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, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________.
Commission File No. _________
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
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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 March 27, 2000 the aggregate market value of the common stock held by
non-affiliates of the registrant was approximately $28,301,340, based on the
average of the closing bid and asked prices on that date of $5.03. As of
that date, there were 12,274,702 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, 1999
TABLE OF CONTENTS
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PAGE
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FORWARD-LOOKING STATEMENTS........................................................................................ 1
PART I
ITEM 1. DESCRIPTION OF BUSINESS................................................................................. 1
ITEM 2. DESCRIPTION OF PROPERTY................................................................................. 9
ITEM 3. LEGAL PROCEEDINGS....................................................................................... 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................................... 9
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS................................................ 9
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION...............................................10
ITEM 7. FINANCIAL STATEMENTS....................................................................................17
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE....................17
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT.....................................................................................18
ITEM 10. EXECUTIVE COMPENSATION..................................................................................21
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...........................................21
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...........................................................24
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.........................................................................26
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As used in this 10-KSB, the terms "we," "us," "our," "the Company," and
"5th Avenue" mean 5th Avenue Channel Corp. (unless context indicates a different
meaning) and the term "common stock" means 5th Avenue Channel Corp.'s common
stock, $.001 par value per share.
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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 and dependence on our key personnel.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
We were organized as a Florida corporation on May 7, 1993 under the
name Tele Consulting Corp. On February 14, 1994, we changed our name to Tel-Com
Wireless Cable TV Corporation and on March 17, 1999, we changed our name to 5th
Avenue Channel Corp. Our principal executive offices are located at 3957 N.E.
163rd Street, North Miami Beach, Florida 33160, and our telephone number is
(305) 947-3010.
We create and aggregate television and video content in niche
categories and make this content available on our own television channels and
websites. We also license this content to other websites and television
channels. We operate wireless cable television systems in Wisconsin and Costa
Rica and sell products to mass market retailers across the country through our
subsidiary, 5th Avenue Channel Retail, Inc.
TELEVISION OPERATIONS
We launched our television channel on March 6, 2000 with two hours of
programming into 11 million homes. These homes were acquired through an
agreement with America's Voice, and are made up of homes using cable, broadcast,
EchoStar Dish Network, PrimeStar and C-Band satellite. This agreement expands to
twelve hours per day on April 16, 2000 and we expect to increase our programming
towards filling this time in the near future. We have also entered into a new
agreement with Comcast Cable for two hours of programming into approximately 2.1
million homes commencing the first week of April 2000. This agreement replaces
an earlier agreement with Comcast's CN8 subsidiary signed in 1999.
We have also commenced discussions with other entities to expand
carriage of our television signal. During our current two hour programming
block, we are producing "Net Financial News," which consists of financial
programming providing current financial information about the stock market,
useful personal financial tools, and interviews with analysts and others about
the financial markets and investing. Additional programming concepts are also
being developed.
Revenue streams are expected to be derived from the sale of
advertising, the production of paid programming profiling different companies
where these companies pay for the time and the production, sponsorships, and the
sale of financial products promoted on the channel. We expect that the
programming will also drive traffic to our website generating additional revenue
from advertising, sponsorship and product sales. Our programming is also
broadcast live on our website, NetVideoNetworks.com, from 10:00 A.M. to 12:00
P.M., rebroadcast during the remainder of the day, and is available in edited
clip version by searchable keyword. We also have an agreement with Conus
Communications Company to provide 1.5 minutes of content for each half hour
episode of their syndicated daily television program, "First Business," which we
expect to develop shortly. First Business is currently broadcast primarily into
full power television stations that are network affiliates reaching over 70
million homes.
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WEBSITE OPERATIONS
We have completely revised our website, which is accessible through the
URL's: NetVideoNetworks.com, 5thAvenueChannel.com, 5AC.com,
NetFinancialNews.com, and NFN.com. The website offers the latest news from our
Net Financial News television program, stock tips, and research tools from Zacks
Investment Research, IPO information from David Menlow, President of IPO
Financials, Telescan and others. The website also offers direct access to our
live and archived television programming and our NetVideoNetworks financial
video archive.
Revenue streams for the website are expected to be derived from
advertising and product and subscription sales. We have already begun serving
banner ads on our video player through which our live television and video
archive can be viewed. We have also signed an agreement with iAgency, a Los
Angeles based Internet advertising agency to assist us in developing our online
advertising revenues and increasing traffic to our site. The website also
contains direct access to a grouping of financial services from which we receive
a percentage of sales or marketing fees. To supply these services, we have
signed agreements with several providers including KeyTrade Online for online
brokerage services; The Producers Group to supply term life insurance from
General Life Insurance, a division of Metropolitan Life; Taxes4Less.com for
online tax preparation, MonsterDaata.com for low cost transaction and real
estate information services; and ITCareernet.com for online career recruitment
services. We are currently in negotiations for online banking, mortgage,
cellular telephone and internet connecting services.
NETVIDEONETWORKS
We also intend to become a significant supplier of niche video content
on the Internet. We have created a wholly owned subsidiary and are developing
this business under the name NetVideoNetworks, we have applied for the trademark
and registered the URL of "NetVideoNetworks.com". We intend to use this as the
principal web address for our website activities. We have begun to implement
this plan with the finance category. The next category we plan to enter is
careers, and we have signed an agreement with INFE.com for the development of a
careers section of our website which will provide video corporate profiles, job
opportunities and video resumes.
For the finance archive, we have commenced aggregating content in three
ways. First, we are editing our television content into video clips by subject,
with links to expanded text versions and additional research resources to help
our viewer. These clips consist of current financial news and an ongoing series
of educational and informational programming segments offering viewers the tools
for personal finance. These segments are meant to provide us with ongoing asset
value as the size of the archive grows. Second, we have begun searching for
existing financial video content libraries to purchase or license for web
distribution. Such programming will consist strictly of educational and
informational programming that should also provide us with ongoing asset value.
Third, we have begun to place broadcast quality cameras and Internet cameras
into the offices of financial experts in institutions throughout the country. We
have already signed agreements with Zacks Investment Research, KeyTradeOnline,
Solomon Smith Barney, Westrock Securities, IPO Financial and others and we have
hired a sales team to quickly expand the placement of these cameras across the
country. We have also provided cameras to Patagon, a large Latin American
financial portal, to place them in offices in Miami, Brazil and Argentina.
Through these cameras, financial experts will be uploading daily 2-5 minute
video clips providing information on stocks, IPO's, industry sector and trend
analysis, and educational and informational tools about personal finance and the
stock market. Cameras installed at companies for the careers archive will also
be used to
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supply corporate video profiles and interviews with CEO's and CFO's. We also
intend to video enable earnings calls and conferences.
The entire archive is accessible through our website's video viewer and
will be licensed to other financial sites. We intend to accomplish this
distribution through our own sales team and through the sales team of Zacks
Investment Research, which already supplies financial content to over 1,500
financial websites. Revenue streams are expected to come from advertising,
syndication payments from other websites, and subscription fees from end users.
The focus of our core business has changed from being a lifestyle
business that focused on the luxury market, towards a broader concept that takes
advantage of the international deployment of broadband delivery technologies and
the convergence of television and the Internet. Our core business has become the
creation of NetVideoNetworks, which contains within it an ongoing series of
niche video networks, commencing with the finance category. We also intend to
create a channel which will focus on the luxury goods market.
SALES DIVISION
In early 1999, we acquired the assets of International Broadcast
Consultants of America, Inc. ("IBC") including the rights to distribute a
variety of products through retail, television and other channels of
distribution. Subsequently, we formed a wholly-owned subsidiary, 5th Avenue
Channel Retail, Inc., to manage and expand the marketing, sale and distribution
of consumer products. This subsidiary manages the sale of products to the home
shopping networks, retail store chains and wholesale distributors. We anticipate
expanding into Internet and international sales.
We recently signed an agreement with Signature Products, Inc. for
exclusive distribution rights in North and South America for a teen cosmetic
line called Body Jewels. The first product was launched on September 1, 1999 and
as of December 31, 1999, we sold approximately $885,000 of this product line,
subject to the customer's right to return the product during a limited period of
time. These sales reflected Christmas orders from stores. Sales for first
quarter 2000 were significantly lower, reflecting the seasonality of the retail
industry. We are currently expanding our product line and we expect to start
selling these additional items during the second quarter of 2000. We are
supplying the Body Jewel products to mass market retailers in the United States,
including Wal-Mart, Target, Walgreens, CVS, Longs, Albertson's and Meijers as
"promotional suppliers". Higher level access to retail chains is available if we
achieve "approved ongoing supplier" status, which we have applied for. We also
recently signed an agreement with Keenwheels, Inc., granting us exclusive
domestic distribution rights to a product called PermaCap which is a gas cap
that is not removed. The Company is expecting to launch the product into the
mass market and on television in the second quarter of 2000.
WIRELESS CABLE TELEVISION
We are 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. We
provide television and related cable services for multiple dwelling units,
commercial locations and single family residences.
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LACROSSE, WISCONSIN. We operate a wireless cable television system in
LaCrosse, Wisconsin. Our business began on August 24, 1993, when we entered into
an agreement with Grand Alliance LaCrosse (F) Partnership and Home/Systems Joint
Venture, which ultimately provided for the lease and purchase of the LaCrosse
System.
We began transmitting programming in LaCrosse in December 1994 and
presently have approximately 800 subscribers in LaCrosse. There are
approximately 70,000 households within the LaCrosse system's 25-mile signal
pattern. We currently offer 22 channels in LaCrosse, consisting of 17 wireless
cable channels and 5 local off-air (VHF/UHF) broadcast channels.
We own main transmitters, encoding equipment, antenna, cables, cable
boxes, satellite dishes, beam benders, computer hardware and software that is
utilized in this business and located in LaCrosse.
COSTA RICA. We acquired certain rights to up to 18 pay television
broadcast channels in Costa Rica in February 1996. 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 our LaCrosse system. At the time we 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. We currently
broadcast pay television programming over the three super band channels and the
three UHF channels in our Costa Rican system. We presently have no plans to use
the additional 12 microwave channels.
As of December 31, 1999, we have approximately 5032 subscribers in our
Costa Rican System. There are approximately 580,000 line-of-sight households in
the central valley that are reachable from our present transmission facility.
All 18 channel licenses may be used exclusively anywhere in Costa Rica, thereby
allowing us to expand our service beyond the central valley.
We own television and microwave transmitters, cable head-end equipment,
encoding equipment, antenna, installation trucks, cable boxes, satellite dishes,
computer hardware and software that are used in this business and which are
located in Costa Rica.
MARKETING
We expect to use a variety of methods to drive traffic to our channel
and website and to promote product sales. These methods include advertising
banners on other websites, listings with major search engines, advertising
outside of the Internet, including print and radio, Internet affiliations, and
joint venture marketing agreements with such websites as Zacks.com,
KeyTradeOnline.com, and others. We also are using our television channel to
drive traffic to our website and using the website to drive viewers to our
television channel.
We utilize media advertising, telemarketing, direct mail, and
door-to-door marketing to increase our subscriber base both in the LaCrosse
system and the Costa Rican system. We emphasize value, reliability of service,
quality and reliability of equipment, and picture quality in our marketing
programs.
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GOVERNMENT REGULATION
INTERNET/E-COMMERCE. There are currently few laws or regulations that
specifically regulate 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.
Several telecommunications carriers are seeking to have telecommunications over
the Internet regulated by the FCC in the same manner as 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
levels 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 of Internet commerce.
We cannot predict the effect of current attempts at taxing or regulating
commerce over the Internet.
WIRELESS CABLE TELEVISION - 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.
In the Telecommunications Act of 1996, the U.S. Congress changed the
focus of government oversight of the communications industry from regulation to
facilitating competition. Congress has passed laws, and the FCC has adopted
rules and regulations, to encourage competition among various providers of
communication services. 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 in the future, and
such changes could have an adverse effect on our business.
In September 1998, the FCC expanded the uses of the wireless cable
spectrum by adopting what is called the "Two Way Rule." The Two Way Rule permits
the use of wireless cable frequencies for two way digital communications where
previously this spectrum could be used only for the one way transmission of
television programming. This change in the FCC regulations makes it possible for
a wireless cable operator to provide data transmissions, such as high speed
internet access service, or voice transmissions, such as local loop telephone
service, as well as television programming, in its service area. The provision
of Internet service or telephone service, however, would require a substantial
financial commitment on our part. At this time, we do not plan to expand into
the internet service business or the telephone business at its wireless cable
system in La Crosse.
The Cable Television Consumer Protection and Competition Act of 1992
(the "Cable Act") allows state and municipal governments to regulate cable
equipment and "basic" tier (i.e., broadcast, local public access, governmental
and educational channels) cable rates for traditional hard-wire cable systems.
The Cable Act gave the FCC the authority to regulate rates on the "cable
programming service" tier (i.e., cable networks and all video programming not on
the basic tier) and the Commission regulated such rates for the last seven
years. The Telecommunications Act of 1996
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provided that rate regulation by the FCC was to be phased out in three years,
and as of March 31, 1999, the FCC no longer has the authority to regulate any
cable rates. Thus, cable operators are now free to offer discounts to our
subscribers or potential subscribers.
The Telecommunications Act of 1996 also permits 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. To date, the telephone companies have not entered the
video distribution business to any significant extent, but that could change at
any time, and such change could have an adverse effect on our business.
