable assets $ 1,338 $4,620 $1,019 $ 6,977
====== ===== ===== ======
Capital expenditures $ 22 $ 292 $ 2 $ 316
======== ====== ======= =======
</TABLE>
In 1998 and 1997, no single customer represented 10% or more of the
Company's revenue.
NOTE 21. PRO FORMA INFORMATION (UNAUDITED)
As discussed in Note 7, the $2,366,000 debenture payable to the
President/Chairman of the Board is convertible into a total of
4,732,000 shares of common stock. In January 1999, 2,366,000 shares
were issued and in March 1999, the remaining 2,366,000 shares were
issued both in connection with the conversion of the debenture. The
accompanying pro forma balance sheet as of December 31, 1998 gives pro
forma effect to the conversion of these convertible debentures assuming
that they had been converted on December 31, 1998.
F-30
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 21. PRO FORMA INFORMATION (UNAUDITED) (Continued)
The following is a supplemental pro forma presentation of net loss per
share assuming that these convertible debentures had been converted
into 4,732,000 shares of common stock as of the beginning of 1998:
<TABLE>
<S> <C>
Numerator for basic and diluted loss per share - net loss $(3,297,941)
==========
Denominator for basic and diluted loss per share - pro forma
weighted average shares 8,812,242
==========
Supplemental pro forma basic and diluted loss per share $(.37)
====
</TABLE>
NOTE 22. YEAR END ADJUSTMENTS
During the fourth quarter of 1998, the Company recorded certain
adjustments that are considered material to the operating results of
the fourth quarter of 1998. The following is an analysis of these
adjustments:
<TABLE>
<CAPTION>
(INCREASE)
DECREASE
IN NET LOSS
-----------
<S> <C>
Recognition of provision for asset impairment $(350,000)
Adjustment of amortization of discount on convertible subordinated debentures (127,000)
Recognition of compensation expense on certain stock options issued (100,000)
--------
$(577,000)
========
Per share $(.14)
====
</TABLE>
NOTE 23. PENDING ACQUISITION
In February 1999, the Company reached an agreement in principle to
acquire substantially all of the assets and business operations of
International Broadcast Consultants of America, Inc. (IBC). The terms
of the acquisition, which are subject to final negotiation of the
definitive agreement, contemplate the payment of $450,000 cash and the
issuance of 300,000 shares of the Company's common stock. The
acquisition is intended to be effective January 4, 1999, and will be
accounted for under the purchase method of accounting.
The transaction is also anticipated to provide for, among other things,
the execution of employment contracts for the two principals of IBC,
one of whom is a director of the Company.
F-31
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
3.1 Amended and Restated Articles of Incorporation.
21.1 Subsidiaries of the Registrant.
27.1 Financial Data Schedule (for Commission use only).
EXHIBIT 3.1
ARTICLES OF INCORPORATION
OF
TELE CONSULTING CORPORATION
ARTICLE I -- NAME
The name of the corporation is: Tele Consulting Corporation.
ARTICLE II -- DURATION
This corporation shall exist perpetually.
ARTICLE III -- PURPOSE
This corporation may engage in or transact any or all lawful activities or
businesses permitted under the laws of the United States, the State of Florida,
or any other State, country, territory or nation.
ARTICLE IV -- CAPITAL STOCK
This corporation is authorized to issue Seven Thousand Five Hundred (7,500)
shares of One Dollar ($1.00) par value common stock which shall be designated
"Common Shares."
ARTICLE V -- PREEMPTIVE RIGHTS
Every shareholder, upon the sale for cash of any new stock of this corporation
of the same kind, class or series as that which he already holds, shall have the
right to purchase his pro-rata share thereof (as nearly as may be done without
the issuance of fractional shares) at the price at which it is offered to
others.
ARTICLE VI -- INITIAL REGISTERED OFFICE AND AGENT
The street address of the initial registered office of this corporation is: 3855
S. Atlantic Avenue PH 3, Daytona Beach Shores, Florida 32127, and the name of
the initial registered agent of this corporation at that address is: Fernand L.
Duquette.
<PAGE>
ARTICLE VII -- INITIAL BOARD OF DIRECTORS
This corporation shall have one (1) Director initially. The number of Directors
may be either increased or diminished from time to time as permitted by the
By-Laws, but shall never be less than one (1). The name and address of the
Initial Director is: Fernand L. Duquette, 3855 S. Atlantic Avenue PH 3, Daytona
Beach Shores, Florida 32127.
