As filed with the Securities and Exchange Commission on April 27, 2000
Registration No. 333-95557
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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5TH AVENUE CHANNEL CORP.
(Name of Small Business Issuer in its Charter)
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FLORIDA 4841 59-3175814
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(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
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3957 N.E. 163rd Street
North Miami Beach, Florida 33160
(305) 947-3010
(Address and telephone number of principal executive offices
and principal place of business)
Melvin Rosen
President
5th Avenue Channel Corp.
3957 N.E. 163rd Street
North Miami Beach, Florida 33160
(305) 947-3010
(Name, address and telephone number of agent for service)
Copies to:
Leonard H. Bloom, P.A.
Broad and Cassel
201 South Biscayne Boulevard
Suite 3000
Miami, Florida 33131
(305) 373-9400
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Approximate date of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
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If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering.[ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.[ ]
If delivery of the Prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE OFFERING REGISTRATION
SHARES TO BE REGISTERED BE REGISTERED PER SHARE(1) PRICE(1) FEE
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Common Stock, 5,686,254 $3.02 $17,172,487 $4,533.54
$.001 par value(2) shares
- ------------------------------------------------------------------------------------------------------------------------
Common Stock, 300,000 $2.50 $750,000 $198.00
$.001 par value(3) shares
- ------------------------------------------------------------------------------------------------------------------------
Common Stock, 15,000 $5.00 $75,000 $19.80
$.001 par value(3) shares
- ------------------------------------------------------------------------------------------------------------------------
Common Stock 5,000 $6.00 $30,000 $7.92
$.001 par value(3) shares
- ------------------------------------------------------------------------------------------------------------------------
Common Stock 9,000 $3.875 $34,875 $9.21
$.001 par value(4) shares
- ------------------------------------------------------------------------------------------------------------------------
Common Stock 10,000 $6.00 $60,000 $15.84
$.001 par value(4) shares
- ------------------------------------------------------------------------------------------------------------------------
Common Stock 10,000 $2.00 $20,000 $5.28
$.001 par value(4) shares
- ------------------------------------------------------------------------------------------------------------------------
Common Stock 8,334 $6.75 $56,255 $14.85
$.001 par value(4) shares
- ------------------------------------------------------------------------------------------------------------------------
Common Stock 8,333 $8.625 $71,872 $18.97
$.001 par value(4) shares
- ------------------------------------------------------------------------------------------------------------------------
Common Stock 8,333 $8.438 $70,314 $18.56
$.001 par value(4) shares
- ------------------------------------------------------------------------------------------------------------------------
Common Stock 100,000 $5.625 $562,500 $148.50
$.001 par value(4) shares
- ------------------------------------------------------------------------------------------------------------------------
Common Stock 75,000 $5.25 $393,750 $103.95
$.001 par value(5) shares
- ------------------------------------------------------------------------------------------------------------------------
Common Stock 75,000 $6.00 $450,000 $118.80
$.001 par value(5) shares
- ------------------------------------------------------------------------------------------------------------------------
Common Stock 50,000 $7.00 $350,000 $92.40
$.001 par value(5) shares
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Previous fee ............................................................................................$5,963.80
New fee .................................................................................................$ 450.46
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TOTAL: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,414.26(6)(7)
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) using the average of the high and low prices
reported for the Company's Common Stock as of April 25, 2000 and Rule
457(g)(1) with respect to the various warrants.
(2) Includes 1,900,000 shares estimated to be issuable in connection with a
Master Facility Agreement with Fusion Capital Fund II, LLC. See "The Fusion
Transaction". Also includes 462,500 shares which are to be issued in
connection with a subscription agreement with Florida Pointe, Inc. See
"Florida Point Agreement."
(3) Represents shares issuable upon exercise of certain warrants issued to the
Company's financial consultant and subsequently assigned to certain
assignees. See "Selling Shareholders."
(4) Represents shares issuable upon the exercise of warrants issued for
consulting services. See "Selling Shareholders."
(5) Represent warrants to purchase shares of common stock issued is connection
with a certain licensing agreement. See "Selling Shareholders."
(6) Does not include the following securities for which the Company paid a fee
in connection with the filing of a Registration Statement on Form SB-2 (File
No. 33-88788-A) and for which this Registration Statement serves as
Post-Effective Amendment No. 3: (i) 2,010,000 shares of our common stock
issuable upon exercise of warrants at $5.75 per share sold in our May 1995
initial public offering ("IPO Warrants"), (ii) 100,000 shares of common
stock issuable upon exercise of warrants at $7.50 per share issued to the
underwriter of our initial public offering, (iii) 140,000 IPO Warrants
issuable upon exercise of warrants at $.325 per share issued to the
underwriter of our public offering, and (iv) 140,000 shares of common stock
underlying the IPO Warrants.
(7) Of this fee, $5,963.80 was previously paid.
Pursuant to Rule 429, this Registration Statement serves as
Post-Effective Amendment No. 3 to the Registrant's Registration Statement on
Form SB-2 (File No. 33-88788-A) relating to: (i) 2,010,000 shares of our common
stock issuable upon exercise of warrants at $5.75 per share sold in our May 1995
initial public offering ("IPO Warrants"), (ii) 100,000 shares of common stock
issuable upon the exercise of warrants at $7.50 per share issued to the
underwriter of our initial public offering, (iii) 140,000 IPO Warrants issuable
upon exercise of warrants at $.325 per warrant issued to the underwriter of our
initial public offering, and (iv) 140,000 shares of common stock underlying the
IPO Warrants.
-------------------------------------
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. We may not sell these securities until the
registration statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities and it is
not soliciting an offer to buy these securities in any state in which the offer
or sale is not permitted.
PROSPECTUS
SUBJECT TO COMPLETION, DATED APRIL 27, 2000
8,610,254 SHARES OF COMMON STOCK
5TH AVENUE CHANNEL CORP.
Certain of our shareholders are offering a total of 6,360,254 shares of
common stock pursuant to this prospectus, consisting of the following:
o 3,323,754 shares of issued and outstanding common stock;
o up to 1,900,000 shares, consisting of 1,500,000 shares which we
currently estimate is the maximum number of shares that are purchasable
pursuant to a $6,000,000 equity purchase agreement to be entered into
with Fusion Capital Fund II, LLC. and 400,000 shares which we currently
estimate we will issue to Fusion Capital as a commitment fee;
o 462,500 shares which are to be issued in connection with a subscription
agreement with Florida Pointe, Inc.;
o 354,000 shares issuable upon the exercise of certain consultant's
warrants;
o 100,000 shares issuable upon the exercise of certain warrants sold to
an accredited investor in a private transaction;
o 200,000 shares issuable upon the exercise of certain warrants issued in
connection with a licensing agreement; and
o 20,000 shares issuable upon the exercise of warrants issued in a
private placement. See "Selling Shareholders."
If more than 1,500,000 shares are purchasable by Fusion Capital under
the equity purchase agreement, we have the right and presently intend to
terminate the equity purchase agreement without any payment to or liability to
Fusion Capital.
The selling shareholders may sell their shares in one or more
transactions in the over-the-counter market, on the Nasdaq SmallCap Market or on
any other exchange on which our common stock may be listed. They may also sell
in privately negotiated transactions or otherwise, or a combination of such
methods of sale, at market prices prevailing at the time of sale or prices
related to such prevailing market prices or at negotiated prices. The selling
shareholders may sell the shares to or through broker-dealers, and such
broker-dealers may receive compensation from the selling shareholders and/or
purchasers of the shares for whom they may act as agent (which compensation may
be in excess of customary commissions). The selling shareholders (other than
Fusion Capital) and any participating broker-dealers may be deemed to be
"underwriters" as defined in the Securities Act of 1933, as amended (the
"Securities Act"). Fusion Capital is an "underwriter" within the meaning of the
Securities Act of 1933. We cannot estimate at the present time the amount of
commissions or discounts, if any, that will be paid by the selling shareholders
on account of their sales of the shares from time to time. We will indemnify the
selling shareholders against certain liabilities, including certain liabilities
under the Securities Act. See "Plan of Distribution."
This prospectus also covers (i) 2,010,000 shares of our common stock
issuable upon exercise of warrants at $5.75 per share sold in our May 1995
initial public offering (the "IPO Warrants"), (ii) 100,000 shares of our common
stock issuable upon exercise of warrants at $7.50 per share issued to the
underwriter of our initial public offering, (iii) 140,000 IPO Warrants issuable
upon exercise of warrants at $.325 per warrant issued to the underwriter of our
initial public offering, and (iv) 140,000 shares of common stock underlying the
IPO Warrants.
We will not receive any proceeds from the sale of these shares but may
receive up to an aggregate of approximately $15,884,125 upon exercise of the
various warrants.
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Our common stock is quoted on the Nasdaq SmallCap Market under the
symbol "FAVE."
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YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE 4 OF
THIS PROSPECTUS.
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YOU SHOULD ONLY RELY ON THE INFORMATION INCORPORATED BY REFERENCE OR
PROVIDED IN THIS PROSPECTUS OR ANY SUPPLEMENT. WE HAVE NOT AUTHORIZED ANYONE
ELSE TO PROVIDE YOU WITH DIFFERENT INFORMATION. THE COMMON STOCK IS NOT BEING
OFFERED IN ANY STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME
THAT THE INFORMATION IN THIS PROSPECTUS OR ANY SUPPLEMENT IS ACCURATE AS OF ANY
DATE OTHER THAN THE DATE ON THE FRONT OF THOSE DOCUMENTS.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is April __, 2000
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FORWARD LOOKING STATEMENTS
Some of the information in this prospectus contains forward-looking
statements within the meaning of the federal securities laws. These statements
include, among others, business development plans, strategies, expectations
regarding competition and market acceptance of our products and services.
Forward-looking statements typically are identified by use of terms like "may,"
"will," "expect," "anticipate," "estimate" and similar words, although some
forward-looking statements are expressed differently. You should be aware that
our actual results could differ materially from those contained in the
forward-looking statements due to a number of factors, including our substantial
operating losses, availability of capital resources, ability to compete
effectively, economic conditions, unanticipated difficulties in development of
products and services, ability to gain market acceptance and market share,
ability to manage growth, dependence on third party content providers and
dependence on our key personnel. You should also consider carefully the risks
described in this prospectus or detailed from time to time in our filings with
the Securities and Exchange Commission. See "Prospectus Summary," "Risk Factors"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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TABLE OF CONTENTS
PAGE
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PROSPECTUS SUMMARY............................................................1
THE OFFERING..................................................................2
SUMMARY CONSOLIDATED FINANCIAL INFORMATION....................................3
RISK FACTORS..................................................................4
PRICE RANGE OF COMMON STOCK..................................................14
USE OF PROCEEDS..............................................................15
DIVIDEND POLICY..............................................................15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS......................................................16
THE FUSION TRANSACTION.......................................................23
THE FLORIDA POINT TRANSACTION................................................27
BUSINESS.....................................................................28
MANAGEMENT...................................................................36
SELLING SHAREHOLDERS.........................................................43
CERTAIN TRANSACTIONS.........................................................47
DESCRIPTION OF SECURITIES....................................................49
SHARES ELIGIBLE FOR FUTURE SALE..............................................51
PLAN OF DISTRIBUTION.........................................................52
LEGAL MATTERS................................................................54
EXPERTS......................................................................54
WHERE YOU CAN FIND MORE INFORMATION..........................................54
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS...................................55
As used in this Prospectus, the terms "we," "us," "our," "the Company"
and "5th Avenue" mean 5th Avenue Channel Corp. (unless the 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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PROSPECTUS SUMMARY
BECAUSE THIS IS A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION
THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS. YOU SHOULD
CONSIDER THE INFORMATION SET FORTH UNDER "RISK FACTORS" AND OUR FINANCIAL
STATEMENTS AND ACCOMPANYING NOTES THAT APPEAR ELSEWHERE IN THIS PROSPECTUS.
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 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
currently being developed. See "Business -- Television Operations."
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, Telescan and others. The website also offers direct access
to our live and archived television programming and our NetVideoNetworks
financial video archive. See "Business -- Website Operations."
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.
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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. See "Business-- NetVideoFinance Division."
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. See "Business -- Sales
Division."
WIRELESS CABLE TELEVISION OPERATIONS
We are 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. See "Business -- Wireless Cable Television."
THE OFFERING
Securities Offered by the Selling Shareholders.....6,360,254 shares of common
stock. See "Description of
Securities."
Common Stock Outstanding ..........................12,769,564 shares(1)
Nasdaq SmallCap Market
Symbols..........................................Common Stock FAVE
Warrants FAVEW
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(1) Excludes 2,924,000 shares issuable upon the exercise of various warrants at
prices ranging from $2.00 to $8.625 per share, 1,500,000 shares estimated to
be issuable upon conversion of an equity purchase agreement, 400,000 shares
estimated to be issued as a commitment fee and 462,500 shares which are
issuable in connection with a subscription agreement.
2
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SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following is a summary of our Consolidated Financial Statements,
which are included elsewhere in this prospectus. You should read the following
data together with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section of this prospectus as well as with
our Consolidated Financial Statements and the notes therewith.
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998
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STATEMENT OF OPERATIONS DATA:
Net sales .................... $ 3,791,670 $ 1,453,033
Gross profit ................. 1,719,390 1,217,666
Net loss ..................... $ (5,178,003) $(3,297,941)
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SHARE DATA:
Net loss per share
basic and diluted .......... $ (0.52) $ (0.81)
============ ===========
Weighted average number
of common shares outstanding -
basic and diluted ......... 10,036,865 4,080,242
============ ===========
AS OF
DECEMBER 31,
1999
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BALANCE SHEET DATA:
Cash................................................. $2,024,143
Total current assets................................. 3,021,707
Total assets......................................... 11,465,359
Total current liabilities............................ 4,295,251
Long term debt....................................... 864,893
Stockholders' equity................................. 6,305,215
3
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RISK FACTORS
THE SECURITIES OFFERED ARE HIGHLY SPECULATIVE. YOU SHOULD PURCHASE THEM
ONLY IF YOU CAN AFFORD TO LOSE YOUR ENTIRE INVESTMENT IN US. YOU SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, AS WELL AS ALL OTHER INFORMATION
SET FORTH ELSEWHERE IN THIS PROSPECTUS.
CERTAIN IMPORTANT FACTORS MAY AFFECT OUR ACTUAL RESULTS AND COULD CAUSE
THOSE RESULTS TO DIFFER SIGNIFICANTLY FROM ANY FORWARD-LOOKING STATEMENTS MADE
IN THIS PROSPECTUS OR OTHERWISE MADE BY US OR ON OUR BEHALF. FOR THIS PURPOSE,
ANY STATEMENTS CONTAINED IN THIS PROSPECTUS THAT ARE NOT STATEMENTS OF
HISTORICAL FACT SHOULD BE CONSIDERED TO BE FORWARD-LOOKING STATEMENTS. WORDS
SUCH AS "MAY," "EXPECT," "BELIEVE," "ANTICIPATE," "INTEND," "COULD," "ESTIMATE,"
OR "CONTINUE" OR THE NEGATIVES OF THOSE WORDS, IDENTIFY FORWARD-LOOKING
STATEMENTS. THESE STATEMENTS APPEAR IN A NUMBER OF PLACES IN THIS PROSPECTUS AND
INCLUDE STATEMENTS AS TO OUR INTENT, BELIEF OR EXPECTATIONS. THESE
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO THE RISKS DETAILED BELOW OR ELSEWHERE
IN THIS PROSPECTUS, OR DETAILED FROM TIME TO TIME IN OUR FILINGS WITH THE
SECURITIES AND EXCHANGE COMMISSION. SEE "FORWARD LOOKING STATEMENTS."
WE HAVE ONLY A LIMITED OPERATING HISTORY WITH OUR CURRENT BUSINESS MODEL.
We were incorporated in 1993, but our efforts in the Internet and
television date back only to 1998. We therefore have only a limited operating
history for you to evaluate our business. No independent market studies have
been conducted concerning the extent to which the public will access our channel
or website, or purchase our products or services. You must consider the risks,
expenses and uncertainties that an early stage company like ours faces. These
risks include our ability to:
o increase awareness of the 5th Avenue Channel, NetVideoNetworks and
NetFinancialNews brands and to be able to build user loyalty;
o develop and expand the content and services on our channel and
website;
o attract a large audience to our channel and website;
o attract a large number of advertisers from a variety of industries;
o maintain our current and develop new strategic relationships;
o respond effectively to competitive pressures; and
o continue to develop and upgrade our programming.
If we are unsuccessful in addressing these risks, our business,
financial condition and results of operations will be materially and adversely
affected.
WE HAVE A HISTORY OF OPERATING LOSSES, ACCUMULATED DEFICITS AND LIMITED FUNDS.
We have a history of operating losses and expect to continue to incur
operating losses for the foreseeable future as we continue to invest in our core
businesses. Our current financial resources are limited and will be utilized for
execution and expansion of our business plan. Our ability to execute our
business model will depend on our ability to obtain additional financing and
achieve a profitable level of operations. There can be no assurance that such
financing will be obtained. Nor can we give any assurance that we will generate
substantial revenues or that our business operations will prove to be
profitable. Our operations are subject to all of the risks inherent in the
establishment of a new business,
4
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particularly one in the highly competitive Internet and television industries.
Our likelihood of success must be considered in light of our limited financial
resources and the problems, expenses, difficulties, complications and delays
frequently encountered in connection with establishing a new business,
including, without limitation, market acceptance of our services, regulatory
requirements, unanticipated expenses and competition. We don't know if our
business will be successful.
WE NEED ADDITIONAL FINANCING FOR GROWTH.
We may not be able to obtain additional capital or generate sufficient
revenues to fund our operations. The growth of our business will require
investment on a continuing basis to finance capital expenditures and related
expenses for equipment, software, licenses, television carriage agreements,
website development, marketing and other expenses. Our future capital
requirements will depend upon a number of factors, many of which are not within
our control, including programming costs, capital costs, marketing rates,
subscriber growth and competitive conditions. Although we have recently signed
agreements for additional capital, we are actively pursuing additional financing
sources, and we may not be able to raise such capital.
WE MUST ESTABLISH AND MAINTAIN THE 5TH AVENUE CHANNEL, NETVIDEONETWORKS AND
NETFINANCIALNEWS BRANDS.
We must strengthen the 5th Avenue Channel NetVideoNetworks and
NetFinancialNews brands in order to establish our television audience and expand
and maintain Internet traffic and subscribers to our website and its services.
For us to be successful in establishing our brand, consumers must perceive us as
offering quality, cost-effective products, services and programming. Our
business could be materially adversely affected if our marketing efforts are not
productive, or if we cannot increase our brand awareness.
OUR QUARTERLY FINANCIAL RESULTS MAY FLUCTUATE SIGNIFICANTLY.
Our quarterly operating results may fluctuate significantly in the
future as a result of a variety of factors, some of which are outside our
control. These factors include:
o the number of ongoing visitors and subscribers to our channel and
website and their use of our services;
o fees we may pay for distribution, service or content agreements and
promotional arrangements or other costs we incur as we expand our
operations;
o the timing and amount of advertising and sponsorship revenues;
o the amount and timing of capital expenditures and other costs related
to the expansion of our operations;
o the introduction of new products or services by us or our
competitors;
o pricing changes in the industry;
o new government regulations that affect business on the Internet;
o general economic conditions; and
o seasonality, price and cost factors affecting the sale of consumer
products.
5
<PAGE>
Due to all of these factors, our quarterly operating results may fall
below market expectations. If this happens, the trading price of our common
stock would likely decline, perhaps significantly.
WE FACE INTENSE INTERNET COMPETITION.
The market for Internet services and products is relatively new,
intensely competitive and rapidly changing. Since the Internet's
commercialization in the early 1990's, the number of websites on the Internet
competing for users' attention has proliferated with no substantial barriers to
entry. We expect that competition will continue to intensify. We compete,
directly and indirectly, for subscribers, consumers, content and service
providers, advertisers, sponsors and acquisition candidates with the following
categories of companies:
o online financial services or financial websites targeted to
consumers;
o publishers and distributors of traditional offline media, including
those targeted to financially and entrepreneurially conscious
consumers, many of which have established web use;
o public sector and non-profit websites that provide information
without advertising or commercial sponsorships;
o vendors of products and services distributed through the web and
other means, including direct sales, mail and fax messaging; and
o web search and retrieval services and other high-traffic websites.
We expect competition in our market to increase significantly as new
companies enter the market and current competitors expand their product lines
and services. Many of these potential competitors are likely to enjoy
substantial competitive advantages, including:
o greater financial, technical and marketing resources that can be
devoted to the development, promotion and sale of their services;
o relatively easy access to capital;
o longer operating histories;
o greater name recognition;
o larger subscriber bases; and
o association or ownership by large entertainment, news or information
corporations.
To be competitive, we must use leading technologies, enhance our
services and content, develop new technologies and respond to technological
advances and emerging industry standards on a timely and cost-effective basis.
We believe that there are many websites that provide much of the same
substantive information that we provide on our website and others could easily
develop such capabilities. There can be no assurances that we will be successful
in using new technologies effectively or adapting our website to user
requirements or emerging industry standards. Any pricing pressures, reduced
margins or loss of market share resulting from our failure to compete
effectively would materially adversely affect our business, financial condition
and operating results.
6
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WE FACE INTENSE TELEVISION COMPETITION.
There are a number of television channels already on the market that
offer financial information to their viewers. These channels are backed by large
organizations that have more resources than we do. We compete, directly and
indirectly with these channels for viewers, consumers, content and service
providers, advertisers and sponsors. We also expect competition to develop in
the broadband delivery of content. Many of these potential competitors are
likely to enjoy substantial competitive advantages, including:
o greater financial, technical and marketing resources that can be
devoted to the development, promotion and sale of their services;
o relatively easy access to capital;
o longer operating histories;
o greater name recognition;
o larger subscriber bases; and
o association or ownership by large entertainment, news or information
corporations.
