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 September 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 (I.R.S. Employer Identification NO.)
incorporation or organization)
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 September 30, 2000, there were 14,476,437 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 SEPTEMBER 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE NO.
<S> <C> <C>
ITEM 1. Condensed Consolidated Financial Statements
Balance Sheets as of September 30, 2000 (Unaudited) and
December 31, 1999 3
Unaudited Statements of Operations for the three
months ended September 30, 2000 and 1999. 4
Unaudited Statements of Operations for the nine
months ended September 30, 2000 and 1999. 5
Unaudited Statements of Cash Flows for the nine months
ended September 30, 2000 and 1999 6
Unaudited Notes to Condensed Consolidated Financial
Statements 7
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
PART II OTHER INFORMATION 22
ITEM 2. Changes in Securities 22
ITEM 6. Exhibits 23
SIGNATURES 24
</TABLE>
2
<PAGE>
5TH AVENUE CHANNEL CORP.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents $ 24,402 $ 2,024,143
Accounts receivable, net 135,847 555,514
Other receivables 426,345
Inventory 70,100 210,486
Loans and notes receivable related parties 57,721 87,924
Prepaid expenses and other current assets 353,836 143,640
------------ ------------
Total Current Assets 1,068,252 3,021,707
Property and Equipment, net 2,171,585 1,500,411
Security Investments 104,388
Licenses, net 4,092,524 4,331,897
Goodwill, net 1,901,100 2,078,292
Notes Receivable, Related parties 344,319 310,353
Other Assets 192,652 222,699
------------ ------------
$ 9,874,820 $ 11,465,359
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------
Current Liabilities
Accounts payable and accrued expenses $ 3,397,976 $ 1,343,029
Accrued payroll, Pres./Chairman of the Board 637,500 450,000
Notes payable 849,037
Current portion of long-term debt 193,778 87,433
Loans and notes payable, related parties 97,523 55,081
Loans payable, President/Chairman of the Board 1,800,806 2,268,308
Obligation under capital leases 266,656
Deferred revenue 201,400 91,400
------------ ------------
Total Current Liabilities 7,444,676 4,295,251
Long term debt:
License installment notes, net of current portion 757,701 864,893
STOCKHOLDERS' EQUITY
Common stock 14,476 12,215
Additional paid-in capital 23,176,797 20,277,555
Accumulated deficit (21,518,830) (13,984,555)
------------ ------------
1,672,443 6,305,215
$ 9,874,820 $ 11,465,359
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
<PAGE>
5TH AVENUE CHANNEL CORP.
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Revenue:
Product sales, net of allowances of $33,348 $ 243,212 $ 510,638
Wireless cable television services 295,471 429,433
Internet and Television 54,600 251,019
Other revenues 250,000 --
------------ ------------
843,283 1,191,090
------------ ------------
Direct Costs:
Product sales 375,546 467,445
Wireless cable television services 99,804 69,417
Internet and television -- 220,136
------------ ------------
475,350 756,998
------------ ------------
Gross Margin 367,933 434,092
------------ ------------
Operating Expenses:
Selling, general and administrative 1,079,554 1,280,413
Television, website and software development costs 833,592 31,330
Depreciation and amortization 291,513 289,245
------------ ------------
2,204,659 1,600,988
Loss from Operations (1,836,726) (1,166,896)
------------ ------------
Other Income (Expense):
Interest income 7,491
Interest expense (109,221) (121,398)
Accretion of debenture discount -- ( 65,490)
------------ ------------
(101,730) (186,888)
------------ ------------
Net Loss ($ 1,938,456) ($ 1,353,784)
============ ============
Net Loss Per Common Share - Basic and Diluted ($ 0.14) ($ 0.14)
============ ============
Weighted Average Number of Shares Outstanding 13,899,862 9,660,143
============ ============
</TABLE>
4
See Notes to Condensed Consolidated Financial Statements
<PAGE>
5TH AVENUE CHANNEL CORP.