ARTICLE VIII -- INCORPORATOR
The name and address of the person signing these Articles of Incorporation is
Fernand L. Duquette, at 3855 S. Atlantic Avenue, PH 3, Daytona Beach Shores,
Florida 32127.
ARTICLE IX -- INITIAL OFFICERS
The names and addresses of initial officers shall be Fernand L. Duquette, 3855
S. Atlantic Avenue PH 3, Daytona Beach Shores, Florida 32127, President,
Secretary and Treasurer.
ARTICLE X -- BY-LAWS
The corporation reserves the right to amend or repeal any provision contained in
these Articles of Incorporation or any amendment hereto, and the bylaws of the
corporation when adopted, and any right conferred upon the shareholders is
subject to this reservation.
IN WITNESS WHEREOF, the undersigned subscriber has executed these Articles of
Incorporation the 3rd day of May, A.D., 1993.
/s/ Fernand L. Duquette
---------------------------------
Fernand L. Duquette, Incorporator
<PAGE>
State of Florida
Department of State
CERTIFICATE DESIGNATING PLACE OF BUSINESS OF DOMICILE FOR THE SERVICE OF PROCESS
WITHIN THIS STATE AND NAMING AGENT UPON WHOM PROCESS MAY BE SERVED.
The following is submitted in compliance with Section 48.091, Florida Statutes.
Tele Consulting Corporation, a corporation organized under the laws of the State
of Florida, with its principal office at: 3855 S. Atlantic Avenue, PH 3, Daytona
Beach Shores, Florida 32127, has named Fernand L. Duquette of 3855 S. Atlantic
Avenue, PH 3, Daytona Beach Shores, Florida 32127, as its Agent to accept
service of process within this State.
Tele Consulting Corporation
By: /S/ FERNAND DUQUETTE
--------------------------------------
Fernand L. Duquette, Incorporator
ACCEPTANCE
Having been named to accept service of process for the above-stated corporation,
at the designated place in this Certificate, I hereby agree to act in this
capacity, and I further agree to comply with the provisions of all statutes
relative to the proper and complete performance of my duties.
/S/ FERNAND DUQUETTE
-------------------------------------------
Fernand L. Duquette, Resident Agent
<PAGE>
STATE OF FLORIDA
COUNTY OF ORANGE:
BEFORE ME, the undersigned Notary Public, duly authorized in the aforesaid State
and County to take oaths and acknowledgements, personally appeared, Fernand L.
Duquette, well-known to me, who, after first being duly sworn by me, deposes and
states that he is the person named in the above and foregoing "Articles of
Incorporation," that he has read same over carefully, completely and thoroughly,
and that to the best of Affiant's knowledge, information and belief, all of the
matters, facts and statements set forth therein are all true, accurate and
correct.
/S/ FERNAND DUQUETTE
-----------------------------------
Fernand L. Duquette
SWORN and SUBSCRIBED to before me this 3 day of May, A.D., 1993.
/S/ ROBERT WOLFE
-----------------------------------
Notary Public, State of Florida
AT LARGE
My Commission Expires: (N.P. Seal)
<PAGE>
ARTICLES OF AMENDMENT TO THE
ARTICLES OF INCORPORATION
OF
TELE CONSULTING CORPORATION
Tele Consulting Corporation, a Florida corporation, hereby amends its
Articles of Incorporation as follows:
1. ARTICLE I of the Articles of Incorporation is deleted in its
entirety and is amended to read as follows:
ARTICLE I. NAME
The name of the corporation shall be:
TEL-COM WIRELESS CABLE TV CORPORATION
2. Article IV of the Articles of Incorporation is deleted in its
entirety and is amended to read as follows:
ARTICLE IV. CAPITAL STOCK
This corporation is authorized to issue 10,000,000 shares of
common stock, par value $.001 per share.
Each outstanding share of common stock on the date hereof
shall be split into 500 shares.
3. Article V of the Articles of Incorporation is deleted in its
entirety.
4. The foregoing Amendment was adopted on February 10, 1994, by the
corporation's Board of Directors and was unanimously approved by all
shareholders by written consent. The number of votes cast by the shareholders
for the Amendment was sufficient for approval by the shareholders.
Dated this 11th day of February, 1994.