To be competitive, we must use leading technologies, enhance our
services and content on a timely and cost-effective basis. There can be no
assurances that we will be successful in using new technologies effectively or
adapting our television channel to user requirements or emerging industry
standards. Any pricing pressures, reduced margins or loss of market share
resulting from our failure to compete effectively could materially adversely
affect our business, financial condition and operating results.
DEPENDENCE ON THE ABILITY TO ATTRACT INTERNET ADVERTISERS.
We expect to generate revenues from the sale of advertising on our
website; however, we have not earned any advertising revenues to date. We may
not be able to generate significant advertising revenues in the future. Our
ability to generate advertising revenue will depend on, among other factors:
o the amount of traffic on, and the number of subscribers to, our
website; and
o our ability to achieve and demonstrate user and member demographic
characteristics that are attractive to advertisers.
Advertisers will want accurate measures of demographics of our
subscriber base. We will need to demonstrate to advertisers the demographics of
our users so that we can set advertising rates. We are unable to predict our
revenues from advertising until we have data on our subscribers and their use of
our website.
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DEPENDENCE ON THE ABILITY TO ATTRACT TELEVISION ADVERTISERS.
The success of our television enterprise is dependant upon the ability
to attract advertisers. The ability to attract advertisers is dependant upon
having a sufficient number of viewers. We currently have two carriage agreements
for approximately 13.5 million households, but cannot guarantee the number of
viewers that will result from this agreement. Further, there can be no
assurances that we will be successful in negotiating and executing additional
carriage contracts or distribution agreements for the channel. We currently do
not have advertising revenues to pay for the operating costs of the channel. The
inability to attract advertisers would materially and adversely affect our
ability to generate advertising revenues.
WE MAY NOT BE ABLE TO RECOGNIZE RECIPROCAL ADVERTISING AGREEMENTS AS REVENUE.
We expect to derive a portion of our revenues from reciprocal
advertising arrangements under which we will exchange advertising space on our
channel and website for advertising space on other television channels and
websites. These will not generate cash flow and there can be no assurances that
we will be able to recognize these arrangements as revenue.
REVENUES DERIVED FROM STOCK POSITIONS MAY NOT GENERATE CASH FLOWS.
We expect to derive a portion of our revenues from strategic, joint
venture or partnership agreements under which we will receive stock in lieu of
cash. These agreements do not generate cash flow and there is no guarantee that
the stock we receive will have value or can be liquidated for cash by us in the
time frame we would like.
OUR BUSINESS AND GROWTH WILL SUFFER IF WE ARE UNABLE TO HIRE AND RETAIN KEY
PERSONNEL THAT ARE IN HIGH DEMAND.
We depend on the services of our senior management. Our success is
largely dependent on our ability to hire highly qualified managerial, sales and
television production personnel. These individuals are in high demand and we may
not be able to attract the staff we need. In addition, the loss of the services
of any of our senior management could have a material adverse effect on our
business, financial condition and operating results.
OUR JOINT VENTURES, ACQUISITIONS AND ALLIANCES MAY STRAIN OUR MANAGERIAL,
OPERATIONAL AND FINANCIAL RESOURCES AND MAY BE DISRUPTIVE TO OUR BUSINESS.
We have established alliances or joint ventures with complementary
businesses for the utilization of technologies, services and products and intend
to continue these efforts in the future; however, we may be unable to integrate
or implement these joint ventures or alliances effectively. Difficulties in this
process could disrupt our ongoing business, distract our management and
employees, increase our expenses and otherwise adversely affect our business.
FINANCING FOR FUTURE JOINT VENTURES, ACQUISITIONS OR ALLIANCES MAY NOT BE
AVAILABLE.
We do not know if we will be able to identify any future joint
ventures, acquisitions or alliances or if we will be able to successfully
finance these transactions. To finance these transactions, it may be necessary
for us to raise additional funds through public or private financings, which may
not be available on acceptable terms, if at all. A failure to identify or
finance future transactions may impair our growth.
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WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY.
There are many companies that offer websites that provide financial
services. Competition for visitors, advertisers and electronic commerce partners
is intense and is expected to increase significantly in the future.
Increased competition could result in:
o lower advertising rates;
o price reductions and lower profit margins;
o loss of visitors;
o reduced page views; or
o loss of market share.
In addition, our competitors may develop content that is better than
ours or that achieves greater market acceptance. It is also possible that new
competitors may emerge and acquire significant market share. Any one of these
factors could materially and adversely affect our business, financial condition
and operating results.
WE MAY HAVE A FURTHER PAYMENT OBLIGATION TO THE FEDERAL COMMUNICATIONS
COMMISSION (THE "FCC") AS A RESULT OF OUR AUCTION DEFAULT IN HICKORY, NORTH
CAROLINA.
We participated in the FCC's auction of wireless cable authorizations
which concluded in March, 1996. We were the winning bidder in three markets:
Hickory, North Carolina; Wausau, Wisconsin; and Stevens Point, Wisconsin. We
made the required down payments for the two Wisconsin markets but defaulted on
the second 10% down payment for the Hickory market. As a result of our default,
on May 23, 1997, the FCC dismissed our Hickory application and assessed an
initial default payment of $55,712, three percent of our bid of $1,857,060,
which was deducted from the $185,706 we had deposited with the FCC for the
Hickory market. The FCC also announced that in accordance with its auction rules
we would be liable for the difference between our Hickory bid and the amount of
the winning bid when the authorization is reauctioned, if the amount of the
winning bid in the reauction is less than our bid. The FCC has not yet scheduled
the reauction of the Hickory market, and there is no way of knowing the amount
that will be obtained in the reauction, or our potential liability.
WE MAY FORFEIT OUR DOWN PAYMENTS TO THE FCC FOR THE TWO WISCONSIN MARKETS, AND
DEFAULT IN THOSE MARKETS AS WELL, AS A RESULT OF THE REAUCTION OF THE HICKORY,
NORTH CAROLINA MARKET.
Following the FCC's wireless cable authorization auction in 1996, we
made down payments totaling $237,862 on our winning bids in Wausau and Stevens
Point, Wisconsin. As indicated above, however, we defaulted on our bid in
Hickory, North Carolina and under the FCC's auction rules, default payments are
to be deducted from any deposits made by a party in default. This means that our
default payment for Hickory can be deducted by the FCC from the funds we have
deposited for Wausau and Stevens Point. We have a balance of $129,994 still on
deposit for Hickory, but if the amount of our bid exceeds the amount of the
winning bid upon the reauction of Hickory by more than that amount, as it may,
our deposits for the two Wisconsin markets may be applied to pay the Hickory
default. This would have the effect of forcing us into default in those markets
also. On July 24, 1998, the FCC granted us licenses in Wausau and Stevens Point,
conditioned on us making additional installment payments for those markets. In
April, 1999, when the first installment payments were due, we requested a waiver
to enable us to make the required installment payments for the two Wisconsin
markets, without placing the additional payments in jeopardy because of the
Hickory default. The FCC has not yet ruled on our waiver request, and we are not
able to predict the outcome.
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WE FACE POTENTIAL LIABILITY CLAIMS FROM THE OFFERING OF FINANCIAL INFORMATION,
PRODUCTS AND SERVICES.
We intend to offer financial products, information and services on our
website. We also intend to syndicate content to other websites and broadcast
content on our television channel. Although a substantial portion of this
content is expected to be provided by others, we face the risk that claims may
be made against us for losses or damages, perceived or real, which could
adversely affect our business.
Although we carry general liability insurance, our insurance may not
cover potential claims of this type or may not be adequate to cover all costs
incurred in defense of potential claims or to indemnify us for all liability
that may be imposed. Any costs or imposition of liability that is not covered by
insurance or in excess of insurance coverage could have a material adverse
effect on our business, financial condition and operating results.
COMPUTER VIRUSES MAY CAUSE OUR SYSTEMS TO INCUR DELAYS OR INTERRUPTIONS AND MAY
ADVERSELY AFFECT OUR BUSINESS.
Computer viruses may cause our systems to incur delays or other service
interruptions. In addition, the inadvertent transmission of computer viruses
could expose us to a material risk of loss or litigation and possible liability.
Moreover, if a computer virus affecting our system is highly publicized, our
reputation could be materially damaged and our visitor traffic may decrease.
WE WILL HAVE TO PROTECT AGAINST INTERNET SECURITY RISKS.
Our activities may involve the storage and transmission of proprietary
information such as credit card numbers. Security breaches in our system could
expose us to a risk of loss, litigation and possible liability. Our security
measures may not prevent security breaches and the failure to prevent such
security breaches may have a material adverse effect on our business, financial
condition and operating results.
WE DEPEND ON OUR CONTENT PROVIDERS.
We will rely on independent content providers for much of the
information and content provided on our website and television channel. We have
entered into relationships with many companies to obtain content for our website
and television channel. We intend to enter into additional relationships in the
future. Our success depends significantly on our ability to maintain our
existing relationships with these content providers and to build new or
replacement relationships with other content providers. Some of our agreements
with content providers are short-term and non-exclusive. Providers could also
increase license fees for their services. Due to the non-exclusivity of certain
of our agreements, the providers could offer certain content that is similar or
the same as ours to our competitors. To the extent that content providers,
including but not limited to our current providers, offer information to users
or our competitors at a lower cost, our business, financial condition and
operating results could be materially adversely affected.
In addition, we depend on the ability of our content providers to
deliver high quality content from reliable sources and to continually upgrade
their content in response to subscriber and consumer demand and evolving
industry trends. The failure by these parties to develop and maintain high
quality, attractive content could result in subscriber and consumer
dissatisfaction, could inhibit our ability to add subscribers and consumers and
could dilute the 5th Avenue Channel, NetVideoNetworks and NetFinancialNews
brands name, each of which could have a material adverse effect on our business,
financial condition and operating results.
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WE MAY EXPERIENCE SYSTEM FAILURES.
We rely on third parties to provide portions of our network
infrastructure such as hosting and broadband delivery. Any significant
interruptions in our services or an increase in response time could result in a
loss of potential or existing subscribers, strategic partners, advertisers and
sponsors and, if sustained or repeated, could reduce the attractiveness of our
website to them. Although we maintain insurance, we cannot guarantee that our
insurance will be adequate to compensate for all losses that may occur or to
provide for costs associated with business interruptions.
We must be able to operate our website 24 hours a day, seven days a
week, without interruption. To operate without interruption, we and our service
providers must guard against:
o damage from fire, power loss and other natural disasters;
o communications failures;
o software and hardware errors, failures or crashes;
o security breaches, computer viruses and similar disruptive problems;
and
o other potential interruptions.
Failure to adequately address any of these issues could materially
adversely affect our business.
WE COULD BE SUBJECT TO SALES OR OTHER TAXES.
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 result in taxes being
imposed on the sale of goods and services and certain other activities through
the Internet. A recently enacted law places a temporary moratorium on certain
types of taxation on Internet commerce. We cannot predict the effect of current
attempts at taxing or regulating commerce over the Internet. Any legislation
that imposes a tax on Internet Commerce could have a material adverse effect on
our business, financial condition and operating results.
OUR STOCK PRICE MAY BE VOLATILE.
The stock market experiences volatility that affects the market prices
of equity securities of technology companies generally and Internet-related
companies in particular. This volatility includes rapid and significant
increases in the trading prices of certain Internet companies following public
offerings to levels that do not bear any reasonable relationship to the
operating performance of such companies. These fluctuations may materially
affect the trading price of our common stock. In the past, following periods of
volatility in the market price for a company's securities, shareholders have
often instituted securities class action litigation. Litigation could result in
substantial costs and the diversion of management's attention and resources,
which could have a material adverse effect on our business, financial condition
and results of operations.
WE MAY BE SUBJECT TO CLAIMS BASED ON PRODUCTS AND SERVICE SOLD ON OUR CHANNEL OR
WEBSITE.
We have entered into arrangements to offer third-party products and
services on our channel and website under which we are entitled to receive a
share of revenues generated from these transactions. These arrangements may
subject us to additional claims including product liability or personal injury
from the products and services, even if we do not ourselves provide the products
or services. These claims
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may require us to incur significant expenses in their defense or satisfaction.
While our agreements with these parties often provide that we will be
indemnified against such liabilities, such indemnification may not be adequate.
Although we carry general liability insurance, our insurance may not
cover all potential claims to which we are exposed or may not be adequate to
indemnify us for all liability that may be imposed. Any imposition of liability
that is not covered by insurance or is in excess of insurance coverage could
have a material adverse effect on our business, financial condition and results
of operations.
GOVERNMENT REGULATION MAY AFFECT OUR BUSINESS.
Our wireless cable business in Wisconsin is subject to regulation by
the FCC and other regulatory agencies. Our Costa Rican operations are subject to
regulation under Costa Rican law. Due to the regulated nature of the cable
industry, our operations may be adversely impacted by the adoption of new, or
changes to, existing laws or regulations or the interpretations thereof.
WE FACE INTENSE COMPETITION IN THE WIRELESS CABLE TV INDUSTRIES.
The pay television industry is highly competitive. Legislative,
regulatory and technological developments may result in additional and
significant new competition, including competition from local telephone
companies. Wireless cable television systems face or may face competition from
several sources, such as traditional hard-wire cable companies, satellite
receivers, direct broadcast satellites and other alternative methods of
distributing and receiving television transmissions. Further, premium movie
services offered by cable television systems have encountered significant
competition from the home video cassette recorder industry. In areas where a
number of local off-air VHF/UHF broadcast signals can be received without the
benefit of cable television, cable television systems have also experienced
competition from the availability of broadcast signals generally and have found
market penetration more difficult. Further, several actual and potential
competitors have greater financial, marketing, and other resources.
WE FACE RISKS IN OUR INTERNATIONAL OPERATIONS.
A significant percentage of our revenue is derived from our
wholly-owned subsidiary in Costa Rica. This revenue is subject to the risks
normally associated with international operations including, without limitation,
difficulties in staffing and managing foreign operations, losses from currency
conversion and fluctuating exchange rates, limitations (including taxes) on the
repatriation of earnings, slower and more difficult accounts receivable
collection, greater difficulty and expense in administering business abroad,
complications in complying with foreign laws and changes in regulatory
requirements, and cultural differences in the conduct of business. These factors
may adversely affect our business, financial condition and operating results.
WE DEPEND ON PROGRAM AGREEMENTS.
We are dependent on fixed-term contracts with various program suppliers
in connection with our distribution of television programming in Costa Rica and
Wisconsin. If such contracts are canceled or not renewed, we will have to seek
program material from other sources. There can be no assurance that other
program material will be available to us on acceptable terms or at all or, if
available, that such material will be acceptable to our subscribers.
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OUR PRESENT MANAGEMENT HAS THE VOTING POWER TO CONTROL OUR AFFAIRS.
As of the date of this prospectus, our officers and directors own
approximately 57.61% of our outstanding common stock. Consequently, these
individuals are in a position to elect a majority of our directors and to
exercise control over our affairs generally.
FUTURE SALES OF COMMON STOCK COULD DEPRESS THE PRICE OF OUR COMMON STOCK.
Future sales of substantial amounts of common stock pursuant to Rule
144 under the Securities Act of 1933 or otherwise by certain shareholders could
have a material adverse impact on the market price for the common stock at the
time. There are presently 8,811,452 outstanding shares of our common stock
beneficially held by management and other shareholders which are deemed
"restricted securities" as defined by Rule 144 under the Securities Act. Under
certain circumstances, these shares may be sold without registration pursuant to
the provisions of Rule 144. In general, under Rule 144, a person (or persons
whose shares are aggregated) who has satisfied a one-year holding period may,
under certain circumstances, sell within any three-month period a number of
restricted securities which does not exceed the greater of one (1%) percent of
the shares outstanding or the average weekly trading volume during the four
calendar weeks preceding the notice of sale required by Rule 144. In addition,
Rule 144 permits, under certain circumstances, the sale of restricted securities
without any quantity limitations by a person who is not an affiliate of ours and
has satisfied a two-year holding period. Any sales of shares by shareholders
pursuant to Rule 144 may have a depressive effect on the price of our common
stock.
AUTHORIZATION OF PREFERRED STOCK COULD AFFECT THE VOTING POWER OF HOLDERS OF OUR
COMMON STOCK.
Our articles of incorporation authorizes us to issue 5,000,000 shares
of "blank check" preferred stock with such designations, rights and preferences
as may be determined from time to time by our Board of Directors. Accordingly,
our Board of Directors is empowered, without stockholder approval (but subject
to applicable government regulatory restrictions), to issue preferred stock with
dividend, liquidation, conversion, voting or other rights which could adversely
affect the voting power or other rights of the holders of our common stock. In
the event of issuance, the preferred stock could be used, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
our control.
OUR CONTINUED LISTING WITH NASDAQ IS NOT ASSURED.
While our common stock and warrants are listed on the Nasdaq SmallCap
Market, there can be no assurance that such listing will continue. If our common
stock were delisted, the shares might be subject to the penny stock rules
promulgated under the Securities Exchange Act of 1934. The SEC has adopted
regulations which generally define a "penny stock" to be any equity security
that has a market price of less than $5.00 per share, subject to certain
exceptions. The shares offered hereby may be deemed to be "penny stocks" and
thus become subject to rules that impose additional sales practice requirements
on broker/dealers who sell such securities to persons other than established
customers and accredited investors. Consequently, the "penny stock" rules may
restrict the ability of broker/dealers to sell our securities and may affect the
ability of purchasers in this offering to sell our securities in a secondary
market.
The Nasdaq Stock Market, Inc. has adopted certain changes to the
maintenance criteria for listing eligibility on the Nasdaq SmallCap market. The
new maintenance standards require at least $2,000,000 in net tangible assets
(total assets less total liabilities and goodwill) or $500,000 in net income in
two of the last three years, a public float of at least 500,000 shares, a
$1,000,000 market value of the public float, a minimum bid price of $1.00 per
share, at least two market makers, at least 300 shareholders and at least two
outside directors. The SEC approved these criteria, and a compliance period for
the new maintenance criteria is being implemented. If we become unable to meet
the listing criteria of the Nasdaq SmallCap market and become delisted, trading
in our common stock would be conducted in the over-the-counter market. In such
an event, the market price of our common stock may be adversely impacted and an
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investor may find it difficult to dispose of, or to obtain accurate quotations
as to the market value of our common stock.
OUR STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE AND COULD DROP UNEXPECTEDLY.
The average daily trading volume for our common stock during the 90-day
period ending March 31, 2000 was 122,362. As a result of this and other factors,
the price at which our common stock trades is highly volatile and may fluctuate
substantially.
In addition, the stock market has from time to time experienced
significant price and volume fluctuations that have affected the market prices
for the securities of technology companies, particularly Internet companies. As
a result, investors in our common stock may experience a decrease in the value
of their common stock regardless of our operating performance or prospects.
PRICE RANGE OF COMMON STOCK
Our common stock is traded on The Nasdaq SmallCap Market under the
symbol "FAVE."
The following table sets forth the range of high and low sale prices
for our common stock for each quarterly period indicated, as reported by 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
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
As of March 31, 2000, the approximate number of record holders of our
common stock was 2,243.
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USE OF PROCEEDS
We will not receive any proceeds from the sale of securities being
offered. However, we may receive approximately $15,884,125 in proceeds from the
exercise of warrants. Such proceeds will be used for working capital and other
corporate purposes.
We expect to incur expenses of approximately $68,400 in connection with
the registration of the shares.
DIVIDEND POLICY
We have not declared any dividends on our common stock in the past two
fiscal years and do not contemplate paying cash dividends for the foreseeable
future, but instead will retain any earnings to fund our growth. Any decision to
pay cash dividends on our common stock in the future will depend on our ability
to generate earnings, our need for capital, our overall financial condition and
such other factors as our Board of Directors deems relevant.
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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. See "Forward
Looking Statements." The following should be read in conjunction with our
Consolidated Financial Statements and the related Notes included elsewhere in
this Prospectus.
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.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 AS COMPARED TO YEAR ENDED DECEMBER 31, 1998 (IN
THOUSANDS)
%
DECEMBER 31, DECEMBER 31, INCREASE
1999 1998 (DECREASE)
------------ ------------ ----------
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 321 149 115%
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 2121%
------- -------
Sub total 914 605 51%
------- -------
Total $ 6,045 $ 3,781 60%
======= =======
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%
DECEMBER 31, DECEMBER 31, INCREASE
1999 1998 (DECREASE)
------------ ------------ ----------
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%
======= =======
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 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 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 channel 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
only in December 1999. Direct costs in Wisconsin decreased $14,000 due to a
decrease in the number of subscribers.
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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%, primarily due 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 $914,000 in 1999
compared to $605,000 in 1998, an increase of $309,000 or 51%. This increase was
due to the amortization of goodwill 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 primarily due 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 on-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.
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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 stocks for a net cash
proceed 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.
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 $109,000 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
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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 our 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.
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 NetVideoNetworks 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.
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 recently signed an agreement with an investment
fund which allows us to sell shares of our common stock to raise approximately
$1,000,000 a month over a twelve month period. See "The Fusion Transaction." In
addition, we entered into a stock subscription agreement with an accredited
investor for the sale of 250,000 shares of 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. See "Florida Pointe Agreement."
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We also have a commitment from our President, Mr. Rosen, that in the
event 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.
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.
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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.