Over the last few years, competition for the wireless cable industry
has also come from direct broadcast satellite carriers, a service which has
grown rapidly to over ten million subscribers nationwide. On November 29, 1999,
as part of the Omnibus Appropriations Act of 1999, the President signed into law
the Satellite Home Viewer Improvement Act, which gives satellite carriers the
right to carry local television stations to subscribers in the stations' own
markets for the first time. At this point, it is too early to tell what impact
this new legislation will have on the wireless cable industry as a whole or on
us in particular.
WIRELESS CABLE TELEVISION - 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
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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
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.
COMPETITION
INTERNET. The Internet business is highly competitive. New companies
are being established everyday and any business set up on the Internet,
including our website, may face competition from a variety of existing or
upcoming websites. Many of these competitors may have greater financial,
technical and marketing resources, greater name recognition and better strategic
relationships. Consequently, we have been focusing on the creation and
aggregation of our own video content through the signing of exclusive or first
priority agreements with content suppliers and through the development of our
own programming through our television channel. Content of immediate value will
drive traffic to our site, and content of long term value creates a valuable
asset base for our Company. We believe that our ability to effectively compete
in this market will depend on our ability to build a significant archive, sign
distribution agreements for the licensing of the content to other websites,
develop our brand name and drive traffic to the site.
The business of finance on the Internet is highly competitive. Many
companies such as On24, CBS MarketWatch, CNBC and CNNfn have established
websites that offer financial and business information and services, and it is
our belief that many new websites will be created and they may decide to add
significant video services as part of their concept.
TELEVISION. The television business is highly competitive. New channels
face competition from a variety of existing television channels and networks.
Consequently, we have been focusing on creating proprietary programming to help
distinguish our television channel from other networks. Ultimately, the quality
of our programming will determine our success in this environment.
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WIRELESS CABLE TELEVISION. The pay television industry is highly
competitive. Wireless cable television systems face competition from several
sources, including established hardwire cable companies.
In Costa Rica, three hard-wire cable companies are our primary, direct
competitors. We estimate that within our 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, 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. We offer a package of 28 channels (22 local
off-air, 6 international) for a monthly fee of approximately $15 to $17, plus
installation. Based on our 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, we believe that we provide a competitive programming alternative to
hard-wire cable.
PRODUCT SALES. Our product sales division competes with all other
suppliers of merchandise to home shopping channels, retail stores and
distributors such as Telebrands, Emson, Media Brands and Media Group. Our
ability to compete in this market will depend upon the pricing and uniqueness of
our products.
EMPLOYEES
As of March 21, 2000, we had 74 full-time employees in our North Miami
Beach, Florida, LaCrosse, Wisconsin, Pelham, New York and Costa Rica offices,
including 10 management, 7 sales and marketing, 31 technical support, 22
clerical employees and 4 financial news anchors. We maintain various employee
group benefit plans and experience good employee relations.
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ITEM 2. DESCRIPTION OF PROPERTY
We lease approximately 4,500 square feet of general office space at
3957 Northeast 163rd Street, North Miami Beach, Florida 33160 used as its
principal executive offices. The lease has a five-year term that commenced May
8, 1998 and provides for an initial annual rent of $60,750 and increases
annually to a maximum of $78,780 in the fifth year.
We lease approximately 1,300 square feet of space at 3953 Northeast
163rd Street, North Miami Beach, Florida 33160. This space is leased in
conjunction with the property above and is used as additional office space. The
lease has a five-year term that commenced May 8, 1998 and provides for an
initial annual rent of $17,550 increasing each year to a maximum of $22,750 in
the fifth year.
We lease approximately 2,500 square feet of space for our warehouse
located at 2055 N.E 151st, N. Miami, FL, 33161. The lease has a four-year term,
expiring on March 31, 2003, and provides for an initial annual rent of $10,800,
with a 10% increase every year thereafter.
We lease approximately 2,000 square feet of space in La Crosse,
Wisconsin for our wireless cable division. The lease provides for a one-year
term, renewing annually, with an annual rent of approximately $15,500.
We lease approximately 750 square feet of office space at 629 Fifth
Avenue, Pelham, New York 10803 which is used to house our retail sales
operations. The lease has a three-year term that commenced March 29, 1999 and
provides for an annual rent of $13,560 for the first two years and $13,967 for
the third year.
We rent office space in Costa Rica from our President. This arrangement
is on a month-to-month basis, and during 1999, we paid Mr. Rosen approximately
$14,000.
On January 10, 2000, we entered into a one year agreement with a
television broadcasting facility located at 7291 NW 74th Street, Miami, Fl 33316
to lease space for our television studio and newsroom and to utilize the
facility's control room and uplink equipment. On March 1, 2000, this agreement
was amended to also include technical equipment for producing the live
television show and programming. The monthly fees for these services are
$72,000.
ITEM 3. LEGAL PROCEEDINGS
On June 9, 1999, the SEC issued an order directing an investigation of
certain of our activities and the activities of others. The investigation
focuses on whether we and other persons misrepresented certain of our affairs in
press releases and public filings during 1998 and the early part of 1999. The
commencement of an SEC investigation is part of the SEC's routine surveillance
and enforcement program and, as expressed by the SEC, should not be construed as
an adverse reflection on us and does not necessarily mean that any wrongdoing
has occurred. We do not believe that we have engaged in any conduct that would
warrant the institution of legal proceedings against us by the SEC and we are
cooperating fully with the SEC staff.
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. Our common stock, par value $.001 per share, (the
"Common Stock") has been listed on the NASDAQ SmallCap Market since May 3, 1995,
initially under the
9
<PAGE>
symbol "TCTV" and since March 25, 1999 under the symbol "FAVE". Warrants to
purchase the Common Stock have traded on the over-the-counter market since May
1995 under the symbol "TCTVW," and since March 25, 1999 under the symbol
"FAVEW."
The following table sets forth the range of high and low prices for
the Company's Common Stock for each quarterly period indicated, as reported in
the NASDAQ Small Cap Market. Such quotations reflect inter-dealer prices without
retail markup, markdown or commissions, and may not necessarily represent actual
transactions:
COMMON STOCK($)
------------------------------
QUARTER ENDED HIGH LOW
- -------------
December 31, 1999 6.750 2.000
September 30, 1999 7.437 2.375
June 30, 1999 11.500 3.500
March 31, 1999 12.750 7.500
QUARTER ENDED HIGH LOW
- -------------
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
RECORD HOLDERS. As of March 27, 2000, The approximate number of record
holders of the Company's Common Stock is 2,243.
DIVIDEND POLICY. We have never paid cash dividends on our Common Stock
and we intend to retain any future earnings for the operation and expansion of
our business.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following is an analysis of our results of operations and our
liquidity and capital resources. To the extent that such analysis contains
statements that are not of a historical nature, such statements are
forward-looking statements, which involve risks and uncertainties.
During 1999, we operated in three segments, wireless cable television
services, product sales, and Internet/television. In 1998, we only operated
wireless cable television operations in Costa Rica and Wisconsin. Corporate
overhead expenses are exclusively included in the internet and television
segment for 1999 due to the shift in our business model from focusing on
wireless cable to the Internet and television production.
10
<PAGE>
RESULTS OF OPERATIONS (IN THOUSANDS)
<TABLE>
<CAPTION>
%
Increase
1999 1998 (Decrease)
------- ------- -------
<S> <C> <C> <C>
REVENUE
Product sales $ 2,196 $ -- --
Wireless cable:
Costa Rica 1,279 1,093 17%
Wisconsin 317 360 (12%)
Corporate, Internet and TV -- --
------- -------
Total $ 3,792 $ 1,453 161%
======= =======
DIRECT COSTS
Product sales $ 1,679 $ -- --
Wireless cable:
Costa Rica 321 149 116%
Wisconsin 72 86 (16)
Corporate, Internet and TV -- --
------- -------
Total $ 2,072 $ 235 782%
======= =======
OPERATING EXPENSES
SELLING, GENERAL & ADMINISTRATIVE
Product sales $ 898 $ -- --
Wireless cable:
Costa Rica 590 795 (26%)
Wisconsin 338 262 29%
Corporate, Internet and TV 2,772 1,072 158%
------- -------
Sub total 4,598 2,129 116%
------- -------
WEBSITE & PRODUCT DESIGN
Corporate, Internet and TV 533 697 (24%)
------- -------
PROVISION FOR ASSET IMPAIRMENT
Corporate, Internet and TV -- 350 (100%)
------- -------
DEPRECIATION AND AMORTIZATION
Product sales 16 --
Wireless cable:
Costa Rica 450 454 --
Wisconsin 137 137 --
Corporate, Internet and TV 311 14 2114%
------- -------
Sub total 914 605 51%
------- -------
Total $ 6,045 $ 3,781 60%
======= =======
INTEREST INCOME (EXPENSE)
INTEREST INCOME
Corporate, Internet and TV $ 18 $ -- --
Costa Rica 1 2 (50%)
------- -------
Sub total 19 2 850%
------- -------
ACCRETION OF DEBENTURE DISCOUNT
Corporate, Internet and TV (472) (448) 5%
------- -------
OTHER INTEREST EXPENSE
Corporate, Internet and TV (399) (288) 39%
------- -------
Total $ (852) $ (734) 16%
======= =======
NET LOSS
Product sales $ (398) $ -- --
Wireless cable:
Costa Rica (82) (303) (73%)
Wisconsin (230) (125) 84%
Corporate, Internet and TV (4,468) (2,870) 56%
------- -------
Total $(5,178) $(3,298) 57%
======= =======
</TABLE>
Revenues
We had revenues of $3,792,000 for 1999 compared to $1,453,000 in 1998,
an increase of $2,339,000 or 161%. Approximately $2,196,000 of this increase was
derived from product sales primarily to home shopping channels and sales of our
teen cosmetic line. Wireless cable television services accounted for $143,000 of
the increase in 1999 due to an increased subscriber base in Costa
11
<PAGE>
Rica (from 4,763 in 1998 to 5,032 in 1999), despite a reduction in revenues of
$43,000 in Wisconsin due to a decrease in the subscriber base (from 941 in 1998
to 799 in 1999).
Product sales during the first three months of 2000 were significantly
lower than in 1999 due primarily to the seasonality of the products sold. We
expect sales to increase as the year progresses.
Some providers of the programming that we rebroadcast in LaCrosse,
Wisconsin, increased the rates charged per subscriber when the contracts are
renewed. To date these increases have not been significant and toward the end of
the year, we increased our rates to pass the additional programming costs onto
our subscribers. We also added a new transmitter, allowing us to provide local
channels to our customers. As a result of these changes, we expect revenue from
our Wisconsin operations to increase.
As of March 27, 2000, the number of subscribers in Costa Rica remains
constant. We therefore expect the same trend in the year 2000.
Direct Costs
Direct costs for 1999 increased $1,837,000 to $2,072,000 from $235,000
in 1998, an increase of 782%. This increase was due primarily to $1,679,000 in
costs incurred from adding the product sales division. Direct costs for the
wireless cable operations increased 172,000 in Costa Rica due to our offering
more channels to subscribers throughout 1999, and increasing subscription fees
in December 1999. Direct costs in Wisconsin decreased $14,000 due to a decrease
in the number of subscribers.
Operating Expenses
Operating expenses during 1999 increased by $2,264,000, or 60%. This
category includes selling, general and administrative expenses, website and
product design, depreciation and amortization.
Selling, general and administrative expenses increased by $2,469,000 or
116%, due primarily to an increase in salary and related expenses of
approximately $942,000 and contracted services of $585,000 as we added personnel
for the development and launch of the website and television channel. In
addition, we incurred legal fees of approximately $182,000 during 1999 compared
to $39,000 in 1998. Furthermore, we incurred substantially higher fees for
advertising, travel and promotion in an effort to promote the company, and
higher rent, insurance, telephone, freight and utilities due to the addition of
the product sales division.
We incurred $533,000 of website and software development costs in 1999
compared to $697,000 in 1998, a 24% decrease. These costs were greater during
the 1998 period as we incurred greater costs in the initial development of the
website.
During 1998, we provided a provision of $350,000 for asset impairment
associated with the underdeveloped Wisconsin licenses.
Depreciation and amortization costs increased to $913,000 in 1999
compared to $605,000 in 1998, an increase of $308,000 or 51%. This increase was
due to the amortization of goodwill
12
<PAGE>
resulting from the acquisitions of Fifth Avenue Channel, Inc. and IBC, as well
as the addition of fixed assets including furniture, office equipment and
television rebroadcast and receiving equipment.
Interest Expense
Interest costs increased to $871,000 in 1999 compared to $736,000 in
1998, an increase of $135,000 or 18%. This increase is partly due to an increase
of $24,000 debenture discount accretion associated with the issuance of
convertible debentures in May and November of 1998.
The remaining $111,000 increase is due primarily to an increase of
$114,000 in interest on loans from our President, an increase of approximately
$60,000 on the convertible debentures, offset by a decrease of approximately
$43,000 on interest on the license fee payable to the FCC. Interest on the
license fee payable included a one-time charge of approximately $110,000 in
1998.