TELE CONSULTING CORPORATION
By: /S/ FERNAND L. DUQUETTE
---------------------------------------
Fernand L. Duquette, President
<PAGE>
ARTICLES OF AMENDMENT TO THE
ARTICLES OF INCORPORATION
OF
TEL-COM WIRELESS CABLE TV CORPORATION
Tel-Com Wireless Cable TV Corporation, a Florida corporation, hereby
amends its Articles of Incorporation as follows:
1. Article IV of the Articles of Incorporation is deleted in its
entirety and is amended to read as follows:
ARTICLE IV. CAPITAL STOCK
1. NUMBER AND CLASS OF SHARES AUTHORIZED; PAR VALUE.
This corporation is authorized to issue the following shares
of capital stock:
(a) COMMON STOCK. The aggregate number of shares of Common Stock
which the corporation shall have authority to issue is 10,000,000 with a par
value of $0.001 per share.
(b) PREFERRED STOCK. The aggregate number of shares of Preferred
Stock which the corporation shall have authority to issue is 5,000,000 with a
par value of $0.001 per share.
2. DESCRIPTION OF PREFERRED STOCK.
The terms, preferences, limitations and relative rights of the
Preferred Stock are as follows:
(a) The Board of Directors is expressly authorized at any time and
from time to time to provide for the issuance of shares of Preferred Stock in
one or more series, with such voting powers, full or limited, but not to exceed
one vote per share, or without voting powers, and with such designations,
preferences and relative participating, optional or other special rights,
qualifications, limitations or restrictions, as shall be fixed and determined in
the resolution or resolutions providing for the issuance thereof adopted by the
Board of Directors, and as are not stated and expressed in these Articles of
Incorporation or any amendment hereto, including (but without limiting the gene
[sic] of the foregoing) the following:
(i) The distinctive designation of such series and the number
of shares which shall constitute such series, which number may be increased
(except where otherwise provided by the Board of Directors in creating such
series) or decreased (but not below the number of shares thereof then
outstanding) from time to time by resolution by the Board of Directors;
<PAGE>
(ii) The rate of dividends payable on shares of such series,
the times of payment, whether dividends shall be cumulative, the conditions upon
which and the date from which such dividends shall be cumulative;
(iii) Whether shares of such series can be redeemed, the time
or times when, and the price or prices at which shares of such series shall be
redeemable, the redemption price, terms and conditions of redemption, and the
sinking fund provisions, if any, for the purchase or redemption of such shares;
(iv) The amount payable on shares of such series and the
rights of holders of such shares in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the corporation;
(v) The rights, if any, of the holders of shares of such
series to convert such shares into, or exchange such shares for, shares of
Common Stock or shares of any other class or series of Preferred Stock and the
terms and conditions of such conversion or exchange; and
(vi) The rights, if any, of the holders of shares of such
series to vote.
(b) Except in respect of the relative rights and preferences that may
be provided by the Board of Directors as hereinbefore provided, all shares of
Preferred Stock shall be of equal rank and shall be identical, and each share of
a series shall be identical in all respects with the other shares of the same
series.
3. The foregoing Amendment was adopted on January 18, 1995, by
unanimous written consent of the corporation's Board of Directors pursuant to
Section 607.0821 of the Florida Statutes and was approved by the shareholders of
the corporation by written consent pursuant to Section 607.0704 of the Florida
Statutes. The number of votes cast by the shareholders for the Amendment was
sufficient for approval by the shareholders.
4. Except as modified hereby, the Articles of Incorporation of the
corporation shall remain in full force and effect.
Dated this 18th day of January, 1995.
TEL-COM WIRELESS CABLE TV
CORPORATION
By: /S/ FERNAND DUQUETTE
----------------------------------
Fernand L. Duquette, President
2
<PAGE>
ARTICLES OF AMENDMENT
TO THE ARTICLES OF INCORPORATION
OF
TEL-COM WIRELESS CABLE TV CORPORATION
Tel-Com Wireless Cable TV Corporation, a corporation existing under the
laws of the State of Florida, pursuant to Section 607.0602 of the Florida
Business Corporation Act, hereby amends its Articles of Incorporation as
follows:
1. Article IV of the Articles of Incorporation is hereby amended to add
a new Section 3 to read as follows:
3. SERIES A PREFERRED STOCK. The corporation hereby designates
500 shares of its authorized but unissued Preferred Stock as Series A
Preferred Stock, which Series A Preferred Stock shall have the
following terms, preferences, limitations and relative rights:
(a) VOTING. The Series A Preferred Stock shall be
nonvoting, and the holders thereof shall not be entitled to vote on any
issue coming before the shareholders of the corporation.
(b) DIVIDENDS. Each holder of record of shares of
Series A Preferred Stock shall be entitled to share pro rata in such
dividends and other distributions as may be declared from time to time
by the board of Directors out of funds legally available therefor.