Condensed Consolidated Statements of Operations
(Unaudited)
Nine Months Ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
Revenue:
Product sales, net of allowances of $330,503 $ 1,063,309 $ 1, 446,197
Wireless cable television services 1,007,046 1,226,144
Internet and Television 54,600 250,745
Other revenues 250,000 --
------------ ------------
2,374,955 2,923,086
------------ ------------
Direct Costs:
Product sales 1,026,161 1,125,186
Wireless cable television services 292,851 201,418
Internet and television -- 220,136
------------ ------------
1,319,012 1,546,740
------------ ------------
Gross Margin 1,055,943 1,376,346
------------ ------------
Operating Expenses:
Selling, general and administrative 4,511,477 3,165,319
Television, website and software development costs 2,902,373 359,040
Depreciation and amortization 838,764 842,186
------------ ------------
8,252,613 4,366,545
Loss from Operations (7,196,671) (2,990,199)
Other Income (Expense)
Interest income 43,666
Interest expense (368,642) (327,101)
Accretion of debenture discount -- (437,080)
------------ ------------
(324,976) (577,293)
------------ ------------
Net Loss (7,521,647) ($ 3,754,380)
============ ============
Net Loss Per Common Share - Basic and Diluted ($ 0.54) ($ 0.39)
============ ============
Weighted Average Number of Shares Outstanding 13,899,862 9,577,429
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
<PAGE>
5TH AVENUE CHANNEL CORP.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss ($7,521,647) ($3,754,380)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 838,764 842,186
Accretion of debentures discount 437,080
Compensation in form of common stock and options issued to officers 524,997 101,861
and consultants
Stock and warrants issued in lieu of interest 101,164
Amortization of deferred marketing revenue (250,000)
Amortization of deferred marketing costs 220,136
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable (6,678) (146,129)
Decrease (increase) in inventory 140,386 59,066
Increase in prepaid expenses and other current assets (210,196) (38,474)
Increase in accrued payroll, President/Chairman of the Board 187,500 --
Increase in accounts payable and accrued liabilities 2,054,947 846,018
Increase in deferred revenue 110,000 20,000
----------- -----------
Net cash used in operating activities (3,780,762) (1,662,636)
Cash Flows from Investing Activities:
Purchase of property and equipment (1,094,933) (594,260)
Equipment purchased under capital Lease 468,362
Net cash received in IBC acquisition 40,381
Decrease (increase) in other assets 369,582 16,338
Deferred TV program production costs -- (117,786)
----------- -----------
Net cash used in investing activities (256,989) (655,327)
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 50,000 1,804,484
Payment of loans from President/Chairman of the Board (470,556) (96,932)
Repayment of long-term debt (120,441) (6,086)
Proceeds from long term loans 250,000
Proceeds from master facility 1,288,000
Proceeds from short term loans 850,000
Cost of registering common stock (10,851)
Repayment of loan from related party (96,932)
Net Change in loans to related party 39,900 (979)
----------- -----------
Net cash provided by (used in) financing activities 2,038,010 2,189,636
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents (1,999,741) 128,327
----------- -----------
Cash and Cash Equivalents, Beginning 2,024,143 256,209
----------- -----------
Cash and Cash Equivalents, Ending $ 24,402 $ 127,882
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
6
<PAGE>
5TH AVENUE CHANNEL CORP.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Nine Months Ended September 30, 2000
NOTE 1. BASIS OF PRESENTATION
The condensed consolidated balance sheet as of September 30, 2000, the
condensed consolidated statements of operations for the three months and nine
months ended September 30, 2000 and 1999, and the condensed consolidated
statements of cash flows for the six months ended September 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
September 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 condensed
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 March 31, 2000 and June 30, 2000 Forms 10-QSB and Form
S-8 filed on October 25, 2000 . The results of operations for the three and nine
months periods ended September 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 nine months
ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Interest paid during the period $ 31,767 $ 16,442
Non-cash investing and financing activities:
Shares issued for equity acquisition costs 780,000
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 71,400
Warrants issued for services to be performed 1,265,378 1,321,414
Shares to be received for services to be performed 1,500,000
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>
7
<PAGE>
NOTE 3. SEGMENT INFORMATION
The Company operates in various segments as follows:
o Product Sales ( New York )
o Wireless Cable television services:
Costa Rica
Wisconsin
o Corporate, Internet/Television ( Florida )
Information regarding the Company's geographic business units follows (in
thousands):
<TABLE>
<CAPTION>
OPERATING
INCOME
REVENUES (LOSS) DEPRECIATION AMORTIZATION
-------- ------ ------------ ------------
<S> <C> <C> <C> <C>
Third Quarter 2000
Product sales 243 (375) 4 --