Net Loss
Net losses for 1999 increased to $5,178,000 compared to $3,298,000 in
1998, an increase of $1,880,000 or 57% due primarily to an increase of
$1,598,000 in losses associated primarily with operations and the development of
our Internet and television operations.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES AND USE OF CASH
To date, we have funded our growth and operations through (i) the sale
of our common stock, (ii) the sale of debentures, and (iii) loans, primarily
from our President, Mr. Rosen. Cash provided by financing activities was
$5,407,000 for 1999 compared to $1,758,000 for 1998. The cash provided from
financing activities for 1999 came from sale of our common stock for net cash
proceeds of approximately $4,780,000, and from loans in the aggregate principal
amount of approximately $1,804,000 from Mr. Rosen. Since 1996, Mr. Rosen has
made loans to us on an ongoing basis. During 1998, Mr. Rosen had loaned us
approximately $935,000 and we repaid him approximately $275,000.
In November 1999, we used $708,000 of proceeds received from the sale
of our common stock to fully repay loans from Mr. Rosen in the aggregate
principal amounts of $79,000 at 18% interest and $300,000 at 10% interest and
applied $329,000 to the balance of an 8% loan. As of December 31, 1999, the
remaining balance of the 8% loan was approximately $2,268,000 including accrued
interest of $243,000. This balance payable to Mr. Rosen plus any accrued
interest is due on demand. In October 1999, we also used approximately $321,000
of the proceeds from the sale of our common stock to fully repay the balance of
the note issued in connection with the purchase of IBC. The balance of the
proceeds from the sale of common stock was used to fund our operations.
During 1999, we paid certain debt of IBC totaling $333,365 for which
the owners of IBC, Mr. Lefkowitz and Mr. Rothstein agreed to repay in 10 annual
installments of $49,681, including interest at 8%. This loan is collateralized
by a total of 55,562 of our common stock owned by Mr. Lefkowitz and Mr.
Rothstein.
13
<PAGE>
Cash used in operating activities was $2,667,000 in 1999 and $1,324,000
in 1998. The cash used during these periods was primarily attributable to net
losses of $5,178,000 for 1999 and $3,298,000 for 1998. These losses were offset
in part by depreciation and amortization and amortization of the discount on the
convertible debentures. We also had an increase in accounts payable and accrued
liabilities of $947,000 for 1999 compared to $301,000 for 1998.
Cash flows from investing activities included investments in property
and equipment of $491,000 compared to $229,000 for 1998, and deferred television
production costs of $114,000 during 1999 due primarily to the development of our
channel and website
Subsequent to December 1999, approximately $800,000 was spent in
capital expenditure for our television studio and internet site. We currently
expect to spend approximately $400,000 in additional capital expenditure for our
television and internet business and our corporate business.
CONVERSION OF DEBENTURE TO COMMON STOCK
During 1999, Mr. Rosen converted the $2,366,000 convertible debenture
he obtained in connection with the debt restructuring agreement into 4,732,000
shares of our common stock. As part of the consideration for early conversion of
the debenture, Mr. Rosen agreed to forego all interest on the debenture from
December 31, 1997.
In December 1999, the May convertible debentures in the principal
amount of $595,000 were converted into 297,500 shares of our common stock, and
$70,117 of accrued interest thereon was converted into 35,059 shares of our
common stock. In addition, the November convertible debenture in the principal
amount of $500,000 was converted into 200,000 shares of our common stock, and
$55,000 of accrued interest thereon was converted into 22,000 shares of our
common stock.
WORKING CAPITAL DEFICIT AND MANAGEMENT PLAN
The accompanying financial statements reflect current liabilities of
$4,295,000 and current assets of $3,022,000, resulting in a working capital
deficit $1,273,000. Approximately $2,268,000 of the working capital deficit
consists of amounts owed to Mr. Rosen. Operating losses for 1999 were
$4,326,000. Operating deficits will continue until such time as substantial
revenues are generated from our channel and website.
We have formulated, and we are in the process of implementing a
business plan intended to develop new and increased revenues and gross profit in
all of its areas of operation. This plan includes the following:
o The expansion of the number of hours and homes into which we are
delivering our recently launched television programming; the sale
of advertising during our programming hours; and the syndication
of our television programming to other television channels and
networks.
14
<PAGE>
o The development and implementation of advertising models for
banner and streaming advertising revenues on our website and video
viewer; the development and implementation of sales plans for the
sale of our financial products to consumers and other websites;
and the licensing of our NetVideoNewtorks archival content to
other websites.
o The addition of new products into the retail product line to
increase sales and profits. In addition, we are looking into
developing markets for our products internationally.
o Attempting to take advantage of the opportunities that currently
exist for new broadband delivery capabilities and the coming
convergence of television and the internet. We are allocating
funds within reason, where necessary to develop these
capabilities and to generate sales, advertising and other revenues
from these opportunities.
o Increasing the number of households subscribing to our wireless
cable television services in both Costa Rica and Wisconsin.
o Managing costs and improving cost controls over operating costs
and the cost of delivery of goods and services, so as to improve
gross margins and profitability.
We believe that we need approximately $6,000,000 over the next year to
carry out our business plan. We have recently signed an agreement with an
investment fund which will allows us to sell shares of our common stock to raise
approximately $1,000,000 per month over a twelve month period. In addition, we
entered into a stock subscription agreement with an accredited investor for the
sale of 250,000 shares our common stock at a price of $4.00 per share. To date,
we have received $100,000, with the remaining $900,000 due on a scheduled basis.
We also have a commitment from our President, Mr. Rosen, that in the
event of and to the extent that, we are unable to obtain at least $6,000,000
over the next year in debt or equity financing from third party sources, and the
Company experiences a cash shortfall, he will advance funds to us in an amount
equal to the difference between $6,000,000 and such third party financing.
YEAR 2000 ISSUES
We did not experience any problems related to the Year 2000 issues. We
believe that our preparations were adequate and we do not anticipate any
problems.
15
<PAGE>
INFLATION AND FOREIGN CURRENCY FLUCTUATION
During 1999, Costa Rica experienced a decline in the value of the Colon
relative to the U.S. dollar of approximately 1% per month. The government of
Costa Rica mandates minimum salary increases on July 1 and January 1 of each
year. We have been able to increase prices to cover the wage increases and the
effects of the currency decline in Costa Rica and believe that we will be able
to continue to do so without significant adverse effect on our subscriber base.
RECENT ACCOUNTING PRONOUNCEMENTS
We do not expect SFAS 130, which establishes standards for reporting
and displaying comprehensive income, its components and accumulated balances, to
have any effect on our 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. We have adopted the provisions of SFAS No. 131 for the year ended
December 31, 1998 as required.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS 137, 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 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,
2000. A company may also implement the provisions of SFAS No. 133 as of the
beginning of any fiscal quarter commencing 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). We have not
entered into derivatives contracts to hedge existing risks or for speculative
purposes. Accordingly, we do not expect the adoption of the new standard to
affect our financial statements.
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 requires all costs
related to the development of internal use software other than those incurred
during the application development stage to be expensed as incurred. Costs
incurred during the application development stage are required to be capitalized
and amortized over the estimated useful life of the software. SOP 98-1 was
adopted by the Company on January 1, 1999 and did not have a material effect on
the Company's financial position or results of operations.
16
<PAGE>
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
Not applicable.
17
<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
Our directors, executive officers and key employees are as follows:
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITION SINCE
- ---- --- -------- -----
<S> <C> <C> <C>
Melvin Rosen 56 Chairman of the Board, President and 1997
Chief Executive Officer
Eric Lefkowitz 40 Senior Vice President and Director 1999
Dennis Devlin 51 Director 1993
Scott Housefield 42 Director 1999
Larry Weinstein 52 Director 1999
Nick van der Linden 31 Director 1999
Adam Taylor 47 Chief Operating Officer --
Dominique Sada 43 Executive Vice President and Chief --
Financial Officer
Ivan Rothstein 56 Executive Vice President, Business --
Development
Michael Tedesco 44 President and Chief Operating Officer --
of 5th Avenue Channel Retail, Inc.
</TABLE>
Each of our directors holds his position until the next annual meeting
of shareholders or until his successor is duly elected and qualified.
Melvin Rosen: President, C.E.O. and Chairman of the Board. Melvin
Rosen, 56, has served as President, Chief Executive Officer and Chairman of the
Board of the Company since May 1997. From July 1986 to May 1996, he owned and
served as the President of the company that owned a wireless cable television
system in Costa Rica which was sold to us in February 1996. He was also the
co-founder of TVN, a large pay-per-view company.
18
<PAGE>
Eric Lefkowitz: Executive Vice President And Director. Eric Lefkowitz,
40, has served as one of our Executive Vice Presidents since January 1999 and as
one of our directors since March 1998. Mr. Lefkowitz was President, CEO and 50%
owner of International Broadcast Consultants of America, Inc., a consumer
products marketing and wholesaling company, between 1994 and 1999.
Dennis J. Devlin: Director. Mr. Devlin, 51, has served as one of our
directors since May 1993 and as our Vice President from 1993 to 1998. Mr. Devlin
is the founder and has served as President of Dennis' Mobile Home Service and
Supply, Inc. in Wayne, Michigan since 1979. Mobile Home Service and Supply, Inc.
is engaged in the construction of additions, roof systems and specialized
products for mobile home owners, including remodeling, insurance services, parts
supply and repair.
Scott Housefield: Director. Scott Housefield, 42, has served as one of
our directors since June 1999. From 1993 to 1998, he held various senior
management positions at Brightpoint, Inc. (Nasdaq: CELL - news), a global
wireless telecommunications company.
Larry Weinstein: Director. Larry Weinstein, 52, has served as one of
our directors since September 1999. He is currently Vice President of Strategic
Projects for Cybergold, Inc. (Cybergold.com), an on-line incentive marketing
company. From 1992 to 1998, Mr. Weinstein served as Executive Vice President for
Greenleaf Technologies Corp., a high-tech company specializing in encryption and
compression technologies.
Nick van der Linden: Director. Mr. van der Linden, 31, has served as
one of our directors since November 1999. Mr. van der Linden is founder of
Caladan B.V., a holding company for a number of investment activities including
corporate finance and consulting. Mr. van der Linden is also founder of The
Traders Society N.V., a wholesale trading house in the Netherlands where he
served as its Chief Executive Officer from 1996 to 1998. From 1994 to 1996, he
was a managing director at Rabo Securities in the Netherlands.
Adam Taylor: Executive Vice President and Chief Operating Officer. Adam
Taylor, 47, has served as an Executive Vice President and Chief Operating
Officer since January 1999. Mr. Taylor was President of Taylor/Fox Enterprises,
LLC, a marketing company based in California from June 1992 to December 1998 and
President of Goldman/Taylor Entertainment Inc., a television development and
production company from February 1990 to May 1997.
Dominique Sada: Executive Vice President and Chief Financial Officer.
Dominique Sada, 43, has served as an Executive Vice President and our Chief
Financial Officer since December 1999. Prior to joining the Company, Ms. Sada
worked as a manager of Accounting, Auditing and Consulting for Rachlin, Cohen &
Holtz, a South Florida public accounting firm from 1997 to 1999. Between 1994
and 1996, she served as financial manager of Chase Manhattan Corp., a financial
services company, and between 1987 and 1994, she worked for Deloitte & Touche, a
public accounting firm, where she was an audit manager. Ms. Sada is a Certified
Public Accountant.
Ivan Rothstein: Executive Vice President, Business Development. Mr.
Rothstein has served as Executive Vice President of Business Development since
January 1999. Mr. Rothstein has been Vice President and 50% owner of
International Broadcast Corporation (IBC) since 1994. From 1982 to 1995, Mr.
Rothstein was Vice President of Centuri, a manufacturer of video game machines.
19
<PAGE>
Michael Tedesco. President and Chief Operating Officer of the 5th
Avenue Channel Retail, Inc. Mr. Tedesco, 44, has served as President and Chief
Operating Officer of 5th Avenue Channel Retail since April 1999. From 1996 to
1999, he was Executive Vice President of Sales at Media Brands, LLC, a
direct-response, retail manufacturing company. Between 1995 and 1996, Mr.
Tedesco served as National Sales Manager at Home Shopping Network, and between
1993 and 1995 Mr. Tedesco served as Vice President of Claude G., Inc., an
importer of private label French fragrances. Prior to joining Claude G, Inc.,
Mr. Tedesco served as a Partner and Vice President of Sales at Innovo Inc., a
manufacturer of canvas bags and aprons. During his tenure, Mr. Tedesco created,
manufactured and marketed the "E.A.R.T.H. Bag" which sold over 10 million units.
DIRECTOR'S REMUNERATION
Each non-employee director is reimbursed for expenses incurred in
attending board meetings. In addition, each non-employee director earns 2,000
options a month at an exercise price equal to the fair market value of our
common stock on the last day of each month.
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 solely upon a review of
Forms 3 and 4 and amendments thereto furnished to us under Rule 16a-3(e) during
1999 and Forms 5 and amendments thereto furnished to us, we do not believe there
have been any untimely filings of such reports.
