U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter period ended June 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission File No. 0-25896
5TH AVENUE CHANNEL CORP.
(Exact name of small business issuer as specified in its charter)
FLORIDA 59-3175814
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification NO.)
3957 N.E. 163RD STREET
NORTH MIAMI BEACH, FLORIDA 33160
(Address of principal executive offices) (Zip Code)
(305) 947-3010
(Issuer's telephone number)
Securities registered under Section 12(G) of the Exchange Act:
Common Stock, par value $.001 per share
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months and (2) has been
subject to such filing requirements for the past 90 days. YES [ ] NO [X]
As of June 30, 2000, there were 13,618,688 shares of the issuer's Common Stock
outstanding.
Transitional Small Business Disclosure Format. YES [ ] NO [X]
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5th AVENUE CHANNEL CORP.
FORM 10-QSB
FOR THE QUARTER ENDED JUNE 30, 2000
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE NO.
ITEM 1. Condensed Consolidated Financial Statements
Balance Sheets as of June 30, 2000 (Unaudited) and
December 31, 1999 3
Unaudited Statements of Operations for the three months
ended June 30, 2000 and 1999. 4
Unaudited Statements of Operations for the six months
ended June 30, 2000 and 1999. 5
Unaudited Statements of Cash Flows for the six months
ended June 30, 2000 and 1999 6
Notes to Unaudited Financial Statements 7
ITEM 2. Management's discussion and analysis of financial condition
and results of operations 16
PART II OTHER INFORMATION
ITEM 2. Changes in securities
ITEM 6. Exhibits 24
SIGNATURES
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5TH AVENUE CHANNEL CORP.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 11,084 $ 2,024,143
Accounts receivable, net 119,621 555,514
Inventory 284,053 210,486
Loans and Notes receivable related parties 57,731 87,924
Prepaid expenses and other current assets 373,069 143,640
------------ ------------
Total Current Assets 845,558 3,021,707
Property and Equipment, net 2,247,091 1,500,411
Security Investments 473,831
Licenses, net 4,172,315 4,331,897
Goodwill, net 1,960,164 2,078,292
Notes Receivable, Related parties 344,319 310,353
Other Assets 214,660 222,699
------------ ------------
$ 10,257,938 $ 11,465,359
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 2,604,477 $ 1,343,029
Accrued payroll, Pres./Chairman of the Board 575,000 450,000
Current portion of long-term debt 169,547 87,433
Loans and notes payable, related parties 56,331 55,081
President/Chairman 1,991,911 2,268,308
Obligation under capital leases 348,947
Deferred revenue 141,400 91,400
------------ ------------
Total Current Liabilities 5,887,613 4,295,251
Long term debt:
License installment notes, net of current portion 781,753 864,893
Obligation to Issue Shares 321,686
Total Liabilities
STOCKHOLDERS' EQUITY
Common stock 13,619 12,215
Additional paid-in capital 24,666,358 20,277,555
Accumulated deficit (19,571,394) (13,984,555)
------------ ------------
5,108,583 6,305,215
Stock Subscription Receivable (600,000)
Deferred Compensation and Other (1,241,697)
------------
Total Stockholders' Equity 3,266,866 6,305,215
------------ ------------
$ 10,257,938 $ 11,465,359
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
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5TH AVENUE CHANNEL CORP.
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Revenue:
Product sales, net of allowances of 297,155 $ 721,853 $ 190,381
Wireless cable television services 345,298 378,974
----------- -----------
1,067,151 569,355
----------- -----------
Direct Costs
Product sales 566,250 170,698
Wireless cable television services 81,998 67,683
----------- -----------
648,248 238,381
----------- -----------
Gross Margin 418,903 330,974
----------- -----------
Operating Expenses
Selling, general and administrative 1,710,151 1,049,175
Television, website and software development costs 1,237,568 91,323
Depreciation and amortization 289,701 313,080
----------- -----------
3,234,420 1,453,578
Loss from Operations (2,818,606) (1,122,604)
----------- -----------
Other Income (Expense)
Interest income 8,897
Interest expense (87,217) (117,067)
Accretion of debenture discount (152,739)
----------- -----------
(78,320) (269,806)
----------- -----------
Net Loss ($2,896,926) ($1,392,410)
=========== ===========
Net Loss Per Common Share - Basic and Diluted ($ 0.15)
===========
Weighted Average Number of Shares Outstanding 9,536,532
===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
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5TH AVENUE CHANNEL CORP.
Condensed Consolidated Statements of Operations
(Unaudited)
Six Months Ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Revenue:
Product sales, net of allowances of $308,433 $ 820,458 $ 935,525
Wireless cable television services 711,578 796,471
----------- -----------
1,532,036 1,731,996
----------- -----------
Direct Costs:
Product sales 651,998 657,741
Wireless cable television services 193,048 138,302
----------- -----------
845,046 796,043
----------- -----------
Gross Margin 686,990 935,953
----------- -----------
Operating Expenses:
Selling, general and administrative 3,439,567 1,878,604
Television, website and software development costs 2,063,426 327,710
Depreciation and amortization 547,251 552,941
----------- -----------
6,050,244 2,759,255
Loss from Operations (5,363,253) (1,823,302)
Other Income (Expense)
Interest income 35,837 (371,588)
Interest expense (259,421) (205,705)
----------- -----------
(223,584) (577,293)
----------- -----------
Net Loss ($5,586,838) ($2,400,595)
=========== ===========
Net Loss Per Common Share - Basic and Diluted ($ 0.25)
===========
Weighted Average Number of Shares Outstanding 9,535,837
===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
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5TH AVENUE CHANNEL CORP.
