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 March 31, 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 (I.R.S. Employer
incorporation 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 [X] NO [ ]
As of May 11, 2000, there were 12,474,564 shares of the issuer's Common Stock
outstanding.
Transitional Small Business Disclosure Format. YES [ ] NO [X]
1
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5TH AVENUE CHANNEL CORP.
FORM 10-QSB
FOR THE QUARTER ENDED MARCH 31, 2000
TABLE OF CONTENT
PART I FINANCIAL INFORMATION PAGE NO.
ITEM 1. Consolidated Financial Statements
Balance Sheets as of March 31, 2000 (Unaudited)
and December 31, 1999 3
Unaudited Statements of Operations for the three
months ended March 31, 2000 and 1999 4
Unaudited Statements of Cash Flows for the three
months ended March 31, 2000 and 1999 5
Notes to Unaudited Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION & RESULTS OF OPERATIONS 14
PART II OTHER INFORMATION
ITEM 2 Changes in Securities 19
ITEM 6. Exhibits 19
SIGNATURE 20
2
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5TH AVENUE CHANNEL CORP.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents 147,649 $ 2,024,143
Accounts receivable, net 123,907 555,514
Inventory 260,748 210,486
Current portion of notes receivable, related parties 23,012 23,012
Loans receivable, related parties 64,912 64,912
Prepaid expenses and other current assets 287,394 143,640
----------- -----------
Total current assets 907,622 3,021,707
Property and Equipment 2,147,052 1,500,411
Security Investments 83,831 -
Licenses 4,252,106 4,331,897
Goodwill 2,019,228 2,078,292
Notes Receivable, Related Parties 310,353 310,353
Other Assets 275,557 222,699
----------- -----------
$ 9,995,749 $11,465,359
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities 1,663,294 $ 1,343,029
Accrued payroll, President/Chairman of the Board 512,500 450,000
Current portion of long-term debt 129,705 87,433
Loans payable, related parties 55,706 55,081
Loans payable, President/Chairman of the Board 1,872,619 2,268,308
Obligation under capital lease 376,063 -
Deferred revenue 141,400 91,400
----------- -----------
Total current liabilities 4,751,287 4,295,251
----------- -----------
Long-Term Debt:
License installment payment plan notes, net of current portion 821,774 864,893
----------- -----------
Stockholders' Equity:
Common stock 12,475 12,215
Additional paid-in capital 23,386,027 20,277,555
Deficit (16,674,467) (13,984,555)
----------- -----------
6,724,035 6,305,215
----------- -----------
Stock Subscription Receivable (850,000) -
Deferred Compensation and Other (1,451,347) -
----------- -----------
4,422,688 6,305,215
----------- -----------
$ 9,995,749 $11,465,359
=========== ===========
</TABLE>
See notes to consolidated financial statements.
3
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5TH AVENUE CHANNEL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Revenue:
Product sales $ 98,605 $ 745,976
Wireless cable television services 366,369 416,664
------------ ------------
464,974 1,162,640
------------ ------------
Direct Costs:
Product sales 85,748 486,210
Wireless cable television services 111,050 70,619
------------ ------------
196,798 556,829
------------ ------------
Gross Margin 268,176 605,811
------------ ------------
Operating Expenses:
Selling, general and administrative 1,729,416 830,262
Television, website and software development costs 825,858 236,387
Depreciation and amortization 257,550 239,861
------------ ------------
2,812,824 1,306,510
------------ ------------
Loss from Operations (2,544,648) (700,699)
------------ ------------
Other Income (Expense):
Interest income 26,940 -
Interest expense (172,204) (307,487)
------------ ------------
(145,264) (307,487)
------------ ------------
Net Loss $ (2,689,912) $ (1,008,186)
============ ============
Net Loss Per Common Share - Basic and Diluted $ (0.22) $ (0.11)
============ ============
</TABLE>
See notes to consolidated financial statements.