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THE FUSION TRANSACTION
GENERAL
On March 29, 2000 we executed a master facility agreement with Fusion
Capital Fund II, LLC pursuant to which Fusion Capital agreed to enter into up to
two equity purchase agreements, each with an aggregate principal amount of
$6,000,000. On April 25, 2000, we entered into an amended and restated master
facility agreement with Fusion Capital. Under the amended and restated master
facility agreement, each equity purchase agreement grants Fusion Capital the
right to purchase from us shares of common stock up to $6,000,000 at a price
equal to the lesser of (1) 140% of the average of the closing bid prices for our
common stock during the 10 trading days prior to the date of the applicable
equity purchase agreement (in the case of the first equity purchase only, this
shall not be less than $8.25) or (2) a price based upon the future performance
of the common stock, in each case without any fixed discount to the market
price. The first equity purchase agreement requires that upon its execution,
Fusion Capital will pay $500,000 to us as partial prepayment of the common
stock. Once the $500,000 has been applied to purchase shares of our common
stock, Fusion Capital will pay the remaining principal amount upon receipt of
our common stock.
The first equity purchase agreement will be executed by Fusion Capital
within five business days after the date of this prospectus. This date is
referred to as the "closing date." The second equity purchase agreement will be
executed after delivery of an irrevocable written notice by us to Fusion Capital
stating that we elect to enter into such purchase agreement with Fusion Capital.
The second equity purchase agreement may be entered into only after the
principal amount under the first equity purchase agreement is fully converted
into our common stock. The obligation of Fusion Capital to enter into both
equity purchase agreements is subject only to customary closing conditions, all
of which are outside the control of Fusion Capital.
PURCHASE OF SHARES UNDER THE EQUITY PURCHASE AGREEMENT
GENERAL. Under the equity purchase agreement Fusion Capital will
purchase shares of our common stock by "converting" a specified dollar amount of
the outstanding principal balance into common stock. Subject to the limits on
conversion and the termination rights described below, each month during the
six-month term of the equity purchase agreement Fusion Capital will have the
right to convert up to $1.0 million of the principal amount of the equity
purchase agreement, plus any amounts for any prior month that have not yet been
converted, into shares of our common stock at the applicable conversion price.
The conversion price per share is equal to the lesser of:
o the lowest sale price of our common stock on the day of submission of a
conversion notice by Fusion Capital; or
o the average of the four lowest closing bid prices of our common stock during
the 20 trading days prior to the submission of a conversion notice by Fusion
Capital; or
o 140% of the average of the closing bid prices of our common stock for the 10
trading days immediately preceding the date of the applicable equity purchase
agreement (in the case of the first equity purchase agreement only, this
shall not be less than $8.25). This is referred to throughout this prospectus
as the "Fixed Conversion Price." If the first equity purchase agreement had
been entered into on April 26, 2000, the Fixed Conversion Price would have
been $8.25.
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The following table sets forth the number of shares of our common stock
that would be issuable to Fusion Capital upon conversion of the first equity
purchase agreement at varying conversion prices:
NUMBER OF SHARES
TO BE ISSUED UPON A PERCENT OF OUR
FULL CONVERSION OF COMMON STOCK
THE FIRST EQUITY OUTSTANDING AS OF
ASSUMED CONVERSION PRICE PURCHASE AGREEMENT APRIL 26, 2000(1)
- ------------------------ ------------------- -----------------
$2.3125, the conversion price
on April 26, 2000 2,594,595(2) 16.89%
$3.00 2,000,000(2) 13.54%
$4.00 1,500,000 10.51%
$5.00 1,200,000 8.59%
$8.25, the fixed
conversion price 727,272 5.39%
$10.00 600,000 4.49%
- ------------
(1) As of April 26, 2000, there were 12,769,564 shares of our common stock
outstanding.
(2) We originally estimated that we would issue no more than 1,500,000 shares to
Fusion Capital upon conversion of the first equity purchase agreement, all
of which are included in this offering. If more than 1,500,000 shares are
issuable to Fusion Capital under the first equity purchase agreement, we
have the right to, and presently intend to, terminate the first equity
purchase agreement without any payment to or liability to Fusion Capital.
OUR RIGHT TO PREVENT CONVERSIONS. If the closing sale price of our
common stock is below the Fixed Conversion Price for any three consecutive
trading days, we will have the unconditional right to suspend conversions until
the earlier of (1) our revocation of such suspension and (2) when the sale price
of our common stock is above the Fixed Conversion Price.
OUR MANDATORY CONVERSION RIGHTS. If the closing sale price of our
common stock on each of the five trading days immediately prior to the first
trading day of any monthly period is at least 40% of the Fixed Conversion Price,
we will have the right to require that Fusion Capital convert all or a portion
of the principal amount of the equity purchase agreement during that monthly
period. We may revoke, in our sole discretion, our written request with respect
to any conversions in excess of the amount that Fusion Capital is otherwise
permitted to convert.
LIMITATION ON FUSION CAPITAL'S BENEFICIAL OWNERSHIP. Notwithstanding
the foregoing, no conversion of the equity purchase agreement will be permitted
if it would result in Fusion Capital or its affiliates beneficially owning more
than 4.99% of our then aggregate outstanding common stock immediately after the
proposed conversion.
OUR TERMINATION RIGHTS
If the closing sale price of our common stock is below the Fixed
Conversion Price for any 10 consecutive trading days, then we may elect to
terminate the equity purchase agreement without any liability or payment to
Fusion Capital. If more than 1,500,000 shares are issuable to Fusion Capital
under the first equity purchase agreement, we presently intend to terminate the
equity purchase agreement without any payment to or liability to Fusion Capital.
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ADJUSTMENT TO CONVERSION PRICE
The conversion price of the equity purchase agreement will be adjusted
for any reorganization, recapitalization, non-cash dividend, stock split or
other similar transaction occurring during the ten trading days in which the
closing bid price is used to compute the conversion price.
MAJOR TRANSACTION
If we enter into any of the following types of transactions, then
Fusion Capital may convert the entire remaining principal amount of the equity
purchase agreement:
o the consolidation, merger or other business combination with another
entity;
o any transaction which could involve a fair value of $10,000,000 or
more in a single transaction or a series of related transactions;
o the issuance of debt or equity securities in a single transaction or
a series of related transactions involving the receipt by us of
proceeds of $10,000,000 or more; or
o a purchase, tender or exchange offer made to the holders of 50% of
the outstanding shares of common stock
These transaction are each referred to as "Major Transactions." If we enter into
a Major Transaction, then we may not terminate the equity purchase agreement
until 30 days after public announcement of the Major Transaction. If we publicly
announce a Major Transaction within 30 days after terminating the equity
purchase agreement, then we must pay to Fusion Capital the amount, if any that,
the average of the closing sale price of our common stock for the ten trading
days following the completion of the Major Transaction exceeds the conversion
price determined as of the date that the agreement is terminated.
NO SHORT-SELLING OR HEDGING BY FUSION CAPITAL
Fusion Capital has agreed that neither it nor its affiliates will
engage in any direct or indirect short-selling or hedging of our common stock
during any time prior to the termination of the master facility agreement.
EVENTS OF DEFAULT
Generally, Fusion Capital may terminate the equity purchase agreement
without any liability or payment to us upon the occurrence of any of the
following events of default:
o if for any reason the shares offered by this prospectus cannot be sold
pursuant to this prospectus for a period of five consecutive trading days or
for more than an aggregate of 10 trading days in any 365-day period;
o suspension by The Nasdaq SmallCap Market of our common stock from trading for
a period of five consecutive trading days or for more than an aggregate of 10
trading days in any 365-day period;
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o our failure to satisfy any listing criteria of our principal securities
exchange or market for a period of 10 consecutive trading days or for more
than an aggregate of 45 trading days in any 365-day period;
o (1) notice from us or our transfer agent to the effect that either of us
intends not to comply with a proper request for conversion of the equity
purchase agreement into shares of common stock or (2) our failure to confirm
to the transfer agent Fusion Capital's conversion notice or (3) the failure
of the transfer agent to issue shares of our common stock upon delivery of a
conversion notice;
o if at any time more than 1,907,205 shares of our common stock (representing
15% of our outstanding common stock as of the date of the master facility
agreement) are issuable to Fusion Capital upon conversion of the equity
purchase agreement;
o any material breach of the representations or warranties or covenants
contained in the master facility agreement or any related agreements which
has or which could have a material adverse affect on us or the value of the
equity purchase agreement, subject to a cure period of 15 trading days;
o a default of any payment obligation of us in excess of $1 million; or
o our participation in insolvency or bankruptcy proceedings by or against us.
ADDITIONAL SHARES ISSUED TO FUSION CAPITAL
Under the terms of the master facility agreement, in connection with
the execution of the first equity purchase agreement, Fusion Capital will
receive additional shares of our common stock as a commitment fee. The shares to
be issued to Fusion Capital will be equal to:
o 12% of $6,000,000, or $600,000, divided by the lower of (1) the
average of the closing bid price of our common stock for the five
consecutive trading days immediately preceding the trading day that
is two trading days prior to the closing date for the first equity
purchase agreement and (2) $2.775, the average of the closing bid
price of our common stock for the five consecutive trading days
immediately preceding the trading day that is two trading days prior
to the date of the amended and restated master facility agreement,
plus
o 3% of $6,000,000, or $180,000, divided by the lower of (1) the
average of the closing bid price of our common stock for the five
consecutive trading days immediately preceding the trading day that
is two trading days prior to the closing date for the first equity
purchase agreement and (2) $2.775, the average of the closing bid
price of our common stock for the five consecutive trading days
immediately preceding the trading day that is two trading days prior
to the date of the amended and restated master facility agreement.
If the closing date for the first equity Purchase agreement had been
April 26, 2000, Fusion Capital would have received an aggregate of 331,034
shares of our common stock as a commitment fee. Unless an event of default
occurs, these shares must be held by Fusion Capital until the first equity
purchase agreement has been fully performed.
On the date of the execution of the second equity purchase agreement,
Fusion Capital will be entitled to receive a commitment fee, payable in shares
of common stock, equal to 7% of $6,000,000, or $420,000, divided by the lower of
(1) the average of the closing bid price of our common stock for the five
consecutive trading days immediately preceding the trading day which is
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two trading days prior to the closing date for the second equity purchase
agreement and (2) the average of the closing bid price of our common stock for
the five consecutive trading days immediately preceding the date we deliver
notice of our election to enter into the second equity purchase agreement.
NO VARIABLE PRICED FINANCINGS
So long as any equity purchase agreement is in effect, we have agreed
not to issue, or enter into any agreement with respect to the issuance of, any
variable priced equity or variable priced equity-like securities unless it has
obtained Fusion Capital's prior written consent.
HOLDINGS OF FUSION CAPITAL UPON TERMINATION OF THIS OFFERING
Because Fusion Capital may sell all, some or none of the common stock
offered by this prospectus, no estimate can be given as to the amount of common
stock that will be held by Fusion Capital upon termination of the offering.
FLORIDA POINT AGREEMENT
We recently entered into an agreement with Florida Point, Inc. for the
sale of up to 500,000 shares of our common stock at a price of $4.00 per share.
Pursuant to the agreement, Florida Point purchased $150,000 in common
stock (or 37,500 shares) on March 29, 2000. Florida Point is required to
purchase an additional $150,000 in common stock (37,500 shares) ten days (10)
after the registration statement, of which this prospectus forms a part, is
declared effective, and each week for four weeks. At the fifth week thereafter,
Florida Point must purchase its final $100,000 in common stock, resulting in an
aggregate investment of $1 million for 250,000 shares.
Once Florida Point has purchased 250,000 shares, we have the option to
require Florida Point to purchase an additional $1 million in common stock
(250,000 shares).
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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 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
currently 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, 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 seen. 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 for which we receive
a percentage of sales or marketing fees. To supply these services, we have
signed agreements with 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 ongoing series of
educational and informational programming segments offering viewers 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 and should also provide 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 their 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 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
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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. 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.
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.
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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-site 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, cables, cable boxes, satellite dishes, beam
benders, 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.
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
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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 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.
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Once the concession is granted, the RCO will periodically control and
supervise its operation. In order to verify that the terms and conditions of the
concession are being fulfilled, the RCO is authorized to visit and inspect the
place of business of the concessionaire at any time. If there is any incorrect
technical functioning, the licensee, within forty-eight hours, must reestablish
the concession to its original terms under penalty of cancellation of the
license. Concessions for the Company's Costa Rican System are owned by the Costa
Rican operating companies that were acquired by the Company through its wholly
owned Costa Rican subsidiary in February 1996.
Furthermore, the owner of a concession is obligated to strive to
increase the cultural level of the population. The owner of the concession is
jointly liable, together with whoever broadcasts or transmits through the
frequency, for any violations of the Law, provided there is intentional conduct
by the concessionaire. In case of negligence, the liability is subsidiary to the
direct offender's. The concessionaire is not liable in the absence of willful
participation or negligence. Any broadcast shall operate free of impurities
(espurias y armabucas) and with the frequency adjusted so that no interference
is caused to other concessionaires.
If the operating center does not meet these requirements, its
functioning will not be authorized by the RCO. Other governmental limitations or
restrictions apply, such as a prohibitions against broadcasting certain
information, whether private or official, local or international, except in
situations of emergency; false news; alarm calls without reason, the
broadcasting of programs emanating from other concessionaires without their
previous authorization, and the use of vulgar or improper language.
The Law establishes that licenses are granted for a limited time, but
they are automatically extended by payment of the corresponding dues, provided
that the functioning and installation of the station are adjusted to the
stipulations of the Law. The transfer or alienation of the right to a frequency
is permitted only with the previous authorization of the RCO, which means that a
formal request has to be submitted to the RCO on these terms. According to the
RCO's current interpretation, a frequency can be leased to a third party without
prior consent from the government. The lessor remains as the concessionaire and,
therefore, continues to be subject to all obligations related to the concession.
Article 3 of the Law requires that concessionaires have not less than
65% Costa Rican ownership. The Company has been advised by its Costa Rican
counsel that this provision is not being actively enforced and that there is a
decision from the Constitutional Court declaring a similar provision in a
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 quickly build a significant
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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
will 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.
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 have 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.
LITIGATION
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.
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EMPLOYEES
As of March 21, 2000, we had 74 full-time employees serving in our
North Miami Beach, Florida, LaCrosse, Wisconsin, Pelham, New York and Costa Rica
offices, including 10 in management, 7 in 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.
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 also 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 utilizes the control
room and uplink facilities of the studio. 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.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors, executive officers and key employees are as follows:
DIRECTOR
NAME AGE POSITION SINCE
- ---- --- -------- --------
Melvin Rosen 56 Chairman of the Board, President and 1997
Chief Executive Officer
Eric Lefkowitz 40 Executive 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 Executive Vice President and --
Chief Operating Officer
Dominique Sada 43 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.
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.
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. Mobil
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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. Mr. Taylor has resigned from
his positions effective April 17, 2000.
DOMINIQUE SADA: CHIEF FINANCIAL OFFICER. Dominique Sada, 43, has served
as 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, 56, 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.
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.
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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.
EXECUTIVE COMPENSATION
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 Executive 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
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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.
Effective April 17, 2000, Mr. Taylor has resigned from the Company.
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.
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.
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<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
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 200,000 shares of common stock under the SOP, 200,000 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.
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PRINCIPAL SHAREHOLDERS
The following table sets forth information regarding beneficial
ownership of our common stock as of March 31, 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:
NAME AND ADDRESS OF AMOUNT AND NATURE PERCENT OF
BENEFICIAL OWNER OR OF BENEFICIAL OUTSTANDING
IDENTITY OF GROUP OWNERSHIP(1) SHARES(2)
- ------------------- ----------------- -----------
Melvin Rosen 7,164,879(3) 48.89%
c/o 5th Avenue Channel Corp.
3957 N.E. 163rd Street
North Miami Beach, FL 33160
Ivana Trump 35,000 *
c/o Lyman & Landy
405 Park Avenue, 17th Floor
New York, NY 10022
Eric Lefkowitz 651,167(4) 4.99%
Ivan Rothstein 459,166(5) 3.57%
Dennis J. Devlin
274,000(6) 2.14%
Scott Housefield 14,000(7) *
Larry Weinstein 14,000(7) *
Nick van der Linden 334,000(8) 2.61%
All officers and directors
as a group (10 persons) 8,811,452(9) 57.61%
- ------------
* Less than 1%.
(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 12,769,564 shares of common stock issued and outstanding shares as
of April 25, 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 April 25, 2000 are included and are
deemed outstanding and are added to the 12,769,564 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 885,000 shares issuable upon
exercise of options.
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<PAGE>
(4) Includes 300,000 shares held by IBC, a company of which Mr. Lefkowitz owns
50% and 287,500 shares issuable upon exercise of options at $2.75 per share
(5) Includes 300,000 shares held by IBC, a company of which Mr. Rothstein owns
50% and 102,500 shares issuable upon the exercise of options.
(6) 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 14,000
shares at fair value on date of grant.
(7) Represents options to purchase 14,000 shares at fair value on date of
grant.
(8) Represents shares owned by Caladan B.V., a company controlled by Mr. van
der Linden, and options to purchase 14,000 shares at fair value on date of
grant.
(9) Includes a total of 2,526,240 shares issuable upon the exercise of
presently exercisable options and warrants held by the following persons:
Melvin Rosen 1,000,000 warrants and 885,000 options; Eric Lefkowitz,
287,500 options; Ivan Rothstein 102,500 options; Dennis Devlin 24,000
options; Scott Housefield, 14,000 options; Larry Weinstein, 14,000 options,
Nick van der Linden, 14,000 options; Adam Taylor 169,740 options and
Michael Tedesco 15,500 options.
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<PAGE>
SELLING SHAREHOLDERS
The following table sets forth certain information with respect to the
ownership of our common stock by selling shareholders as of April 25, 2000.
Unless otherwise indicated, none of the selling shareholders has or had
position, office or other material relationship with us within the past three
years.
<TABLE>
<CAPTION>
OWNERSHIP OF SHARES OWNERSHIP OF SHARES
OF COMMON STOCK OF COMMON STOCK
PRIOR TO OFFERING NUMBER OF AFTER OFFERING(1)
----------------------------------- SHARES OFFERED -------------------------------
SELLING SHAREHOLDER SHARES PERCENTAGE HEREBY SHARES PERCENTAGE
------------------- ------------------ ------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Michael Ploshnick 30,000(2) * 30,000 0 *
Steven Finkelstein 54,000(2) * 54,000 0 *
Salvatore Marasa 54,000(2) * 54,000 0 *
David Ganz 54,000(2) * 54,000 0 *
Anthony Imbo 54,000(2) * 54,000 0 *
Howard Schwartz 67,875(3) * 67,875 0 *
Donald Fiore 13,875(4) * 13,875 0 *
James Ganduglia 11,100(4) * 11,100 0 *
Dermot Kiernan 13,875(4) * 13,875 0 *
Debra & Harvey Lichtman
13,875(4) * 13,875 0 *
Elmer Macke 27,750(4) * 27,750 0 *
Richard Measelle 27,750(4) * 27,750 0 *
Leonard Pianko 5,550(4) * 5,550 0 *
Charles Rankin 13,875(4) * 13,875 0 *
Jeremy & Franca Rawitz 11,100(4) * 11,100 0 *
Lawrence & Lori Turel 11,100(4) * 11,100 0 *
Ganot Corporation 168,834(5) 1.32% 168,834 0 *
Klurman Investment Limited
Partnership 222,000(6) 1.74% 222,000 0 *
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
OWNERSHIP OF SHARES OWNERSHIP OF SHARES
OF COMMON STOCK OF COMMON STOCK
PRIOR TO OFFERING NUMBER OF AFTER OFFERING(1)
----------------------------------- SHARES OFFERED -------------------------------
SELLING SHAREHOLDER SHARES PERCENTAGE HEREBY SHARES PERCENTAGE
------------------- ------------------ ------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Klurman Investment Limited
Partnership II 145,000(7) * 145,000 0 *
Carina B.V. 50,000 * 50,000 0 *
Maddox Mutual 250,000 1.96% 250,000 0 *
J.W. Kranendonk 100,000 * 100,000 0 *
J.J. Van den Berg 320,000 2.51% 320,000 0 *
M.M.G. Pilarczyk 100,000 * 100,000 0 *
Caladan B.V. 320,000 2.51% 320,000 0 *
Finance IT B.V. 500,000 3.92% 500,000 0 *
Trasmin Invest B.V. 250,000 1.96% 250,000 0 *
AGI Finance SA 50,000 * 50,000 0 *
John Bus 10,000 * 10,000 0 *
Ab ter Horst 50,000 * 50,000 0 *
International Broadcast
Consultants of America,
Inc. (8) 300,000 2.35% 300,000 0 *
Miron Leshem(9) 9,000 * 9,000 0 *
Stewart Adams Ltd. 60,000 * 60,000 0 *
Charles Ramos(10) 30,000 * 30,000 0 *
Catherine Saxton(11) 10,000 * 10,000 0 *
Jim Pakarek(12) 10,000 * 10,000 0 *
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
OWNERSHIP OF SHARES OWNERSHIP OF SHARES
OF COMMON STOCK OF COMMON STOCK
PRIOR TO OFFERING NUMBER OF AFTER OFFERING(1)
----------------------------------- SHARES OFFERED -------------------------------
SELLING SHAREHOLDER SHARES PERCENTAGE HEREBY SHARES PERCENTAGE
------------------- ------------------ ------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Eugene Siriani 67,862 * 67,862 0 *
Ralph Olsen 3,500 * 3,500 0 *
David Menlow(13) 100,000 * 100,000 0 *
Fusion Capital Fund II, 651,167 4.99% 1,900,000 0 *
LLC(14)
Florida Point, Inc.(15) 700,000 5.38% 700,000 0 *
Adam Taylor (16) 184,740 1.43% 15,000 169,740 1.31%
Ivan Rothstein(17) 459,166 3.57% 356,666 102,500 *
Eric Lefkowitz(18) 651,167 4.99% 363,667 289,500 2.15%
Ivana Trump 35,000 * 35,000 0 *
</TABLE>
- ------------
* Indicates less than 1%.