20
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the total compensation paid to or
accrued for the years ended December 31, 1999, 1998 and 1997 to our Chief
Executive Officer and to each of our most highly compensated executive officers,
other than the Chief Executive Officer, whose salary and bonus for such fiscal
years exceeded $100,000.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------
OTHER
NAME AND YEAR ANNUAL ALL OTHER
PRINCIPAL POSITION ENDED SALARY BONUS COMPENSATION OPTIONS (#) COMPENSATION
- ------------------ ----- ------ ----- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Melvin Rosen, 12/31/99 $ 180,000 0 0 0 0
President and CEO 12/31/98 $ 180,000 0 0 0 0
12/31/97(1) $ 90,000 0 0 0 0
Eric Lefkowitz 12/31/99 $150,000 0 0 0 0
Executive VP and Director 12/31/98(2) $ 50,000 0 0 0 0
</TABLE>
- ----------
(1) Mr. Rosen commenced his employment with us in May 1997 and has accrued his
entire salary since that time.
(2) Mr. Lefkowitz commenced his employment with us in November 1998.
OPTION GRANTS
None of the above named executive officers received options during the
year ended December 31, 1999.
OPTION VALUES ON DECEMER 31, 1999
None of the named executive officers exercised options during 1999.
EMPLOYMENT AGREEMENTS
We have entered into employment agreements with certain of our key
executives as follows:
Melvin Rosen, President and Chief Executive Officer, entered into a
five year agreement commencing January 1, 2000. The agreement provides for an
annual salary of $250,000. The agreement also provides for a grant of 240,000
options to purchase our common stock at an exercise price equal to the fair
market value of the stock on the date of grant, January 31, 2000. The options
have a five year term. The options vest ratably over a twelve month period
commencing February 2000. The agreement also grants a one time stock grant of
30,000 shares of common stock of the Company as of January 1, 2000 and an
additional 150,000 options at prices ranging between $10 and $20. The agreement
also provides for health, life and disability insurance and reimbursement for
all reasonable business expenses.
Eric Lefkowitz, our Senior Vice President, entered into a five-year
agreement effective January 1, 1999. The agreement provides for an annual salary
of $150,000. The agreement also provides for bonuses and stock options based on
our performance and for health, life and disability insurance and reimbursement
for all reasonable business expenses. Commencing January 1, 2000 the company
entered into a new two-year agreement that replaces the previous agreement. The
new agreement provides for an annual salary of $200,000. The agreement also
provides for a grant of 180,000 options to purchase our common stock at an
exercise price equal to the fair market value of the stock on the date of grant,
January 31, 2000. The options have a five year term and vest ratably over a
twelve month period commencing February 2000. The agreement also grants a one
time stock grant of 20,000 shares of common stock of the Company as of January
1, 2000 and an additional 75,000 options at prices ranging between $10 and $20.
The agreement also provides for health, life and disability insurance and
reimbursement for all reasonable business expenses.
Adam Taylor, our Chief Operating Officer, entered into a one-year
agreement effective January 5, 1999. The agreement provides for an annual salary
of $102,000 plus benefits. The agreement also provides for grants of 5,000
options to purchase our common stock per month at an exercise price equal to
$.25 above the average market value of the common stock for the five days prior
to each monthly grant date. The options vest ratably over a three-year period
from the date of the grant. The agreement also provides for term life, health,
medical, dental and hospitalization insurance, as well as pension and
profit-sharing benefits and for reimbursement of all reasonable business
expenses and a monthly automobile reimbursement allowance of $1,000. Commencing
January 1, 2000 the company entered into a new two-year agreement. The new
agreement provides for an annual salary of $140,000. The agreement also provides
for a grant of 121,000 options to purchase our common stock at an exercise price
equal to the fair market value of the stock on the date of grant, January 31,
2000. The options have a five year term. 25,000 of the options vest immediately
upon grant and the balance vest ratably over a twelve month period commencing
February 2000. The agreement also grants a one time stock grant of 15,000 shares
of common stock of the Company as of January 1, 000 and an additional 75,000
options at prices ranging between $10 and $20. The agreement also provides for
health, life and disability insurance and reimbursement for all reasonable
business expenses.
Ivan Rothstein, Executive Vice President, entered into a two year
agreement commencing January 1, 2000. The agreement provides for an annual
salary of $140,000. The agreement also provides for a grant of 96,000 options to
purchase our common stock at an exercise price equal to the fair market value of
the stock on the date of grant, January 31, 2000. The options have a five year
term. The options vest ratably over a twelve month period commencing February
2000. The agreement also grants a one time stock grant of 15,000 shares of
common stock of the Company as of January 1, 2000 and an additional 75,000
options at prices ranging between $10 and $20. The agreement also provides for
health, life and disability insurance and reimbursement for all reasonable
business expenses.
Michael Tedesco, President and Chief Operating Officer of 5th Avenue
Channel Retail, Inc., our wholly-owned subsidiary, entered into a one-year
agreement dated April 1999. The agreement provides for an annual salary of
$102,000 plus benefits and incentive bonuses as determined by the Board of
Directors. The agreement also provides for Mr. Tedesco to receive up to 24,000
options to purchase our common stock at an exercise price of $7.25 per share in
the first year of employment accruing at a rate of 2,000 options per month. If
we elect to renew Mr. Tedesco's agreement for a second year, he will receive a
grant of an additional 30,000 options. Mr. Tedesco also receives an incentive
monthly bonus equal to one percent of the gross sales receipts from the sale of
products and services by 5th Avenue Channel Retail during the preceding month.
If 5th Avenue Channel Retail exceeds its annual sales projections, Mr. Tedesco
will receive options to purchase 50,000 shares of our common stock at an
exercise price equal to the fair market value of our stock at the date of grant.
The agreement provides for life, health, medical, dental and hospitalization
insurance, as well as pension and profit-sharing benefits and reimbursement of
all reasonable business expenses and an annual automobile allowance of $5,000.
STOCK OPTION PLAN
In January 1995, the Company adopted a stock option plan (the "SOP"),
pursuant to which officers, directors, key employees and consultants are
eligible to receive "incentive" and/or non-qualified stock options. The Company
can grant 200,000 shares of its common stock under the SOP. The SOP is
administered by the Board of Directors which determines, among other things, the
persons to be granted options under the SOP, the number of shares subject to
each option, and the option price. To date, the Company has granted options to
purchase 142,360 shares of common stock under the SOP, 129,360 of which remain
outstanding. The exercise price of all options granted under the SOP equaled or
exceeded the fair market value of the common stock on the date of grant.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding beneficial
ownership of our common stock as of March 27, 2000 by all persons known by us to
own beneficially 5% or more of the outstanding shares of our common stock, each
director, and all executive officers and directors as a group:
<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>
Melvin Rosen 7,089,879(3) 50.30%
c/o 5th Avenue Channel Corp.
3957 N.E. 163rd Street
North Miami Beach, FL 33160
</TABLE>
21
<PAGE>
<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>
Ivana Trump 745,000(4) 5.74%
c/o Lyman & Landy
405 Park Avenue, 17th Floor
New York, NY 10022
Eric Lefkowitz 608,667(5) 4.86%
Ivan Rothstein
430,666(6) 3.49%
Dennis J. Devlin
272,000(7) 2.21%
Scott Housefield 12,000(8) .10%
Larry Weinstein 12,000(9) .10%
Nick van der Linden 332,000(10) 2.70%
All officers and directors as a group 8,858,285(11) 74.83%
(11 persons)
</TABLE>
- -------------------------------------------
(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 12,274,702 shares of common stock issued and outstanding shares as
of March 27, 2000 For purposes of calculating each person's beneficial
ownership, amount and percentage, each person's options and warrants that
are exercisable within 60 days as of March 27, 2000 are included and are
deemed outstanding and are added to the 12,274,702 shares outstanding.
(3) Includes 500,000 shares of common stock issuable upon exercise of a warrant
at an exercise price of $1.00 per share, 500,000 shares issuable upon
exercise of a warrant at $5.00 per share and 820,000 shares issuable upon
exercise of options.
(4) Includes options to purchase an aggregate of 700,000 shares of common stock
at exercise prices ranging from $5.00 per share to $15.00 per share.
(5) Includes 300,000 shares held by IBC, a company of which Mr. Lefkowitz owns
50% and 245,000 shares issuable upon exercise of options.
(6) Includes 300,000 shares held by IBC, a company of which Mr. Rothstein owns
50% and 74,000 shares issuable upon exercise of options.
(7) Includes options to purchase 5,000 shares at $5.85 per share, options to
purchase 5,000 shares at $8.25 per share, and options to purchase 12,000 at
fair value on date of grant.
(8) Represents options to purchase 12,000 shares at fair value on date of
grant.
22
<PAGE>
(9) Represents options to purchase 12,000 shares at fair value on date of
grant.
(10) Represents shares owned by Caladan B.V., a company controlled by Mr. van
der Linden, and options to purchase 12,000 shares at fair value on date of
grant.
(11) Includes a total of 2,505,073 shares issuable upon the exercise of
presently exercisable options and warrants held by the following persons: Melvin
Rosen 1,000,000 warrants and 820,000 options; Eric Lefkowitz, 245,000 options;
Ivan Rothstein 74,000 options; Dennis Devlin 22,000 options; Scott Housefield,
12,000 options; Larry Weinstein, 12,000 options, Nick van der Linden, 12,000
options; Adam Taylor 141,240 options; Michael Tedesco 14,833 options; and
Dominique Sada, 152,000 options
23
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LOANS TO THE COMPANY
During 1996 and 1997, Mr. Rosen loaned us $262,479 at 18% interest. We
repaid $183,400 during 1998 and the remaining balance (including accrued
interest thereon) in November 1999.
During 1998, Mr. Rosen also loaned us $300,000 at 10% interest. We
fully repaid this loan (including accrued interest thereon) in November 1999. In
addition, during 1998 Mr. Rosen loaned us $550,000 at 8% interest. At various
times during 1999, he loaned us additional amounts at the same rate and we made
certain repayments to him. The balance of this loan as of December 31, 1999 was
$2,268,308, including accrued interest of $242,958. This loan is payable on
demand.
Aggregate accrued interest on the three loans at December 31, 1998 was
$70,696.
On February 24, 1997, Mr. Duquette and Mr. Devlin each loaned us
$25,000 ($50,000 in the aggregate), which we used to pay Mr. Rosen for an
extension of the indebtedness due to him as described below. These loans accrue
interest at 10% per annum. As of December 31, 1999, the balance of these loans,
including accrued interest, was $55,081 and $52,581, respectively. These loans
are payable on demand.
LOANS TO EMPLOYEES
During 1998 and 1999, we loaned $51,274 to a former officer of the
Company. This loan will be repaid upon exercise of options to purchase our
common stock held by the former officer's estate.
During 1999, we paid certain debt of IBC totaling $333,365 for which
the owners of IBC, Mr. Lefkowitz and Mr. Rothstein agreed to repay in 10 annual
installments of $49,681, including interest at 8%. This loan is collateralized
by a total of 55,562 of our common stock owned by Mr. Lefkowitz and Mr.
Rothstein.
During 1999, we loaned $23,000 to an employee. This loan was settled in
early 2000 in exchange for services performed by the employee.
DEBT RESTRUCTURING AGREEMENT AND DEBENTURE
In January 1999 and March 1999 Mr. Rosen converted a debenture in the
amount of $2,366,000 including accrued interest into 4,732,000 shares of our
common stock.
Mr. Rosen acquired the convertible debentures in 1997 in an agreement
to restructure a $2 million note issued to him as part of the acquisition of our
Costa Rican operations. The agreement provided for restructuring the note into a
convertible 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. We
paid interest of $12,000 on the original note to Mr. Rosen in early 1997. No
interest was paid on the debenture in 1997 and $156,033 of interest accrued from
May 19, 1997 to December 31, 1997 and was added to the debenture principal.
24
<PAGE>
As consideration for this debt restructuring, we agreed to issue to Mr.
Rosen (i) 180,000 shares of our common stock; (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 our Board of Directors until such time as he exercised the conversion
rights under the debenture and we released him from any liability in connection
with the Costa Rican acquisition. Upon consummation of the debt restructuring,
Mr. Rosen and his designee, Samuel H. Simkin, were appointed to our Board of
Directors and Mr. Rosen was named our President and Chief Executive Officer.
The debenture was convertible by Mr. Rosen into our 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 price for our common stock as reported on the
Nasdaq Small Cap Market for the five trading days immediately prior to the
conversion date.
OTHER RELATED TRANSACTIONS
Effective December 10, 1998, we acquired 100% of the capital stock of
The Fifth Avenue Channel, Inc. ("5th Avenue") from its shareholders for 335,000
shares of our common stock and we agreed to issue up to 665,000 additional
"performance shares" as follows: 332,500 if 5th Avenue achieves gross revenues
in excess of $10,000,000 for any calendar quarter; and the remaining 332,500
shares if 5th 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. If 5th Avenue does not achieve these objectives by September 30, 2003,
the right to receive the performance shares will terminate. Mr. Rosen owned 65%
of the 5th Avenue stock, IBC Partners owned 25% and Ms. Trump owned 10%.
IBC Partners is 50% owned by Mr. Lefkowitz, our Executive Vice President and
Director, and 50% by Mr. Rothstein, our Executive Vice President
Effective January 4, 1999, we purchased 100% of the assets and
operations of International Broadcast Consultants ("IBC") for 300,000 shares of
our common stock and $450,000 in cash. IBC was active in the electronic media
field, specializing in new product marketing on cable television. See "Notes to
Consolidated Financial Statements."
AFFILIATED TRANSACTION 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.
25
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (OPEN)
---------------------------------------
Item 27. Exhibits.