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
----------- -----------
(Unaudited)
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss ($5,586,839) ($2,400,595)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 547,251 552,941
Accretion of debentures discount 371,588
Compensation in form of common stock and options issued to
officers and consultants 515,997
Stock and warrants issued in lieu of interest 101,164
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable 435,893 (91,067)
Decrease (increase) in inventory (73,567) 102,080
Increase in prepaid expenses and other current assets (199,236) 85,887
Increase in accrued payroll, President/Chairman of the Board 125,000
Increase in accounts payable and accrued liabilities 1,471,143 304,051
Increase in deferred revenue 50,000
----------- -----------
Net cash used in operating activities (2,613,195) (1,075,115)
Cash Flows from Investing Activities:
Purchase of property and equipment (1,016,402) (532,351)
Equipment purchased under capital Lease 468,362
Net cash received in IBC acquisition 40,381
Decrease (increase) in other assets (225,490) 14,102
Deferred TV program production costs (100,151)
----------- -----------
Net cash used in investing activities (773,530) (578,019)
Cash Flows from Financing Activities:
Net proceeds from sales of common stock 151,107 500,000
Proceeds of loans from President/Chairman of the Board 1,521,348
Payment of loans from President/Chairman of the Board (195,000)
Repayment of long-term debt (120,441) (6,868)
Proceeds from long term loans 250,000
Proceeds from master facility 1,288,000
Cost of registering common stock (10,851)
Repayment of loan from related party (29,776)
Net Change in loans to related party (2,979)
----------- -----------
Net cash provided by (used in) financing activities 1,373,666 1,970,874
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents (2,013,059) 317,740
----------- -----------
Cash and Cash Equivalents, Beginning 2,024,143 256,209
----------- -----------
Cash and Cash Equivalents, Ending $ 11,084 $ 573,949
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
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5TH AVENUE CHANNEL CORP.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Six Months Ended June 30, 2000
NOTE 1. BASIS OF PRESENTATION
The condensed consolidated balance sheet as of June 30, 2000, the
condensed consolidated statements of operations for the three months and six
months ended June 30, 2000 and 1999, and the condensed consolidated statements
of cash flows for the six months ended June 30, 2000 and 1999 have been prepared
by the Company. In the opinion of management, all adjustments (which include
reclassifications and normal recurring adjustments) necessary to present fairly
the financial position, results of operations and cash flows at June 30, 2000
and for all periods presented, have been made.
Certain information and footnote disclosures normally included in the
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
consolidated financial statements be read in conjunction with the Company's
financial statements and notes thereto included in the Company's December 31,
1999 Form 10-KSB. The results of operations for the three and six-month periods
ended June 30, 2000 are not necessarily indicative of the operating results for
the full year.
NOTE 2. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of cash flow information of the six months
ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Interest paid during the period $ 19,900 $ 10,744
Non-cash investing and financing activities:
Shares received in exchange for shares 1,249,878
Shares issued in repayment of loan 250,000
Shares issued for services to be performed 198,400
Warrants issued for services to be performed 1,265,378
Conversion of debentures 2,366,000
Stock issued for acquisition of IBC 2,463,000
Loan payable for acquisition of IBC, net 450,000
</TABLE>
NOTE 3. AMENDMENT TO SHARES EXCHANGE AGREEMENT AND CONSULTING AGREEMENT
Effective December 10, 1998 the Company acquired 100% of the capital
stock of The 5th Avenue Channel, Inc. ("5th Avenue") for 335,000 shares of the
Company common stock and agreed to issue up to 665,000 additional "performance
shares" as follows: 332,500 shares if 5th Avenue achieves gross revenues in
excess of $10,000,000 for any calendar quarter and the remaining 332,5000 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.
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 limits the period in which the
performance shares can be earned to September 30, 2003.
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As an integral part of the acquisition of 5th Avenue Channel, the
Company had entered into a Consulting Agreement with Ivana Trump for "on air"
marketing and other promotional services. Ms. Trump was Chairman for 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 renumeration based upon appearances. In addition, she received
options to purchase up to 700,000 shares at various exercise prices ranging form
$5 to $15 per share. The options were to 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 rights 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 share which she was entitled to receive
under certain conditions as per the Amended Share Exchange Agreement dated April
24, 2000.
NOTE 4. MASTER FACILITY AGREEMENT
On March 29, 2000, the Company entered into a master facility agreement
with Fusion Capital Fund II, LLC ("Fusion Capital") 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, the Company 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 shares of the Company's
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 the Company's 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 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, as further
described below. The first equity purchase agreement requires that upon its
execution, Fusion Capital will pay $500,000 to the Company as partial prepayment
of the common stock. Once the $500,000 has been applied to purchase shares of
the Company's common stock, Fusion Capital will pay the remaining principal
amount upon receipt of the Company's common stock.
Fusion Capital executed the first equity purchase agreement on May 5,
2000, and accordingly, the Company received the $500,000 prepayment. This date
is referred to as the "closing date". The second equity purchase agreement will
be executed after delivery of an irrevocable written notice by the Company to
Fusion Capital stating that the Company elects 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 shares of the Company's 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
Under each equity purchase agreement Fusion Capital will purchase
shares of the Company's common stock by "converting" a specified dollar amount
of the outstanding principal balance into common stock. Subject to the limits on
conversion and the termination rights described below, each month during the
six-month term of the equity purchase agreement Fusion Capital will have the
right to convert up to $1,000,000 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 the Company's common stock at the applicable
conversion price. The conversion price per share is equal to the lesser of:
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o the lowest sale price of the Company's common stock on the day of
submission of a conversion notice by Fusion Capital; or
o the average of the four lowest closing bid prices of the Company's
common stock during the 20 trading days prior to the submission of a
conversion notice by Fusion Capital; or
o 140% of the average of the closing bid prices of the Company's 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 as the "Fixed Conversion Price."
