PROSPECTUS
8,534,578 SHARES OF COMMON STOCK
5TH AVENUE CHANNEL CORP.
Certain of our shareholders are offering a total of 6,284,578 shares of
common stock pursuant to this prospectus, consisting of the following:
/bullet/ 3,323,754 shares of issued and outstanding common stock;
/bullet/ up to 1,824,324 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 entered into on May 4,
2000 with Fusion Capital Fund II, LLC and 324,324 shares which we issued
to Fusion Capital on May 4, 2000 as a commitment fee;
/bullet/ 462,500 shares which are to be issued in connection with a
subscription agreement with Florida Pointe, Inc.;
/bullet/ 354,000 shares issuable upon the exercise of certain consultant's
warrants;
/bullet/ 100,000 shares issuable upon the exercise of certain warrants sold
to an accredited investor in a private transaction;
/bullet/ 200,000 shares issuable upon the exercise of certain warrants
issued in connection with a licensing agreement; and
/bullet/ 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.
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.
----------------
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 MAY 4, 2000
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TABLE OF CONTENTS
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PAGE
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<S> <C>
Prospectus Summary ................................................................... 1
The Offering ......................................................................... 2
Summary Consolidated Financial Information ........................................... 3
Risk Factors ......................................................................... 4
Price Range of Common Stock .......................................................... 14
Use of Proceeds ...................................................................... 14
Dividend Policy ...................................................................... 14
Management's Discussion and Analysis of Financial Condition and Results of Operations 15
The Fusion Transaction. .............................................................. 21
Florida Point Agreement .............................................................. 25
Business. ............................................................................ 26
Management. .......................................................................... 34
Principal Shareholders ............................................................... 38
Selling Shareholders. ................................................................ 39
Certain Transactions. ................................................................ 41
Description of Securities ............................................................ 43
Shares Eligible for Future Sale ...................................................... 45
Plan of Distribution. ................................................................ 46
Legal Matters ........................................................................ 47
Experts .............................................................................. 47
Where You Can Find More Information .................................................. 48
Index to Consolidated Financial Statements. .......................................... F-1
</TABLE>
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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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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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
<TABLE>
<S> <C>
Securities Offered by the Selling Shareholders ......... 6,284,578 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
</TABLE>
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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.
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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)
============ ============
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
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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:
/bullet/ increase awareness of the 5th Avenue Channel, NetVideoNetworks and
NetFinancialNews brands and to be able to build user loyalty;
/bullet/ develop and expand the content and services on our channel and
website;
/bullet/ attract a large audience to our channel and website;
/bullet/ attract a large number of advertisers from a variety of
industries;
/bullet/ maintain our current and develop new strategic relationships;
/bullet/ respond effectively to competitive pressures; and
/bullet/ 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, 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.
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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:
/bullet/ the number of ongoing visitors and subscribers to our channel and
website and their use of our services;
/bullet/ fees we may pay for distribution, service or content agreements
and promotional arrangements or other costs we incur as we expand our
operations;
/bullet/ the timing and amount of advertising and sponsorship revenues;
/bullet/ the amount and timing of capital expenditures and other costs
related to the expansion of our operations;
/bullet/ the introduction of new products or services by us or our
competitors;
/bullet/ pricing changes in the industry;
/bullet/ new government regulations that affect business on the Internet;
/bullet/ general economic conditions; and
/bullet/ seasonality, price and cost factors affecting the sale of
consumer products.
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
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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:
/bullet/ online financial services or financial websites targeted to
consumers;
/bullet/ publishers and distributors of traditional offline media,
including those targeted to financially and entrepreneurially conscious
consumers, many of which have established web use;
/bullet/ public sector and non-profit websites that provide information
without advertising or commercial sponsorships;
/bullet/ vendors of products and services distributed through the web and
other means, including direct sales, mail and fax messaging; and
/bullet/ 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:
/bullet/ greater financial, technical and marketing resources that can be
devoted to the development, promotion and sale of their services;
/bullet/ relatively easy access to capital;
/bullet/ longer operating histories;
/bullet/ greater name recognition;
/bullet/ larger subscriber bases; and
/bullet/ 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.