Dividends declared on Series A Preferred Stock shall be paid in
preference to any dividends on Common Stock, and no cash dividends
shall be paid on the Common Stock if the payment of dividends on the
Series A Preferred Stock shall be in arrears.
(c) CONVERSION. The shares of Series A Preferred
Stock shall have conversion rights ("Conversion Rights") as follows:
(i) OPTIONAL CONVERSION BY SHAREHOLDERS.
Each share of Series A Preferred Stock shall be convertible, at the
option of the holder thereof, at any time after the date of issuance of
such share at the office of the corporation or any transfer agent for
such stock into shares of the corporation's Common Stock at the
conversion rate set forth in subsection 3(c)(iii) below ("Conversion
Rate"). All declared but unpaid dividends on each share of Series A
Preferred Stock at the time of conversion shall, at the option of the
holder thereof, be paid in full in cash on the conversion date. No
fractional shares shall be issued. Before any holder of shares of
Series A Preferred Stock shall be entitled to convert the same into
shares of Common Stock pursuant to this subsection 3(c)(i), such holder
shall surrender the certificate or certificates representing such
shares thereof, duly endorsed, at the office of the corporation or any
transfer agent for such stock, and shall give written notice to the
corporation at such office that he elects to convert the same. The
corporation shall, as soon as practicable thereafter and at its
expense, issue and deliver at such office to such holder a certificate
or certificates for the number of shares of Common Stock to which he
shall be entitled. Such conversion shall
<PAGE>
be deemed to have been made immediately prior to the close of business
on the date of surrender of the certificate(s) for the shares of Series
A Preferred Stock to be converted, and the person or persons entitled
to receive the shares of Common stock issuable upon such conversion
shall be treated for all purposes as the record holder or holders of
such shares of Common Stock on such date.
(ii) AUTOMATIC CONVERSION. Each share of
Series A Preferred Stock shall be automatically converted into share(s)
of Common Stock of the corporation, at the Conversion Rate set forth in
subsection 3(c)(iii) below, on the effective date of a registration
statement ("Registration Statement") filed by the corporation with the
Securities Exchange Commission ("SEC") to register the shares of Common
Stock of the corporation issuable upon conversion of all shares of
Series A Preferred Stock. As soon as practicable after the effective
date of the Registration Statement, the corporation shall notify each
holder of Series A Preferred Stock of the effectiveness of such
Registration Statement. As soon as practicable following receipt of
such notice, each holder of Series A Preferred Stock shall surrender
for cancellation at the office of the corporation or any transfer agent
for such stock his certificate(s) representing such shares, duly
endorsed. The corporation shall as soon as practicable thereafter and
at its expense, issue and deliver at such office to such holder a
certificate or certificates for the number of shares of Common Stock to
which the holder shall be entitled. Such conversion shall be deemed to
have been made immediately prior to the close of business on the
effective date of the Registration Statement, and the person or persons
entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock on such date. Notwithstanding
that any certificate of Series A Preferred Stock converted into Common
Stock under the subsection 3(c)(ii) shall not have been surrendered for
cancellation, the shares represented thereby shall be deemed no longer
to be outstanding, and all rights with respect to such Series A
Preferred Stock shall forthwith terminate upon the effective date of
the Registration Statement, except the right to receive shares of
Common Stock upon conversion thereof.
(iii) CONVERSION RATE. The number of shares
of Common Stock issuable upon conversion of each share of Series A
Preferred Stock into Common Stock of the corporation pursuant to either
of Sections 3(c)(i) or (ii) above shall be equal to the total price
paid for the share of Series A Preferred Stock dividend by the lesser
of (a) an amount equal to sixty-five percent (65%) of the average of
the "bid" for the corporation's Common Stock for the five (5) trading
days prior to the effective date of the Registration Statement, or (b)
Three and 25/100 Dollars ($3.25). Fractional shares shall be treated as
set forth in subsection 3(c)(ix).
(iv) ADJUSTMENTS FOR REORGANIZATION,
RECLASSIFICATION, EXCHANGE AND SUBSTITUTION. In case of any
reorganization or any reclassification of the capital stock of the
corporation, any consolidation or merger of the corporation with or
into another corporation or corporations, or the conveyance of all or
substantially all of the assets of the corporation to another
corporation, the Conversion Rate for Series A Preferred Stock then in
effect shall concurrently with the effectiveness of such reorganization
or reclassification, be proportionately adjusted such that Series A
2
<PAGE>
Preferred Stock shall be convertible into, in lieu of the number of
shares of Common Stock which the holders would otherwise have been
entitled to receive, a number of shares of such other class or classes
of stock or other securities or property equivalent to the number of
shares of Common Stock that would have been subject to receipt by the
holders upon conversion of Series A Preferred Stock immediately before
such event; and, in any such case, appropriate adjustment (as
determined by the Board) shall be made in the application of the
provisions herein set forth with respect to the rights and interest
thereafter of the holders of Series A Preferred Stock, to the end that
the provisions set forth herein shall thereafter be applicable, as
nearly as reasonably may be, in relation to any shares of stock or
other property thereafter deliverable upon the conversion of Series A
Preferred Stock.