RIGHT TO PREVENT CONVERSIONS
If the closing sale price of the Company's common stock is below the
Fixed Conversion Price for any three consecutive trading days, the Company will
have the unconditional right to suspend conversions until the earlier of (1) the
Company's revocation of such suspension and (2) when the sale price of the
Company's common stock is above the Fixed Conversion Price.
MANDATORY CONVERSION RIGHTS
If the closing sale price of the Company's 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, the Company 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. The Company
may revoke, in its sole discretion, its 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 the Company's then aggregate
outstanding common stock immediately after the proposed conversion.
TERMINATION RIGHTS
If the closing sale price of the Company's common stock is below the
Fixed Conversion Price for any 10 consecutive trading days, the Company may
elect to terminate the equity purchase agreement without any liability or
payment to Fusion Capital.
ADDITIONAL SHARES ISSUED TO FUSION CAPITAL
Under the terms of the master facility agreement, in connection with
the execution of the first equity purchase agreement, Fusion Capital will
receive additional shares of the Company's common stock as a commitment fee. The
shares to be issued to Fusion Capital will be equal to:
o 12% of $6,000,000, or $600,000, divided by the lower of (1) the average
of the closing bid price of the Company's common stock for the five
consecutive trading days immediately preceding the trading day that is
two trading days prior to the closing date for the first equity
purchase agreement and (2) $2.775, the average of the closing bid price
of the Company's common stock for the five consecutive trading days
immediately preceding the trading day that is two trading days prior to
the date of the amended and restated master facility agreement, plus
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o 3% of $6,000,000, or $180,000, divided by the lower of (1) the average
of the closing bid price of the Company's common stock for the five
consecutive trading days immediately preceding the trading day that is
two trading days prior to the closing date for the first equity
purchase agreement and (2) $2.775, the average of the closing bid price
of the Company's common stock for the five consecutive trading days
immediately preceding the trading day that is two trading days prior to
the date of the amended and restated master facility agreement.
Unless an event of default occurs, Fusion Capital must hold these
shares 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 the Company's 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 the Company's common stock for
the five consecutive trading days immediately preceding the date the Company
delivers notice of its election to enter into the second equity purchase
agreement.
The agreement also provides for the following:
o Adjustments to the conversion price 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;
o Fusion Capital's rights to convert the entire remaining
principal amount of the equity purchase agreement upon the
occurrence of "major transactions" as defined in the
agreement;
o Fusion capital's agreement not to short-sell or hedge the
Company's common stock during any time prior to the
termination of the agreement; and
o The Company's agreement 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's Capital prior written consent.
As of June 30, 2000, the Company had drawn $1,107,818.90 under the
Agreement and Fusion had converted 1,135,124 shares, including 324,324, as the
commitment fee discussed under the caption titled "additional shares issued to
Fusion Capital". The outstanding principal amount not converted as of June 30,
2000 of $321,686 is presented in the balance sheet as an obligation to issue
shares.
NOTE 5. STOCK SUBSCRIPTION AGREEMENT
On March 27, 2000, the Company entered into a subscription agreement or
the sale of 500,000 shares of its common stock at a price of $4.00 per share.
Under the agreement, the subscriber purchased 37,500 shares for $150,000 in
March 2000. The subscriber is required to purchase an additional $150,000 in
common stock ten days after the effectiveness of the Company's registration
statement, and each week for four weeks. At the fifth week thereafter, the
subscriber is required to purchase its final $100,000 in common stock, resulting
in an aggregate investment of $1,000,000 for 250,000 shares. The right to sell
the additional 250,000 shares to the subscriber is at the option of the Company.
The Company has registered the 500,000 shares under the Securities Act of 1933,
as amended.
As of August 28, 2000, the Company and the subscriber have not further
executed on this agreement.
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NOTE 6. OPERATING AGREEMENTS
AGREEMENT WITH TELEVISION BROADCASTING FACILITY
On January 10, 2000, the Company entered into an agreement with a
television broadcasting facility to lease space for its 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 $92,000 plus 20,000 uplink. The agreement is for one year
with a one-year renewal option.
CARRIAGE AGREEMENTS
On March 2, 2000, the Company entered into an agreement with America's
Voice, Inc. for the insertion and distribution of its television programming
into America's voice network distribution. The agreement grants to the Company
two hours per weekday commencing on March 6, 2000 was to expand to twelve hours
per day on April 16.
On March 23, 2000, the Company entered into an agreement with Comcast
Cable Communication, Inc. ("Comcast") for cable casting of its television
programming over certain channels. This agreement supercedes a previous
agreement dated September 22, 1999 between the Company and Comcast. The
agreement also provides for promotional spots on the Comcast system on other
channels appropriate for the promotion of the Company, financial programming.
The monthly fee to the Company is $5,000.
DISTRIBUTION AGREEMENT
On March 21, 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.
The Company estimates the fair market value of the options that it
grants to the company every month using the Black-Sholes option-pricing model.
The Company assigns the same value to the options it receives every month.
Grants during this quarter begin to vest in July, accordingly, no additional
investment was recorded in this period.
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 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.