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:
/bullet/ greater financial, technical and marketing resources that can be
devoted to the development, promotion and sale of their services;
/bullet/ relatively easy access to capital;
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/bullet/ longer operating histories;
/bullet/ greater name recognition;
/bullet/ larger subscriber bases; and
/bullet/ 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:
/bullet/ the amount of traffic on, and the number of subscribers to, our
website; and
/bullet/ 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.
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.
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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.
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:
/bullet/ lower advertising rates;
/bullet/ price reductions and lower profit margins;
/bullet/ loss of visitors;
/bullet/ reduced page views; or
/bullet/ 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
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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.
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
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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.
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:
/bullet/ damage from fire, power loss and other natural disasters;
/bullet/ communications failures;
/bullet/ software and hardware errors, failures or crashes;
/bullet/ security breaches, computer viruses and similar disruptive
problems; and
/bullet/ 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
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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 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,
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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.
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
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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
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.
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<PAGE>
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.
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)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, % INCREASE
1999 1998 (DECREASE)
-------------- ------------- -----------
<S> <C> <C> <C>
REVENUE
Product sales ...................... $2,196 $ -- --
Wireless cable:
Costa Rica ........................ 1,279 1,093 17%
Wisconsin ......................... 317 360 (12%)
Corporate, Internet and TV .........
Total .............................. $3,792 $1,453 161%
====== ======
DIRECT COSTS
Product sales ...................... $1,679 $ -- --
Wireless cable:
Costa Rica ........................ 321 149 115%
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%
====== ======
</TABLE>
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<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, % INCREASE
1999 1998 (DECREASE)
------------- -------------- -----------
<S> <C> <C> <C>
INTEREST INCOME (EXPENSE)
INTEREST INCOME
Corporate, Internet and TV ......... $ 18 $ -- --
-------- -------- --
Costa Rica ........................ 1 2 (50%)
-------- --------
Sub total ........................ 19 2 850%
-------- --------
ACCRETION OF DEBENTURE DISCOUNT
Corporate, Internet and TV ......... (472) (448) 5%
-------- --------
OTHER INTEREST EXPENSE
Corporate, Internet and TV ......... (399) (288) 39%
-------- --------
Total .......................... $ (852) $ (734) 16%
======== ========
NET LOSS
Product sales ...................... $ (398) $ -- --
Wireless cable:
Costa Rica ........................ (82) (303) (73%)
Wisconsin ......................... (230) (125) 84%
Corporate, Internet and TV ......... (4,468) (2,870) 56%
-------- --------
Total ............................ $ (5,178) $ (3,298) 57%
======== ========
</TABLE>
REVENUES
We had revenues of $3,792,000 for 1999 compared to $1,453,000 in 1998, an
increase of $2,339,000 or 161%. Approximately $2,196,000 of this increase was
derived from product sales primarily to home shopping channels and sales of our
teen cosmetic line. Wireless cable television services accounted for $143,000
of the increase in 1999 due to an increased subscriber base in Costa 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.
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.
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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.
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
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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 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:
/bullet/ 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.
/bullet/ 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.
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/bullet/ 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.
/bullet/ 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.
/bullet/ Increasing the number of households subscribing to our wireless
cable television services in both Costa Rica and Wisconsin.
/bullet/ 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."
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
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the derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company formally document,
designate and assess the effectiveness of transactions that receive hedge
accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 2000.
A company may also implement the provisions of SFAS No. 133 as of the beginning
of any fiscal quarter commencing June 16, 1998 and thereafter. SFAS No. 133
cannot be applied retroactively. SFAS No. 133 must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid contracts
that were issued, acquired, or substantively modified after December 31, 1997
(and, at the Company's election, before January 1, 1998). We have not entered
into derivatives contracts to hedge existing risks or for speculative purposes.
Accordingly, we do not expect the adoption of the new standard to affect our
financial statements.
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 requires all costs
related to the development of internal use software other than those incurred
during the application development stage to be expensed as incurred. Costs
incurred during the application development stage are required to be
capitalized and amortized over the estimated useful life of the software. SOP
98-1 was adopted by the Company on January 1, 1999 and did not have a material
effect on the Company's financial position or results of operations.