(1) Assumes that all shares are sold pursuant to this offering and that no
other shares of common stock are acquired or disposed of by the selling
shareholders prior to the termination of this offering. Because the
selling shareholders may sell all, some or none of their shares or may
acquire or dispose of other shares of common stock, no reliable estimate
can be made of the aggregate number of shares that will be sold pursuant
to this offering or the number or percentage of shares of common stock
that each selling shareholder will own upon completion of this offering.
(2) Represents shares of common stock issuable upon the exercise of warrants
originally issued to a consultant to the Company and assigned to the
holders. Such warrants are exercisable for $2.50 per share and expire on
July 10, 2000.
(3) Consists of 54,000 shares of common stock issuable upon exercise of
warrants assigned to the holder and 13,875 shares issued upon conversion
of 12% convertible debentures in the principal amount of $25,000 including
1,375 shares issued in lieu of accrued interest.
(4) Part of an aggregate of 297,500 shares issued upon conversion of 12%
convertible debentures in the aggregate principal amount of $595,000
including 35,059 shares issued in lieu of accrued interest.
(5) Represents 150,000 shares issued upon conversion of $2.00 per share of 12%
convertible debentures in the principal amount of $300,000 and 18,834
shares issued in lieu of accrued interest.
(6) Represents 200,000 shares issued upon conversion of a 12% convertible
debenture in the principal amount of $500,000 and 22,000 shares issued in
lieu of accrued interest.
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<PAGE>
(7) Includes 15,000 shares issuable upon the exercise of warrants at $5.00 per
share and 5,000 shares issuable upon the exercise of warrants at $6.00 per
share.
(8) International Broadcast Consultants of America, Inc. is a company of which
Eric Lefkowitz, our Executive Vice President and Director and Ivan
Rothstein, our Executive Vice President, each owns 50%. Assuming the sale
of all of these shares, Mr. Lefkowitz will own 63,667 shares of common
stock and Mr. Rothstein will own 56,666 shares of common stock which is
less than 1% of our issued and outstanding shares.
(9) Represents shares of common stock issuable upon the exercise of warrants
at a price of $3.875 per share issued for consulting services.
(10) Includes an aggregate of 25,000 shares issuable upon the exercise of
warrants at prices ranging from $6.75 to $8.625.
(11) Represents shares of common stock issuable upon the exercise of warrants
at a price of $6.00 per share.
(12) Represents shares of common stock issuable upon the exercise of warrants
at a price of $2.00 per share.
(13) Represents shares of common stock issuable upon the exercise of warrants
at a price of $5.625 per share.
(14) Includes 400,000 shares to be issued as a commitment fee in connection
with the execution of an equity purchase agreement and an estimated
1,500,000 shares which are issuable upon conversion of the equity purchase
agreement which has a principal amount of $6,000,000. The equity purchase
agreement provides that Fusion Capital may not beneficially own in excess
of 4.99% of our outstanding common stock. See "The Fusion Transaction."
(15) Includes 500,000 shares to be issued in connection with a subscription
agreement and 200,000 shares issuable upon the exercise of warrants at
prices ranging from $5.25 to $7.00 issued in connection with a licensing
agreement.
(16) Includes 169,740 shares issuable upon the exercise of options. Mr. Taylor
is an Executive Vice-President and Chief Operating Officer of the Company.
(17) Includes 300,000 shares owned by International Broadcast Consultants,
Inc., a company of which Mr. Rothstein owns 50%. Also includes 102,500
shares issuable upon the exercise of options. Mr. Rothstein is Executive
Vice-President of Business Development for the Company.
(18) Includes 300,000 shares owned by International Broadcast Consultants,
Inc., a company of which Mr. Lefkowitz owns 50%. Also includes 287,500
shares issuable upon the exercise of options. Mr. Lefkowitz is a Director
and Executive Vice-President of the Company.
46
<PAGE>
CERTAIN 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.
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.
47
<PAGE>
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. 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. On April 24, 2000 and effective December 31, 1999, the agreement was
amended to reduce the number of possible performance shares to be issued from
665,000 to 335,000. The amendment further limited the period in which the
performance shares can be earned to September 30, 2003.
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.
On April 24, 2000, the Consulting Agreement was canceled. Under a
Termination and Settlement Agreement, the obligations of Ms. Trump referred to
in the Consulting Agreement as "Consultant's Duties", and likewise, the
obligations of the Company to pay Ms. Trump the consulting fees were terminated.
In addition, Ms. Trump waives any right she may have to the 700,000 shares of
the Company's common stock provided by the Consulting Agreement, and to the
possible issuance of 35,000 performance shares which she was entitled to receive
under certain conditions as per the Amended Share Exchange agreement dated April
24, 2000.
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."
AFFILIATE 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.
48
<PAGE>
DESCRIPTION OF SECURITIES
GENERAL
Our authorized capital stock consists of 50,000,000 shares of common
stock, par value $.001 per share, and 5,000,000 shares of preferred stock, par
value $.001 per share. As of the date of this prospectus, 12,769,564 shares of
common stock and no shares of preferred stock were outstanding. The transfer
agent for our common stock is Continental Stock Transfer & Trust Company, 2
Broadway, New York, New York 10004.
COMMON STOCK
We are authorized to issue 50,000,000 shares of common stock, $.001 par
value, of which 12,769,564 shares are issued and outstanding as of the date of
this prospectus. The issued and outstanding shares of common stock are fully
paid and non-assessable. Holders of common stock are entitled to one vote for
each share held of record on all matters submitted to a vote of stockholders and
may not cumulate their votes for the election of directors. Shares of common
stock are not redeemable, do not have any conversion or preemptive rights and
are not subject to further calls or assessments once fully paid.
Holders of common stock will be entitled to share pro rata in such
dividends and other distributions as may be declared from time to time by the
Board of Directors out of funds legally available therefore, subject to any
prior rights accruing to any holders of our preferred stock. Upon our
liquidation or dissolution, holders of shares of common stock will be entitled
to share proportionally in all assets available for distribution to such
holders.
PREFERRED STOCK
The Board of Directors has the authority, without further action by our
shareholders, to issue up to 5,000,000 shares of preferred stock, par value of
$.001 per share, in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption, liquidation preferences and the
number of shares constituting any series or the designation of such series. No
shares of preferred stock are currently issued and outstanding. The issuance of
preferred stock could adversely affect the voting power of holders of common
stock and could have the effect of delaying, deferring or preventing a change in
our control.
PURCHASE WARRANTS AND CONVERTIBLE DEBENTURES
The various exercise or conversion prices and the number of shares of
common stock purchasable upon the exercise of the warrants and conversion of
debentures, are subject to adjustment upon the occurrence of certain events,
including stock dividends, stock splits, combinations or reclassification of the
common stock. The warrants and the debentures do not confer upon holders any
voting or any other rights as our shareholders.
12% CONVERTIBLE DEBENTURES
In May 1998, we completed a private placement of 12% convertible
debentures in the principal amount of $595,000 to accredited investors. In
December 1999, these investors converted their debentures into common stock at a
conversion price of $2.00 per share and are listed as selling shareholders
herein. See "Selling Shareholders."
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<PAGE>
In November 1998, we completed a private placement of a 12% convertible
debenture in the principal amount of $500,000 to an accredited investor. In
December 1999, this investor elected to convert his debenture at a conversion
price of $2.50 per share and is listed as a selling shareholder herein. See
"Selling Shareholders."
IPO WARRANTS
In connection with our initial public offering, we sold 1,610,000
redeemable common stock purchase warrants for $.25 per warrant and certain
selling 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 us and Continental Stock Transfer & Trust Company as
warrant agent.
The warrants are subject to redemption by us upon 30 days' prior
written notice, at a price of $.25 per warrant, if the closing sale or bid price
per share of our 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.
UNDERWRITER'S WARRANTS AND UNDERWRITER'S STOCK WARRANTS
The 140,000 underwriter's warrants and the 100,000 underwriter's stock
warrants were issued to designees of our underwriter in our initial public
offering in May 1995.
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 holder to purchase one share of common stock at
an exercise price of $5.75 until May 3, 2000, and is subject to redemption by us
upon 30 days prior written notice at a price of $.25 per underlying warrant,
provided that the closing sale or bid price per share of our common stock equals
or exceeds 120% of the then current exercise price (initially $5.75, subject to
adjustment) to 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 the underwriter's stock warrants are exercisable until May 3, 2000.
CONSULTANT'S WARRANTS
The consultant's warrants were issued to Meyers, Pollock, Robbins,
Inc., our financial consultant, pursuant to a consulting agreement entered into
as of July 24, 1997. The consultant's warrants were subsequently assigned to
certain individuals. 500,000 of the consultant's warrants were previously
exercised.
EQUITY PURCHASE AGREEMENT
On March 29, 2000, 5th Avenue Channel executed a master facility
agreement with Fusion Capital Fund II, LLC ("Fusion Capital") pursuant to which
it agreed to issue to Fusion Capital up to two equity purchase agreements, each
with an aggregate principal amount of $6,000,000. On April 25, 2000, we entered
into an amended and restated master facility agreement with Fusion Capital.
Under the amended and restated master facility agreement, each equity purchase
agreement will be convertible into shares of common stock of 5th Avenue Channel
at a price equal to the lesser of (1) 140% of the average of the closing bid
prices for our common stock during the 10 trading days prior to issuance of the
equity purchase agreement (in the case of the first equity purchase agreement
only, this shall not be less than $8.25) or (2) a price based upon the future
performance of the common stock, in each case without any fixed discount to the
market price.
The first equity purchase agreement will be issued to Fusion Capital
within five business days after the date of this prospectus. This date is
referred to as the "closing date." The second equity
50
<PAGE>
purchase agreement will be issued after delivery of an irrevocable written
notice by us to Fusion Capital stating that we elect to issue the second equity
purchase agreement to Fusion Capital. This notice may be given no later than the
10 trading days after the date that the first equity purchase agreement is no
longer outstanding. The obligation of Fusion Capital to execute the equity
purchase agreements is subject only to customary closing conditions, all of
which are outside the control of Fusion Capital.
Upon conversion of the first equity purchase agreement into shares of
common stock, Fusion Capital will send to 5th Avenue Channel, in cash, the
aggregate principal amount converted. On the closing date, Fusion Capital will
advance $500,000 to 5th Avenue Channel. This amount will be credited against the
first $500,000 aggregate principal amount of the equity purchase amount that is
converted into common stock of 5th Avenue Channel.
CERTAIN ANTI-TAKEOVER EFFECTS
Florida has enacted legislation that may deter or frustrate takeovers
of Florida corporations. The Florida Control Share Act generally provides that
shares acquired in excess of certain specified thresholds will not possess any
voting rights unless such voting rights are approved by a majority vote of a
corporation's disinterested shareholders. The Florida Affiliated Transactions
Act generally requires supermajority approval by disinterested shareholders of
certain specified transactions between a public corporation and holders of more
than 10% of the outstanding voting shares of the corporation (or their
affiliates). Florida law and our Articles of Incorporation also authorize us to
indemnify our directors, officers, employees and agents.
Additionally, the authority possessed by the Board of Directors to
issue preferred stock could potentially be used to discourage attempts by others
to obtain control of us through merger, tender offer, proxy contest or otherwise
by making such attempts more difficult to achieve or more costly. The Board of
Directors may issue preferred stock with voting and conversion rights that could
adversely affect the voting power of the holders of common stock. Except as
described above, there are no agreements or understandings for the issuance of
preferred stock and the Board of Directors has no intention to issue additional
series of preferred stock as of the date of this prospectus.
SHARES ELIGIBLE FOR FUTURE SALE
Of the 12,769,564 shares currently outstanding, 6,285,212 shares are
owned by our affiliates, as that term is defined under the Securities Act.
Absent registration under the Securities Act, such as the shares being offered
by selling shareholders herein, the sale of these shares is subject to Rule 144.
Under Rule 144, if certain conditions are satisfied, a person (including any of
our affiliates) who has beneficially owned restricted shares of common stock for
at least one year is entitled to sell within any three-month period a number of
shares up to the greater of 1% of the total number of outstanding shares of
common stock, or if the common stock is quoted on Nasdaq, the average weekly
trading volume during the four calendar weeks preceding the sale. A person who
has not been an affiliate of us for at least three months immediately preceding
the sale, and who has beneficially owned the shares of Common Stock for at least
two years, is entitled to sell the shares under Rule 144 without regard to any
of the volume limitations described above.
No prediction can be made as to the effect, if any, that sales of
shares or the availability of shares for sale as described above will have on
the market prices of the common stock prevailing from time to time.
Nevertheless, the possibility that substantial amounts of common stock may be
sold in the public market may adversely affect prevailing prices for the common
stock and could impair our ability to raise capital in the future through the
sale of equity securities. See "Risk Factors -- Future sales of common stock
could depress the price of our common stock."
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<PAGE>
PLAN OF DISTRIBUTION
The common stock offered by this prospectus is being offered by the
selling shareholders. The common stock may be sold or distributed from time to
time by the selling shareholders, or by donees or transferees of, or other
successors in interests to, the selling shareholders, directly to one or more
purchasers or through brokers, dealers or underwriters who may act solely as
agents or may acquire such common stock as principals, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices, at negotiated prices, or at fixed prices, which may be changed. The sale
of the common stock offered by this prospectus may be effected in one or more of
the following methods:
o ordinary brokers' transactions;
o transactions involving cross or block trades or otherwise on the
Nasdaq SmallCap Market;
o purchases by brokers, dealers or underwriters as principal and resale
by such purchasers for their own accounts pursuant to this
prospectus;
o "at the market" to or through market makers or into an existing
market for the common stock;
o in other ways not involving market makers or established trading
markets, including direct sales to purchasers or sales effected
through agents;
o in privately negotiated transactions; or
o any combination of the foregoing.
In order to comply with the securities laws of certain states, if
applicable, the shares may be sold only through registered or licensed brokers
or dealers. In addition, in certain states, the shares may not be sold unless
they have been registered or qualified for sale in such state or an exemption
from such registration or qualification requirement is available and complied
with.
Brokers, dealers, underwriters or agents participating in the
distribution of the shares as agents may receive compensation in the form of
commissions, discounts or concessions from the selling shareholders and/or
purchasers of the common stock for whom such broker-dealers may act as agent, or
to whom they may sell as principal, or both. The compensation paid to a
particular broker-dealer may be less than or in excess of customary commissions.
Fusion Capital is an "underwriter" within the meaning of Section 2(11)
of the Securities Act of 1933. The other selling shareholders may be deemed to
be "underwriters" within the meaning of Section 2(11) of the Securities Act .
Therefore, they will be subject to prospectus delivery requirements under the
Securities Act. Any broker-dealers who act in connection with the sale of the
shares hereunder may be deemed to be "underwriters" within the meaning of the
Securities Act, and any commissions they receive and proceeds of any sale of the
shares may be deemed to be underwriting discounts and commissions under the
Securities Act.
Neither us nor any selling shareholder can presently estimate the
amount of compensation that any agent will receive. We know of no existing
arrangements between any selling shareholder, any other shareholder, broker,
dealer, underwriter or agent relating to the sale or distribution of the shares.
At a time particular offer of shares is made, a prospectus supplement, if
required, will be distributed that will set forth the names of any agents,
underwriters or dealers and any compensation from the selling shareholders and
any other required information.
52
<PAGE>
We will pay all of the expenses incident to the registration, offering
and sale of the shares to the public, estimated to be approximately $68,400, but
will not pay commissions and discounts, if any, of underwriters, broker-dealers
or agents, or counsel fees or other expenses of the selling shareholders. We
have also agreed to indemnify the selling shareholders and related persons
against specified liabilities, including liabilities under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling persons, we have
been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is therefore,
unenforceable.
FUSION CAPITAL AND ITS AFFILIATES HAVE AGREED NOT TO ENGAGE IN ANY
DIRECT OR INDIRECT SHORT SELLING OR HEDGING OF OUR COMMON STOCK DURING THE TERM
OF THE EQUITY PURCHASE AGREEMENT.
We have advised the selling shareholders that while they are engaged in
a distribution of the shares included in this prospectus they are required to
comply with Regulation M promulgated under the Securities Exchange Act of 1934,
as amended. With certain exceptions, Regulation M precludes the selling
shareholders, any affiliated purchasers, and any broker-dealer or other person
who participates in such distribution from bidding for or purchasing, or
attempting to induce any person to bid for or purchase any security which is the
subject of the distribution until the entire distribution is complete.
Regulation M also prohibits any bids or purchases made in order to stabilize the
price of a security in connection with the distribution of that security. All of
the foregoing may affect the marketability of the shares offered hereby this
prospectus.
This offering will terminate on the earlier of (1) the date on which
the shares are eligible for resale without restrictions pursuant to Rule 144(k)
under the Securities Act or (2) the date on which all shares offered by this
prospectus have been sold by the selling shareholders.
53
<PAGE>
LEGAL MATTERS
Broad and Cassel, a partnership including professional associations,
Miami, Florida, will give an opinion for us regarding the validity of the common
stock offered in this prospectus.
EXPERTS
Rachlin Cohen & Holtz, LLP, independent certified public accountants,
have audited our consolidated financial statements at December 31, 1999 and 1998
and for the two years then ended as set forth in their report (which contains an
explanatory paragraph regarding certain liquidity and profitability
considerations). We have included our consolidated financial statements in the
registration statement, in reliance on Rachlin Cohen & Holtz's report given on
its authority as an expert in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form SB-2 with the Securities
and Exchange Commission in connection with this offering. This prospectus does
not contain all of the information set forth in the registration statement, as
permitted by the Rules and Regulations of the Securities and Exchange
Commission. Whenever reference is made in this prospectus to any contract or
other document of ours, the reference may not be complete and you should refer
to the exhibits that are part of the registration statement for a copy of the
contract or document.
We also file annual, quarterly and current reports and other
information with the Securities and Exchange Commission. You may read and copy
any report or document we file, and the registration statement, including the
exhibits, may be inspected at the Securities and Exchange Commission's public
reference room located at 450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the Securities and Exchange Commission at 1-800-SEC-0330 for further
information on the public reference rooms. Our Securities and Exchange
Commission filings are also available to the public from the SEC's website at:
HTTP://WWW.SEC.GOV.
54
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Certified Public Accountants F-1
Balance Sheet as of December 31, 1999 F-2
Statements of Operations for the Years Ended December 31, 1999 and 1998 F-3
Statements of Stockholders' Equity
for the Years Ended December 31, 1999 and 1998 F-4
Statements of Cash Flows for the Years Ended December 31, 1999 and 1998 F-5
Notes to Financial Statements F-6
<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 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>
DECEMBER 31,
1999
------------
<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 and Chairman of the Board ...................... 450,000
Current portion of long-term debt ......................................... 87,433
Loans payable, related parties ............................................ 55,081
Loans payable, President and 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
------------
Stockholders' Equity:
Preferred stock, $.001 par value, 5,000,000 shares authorized; 500 shares
designated as Series A; none issued and outstanding; 1500 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
1999 1998
----------- -----------
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)
=========== ===========
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>
ADDITIONAL TOTAL
COMMON PAID-IN STOCKHOLDERS'
STOCK AMOUNT CAPITAL DEFICIT EQUITY
---------- ------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1998 4,009,643 $ 4,010 $ 8,171,457 $ (5,508,611) $ 2,666,856
Year Ended December 31, 1998
Issuance of common stock in payment of consulting
fees............................................ 26,000 26 86,600 -- 86,626
Issuance of common stock in settlement of debt . 82,500 82 99,554 -- 99,636
Exercise of warrants............................ 50,000 50 49,950 -- 50,000
Issuance of common stock in connection with
acquisition of 5th Avenue Channel............... 335,000 335 614,665 -- 615,000
Discount on subordinated convertible debenture -- -- 920,000 -- 920,000
Net loss........................................ -- -- -- (3,297,941) (3,297,941)
---------- ------- ----------- ------------- -----------
Balance, December 31, 1998 4,503,143 4,503 9,942,226 (8,806,552) 1,140,177
Year Ended December 31, 1999
Sale of common stock, net of fees............... 2,125,000 2,125 4,777,518 -- 4,779,643
Conversion of convertible debentures, net fees.. 4,732,000 4,732 2,350,418 -- 2,355,150
Conversion of subordinated convertible debentures 554,559 555 1,219,562 -- 1,220,117
Issuance of common stock in connection with
acquisition of International Broadcast
Consultants of America, Inc..................... 300,000 300 1,723,800 -- 1,724,100
Issuance of options in payment of consulting fees -- -- 218,763 -- 218,763
Issuance of options to Director................. -- -- 45,268 -- 45,268
Net loss........................................ -- -- -- (5,178,003) $(5,178,003)
---------- ------- ----------- ------------ -----------
Balance, December 31, 1999 12,214,702 $12,215 $20,277,555 $(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 the 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 debenture - 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 a 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>
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 primarily 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>
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>
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>
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>
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.
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
F-11
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
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.
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.
F-12
<PAGE>
NOTE 2. LIQUIDITY AND PROFITABILITY CONSIDERATIONS (Continued)
LIQUIDITY (Continued)
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 NetVideoNetworks 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.
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.
F-13
<PAGE>
NOTE 2. LIQUIDITY AND PROFITABILITY CONSIDERATIONS (Continued)
PROFITABILITY (Continued)
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.
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.
F-14
<PAGE>
NOTE 3. BUSINESS ACQUISITIONS (Continued)
CONSULTING AGREEMENT
As an integral part of the acquisition of 5th Avenue Channel, the
Company entered into a Consulting Agreement with Ivana Trump for
"on air" marketing and other promotional services. Ms. Trump 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 a 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 of 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.