(v) NO IMPAIRMENT. The corporation will not,
by amendment of its Articles of Incorporation or through any
reorganization, transfer of assets, consolidation, merger, dissolution,
issue or sale of securities or any other voluntary action, avoid or
seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the corporation, but will at all
times in good faith assist in the carrying out of all the provisions of
this Section 3(v) and in the taking of all such action as may be
necessary or appropriate in order to protect the Conversion Rights of
the holders of Series A Preferred Stock against impairment.
(vi) NOTICES OF RECORD DATE. In the event of
any taking by the corporation of a record of the holders of any class
of securities for the purpose of determining the holders thereof who
are entitled to receive any dividend or other distribution, any
security or right convertible into or entitling the holder thereof to
receive Common Stock, or any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right, the corporation
shall mail to each holder of Series A Preferred Stock at least thirty
(30) days prior to the date specified therein, a notice specifying the
date on which any such record is to be taken for the purpose of such
dividend, distribution, security or right, and the amount and character
of such dividend, distribution, security or right.
(vii) ISSUE TAXES. The corporation shall pay
any and all issue and other taxes that may be payable in respect of any
issue or delivery of shares of Common Stock on conversion of shares of
Series A Preferred Stock pursuant hereto; provided, however, that the
corporation shall not be obligated to pay any transfer taxes resulting
from any transfer requested by any holder in connection with any such
conversion.
(viii) RESERVATION OF STOCK ISSUABLE UPON
CONVERSION OR EXCHANGE. The corporation shall at all times reserve and
keep available out of its authorized but unissued shares of Common
Stock, solely for the purpose of effecting the conversion or exchange
of the shares of Series A Preferred Stock, such number of its shares of
Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of Series A Preferred Stock; and
if at any time the number of authorized but unissued shares of Common
Stock shall not be sufficient to effect the conversion or exchange of
all then outstanding shares of Series A Preferred Stock, the
3
<PAGE>
corporation will take such corporate action as may, in the opinion of
its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient
for such purpose.
(ix) FRACTIONAL SHARES. No fractional share
shall be issued upon the conversion or exchange of any share or shares
of Series A Preferred Stock. All shares of Common Stock (including
fractions thereof) issuable upon conversion of a holder's Series A
Preferred Stock shall be aggregated for purposes of determining whether
the conversion or exchange would result in the issuance of any
fractional share. If, after the aforementioned aggregation, the
conversion or exchange would result in the issuance of a fraction of a
share of Common Stock, the corporation shall, in lieu of issuing any
fractional share, round each fractional share to the nearest whole
share.
(d) NOTICES. Any notice required by the provisions of
Section 3(c) to be given to the holders of shares of Series A Preferred
Stock shall be deemed given upon confirmed transmission by facsimile or
telecopy or upon deposit in the United States mail, postage prepaid,
and addressed to each holder of record at its address appearing on the
books of the corporation. Notwithstanding the foregoing, if a
shareholder to whom notice is to be given has an address of record
which is outside of the United States, then any notice to such
shareholder under this Section 3(d) shall be deemed given upon
confirmed transmission by facsimile or telecopy or ten (10) days after
deposit in the United States mail, postage prepaid, and addressed to
such holder at its address appearing on the books of the corporation.
(e) LIQUIDATION. The holders of record of shares of
Series A Preferred Stock shall be entitled to receive, upon any
voluntary or involuntary liquidation, dissolution or winding up of the
corporation, One Thousand Dollars ($1,000) per share plus the amount of
all dividends declared and unpaid with respect to the Series A
Preferred Stock as of the date thereof ("Liquidation Amount"), prior to
any distribution to the holders of Common Stock. If, in any such case,
the assets of the corporation are insufficient to make such payments in
full, then the available assets will be distributed among the holder of
Series A Preferred Stock ratably in proportion to the full amount to
which each such holder would have been entitled had the assets of the
corporation been sufficient to make such payments in full. The holders
of record of Series A Preferred Stock shall not be entitled to any
distribution of assets remaining after payment in full of the
Liquidation Amount.