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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 was entered into by Fusion Capital and
us on May 4, 2000. Fusion Capital paid us $500,000 as partial prepayment of the
common stock on such 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" from time to time specified dollar
amounts of the $6,000,000 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:
/bullet/ the lowest sale price of our common stock on the day of submission of
a conversion notice by Fusion Capital; or
/bullet/ 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
/bullet/ 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." The
first equity purchase agreement was entered into on May 4, 2000, and
the Fixed Conversion Price is $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:
<TABLE>
<CAPTION>
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)
- --------------------------------------------------- --------------------- ------------------
<S> <C> <C>
$2.50, the conversion price on May 3, 2000......... 2,400,000(2) 15.82%
$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%
</TABLE>
- ----------------
(1) As of May 3, 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.
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:
/bullet/ the consolidation, merger or other business combination with
another entity;
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/bullet/ any transaction which could involve a fair value of $10,000,000 or
more in a single transaction or a series of related transactions;
/bullet/ 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
/bullet/ 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:
/bullet/ 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;
/bullet/ 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;
/bullet/ 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;
/bullet/ (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;
/bullet/ 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;
/bullet/ 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;
/bullet/ a default of any payment obligation of us in excess of $1 million; or
/bullet/ our participation in insolvency or bankruptcy proceedings by or
against us.
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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, on May 4, 2000 Fusion Capital
received 324,324.
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 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.
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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.
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
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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 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.
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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.
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
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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 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
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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.
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
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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
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.
31
<PAGE>
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.
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.
32
<PAGE>
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.
33
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors, executive officers and key employees are as follows:
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITION SINCE
- --------------------- ----- ----------------------------------------------------- ---------
<S> <C> <C> <C>
Melvin Rosen 55 Chairman of the Board, President and 1997
and 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 andChief 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.
</TABLE>
Each of our directors holds his position until the next annual meeting of
shareholders or until his successor is duly elected and qualified.
MELVIN ROSEN: PRESIDENT, C.E.O. AND CHAIRMAN OF THE BOARD. Melvin Rosen,
56, has served as President, Chief Executive Officer and Chairman of the Board
of the Company since May 1997. From July 1986 to May 1996, he owned and served
as the President of the company that owned a wireless cable television system
in Costa Rica which was sold to us in February 1996. He was also the co-founder
of TVN, a large pay-per-view company.
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 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
34
<PAGE>
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.
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.
35
<PAGE>
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 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.
36
<PAGE>
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.
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
OTHER
NAME AND ANNUAL ALL OTHER
PRINCIPAL POSITION YEAR 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 12/31/98 $180,000 0 0 0 0
CEO 12/31/97(1) $ 90,000 0 0 0 0
Eric Lefkowitz 12/31/99 $150,000 0 0 0 0
Executive VP 12/31/98(2) $ 50,000 0 0 0 0
and Director
</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.
37
<PAGE>
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:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF
BENEFICIAL OWNER OR IDENTITY OF GROUP BENEFICIAL OWNERSHIP(1) OUTSTANDING SHARES(2)
- --------------------------------------- ------------------------- ----------------------
<S> <C> <C>
Melvin Rosen 7,164,879(3) 48.89%
c/o 5th Avenue Channel Corp.
3957 N.E. 163rd Street
North Miami Beach, FL 33160
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%
</TABLE>
- ----------------
* 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.
(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.
38
<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 *
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 *
</TABLE>
39
<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>
Jim Pakarek(12) 10,000 * 10,000 0 *
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, LLC(14) 651,167 4.99% 1,824,324 0 *
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.
(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 324,324 shares we 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.
40
<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.
41
<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.
42
<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."
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."
43
<PAGE>
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 was entered into with Fusion Capital
on May 4, 2000. The second equity 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.
44
<PAGE>
Upon each conversion into shares of common stock under the equity purchase
agreements, Fusion Capital will send to 5th Avenue Channel, in cash, the
aggregate principal amount converted as the purchase price for the shares
received. Upon entering the first equity purchase agreement, Fusion Capital
will advance $500,000 to 5th Avenue Channel. This amount will be credited
against the first $500,000 of purchases of common stock under the first equity
purchase agreement.
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."
45
<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:
/bullet/ ordinary brokers' transactions;
/bullet/ transactions involving cross or block trades or otherwise on the
Nasdaq SmallCap Market;
/bullet/ purchases by brokers, dealers or underwriters as principal and
resale by such purchasers for their own accounts pursuant to this
prospectus;
/bullet/ "at the market" to or through market makers or into an existing
market for the common stock;
/bullet/ in other ways not involving market makers or established trading
markets, including direct sales to purchasers or sales effected through
agents;
/bullet/ in privately negotiated transactions; or
/bullet/ 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.