A summary of the allocation of the $2,174,000 purchase price to the
net assets acquired is as follows:
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
==========
F-15
<PAGE>
NOTE 3. BUSINESS ACQUISITIONS (Continued)
SUMMARY OF GOODWILL
5th Avenue Channel, Inc. $ 615,000
IBC 1,698,848
----------
2,313,848
Less accumulated amortization 235,556
----------
$2,078,292
==========
NOTE 4. PROPERTY AND EQUIPMENT
ESTIMATED USEFUL
LIVES (YEARS)
----------------
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
==========
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.
NOTE 5. LICENSES
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
==========
Amortization expense was $319,164 and $319,697 for 1999 and 1998,
respectively.
F-16
<PAGE>
NOTE 5. LICENSES (Continued)
UNITED STATES LICENSES
During 1993, the Company entered into agreements for the lease and
purchase of certain channel licenses and for the lease and purchase
of transmitting equipment and tower site usage in LaCrosse,
Wisconsin. Pursuant to the agreements, the Company incurred
$371,493 of costs related to the channel licenses.
On March 28, 1996, the Federal Communications Commission (FCC)
completed its auction of authorizations to provide single channel
and Multi-Channel Multi-Point Distribution Service (MDS) in 493
Basic Trading Areas. The Company won bids in three markets:
Hickory-Lenoir-Morganton, NC; Wausau-Rhinelander, WI; and Stevens
Point-Marchfield-Wisconsin Rapids, WI. The Company's total bid for
these three markets was $3,046,212. The Company made the full 10%
down payment of $304,622 for all three markets but only made the
second 10% down payment of $118,946 on the two Wisconsin markets.
On July 24, 1998, the Company received written notification from
the FCC that the two Wisconsin licenses had been conditionally
granted, subject to the making of required installment payments,
effective as of July 25, 1997. In connection therewith, the Company
elected to participate in the installment payment plan, and two
installment payment plan notes were entered into in the total
amount of $951,479. The terms of these notes provide for the
payment of interest only at 9.125%, aggregating $115,260, through
October 31, 1998, and thereafter $21,702 on a quarterly basis until
July 31, 1999; commencing on October 31, 1999, quarterly payments
of principal and interest, aggregating $42,211, are required
through the maturity date of July 25, 2007. The Company has granted
the FCC a first lien on and security interest in all of the rights
and interest in the two Wisconsin licenses and all proceeds of any
sale or other disposition thereof.
The Company has accrued, but has not paid, the required interest
payment of $115,620, 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 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 notice 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.
F-17
<PAGE>
NOTE 5. LICENSES (Continued)
UNITED STATES LICENSES (Continued)
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.
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.
F-18
<PAGE>
NOTE 5. LICENSES (Continued)
COSTA RICA LICENSES (Continued)
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.
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.
F-19
<PAGE>
NOTE 7. LOAN RESTRUCTURE (Continued)
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
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
========
NOTE 9. LOANS PAYABLE, RELATED PARTIES
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
==========
F-20
<PAGE>
NOTE 9. LOANS PAYABLE, RELATED PARTIES (Continued)
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.
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
==========
F-21
<PAGE>
NOTE 10. COMMITMENTS AND CONTINGENCIES (Continued)
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.
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.
F-22
<PAGE>
NOTE 11. CONVERTIBLE SUBORDINATED DEBENTURES (Continued)
MAY DEBENTURES (Continued)
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.
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.
F-23
<PAGE>
NOTE 12. COMMON STOCK (Continued)
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.
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.
F-24
<PAGE>
NOTE 13. STOCK WARRANTS, CONSULTING AGREEMENTS AND SHARES RESERVED (Continued)
UNDERWRITER'S WARRANTS AND UNDERWRITER'S STOCK WARRANTS (Continued)
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
includes options and warrants that are exercisable within 60 days
of March 27, 2000.
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.
F-25
<PAGE>
NOTE 14. STOCK OPTION PLAN (Continued)
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.
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:
1999 1998
----------- -----------
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)
F-26
<PAGE>
NOTE 14. STOCK OPTION PLAN (Continued)
A summary of the status of options under this plan and additional
options granted outside of the plan as of December 31, 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>
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
RANGE NUMBER AVERAGE AVERAGE NUMBER EXERCISABLE AT AVERAGE
OF EXERCISE OUTSTANDING AT REMAINING EXERCISE DECEMBER 31, EXERCISE
PRICES DECEMBER 31, 1999 CONTRACTUAL LIFE PRICE 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>
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:
1999 1998
---- ----
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)
=========== ===========
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>
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:
Product sales
Wireless cable television services:
Costa Rica
Wisconsin
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>
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>
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 of IBC (219,000) - (739,000) 520,000
Adjustment of Property 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>
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>
NOTE 20. SUBSEQUENT EVENTS (Continued)
TELEVISION CONTENT AGREEMENTS
Subsequent to year end, the Company 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>
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 INTENT
On March 27, 2000, the Company entered into a letter 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>
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. 268,000 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 exercise 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
renegotiated 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
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article VIII of the Company's Amended and Restated Articles of
Incorporation provides that the Company shall indemnify its officers and
directors to the fullest extent permitted by law.
The Company's Bylaws and the Florida Business Corporation Act provide
for indemnification of directors and officers against certain liabilities.
Pursuant to the Company's Bylaws, officers and directors of the Company are
indemnified, to the fullest extent available under Florida law, against expenses
actually and reasonably incurred in connection with threatened, pending or
completed proceedings, whether civil, criminal or administrative, to which an
officer or director is, was or is threatened to be made a party by reason of the
fact that he or she is or was an officer, director, employee or agent of the
Company. The Company may advance expenses in connection with defending any such
proceeding, provided the indemnitee undertakes to repay any such amounts if it
is later determined that he or she was not entitled to be indemnified by the
Company.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Company estimates that its expenses in connection with this
Registration Statement will be as follows:
SEC registration fee........................................ $ 5,700
Legal fees and expenses..................................... $ 40,000
Accounting fees and expenses................................ $ 15,000
Miscellaneous............................................... $ 7,700
--------
Total....................................................... $ 68,400
========
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
During the past three years the following shares were sold by us
without registration under the Securities Act. No commissions were paid in
connection with any of the following transactions.
1997. On March 14, 1997, we sold 100 shares of our Series B Convertible
Preferred Stock to Aurora Capital for $100,000. On September 16, 1997, the 100
shares of Series B Convertible Preferred Stock and 200 shares of outstanding
Series A Convertible Preferred Stock issued in 1996 were converted into
1,183,431 shares of our common stock. These securities were issued pursuant to
an exemption from registration provided by section 4(2) of the Securities Act.
On May 19, 1997 we entered into an agreement with Melvin Rosen to
restructure a $2,000,000 note issued to him in the acquisition of Channel 19, a
company he owned, 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 Mr. Rosen at the issue date of
the debenture. As consideration for this debt restructuring, we agreed to issue
to Mr. Rosen (i) 180,000 shares of 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 our common stock at $5.00 per share. These securities were issued
pursuant to an exemption from registration provided by section 4(2) of the
Securities Act.
In July 1997, we entered into a two-year consulting agreement with an
investment banking firm and granted the investment bankers 500,000 one-year
warrant exercisable at $1.00 per share, 200,000 one-year warrants exercisable at
$2.50 per share, and 100,000 three-year warrants exercisable at $2.50 per share.
In October 1997, assignees of the investment banker exercised 450,000 of the
one-year warrants at
II-1
<PAGE>
$1.00 per share. The securities were issued pursuant to an exemption from
registration provided by Section 4(2) of the Securities Act.
1998. During 1998 we issued a total of 26,000 shares of our common
stock for consulting services and 7,500 shares in payment of legal services. The
securities were issued pursuant to an exemption from registration provided by
Section 4(2) of the Securities Act.
During 1998 a note payable in the principal amount of $50,000 and
accrued interest was converted into 75,000 shares of our common stock. The
securities were issued pursuant to an exemption from registration provided by
Section 4(2) of the Securities Act.
In May 1998, we sold $595,000 of 12% Convertible Subordinated
Debentures due on October 31, 1999. The debentures were converted into 297,500
shares of our common stock at $2.00 per share in December 1999. The securities
were issued pursuant to an exemption from registration provided by Section 4(2)
of the Securities Act.
In July 1998 the remaining 50,000 one-year warrants issued to the
investment banker at $1.00 per share were converted into 50,000 shares of common
stock. The securities were issued pursuant to an exemption from registration
provided by Section 4(2) of the Securities Act.
In November 1998, we sold a $500,000 12% Convertible Subordinated
Debenture due on April 30, 2000. This debenture was converted into 200,000
shares of common stock at $2.50 per share. An additional 22,000 shares were also
issued in lieu of accrued interest. These securities were issued pursuant to an
exemption from registration provided by Section 4(2) of the Securities Act.
In a share exchange agreement effective December 10, 1998, we completed
the acquisition of the Fifth Avenue Channel, Inc. (the "5th Avenue Channel").
Under the Agreement and pursuant to Section 4(2) of the Securities Act, we
exchanged 335,000 shares of our common stock for 100% of the outstanding Common
Stock of 5th Avenue Channel. In connection with this transaction, Ms. Ivana
Trump received options to purchase 700,000 shares at various exercise prices
ranging from $5.00 to $15.00 per share. The options expire in December 2001.
These securities were issued pursuant to an exemption from registration provided
by Section 4(2) of the Securities Act.
1999. In 1999, we issued 300,000 shares of our common stock in
connection with the acquisition of International Broadcast Consultants of
America, Inc. These securities were issued pursuant to an exemption from
registration provided by Section 4(2) of the Securities Act.
In January 1999, Mr. Rosen converted a portion of his debenture into
2,366,000 shares of our common stock in January 1999 and converted the remainder
of the debenture into an additional 2,366,000 shares in March 1999. These
securities were issued pursuant to an exemption from registration provided by
Section 4(2) of the Securities Act.
On June 29, 1999, we sold 125,000 shares of our common stock for
$500,000. We also agreed to issue three-year warrants to purchase 15,000 shares
of common stock at an exercise price of $5.00 per share and 5,000 shares of
common stock at an exercise price of $6.00 per share. These securities were
issued pursuant to an exemption from registration provided by Section 4(2) of
the Securities Act.
In November 1999 we issued sold a total of 2,000,000 shares of common
stock in consideration for $4,612,500 in the aggregate. These securities were
issued pursuant to an exemption from registration provided by Section 4(2) of
the Securities Act.
2000. In March 2000, we entered into a master facility agreement with
an investment company. The agreement was amended and restated in April 2000 and
provides for 400,000 shares to be issued as a commitment fee and up to 1,500,000
to be issued upon the conversion of an equity purchase agreement in the
aggregate principal amount of $6,000,000. These
II-2
<PAGE>
securities were issued pursuant to an exemption from registration provided by
Section 4(2) of the Securities Act.
In March 2000, we entered into a subscription agreement for the sale of
500,000 shares of our common stock at a price of $4.00 per share. These
securities were issued pursuant to an exemption from registration provided by
Section 4(2) of the Securities Act.
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.(6)
(5.1) Opinion of Broad and Cassel.(7)
(10.1) Debt Restructuring Agreement by and between the Company and
Melvin Rosen dated May 19, 1997.(8)
(10.2) Secured Convertible Debenture.(9)
(10.3) Agreement to Convert the Secured Convertible Debenture(10)
(10.4) Consulting Agreement between the Company, Ivana Trump and
Melvin Rosen, effective November 5, 1998 dated February 28,
1999.(11)
(10.5) Lease Agreement between Intracoastal Pacific Limited
Partnership, the Company and International Broadcast
Consultants of America, Inc. dated May 8, 1998.(12)
(10.6) Employment Agreement with Michael Tedesco dated April
1999.(13)
(10.7) Employment Agreement with Adam Taylor effective January 5,
1999, but entered into August 3, 1999.(14)
(10.8) Employment Agreement with Eric Lefkowitz dated May 10,
1999.(15)
(10.9) Exclusive Television Broadcast and Information Licensing
Agreement between the Company and Zacks Investments Research,
Inc. dated August 24, 1999.(16)
(10.10) Broadcast Agreement between the Company and The Comcast
Network dated September 22, 1999.(17)
(10.11) Stock Option Plan.(18)
(10.12) Agreement with Signature Products, Inc.(19)
(10.13) Master Facility Agreement by and between the Company and
Fusion Capital Fund II, LLC dated as of March 29, 2000.(20)
(10.14) License Agreement between the Company and Point Video
Advertising Inc. dated March 27, 2000.(21)
(10.15) Affiliation and Co-Marketing Agreement between the Company and
Key Trade, Inc. effective as of May 1999.(22)
(10.16) Subscription Agreement between the Company and Florida Pointe,
Inc. dated March 21, 2000.(23)
(10.17) Carriage Agreement by and between the Company and Comcast
Cable Communications, Inc. dated March 23, 2000.(24)
(10.18) Co-Marketing Agreement between the Company and Infocall
Communication Corp. dated March 14, 2000.(25)
(10.19) Programming inclusion between the Company and America's Voice,
Inc. dated March 2, 2000.(26)
II-3
<PAGE>
(10.20) Facility Use and Production Personnel Agreement between
Globecast North America Incorporated and 5th Avenue Channel
Corp. dated January 10, 2000.(27)
(10.21) Employment Agreement with Melvin Rosen dated January 1,
2000.(28)
(10.22) Employment Agreement with Eric Lefkowitz dated January 1,
2000.(29)
(10.23) Employment Agreement with Ivan Rothstein dated January 1,
2000.(30)
(10.24) Employment Agreement with Adam Taylor dated January 1,
2000.(31)
(10.25) Employment Agreement with Joseph Andrew Tomkiewicz dated March
22, 2000.(32)
(10.26) Settlement Agreement and Mutual Release between Comcast Cable
Communications, Inc. and 5th Avenue Channel dated March 23,
2000.(33)
(10.27) License and Production Agreement between the company and IPO
Financial dated March 16, 2000.(34)
(10.28) Amendment to Share Exchange Agreement by and among the
Company, IBC Partners, Melvin Roden and Ivana Trump dated
December 30, 1999.*
(10.29) Amended Master Facility Agreement by and between the Company
and Fusion Capital Fund II, LLC. dated April 25, 2000*
(16.1) Letter on Change in Certifying Accountants.(35)
(21.1) Subsidiaries of Registrant.(36)
(23.1) Consent of Rachlin Cohen & Holtz, LLP.*
(23.3) Consent of Broad and Cassel (included in Exhibit 5.1).
(99.1) Financial Statements of International Broadcast Consultants of
America, Inc.(37)
(99.2) Pro Forma Financial Statements giving effect to the
acquisition of certain assets of International Broadcast
Consultants of America, Inc.(38)
- ------------
* 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 Exhibit 4.1 filed with the Company's
Registration Statement on Form SB-2, File No. 333-95557, filed on January
28, 2000.
(6) Incorporated by reference from Exhibit 4.2 filed with the Company's
Registration Statement on Form SB-2, File No. 333-95557, filed on January
28, 2000.
(7) Incorporated by reference from Exhibit 5.1 filed with the Company's
Registration Statement on Form SB-2, File No. 333-95557, filed on January
28, 2000.
(8) Incorporated by reference from Exhibit 10.1 filed with the Company's
Current Report on Form 8-K filed May 29, 1997.
(9) Incorporated by reference from Exhibit 10.2 filed with the Company's
Current Report on Form 8-K filed May 29, 1997.
(10) Incorporated by reference from Exhibit 10.3 filed with the Company's Annual
Report on Form 10-KSB filed April 15, 1998.
(11) Incorporated by reference from Exhibits 10.4 filed with the Company's
Current Report on Form 8-K filed March 25, 1999.
II-4
<PAGE>
(12) Incorporated by reference from Exhibit 10.5 filed with the Company's
Registration Statement on Form SB-2, File No. 333-95557, filed on January
28, 2000.
(13) Incorporated by reference from Exhibit 10.6 filed with the Company's
Registration Statement on Form SB-2, File No. 333-95557, filed on January
28, 2000.
(14) Incorporated by reference from Exhibit 10.7 filed with the Company's
Registration Statement on Form SB-2, File No. 333-95557, filed on January
28, 2000.
(15) Incorporated by reference from Exhibit 10.8 filed with the Company's
Registration Statement on Form SB-2, File No. 333-95557, filed on January
28, 2000.
(16) Incorporated by reference from Exhibit 10.9 filed with the Company's
Registration Statement on Form SB-2, File No. 333-95557, filed on January
28, 2000.
(17) Incorporated by reference from Exhibit 10.10 filed with the Company's
Registration Statement on Form SB-2, File No. 333-95557, filed on January
28, 2000.
(18) Incorporated by reference from Exhibit 10.11 filed with the Company's
Registration Statement on Form SB-2, File No. 333-95557, filed on January
28, 2000.
(19) Incorporated by reference from Exhibit 10.12 filed with the Company's
Current Report on Form 8-K filed February 25, 1999.
(20) Incorporated by reference from Exhibit 10.13 filed with the Company's
Amendment to its Registration Statement on Form SB-2, file No. 333-95557,
filed on April 18, 2000.
(21) Incorporated by reference from Exhibit 10.14 filed with the Company's
Amendment to its Registration Statement on Form SB-2, file No. 333-95557,
filed on April 18, 2000.
(22) Incorporated by reference from Exhibit 10.15 filed with the Company's
Amendment to its Registration Statement on Form SB-2, file No. 333-95557,
filed on April 18, 2000.
(23) Incorporated by reference from Exhibit 10.16 filed with the Company's
Amendment to its Registration Statement on Form SB-2, file No. 333-95557,
filed on April 18, 2000.
(24) Incorporated by reference from Exhibit 10.17 filed with the Company's
Amendment to its Registration Statement on Form SB-2, file No. 333-95557,
filed on April 18, 2000.
(25) Incorporated by reference from Exhibit 10.18 filed with the Company's
Amendment to its Registration Statement on Form SB-2, file No. 333-95557,
filed on April 18, 2000.
(26) Incorporated by reference from Exhibit 10.19 filed with the Company's
Amendment to its Registration Statement on Form SB-2, file No. 333-95557,
filed on April 18, 2000.
(27) Incorporated by reference from Exhibit 10.20 filed with the Company's
Amendment to its Registration Statement on Form SB-2, file No. 333-95557,
filed on April 18, 2000.
(28) Incorporated by reference from Exhibit 10.21 filed with the Company's
Amendment to its Registration Statement on Form SB-2, file No. 333-95557,
filed on April 18, 2000.
(29) Incorporated by reference from Exhibit 10.22 filed with the Company's
Amendment to its Registration Statement on Form SB-2, file No. 333-95557,
filed on April 18, 2000.
(30) Incorporated by reference from Exhibit 10.23 filed with the Company's
Amendment to its Registration Statement on Form SB-2, file No. 333-95557,
filed on April 18, 2000.
(31) Incorporated by reference from Exhibit 10.24 filed with the Company's
Amendment to its Registration Statement on Form SB-2, file No. 333-95557,
filed on April 18, 2000.
(32) Incorporated by reference from Exhibit 10.25 filed with the Company's
Amendment to its Registration Statement on Form SB-2, file No. 333-95557,
filed on April 18, 2000.
(33) Incorporated by reference from Exhibit 10.26 filed with the Company's
Amendment to its Registration Statement on Form SB-2, file No. 333-95557,
filed on April 18, 2000.
(34) Incorporated by reference from Exhibit 10.27 filed with the Company's
Amendment to its Registration Statement on Form SB-2, file No. 333-95557,
filed on April 18, 2000.
(35) Incorporated by referenced from Exhibit 16.1 filed with the Company's
Current Report on Form 8-K filed February 25, 1999.
(36) Incorporated by reference from Exhibit 21.1 filed with the Company's Annual
Report on Form 10-KSB filed April 23, 1999.
(37) Incorporated by reference from Exhibit 99.1 filed with the Company's
Current Report on Form 8-K filed December 27, 1999.
(38) 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.
ITEM 28. UNDERTAKINGS.
RULE 415 OFFERING. The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement to: (i) include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii)
reflect in the prospectus any facts or events which, individually or together,
represent a fundamental change in the information set forth in the Registration
Statement; and (iii) include any additional or changed material information in
the plan of distribution.
(2) For determining liability under the Securities Act of 1933, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
Offering.
II-5
<PAGE>
REQUEST FOR ACCELERATION OF EFFECTIVE DATE. Insofar as indemnification for
liabilities arising under the Securities Act of 1933, as amended (the "Act"),
may be permitted to directors, officers or persons controlling the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-6
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing this Registration Statement Form SB-2 and
authorizes this Registration Statement to be signed on its behalf by the
undersigned, in the City of North Miami Beach in the State of Florida on the 18
day of April, 2000.
5TH AVENUE CHANNEL CORPORATION
By: /S/ MELVIN ROSEN
-------------------------------------------------
Melvin Rosen, Chairman of the Board and President
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated below.
SIGNATURE TITLE DATE
--------- ----- ----
/S/ MELVIN ROSEN Chairman of the Board April 26, 2000
- -------------------------- and President
Melvin Rosen (Principal Executive Officer)
/S/ DOMINIQUE SADA* Executive Vice President, and April 26, 2000
- -------------------------- Chief Financial Officer
Dominique Sada (Principal Financial Officer and
Accounting Officer)
/S/ ERIC LEFKOWITZ* Director April 26, 2000
- --------------------------
Eric Lefkowitz
/S/ DENNIS J. DEVLIN* Director April 26, 2000
- --------------------------
Dennis J. Devlin
/S/ SCOTT HOUSEFIELD* Director April 26, 2000
- --------------------------
Scott Housefield
Director April __, 2000
- --------------------------
Larry Weinstein
Director April __, 2000
- --------------------------
Nick van der Linden
ATTORNEY-IN-FACT
April 26, 2000
/S/ MELVIN ROSEN
- --------------------------
Melvin Rosen
II-7
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
(10.28) Amendment to Share Exchange Agreement by and among the Company, IBC
Partners, Melvin Rosen and Ivana Trump dated December 30, 1999.*
(10.29) Amended and Restated Master Facility Agreement by and between the
Company and Fusion Capital Fund II, LLC. dated April 25, 2000*
(23.1) Consent of Rachlin Cohen & Holtz, LLP.