The agreed upon fair market value of this transaction was $390,000 and is
recorded in the balance sheet within security investments. Subsequently, this
online entity was acquired conditionally requiring our sale of the securities.
The sale was effectuated in July 2000. Additionally, the buyer entered into a
new advertising agreement with the Company when supercedes the one with the
online entity. Further, for its part in the acquisition, the
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Company will receive a finders fee. No transaction has been recorded for the
sale of securities, advertising revenues or the finders fee since the effective
date falls in the next period.
REVENUE SHARING AGREEMENTS
On March 14, 2000, the Company entered into an agreement with an
employment service entity to co-develop and co-market a career service on the
Internet and through the Company's television channel and website. In addition,
the employment service entity agreed to design and manage a career service
program branded for the Company. The parties will share the revenues generated
from the career service. The programming cost for the career service is to be
borne by both parties. In addition, the company is to receive 700,000 restricted
shares of the employment service entity's common stock in exchange for 100,000
restricted of the Company's common stock.
Since the parties have not rendered this agreement effective, and since
the exchange of shares had not taken place as of June 30, 2000, no transaction
has been recorded.
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 piggyback registrations provisions.
The Company estimated the fair market value of the options granted to
the entity using the Black-Sholes option-pricing model. The Company recognized a
deferred expense of $439,100 equal to the estimated value of the options, with a
corresponding credit to additional paid-in-capital. The deferred expense is
being amortized over the period in which the options will be delivered and the
unamortized balance is presented as a reduction of stockholders, equity.
PUBLIC RELATIONS AND FINANCIAL CONSULTING SERVICES AGREEMENTS
On February 1, 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.
On February 21, 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. The Company recorded a deferred compensation expense
of $202,740 equal to the value of the shares issued. The deferred compensation
expense is being amortized over the term of the agreement, which is one year.
Consulting expense of $16,900 was recognized for February and March 2000. The
remaining unamortized balance of $185,900 has been written off to consulting
expense due to nonperformance of consultant.
On February 23, 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 $60,000 of which $20,000 shall be in the form of
10,000 stock options having an
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exercise price equivalent to the closing price of the Company's common stock on
March 1, 2000. The Company recorded a deferred compensation expense of $20,000
equal to the value of the options granted. The deferred compensation expense is
being amortized over the term of the agreement. Consulting expense of $12,000
and $4,000 were recognized for the three and six month, respectively, ended June
30, 2000. The remaining unamortized balance of $4,000 is being presented as a
reduction of stockholders' equity.
LETTER OF AGREEMENT
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 with the Shares
underlying these warrants being registered under the Securities Act of 1933, as
amended. The Company is to receive total fee of $500,000 from the third party;
however, if the third party does not recover all of its investment within
eighteen months, the Company shall have the right to purchase the territories
back from the third party in the form of common shares. The third party paid
$50,000 under the terms of the agreement with the remaining balance to be paid
on a schedule basis.
The Company estimated the fair market value of the warrants granted to
the entity using the Black-Sholes option-pricing model. The Company recognized a
deferred cost of $797,847 equal to the estimated value of the options, with a
corresponding credit to additional paid-in-capital. The deferred cost will be
recognized as revenue is earned and the unamortized balance is presented as a
reduction of stockholders' equity. No revenue has been recognized through June
30, 2000.
TELEVISION CONTENT AGREEMENTS
The Company has entered into agreements with several companies to
provide text and video content for the company's television programming. The
cost of these services is approximately $7,500 a month.
NOTE 7. GRANT OF STOCK OPTIONS AND STOCK
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 547,000 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. 175,000
options vest immediately while the remaining options vest on a monthly basis. In
addition, the company granted the executives a total of 225,000 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.
The Company recognized compensation expense of $220,000 relating to the
grant of shares to the above executives.
In March 2000, and effective January 1, 2000, a number of the Company's
executives renegotiated their employment contracts resulting in annual increases
in compensation of approximately $143,000, plus an employment contract for the
chief executive officer raising his compensation to $250,000.
13
<PAGE>
NOTE 8. SEGMENT INFORMATION
The Company operates in various segments as follows:
o Product Sales
o Wireless Cable television services:
Costa Rica
Wisconsin
o Corporate, Internet/Television
Information regarding the Company's geographic business units follows (in
thousands):
<TABLE>
<CAPTION>
OPERATING
INCOME
REVENUES (LOSS) DEPRECIATION AMORTIZATION
-------- ------ ------------ ------------
<S> <C> <C> <C> <C>
Second Quarter 2000
Product sales 722 (5) 6 --
Wireless cable:
Costa Rica 281 (59) 45 73
Wisconsin 65 (46) 28 7
Corporate, Internet and TV (2,787) 72 59
------ ------ ------ ------
Total 1,068 (2,897) 151 139
Second Quarter 1999
Product sales 190 (308) 16 --
Wireless cable:
Costa Rica 305 (25) 55 73
Wisconsin 74 (55) 45 7
Corporate, Internet and TV (734) 21 96
------ ------ ------ ------
Total 569 (1,122) 137 176
Six months ended June 30, 2000
Product sales 821 (169) 10 --
Wireless cable:
Costa Rica 590 (73) 88 146
Wisconsin 122 (83) 55 14
Corporate, Internet and TV (5,262) 117 118
------ ------ ------ ------
Total 1,533 (5,587) 270 278
Six months ended June 30, 1999
Product sales 936 (248) 24 --
Wireless cable:
Costa Rica 647 (16) 110 146
Wisconsin 149 (121) 88 14
Corporate, Internet and TV (1,438) 33 138
------ ------ ------ ------
Total 1,732 (1,823) 255 298
</TABLE>
14
<PAGE>
NOTE 9. SUBSEQUENT EVENT
The Company has recently completed a $600,000 financing by issuing a convertible
debenture due in one year with interest of 12% per annum and convertible into
shares at a fixed price of $.30 per share plus warrants for 100,000 shares at
$.50, 100,000 shares at $.70 and 100,000 at $.90. Although the Company was not
happy with the possibility of issuing 2,000,000 additional shares at this
conversion price, it should be kept in mind that the transaction was negotiated
at a time when the Company's shares were trading at approximately $.30 - $.35
per share.