Wireless cable:
Costa Rica 238 (79) 46 73
Wisconsin 57 (58) 28 7
Corporate, Internet and TV 305 (1,325) 75 59
------ ------ ------ ------
Total 843 (1,837) 153 139
------ ------ ------ ------
Third Quarter 1999
Product sales 511 (230) 13 --
Wireless cable:
Costa Rica 327 (12) 62 73
Wisconsin 102 (48) 45 7
Corporate, Internet and TV 251 (877) 21 68
------ ------ ------ ------
Total 1,191 (1,167) 141 148
------ ------ ------ ------
Nine months ended September 30, 2000
Product sales 1,063 (543) 14 --
Wireless cable:
Costa Rica 828 (980) 219 134
Wisconsin 179 (139) 83 20
Corporate, Internet and TV 305 (5,535) 106 263
------ ------ ------ ------
Total 2,375 (7,197) 422 417
------ ------ ------ ------
Nine months ended September 30, 1999
Product sales 1,446 (478) 37 --
Wireless cable:
Costa Rica 974 (27) 172 219
Wisconsin 252 (169) 133 20
Corporate, Internet and TV 251 (2,316) 54 207
------ ------ ------ ------
Total 2,923 (2,990) 396 446
------ ------
</TABLE>
8
<PAGE>
NOTE 4. MASTER FACILITY AGREEMENT-Equity Purchase Agreements
As of September 30, 2000, the Company had drawn $1,288,000 under the
Agreement and Fusion had converted 2,038,387 shares, including 324,324, as the
commitment fee. These agreements are more fully discussed under the
corresponding footnote titled MASTER FACILITY AGREEMENT in the March 31, 2000
and June 30, 2000 Forms 10-QSB. All the principal had been converted as of
September 30, 2000 .
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 $1,228,000 of funding, the Company issued Fusion
Capital 1,824,324 registered shares and 214,063 unregistered shares . It is
unlikely that the Company could 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.
NOTE 5. STOCK SUBSCRIPTION AGREEMENT
On March 24, 2000, the Company entered into a subscription agreement
for the sale of 500,000 shares of its common stock which is discussed in depth
under the corresponding footnote titled STOCK SUBSCRIPTION AGREEMENT in the June
30, 2000 Form 10-QSB. During this quarter, a contractural dispute between the
Company and subscriber was settled by amending the agreement. This agreement was
deemed to be fully performed by the issuance of 662,500 registered shares for
$272,500, of which $22,500 was for the repayment of a loan and accrued interest.
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. This agreement was
further amended effective November 6, 2000 reducing the monthly fees for these
services to $50,000 from $92,000, maintaining a half hour uplink instead of
eight hours and self staffing the control room. The agreement is for one year
with a one-year renewal option.
CARRIAGE AGREEMENTS
As of this writing, the Company is no longer providing the carriage for
its television programming with America's Voice, Inc. nor Comcast Cable
Communication, Inc.
On November 3, 2000, the Company entered into an agreement with
ALLNEWSCO, Inc. d/b/a NewsChannel8 to provide the carriage for its television
programming in portions of the states of Maryland, Virginia, West Virginia and
the District of Columbia and over the Internet at their web site NEWS8.NET. As
of the effective date of this agreement ALLNEWSCO had approximately 1.12 million
viewers.
The cost to the Company is a 50/50 inventory split on available
television advertising spots and a link exchange between the Company's web site
and that of ALLNEWSCO, Inc.
9
<PAGE>
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 three months ended September 30, 2000, the Company recorded an investment of
$20,557 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 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 was
recorded in the balance sheet within security investments. Subsequently, this
online entity was acquired conditionally requiring our sale of the securities
for an adjusted amount of $389,518. The sale was effectuated in July 2000.
Additionally, the buyer entered into a new advertising agreement with the
Company which superceded the one with the online entity. The agreement runs
through September 30, 2001 and totals $200,000 in advertising revenues of which
$40,000 is being recognized in this quarter. Deferred revenue of $60,000
resulted from an advance on this transaction and is reported under current
liabilities. Further, for its part in the acquisition, the Company received a
finders fee of $250,000.
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 September 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
10
<PAGE>
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 was for six months and
expired in July, 2000.
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 and $12,000 were recognized for the three and nine
months , respectively, ended September 30, 2000.
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 1933, as
amended. The Company is to receive total fees 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 would have
been recognized against earned revenue, instead the unamortized balance, which
was presented as a reduction of stockholders' equity, has been reversed since
the agreement was terminated pursuant to a settlement in which the Company
purchased the territories back from the third party and repaid third party's
investment of $200,000 by issuing to third party 716,666 shares of restricted
stock. No revenue has been recognized through September 30, 2000.