EXHIBIT 10.28
AMENDMENT TO SHARE EXCHANGE AGREEMENT
THIS AMENDMENT TO SHARE EXCHANGE AGREEMENT (this "Amendment") dated as
of December 30, 1999, is made by and among Tel-Com Wireless Cable TV
Corporation, a Florida corporation ("Tel-Com"), IBC Partners, a Florida general
partnership, Melvin Rosen and Ivana Trump to amend the Share Exchange Agreement
by and among such parties, dated February 28, 1999 to be effective as of
December 10, 1998 (the "Agreement"), as amended as of March 8, 1999.
WITNESSETH:
WHEREAS, the Agreement contains defined terms that are used herein, and
any such terms used in this Amendment that are not separately defined herein
shall have the same meaning as in the initial text of the Agreement;
WHEREAS, in entering into the Agreement, the parties intended that the
Exchange shall qualify as a tax-free reorganization under Section 368(a)(1)(B)
of the Internal Revenue Code of 1986, as amended;
WHEREAS, as set forth in the Agreement, the parties had agreed to
provide for the issuance of Performance Shares due to the difficulty in
determining the value of 5th Avenue and the 5th Avenue Common Stock;
WHEREAS, in Revenue Procedure 84-42, the Internal Revenue Service
provided an advance ruling guideline, which requires that the number of
performance-based shares to be limited to the number of initial shares, that all
performance-based shares issued within 5 years of the exchange, and that,
generally, the right to receive performance-based shares not be assignable; and
<PAGE>
WHEREAS, the, parties would like to incorporate the advance ruling
guidelines of Revenue Procedure 84-42 into their Agreement;
NOW, THEREFORE, in consideration of the payment of ten dollars ($10.00)
by the Sellers to Tel-Com, and other good and valuable consideration, the
receipt and sufficiency of which are acknowledged, the parties hereto agree as
follows:
The third WHEREAS clause of the Agreement is amended by changing
"665,000" to "335,000," and "1,000,000" to "670,000."
Section 1 of the Agreement (captioned "EXCHANGE OF SHARES") is hereby
amended by eliminating the text following clause (i) thereof, and replacing such
text by (ii) below, which new text hereby is incorporated into and deemed to be
a part of such Section 1:
(ii) If in any calendar quarter ending on or before September
30, 2003, the 5th Avenue Channel. achieves either gross
revenues in excess of $10,000,000 or net income in excess of
$1,000,000, all 335,000 Performance Shares shall be
transferred from Tel-Com to the Sellers within thirty days of
the close of such quarter. The 335,000 Performance Shares
shall be issued as follows: 218,833 Performance Shares to
Melvin Rosen, 32,000 Performance Shares to Ivana Trump, and
84,167 Performance Shares to IBC Partners. The right to
receive Performance Shares shall expire if the 5th Avenue
Channel has not achieved gross revenues in excess of
$10,000,000 or net income in excess of $1,000,000 in any
calendar quarter ending on or before September 30, 2003. The
Sellers' right
2
<PAGE>
to receive these additional Performance Shares is not
assignable, except by operation of law.
The March 8, 1999 amendment to the Agreement is hereby nullified and
rescinded and shall have no further force or effect.
This Amendment may be executed in one or more counterparts, each of
which shall be deemed to be an original, and all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto, individually and through
Tel-Com's duly authorized officer and as all of the partners of IBC Partners
have executed this Amendment as of the date first written above.
"TEL-COM":
Tel-Com Wireless Cable TV Corporation,
a Florida corporation
By: /S/ MELVIN ROSEN
-----------------------------------
Name: Melvin Rosen
Title: President
IBC Partners, a Florida general
partnership
By: /S/ ERIC LEFKOWITZ
-----------------------------------
Name: Eric Lefkowitz, partner
By: /S/ IVANN ROTHSTEIN
-----------------------------------
Name: Ivan Rothstein, partner
/S/ MELVIN ROSEN
--------------------------------------
Melvin Rosen
/S/IVANA TRUMP
--------------------------------------
Ivana Trump
3
EXHIBIT 10.29
EXECUTION COPY
AMENED[sic] AND RESTATED MASTER FACILITY AGREEMENT
AMENED[sic] AND RESTATED MASTER FACILITY AGREEMENT (the
"AGREEMENT"), dated as of April 25, 2000, by and between 5TH AVENUE CHANNEL
CORP., a Florida corporation (the "COMPANY"), and FUSION CAPITAL FUND II, LLC
(together with its assigns, the "BUYER").
WHEREAS:
Subject to the terms and conditions set forth herein, the
Company has authorized the entering into with the Buyer of up to two Equity
Purchase Agreements (each an "EQUITY PURCHASE AGREEMENT" and collectively the
"EQUITY PURCHASE AGREEMENTS"), substantially in the form attached hereto as
EXHIBIT A, with each Equity Purchase Agreement having an aggregate principal
amount of Six Million Dollars ($6,000,000). The principal amount of each Equity
Purchase Agreement shall be convertible into shares of the Company's common
stock, par value $.001 per share (the "COMMON STOCK") (as converted, the
"CONVERSION SHARES"), in accordance with the terms of each Equity Purchase
Agreement.
NOW THEREFORE, the Company and the Buyer hereby agree as follows:
1. ENTRY INTO EQUITY PURCHASE AGREEMENTS.
-------------------------------------
a. EXECUTION AND DELIVERY OF THE EQUITY PURCHASE AGREEMENTS.
Subject to the satisfaction (or waiver) of the conditions set forth in Sections
6 and 7 below, the Company and the Buyer agree as follows: (i) the execution and
delivery of the first Equity Purchase Agreement to be entered into under this
Agreement (the "FIRST EQUITY PURCHASE AGREEMENT") shall take place within five
(5) Trading Days (as defined in the last sentence of this Section 1(a)) of the
date that the Registration Statement on Form SB-2 referred to in the first
sentence of Section 4(a) hereof is declared effective under the Securities Act
of 1933, as amended (the "1933 Act") by the United States Securities and
Exchange Commission (the "SEC") (the "FIRST CLOSING"); and (ii) the execution
and delivery of the second Equity Purchase Agreement to be entered into under
this Agreement (the "SECOND EQUITY PURCHASE AGREEMENT") shall take place within
five (5) Trading Days of the date that the Registration Statement on Form SB-2
referred to in the second sentence of Section 4(a) hereof is declared effective
under the 1933 Act by the SEC (the "SECOND CLOSING"), (each such execution and
delivery of an Equity Purchase Agreement, a "CLOSING"). It is agreed and
acknowledged by the parties hereto that entering into the Second Equity Purchase
Agreement shall be at the option of the Company in its sole discretion until
such time as the Company shall have delivered an irrevocable written notice (the
"SECOND CLOSING NOTICE") to the Buyer stating that the Company elects to enter
into the Second Equity Purchase Agreement under the terms and conditions
provided herein. The Second Equity Purchase Agreement may not be entered into
until the aggregate principal amount of the First Equity Purchase Agreement is
fully converted into Common Stock. The Buyer is not obligated to enter into the
Second Equity Purchase Agreement unless the Company has delivered the Second
Closing Notice prior to the date that is ten (10) Trading Days following the
<PAGE>
date on which the aggregate principal amount of the First Equity Purchase
Agreement is fully converted into Common Stock. Upon delivery of the Second
Closing Notice to the Buyer, subject to the satisfaction (or waiver) of the
conditions set forth in Sections 6 and 7 below, the Company and the Buyer shall
be obligated to enter into the Second Equity Purchase Agreement. For purposes of
this Agreement, "TRADING DAY" shall mean any day on which the Principal Market
(as defined in Section 4(d) hereof) is open for customary trading.
b. CLOSING DATES. The date of each Closing (each a "CLOSING
DATE") shall be within five (5) Trading Days following the date of satisfaction
(or waiver) of the conditions to the Closing set forth in Sections 6 and 7 below
(or such later date as is mutually agreed to by the Company and the Buyer) with
respect to the Closing of each Equity Purchase Agreement.
2. BUYER'S REPRESENTATIONS AND WARRANTIES.
--------------------------------------
The Buyer represents and warrants to the Company that:
a. INVESTMENT PURPOSE. The Buyer (i) is entering into the
Equity Purchase Agreements and acquiring the Commitment Shares (as defined in
Section 7(b) hereof) (collectively referred to herein as the "SECURITIES"), for
its own account for investment only and not with a view towards, or for resale
in connection with, the public sale or distribution thereof; provided however,
by making the representations herein, the Buyer does not agree to hold any of
the Securities for any minimum or other specific term.
b. ACCREDITED INVESTOR STATUS. The Buyer is an "accredited
investor" as that term is defined in Rule 501(a)(3) of Regulation D.
c. RELIANCE ON EXEMPTIONS. The Buyer understands that the
Commitment Shares are being offered and sold to it in reliance on specific
exemptions from the registration requirements of United States federal and state
securities laws and that the Company is relying in part upon the truth and
accuracy of, and the Buyer's compliance with, the representations, warranties,
agreements, acknowledgments and understandings of the Buyer set forth herein in
order to determine the availability of such exemptions and the eligibility of
the Buyer to acquire the Commitment Shares.
d. INFORMATION. The Buyer has been furnished with all
materials relating to the business, finances and operations of the Company and
materials relating to the offer and sale of the Securities which have been
reasonably requested by the Buyer, including, without limitation, the SEC
Documents (as defined in Section 3(f) hereof). The Buyer understands that its
investment in the Securities involves a high degree of risk. The Buyer (i) is
able to bear the economic risk of an investment in the Securities including a
total loss, (ii) has such knowledge and experience in financial and business
matters that it is capable of evaluating the merits and risks of the proposed
investment in the Securities and (iii) has had an opportunity to ask questions
of and receive answers from the officers of the Company concerning the financial
condition and business of the Company and others matters related to an
investment in the Securities. Neither such inquiries nor any other due diligence
investigations conducted by the Buyer or its representatives shall modify, amend
or
2
<PAGE>
affect the Buyer's right to rely on the Company's representations and
warranties contained in Section 3 below. The Buyer has sought such accounting,
legal and tax advice as it has considered necessary to make an informed
investment decision with respect to its acquisition of the Securities.
e. NO GOVERNMENTAL REVIEW. The Buyer understands that no
United States federal or state agency or any other government or governmental
agency has passed on or made any recommendation or endorsement of the Securities
or the fairness or suitability of the investment in the Securities nor have such
authorities passed upon or endorsed the merits of the offering of the
Securities.
f. TRANSFER OR RESALE. The Buyer understands that except as
provided in the Registration Rights Agreement (as defined in Section 6(a)
hereof): (i) the Securities have not been and are not being registered under the
1933 Act or any state securities laws, and may not be offered for sale, sold,
assigned or transferred unless (A) subsequently registered thereunder or (B) an
exemption exists permitting such Securities to be sold, assigned or transferred
without such registration; (ii) any sale of the Securities made in reliance on
Rule 144 may be made only in accordance with the terms of Rule 144 and further,
if Rule 144 is not applicable, any resale of the Securities under circumstances
in which the seller (or the person through whom the sale is made) may be deemed
to be an underwriter (as that term is defined in the 1933 Act) may require
compliance with some other exemption under the 1933 Act or the rules and
regulations of the SEC thereunder; and (iii) neither the Company nor any other
person is under any obligation to register such securities under the 1933 Act or
any state securities laws or to comply with the terms and conditions of any
exemption thereunder.
g. VALIDITY; ENFORCEMENT. This Agreement has been duly and
validly authorized, executed and delivered on behalf of the Buyer and is a valid
and binding agreement of the Buyer enforceable against the Buyer in accordance
with its terms, subject as to enforceability to general principles of equity and
to applicable bankruptcy, insolvency, reorganization, moratorium, liquidation
and other similar laws relating to, or affecting generally, the enforcement of
applicable creditors' rights and remedies.
h. RESIDENCY. The Buyer is a resident of the State of
Illinois.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
---------------------------------------------
The Company represents and warrants to the Buyer that:
a. ORGANIZATION AND QUALIFICATION. The Company and its
"SUBSIDIARIES" (which for purposes of this Agreement means any entity in which
the Company, directly or indirectly, owns 50% or more of the voting stock or
capital stock or other similar equity interests) are corporations duly organized
and validly existing in good standing under the laws of the jurisdiction in
which they are incorporated, and have the requisite corporate power and
authority to own their properties and to carry on their business as now being
conducted. Each of the Company and its Subsidiaries is duly qualified as a
foreign corporation to do business and is in good standing in every jurisdiction
in which its ownership of property or the nature of the business conducted by
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it makes such qualification necessary, except to the extent that the failure to
be so qualified or be in good standing could not reasonably be expected to have
a Material Adverse Effect. As used in this Agreement, "MATERIAL ADVERSE EFFECT"
means any material adverse effect on any of: (i) the business, properties,
assets, operations, results of operations or financial condition of the Company
and its Subsidiaries, if any, taken as a whole, (ii) the value of the Common
Stock or the value of, or security for, any Equity Purchase Agreement, (iii) the
transactions contemplated hereby or by the agreements and instruments to be
entered into in connection herewith or (iv) the authority or ability of the
Company to perform its obligations under the Transaction Documents (as defined
in Section 2(b) hereof). The Company has no Subsidiaries except as set forth on
SCHEDULE 3(A).
b. AUTHORIZATION; ENFORCEMENT; VALIDITY. (i) The Company has
the requisite corporate power and authority to enter into and perform its
obligations under this Agreement, the Equity Purchase Agreements, the
Registration Rights Agreements (as defined in Section 6(a) hereof) and each of
the other agreements entered into by the parties hereto in connection with the
transactions contemplated by this Agreement (collectively, the "TRANSACTION
DOCUMENTS"), and to issue the Securities in accordance with the terms hereof and
thereof, (ii) the execution and delivery of the Transaction Documents by the
Company and the consummation by it of the transactions contemplated hereby and
thereby, including without limitation, the issuance of the Commitment Shares and
the reservation for issuance and the issuance of the Conversion Shares issuable
upon conversion of the Equity Purchase Agreements, have been duly authorized by
the Company's Board of Directors and no further consent or authorization is
required by the Company, its Board of Directors or its shareholders, (iii) this
Agreement has been, and each other Transaction Document shall be at its
respective Closing, duly executed and delivered by the Company and (iv) this
Agreement constitutes, and each other Transaction Document shall constitute as
of its respective Closing, the valid and binding obligations of the Company
enforceable against the Company in accordance with their terms, except as such
enforceability may be limited by general principles of equity or applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws
relating to, or affecting generally, the enforcement of creditors' rights and
remedies.
c. CAPITALIZATION. As of the date hereof, the authorized
capital stock of the Company consists of (i) 50,000,000 shares of Common Stock,
of which as of the date hereof, 12,714,702 shares are issued and outstanding,
none are held as treasury shares,1,599,100 shares are reserved for issuance
pursuant to the Company's stock option plan and 6,562,362 shares are issuable
and reserved for issuance pursuant to securities (other than the Equity Purchase
Agreements or stock options issued pursuant to the Company's stock option plan)
exercisable or exchangeable for, or convertible into, shares of Common Stock and
(ii) 5,000,000 shares of preferred stock, $.001 par value, of which as of the
date hereof no shares are issued and outstanding. All of such outstanding shares
have been, or upon issuance will be, validly issued and are fully paid and
nonassessable. Except as disclosed in SCHEDULE 3(C), (i) no shares of the
Company's capital stock are subject to preemptive rights or any other similar
rights or any liens or encumbrances suffered or permitted by the Company, (ii)
there are no outstanding debt securities, (iii) there are no outstanding
options, warrants, scrip, rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities or rights convertible into, any
shares of capital stock of the Company or any of its Subsidiaries, or contracts,
commitments, understandings or arrangements by which the Company or any of its
Subsidiaries is or may become bound to issue additional shares of capital stock
of the
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Company or any of its Subsidiaries or options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into, any shares of capital stock of the
Company or any of its Subsidiaries, (iv) there are no agreements or arrangements
under which the Company or any of its Subsidiaries is obligated to register the
sale of any of their securities under the 1933 Act (except the Registration
Rights Agreement), (v) there are no outstanding securities or instruments of the
Company or any of its Subsidiaries which contain any redemption or similar
provisions, and there are no contracts, commitments, understandings or
arrangements by which the Company or any of its Subsidiaries is or may become
bound to redeem a security of the Company or any of its Subsidiaries, (vi) there
are no securities or instruments containing anti-dilution or similar provisions
that will be triggered by the issuance of the Securities as described in this
Agreement and (vii) the Company does not have any stock appreciation rights or
"phantom stock" plans or agreements or any similar plan or agreement. The
Company has furnished to the Buyer true and correct copies of the Company's
Articles of Incorporation, as amended and as in effect on the date hereof (the
"ARTICLES OF INCORPORATION"), and the Company's By-laws, as amended and as in
effect on the date hereof (the "BY-LAWS"), and a summary description of the
terms of all securities convertible into or exercisable for Common Stock, if
any, and the material rights of the holders thereof in respect thereto.
d. ISSUANCE OF SECURITIES. The Commitment Shares have been
duly authorized and, upon issuance in accordance with the terms hereof, shall be
(i) validly issued, fully paid and non-assessable and (ii) free from all taxes,
liens and charges with respect to the issue thereof. 1,200,000 shares of Common
Stock have been duly authorized and reserved for issuance upon conversion of
each Equity Purchase Agreement. Upon conversion in accordance with the terms and
conditions of the Equity Purchase Agreements, the Conversion Shares will be
validly issued, fully paid and nonassessable and free from all taxes, liens and
charges with respect to the issue thereof, with the holders being entitled to
all rights accorded to a holder of Common Stock.
e. NO CONFLICTS. Except as disclosed in SCHEDULE 3(E), the
execution, delivery and performance of the Transaction Documents by the Company
and the consummation by the Company of the transactions contemplated hereby and
thereby (including, without limitation, the reservation for issuance and
issuance of the Conversion Shares) will not (i) result in a violation of the
Articles of Incorporation, any Certificate of Designations, Preferences and
Rights of any outstanding series of preferred stock of the Company or the
By-laws or (ii) conflict with, or constitute a default (or an event which with
notice or lapse of time or both would become a default) under, or give to others
any rights of termination, amendment, acceleration or cancellation of, any
agreement, indenture or instrument to which the Company or any of its
Subsidiaries is a party, or result in a violation of any law, rule, regulation,
order, judgment or decree (including federal and state securities laws and
regulations and the rules and regulations of the Principal Market applicable to
the Company or any of its Subsidiaries) or by which any property or asset of the
Company or any of its Subsidiaries is bound or affected which, in the case of
(ii), could not reasonably be expected to result in a Material Adverse Effect.
Except as disclosed in SCHEDULE 3(E), neither the Company nor its Subsidiaries
is in violation of any term of or
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in default under its Articles of Incorporation, any Certificate of Designation,
Preferences and Rights of any outstanding series of preferred stock of the
Company or By-laws or their organizational charter or by-laws, respectively.
Except as disclosed in SCHEDULE 3(E), neither the Company nor any of its
Subsidiaries is in violation of any term of or in default under any material
contract, agreement, mortgage, indebtedness, indenture, instrument, judgment,
decree or order or any statute, rule or regulation applicable to the Company or
its Subsidiaries, except for possible conflicts, defaults, terminations or
amendments which could not reasonably be expected to have a Material Adverse
Effect. The business of the Company and its Subsidiaries is not being conducted,
and shall not be conducted, in violation of any law, ordinance, regulation of
any governmental entity, except for possible violations, the sanctions for which
either individually or in the aggregate could not reasonably be expected to have
a Material Adverse Effect. Except as specifically contemplated by this Agreement
and as required under the 1933 Act, the Company is not required to obtain any
consent, authorization or order of, or make any filing or registration with, any
court or governmental agency or any regulatory or self-regulatory agency in
order for it to execute, deliver or perform any of its obligations under or
contemplated by the Transaction Documents in accordance with the terms hereof or
thereof. Except as disclosed in SCHEDULE 3(E), all consents, authorizations,
orders, filings and registrations which the Company is required to obtain
pursuant to the preceding sentence have been obtained or effected on or prior to
the date hereof. The Company is not and has not been since January 1, 1998, in
violation of the listing requirements of the Principal Market.
f. SEC DOCUMENTS; FINANCIAL STATEMENTS. Since January 1, 1998,
the Company has filed all reports, schedules, forms, statements and other
documents required to be filed by it with the SEC pursuant to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the "1934 ACT")
(all of the foregoing filed prior to the date hereof and all exhibits included
therein and financial statements and schedules thereto and documents
incorporated by reference therein being hereinafter referred to as the "SEC
DOCUMENTS"). As of their respective dates, the SEC Documents complied in all
material respects with the requirements of the 1934 Act and the rules and
regulations of the SEC promulgated thereunder applicable to the SEC Documents,
and none of the SEC Documents, at the time they were filed with the SEC (except
as they may have been correctly amended), contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. As of their respective
dates, the financial statements of the Company included in the SEC Documents
complied as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC with respect
thereto. Such financial statements have been prepared in accordance with
generally accepted accounting principles, consistently applied, during the
periods involved (except (i) as may be otherwise indicated in such financial
statements or the notes thereto or (ii) in the case of unaudited interim
statements, to the extent they may exclude footnotes or may be condensed or
summary statements) and fairly present in all material respects the financial
position of the Company as of the dates thereof and the results of its
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments).
g. ABSENCE OF CERTAIN CHANGES. Except as disclosed in SCHEDULE
3(G), since September 30, 1999, there has been no material adverse change in the
business, properties, operations, financial condition or results of operations
of the Company or its Subsidiaries. The Company has not taken any steps, and
does not currently expect to take any steps, to seek protection pursuant to any
bankruptcy law nor does the Company or any of its Subsidiaries have any
knowledge or reason to believe that its creditors intend to initiate involuntary
bankruptcy proceedings.