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
46
<PAGE>
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.
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.
47
<PAGE>
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.
48
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Reports of Independent Certified Public Accountants .............................. F-2
Balance Sheet as of December 31, 1999 ............................................ F-3
Statements of Operations for the Years Ended December 31, 1999 and 1998 .......... F-4
Statements of Stockholders' Equity for the Years Ended December 31, 1999 and 1998 F-5
Statements of Cash Flows for the Years Ended December 31, 1999 and 1998 .......... F-6
Notes to Financial Statements .................................................... F-7
</TABLE>
F-1
<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 29, 2000
F-2
<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-3
<PAGE>
5TH AVENUE CHANNEL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Revenue:
Product sales ....................................... $ 2,195,675 $ --
Wireless cable television services .................. 1,595,995 1,453,033
------------ ------------
3,791,670 1,453,033
Direct Costs:
Product sales ....................................... 1,678,922 --
Wireless cable television services .................. 393,358 235,367
------------ ------------
2,072,280 235,367
Gross Margin ......................................... 1,719,390 1,217,666
------------ ------------
Operating Expenses:
Selling, general and administrative ................. 4,598,174 2,128,821
Website and software development costs .............. 533,237 696,762
Depreciation and amortization ....................... 913,529 605,652
Provision for asset impairment ...................... -- 350,000
------------ ------------
6,044,940 3,781,235
------------ ------------
Loss from Operations ................................. (4,325,550) (2,563,569)
Other Income (Expense):
Interest income ...................................... 18,664 2,377
------------ ------------
Interest expense ..................................... (871,117) (736,749)
------------ ------------
(852,453) (734,372)
------------ ------------
Net Loss ............................................. $ (5,178,003) $ (3,297,941)
============ ============
Net Loss Per Common Share--Basic and Diluted ......... $ (0.52) $ (0.81)
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<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-5
<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-6
<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.
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.
F-7
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999 AND 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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.
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
F-8
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999 AND 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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.
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
F-9
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999 AND 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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.
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.
F-10
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999 AND 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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.
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
F-11
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999 AND 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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 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
F-12
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999 AND 1998
NOTE 2. LIQUIDITY AND PROFITABILITY CONSIDERATIONS--(CONTINUED)
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.
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:
/bullet/ 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.
/bullet/ 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.
/bullet/ 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.
/bullet/ 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.
F-13
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999 AND 1998
NOTE 2. LIQUIDITY AND PROFITABILITY CONSIDERATIONS--(CONTINUED)
/bullet/ Increasing the number of households subscribing to the Company's
wireless cable television services in both Costa Rica and Wisconsin.
2. IMPROVEMENT IN OPERATIONAL COSTS
Management continues in its efforts to manage costs and to continually
improve cost controls over operating costs and the cost of delivery of goods
and services, so as to improve gross margins and profitability.
NOTE 3. BUSINESS ACQUISITIONS
ACQUISITION OF 5TH AVENUE CHANNEL, INC.
In the Share Exchange Agreement dated February 28, 1999 effective December
10, 1998, the Company completed the acquisition of The 5th Avenue Channel, Inc.
(5th Avenue Channel). Under the agreement, the Company exchanged 335,000 shares
of the Company's stock in exchange for 100% of the outstanding common stock of
5th Avenue Channel and agreed to issue up to 665,000 additional "performance
shares" of the Company's common stock. 332,500 shares will be earned when 5th
Avenue Channel achieves or exceeds $10,000,000 in revenue in any calendar
quarter and another 332,500 shares can be earned if 5th Avenue Channel achieves
or exceeds $25,000,000 of gross sales or $1,000,000 of net income in any one
calendar quarter. In a March 17, 1999 amendment to the agreement, if 5th Avenue
Channel achieves $25,000,000 of sales or $1,000,000 in net income in any
calendar quarter, all 665,000 of the performance shares will be earned.
The controlling stockholder of the Company owned 65% of 5th Avenue Channel
common stock and, accordingly, that portion of the acquisition has been
accounted in a manner similar to the pooling of interests method, at the
majority stockholder's historical cost, which was insignificant. The portion of
the acquisition acquired from minority stockholders was recorded at estimated
fair value of the common stock issued. When and if the performance shares are
earned, they will be recorded at estimated fair value.