11
<PAGE>
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. SUBSEQUENT EVENT
The Company entered into separate consulting agreements with two cosultants. The
duties of each consultant consist of consulting in the areas of management
advice and assistance with outside professionals such as accountants and
attorneys. As compensation, the Company registered 1,000,000 shares in an S-8
filing, 500,000shares to be issued to each consultant. The original agreement
between the parties included the right to options of the Company's common stock,
this right has since been waived by the consultants. Therefore, the consultants
will only receive a total of 500,000 shares each for all consulting services
performed under this agreement.
As of September 30, 2000 the Company had received $850,000 in convertible
short-term notes payable.
As of this filing $100,000 of the notes were converted to equity. Subsequent to
September 30, 2000 the Company received an additional $148,324 from similar
convertible short-term notes. All the remaining note holders have expressed an
interest in converting.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF
OPERATIONS
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
nine months periods ended September 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.
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.
13
<PAGE>
RESULTS OF OPERATIONS (IN THOUSANDS)
Three Months Ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999 Increase
(decrease)
<S> <C> <C> <C>
REVENUE
Product sales 243 511 (52%)
Wireless cable:
Costa Rica 238 327 (27%)
Wisconsin 57 102 (44%)
Corporate, Internet and TV 305 251 (22%)
------ ------ ------
Total 843 1,191 (29%)
------ ------
DIRECT COST
Product sales 375 467 (20%)
Wireless cable:
Costa Rica 82 54 52%
Wisconsin 18 16 13%
Corporate, Internet and TV -- 220 (100%)
------ ------ ------
Total 475 757 (37%)
------ ------ ------
Operating Expenses
Selling, general and administrative
Product Sales 238 260 (8%)
Costa Rica 116 150 (23)
Wisconsin 60 83 (28%)
Corporate, Internet and TV 660 787 (15)
------ ------ ------
Sub total 1,080 1,280 (16%)
------ ------
Television, Website, Software Costs
Television Operations 709 --
Internet Operations 124 --
Corporate, Internet and TV -- 32 (100%)
------ ------
Sub total 833 32 2503%
------ ------
Depreciation and Amortization
Product sales 4 13 (69%)
Costa Rica 119 135 (12%)
Wisconsin 35 51 (31%)
Corporate, Internet and TV 134 90 49%
------ ------ ------
Sub total 292 289 1%
------ ------
Total 2,205 1,601 38%
------ ------
Interest Income (Expense)
Interest Income
Corporate, Internet and TV 7 --
Accretion of debenture discount -- (66) (100%)
Other Interest Expense
Product (40) --
Corporate, Internet and TV (69) (121) (43%)
------ ------ ------
Total 102 187 (45%)
------ ------
NET INCOME (LOSS) (414) (229) 81%
Product sales
Wireless cable:
Costa Rica
(79) (12) 558%
Wisconsin (56) (48) 17%
Corporate, Internet and TV (1,390) (1,065) 31%
Total (1,939) (1,354) 43%
</TABLE>
14
<PAGE>
RESULTS OF OPERATIONS (IN THOUSANDS)
Nine Months Ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999 Increase
(decrease)
<S> <C> <C> <C>
REVENUE
Product sales 1,063 1,446 (26%)
Wireless cable:
Costa Rica 828 975 (15%)
Wisconsin 180 252 (29%)
Corporate, Internet and TV 304 251 21%
------ ------ ------
Total 2,375 2,924 (19%)
------ ------ ------
DIRECT COST
Product sales 1,026 1,125 (9%)
Wireless cable:
Costa Rica 192 145 32%
Wisconsin 57 56 2%
Corporate 44 --
Corporate, Internet and TV -- 221 (100%)
------ ------ ------
Total 1,319 1,547 (15%)
------ ------ ------
Operating Expenses
Selling, general and administrative
Product 567 762 (26%)
Costa Rica 435 466 (7%)
Wisconsin 158 210 (25%)
Corporate, Internet and TV 3,352 1,727 94%
------ ------ ------
Total 4512 3,165 43%
------ ------ ------
Television, Website, Software Costs
Television Operations 2222 --
Internet Operations 664 --
Corporate, Internet and TV 16 359 (96%)
------ ------ ------
Sub total 2902 359 708%
------ ------ ------
Depreciation and Amortization
Product sales 14 37 (62%)
Wireless cable:
Costa Rica 353 391 (10%)
Wisconsin 103 154 (33%)
Corporate, Internet and TV 369 261 41%
------ ------ ------
Sub total 839 843 0%
------ ------ ------
Total
Interest Income (Expense)
Interest Income
Corporate, Internet and TV 44 --
Accretion of debenture discount -- (437) (100%)
Other Interest Expense
Product (40) --
Corporate, Internet and TV (329) (327) 1%
------ ------ ------
Total (325) 764 (143%)
------ ------ ------
NET INCOME (LOSS)
Product sales (584) (478) 22%
Wireless cable:
Costa Rica (152) (27) 463%
Wisconsin (138) (168) (18%)
Corporate, Internet and TV (6,648) (3,081) 116%
------ ------ ------
Total (7,522) (3,754) 100%
------ ------ ------
</TABLE>
15
<PAGE>
MD&A (Continued)
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUES
We had revenues of $843,000 during the third quarter of 2000 compared
to $1,191,000 during the second quarter of 1999, a decrease of $348,000 or 29%.