4
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5TH AVENUE CHANNEL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
----------- ------------
(Unaudited)
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $(2,689,912) $ (1,008,186)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 257,550 239,861
Amortization of discount on convertible subordinated debentures - 218,849
Compensation in form of common stock and warrants issued
to officers and consultants 293,790 -
Stock and warrants issued in lieu of interest 101,164 -
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable 431,607 (524,727)
Decrease (increase) in inventory (50,262) 160,214
Increase in prepaid expenses and other current assets (143,754) (15,162)
Increase in accrued payroll, President/Chairman of the Board 62,500 45,000
Increase in accounts payable and accrued liabilities 370,201 267,903
Increase in deferred revenue 50,000 -
----------- ------------
Net cash used in operating activities (1,317,116) (616,248)
----------- ------------
Cash Flows from Investing Activities:
Purchase of property and equipment (765,336) (202,664)
Equipment purchased under capital lease 376,063 -
Net cash used in IBC acquisition - 40,381
Increase in other assets (124,258) 88,287
----------- ------------
Net cash used in investing activities (513,531) (73,996)
----------- ------------
Cash Flows from Financing Activities:
Net proceeds from sales of common stock 150,000 -
Proceeds of loans from President/Chairman of the Board - 514,463
Payment of loans from President/Chairman of the Board (195,000) -
Repayment of long-term debt (847) (2,462)
----------- ------------
Net cash provided by (used in) financing activities (45,847) 512,001
----------- ------------
Net Decrease in Cash and Cash Equivalents (1,876,494) (178,243)
Cash and Cash Equivalents, Beginning 2,024,143 256,209
----------- ------------
Cash and Cash Equivalents, Ending $ 147,649 $ 77,966
=========== ============
</TABLE>
See notes to consolidated financial statements.
5
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5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The consolidated balance sheet as of March 31, 2000, the consolidated
statements of operations for the three months ended March 31, 2000 and 1999 and
the consolidated statements of cash flows for the three months ended March 31,
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 March 31, 2000 and for the three months then ended,
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 months ended March 31,
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 for the three months
ended March 30, 2000 and 1999:
2000 1999
---- ----
Interest paid during the period $ $5,250
Non-cash investing and financing activities:
Shares received in exchange for shares 860,173
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
NOTE 2. 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 332,500 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.
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.
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 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 were to expire
6
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5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
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.
NOTE 3. 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:
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
7
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5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
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
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.
8
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5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
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.
NOTE 4. 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 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 agreed to include all of the 500,000 shares in the current
registration statement being filed by the Company.
NOTE 5. 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 $72,000. 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 and expands to twelve hours
per day on April 16.
9
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5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
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. For
the month of March 2000, the Company recorded an investment of $12,431 with a
corresponding credit to additional paid-in-capital.
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.
Since the parties have not rendered this agreement effective, and since
the exchange of shares had not taken place as of March 31, 2000, no transaction
has been recorded.
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 March 31, 2000, no transaction
has been recorded.
10
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5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
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 is being presented as a reduction of
stockholders' equity.
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 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 $4,000 was recognized for the month of March 2000. The
remaining unamortized balance of $16,000 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. The Company is to
receive total fee of $500,000 from the third party;
11
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5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
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 agreement provides
for the third party to pay $50,000 by March 29, with the remaining balance 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.
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 6. 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.
12
<PAGE>
5TH AVENUE CHANNEL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
NOTE 7. 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):
OPERATING
INCOME
REVENUES (LOSS) DEPRECIATION AMORTIZATION
-------- --------- ------------ ------------
First Quarter - 2000:
Product sales $ 99 $ (164) $ 4 $-
Wireless cable:
Costa Rica 309 (14) 43 73
Wisconsin (37) 28 7
57
Corporate, Internet and TV - (2,330) 43 59
------- ------- ------- -------
Total $ 465 $(2,545) $ 118 $ 139
======= ======= ======= =======
First Quarter - 1999:
Product sales $ 746 $ 60 $ 8 $-
Wireless cable:
Costa Rica 342 9 55 73
Wisconsin 75 (66) 44 7
Corporate, Internet and TV - (704) 11 42
------- ------- ------- -------
Total $ 1,163 $ (701) $ 118 $ 122
======= ======= ======= =======
NOTE 8. SUBSEQUENT EVENT
On April 26, 2000, the Company borrowed $600,000 under a demand note.
The note is guaranteed by the Company's President, Chief Executive Officer and
Chairman.
13
<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.