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h. ABSENCE OF LITIGATION. There is no action, suit,
proceeding, inquiry or investigation before or by any court, public board,
government agency, self-regulatory organization or body pending or, to the
knowledge of the Company or any of its Subsidiaries, threatened against or
affecting the Company, the Common Stock or any of the Company's Subsidiaries or
any of the Company's or the Company's Subsidiaries' officers or directors in
their capacities as such, which could reasonably be expected to have a Material
Adverse Effect. A description of each action, suit, proceeding, inquiry or
investigation before or by any court, public board, government agency,
self-regulatory organization or body which, as of the date of this Agreement, is
pending or threatened in writing against or affecting the Company, the Common
Stock or any of the Company's Subsidiaries or any of the Company's or the
Company's Subsidiaries' officers or directors in their capacities as such, is
set forth in SCHEDULE 3(H).
i. ACKNOWLEDGMENT REGARDING BUYER'S PURCHASE OF THE
SECURITIES. The Company acknowledges and agrees that the Buyer is acting solely
in the capacity of arm's length purchaser with respect to the Transaction
Documents and the transactions contemplated hereby and thereby. The Company
further acknowledges that the Buyer is not acting as a financial advisor or
fiduciary of the Company (or in any similar capacity) with respect to the
Transaction Documents and the transactions contemplated hereby and thereby and
any advice given by the Buyer or any of its representatives or agents in
connection with the Transaction Documents and the transactions contemplated
hereby and thereby is merely incidental to the Buyer's purchase of the
Securities. The Company further represents to the Buyer that the Company's
decision to enter into the Transaction Documents has been based solely on the
independent evaluation by the Company and its representatives and advisors.
j. NO GENERAL SOLICITATION. Neither the Company, nor any of
its affiliates, nor any person acting on its or their behalf, has engaged in any
form of general solicitation or general advertising (within the meaning of
Regulation D under the 1933 Act) in connection with the offer or sale of the
Securities.
k. NO INTEGRATED OFFERING. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security, under circumstances that would require registration of any of
the Securities under the 1933 Act or cause this offering of the Securities to be
integrated with prior offerings by the Company for purposes of the 1933 Act or
any applicable shareholder approval provisions, including, without limitation,
under the rules and regulations of any exchange or automated quotation system on
which any of the securities of the Company are listed or designated, nor will
the Company or any of its Subsidiaries take any action or steps that would
require registration of any of the Securities under the 1933 Act or cause the
offering of the Securities to be integrated with other offerings.
l. DILUTIVE EFFECT. The Company understands and acknowledges
that the number of Conversion Shares issuable upon conversion of the Equity
Purchase Agreements will increase in certain circumstances. The Company further
acknowledges that its obligation to issue Conversion Shares upon conversion of
the Equity Purchase Agreements in accordance with this
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Agreement and the Equity Purchase Agreements is absolute and unconditional
regardless of the dilutive effect that such issuance may have on the ownership
interests of other shareholders of the Company.
m. INTELLECTUAL PROPERTY RIGHTS. The Company and its
Subsidiaries own or possess adequate rights or licenses to use all material
trademarks, trade names, service marks, service mark registrations, service
names, patents, patent rights, copyrights, inventions, licenses, approvals,
governmental authorizations, trade secrets and rights necessary to conduct their
respective businesses as now conducted. Except as set forth on SCHEDULE 3(M),
none of the Company's material trademarks, trade names, service marks, service
mark registrations, service names, patents, patent rights, copyrights,
inventions, licenses, approvals, government authorizations, trade secrets or
other intellectual property rights have expired or terminated, or, by the terms
and conditions thereof, could expire or terminate within two years from the date
of this Agreement. The Company and its Subsidiaries do not have any knowledge of
any infringement by the Company or its Subsidiaries of any material trademark,
trade name rights, patents, patent rights, copyrights, inventions, licenses,
service names, service marks, service mark registrations, trade secret or other
similar rights of others, or of any such development of similar or identical
trade secrets or technical information by others and, except as set forth on
SCHEDULE 3(M), there is no claim, action or proceeding being made or brought
against, or to the Company's knowledge, being threatened against, the Company or
its Subsidiaries regarding trademark, trade name, patents, patent rights,
invention, copyright, license, service names, service marks, service mark
registrations, trade secret or other infringement, which could reasonably be
expected to have a Material Adverse Effect.
n. ENVIRONMENTAL LAWS. The Company and its Subsidiaries (i)
are in compliance with any and all applicable foreign, federal, state and local
laws and regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("ENVIRONMENTAL LAWS"), (ii) have received all permits, licenses or
other approvals required of them under applicable Environmental Laws to conduct
their respective businesses and (iii) are in compliance with all terms and
conditions of any such permit, license or approval, except where, in each of the
three foregoing clauses, the failure to so comply could not reasonably be
expected to have, individually or in the aggregate, a Material Adverse Effect.
o. TITLE. The Company and its Subsidiaries have good and
marketable title in fee simple to all real property and good and marketable
title to all personal property owned by them which is material to the business
of the Company and its Subsidiaries, in each case free and clear of all liens,
encumbrances and defects except such as are described in SCHEDULE 3(O) or such
as do not materially affect the value of such property and do not interfere with
the use made and proposed to be made of such property by the Company and any of
its Subsidiaries. Any real property and facilities held under lease by the
Company and any of its Subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not interfere
with the use made and proposed to be made of such property and buildings by the
Company and its Subsidiaries.
p. INSURANCE. The Company and each of its Subsidiaries are
insured by insurers of recognized financial responsibility against such losses
and risks and in such amounts as
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management of the Company believes to be prudent and customary in the businesses
in which the Company and its Subsidiaries are engaged. Neither the Company nor
any such Subsidiary has been refused any insurance coverage sought or applied
for and neither the Company nor any such Subsidiary has any reason to believe
that it will not be able to renew its existing insurance coverage as and when
such coverage expires or to obtain similar coverage from similar insurers as may
be necessary to continue its business at a cost that would not materially and
adversely affect the condition, financial or otherwise, or the earnings,
business or operations of the Company and its Subsidiaries, taken as a whole.
q. REGULATORY PERMITS. The Company and its Subsidiaries
possess all material certificates, authorizations and permits issued by the
appropriate federal, state or foreign regulatory authorities necessary to
conduct their respective businesses, and neither the Company nor any such
Subsidiary has received any notice of proceedings relating to the revocation or
modification of any such certificate, authorization or permit.
r. TAX STATUS. The Company and each of its Subsidiaries has
made or filed all federal and state income and all other material tax returns,
reports and declarations required by any jurisdiction to which it is subject
(unless and only to the extent that the Company and each of its Subsidiaries has
set aside on its books provisions reasonably adequate for the payment of all
unpaid and unreported taxes) and has paid all taxes and other governmental
assessments and charges that are material in amount, shown or determined to be
due on such returns, reports and declarations, except those being contested in
good faith and has set aside on its books provision reasonably adequate for the
payment of all taxes for periods subsequent to the periods to which such
returns, reports or declarations apply. There are no unpaid taxes in any
material amount claimed to be due by the taxing authority of any jurisdiction,
and the officers of the Company know of no basis for any such claim.
s. TRANSACTIONS WITH AFFILIATES. Except as set forth on
SCHEDULE 3(S) and other than the grant or exercise of stock options disclosed on
SCHEDULE 3(C), none of the officers, directors, or employees of the Company is
presently a party to any transaction with the Company or any of its Subsidiaries
(other than for services as employees, officers and directors), including any
contract, agreement or other arrangement providing for the furnishing of
services to or by, providing for rental of real or personal property to or from,
or otherwise requiring payments to or from any officer, director or such
employee or, to the knowledge of the Company, any corporation, partnership,
trust or other entity in which any officer, director, or any such employee has
an interest or is an officer, director, trustee or partner.
t. APPLICATION OF TAKEOVER PROTECTIONS. The Company and its
board of directors have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination, poison pill
(including any distribution under a rights agreement) or other similar
anti-takeover provision under the Articles of Incorporation or the laws of the
state of its incorporation which is or could become applicable to the Buyer as a
result of the transactions contemplated by this Agreement, including, without
limitation, the Company's issuance of the Securities and the Buyer's ownership
of the Securities.
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u. RIGHTS AGREEMENT. The Company has not adopted a shareholder
rights plan or similar arrangement relating to accumulations of beneficial
ownership of Common Stock or a change in control of the Company.
v. FOREIGN CORRUPT PRACTICES. Neither the Company, nor any of
its Subsidiaries, nor any director, officer, agent, employee or other person
acting on behalf of the Company or any of its Subsidiaries has, in the course of
its actions for, or on behalf of, the Company, used any corporate funds for any
unlawful contribution, gift, entertainment or other unlawful expenses relating
to political activity; made any direct or indirect unlawful payment to any
foreign or domestic government official or employee from corporate funds;
violated or is in violation of any provision of the U.S. Foreign Corrupt
Practices Act of 1977, as amended; or made any unlawful bribe, rebate, payoff,
influence payment, kickback or other unlawful payment to any foreign or domestic
government official or employee.
4. COVENANTS.
---------
a. FILING REGISTRATION STATEMENT. The Company shall within ten
(10) Trading Days from the date hereof: (i) file a new Registration Statement on
Form SB-2 or (ii) file a pre-effective amendment to an existing Registration
Statement on Form SB-2, in either case covering the resale of at least 1,500,000
Conversion Shares underlying the First Equity Purchase Agreement and the resale
of 400,000 First Closing Commitment Shares (as defined in Section 7(b)). The
Company shall also within ten (10) Trading Days from the date of the delivery to
the Buyer of the Second Closing Notice: (i) file a new Registration Statement on
Form SB-2 or (ii) file a pre-effective amendment to an existing Registration
Statement on Form SB-2, in either case covering the resale of a reasonable
estimate of the number of Conversion Shares underlying the Second Equity
Purchase Agreement and a reasonable estimate of the number of Second Closing
Commitment Shares (as defined in Section 7(b)). The Buyer and its counsel shall
have a reasonable opportunity to review and comment upon each such registration
statement or amendment to such registration statement and any related prospectus
prior to its filing with the SEC. The Company shall use its reasonable best
efforts to have such registration statements or amendments declared effective by
the SEC at the earliest possible date.
b. BLUE SKY. The Company shall, on or before each Closing
Date, take such action, if any, as the Company shall reasonably determine is
necessary in order to obtain an exemption for or to qualify the Commitment
Shares and the Conversion Shares for sale to the Buyer at each Closing pursuant
to this Agreement under applicable securities or "Blue Sky" laws of the states
of the United States, and shall provide evidence of any such action so taken to
the Buyer on or prior to each Closing Date. The Company shall make all filings
and reports relating to the offer and sale of the Commitment Shares and the
Conversion Shares required under applicable securities or "Blue Sky" laws of the
states of the United States following each Closing Date.
c. NO VARIABLE PRICED FINANCING. Other than pursuant to this
Agreement, the Company agrees that beginning on the date of this Agreement and
ending on the date of termination of this Agreement (as provided in Section 9(k)
hereof), and so long as any Equity Purchase Agreement is executory, neither the
Company nor any of its Subsidiaries shall, without the prior
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written consent of the Buyer, contract for any equity financing (including any
debt financing with an equity component) or issue any equity securities of the
Company or any Subsidiary or securities convertible or exchangeable into or for
equity securities of the Company or any Subsidiary (including debt securities
with an equity component) which, in any case (i) are convertible into or
exchangeable for an indeterminate number of shares of common stock, (ii) are
convertible into or exchangeable for Common Stock at a price which varies with
the market price of the Common Stock, (iii) directly or indirectly provide for
any "re-set" or adjustment of the purchase price, conversion rate or exercise
price or (iv) contain any "make-whole" provision based upon, directly or
indirectly, the market price of the Common Stock, in each case, other than
reasonable and customary anti-dilution adjustments for issuance of shares of
Common Stock at a price which is below the market price of the Common Stock.
d. LISTING. The Company shall promptly secure the listing of
all of the Conversion Shares and Commitment Shares upon each national securities
exchange and automated quotation system, if any, upon which shares of Common
Stock are then listed (subject to official notice of issuance) and shall
maintain, so long as any other shares of Common Stock shall be so listed, such
listing of all such securities from time to time issuable under the terms of the
Transaction Documents. The Company shall maintain the Common Stock's
authorization for quotation on The Nasdaq SmallCap Market (the "PRINCIPAL
MARKET") or the Nasdaq National Market. Neither the Company nor any of its
Subsidiaries shall take any action which would be reasonably expected to result
in the delisting or suspension of the Common Stock on the Principal Market. The
Company shall promptly, and in no event later than the following Trading Day,
provide to the Buyer copies of any notices it receives from the Principal Market
regarding the continued eligibility of the Common Stock for listing on such
automated quotation system or securities exchange. The Company shall pay all
fees and expenses in connection with satisfying its obligations under this
Section.
e. LIMITATION ON SHORT SALES AND HEDGING TRANSACTIONS. The
Buyer agrees that beginning on the date of this Agreement and ending on the date
of termination of this Agreement as provided in Section 9(k), the Buyer and its
affiliates shall not in any manner whatsoever enter into or effect, directly or
indirectly, any (i) "short sale" (as such term is defined in Rule 3b-3 of the
1934 Act) of the Common Stock or (ii) hedging transaction, which establishes a
net short position with respect to the Common Stock; provided, however, that
such restrictions shall not apply if an Event of Default (as defined the Equity
Purchase Agreement) has occurred, or any event which, after notice and/or lapse
of time, would become an Event of Default has occurred, under any Equity
Purchase Agreement including any failure by the Company to timely effect any
conversion properly submitted pursuant to an Equity Purchase Agreement.
f. LIMITATION ON SALES OF COMMITMENT SHARES. The Buyer agrees
that beginning on the date of this Agreement and ending on the date of
termination of this Agreement as provided in Section 9(k), the Buyer shall not
transfer or sell (i) the First Closing Commitment Shares (as defined in Section
7(b) hereof) until such date as the First Equity Purchase Agreement is fully
performed and (ii) the Second Closing Commitment Shares (as defined in Section
7(b) hereof) until such date as the Second Equity Purchase Agreement is fully
performed; provided, however, that such restrictions shall not apply: (A) to any
transfers to or among affiliates (as defined in the Securities
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Exchange Act of 1934, as amended), (B) to any pledge in connection with a bona
fide loan or margin account or (C) if an Event of Default has occurred, or any
event which, after notice and/or lapse of time, would become an Event of
Default, under any Equity Purchase Agreement including any failure by the
Company to timely effect any conversion properly submitted pursuant to an Equity
Purchase Agreement.
g. MAINTENANCE OF FUNDING ACCOUNT BY BUYER. The Buyer agrees
to deliver to the Company on the Closing Date of the First Closing immediately
available funds in the amount of $500,000. The Buyer shall maintain a segregated
account in its own name (the "FUNDING ACCOUNT") and shall deposit into such
Funding Account (i) on the Closing Date of the First Closing, $500,000, and (ii)
thereafter on the first day of each Monthly Period, $1,000,000. On the Closing
Date of the First Closing and on the first day of each Monthly Period, the Buyer
shall provide to the Company reasonable documentation of deposits made to the
Funding Account.
h. DUE DILIGENCE. The Buyer shall have the right, from time to
time as the Buyer may deem appropriate, to perform reasonable due diligence on
the Company during normal business hours.
5. TRANSFER AGENT INSTRUCTIONS.
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The Company shall issue irrevocable instructions to its
transfer agent, and any subsequent transfer agent, to issue certificates,
registered in the name of the Buyer or its respective nominee(s), for the
Conversion Shares from time to time upon conversion of an Equity Purchase
Agreement (the "IRREVOCABLE TRANSFER AGENT INSTRUCTIONS"). The Company warrants
to the Buyer that no instruction other than the Irrevocable Transfer Agent
Instructions referred to in this Section 5, will be given by the Company to its
transfer agent with respect to the Securities and that the Securities shall
otherwise be freely transferable on the books and records of the Company as and
to the extent provided in this Agreement and the Registration Rights Agreement
subject to the provisions of Section 4(f) in the case of the Commitment Shares.
Nothing in this Section 5 shall affect in any way the Buyer's obligations to
comply with all applicable prospectus delivery requirements, if any, upon resale
of the Securities. If a Buyer provides the Company with an opinion of counsel,
in a generally acceptable form, to the effect that a public sale, assignment or
transfer of the Securities may be made without registration under the 1933 Act
or the Buyer provides the Company with reasonable assurances that the Securities
can be sold pursuant to Rule 144, the Company shall permit the transfer, and, in
the case of the Conversion Shares, promptly instruct its transfer agent to issue
one or more certificates in such name and in such denominations as specified by
the Buyer and without any restrictive legend. The Company acknowledges that a
breach by it of its obligations hereunder will cause irreparable harm to the
Buyer by vitiating the intent and purpose of the transaction contemplated
hereby. Accordingly, the Company acknowledges that the remedy at law for a
breach of its obligations under this Section 5 will be inadequate and agrees, in
the event of a breach or threatened breach by the Company of the provisions of
this Section 5, that the Buyer shall be entitled, in addition to all other
available remedies, to an order and/or injunction restraining any breach and
requiring immediate issuance and transfer, without the necessity of showing
economic loss and without any bond or other security being required.
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6. CONDITIONS TO THE COMPANY'S OBLIGATION TO ENTER INTO
EQUITY PURCHASE AGREEMENTS.
----------------------------------------------------
The obligation of the Company hereunder to enter into each
Equity Purchase Agreement with the Buyer at each Closing is subject to the
satisfaction, at or before the respective Closing Date, of each of the following
conditions, provided that these conditions are for the Company's sole benefit
and may be waived by the Company at any time in its sole discretion by providing
the Buyer with prior written notice thereof:
a. The Buyer shall have executed each of the Transaction
Documents to which it is a party and delivered the same to the Company
applicable to the respective Closing including for each Closing: (i) an Equity
Purchase Agreement substantially in the form of EXHIBIT A hereto and (ii) a
Registration Rights Agreement substantially in the form of EXHIBIT B hereto
(individually, a "REGISTRATION RIGHTS AGREEMENT" and collectively, the
"REGISTRATION RIGHTS AGREEMENTS").
b. Subject to the Company's compliance with Section 4(a), a
Registration Statement on Form SB-2 covering the resale of the respective
Commitment Shares and the Conversion Shares underlying the Equity Purchase
Agreement to be sold at such Closing shall have been declared effective under
the 1933 Act by the SEC and no stop order with respect to the Registration
Statement shall be pending or threatened by the SEC.
c. The representations and warranties of the Buyer shall be
true and correct in all material respects as of the date when made and as of
such Closing Date as though made at that time (except for representations and
warranties that speak as of a specific date), and the Buyer shall have
performed, satisfied and complied in all material respects with the covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by the Buyer at or prior to the Closing Date.
d. In connection with entering into the First Equity Purchase
Agreement, the Buyer shall have, on the Closing Date of the First Closing: (i)
delivered to the Company immediately available funds in the amount of $500,000,
and (ii) provided to the Company evidence of a deposit to the Funding Account in
the amount of $500,000. In connection with entering into the Second Equity
Purchase Agreement, the Buyer shall have, on the Closing Date of the Second
Closing provided to the Company evidence of a deposit to the Funding Account in
the amount of $1,000,000.
It is agreed and acknowledged by the parties hereto, that until such time has
the Company shall have delivered the Second Closing Notice to the Buyer with
respect to the Closing of the Second Equity Purchase Agreement, the Company
shall not be obligated to enter into the Second Equity Purchase Agreement.
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7. CONDITIONS TO THE BUYER'S OBLIGATION TO ENTER INTO
EQUITY PURCHASE AGREEMENTS.
--------------------------------------------------
The obligation of the Buyer hereunder to enter into each
Equity Purchase Agreement at the respective Closing is subject to the
satisfaction, at or before the respective Closing Date, of each of the following
conditions, provided that these conditions are for the Buyer's sole benefit and
may be waived by the Buyer at any time in its sole discretion by providing the
Company with prior written notice thereof:
a. The Company shall have executed each of the Transaction
Documents and delivered the same to the Buyer applicable to the respective
Closing including for each Closing: (i) the respective Equity Purchase Agreement
and (ii) a Registration Rights Agreement substantially in the form of EXHIBIT B
hereto.
b. On the Closing Date for the First Closing the Company shall
have delivered to the Buyer a number of shares of Common Stock (the "FIRST
CLOSING COMMITMENT SHARES") equal to: (i) 12% of $6,000,000 divided by the lower
of (A) the arithmetic average of the Closing Bid Prices (as defined in the
Equity Purchase Agreements) of the Common Stock for the five (5) consecutive
Trading Days immediately preceding the Trading Day which is two (2) Trading Days
prior to the Closing Date for the First Closing and (B) the arithmetic average
of the Closing Bid Prices of the Common Stock for the five (5) consecutive
Trading Days immediately preceding the Trading Day which is two (2) Trading Days
prior to the date hereof, PLUS (ii) 3% of $6,000,000 divided by the lower of (A)
the arithmetic average of the Closing Bid Prices of the Common Stock for the
five (5) consecutive Trading Days immediately preceding the Trading Day which is
two (2) Trading Days prior to the Closing Date for the First Closing and (B) the
arithmetic average of the Closing Bid Prices of the Common Stock for the five
(5) consecutive Trading Days immediately preceding the date hereof. On the
Closing Date for the Second Closing the Company shall have delivered to the
Buyer a number of shares of Common Stock (the "SECOND CLOSING COMMITMENT SHARES"
and together with the First Closing Commitment Shares, the "COMMITMENT SHARES")
equal to 7% of $6,000,000 divided by the lower of (A) the arithmetic average of
the Closing Bid Prices of the Common Stock for the five (5) consecutive Trading
Days immediately preceding the Trading Day which is two (2) Trading Days prior
to the Closing Date for the Second Closing and (B) the arithmetic average of the
Closing Bid Prices of the Common Stock for the five (5) consecutive Trading Days
immediately preceding the date on which the Second Closing Notice is delivered.