5th Avenue Channel's primary asset is its Internet concept, which is
primarily an intangible asset. The Company allocated the purchase price to this
asset, which is being amortized over a five year period commencing January 1,
1999.
5th Avenue Channel commenced limited operations in December 1998. $696,762
of website and product development costs were included in the Company's
consolidated financial statements for 5th Avenue Channel in 1998. There were no
significant revenues generated in 1999 or 1998 by 5th Avenue Channel.
Accordingly, substantially all of 5th Avenue Channel's operating results have
been included in the Company's consolidated financial statements for 1999 and
1998.
CONSULTING AGREEMENT
As an integral part of the acquisition of 5th Avenue Channel, the Company
entered into a Consulting Agreement with Ivana Trump for "on air" marketing and
other promotional services.
F-14
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999 AND 1998
NOTE 3. BUSINESS ACQUISITIONS--(CONTINUED)
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
==========
SUMMARY OF GOODWILL
5th Avenue Channel, Inc. ..................... $ 615,000
IBC .......................................... 1,698,848
----------
2,313,848
Less accumulated amortization ................ 235,556
----------
$2,078,292
==========
F-15
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999 AND 1998
NOTE 4. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
ESTIMATED USEFUL
LIVES (YEARS)
-----------------
<S> <C> <C>
Leasehold improvements ................................ 7-10 $ 60,365
Furniture, fixtures and office equipment .............. 7 229,552
TV signal rebroadcast and receiving equipment ......... 5-10 1,968,068
Vehicles .............................................. 5 133,371
Web site software and hardware ........................ 3-5 193,464
----------
2,584,820
Less accumulated depreciation ......................... 1,084,409
----------
$1,500,411
==========
</TABLE>
Depreciation expense was $358,809 and $286,488 for 1999 and 1998,
respectively. In 1998, the Company wrote off approximately $82,000 of converter
boxes, which were no longer operational.
Depreciation of website software and hardware will start during the second
quarter of 2000 upon the launch of the internet site.
NOTE 5. LICENSES
<TABLE>
<CAPTION>
LOCATION OF LICENSE
- -------------------
<S> <C>
United States:
LaCrosse, Wisconsin .......................................... $ 371,493
Stevens Point and Wausau, Wisconsin, net of $350,000 allowance
for impairment ............................................. 839,361
----------
1,210,854
Costa Rica:
San Jose, Costa Rica ......................................... 4,174,000
----------
5,384,854
Less accumulated amortization ................................. 1,052,957
----------
$4,331,897
==========
</TABLE>
Amortization expense was $319,164 and $319,697 for 1999 and 1998,
respectively.
UNITED STATES LICENSES
During 1993, the Company entered into agreements for the lease and
purchase of certain channel licenses and for the lease and purchase of
transmitting equipment and tower site usage in LaCrosse, Wisconsin. Pursuant to
the agreements, the Company incurred $371,493 of costs related to the channel
licenses.
On March 28, 1996, the Federal Communications Commission (FCC) completed
its auction of authorizations to provide single channel and Multi-Channel
Multi-Point Distribution Service (MDS) in 493 Basic Trading Areas. The Company
won bids in three markets: Hickory-Lenoir-Morganton, NC;
F-16
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999 AND 1998
NOTE 5. LICENSES--(CONTINUED)
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.
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
========
F-17
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999 AND 1998
NOTE 5. LICENSES--(CONTINUED)
In 1998, the Company recorded a $350,000 impairment allowance relating to
the Stevens Point and Wausau, Wisconsin licenses. The Company believes the
value of these licenses declined by the estimated allowance recorded. At
December 31, 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.
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.
F-18
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999 AND 1998
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.
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.