(2.1) Share Exchange Agreement by and among the
Company, IBC Partners, Melvin Rosen and Ivana Trump effective
December 10, 1998, dated February 18, 1999 but executed March 17,
1999.(1)
(2.2) Amendment to Share Exchange Agreement by and among the Company,
IBC Partners, Melvin Rosen and Ivana Trump dated March 8, 1999
but executed March 17, 1999.(1)
(2.3) Asset Purchase Agreement by and between the Company and
International Broadcast Consultants of America, Inc. effective as
of January 19, 1999 but dated May 12, 1999.
(3.1) Amended and Restated Articles of Incorporation.(3)
(3.2) Bylaws.(4)
(4.1) Specimen Common Stock Certificate.(5)
(4.2) Specimen Warrant Certificate.(5)
(10.1) Debt Restructuring Agreement by and between the Company and
Melvin Rosen dated May 19, 1997.(6)
(10.2) Secured Convertible Debenture.(7)
(10.3) Agreement to Convert the Secured Convertible Debenture(8)
(10.4) Consulting Agreement between the Company, Ivana Trump and Melvin
Rosen, effective November 5, 1998 dated February 29, 1999.(9)
(10.5) Lease Agreement between Intracoastal Pacific Limited Partnership,
the Company and International Broadcast Consultants of America,
Inc. dated May 8, 1998.(5)
(10.6) Employment Agreement with Michael Tedesco dated April 1999.(5)
(10.7) Employment Agreement with Adam Taylor effective January 5, 1999,
but enetered into August 3, 1999.(5)
(10.8) Employment Agreement with Eric Lefkowitz dated May 10, 1999.(5)
(10.9) Exclusive Television Broadcast and Information Licensing
Agreement between the Company and Zacks Investments Research,
Inc. dated August 24, 1999.(5)
(10.10) Broadcast Agreement between the Company and The Comcast Network
dated September 22, 1999.(5)
(10.11) Stock Option Plan(5)
(10.12) Agreement with Signature Products, Inc.(5)
(16.1) Letter on Change in Certifying Accountants(10)
(21.1) Subsidiaries of Registrant(11)
(27.1) Financial Data Schedule*
(99.1) Financial Statements of International Broadcast Consultants of
Americaa, Inc.(12)
(99.2) Pro Forma Financial Statements giving effect to the acquisition
of certain assets of International Broadcast Consultants of
America, Inc.(13)
- --------------------
* Filed herewith.
(1) Incorporated by reference from Exhibits 2.1 and 2.2 filed with the
Company's Current Report on Form 8-K filed March 25, 1999.
(2) Incorporated by reference from Exhibit 2.3 filed with the Company's
Quarterly Report on Form 10-QSB filed May 17, 1999.
(3) Incorporated by reference from Exhibit 3.1 filed with the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1998.
(4) Incorporated by reference from Exhibit 3.2 filed with the Company's
Registration Statement on Form SB-2, File No. 333-89042, filed on January
26, 1995.
(5) Incorporated by reference from the Company's Registration Statement on
Form SB-2, File No. 333-95557, filed on January 27, 2000.
(6) Incorporated by reference from Exhibit 10.1 filed with the Company's
Current Report on Form 8-K filed May 29, 1997.
(7) Incorporated by reference from Exhibit 10.2 filed with the Company's
Current Report on Form 8-K filed May 29, 1997.
(8) Incorporated by reference from Exhibit 10.3 filed with the Company's
Annual Report on From 10-KSB filed April 15, 1998.
(9) Incorporated by reference from Exhibits 10.4 filed with the Company's
Current Report on Form 8-K filed March 25, 1999.
(10) Incorporated by reference from Exhibit 16.1 filed with the Company's
Current Report on Form 8-K filed February 25, 1999.
(11) Incorporated by reference from Exhibit 21.1 filed with the Company's
Annual Report on From 10-KSB filed April 23, 1999.
(12) Incorporated by reference from Exhibit 99.1 filed with the Company's
Current Report on Form 8-K filed December 27, 1999.
(13) Incorporated by reference from Exhibit 99.2 filed with the Amendment to
the Company's Current Report on Form 8-K filed December 29, 1999.
26
<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, 1999 to be signed on its behalf by the undersigned, thereunto duly
authorized.
5TH AVENUE CHANNEL CORP.
Dated: March 30, 1999 By: /s/ MELVIN ROSEN
------------------------------------
Melvin Rosen: Chairman of the Board,
President and CEO
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ MELVIN ROSEN Chairman of the Board March 30, 2000
- ------------------------------------ and President
Melvin Rosen (Principal Executive Officer)
/s/ DOMINIQUE SADA
- ------------------------------------ Executive Vice President, and March 30, 2000
Dominique Sada Chief Financial Officer
(Principal Financial Officer and
Accounting Officer)
/s/ ERIC LEFKOWITZ
- ------------------------------------ Director March 30, 2000
Eric Lefkowitz
- ------------------------------------ Director
Dennis J. Devlin
/s/ SCOTT HOUSEFIELD
- ------------------------------------ Director March 30, 2000
Scott Housefield
/s/ LARRY WEINSTEIN
- ------------------------------------ Director March 30, 2000
Larry Weinstein
- ------------------------------------ Director
Nick van der Linden
</TABLE>
27
<PAGE>
5TH AVENUE CHANNEL CORP.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheet F-2
Statements of Operations F-3
Statements of Stockholders' Equity F-4
Statements of Cash Flows F-5
Notes to Financial Statements F-6 TO F-36
</TABLE>
<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, 1999 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the two years in the
period then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits 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 audits provide 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, 1999, and the results of their operations and their
cash flows for each of the two years in the period 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
March 28, 2000
F-1
<PAGE>
5TH AVENUE CHANNEL CORP.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents $2,024,143
Accounts receivable, net of allowance of approximately $356,000 555,514
Inventory 210,486
Current portion of notes receivable, related parties 23,012
Loans receivable, related parties 64,912
Prepaid expenses and other current assets 143,640
------------
Total current assets 3,021,707
Property and Equipment 1,500,411
Licenses 4,331,897
Goodwill 2,078,292
Notes Receivable, Related Parties 310,353
Other Assets 222,699
------------
$ 11,465,359
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $1,343,029
Accrued payroll, President/Chairman of the Board 450,000
Current portion of long-term debt 87,433
Loans payable, related parties 55,081
Loans payable, President/Chairman of the Board 2,268,308
Deferred revenue 91,400
------------
Total current liabilities 4,295,251
------------
Long-Term Debt:
License installment payment plan notes, net of current portion 864,893
------------
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;
12,214,702 shares issued and outstanding 12,215
Additional paid-in capital 20,277,555
Deficit (13,984,555)
------------
6,305,215
$ 11,465,359
============
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
5TH AVENUE CHANNEL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Revenue:
Product sales $ 2,195,675 $ --
Wireless cable television services 1,595,995 1,453,033
----------- -----------
3,791,670 1,453,033
Direct Costs:
Product sales 1,678,922 --
Wireless cable television services 393,358 235,367
----------- -----------
2,072,280 235,367
Gross Margin 1,719,390 1,217,666
----------- -----------
Operating Expenses:
Selling, general and administrative 4,598,174 2,128,821
Website and software development costs 533,237 696,762
Depreciation and amortization 913,529 605,652
Provision for asset impairment -- 350,000
----------- -----------
6,044,940 3,781,235
Loss from Operations (4,325,550) (2,563,569)
----------- -----------
Other Income (Expense):
Interest income 18,664 2,377
Interest expense (871,117) (736,749)
----------- -----------
(852,453) (734,372)
Net Loss $(5,178,003) $(3,297,941)
=========== ===========
Net Loss Per Common Share - Basic and Diluted $ (0.52) $ (0.81)
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
5TH AVENUE CHANNEL CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Common Stock Additional
------------ Paid-In
Shares Amount Capital
---------- -------- ------------
<S> <C> <C> <C>
Balance, January 1, 1998 4,009,643 $4,010 $8,171,457
Year Ended December 31, 1998:
Issuance of common stock in payment of consulting fees 26,000 26 86,600
Issuance of common stock in settlement of debt 82,500 82 99,554
Exercise of warrants 50,000 50 49,950
Issuance of common stock in connection with
acquisition of 5th Avenue Channel 335,000 335 614,665
Discount on subordinated convertible debentures - - 920,000
Net loss - - -
---------- ------- -----------
Balance, December 31, 1998 4,503,143 4,503 9,942,226
Year Ended December 31, 1999:
Sale of common stock, net of fees 2,125,000 2,125 4,777,518
Conversion of convertible debentures, net of fees 4,732,000 4,732 2,350,418
Conversion of subordinated convertible debentures 554,559 555 1,219,562
Issuance of common stock in connection with
acquisition of International Broadcast Consultants of America, Inc. 300,000 300 1,723,800
Issuance of options in payment of consulting fees - - 218,763
Issuance of options to Director - - 45,268
Net loss - - -
---------- -------- ------------
Balance, December 31, 1999 12,214,702 $ 12,215 $ 20,277,555
========== ======== ============
<CAPTION>
Total
Stockholders'
Deficit Equity
------------- ----------
<S> <C> <C>
Balance, January 1, 1998 $(5,508,611) $2,666,856
Year Ended December 31, 1998:
Issuance of common stock in payment of consulting fees - 86,626
Issuance of common stock in settlement of debt - 99,636
Exercise of warrants - 50,000
Issuance of common stock in connection with
acquisition of 5th Avenue Channel - 615,000
Discount on subordinated convertible debentures - 920,000
Net loss (3,297,941) (3,297,941)
------------- ----------
Balance, December 31, 1998 (8,806,552) 1,140,177
Year Ended December 31, 1999:
Sale of common stock, net of fees - 4,779,643
Conversion of convertible debentures, net of fees - 2,355,150
Conversion of subordinated convertible debentures - 1,220,117
Issuance of common stock in connection with -
acquisition of International Broadcast Consultants of America, Inc. - 1,724,100
Issuance of options in payment of consulting fees - 218,763
Issuance of options to Director - 45,268
Net loss (5,178,003) (5,178,003)
------------- ----------
Balance, December 31, 1999 $ (13,984,555) $6,305,215
============== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
5TH AVENUE CHANNEL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $(5,178,003) $(3,297,941)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 913,529 605,652
Amortization of discount on convertible subordinated debentures 471,899 448,101
Provision for asset impairment and equipment write-off - 431,632
Compensation in form of common stock and warrants issued
to consultants and Directors 264,031 86,626
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable (420,205) 4,710
Decrease in inventory 101,779 -
Increase in prepaid expenses and other current assets (39,011) (83,868)
Increase in accrued payroll, President/Chairman of the Board 180,000 180,000
Increase in accounts payable and accrued liabilities 947,318 301,421
Increase in deferred revenue 91,400 -
----------- -----------
Net cash used in operating activities (2,667,263) (1,323,667)
----------- -----------
Cash Flows from Investing Activities:
Purchase of property and equipment (491,387) (229,462)
Net cash used in IBC acquisition (52,120) -
Increase in other assets, primarily TV production costs (109,156) (33,229)
Loans to related parties (370,086) (28,191)
Repayment of loans receivable from related parties 50,504 -
----------- -----------
Net cash used in investing activities (972,245) (290,882)
----------- -----------
Cash Flows from Financing Activities:
Net proceeds from sales of common stock 4,779,643 -
Proceeds of loans from President/Chairman of the Board 1,804,484 935,394
Payment of loans from President/Chairman of the Board (708,213) (275,344)
Net proceeds from convertible subordinated debentures - 1,055,330
Proceeds from exercise of warrants - 50,000
Repayment of note payable related to IBC acquisition (450,000) -
Repayment of long-term debt (7,622) (7,829)
Other (10,850) -
----------- -----------
Net cash provided by financing activities 5,407,442 1,757,551
----------- -----------
Net Increase in Cash and Cash Equivalents 1,767,934 143,002
Cash and Cash Equivalents, Beginning 256,209 113,207
----------- -----------
Cash and Cash Equivalents, Ending $2,024,143 $ 256,209
============ ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
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. As of December 31, 1999, the Company had no 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 currently offers 22 channels in the LaCrosse System,
consisting of 17 wireless cable channels and 5 local off-air
(VHF/UHF) broadcast channels to approximately 800 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 5,032
residential and commercial subscribers in a 100 mile radius of the
11,000 foot Mt. Irazu in the center of Costa Rica.
In early 1999, the Company acquired the assets of International
Broadcast Consultants of America, Inc. (IBC), including the rights
to distribute a variety of products through retail, television and
other channels of distribution, a corporation one of whose
stockholders was an officer and director of the Company.
Subsequently, the Company formed a wholly-owned subsidiary, 5th
Avenue Channel Retail, Inc. to manage and expand the marketing,
sale and distribution of consumer products. This subsidiary is
intended to manage the sale of products to the home shopping
networks, retail store chains and wholesale distributors. This
subsidiary is also responsible for the marketing of the Company's
financial services and products through mass market chains and
direct-mail efforts and on websites.
F-6
<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. from a related party (see Note 3). With this
acquisition, the Company is moving forward as a multi-media company
that seeks to utilize the convergence of the Internet and
television to provide financial information and products and
services to its clientele. The Company operates a website,
5thAvenueChannel.com, and is developing the 5th Avenue Financial
Television Network.