The number of Commitment Shares shall be appropriately adjusted for any
reorganization, recapitalization, non-cash dividend, stock split or other
similar transaction during such five (5) Trading Day period.
c. The Common Stock shall be authorized for quotation on the
Principal Market, trading in the Common Stock shall not have been within the
last 365 days suspended by the SEC or the Principal Market and the Conversion
Shares and the Commitment Shares shall be listed upon the Principal Market.
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<PAGE>
d. The Buyer shall have received the opinions of the Company's
legal counsel dated as of the respective Closing Date, in the forms of EXHIBIT
C-1 and EXHIBIT C-2 attached hereto.
e. The representations and warranties of the Company shall be
true and correct in all material respects (except to the extent that any of such
representations and warranties is already qualified as to materiality in Section
3 above, in which case, such representations and warranties shall be true and
correct without further qualification) as of the date when made and as of the
respective Closing Date as though made at that time (except for representations
and warranties that speak as of a specific date) and the Company shall have
performed, satisfied and complied with the covenants, agreements and conditions
required by the Transaction Documents to be performed, satisfied or complied
with by the Company at or prior to the respective Closing Date. The Buyer shall
have received a certificate, executed by the President of the Company, dated as
of the respective Closing Date, to the foregoing effect in the form attached
hereto as EXHIBIT D.
f. The Board of Directors of the Company shall have adopted
resolutions in the form attached hereto as EXHIBIT E which shall be in full
force and effect without any amendment or supplement thereto as of the
respective Closing Date.
g. As of the respective Closing Date, the Company shall have
reserved out of its authorized and unissued Common Stock, solely for the purpose
of effecting the conversion of the respective Equity Purchase Agreement, at
least 1,200,000 shares of Common Stock.
h. The Irrevocable Transfer Agent Instructions, in the form of
EXHIBIT F attached hereto, shall have been delivered to and acknowledged in
writing by the Company's transfer agent.
i. The Company shall have delivered to the Buyer a certificate
evidencing the incorporation and good standing of the Company in the State of
Florida issued by the Secretary of State of the State of Florida as of a date
within ten (10) Trading Days of the respective Closing Date.
j. The Company shall have delivered to the Buyer a certified
copy of the Articles of Incorporation as certified by the Secretary of State of
the State of Florida within ten (10) Trading Days of the respective Closing
Date.
k. The Company shall have delivered to the Buyer a secretary's
certificate executed by the Secretary of the Company, dated as of the respective
Closing Date, in the form attached hereto as EXHIBIT G.
l. A Registration Statement on Form SB-2 covering the resale
of all of the respective Commitment Shares and the Conversion Shares (assuming
the Closing Date is the Conversion Date) underlying the Equity Purchase
Agreement to be sold at such Closing shall have been declared effective under
the 1933 Act by the SEC and no stop order with respect to the Registration
Statement shall be pending or threatened by the SEC. The Company shall have made
15
<PAGE>
all filings under all applicable federal and state securities laws necessary to
consummate the issuance of the Securities pursuant to this Agreement in
compliance with such laws.
m. No Event of Default (as defined in the Equity Purchase
Agreement) has occurred, or any event which, after notice and/or lapse of time,
would become an Event of Default under the Equity Purchase Agreement has
occurred.
8. INDEMNIFICATION. In consideration of the Buyer's execution and
delivery of the Transaction Documents and acquiring the Securities thereunder
and in addition to all of the Company's other obligations under the Transaction
Documents, the Company shall defend, protect, indemnify and hold harmless the
Buyer and each other holder of the Securities and all of their shareholders,
officers, directors, employees and direct or indirect investors and any of the
foregoing person's agents or other representatives (including, without
limitation, those retained in connection with the transactions contemplated by
this Agreement) (collectively, the "INDEMNITEES") from and against any and all
actions, causes of action, suits, claims, losses, costs, penalties, fees,
liabilities and damages, and expenses in connection therewith (irrespective of
whether any such Indemnitee is a party to the action for which indemnification
hereunder is sought), and including reasonable attorneys' fees and disbursements
(the "INDEMNIFIED LIABILITIES"), incurred by any Indemnitee as a result of, or
arising out of, or relating to (a) any misrepresentation or breach of any
representation or warranty made by the Company in the Transaction Documents or
any other certificate, instrument or document contemplated hereby or thereby,
(b) any breach of any covenant, agreement or obligation of the Company contained
in the Transaction Documents or any other certificate, instrument or document
contemplated hereby or thereby, or (c) any cause of action, suit or claim
brought or made against such Indemnitee and arising out of or resulting from the
execution, delivery, performance or enforcement of the Transaction Documents or
any other certificate, instrument or document contemplated hereby or thereby. To
the extent that the foregoing undertaking by the Company may be unenforceable
for any reason, the Company shall make the maximum contribution to the payment
and satisfaction of each of the Indemnified Liabilities which is permissible
under applicable law.
9. GOVERNING LAW; MISCELLANEOUS.
----------------------------
a. GOVERNING LAW; JURISDICTION; JURY TRIAL. The corporate laws
of the State of Florida shall govern all issues concerning the relative rights
of the Company and its shareholders. All other questions concerning the
construction, validity, enforcement and interpretation of this Agreement and the
other Transaction Documents shall be governed by the internal laws of the State
of Illinois, without giving effect to any choice of law or conflict of law
provision or rule (whether of the State of Illinois or any other jurisdictions)
that would cause the application of the laws of any jurisdictions other than the
State of Illinois. Each party hereby irrevocably submits to the exclusive
jurisdiction of the state and federal courts sitting in the City of Chicago, for
the adjudication of any dispute hereunder or under the other Transaction
Documents or in connection herewith or therewith, or with any transaction
contemplated hereby or discussed herein, and hereby irrevocably waives, and
agrees not to assert in any suit, action or proceeding, any claim that it is not
personally subject to the jurisdiction of any such court, that such suit, action
or proceeding is brought in an inconvenient forum or that the venue of such
suit, action or proceeding is improper. Each party hereby irrevocably
16
<PAGE>
waives personal service of process and consents to process being served in any
such suit, action or proceeding by mailing a copy thereof to such party at the
address for such notices to it under this Agreement and agrees that such service
shall constitute good and sufficient service of process and notice thereof.
Nothing contained herein shall be deemed to limit in any way any right to serve
process in any manner permitted by law. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY
RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION
OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS
AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.
b. COUNTERPARTS. This Agreement may be executed in two or more
identical counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each
party and delivered to the other party; provided that a facsimile signature
shall be considered due execution and shall be binding upon the signatory
thereto with the same force and effect as if the signature were an original, not
a facsimile signature.
c. HEADINGS. The headings of this Agreement are for
convenience of reference and shall not form part of, or affect the
interpretation of, this Agreement.
d. SEVERABILITY. If any provision of this Agreement shall be
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.
e. ENTIRE AGREEMENT; AMENDMENTS. This Agreement supersedes all
other prior oral or written agreements between the Buyer, the Company, their
affiliates and persons acting on their behalf with respect to the matters
discussed herein, and this Agreement, the Other Transaction Documents and the
instruments referenced herein contain the entire understanding of the parties
with respect to the matters covered herein and therein and, except as
specifically set forth herein or therein, neither the Company nor the Buyer
makes any representation, warranty, covenant or undertaking with respect to such
matters. No provision of this Agreement may be amended other than by an
instrument in writing signed by the Company and the Buyer, and no provision
hereof may be waived other than by an instrument in writing signed by the party
against whom enforcement is sought.
f. NOTICES. Any notices, consents, waivers or other
communications required or permitted to be given under the terms of this
Agreement must be in writing and will be deemed to have been delivered: (i) upon
receipt, when delivered personally; (ii) upon receipt, when sent by facsimile
(provided confirmation of transmission is mechanically or electronically
generated and kept on file by the sending party); or (iii) one Trading Day after
deposit with a nationally recognized overnight delivery service, in each case
properly addressed to the party to receive the same. The addresses and facsimile
numbers for such communications shall be:
17
<PAGE>
If to the Company:
5th Avenue Channel Corp.
3957 N.E. 163rd Street
North Miami Beach, Florida 33160
Telephone: 305-947-3010
Facsimile: 305-919-8154
Attention: Melvin Rosen
With a copy to:
King & Spalding
191 Peachtree Street
Atlanta, Georgia 30303
Telephone: 404-572-4600
Facsimile: 404-572-5100
Attention: Stacey K. Geer
If to the Buyer:
Fusion Capital Fund II, LLC
216 West Jackson Boulevard, Suite 400
Chicago, Illinois 60606
Telephone: (312) 795-7900
Facsimile: (312) 795-7901
Attention: Steven G. Martin
with a copy to:
Ungaretti & Harris
3500 Three First National Plaza
Chicago, Illinois 60602
Telephone: (312) 977-4400
Facsimile: (312) 977-4405
Attention: James T. Easterling
If to the Transfer Agent:
Continental Stock Transfer and Trust Company
2 Broadway, 19th Floor
New York, New York 10004
Telephone: (212) 509-4000 x218
Facsimile: (212) 509-5150
Attention: Hank Drews
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<PAGE>
or at such other address and/or facsimile number and/or to the attention of such
other person as the recipient party has specified by written notice given to
each other party three (3) Trading Days prior to the effectiveness of such
change. Written confirmation of receipt (A) given by the recipient of such
notice, consent, waiver or other communication, (B) mechanically or
electronically generated by the sender's facsimile machine containing the time,
date, recipient facsimile number and an image of the first page of such
transmission or (C) provided by a nationally recognized overnight delivery
service shall be rebuttable evidence of personal service, receipt by facsimile
or receipt from a nationally recognized overnight delivery service in accordance
with clause (i), (ii) or (iii) above, respectively.
g. SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon and inure to the benefit of the parties and their respective successors and
assigns, including any transferee of the Equity Purchase Agreements. The Company
shall not assign this Agreement or any rights or obligations hereunder without
the prior written consent of the Buyer, including by merger or consolidation.
The Buyer may not assign its rights under this Agreement without the consent of
the Company, other than to an affiliate of the Buyer. Notwithstanding anything
to the contrary contained in the Transaction Documents, the Buyer shall be
entitled to pledge the Securities in connection with a bona fide loan or margin
account.
h. NO THIRD PARTY BENEFICIARIES. This Agreement is intended
for the benefit of the parties hereto and their respective permitted successors
and assigns, and is not for the benefit of, nor may any provision hereof be
enforced by, any other person.
i. PUBLICITY. The Company and the Buyer shall have the right
to approve before issuance any press releases or any other public disclosure
(including any filings with the SEC) with respect to the transactions
contemplated hereby; provided, however, that the Company shall be entitled,
without the prior approval of any Buyer, to make any press release or other
public disclosure (including any filings with the SEC) with respect to such
transactions as is required by applicable law and regulations (although the
Buyer shall be consulted by the Company in connection with any such press
release or other public disclosure prior to its release and shall be provided
with a copy thereof).
j. FURTHER ASSURANCES. Each party shall do and perform, or
cause to be done and performed, all such further acts and things, and shall
execute and deliver all such other agreements, certificates, instruments and
documents, as the other party may reasonably request in order to carry out the
intent and accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
k. TERMINATION; SURVIVAL. This Agreement may be terminated
only as follows:
(i) By the Buyer any time after an Event of Default (as
defined in the Equity Purchase Agreements) has occurred.
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<PAGE>
(ii) In the event that the First Closing shall not have
occurred, the Company shall have the option to terminate this Agreement
for any reason or for no reason without liability of any party to any
other party. If this Agreement is terminated pursuant to this Section
9(k)(ii), the Company shall issue to the Buyer the First Closing
Commitment Shares immediately prior to the termination hereof. In the
such case, the number of First Closing Commitment Shares shall be equal
to: (A) 12% of $6,000,000 divided by the lower of (1) the arithmetic
average of the Closing Bid Prices of the Common Stock for the five (5)
consecutive Trading Days immediately preceding the Trading Day which is
two (2) Trading Days prior to the date of termination of this Agreement
and (2) the arithmetic average of the Closing Bid Prices of the Common
Stock for the five (5) consecutive Trading Days immediately preceding
the date hereof, plus (B) 3% of $6,000,000 divided by the lower of (1)
the arithmetic average of the Closing Bid Prices of the Common Stock
for the five (5) consecutive Trading Days immediately preceding the
Trading Day which is two (2) Trading Days prior to the date of
termination of this Agreement and (2) the arithmetic average of the
Closing Bid Prices of the Common Stock for the five (5) consecutive
Trading Days immediately preceding the date hereof.
(iii) In the event that the First Closing shall not have
occurred on or before June 30, 2000, due to the failure to satisfy the
conditions set forth in Sections 6 and 7 above with respect to the
First Closing (and the nonbreaching party's failure to waive such
unsatisfied condition(s)), the nonbreaching party shall have the option
to terminate this Agreement at the close of business on such date
without liability of any party to any other party; provided, however,
that any such termination shall not release any breaching party from
liability hereunder. If this Agreement is terminated pursuant to this
Section 9(k)(iii) prior to the First Closing other than solely as a
result of any material breach of the Buyer's obligation hereunder, the
Company shall issue to the Buyer the First Closing Commitment Shares
immediately upon the termination hereof. In the such case, the number
of First Closing Commitment Shares shall be equal to: (A) 12% of
$6,000,000 divided by the lower of (1) the arithmetic average of the
Closing Bid Prices of the Common Stock for the five (5) consecutive
Trading Days immediately preceding the Trading Day which is two (2)
Trading Days prior to the date of termination of this Agreement and (2)
the arithmetic average of the Closing Bid Prices of the Common Stock
for the five (5) consecutive Trading Days immediately preceding the
date hereof, plus (B) 3% of $6,000,000 divided by the lower of (1)
arithmetic average of the Closing Bid Prices of the Common Stock for
the five (5) consecutive Trading Days immediately preceding the Trading
Day which is two (2) Trading Days prior to the date of termination of
this Agreement and (2) the arithmetic average of the Closing Bid Prices
of the Common Stock for the five (5) consecutive Trading Days
immediately preceding the date hereof.
(iv) If the First Equity Purchase Agreement has been entered
into as provided herein, by the Company any time after the date on
which the aggregate principal amount of the First Equity Purchase
Agreement has been fully converted to Common Stock, but prior to the
delivery to the Buyer of the Second Closing Notice.
20
<PAGE>
(v) If the First Equity Purchase Agreement has been entered
into as provided herein, by either the Company or the Buyer if (A) the
aggregate principal amount of the First Equity Purchase Agreement has
been fully converted to Common Stock and (B) the Company has not
delivered a Second Closing Notice to the Buyer on or prior to the tenth
(10th) Trading Day after the date on which the aggregate principal
amount of the First Equity Purchase Agreement has been fully converted
to Common Stock.
(vi) If (A) the First Equity Purchase Agreement has been
entered into as provided herein, (B) the aggregate principal amount of
the First Equity Purchase Agreement has been fully converted to Common
Stock and (C) the Company has delivered a Second Closing Notice to the
Buyer, in the event that the Second Closing shall not have occurred on
or before twenty (20) Trading Days from the date of the Second Closing
Notice due to the failure to satisfy the conditions set forth in
Sections 6 and 7 above with respect to the Second Closing (and the
nonbreaching party's failure to waive such unsatisfied condition(s)),
the nonbreaching party shall have the option to terminate this
Agreement at the close of business on such date without liability of
any party to any other party; provided, however, that any such
termination shall not release any breaching party from liability
hereunder. If this Agreement is terminated pursuant to this Section
9(k)(vi) prior to the Second Closing other than a material breach of
the Buyer's obligation hereunder, the Company shall issue to the Buyer
the Second Closing Commitment Shares immediately upon the termination
hereof. In such case, the number of Second Closing Commitment Shares
shall be equal to 7% of $6,000,000 divided by the lesser of (A) the
arithmetic average of the Closing Bid Prices of the Common Stock for
the five (5) consecutive Trading Days immediately preceding the Trading
Day which is two (2) Trading Days prior to the date of termination of
this Agreement and (B) the arithmetic average of the Closing Bid Prices
of the Common Stock for the five (5) consecutive Trading Days
immediately preceding the date on which the Second Closing Notice is
delivered.
(vii) If the First Equity Purchase Agreement or the Second
Equity Purchase Agreement is terminated by either party pursuant to its
terms without full conversion into Common Stock or if the Second Equity
Purchase Agreement has been fully converted to Common Stock, this
Agreement shall automatically terminate at such time.
Except for termination of this Agreement under Section 9(k)(vii), any
termination of this Agreement pursuant to this Section 9(k) shall be effected by
written notice from the Company to the Buyer, or the Buyer to the Company, as
the case may be, setting forth the basis for the termination hereof. A
termination of this Agreement under Section 9(k)(vii) shall automatically occur
on such date as the First Equity Purchase Agreement or the Second Equity
Purchase Agreement has been terminated by either party pursuant to its terms
without full conversion into Common Stock or on such date as the aggregate
principal amount of the Second Equity Purchase Agreement has been fully
converted to Common Stock, in each case, without any action or notice on the
part of any party. Except as expressly set forth in this Agreement, the
representations and warranties of the Company and the Buyer contained in
Sections 2 and 3 hereof, the indemnification provisions set forth in Section 8
hereof and the agreements and covenants set forth in Section 9, shall survive
each Closing and any termination hereof.
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<PAGE>
l. FINANCIAL ADVISOR. The Company acknowledges that it has
engaged Miron Leshem, as financial advisor in connection with the sale of the
Securities. The Company shall be responsible for the payment of any fees or
commissions, if any, of Mr. Leshem or any other financial advisor or placement
agent relating to or arising out of the transactions contemplated hereby. The
Company shall pay, and hold the Buyer harmless against, any liability, loss or
expense (including, without limitation, attorneys' fees and out of pocket
expenses) arising in connection with any such claim.
m. NO STRICT CONSTRUCTION. The language used in this Agreement
will be deemed to be the language chosen by the parties to express their mutual
intent, and no rules of strict construction will be applied against any party.
n. REMEDIES. The Buyer and each holder of the Securities shall
have all rights and remedies set forth in the Transaction Documents and all
rights and remedies which such holders have been granted at any time under any
other agreement or contract and all of the rights which such holders have under
any law. Any person having any rights under any provision of the Transaction
Documents shall be entitled to enforce such rights specifically (without posting
a bond or other security), to recover damages by reason of any breach of any
provision of the Transaction Documents and to exercise all other rights granted
by law.
o. PAYMENT SET ASIDE. To the extent that the Buyer receives a
payment or payments hereunder or pursuant to the other Transaction Documents or
the Buyer enforces or exercises its rights hereunder or thereunder, and such
payment or payments or the proceeds of such enforcement or exercise or any part
thereof are subsequently invalidated, declared to be fraudulent or preferential,
set aside, recovered from, disgorged by or are required to be refunded, repaid
or otherwise restored to the Company, a trustee, receiver or any other Person
under any law (including, without limitation, any bankruptcy law, state or
federal law, common law or equitable cause of action), then to the extent of any
such restoration the obligation or part thereof originally intended to be
satisfied shall be revived and continued in full force and effect as if such
payment had not been made or such enforcement or setoff had not occurred.
q. PAYMENT OF EXPENSES. The Company shall pay to the Buyer
$20,000 as a refundable deposit towards the Buyer's expenses. In addition, in
the event the Buyer incurs expenses in excess of $10,000, the Company shall
reimburse the investor for all expenses in connection with consummation of the
transaction, including any due diligence expenses and legal fees, provided that
the Buyer submits full documentation and accounting of such expenses up to a
limit of $40,000.
* * * * * *
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IN WITNESS WHEREOF, the Buyer and the Company have caused this AMENED
AND RESTATED Master Facility Agreement to be duly executed as of the date first
written above.
COMPANY:
5TH AVENUE CHANNEL CORP.
By: /s/ ERIC LEFKOWITZ
----------------------------------------
Name: Eric Lefkowitz
Title: Executive Vice President
BUYER:
FUSION CAPITAL FUND II, LLC
BY: FUSION CAPITAL PARTNERS II, LLC
BY: SGM HOLDING CORP.
By: /s/ STEVEN G. MARTIN
-------------------------
Name: Steven G. Martin
Title: President
23
<PAGE>
EXHIBIT E
---------
FORM OF COMPANY RESOLUTIONS
5TH AVENUE CHANNEL CORP.
Attached hereto.
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form SB-2 of 5th Avenue Channel Corp., of our report
dated March 28, 2000 (which report contains an emphasis paragraph relating to
certain liquidity and profitability considerations) relating to the consolidated
financial statements of 5th Avenue Channel Corp., as of December 31, 1999 and
for each of the two years in the period then ended, appearing in such
Prospectus. We also consent to the references to us under the heading "Expert"
in the Prospectus.
RACHLIN COHEN & HOLTZ LLP
Miami, Florida
April 26, 2000