14
<PAGE>
RESULTS OF OPERATIONS (IN THOUSANDS)
<TABLE>
<CAPTION>
%
Quarter Ended Quarter Ended Increase
March 31, 2000 March 31, 1999 (Decrease)
----------------- ---------------- --------------
<S> <C> <C> <C>
REVENUE
Product sales $ 99 $ 746 (87%)
Wireless cable:
Costa Rica 309 342 (10%)
Wisconsin 57 75 (24%)
Corporate, Internet and TV - -
----------- -----------
Total $ 465 $ 1,163 (60%)
=========== ===========
DIRECT COSTS
Product sales $ 86 $ 486 (82%)
Wireless cable:
Costa Rica 89 49 82%
Wisconsin 22 22 -
Corporate, Internet and TV - -
----------- -----------
Total $ 197 $ 557 (65%)
=========== ===========
OPERATING EXPENSES
SELLING, GENERAL &
ADMINISTRATIVE
Product sales $ 173 $ 191 (9%)
Wireless cable:
Costa Rica 118 156 (24%)
Wisconsin 37 68 (46%)
Corporate 1,401 415 238%
----------- -----------
Sub total 1,729 830 108%
----------- -----------
TELEVISION, WEBSITE & SOFTWARE
COSTS
TELEVISION OPERATIONS 657 - -
INTERNET OPERATIONS 158 - -
CORPORATE 11 236 (95%)
----------- -----------
Sub total 826 236 250%
----------- -----------
DEPRECIATION AND AMORTIZATION
Product sales 4 8 (50%)
Wireless cable:
Costa Rica 116 128 (9%)
Wisconsin 35 51 (31%)
Corporate, Internet and TV 103 53 94%
----------- -----------
Sub total 258 240 8%
----------- -----------
Total $ 2,813 $ 1,306 115%
=========== ===========
INTEREST INCOME (EXPENSE)
INTEREST INCOME
Corporate, Internet and TV $ 27 $ - -
ACCRETION OF DEBENTURE
DISCOUNT
Corporate, Internet and TV - (219) (100%)
OTHER INTEREST EXPENSE
Corporate, Internet and TV (172) (88) 95%
----------- -----------
Total $ (145) $ (307) (53%)
=========== ===========
NET INCOME (LOSS)
Product sales $ (164) $ 60 373%
Wireless cable:
Costa Rica (14) 9 256%
Wisconsin (37) (66) (44%)
Corporate, Internet and TV (2,475) (1,011) 142%
----------- -----------
Total $ (2,690) $ (1,008) 167%
=========== ===========
</TABLE>
REVENUES
We had revenues of $465,000 during the first quarter of 2000 compared
to $1,163,000 during the first quarter of 1999, a decrease of $698,000 or 60%.
Product sales accounted for approximately $647,000 of the decrease due to a
change in product mix and the seasonality of the products sold. During 1999, our
product mix consisted of a variety of products. During the first quarter of
2000, we were focusing mainly on our teen cosmetic line of Body Jewels, which is
15
<PAGE>
more seasonal. Sales during the last quarter of 1999 were significantly higher
because of the Holidays Season. We have purchase orders for the second quarter
of 2000 amounting to approximately $672,000. 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 once we get
approved as an "approved ongoing supplier. Wireless cable television services
accounted for $51,000 of the decrease, due to a decrease in 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 first quarter of 2000 decreased $360,000 to
$197,000 from $557,000 in 1999, a decrease of 65%. Approximately $400,000 of the
decrease related to the product sales division, due a decrease in product sales.
Direct costs for the wireless cable operations increased $40,000 in Costa Rica
due to our offering more channels to subscribers and not passing on the
additional costs to the subscribers.
OPERATING EXPENSES
Operating expenses during the first quarter of 2000 increased to
$2,813,000 (an increase of $1,507,000 or 115%), compared to $1,306,000 during
the first 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 $899,000 or
108%. Approximately $227,000 of this increase was due to an increase in salary
and related expenses and contracted services of $109,000 as we added personnel
in our corporate office and entered new employment agreements with certain of
our executives, providing for salary increases. This increase was also due to an
increase of approximately $220,000 in salary in the form of stock compensation
granted to certain of our executives. In addition, we incurred higher costs in
2000 in the following categories: Legal, increase of approximately $63,000;
audit, increase of approximately $160,000; public relations and consulting,
increase of approximately $98,000; and insurance, increase of approximately
$46,000. Selling, general and administrative expenses during the first quarter
of 2000 decreased in the product sales division and in Costa Rica and Wisconsin,
as compared to the first quarter of 1999.
We incurred approximately $826,000 of television, website and software
development costs during the first quarter of 2000, compared to approximately
$236,000 during the first quarter of 1999, a 250% increase. This is due to
expenses of approximately $657,000 incurred to launch our television channel and
the addition of personnel in our television division, and expenses of
approximately $158,000 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 $103,000 during the first quarter of 2000
compared to $53,000 during the first quarter of 1999, an increase of $50,000 or
94%. This increase was mostly due the purchase of equipment for the television
channel.
INTEREST EXPENSE
Interest costs decreased to $172,000 during the first quarter of 2000
compared to $307,000 during the first quarter of 1999, a decrease of $135,000 or
44%. During the first quarter of 1999, we incurred interest expense of $219,000
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.
16
<PAGE>
Interest costs other than the accretion on debenture discount discussed
above increased by $88,000 during the first quarter of 2000, compared to the
first quarter of 1999. This increase in partly due to an increase of $101,000 of
interest on a short-term loan and an increase of $33,000 of interest on
officers' loans. This increase was partly offset by a decrease of approximately
$51,000 on interest on the debentures discussed above.