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 consist of the allowance for impairment of certain
licenses and the recoverability of acquired goodwill. 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 statement presentation purposes, the Company
considers 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 AND CASH EQUIVALENTS
At various times during the year, the Company had deposits in
financial institutions in excess of federally insured limits. At
December 31, 1999, the Company had deposits in excess of
federally insured limits of approximately $2,030,000. The
Company maintains its cash with high quality financial
institutions, which the Company believes minimize these risks.
F-7
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
CONCENTRATIONS OF CREDIT RISK (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.
REVENUE
Revenue is recognized when products are shipped to customers or
upon performance of services. For each retail product sold, the
Company estimates a provision for estimated returns. These amounts
are recorded as a reduction of sales in the period in which the
sale is recorded. In certain situations, the Company negotiates a
policy with its suppliers for the Company to be reimbursed for the
cost of actual returns.
INVENTORY
Inventory, which is comprised of goods held for sale to customers,
is stated at the lower of cost or market, cost being determined on
the first-in, first-out (FIFO) basis.
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 is 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.
F-8
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
DEFERRED TV PRODUCTION COSTS
Deferred TV production costs are capitalized and will be amortized
over 2 to 5 years. These costs are currently included in other
assets.
GOODWILL
Goodwill primarily relates to the acquisitions of 5th Avenue
Channel, Inc. and of IBC. Goodwill related to the acquisition of
5th Avenue Channel, Inc. is amortized on a straight-line basis over
5 years. Goodwill related to the acquisition of IBC is amortized on
a straight-line period over 15 years. The Company periodically
evaluates 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.
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, 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, 1999. 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 SOFTWARE DEVELOPMENT COSTS
Website and software developed costs are accounted for in
accordance with Statement of Position 98-1, "SOFTWARE DEVELOPED OR
OBTAINED FOR INTERNAL USE". Costs incurred in a preliminary project
stage are being expensed as incurred. External direct costs,
payroll and payroll related costs for those directly involved with
a project and interest costs in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 34,
"CAPITALIZATION OF INTEREST COST", are capitalized during the
application development stage. Costs incurred during the
post-implementation/operation stage 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.
F-9
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
NET LOSS PER COMMON SHARE
The Company computes earnings (loss) per share in accordance with
SFAS No. 128, "EARNINGS PER Share". 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 are
excluded from the Company's diluted computation as their effect
would be anti-dilutive.
INCOME TAXES
The Company accounts for income taxes using 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, 1999 and 1998.
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 1999 amounted to approximately $81,000. Advertising
costs for 1998 were not material.
F-10
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
CERTAIN REGULATORY MATTERS
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.
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.
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 as
amended by SFAS No. 137, is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000.
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 to affect its financial statements.
F-11
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1
requires all costs related to the development of internal used
software other than those incurred during the application
development stage to be expensed as incurred. Costs incurred during
the application development stage are required to be capitalized
and amortized over the estimated useful life of the software. SOP
98-1 was adopted by the Company on January 1, 1999 and did not have
a material effect on the Company's financial position or results of
operations.
NOTE 2. LIQUIDITY AND PROFITABILITY CONSIDERATIONS
During 1999, and continuing in early 2000, 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. As reflected in the consolidated financial statements, the
Company has incurred net losses of approximately $5,178,000 in 1999 and
$3,298,000 in 1998 and, as of December 31, 1999, the Company's
consolidated financial position reflects a working capital deficiency
of approximately $1,274,000.
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 $6,000,000 in debt or equity financing from third party
sources (see below) during the twelve month period ending March 31,
2001 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 $6,000,000 and such third party funding.
2. FINANCING FROM THIRD PARTY SOURCES
As further discussed in Note 20, on March 28, 2000, the Company
entered into a Master Facility Agreement pursuant to which the
Company entered into two Equity Purchase Agreements having an
aggregate principal amount of $6,000,000 each or a total of
$12,000,000. Under these agreements, the Company will have the
right to issue and sell common stock on a formula basis for up to
$1,000,000 per month.
F-12
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 2. LIQUIDITY AND PROFITABILITY CONSIDERATIONS (TO BE UPDATED) (Continued)
LIQUIDITY (Continued)
2. FINANCING FROM THIRD PARTY SOURCES (Continued)
As discussed in Note 20, on March 27, 2000, the Company entered
into a stock subscription agreement for the sale of its common
shares. The Company expects to raise between $1 million to $2
million from this financing.
3. CONVERSION OF OUTSTANDING WARRANTS
As more fully described in Note 13, the Company presently has
outstanding warrants to purchase an aggregate of 2,475,000 shares
of common stock.
These warrants provide for an exercise price of $5.75 per share and
expire in 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 filed a
registration statement in January 2000, which is expected to be
declared effective upon the filing of the Company's Annual Report
on Form 10-KSB. If the Company were 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 develop new and increased revenues and
gross margins in all of its areas of operation. This plan includes
the following:
o The expansion of the number of hours and homes into which it is
delivering its recently launched television programming; the
sale of advertising during its programming hours; and the
syndication of its television programming to other television
channels and networks.
o The development and implementation of advertising models for
banner and streaming advertising revenues on its website and
video viewer; the development and implementation of sales plans
for the sale of its financial products to consumers and other
websites; and the licensing of its NetVideoNewtorks archival
content to other websites.
o The addition of new products into the retail product line to
increase sales and profits. In addition, the Company is looking
into developing markets for its products internationally.
F-13
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 2. LIQUIDITY AND PROFITABILITY CONSIDERATIONS (TO BE UPDATED) (Continued)
PROFITABILITY (Continued)
1. BUSINESS PLAN (Continued)
o Attempting to take advantage of the opportunities that
currently exist for new broadband delivery capabilities and the
coming convergence of television and the internet. The Company
is spending money, within reason, where necessary to develop
these capabilities and to generate sales, advertising and other
revenues from these opportunities.
o Increasing the number of households subscribing to the
Company's wireless cable television services in both Costa Rica
and Wisconsin.
2. IMPROVEMENT IN OPERATIONAL COSTS
Management continues in its efforts to manage costs and to
continually improve cost controls over operating costs and the cost
of delivery of goods and services, so as to improve gross margins
and profitability.
NOTE 3. BUSINESS ACQUISITIONS
ACQUISITION OF 5TH AVENUE CHANNEL, INC.
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.
F-14
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3. BUSINESS ACQUISITIONS (Continued)
ACQUISITION OF 5TH AVENUE CHANNEL, INC. (Continued)
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 is being 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 financial statements for 5th Avenue
Channel in 1998. There were no significant revenues generated in
1999 or 1998 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 1999 and 1998.
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 was
Chairman of one of the Company's subsidiaries and was a minority
stockholder of 5th Avenue Channel prior to its acquisition. Ms.
Trump was to 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 had an initial term expiring on December 31, 2001 and was
renewable for successive additional one-year terms unless either
party provides specified written notice of non-renewal.
ACQUISITION OF INTERNATIONAL BROADCAST CONSULTANTS OF AMERICA, INC.
("IBC")
In February 1999, the Company signed a letter of intent to acquire
all of the assets and business operations of IBC for $450,000 in a
note and 300,000 shares of the Company's common stock. 50% of the
outstanding common stock of IBC was owned by an officer and
Director of the Company. IBC was an innovator in the electronic
media field, specializing in new product marketing on cable TV. The
operations of IBC have been integrated with the Company for the
entire year of 1999.
The acquisition was effective January 4, 1999 and has been recorded
as a purchase; accordingly, the operations of IBC have been
included in consolidation for all 1999. The purchase was completed
on May 12, 1999. The total consideration amounted to $2,174,000,
which was measured by the note of $450,000 and the 300,000 shares
of common stock, which were valued at a specified average price of
the Company's common stock for a period prior to the closing,
discounted for various market factors. This consideration exceeded
the estimated fair market value of the net tangible assets acquired
by approximately $1,698,848. The excess has been recorded as
goodwill and is being amortized over 15 years.
F-15
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3. BUSINESS ACQUISITIONS (Continued)
ACQUISITION OF INTERNATIONAL BROADCAST CONSULTANTS OF AMERICA, INC.
("IBC") (Continued)
A summary of the allocation of the $2,174,000 purchase price to the
net assets acquired is as follows:
<TABLE>
<CAPTION>
<S> <C>
Cash $ 40,381
Accounts receivable 93,750
Inventory 312,265
Officer loans 50,504
Equipment and leasehold improvements 44,429
Other assets 26,424
Acquisition costs (92,501)
Goodwill 1,698,848
---------
Total purchase price $2,174,100
=========
SUMMARY OF GOODWILL
5th Avenue Channel, Inc. $ 615,000
IBC 1,698,848
---------
2,313,848
Less accumulated amortization 235,556
----------
$2,078,292
==========
</TABLE>
NOTE 4. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Estimated Useful
Lives (Years)
-------------
<S> <C> <C>
Leasehold improvements 7-10 $ 60,365
Furniture, fixtures and office equipment 7 229,552
TV signal rebroadcast and receiving equipment 5-10 1,968,068
Vehicles 5 133,371
Web site software and hardware 3-5 193,464
----------
2,584,820
Less accumulated depreciation 1,084,409
---------
$1,500,411
</TABLE>
Depreciation expense was $358,809 and $286,488 for 1999 and 1998,
respectively. In 1998, the Company wrote off approximately $82,000 of
converter boxes, which were no longer operational.
Depreciation of website software and hardware will start during the
second quarter of 2000 upon the launch of the internet site.
F-16
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 5. LICENSES
<TABLE>
<CAPTION>
<S> <C>
LOCATION OF LICENSE
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 1,052,957
---------
$4,331,897
==========
</TABLE>
Amortization expense was $319,164 and $319,697 for 1999 and 1998,
respectively.
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 $115,620, which was due on October 31, 1998, or the
payment of $21,702, which was due on January 31, 1999. In April
1999, the Company tendered the first interest-only installment
payment, with the conditional endorsement that these payments were
to be applied to the Wisconsin licenses
F-17
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 5. LICENSES (Continued)
UNITED STATES LICENSES (Continued)
and not held to make good the Hickory default (see below). The
installment checks were returned because of the conditional
endorsement. The waiver request was resubmitted by the Company on
May 14, 1999 and the Company is now awaiting action by the FCC. In
effect, on the due date for the first installment payments, the
Company petitioned the Commission for a waiver of the provision of
the auction rules under which any amount may be due for the
Company's default in Hickory, North Carolina, would be taken out of
the payments made for Wausau and Stevens Point, thus causing those
licenses to go into default as well. The Commission has not yet
ruled on the Company's petition. When a ruling is made, the notes
will have to be brought current. At December 31, 1999, the Company
has accrued but has not paid a total of $216,510 of interest
charged by the FCC on the two notes. The total obligations have
been presented as long-term debt in the accompanying consolidated
financial statements based upon the opinion of special counsel that
under the circumstances these obligations are not considered to be
in technical default.
Future required principal payments are as follows:
Year ending December 31:
2000 $ 86,586
2001 94,999
2002 103,969
2003 113,786
2004 124,398
Thereafter 427,741
-------
$951,479
========
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, 1999, 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 has been recorded for the potential shortfall of a
re-auction. The Company is not able to estimate what the shortfall
may be, if any.
F-18
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 5. LICENSES (Continued)
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 President and 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.
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
Accounts payable $ 762,810
Accrued interest on license fee payable 216,510
Other accrued liabilities 363,709
----------
$1,343,029
NOTE 7. LOAN RESTRUCTURE
On May 19, 1997, the Company entered into an agreement with Mr. Melvin
Rosen ("Rosen") 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 Rosen at the issue date of the debenture.
F-19
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 7. LOAN RESTRUCTURE (Continued)
As consideration for this debt restructuring, the Company agreed to
issue to 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 at $5.00 per share. Under the agreement, Rosen became the
President and Chairman of the Board and received the right to nominate
two members to the Company's Board of Directors.
The debenture was convertible by Rosen 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.
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, Rosen 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 converted into 4,732,000
restricted common shares in the first quarter of 1999 after the number
of authorized shares was increased from 10,000,000 to 50,000,000.
NOTE 8. NOTES AND LOANS RECEIVABLE, RELATED PARTIES
<TABLE>
<CAPTION>
<S> <C>
NOTES RECEIVABLE
Notes receivable from officers/stockholders, one of whom is a director;
including interest at 8%, payable in 10 annual installments of
approximately $50,000, collateralized by 55,562 shares of the Company
common stock $333,365
Less current maturities 23,012
--------
$310,353
LOANS RECEIVABLE
Loan receivable from a former officer, no specified maturity date or interest rate. $ 51,274
Loan receivable from a current employee, no specified maturity date or interest rate; the
loan was settled in early 2000 in consideration for services performed by the employee in
2000. 23,000
Other employee loans 13,638
--------
87,912
Less allowance 23,000
--------
$ 64,912
=========
</TABLE>
F-20
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. LOANS PAYABLE, RELATED PARTIES
<TABLE>
<CAPTION>
<S> <C>
Loans payable to the President/Chairman of the Board, interest at 8%, no specified maturity
date, including accrued interest of $242,958 $2,268,308
=========
Loan payable to former CEO and director, interest at 10%, no specified maturity date,
including accrued interest of $4,491 $ 22,941
Loan payable to current director, interest at 10%, no specified maturity date, including
accrued interest of $7,140. 32,140
-----------
$ 55,081
============
</TABLE>
Interest expense on the related party loans payable amounted to
approximately $175,000 and $63,000 during 1999 and 1998, respectively.