2. The foregoing Amendment was adopted on December 2, 1996, by the
unanimous written consent of the Board of Directors of the corporation pursuant
to Section 607.0821 of the Florida Business Corporation Act. Pursuant to Section
607.0602 of the Florida Business Corporation Act, no approval of the amendment
was required by the shareholders of the corporation.
3. Except as modified hereby, the Articles of Incorporation of the
corporation remain in full force and effect.
4
<PAGE>
Dated this 5th day of December, 1996.
TEL-COM WIRELESS CABLE TV
CORPORATION
By: /S/ FERNAND DUQUETTE
-----------------------------------
Fernand L. Duquette, President
5
<PAGE>
ARTICLES OF AMENDMENT
TO THE ARTICLES OF INCORPORATION
OF
TEL-COM WIRELESS CABLE TV CORPORATION
Tel-Com Wireless Cable TV Corporation, a corporation existing under the
laws of the State of Florida, pursuant to Section 607.0602 of the Florida
Business Corporation Act, hereby amends its Articles of Incorporation as
follows:
1. Article IV of the Articles of Incorporation is hereby amended to add
a new Section 4 to read as follows:
4. SERIES B PREFERRED STOCK. The corporation hereby designates
1,500 shares of its authorized but unissued Preferred Stock as Series B
Convertible Preferred Stock ("Series B Preferred Stock"), which Series
B Preferred Stock shall have the following terms, preferences,
limitations and relative rights:
(a) VOTING. The Series B Preferred Stock shall be
nonvoting, and the holders thereof shall not be entitled to vote on any
issue coming before the shareholders of the corporation, except that
the holders of record of shares of Series B Preferred Stock shall be
entitled to vote, as a class, by a vote of the holders of a majority of
the outstanding shares of Series B Preferred Stock, to elect one (1)
member to the Board of Directors of the Corporation. The provisions of
this Section 4(a) of this Article IV may not be amended without the
affirmative vote of the holders of Series B Preferred Stock holding at
least seventy five percent (75%) of the total shares of Series B
Preferred Stock issued and outstanding at the time of such vote.
(b) DIVIDENDS. Each holder of record of shares of
Series B Preferred Stock shall be entitled to share pro rata in such
dividends and other distributions as may be declared from time to time
by the Board of Directors out of funds legally available therefor.
Dividends declared on Series B Preferred Stock shall not be paid in
preference to any dividends on Common Stock.
(c) CONVERSION. Each share of Series B Preferred
Stock shall be convertible, at the option of the holder thereof, at any
time after the date of issuance ("Issue Date") of such share at the
office of the corporation or any transfer agent for such stock, into
shares of the corporation's Common Stock at the conversion rate set
forth in subsection 4(c)(i) below ("Conversion Rate"). All declared but
unpaid dividends on each share of Series B Preferred Stock at the time
of conversion shall, at the option of the holder thereof, be paid in
full in cash on the conversion date. Before any holder of shares of
Series B Preferred Stock shall be entitled to convert the same into
shares of Common Stock pursuant to this subsection 4(c), such holder
shall surrender the certificate or certificates representing such
shares thereof, duly endorsed, at the office of the corporation or any
transfer agent for such shares, and shall give written notice to the
corporation at such office that he elects to convert the same. The
corporation shall, as soon as
1
<PAGE>
practicable thereafter (but in no event later than five (5) days) and
at its expense, issue and deliver at such office to such holder a
certificate or certificates for the number of shares of Common Stock to
which he shall be entitled. Such conversion shall be deemed to have
been made immediately prior to the close of business on the date of
surrender of the certificate(s) for the shares of Series B Preferred
Stock to be converted, and the person or persons entitled to receive
the shares of Common Stock issuable upon such conversion shall be
treated for all purposes as the record holder or holders of such shares
of Common Stock on such date.
(i) CONVERSION RATE. The number of shares of Common
Stock issuable upon conversion of each share of Series B Preferred
Stock into Common Stock of the corporation shall be equal to $1,000
divided by the LESSER of (a) an amount equal to sixty-five percent
(65%) of the average of the closing "bid" price as quoted in the
Over-The-Counter Market Summary for the corporation's Common Stock for
the five (5) trading days prior to the effective date of the
conversion, or (b) One Dollar ($1.00). Fractional shares shall be
treated as set forth in subsection 4(c)(vii).