Product sales accounted for most of the decrease due to our limited availability
of working capital for inventory purchases. Wireless cable television services
accounted for a decrease of $134,000 due to a decrease in the subscriber base in
both Costa Rica and Wisconsin. Total revenues were enhanced during this period
by a $250,000 finder's fee under "Other revenues" further explained in Note 6 to
the financial statements titled; OPERATING AGREEMENTS - Co-Marketing Agreement.
DIRECT COSTS
Direct costs for the third quarter of 2000 decreased $282,000 to
$475,000 from $757,000 in 1999, or a decrease of 37%. Approximately $92,000 of
the decrease is related to the product sales division due to the corresponding
decrease in product sales. The negative gross margin of approximately $133,000
from product sales resulted from liquidated inventory. Direct costs for the
wireless cable operations increased $28,000 in Costa Rica due to our offering
more channels to subscribers.
OPERATING EXPENSES
Operating expenses during the third quarter of 2000 increased to
$2,205,000 an increase of $604,000 or 38% compared to $1,601,000 during the
third 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 decreased by $200,000 or
16%. Most of this decrease was due to reductions in salary and related expenses
and discontinued contracted services throughout the Company.
We incurred approximately $833,000 of television, website and software
development costs during the third quarter of 2000, compared to approximately
$32,000 during the third quarter of 1999, a 2,503% increase. This increase is
attributable to expenses incurred to launch our television channel , the
addition of personnel in our television division, and expenses 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 $134,000 during the third quarter of 2000
compared to $90,000 during the third quarter of 1999, an increase of $44,000 or
49%. This increase was mostly due to the purchase of equipment for the
television channel.
INTEREST EXPENSE
Interest costs decreased to $109,000 during the third quarter of 2000
compared to $121,000 during the third quarter of 1999, a decrease of $12,000 or
10%. During the third quarter of 1999, we incurred interest expense of $65,000
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>
NET LOSS
Net losses for the third quarter of 2000 increased to $1,938,000
compared to $1,354,000 in the third quarter of 1999, an increase of $584,000 or
43% due primarily to an increase of $1,237,000 in losses associated primarily
with the development and operation of our Internet and television businesses.
17
<PAGE>
MD&A (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUES
We had revenues of $2,375,000 during the nine months ended September
30, 2000 compared to $2,923,000 during the comparable period in 1999, a decrease
of $548,000 or 19%. Product sales accounted for the majority of the decrease
primarily because of approximately $331,000 for allowances for returns and
guaranteed sales. The decrease in product sales for the nine months ended
September 30, 2000 was approximately $383,000 or 26% compared to the same period
in 1999.
Wireless cable posted decreases in both Costa Rica and Wisconsin. The
latter experienced a $72,000 decrease or 29% and Costa Rica had a decrease of
approximately $147,000 or 15%. These decreases 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 nine months ended September 30, 2000 decreased
$228,000 to $1,319,000 from $1,547,000 in 1999, a decrease of 15%.
OPERATING EXPENSES
Operating expenses during the nine months ended September 30, 2000
increased to $8,253,000 an increase of $3,886,000 or 89% compared to $4,367,000
during the same period in 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 $1,347,000 or
43%. Approximately all of this increase was due to an increase in salary and
related expenses and contracted services for all segments.