NOTE 10. COMMITMENTS AND CONTINGENCIES
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:
Year ending December 31:
2000 $114,600
2001 120,700
2002 112,300
2003 67,700
---------
Total $415,300
=========
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 $185,000 and $118,000 for 1999 and 1998,
respectively. The rent paid by the Company to the President/Chairman of
the Board for the Costa Rica property lease was approximately $14,000
for 1999 and $20,000 for 1998.
The Company has also entered into lease agreements for certain 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 ten year terms. The Company is required
to pay a monthly subscriber royalty fee based on the number of
subscribers.
F-21
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 10. COMMITMENTS AND CONTINGENCIES (Continued)
EMPLOYMENT AGREEMENTS
During 1999, the Company entered into various employment agreements
with certain management personnel. The agreements expire on
December 31, 2003 and provide for approximate annual salaries as
follows:
Year ending December 31:
2000 $ 415,000
2001 250,000
2002 250,000
2003 250,000
----------
$1,165,000
==========
OTHER
In June 1999, the U.S. Securities and Exchange Commission (SEC)
issued an order directing an investigation of certain activities of
the Company and others. The Company is cooperating fully with the
SEC staff and does not believe it has engaged in any conduct which
would warrant the institution of legal proceedings by the SEC.
From time to time, the Company is involved in disputes, claims and
litigation in the normal course of business. The Company believes
that there are no material claims or disputed matters, which are
not covered by insurance.
The Company entered into a revenue sharing agreement in April 1999.
The parties have not performed services under the contract as of
December 31, 1999. The Company granted to this entity 100,000 stock
options and the entity can earn an additional 100,000 options based
upon certain performance criteria. If the entity exercises the
options, the exercise prices are $12.00, $14.00 and $16.00 per
share if the options are exercised within 12, 24 or 36 months,
respectively. The Company is to receive 200,000 restricted options
to purchase the entity's common stock. The exercise prices are
$4.00, $6.00 and $8.00 per share if the options are exercised
within 12, 24 or 36 months, respectively.
NOTE 11. CONVERTIBLE SUBORDINATED DEBENTURES
MAY DEBENTURES
In April 1998, the Company completed a private offering of 12%
Convertible Subordinated Debentures (the "May Debentures") due on
October 31, 1999. Interest was payable monthly. The May Debentures
were convertible into shares of common stock at $2 per share.
Debenture holders had the option to convert up to 50% of the
principal amount of the Debentures in the event that the Company
had not exercised its redemption rights at any time prior to
February 28, 1999. If the Company did not offer to redeem the
debentures by that date, Debenture holders had the right to convert
the remaining 50% of the principal amount after July 31, 1999.
F-22
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 11. CONVERTIBLE SUBORDINATED DEBENTURES (Continued)
MAY DEBENTURES (Continued)
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 was amortized into interest expense
from the issuance dates through February 28,1999 (the first
conversion date) and the remaining 50% was amortized to interest
expense from the issuance dates through July 31, 1999 (the second
conversion date). $204,348 and $390,652 were amortized as interest
expense during 1999 and 1998, respectively.
In December 1999, the debenture holders opted to convert the
debentures and accrued interest thereon into shares of the
Company's common stock. Accrued interest through the date of
conversion amounted to $70,117. The principal amount and accrued
interest of $70,117 were converted into 332,559 shares of common
stock.
NOVEMBER DEBENTURE
In November 1998, the Company completed a private offering of a 12%
Convertible Subordinated Debenture (the "November Debenture") due
on April 30, 2000. Interest was payable quarterly from January 30,
1999, to April 30, 2000. The November Debenture was convertible
into shares of common stock at $2.50 per share. The Debenture
holder had the option to convert up to 50% of the principal amount
of the Debenture in the event that the Company did not exercise its
redemption rights at any time prior to July 30, 1999. If the
Company did not offer to redeem the debentures by that date, the
Debenture holder had 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 was amortized into interest expense from the issuance date
through July 30, 1999 (the first conversion date) and the remaining
50% was being amortized to interest expense from the issuance date
through December 31, 1999 (the second conversion date). $267,551
and $57,449 was amortized as interest expense during 1999, and
1998, respectively.
In December 1999, the debenture holder opted to convert the
debenture and accrued interest thereon into shares of the Company's
common stock. Accrued interest through the date of conversion
amounted to $55,000. The principal amount and accrued interest of
$55,000 were converted into 222,000 shares of common stock.
F-23
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 12. COMMON STOCK
PRIVATE PLACEMENTS OF COMMON STOCK
In June 1999, the Company issued 125,000 shares of common stock in
a private transaction to an accredited investor in exchange for
$500,000 in cash. The Company also agreed to issue three-year
warrants to purchase 15,000 shares of common stock at $5.00 per
share and 5,000 shares at $6.00 per share.
In late October and November of 1999, the Company issued a total of
2,000,000 shares of common stock in private transactions to
accredited investors in exchange for $4,612,500 in cash. Finder's
fees, professional fees and other related costs amounting to
approximately $333,000 have been recorded as a reduction of
additional paid-in-capital.
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 13. STOCK WARRANTS, CONSULTING AGREEMENTS AND SHARES RESERVED
IPO WARRANTS
In connection with its initial public offering on May 10, 1995, the
Company sold 1,610,000 redeemable common stock purchase warrants
for $.25 per warrant and certain shareholders sold an additional
400,000 warrants. The warrants are exercisable at a price of $5.75
per share until May 3, 2000 and are governed by a warrant agreement
between the Company and Continental Stock Transfer & Trust Company
as warrant agent.
The warrants are subject to redemption by the Company upon 30 days
prior written notice, at a price of $.25 per warrant, if the
closing sale or bid price per share of the Company's common stock
equals or exceeds 120% of the then-current exercise price
(initially $5.75, subject to adjustment) per share for the 20
trading days ending on the third trading day prior to the mailing
of the notice of the redemption.
F-24
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 13. STOCK WARRANTS, CONSULTING AGREEMENTS AND SHARES RESERVED
(Continued)
UNDERWRITER'S WARRANTS AND UNDERWRITER'S STOCK WARRANTS
In connection with the initial public offering, the Company issued
140,000 underwriter's warrants and 100,000 underwriter's stock
warrants.
The 140,000 underwriter's warrants are exercisable at $3.75 per
warrant and entitle the holders to purchase a like number of
underlying warrants. Each underlying warrant entitles the holders
to purchase one share of common stock at an exercise price of $5.75
until May 3, 2000, and is subject to redemption by the Company upon
30 days prior written notice at a price of $.25 per underlying
warrant, provided that the closing price or bid price per share of
the common stock equals or exceeds 120% of the then current
exercise price (initially $5.75, subject to adjustment) for the 20
trading days ending on the third trading day prior to the mailing
of the notice of redemption.
The underwriter's stock warrants are exercisable for a like number
of shares of common stock at a price of $7.50 per share. The
underwriter's warrants and underwriter's stock warrants are
exercisable until May 3, 2000.
CONSULTANT'S WARRANTS
In July 1997, the Company entered into a two year consulting
agreement with an investment banking firm (the "Consultant'). The
Company granted the Consultant (i) 500,000 one-year warrants
exercisable at $1.00 per share, (ii) 200,000 one-year warrants
exercisable at $2.50 per share and (iii) 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. The consultant's warrants were
subsequently assigned to certain individuals.
In October 1997, 450,000 of the one-year 500,000 warrants were
exercised at $1.00 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 50,000 warrants
were exercised at $1.00 per share, for proceeds of $50,000.
The exercise date of the one-year warrants for the purchase of
200,000 shares of common stock at $2.50 per share was extended to
July 10, 2000.
SHARES RESERVED
As of December 31, 1999, the Company has reserved a total of
8,379,462 shares of common stock for future issuances pursuant to
stock warrant, stock option and performance shares. This balance
includess options and warrants that are exercisable within 60 days
March 27, 2000.
F-25
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 14. 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 five 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.
During 1999, the Company issued 35,000 stock options to certain
consultants and 16,000 options to independent directors. The consultant
options are at $0.25 above the closing price of the Company's common
stock at the date of grant and expire over a five year period. The
directors options are at the closing price of the Company's common
stock at the date of grant and expire over a five year period. During
1998, the Company issued 995,000 stock options to certain consultants
and non-employee celebrities. The options are at various exercise
prices from $2 to $15 and expire over three to five year periods.
Compensation expense of $264,031 and $100,000 was recognized in 1999
and 1998, respectively, in conjunction with options issued to
consultants and outside directors.
The Company applies APB Opinion 25, "ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES" and related interpretations in accounting for options issued
to employees. 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.
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 1999 and 1998: no
dividend yield; an expected life of three to five years; 135% expected
volatility for 1999 and 130% expected volatility for 1998, and 6.00%
risk free interest for 1999 and 5.07% risk free interest rate for 1998.
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.
F-26
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 14. STOCK OPTION PLAN (Continued)
Under the accounting provisions of SFAS 123, the Company's net loss and
loss per share would have been increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Net loss:
As reported $(5,178,003) $(3,297,941)
Pro forma (5,329,955) (4,781,915)
Loss per share - basic and diluted:
As reported $ (0.52) $ (0.81)
Pro forma (0.53) (1.18)
</TABLE>
A summary of the status of options under this plan and additional
options granted outside of the plan as of December 31, 1999 and 1998
and changes during the years ended on that date are presented below:
<TABLE>
<CAPTION>
1999 1998
---- ----
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
Balance at beginning of year 1,018,000 $7.15 23,000 $7.64
Options granted 152,360 5.85 995,000 7.14
Options exercised - - -
Options expired (73,000) - - -
--------- -------- --------- ---------
Balance at end of year 1,097,360 $7.23 1,018,000 $7.15
========= ======== ========= =========
Options granted during the year at exercise
prices which equal to or exceed market price
of stock at date of grant:
Weighted average exercise price 150,360 $5.83 935,000 $7.45
Weighted average fair value 150,360 5.30 935,000 4.17
Options granted during the year at exercise
prices below market price of stock at date
of grant:
Weighted average exercise price 2,000 $7.25 60,000 2.25
Weighted average fair value 2,000 7.94 60,000 3.78
</TABLE>
F-27
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 14. STOCK OPTION PLAN (Continued)
The following table summarizes information about options under the plan
and those issued outside of the plan, which are outstanding at December
31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------------------- -------------------
Weighted Weighted Weighted
Number Average Average Number Average
Range of Exercise Outstanding At Remaining Exercise Exercisable At Exercise
Prices December 31, 1999 Contractual Life Price December 31, 1999 Price
------------------ ----------------- ---------------- --------- ----------------- --------
<S> <C> <C> <C> <C> <C>
$2.00 - $2.94 253,560 4.8 $ 2.05 243,000 $ 2.02
3.13 - 3.88 20,000 5.0 3.61 14,667 3.76
4.00 - 4.50 25,120 5.0 4.21 - -
5.00 - 5.85 214,280 3.5 5.03 205,000 5.02
6.00 - 6.75 18,334 4.0 6.34 18,334 6.34
7.13 - 7.25 23,280 4.7 7.22 6,000 7.25
8.00 - 8.25 226,946 3.2 8.05 226,946 8.05
9.00 - 9.03 10,560 4.0 9.02 10,560 9.02
10.00 5,280 4.0 10.00 5,280 10.00
12.00 200,000 2.0 12.00 200,000 12.00
15.00 100,000 2.0 15.00 100,000 15.00
--------- ---------
1,097,360 3.8 $ 7.23 1,029,787 $ 7.39
========= === ====== ========= ======
</TABLE>
NOTE 15. INCOME TAXES
No credit for income taxes has been reflected in the accompanying
financial statements for 1999 and 1998 because of the significant
uncertainty that exists regarding the realization of such income tax
credits (see below).
As of December 31, 1999, 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, 1999 were approximately as
follows:
Deferred income tax assets:
Net operating loss carryforwards $ 2,900,000
Other 500,000
------------
Gross deferred tax asset 3,400,000
Valuation allowance (3,400,000)
------------
$ -
=============
F-28
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 15. INCOME TAXES (Continued)
As of December 31, 1999, the Company estimates that it has net
operating loss carryforwards of approximately $8,300,000, which expire
in various years through 2020; 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 $3,400,000, which related to the net operating losses, and other
temporary differences, has been established.
The Company had been 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 federal, state and
local 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.
NOTE 16. NET LOSS PER COMMON SHARE
The following table sets forth the computation of basic and diluted net
loss per common share for the years ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Numerator for basic and diluted loss per share - net loss $(5,178,003) $(3,297,941)
========== ==========
Denominator for basic and diluted loss per share -
weighted average shares 10,036,865 4,080,242
========== =========
Basic and diluted net loss per common share $(0.52) $(0.81)
===== =====
</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.