15
<PAGE>
ITEM 2. MANAGEMENTS DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & 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.
We operate in three segments wireless cable television services,
product sales, and Internet/television. During 1999, corporate overhead expenses
were exclusively included in the Internet and television segment due to the
shift in our business model from focusing on wireless cable to the Internet and
television production. During 2000, overhead expenses for the television and
Internet division are shown separately.
16
<PAGE>
RESULTS OF OPERATIONS (IN THOUSANDS)
Three Months Ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
Increase
2000 1999 (Decrease)
<S> <C> <C> <C>
REVENUE
Product sales 722 190 280%
Wireless cable:
Costa Rica 281 305 (8%)
Wisconsin 65 74 (12%)
------ ------
Corporate, Internet and TV
Total 1,068 238 88%
------ ------
DIRECT COST
Product sales 566 171 231%
Wireless cable:
Costa Rica 65 46 41%
Wisconsin 17 21 (19%)
------ ------
Corporate, Internet and TV
Total 648 238 172%
------ ------
OPERATING EXPENSES
Selling, general and administrative
Product 155 310 (50%)
Costa Rica 157 156 1%
Wisconsin 59 56 5%
Corporate, Internet and TV 1,336 875 53%
------ ------
Total 1,707 1,397 22%
------ ------
Television, Website, Software Costs
Television Operations 856 -- --
Internet Operations 381 -- --
Corporate, Internet and TV 5 92 (95%)
------ ------
Sub total 1,242 92 1,250%
------ ------
Depreciation and Amortization
Product sales 6 16 (63%)
Wireless cable:
Costa Rica 118 128 (8%)
Wisconsin 35 52 (33%)
Corporate, Internet and TV 131 117 12%
------ ------
Sub total 290 313 (7%)
------ ------
Total 3,239 1,802 80%
------ ------
Interest Income (Expense)
Interest Income
Corporate, Internet and TV 9 1 800%
Accretion of debenture discount -- (153) (100%)
Other Interest Expense
Corporate, Internet and TV (87) (117) (26%)
------ ------
Total 78 269 (71%)
------ ------
NET INCOME (LOSS)
Product sales (5) (307) (98%)
Wireless cable:
Costa Rica (59) (25) 136%
Wisconsin (46) (55) (16%)
Corporate, Internet and TV (2,787) (1,353) (106%)
------ ------
Total (2,897) (1,740) (66%)
====== ======
</TABLE>
17
<PAGE>
RESULTS OF OPERATIONS (IN THOUSANDS)
Six Months Ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
Increase
2000 1999 (Decrease)
<S> <C> <C> <C>
REVENUE
Product sales 821 936 (12%)
Wireless cable:
Costa Rica 590 647 (9%)
Wisconsin 122 149 (18%)
Corporate, Internet and TV
------ ------
Total 1,533 1,732 (11%)
------ ------
DIRECT COST
Product sales 652 657 (1%)
Wireless cable:
Costa Rica 154 95 62%
Wisconsin 39 43 (9%)
Corporate, Internet and TV
------ ------
Total 845 795 6%
------ ------
OPERATING EXPENSES
Selling, general and administrative
Product 328 501 (35%)
Costa Rica 275 312 (12%)
Wisconsin 96 124 (23%)
Corporate, Internet and TV 2,737 1,290 112%
------ ------
Total 3,436 2,227 54%
------ ------
Television, Website, Software Costs
Television Operations 1,513 -- --
Internet Operations 539 -- --
Corporate, Internet and TV 16 328 (95%)
------ ------
Sub total 2,068 328 530%
------ ------
Depreciation and Amortization
Product sales 10 24 (58%)
Wireless cable:
Costa Rica 234 256 (9%)
Wisconsin 69 103 (33%)
Corporate, Internet and TV 234 170 38%
------ ------
Sub total 547 553 (1%)
------ ------
Total 6,051 3,108 95%
------ ------
Interest Income (Expense)
Interest Income
Corporate, Internet and TV 36 1 3,500%
Accretion of debenture discount -- (372) (100%)
Other Interest Expense
Corporate, Internet and TV (259) (205) 26%
------ ------
Total (223) (576) (61%)
------ ------
NET INCOME (LOSS)
Product sales (169) (247) (32%)
Wireless cable:
Costa Rica (73) (16) 356%
Wisconsin (83) (121) (31%)
Corporate, Internet and TV (5,262) (2,364) 123%
------ ------
Total (5,587) (2,748) 103%
====== ======
</TABLE>
18
<PAGE>
MD&A (Continued)
Three Months Ended June 30, 2000 and 1999
REVENUES
We had revenues of $1,068,000 during the second quarter of 2000
compared to $569,000 during the second quarter of 1999, an increase of $499,000
or 88%. Product sales accounted for all of the increase due to expanded placing
of goods with major retailers. During 1999, our product mix consisted of a
variety of products. During the second quarter of 2000, we were focusing mainly
on our teen cosmetic line of Body Jewels, which has met with great acceptance.