We incurred approximately $2,902,000 of television, website and
software development costs during the nine months ended September 30, 2000
compared to approximately $359,000 during the same period in 1999, a 708%
increase. This is due to expenses of approximately $2,222,000 incurred to launch
our television channel and the addition of personnel in our television division,
and expenses of approximately $680,000 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 $369,000 during the nine months ended September
30, 2000 compared to $261,000 during the same period in 1999, an increase of
$108,000 or 41%. This increase was mostly due to the purchase of equipment for
the television channel.
18
<PAGE>
INTEREST EXPENSE
Interest costs increased to $369,000 during the nine months ended
September 30, 2000 compared to $327,000 during the same period in 1999, an
increase of $42,000 or 13%. The increase is mainly due to new capital lease
obligations and the company's factoring of its product accounts receivable.
NET LOSS
Net loss for the nine months ended September 30, 2000 increased to
$7,522,000 compared to $3,754,000 during the same period in 1999, an increase of
$3,768,000 or 100% due primarily to an increase of $2,543,000 in losses
associated primarily with the development and operation of our Internet and
television businesses.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES AND USE OF CASH - Nine Months Ended September 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 $2,038,000 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 short-term loans of $850,000,
loans from related parties / President of $89,900 and the proceeds from the
master facility of $1,288,000. Less approximately $73,000 of costs associated
with the SB-2 registration and other reductions for repayments of approximately
$591,000.
Cash used in operating activities was $3,786,000 during this period,
compared to $1,663,000 during the same period in 1999. The cash used during
these periods was primarily attributable to net losses of $7,522,000 for the
period and $3,754,000 for the same period in 1999.
These losses were offset in part by depreciation and amortization of
$839,000 and $842,000 for the comparable period in 2000 and 1999, respectively.
We also had an increase in accounts payable and accrued liabilities of
$2,055,000 during this period, compared to $846,000 during the same period in
1999.
During this period, we spent approximately $1,095,000 including
$468,000 under capital leases, in property and equipment, primarily for our
television studio. For this period in 1999, we spent $594,000 in property and
equipment.
WORKING CAPITAL DEFICIT AND MANAGEMENT PLAN
The accompanying financial statements reflect current liabilities of
$7,445,000 and current assets of $1,068,000 resulting in a working capital
deficit of $6,377,000. Approximately $2,438,000 of the working capital deficit
consists of amounts owed to Mr. Rosen. Operating losses for the period were
$7,197,000. Operating deficits will continue until such time as substantial
revenues are generated from our channel and website.
The Company has been hindered in accomplishing some of its goals due to
the fact that it did not receive anticipated capital infusions. As a continued
option to further equity infusions and conversion of debt to shares , the
Company has been receiving working capital in the quarter ending September 30,
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.
19
<PAGE>
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.
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:
o Sale of Company shares;
o Receipt of loans;
o Factoring of receivables generated by the Company's wholesale-to-retail
business;
o Collection of other significant receivables generated by the sale of
advertising, the provision of other services and the sale of shares of
stock in other companies in which the Company holds equity positions;
o Capital contributions and loans from shareholders;
o The implementing cost-saving restructuring;
o The expansion of product sales by both method and product lines (i.e.
by telemarketing and direct response television;
o Loans from Company officers;
o Deferment of salaries by Company officers;
o Deferment of interest due to a major shareholder;
o Increasing operating revenues (advertising, cable subscriptions and
product sales);
o Sales of non-core business assets, and;
o Sub-lease of studio and equipment during the time the studio is not
used for Company productions.
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.
Since the beginning of the year, the Company completed building its
leased, modern broadcast studio facilities, put 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.
20
<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 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.
21
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
During the quarter ended September 30, 2000, we issued 903,263 shares
of our common stock to Fusion Capital in accordance with the Master Facility
Agreement. These shares were issued pursuant to the exemption from registration
provided by section 4 (2) of the Securities Act of 1933.
ACCOUNTANTS' REVIEW
The Company `s independent accountants have not reviewed this Form
10-QSB for the quarter period ended September 30, 2000.
22
<PAGE>
ITEM 6. EXHIBITS
(27.1) Financial Data Schedule (for Commission use only)
23
<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: November 14, 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 November 14, 2000
------------------------- and President
Melvin Rosen (Principal Executive Officer)
/s/ Aurelio E. Alonso Chief Financial Officer November 14, 2000
-------------------------
Aurelio E. Alonso (Principal Financial Officer)
</TABLE>
24
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
27.1 Financial Data Schedule
25