NET LOSS
Net losses for the first quarter of 2000 increased to $2,690,000
compared to $1,008,000 in the first quarter of 1999, an increase of $1,682,000
or 167% due primarily to an increase of $701,000 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.
Net cash used in financing activities was $46,000 for the first quarter
of 2000, mostly due to repayment of loans from our President of $195,000 and
sale of our common stock for a net cash proceeds of $150,000. During the first
quarter of 1999, we had net cash provided by financing activities of $512,000,
mostly due to loans from our President. The balance of the loan payable to Mr.
Rosen plus accrued interest thereon of approximately $1,873,000 is due on
demand.
Cash used in operating activities was $1,317,000 during the first
quarter of 2000, compared to $616,000 during the first quarter of 1999. The cash
used during these periods was primarily attributable to net losses of $2,690,000
for the first quarter of 2000 and $1,008,000 for the first quarter of 1999.
These losses were offset in part by depreciation and amortization and
amortization of the discount on the convertible debentures in 1999. We also had
an increase in accounts payable and accrued liabilities of $370,000 during the
first quarter of 2000, compared to $268,000 during the first quarter of 1999.
During the first quarter of 2000, we spent approximately $765,000 in
property and equipment, primarily for our television studio. We also purchased
$376,000 of equipment under a capital lease. During the first quarter of 1999,
we spent $203,000 in property and equipment.
WORKING CAPITAL DEFICIT AND MANAGEMENT PLAN
The accompanying financial statements reflect current liabilities of
$4,751,000 and current assets of $908,000 resulting in a working capital deficit
$3,843,000. Approximately $1,873,000 of the working capital deficit consists of
amounts owed to Mr. Rosen. Operating losses for the first quarter of 2000 were
$2,545,000. Operating deficits will continue until such time as substantial
revenues are generated from our channel and website.
We believe that we need approximately $6,000,000 over the next year to
carry out our business plan. We have recently signed an Equity Purchase
Agreement with Fusion Capital Fund II, LLC that will allow us to sell shares of
our common stock to raise approximately $1,000,000 a month over a twelve-month
period. In addition, we entered into a stock subscription agreement with an
accredited investor for the sale of our common stock. We received $150,000 and
expect to receive the remaining balance of $850,000 due on a schedule basis.
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.
17
<PAGE>
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 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 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
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 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.
18
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
In March 2000, we entered into a master facility agreement with an
investment company. The agreement was amended and restated in April 2000 and
provides for 400,000 shares to be issued as a commitment fee and up to 1,500,000
shares to be issued upon the conversion of an equity purchase agreement in the
aggregate principal amount of $6,000,000.
In March 2000, we entered into a subscription agreement for the sale of
500,000 shares of our common stock at a price of $4.00 per share. These
securities were issued pursuant to an exemption from registration provided by
Section 4(2) of the Securities Act.
In March 2000, we issued 80,000 shares of our common stock to certain
executives for a total compensation of $220,000. These securities were issued
pursuant to an exemption from registration provided by Section 4(2) of the
Securities Act.
In March 2000, we issued 71,000 shares of our common stock to
consultants with an aggregate value of $239,488. These securities were issued
pursuant to an exemption from registration provided by Section 4(2) of the
Securities Act.
In February 2000, we issued 71,362 shares of our common stock to an
individual in repayment of a short term loan of $288,304. These securities were
issued pursuant to an exemption from registration provided by Section 4(2) of
the Securities Act.
ITEM 6. EXHIBITS
(27.1) Financial Data Schedule (for Commission use only)
19
<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: May 12, 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 May 12, 2000
- ------------------------------------ and President
Melvin Rosen (Principal Executive Officer)
/s/ Dominique Sada
- ------------------------------------ Executive Vice President, and May 12, 2000
Dominique Sada Chief Financial Officer
(Principal Financial Officer and
Accounting Officer)
</TABLE>
20
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 147,649
<SECURITIES> 473,831
<RECEIVABLES> 383,927
<ALLOWANCES> (260,020)
<INVENTORY> 260,748
<CURRENT-ASSETS> 907,622
<PP&E> 3,350,156
<DEPRECIATION> (1,203,104)
<TOTAL-ASSETS> 10,385,749
<CURRENT-LIABILITIES> 4,751,287
<BONDS> 0
0
0
<COMMON> 12,670
<OTHER-SE> 21,474,485
<TOTAL-LIABILITY-AND-EQUITY> 10,385,749
<SALES> 464,974
<TOTAL-REVENUES> 464,974
<CGS> 196,798
<TOTAL-COSTS> 196,978
<OTHER-EXPENSES> 2,544,648
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 172,204
<INCOME-PRETAX> (2,689,912)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,689,912)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,689,912)
<EPS-BASIC> (0.22)
<EPS-DILUTED> (0.22)
</TABLE>