F-29
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 17. SUPPLEMENTAL CASH FLOW INFORMATION
Certain supplemental disclosure of cash flow information and non-cash
investing and financing activities for the years ended December 31,
1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash paid during the year for:
Interest $ 39,179 $ 73,774
Non-cash investing and financing activities:
Conversion of convertible debenture 2,366,000 -
Stock issued in connection with acquisition IBC 1,724,100 -
Common stock issued in connection with acquisition of 5th
Avenue Channel - 615,000
Note payable issued in connection with acquisition of IBC 450,000 -
Conversion of May Debentures 665,117 -
Conversion of November Debenture 555,000 -
Common stock issued in settlement of debt - 99,636
</TABLE>
NOTE 18. SEGMENT INFORMATION
OPERATING SEGMENTS, GEOGRAPHIC AND CUSTOMER INFORMATION
During 1999, the Company operated in various segments as follows:
o Product sales
o Wireless cable television services:
Costa Rica
Wisconsin
o Corporate, Internet/television
In 1998, the Company operated wireless cable television operations
in Costa Rica and Wisconsin. Corporate overhead expenses are
exclusively included in the Internet and television segment for
1999 due to the shift in the Company's business model from focusing
on wireless cable to the Internet and television production.
The Company uses operating income before depreciation, amortization
of licenses and interest to manage its 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 as corporate assets.
F-30
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 18. SEGMENT INFORMATION (Continued)
OPERATING SEGMENTS, GEOGRAPHIC AND CUSTOMER INFORMATION (Continued)
Information regarding the Company's geographic business units
follows (in thousands):
<TABLE>
<CAPTION>
Wireless Cable
Television Services
Corporate, -------------------
Internet Product Costa
and TV Sales Rica Wisconsin Total
------ ----- ---- --------- -----
<S> <C> <C> <C> <C> <C>
December 31, 1999 and the year
then ended:
Revenue $ -- $ 2,196 $ 1,279 $ 317 $ 3,792
======== ========= ======== ======== ========
Operating income (loss) before
depreciation and amortization $ (3,304) $ (382) $ 367 $ (93) $ (3,412)
Depreciation (75) (16) (158) (110) (359)
Amortization (235) -- (292) (27) (555)
-------- --------- -------- -------- --------
Operating loss $ (3,614) $ (398) $ (83) $ (230) $ (4,326)
======== ========= ======== ======== ========
Identifiable assets $ 5,881 $ 793 $ 3,988 $ 803 $ 11,465
======== ========= ======== ======== ========
Capital expenditures $ 281 $ 11 $ 179 $ 20 $ 491
======== ========= ======== ======== ========
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) (286)
Amortization -- -- (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
======== ========= ======== ======== ========
</TABLE>
In 1999, sales to one customer accounted for approximately 10% of
the Company's total revenue. In 1998, no single customer accounted
for 10% or more of the Company's revenue.
In 1999, purchases from three suppliers accounted for approximately
63% of the Company's total purchases. In 1998, no single supplier
accounted for 10% or more of the Company's purchases.
F-31
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 19. YEAR END ADJUSTMENTS
During the fourth quarter of 1999, the Company recorded certain
adjustments that are considered material to the Company's financial
position and operating results for the fourth quarter of 1999. The
following is an analysis of these adjustments:
<TABLE>
<CAPTION>
(Decrease)
------------------------------------------------ (Increase)
Stockholders' Decrease
Assets Liabilities Equity Net Loss
---------- --------------- --------------- ---------
<S> <C> <C> <C> <C>
Adjustment related to accounting
for co-marketing agreement $(1,500,000) $(1,250,000) $ (220,000) $ (30,000)
Inventory write-down (241,000) - (241,000)
Adjustment relating to
acquisition cost of IBC (219,000) (739,000) 520,000
Adjustment of Property and
and Equipment (157,000) - - (157,000)
------------ --------------- --------------- -----------
$(2,117,000) $(1,250,000) $ (959,000) $ 92,000
============ ============= =========== ==========
Per share $.02
====
</TABLE>
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>
Effect on
Net Loss -
Over (Under)
Stated
<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 20. SUBSEQUENT EVENTS
MASTER FACILITY AGREEMENT
On March 28, 2000, the Company signed a Master Facility Agreement
with Fusion Capital Fund II, LLC the ("Holder") pursuant to which
the Company and the Holder entered into two Equity Purchase
Agreements having an aggregate principal amount of $6,000,000 each
or a total of $12,000,000. The principal amount of each Equity
Purchase Agreement is convertible into shares of the Company's
common stock. The Company has agreed to promptly register the
shares pursuant to a registration statement. As a commitment fee,
the Holder will receive shares with a value equal to $780,000 upon
the closing of the first Equity Purchase Agreement.
F-32
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 20. SUBSEQUENT EVENTS (Continued)
MASTER FACILITY AGREEMENT (Continued)
The Holder will fund the Company $500,000 immediately upon the
closing. Thereafter, the Holder will purchase at least $1,000,000 a
month for a period of six months to complete the first Equity
Purchase Agreement, subject to the shares being registered. The
Holder will maintain a segregated account designated specifically
for purchasing the Company's common stock, which will have a
minimum of $1,000,000 balance at the beginning of each month.
The purchase price of the shares will be the lesser of: (i) The
Fixed Conversion Price, defined as 140% of the price of the shares
at the closing; (ii) The Variable Conversion Price, defined as (a)
the low sale price of the common stock on the date of notice of
purchase or (b) the average four closing bid prices for the common
stock for the twenty days prior to the date of notice of purchase.
The Company may block the Holder's right to purchase the common
stock at any time, provided that the common stock price is below
the Fixed Conversion Price. If the common stock price is above the
Fixed Conversion Price, the Company may require the Holder to
purchase in excess of $1,000,000 worth of stock.
STOCK SUBSCRIPTION AGREEMENT
On March 27, 2000, the Company entered into a subscription
agreement for the sale of 500,000 shares of its common stock at a
price of $4.00 per share. Under the agreement, the subscriber is
required to purchase 37,500 shares for $150,000 by March 29, 2000.
The Company shall deliver those shares as soon as possible after
the effectiveness of its currently pending Registration Statement.
On April 8, 2000, the subscriber is required to purchase an
additional 37,500 shares for $150,000. Subsequently, each week the
subscriber is required to purchase 37,500 additional shares until
the Company has received $1 million, with the final purchase of
25,000 shares. The right to sell more shares to the subscriber is
at the option of the Company. The Company has agreed to include all
of the 500,000 shares in the current Registration Statement being
filed by the Company.
AGREEMENT WITH TELEVISION BROADCASTING FACILITY
In February 2000, the Company entered into an agreement with a
Miami-based television broadcasting facility whereby the Company
built its television studio and newsroom inside the facility and
utilizes the control room and uplink facilities of the studio for a
monthly fee of $72,000 per month. The agreement is for one year
with a one year renewal option.
CARRIAGE AGREEMENTS
In March 2000, the Company entered into agreements with two
companies for broadcasting of the Company's television programming.
The fees to be paid to these two companies will amount to
approximately $170,000 a month. The Company has the option to
cancel these agreements at any time.
F-33
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 20. SUBSEQUENT EVENTS (Continued)
TELEVISION CONTENT AGREEMENTS
Subsequent to year end, the Companies entered into agreements with
several companies to provide text and video content for the
Company's television programming. The cost of these services will
be approximately $7,350 a month.
DISTRIBUTION AGREEMENT
In March 2000, the Company signed an agreement with a company to
"host, serve, and stream" the Company's television broadcast over a
distributed network at various bandwidths for internet
distribution. The Company will share revenue for various
advertising and media content products. The Company will earn
100,000 warrants to purchase the distributor's common stock (4,167
warrants monthly) over the two year term of the agreement, having
an exercise price equal to the price of the distributor's common
stock as used in the distributor's Employee Stock Option Plan on
the date of grant. The warrants will vest after three months and
have an expiration term of two years after the distributor's
expected initial public offering. In exchange, the Company will
grant the distributor 100,000 stock options, (4,167 options per
month) which will be valued at fair market value at date of grant
and shall be governed by the terms of the Company's Stock Option
Plan.
PUBLIC RELATIONS AND FINANCIAL CONSULTING SERVICES AGREEMENTS
In February 2000, the Company signed an agreement with a media
company to provide public and corporate relations services to the
Company for a fee of $10,000 and 1,000 shares per month. The
contract is for six months.
In March 2000, the Company entered into an agreement with a company
to provide financial consulting services to the Company, including
contract negotiations, financial services, public relations and
media relations, short and long-term strategic business plans, and
evaluations of future financings. The fees for these services
consist of $30,000 and 60,000 shares of the Company's common stock.
In March 2000, the Company entered into an agreement with an
internet advertising agency for the development of the Company's
advertising revenue model, the marketing of the Company's website
on other websites, and the optimization of results from search
engines. The contract is for six months and the cost of the
services is $40,000 plus 10,000 stock options having an exercise
price equivalent to the closing price of the Company's common stock
on March 1, 2000.
F-34
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 20. SUBSEQUENT EVENTS (Continued)
CO-MARKETING AGREEMENT
In May 1999, the Company had entered into a two-year co-marketing
agreement with a privately-held online securities brokerage firm.
This agreement was revised in March 2000. Under the revised
agreement, the Company is granting the online entity a limited
right to advertise online brokerage services on the Company's
television channel and website, in exchange for the firm to promote
the Company's NetVideoNetworks archive to its online partners and
to broadcast weekly video content which will be downloaded to the
Company's video servers and be available in the archive. The
Company is to receive $5,000 a month upon completion of each
companies' facilities plus a fee for each account opened through
the Company's website. Additionally, the Company received 500,000
restricted shares of the online entity in exchange for 195,000
restricted shares of the Company's stock to be provided to the
online entity.
REVENUE SHARING CONTRACTS
The Company signed contracts with an employment service entity to
provide internet access and services to the employment service
entity. The Company is to receive 700,000 restricted shares of the
employment service entity's common stock in exchange for 100,000
restricted shares of the Company's common stock.
REVENUE SHARING CONTRACTS
On March 16, 2000, the Company entered into an agreement with an
entity providing certain analysis and information about Initial
Public Offerings (IPOs). The agreement provides for the entity to
grant the Company the royalty free right to use IPO clips on its
internal sites for users around the world. The Company will pay the
entity 50% of all net revenues actually received by the Company
from advertising that will appear prior to, during and subsequent
to the playing by a viewer of any video or audio derived from an
IPO clip, or any video or audio containing content from an IPO
clip. In addition, the Company granted the entity 100,000 stock
options to purchase the shares of the Company's common stock at a
price equal to the closing price of the Company's common stock on
March 16, 2000. Such options will vest and be delivered as follows:
33,333 upon signing of the agreement, 33,334 on July 16, 2000 and
33,333 on November 16, 2000. The shares issuable upon exercise of
the options will be subject to standard piggy-back registrations
provisions.
LETTER OF AGREEMENT
On March 27, 2000, the Company entered into a letter of credit of
intent to grant specific geographic territories for legal
advertising over the internet to a third party. A component of this
agreement is to grant the third party 200,000 warrants to purchase
the Company's stock at various prices. The Company is to receive
$500,000 from the third party; however, if the third party does not
recover all of its investment, the Company shall have the right to
purchase the territories back from the third party in the form of
common shares.
F-35
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 20. SUBSEQUENT EVENTS (Continued)
GRANT OF STOCKS OPTIONS
In January 2000, the Company granted a total of 900,000 stock
options to its President, Chief Executive Officer and Chairman.
800,000 of these options are at an exercise price equal to the fair
market value of the Company's common stock at the date of grant and
100,000 are at an exercise price equal to 110% of the Company's
common stock at the date of grant. 660,000 of the options vest
immediately while the remaining options vest at the rate of 20,000
a month. In addition, the Company granted him a total of 150,000
options for each six months of employment commencing January 1,
2000, at exercise prices ranging from $10.00 to $20.00 per share
after a vesting period of 6 months, and 30,000 shares of the
Company's common stock.
In January 2000, the Company granted a total of 658,000 stock
options to some of its executives. The options are at an exercise
price equal to the fair market value of the Company's common stock
at the date of grant. 928,000 options vest immediately while the
remaining options vest on a monthly basis. In addition, the Company
granted the executives a total of 300,000 options for each six
months of employment commencing January 1, 2000, at exercize prices
ranging from $10.00 to $20.00 per share having a vesting period of
six months, and 50,000 shares of the Company's common stock.
Subsequent to year end, a number of the Company's executives
renegotiatedd their employment contracts resulting in annual
increases in compensation of approximately $128,000, plus an
employment contract for the chief executive officer raising his
compensation to $250,000.
F-36
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,024,143
<SECURITIES> 0
<RECEIVABLES> 911,514
<ALLOWANCES> (356,000)
<INVENTORY> 210,486
<CURRENT-ASSETS> 3,021,707
<PP&E> 2,584,820
<DEPRECIATION> (1,084,409)
<TOTAL-ASSETS> 11,465,359
<CURRENT-LIABILITIES> 4,295,251
<BONDS> 0
0
0
<COMMON> 12,215
<OTHER-SE> 20,277,555
<TOTAL-LIABILITY-AND-EQUITY> 11,465,359
<SALES> 3,791,670
<TOTAL-REVENUES> 3,791,670
<CGS> 2,072,280
<TOTAL-COSTS> 2,072,280
<OTHER-EXPENSES> 6,044,940
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 871,117
<INCOME-PRETAX> (5,178,003)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,178,003)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,178,003)
<EPS-BASIC> (0.52)
<EPS-DILUTED> (0.52)
</TABLE>