(ii) ADJUSTMENTS FOR REORGANIZATION,
RECLASSIFICATION, EXCHANGE AND SUBSTITUTION. In case of any
reorganization or any reclassification of the capital stock of the
corporation, any consolidation or merger of the corporation with or
into another corporation or corporations, or the conveyance of all or
substantially all of the assets of the corporation to another
corporation, the Conversion Rate for Series B Preferred Stock then in
effect shall, concurrently with the effectiveness of such
reorganization or reclassification, be proportionately adjusted such
that Series B Preferred Stock shall be convertible into, in lieu of the
number of shares of Common Stock which the holders would otherwise have
been entitled to receive, a number of shares of such other class or
classes of stock or other securities or property equivalent to the
number of shares of Common Stock that would have been subject to
receipt by the holders upon conversion of Series B Preferred Stock
immediately before such event; and, in any such case, appropriate
adjustment (as determined by the Board) shall be made in the
application of the provisions herein set forth with respect to the
rights and interest thereafter of the holders of Series B Preferred
Stock, to the end that the provisions set forth herein shall thereafter
be applicable, as nearly as reasonably may be, in relation to any
shares of stock or other property thereafter deliverable upon the
conversion of Series B Preferred Stock.
(iii) NO IMPAIRMENT. The corporation will not, by
amendment of its Articles of Incorporation or through any
reorganization, transfer of assets, consolidation, merger, dissolution,
issue or sale of securities or any other voluntary action, avoid or
seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the corporation, but will at all
times in good faith assist in the carrying out of all the provisions of
this Section 4(c) and in the taking of all such action as may be
necessary or
2
<PAGE>
appropriate in order to protect the Conversion Rights of the holders of
Series B Preferred Stock against impairment.
(iv) NOTICES OF RECORD DATE. In the event of any
taking by the corporation of a record of the holders of any class or
securities for the purpose of determining the holders thereof who are
entitled to receive any dividend or other distribution, any security or
right convertible into or entitling the holder thereof to receive
Common Stock, or any right to subscribe for, purchase or otherwise
acquire any shares of stock of any class or any other securities or
property, or to receive any other right, the corporation shall mail to
each holder of Series B Preferred Stock at least ten (10) days prior to
the date specified therein a notice specifying the date on which any
such record is to be taken for the purpose of such dividend,
distribution, security or right, and the amount and character of such
dividend, distribution, security or right.
(v) ISSUE TAXES. The corporation shall pay any and
all issue and other taxes that may be payable in respect of any issue
or delivery of shares of Common Stock on conversion of shares of Series
B Preferred Stock pursuant hereto; provided, however, that the
corporation shall not be obligated to pay any transfer taxes resulting
from any transfer requested by any holder in connection with any such
conversion.
(vi) RESERVATION OF STOCK ISSUABLE UPON CONVERSION OR
EXCHANGE. The corporation shall at all times reserve and keep available
out of its authorized but unissued shares of Common Stock, solely for
the purpose of effecting the conversion of the shares of Series B
Preferred Stock, such number of its shares of Common Stock as shall
from time to time be sufficient to effect the conversion of all
outstanding shares of Series B Preferred Stock; and if at any time the
number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion or exchange of all then outstanding
shares of Series B Preferred Stock, the corporation will take such
corporate action as may, in the opinion of its counsel, be necessary to
increase its authorized but unissued shares of Common Stock to such
number of shares as shall be sufficient for such purpose.
(vii) FRACTIONAL SHARES. No fractional share shall be
issued upon the conversion or exchange of any share or shares of Series
B Preferred Stock. All shares of Common Stock (including fractions
thereof) issuable upon conversion of a holder's Series B Preferred
Stock shall be aggregated for purposes of determining whether the
conversion or exchange would result in the issuance of any fractional
share. If, after the aforementioned aggregation, the conversion or
exchange would result in the issuance of a fraction of a share of
Common Stock, the corporation shall, in lieu of issuing any fractional
share, round each fractional share to the nearest whole share.
(d) NOTICES. Any notice required by the provisions of Section
4(c) to be given to the holders of shares of Series B Preferred
Stock shall be
3
<PAGE>
deemed given upon confirmed transmission by facsimile or telecopy or
upon deposit in the United States mail, postage prepaid, and addressed
to each holder of record at its address appearing on the books of the
corporation. Notwithstanding the foregoing, if a share holder to whom
notice is to be given has an address of record which is outside of the
United States, then any notice to such shareholder under this Section
4(d) shall be deemed given upon confirmed transmission by facsimile or
telecopy or ten (10) days after deposit in the United States mail,
postage prepaid, and addressed to such holder at its address appearing
on the books of the corporation.