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
mailers as "promotional suppliers". Higher-level access to retail chains is
available once we get approved as an "approved ongoing supplier". Wireless cable
television services accounted for a decrease of $33,000 due to a decrease in the
subscriber base in both Costa Rica and Wisconsin and an increase in the
inflation rate of approximately 9% in Costa Rica.
Some providers of the programming that we rebroadcast in Lacrosse,
Wisconsin, increased the rates charged per subscriber when the contracts are
renewed. To date these increases have not been significant and toward the end of
the year, we increased our rates to pass the additional programming costs onto
our subscribers. We also added a new transmitter, allowing us to provide local
channels to our customers. As a result of these changes, we expect revenue from
our Wisconsin operations to increase.
DIRECT COSTS
Direct costs for the second quarter of 2000 increased $410,000 to
$648,000 from $238,000 in 1999, and an increase of 172%. Approximately $395,000
of the increase is related to the product sales division due to the
corresponding increase in product sales. Direct costs for the wireless cable
operations increased $19,000 in Costa Rica due to our offering more channels to
subscribers.
OPERATING EXPENSES
Operating expenses during the second quarter of 2000 increased to
$3,239,000 an increase of $1,437,000 or 80% compared to $1,802,000 during the
second quarter of 1999. In this category are included selling, general and
administrative expenses; television, website and software development costs; and
depreciation and amortization.
Selling, general and administrative expenses increased by $310,000 or
22%. Approximately $149,000 of this increase was due to an increase in salary
and related expenses and contracted services of $106,000 as we continue to add
personnel in our corporate office and entered new employment agreements with
certain of our executives, providing for salary increases. In addition, we
experienced increases in the second quarter of 1999 in the following categories:
Public relations, increase of approximately $70,000 and insurance and office
expense approximately $44,000 each. Selling, general and administrative expenses
during the second quarter of 2000 decreased in the product sales division and
had minimal increases in Costa Rica and Wisconsin, as compared to the second
quarter of 1999.
We incurred approximately $1,242,000 of television, website and
software development costs during the second quarter of 2000, compared to
approximately $92,000 during the second quarter of 1999, a 1250% increase. This
is due to expenses of approximately $856,000 incurred to launch our television
channel and the addition of personnel in our television division, and expenses
of approximately $381,000 incurred to continue to develop our website, as well
as the addition of the internet personnel.
19
<PAGE>
Depreciation and amortization costs for our corporate, television and
internet division increased to $131,000 during the second quarter of 2000
compared to $117,000 during the second quarter of 1999, an increase of $14,000
or 12%. This increase was mostly due to the purchase of equipment for the
television channel.
INTEREST EXPENSE
Interest costs decreased to $78,000 during the second quarter of 2000
compared to $269,000 during the first quarter of 1999, a decrease of $191,000 or
71%. During the second quarter of 1999, we incurred interest expense of $153,000
related to debenture discount accretion associated with the issuance of
convertible debentures in May and November of 1998. The debentures were
converted at the end of 1999, and therefore, we did not incur such expense in
2000.
Interest costs other than the accretion on debenture discount discussed
above decreased by $30,000 during the second quarter of 2000, compared to the
first quarter of 1999.
NET LOSS
Net losses for the second quarter of 2000 increased to $2,897,000
compared to $1,740,000 in the second quarter of 1999, an increase of
$1,157,000 or 167% due primarily to an increase of $1,429,000 in losses
associated primarily with operations and the development of our Internet and
television operations.
20
<PAGE>
MD&A (Continued)
Six Months Ended June 30, 2000 and 1999
REVENUES
We had revenues of $1,533,000 during the six months ended June 30, 2000
compared to $1,732,000 during the comparable period in 1999, a decrease of
$199,000 or 11%. Product sales accounted for the majority of the decrease
primarily because of approximately $308,000 for allowances for returns and
guaranteed sales. The decrease in product sales for the six months ended June
30, 2000 was approximately $115,000 or 12% compared to the same period in 1999.
The Company had previously announced that product (retail) sales for the second
quarter were approximately $1,200,000. During the Company's second quarter sales
analysis in conjunction with SEC's SABs, the Company did not recognize
guaranteed sales and maintained its policy of recording an allowance for
estimated returns. The practice of allowing for guaranteed sales started during
this quarter and has impacted significantly on the net product sales reported.
Accordingly, even though title and possession (of sold and shipped goods) of
approximately $1,128,000 in product sales passed to customers, the Company is
only recognizing the net sale of approximately $820,000.
Wireless cable posted decreases in both Costa Rica and Wisconsin. The
latter experienced a $27,000 decrease or 18% and Costa Rica had decreases of
approximately $57,000 or 9%. These decrease are mainly due to a decrease in the
subscriber base in both Costa Rica and Wisconsin and an increase in the
inflation rate of approximately 9% in Costa Rica.
DIRECT COSTS
Direct costs for the six months ended June 30, 2000 increased $50,000
to $845,000 from $795,000 in 1999, an increase of 6%. All of the increase is
attributable to an approximate increase of $59,000 or 62% in the Costa Rica
wireless cable operations. The was caused by our offering more channels to
subscribers.
OPERATING EXPENSES
Operating expenses during the six months ended June 30, 2000 increased
to $6,052,000 (an increase of $2,944,000 or 95%) compared to $3,108,000 during
the same period of 1999. In this category are included selling, general and
administrative expenses; television, website and software development costs; and
depreciation and amortization.