F-19
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999 AND 1998
NOTE 8. NOTES AND LOANS RECEIVABLE, RELATED PARTIES
<TABLE>
<S> <C>
NOTES RECEIVABLE
Notes receivable from officers/stockholders, one of whom is a director; including
interest at 8%, payable in 10 annual installments of approximately $50,000,
collateralized by 55,562 shares of the Company common stock .......................... $333,365
Less current maturities ............................................................... 23,012
--------
$310,353
========
LOANS RECEIVABLE
Loan receivable from a former officer, no specified maturity date or interest rate .... $ 51,274
Loan receivable from a current employee, no specified maturity date or interest
rate; the loan was settled in early 2000 in consideration for services performed
by the employee in 2000 .............................................................. 23,000
Other employee loans .................................................................. 13,638
--------
87,912
Less allowance ........................................................................ 23,000
--------
$ 64,912
========
</TABLE>
NOTE 9. LOANS PAYABLE, RELATED PARTIES
<TABLE>
<S> <C>
Loans payable to the President/Chairman of the Board, interest at 8%,
no specified maturity date, including accrued interest of $242,958........... $2,268,308
==========
Loan payable to former CEO and director, interest at 10%, no specified
maturity date, including accrued interest of $4,491.......................... $ 22,941
Loan payable to current director, interest at 10%, no specified maturity date,
including accrued interest of $7,140......................................... 32,140
----------
$ 55,081
==========
</TABLE>
Interest expense on the related party loans payable amounted to
approximately $175,000 and $63,000 during 1999 and 1998, respectively.
F-20
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999 AND 1998
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
==========
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.
F-21
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999 AND 1998
NOTE 10. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
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.
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
F-22
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999 AND 1998
NOTE 11. CONVERTIBLE SUBORDINATED DEBENTURES--(CONTINUED)
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.
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.
F-23
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999 AND 1998
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.
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.
F-24
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999 AND 1998
NOTE 13. STOCK WARRANTS, CONSULTING AGREEMENTS AND SHARES RESERVED--(CONTINUED)
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.
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.
F-25
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999 AND 1998
NOTE 14. STOCK OPTION PLAN--(CONTINUED)
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)
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-26
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999 AND 1998
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
- --------------------------------------------------------------------------- -----------------------------
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
OUSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
RANGE OF AT DECEMBER 31, REMAINING EXERCISE AT DECEMBER 31, EXERCISE
EXERCISE PRICES 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)
------------
$ --
============
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.
F-27
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999 AND 1998
NOTE 15. INCOME TAXES--(CONTINUED)
The Company had been delinquent in the filing of various federal, state
and local income and other tax returns. The ultimate determination of the
Company's taxable income, including the amount and expiration dates of net
operating loss carryforwards, is subject to, among other things, certain
restrictions as a result of the late filing of the various tax returns. The
Company may also be subject to possible review and examination of such tax
returns by the appropriate federal, state and local taxing authorities.
Additional income taxes, including penalties for non-compliance and interest,
if any that may be assessed will be charged to operations when determined.
In accordance with certain provisions of the Tax Reform Act of 1986, a
change in ownership of greater than 50% of a corporation within a three year
period will place an annual limitation on the corporation's ability to utilize
its existing tax benefit carryforwards. Under such circumstances, the potential
benefits from utilization of the tax loss carryforwards as of that date may be
substantially limited or reduced on an annual basis. To the extent that net
operating loss carryforwards, when realized, relate to stock option deductions,
the resulting benefits will be credited to stockholders' equity.
NOTE 16. NET LOSS PER COMMON SHARE
The following table sets forth the computation of basic and diluted net
loss per common share for the years ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Numerator for basic and diluted loss per share--net loss .......... $ (5,178,003) $ (3,297,941)
============ ============
Denominator for basic and diluted loss per share--
weighted average shares .......................................... 10,036,865 4,080,242
============ ============
Basic and diluted net loss per common share ....................... $ (0.52) $ (0.81)
============ ============
</TABLE>
All convertible instruments, which are convertible into shares of common
stock, were excluded in the computation of diluted loss per share because their
effect would be anti-dilutive.
F-28
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999 AND 1998
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-29
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999 AND 1998
NOTE 18. SEGMENT 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-30
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999 AND 1998
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 29, 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.
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
F-31
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999 AND 1998
NOTE 20. SUBSEQUENT EVENTS--(CONTINUED)
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.
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.
F-32
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999 AND 1998
NOTE 20. SUBSEQUENT EVENTS--(CONTINUED)
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.
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.
F-33
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999 AND 1998
NOTE 20. SUBSEQUENT EVENTS--(CONTINUED)
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.
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
F-34
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999 AND 1998
NOTE 20. SUBSEQUENT EVENTS--(CONTINUED)
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-35