(e) LIQUIDATION. The holders of record of shares of Series B
Preferred Stock shall be entitled to receive, upon any voluntary or
involuntary liquidation, dissolution or winding up of the corporation,
One Thousand Dollars ($1,000) per share plus the amount of all
dividends declared and unpaid with respect to the Series B Preferred
Stock as of the date thereof ("Liquidation Amount"), prior to any
distribution to the holders of Common Stock. If, in any such case, the
assets of the corporation are insufficient to make such payments in
full, then the available assets will be distributed among the holders
of Series B Preferred Stock ratably in proportion to the full amount to
which each such holder would have been entitled had the assets of the
corporation been sufficient to make such payments in full. The holders
of record of Series B Preferred Stock shall not be entitled to any
distribution of assets remaining after payment in full of the
Liquidation Amount.
2. The foregoing Amendment was adopted on February 20, 1997, by the
unanimous written consent of the Board of Directors of the corporation pursuant
to Section 607.0821 of the Florida Business Corporation Act. Pursuant to Section
607.0602 of the Florida Business Corporation Act, no approval of the amendment
was required by the shareholders of the corporation.
3. Except as modified hereby, the Articles of Incorporation of the
corporation remain in full force and effect.
Dated this 20th day of February, 1997.
TEL-COM WIRELESS CABLE
TV CORPORATION
By: /S/ FERNAND DUQUETTE
------------------------------------------
Fernand L. Duquette, President, Dir.
4
<PAGE>
ARTICLES OF AMENDMENT
TO ARTICLES OF INCORPORATION
OF
TEL-COM WIRELESS CABLE TV CORPORATION
Pursuant to the provisions of Sections 607.0602, 607.1003 and 607.1006
of the Florida Business Corporation Act, Tel-Com Wireless Cable TV Corporation
(the "Company"), a corporation organized and existing under the Florida Business
Corporation Act, hereby adopts the following Articles of Amendment to its
Articles of Incorporation.
FIRST: Change of Company Name
Article I of the Company's Articles of Incorporation is amended to read
in its entirety as follows:
ARTICLE I-NAME
The name of the corporation is 5th Avenue Channel Corp.
SECOND: Increase in Authorized Shares of Common Stock
Section 1 (a) of Article IV of the Company's Articles of Incorporation
is amended to read in its entirety as follows:
(a) Common Stock. The aggregate number of shares of Common
Stock which the corporation shall have authority to issue is 50,000,000
shares, $.001 par value per share.
THIRD: Adoption of Amendments to Articles of Incorporation
These Articles of Amendment to Articles of Incorporation and the
amendments to the Company's Articles of Incorporation set forth herein were
adopted and approved by the Company's Board of Directors on December 23, 1998,
pursuant to Section 607.0602 of the Florida Business Corporation Act, and by the
Company's shareholders at the Company's annual meeting of shareholders held on
February 12, 1999, and the number of votes cast by the Company's shareholders
was sufficient for approval.
<PAGE>
IN WITNESS WHEREOF, these Articles of Amendment to Articles of
Incorporation have been executed by the undersigned duly authorized officer of
the Company as of the 8th day of March, 1999.
TEL-COM WIRELESS CABLE TV
CORPORATION
By: /S/ MELVIN ROSEN
-------------------------------
Melvin Rosen
President and
Chief Executive Officer
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Teleplus, S.A., a Costa Rican corporation
Televisora Canal Diecinueve, S.A., a Costa Rican corporation
Grupo Masteri, S.A., a Costa Rican corporation
5th Avenue Television, Inc., a Florida corporation
5th Avenue Retail, Inc., a Florida corporation
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 256,209
<SECURITIES> 0
<RECEIVABLES> 41,559
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 430,588
<PP&E> 2,049,004
<DEPRECIATION> 725,600
<TOTAL-ASSETS> 7,107,172
<CURRENT-LIABILITIES> 2,435,438
<BONDS> 0
0
0
<COMMON> 4,504
<OTHER-SE> 1,135,673
<TOTAL-LIABILITY-AND-EQUITY> 7,107,172
<SALES> 0
<TOTAL-REVENUES> 1,453,033
<CGS> 0
<TOTAL-COSTS> 235,367
<OTHER-EXPENSES> 3,431,235
<LOSS-PROVISION> 350,000
<INTEREST-EXPENSE> 736,749
<INCOME-PRETAX> (3,297,941)
<INCOME-TAX> 0
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,297,941)
<EPS-PRIMARY> (.81)
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