Selling, general and administrative expenses increased by $1,209,000 or
54%. Approximately $1,096,000 of this increase was due to an increase in salary
and related expenses and contracted services for all segments.
We incurred approximately $1,242,000 of television, website and
software development costs during the six months ended June 30, 2000 compared to
approximately $328,000 during the same period in of 1999, a 530% increase. This
is due to expenses of approximately $1,513,000 incurred to launch our television
channel and the addition of personnel in our television division, and expenses
of approximately $539,000 incurred to continue to develop our website, as well
as the addition of the internet personnel.
Depreciation and amortization costs for our corporate, television and
internet division increased to $234,000 during the six months ended June 30,
2000 compared to $170,000 during the same period in 1999, an increase of $74,000
or 38%. This increase was mostly due to the purchase of equipment for the
television channel.
21
<PAGE>
INTEREST EXPENSE
Interest costs increased to $259,000 during the six months ended June
30, 2000 compared to $205,000 during the same period in 1999, an increase of
$54,000 or 26%. The increase is mainly due to new capital lease obligations and
the company's factoring of its product accounts receivable.
NET LOSS
Net losses for the six months ended June 30, 2000 increased to
$5,587,000 compared to $2,748,000 during the same period in 1999, an increase of
$2,839,000 or 103% due primarily to an increase of $2,052,000 in losses
associated primarily with operations and the development of our Internet and
television operations.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES AND USE OF CASH -- SIX MONTHS ENDED JUNE 30, 2000
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.
Net cash provided by financing activities was $1,443,000 for the
period, this mostly consisted of sale of our common stock for a net cash
proceeds of $151,000; a long-term loan of $250,000 and the proceeds from the
master facility of $1,288,000.
Cash used in operating activities was $2,611,000 during this period,
compared to $1,075,000 during this period, compared to $1,075,000 during the
same period in 1999. The cash used during these periods was primarily
attributable to net losses of $5,587,000 for the period and $2,401,000 for the
same period in 1999.
These losses were offset in part by depreciation and amortization of
$547,000 and $553,000 for the comparable period in 2000 and 1999, respectively.
We also had an increase in accounts payable and accrued liabilities of
$1,471,000 during this period, compared to $305,000 during the same period in
1999.
During this period, we spent approximately $1,016,000 in property and
equipment, primarily for our television studio. We also purchased $468,000 of
equipment under capital leases. During this period in 1999, we spent $532,000 in
property and equipment.
WORKING CAPITAL DEFICIT AND MANAGEMENT PLAN
The accompanying financial statements reflect current liabilities of
$5,888,000 and current assets of $846,000 resulting in a working capital deficit
$5,042,000. Approximately $2,567,000 of the working capital deficit consists of
amounts owed to Mr. Rosen. Operating losses for the period were $5,587,000.
Operating deficits will continue until such time as substantial revenues are
generated from our channel and website.
22
<PAGE>
INFLATION AND FOREIGN CURRENCY FLUCTUATION
During 2000, 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 increase on July I 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
SFAS No. 130, "Reporting Comprehensive Income", establishes standards
for reporting and displaying comprehensive income, its components and
accumulated balances. 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 adopted
these new accounting standards in 1998.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS 137, establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. SFAS No. 133
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
formally document, designate and assess the effectiveness of transactions that
receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15,
2000. A company may also implement the provisions of SFAS No. 133 as of the
beginning of any fiscal quarter commencing June 16, 1998 and thereafter. SFAS
No. 133 cannot be applied retroactively. SFAS No. 133 must be applied to (a)
derivative instruments and (b) certain derivative instruments embedded in hybrid
contracts that were issued, acquired, or substantively modified after December
31, 1997 (and, at the Company's election, before January 1, 1998). We have not
entered into derivatives contracts to hedge existing risks or for speculative
purposes. Accordingly, we do not expect the adoption of the new standard to
affect our financial statements-
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 requires all costs
related to the development of internal use software other than those incurred
during the application development stage to be expensed as incurred. Costs
incurred during the application
23
<PAGE>
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.
In March 2000, we issued 80,000 shares of our common stock to
executives for a total compensation of $220,000. These securities were pursuant
to an exemption from registration provided by Section 4(2) of Securities Act.
In March 2000, we issued 71,000 shares of our common stock to
consultants with an aggregate value of $239,468. These securities were pursuant
to an exemption from registration provided by Section 4(2) of Securities Act.
In February 2000, we issued 71,362 shares of our common stock the
Securities Act.
24
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
I. Preamble
The following discussion and analysis provides information that the
Company's management believes is relevant to an assessment and understanding of
the Company's results of operations and financial conditions for the three and
six-month periods ended June 30, 2000 and 1999. The following discussion should
be read in conjunction with the Financial Statements and Notes thereto appearing
elsewhere in this Report on Form 10-QSB and in conjunction with the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1999, as well as
the Company's Prospectus filed on May 9, 2000 pursuant to Rule 424 on Form
424B3. Some of the information in this discussion and analysis contains
forward-looking statements, which involve substantial risks and uncertainties.
The statements can be identified by forward-looking words such as "may," "will,"
"expect," "anticipate," "believe," "estimate" and "continue" or similar words.
Investors should read statements that contain these or similar words carefully
because they 1) discuss our expectations about the Company's future performance;
(2) contain projections of the Company's future operating results or of the
Company's future financial condition; (3) state other "forward-looking"
information. The Company believes it is important to communicate its
expectations to its investors. There may be events in the future, however, that
the Company is not accurately able to predict or over which it has no control.
The risk factors discussed below, as well as any cautionary language in this
Report, provide examples of risks, uncertainties and events that may cause the
Company's actual results to differ materially from the expectations described in
the forward-looking statements. Additional risks will be described from time to
time in the Company's other filings with the SEC. Investors should be aware that
the occurrence of any of the events described in the risk factors and elsewhere
in this Report and in the Company's other periodic SEC filings could have a
material and adverse effect on its business, results of operations and financial
condition.
25
<PAGE>
The Company has been hindered in accomplishing some of its goals due to
the fact that it did not receive anticipated capital infusions. For example, as
a result of a large decline in the market share price of the Company's stock
since the signing of the Equity Purchase Agreement with Fusion Capital Fund II,
LLC on May 4, 2000, the following results have occurred. In exchange for the
receipt of $1,288,000 of funding the Company issued Fusion Capital 1,564,224
shares leaving a balance of approximately 260,000 registered shares available
for conversion. It is unlikely that the conversion of that amount of shares
would enable the Company to receive the full $12,000,000 committed to the
Company without registering more shares. Even if more shares were registered,
the conversion of shares at low share prices is not very attractive to the
Company.
As a continued option to further equity infusions and corresponding
conversion of shares under the Fusion Agreement, the Company has been receiving
working capital in the quarter ending June, 2000 and up to the present from a
variety of sources and methods and many of these same sources and methods of
funding the Company will most likely continue for the balance of this fiscal
year.
The Company believes that its current financial resources will not
be sufficient to fund its operations for the next 12 months. During that period,
it will become necessary for the Company to raise additional funds to meet the
expenditures required for operating its business. The Company currently has no
firm plans or arrangements for securing the needed additional capital, although
it is actively pursuing various options and opportunities. If additional funds
are raised through the issuance of debt securities, these securities could have
certain rights, preferences, and privileges senior to holders of Common Stock,
and the terms of such debt could impose restrictions on the Company's
operations. The sale of additional equity or debt securities could result in
additional dilution to the Company's shareholders. Additional financing may not
be available at all and, if available, such financing may not be obtainable on
terms favorable to the Company. If the Company is unable to obtain this
additional financing, it may be required to reduce the scope of its planned
development and marketing efforts, which could seriously harm its business.
26
<PAGE>
The Company's future expenditures and capital requirements will
depend on a number of factors including the development and implementation of
next generation technologies, technological developments on the Internet and the
regulatory and competitive environment for Internet-based products and services.
Sources of funding have been and may continue to include the
following:
1. Sale of Company shares;
2. Receipt of loans;
3. Factoring of receivables generated by the Company's
wholesale-to-retail business;
4. Collection of other significant receivables generated by the
sale advertising, the provision of other services and the sale
of shares of stock in other companies in which the Company
holds equity positions;
5. Capital contributions and loans from shareholders;
6. The implementing cost-saving restructuring;
7. The expansion of product sales by both method and product
lines (i.e. by telemarketing and direct response television;
8. Loans from Company officers;
9. Deferment of salaries by Company officers;
10. Deferment of interest due to a major shareholder;
11. Increasing operating revenues (advertising, cable
subscriptions and product sales);
12. Sales of non-core business assets, and;
13. Sub-lease of studio and equipment during the time the studio
is not used for Company productions.
14. The Company has recently completed a $600,000 financing by
issuing a convertible debenture due in one year with interest
of 12% per annum and convertible into shares at a fixed price
of $.30 per share plus warrants for 100,000 shares at $.50,
100,000 shares at $.70 and 100,000 at $.90. Although the
Company was not happy with the possibility of issuing
2,000,000 additional shares at this conversion price, it
should be kept in mind that the transaction was negotiated at
a time when the Company's shares were trading at approximately
$.30 - $.35 per share.
The Company believes that it has growth opportunities before it which
require new or additional persons in senior management. It continues to seek new
directors for its board, which presently has three members with two members
having resigned to devote themselves more fully to new business opportunities
with which they have become involved. The Company hopes to locate and hire a
senior executive with a record of successfully developing and implementing
strategies that have resulted in substantial revenue increases for companies
with Internet and/or television businesses. The Company has recently hired a new
Chief Financial Officer and a new Vice-President for Marketing.
Since the beginning of the year, the Company completed building its
leased, modern broadcast studio facilities, put to together its production team
and broadcast its Net Financial News television programming via satellite, cable
TV, and terrestrial broadcast systems making Net Financial News available to
millions of home. As of this writing, the Company has decided to limit the
television carriage of its programming to its 2.1 million Comcast Cable TV homes
while it pursues carriage agreements to replace that of America's Voice. It
generally takes a period of time for new television programs to obtain and
retain an audience. Since America's Voice has not yet resolved its bankruptcy
status, the Company has decided to not continue paying for such carriage to
build its audience without having meaningful assurance that that audience will
be there in the future. The Company is presently seeking replacement carriage
with other providers.
27
<PAGE>
ITEM 6. EXHIBITS
(27.1) Financial Data Schedule (for Commission use only)
28
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
5TH AVENUE CHANNEL CORP.
Date: August 28, 2000 BY: /S/ MELVIN ROSEN
--------------------
Melvin Rosen, President and
Chief Executive Officer
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Melvin Rosen Chairman of the Board August 28, 2000
------------------------------------ and President
Melvin Rosen (Principal Executive Officer)
/s/ Aurelio E. Alonfo
------------------------------------ August 28, 2000
Aurelio E. Alonfo Chief Financial Officer
</TABLE>
29
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- -----------
27.1 Financial Data Schedule
