Item 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
We were incorporated in Delaware on November 12, 1998, under the name foreignTV.com, Inc. to pursue opportunities arising out of the Internet's emergence as a broadcast medium, which resulted, in large part, from the advent of streaming video technology and the availability of high speed Internet access.
We commenced our operations in 1999 as a single TV network that created, produced and distributed location-specific programming on the Internet using streaming video technology, which enabled an Internet user to select and view this "stream" of programming on demand, 24 hours a day. Seeking to expand this "video-on-demand" business, we increased the breadth of our programming by establishing new content-specific networks, each hosting and featuring numerous channels offering unique thematic streaming audio and video content and special-interest programming, or "niche programming," to select from and view. In December 1999, we changed our name from foreignTV.com, Inc. to Medium4.com, Inc. to underscore the Internet's emerging role as the fourth medium for television broadcasting, after cable, satellite and traditional television transmission. By the end of 2000, we were providing streaming audio and video content over six Internet "television" networks, which in the aggregate hosted over 100 distinct channels targeted to various market segments and niches. Most of these audio and video segments were encoded at three different speeds, for low-, medium- and high-band users, and were made available for audiences by the use of Windows Media Player (TM) or Real Networks, Inc.'s Real Player (TM).
During 2001 we refocused our business model to de-emphasize the offering of thematic video-on-demand networks in favor of a single network of special interest, continuously streaming broadband entertainment channels, using a previously unavailable technology called Simulated Live Stream, or SLS.
Our executive offices are located at 1220 Collins Avenue, Suite 100, Miami Beach, FL 33139. Our telephone number is (305) 538-0955 and our primary Website is located at www.medium4.com. The information on our Website is not a part of this Report.
RECENT DEVELOPMENTS
During the fourth quarter of 2001, in light of the September 11th terrorist attacks, we relaunched our StreamingUSA network, previously a collection of thematically linked video-on-demand channels, and focused on providing "American" content, incorporating the following elements:
- an SLS travel-America channel entitled StreamingUSATV;
- a selection of video-on-demand jazz, blues, and Americana music videos;
- two photo-image slideshow channels (SlideChannel and SlideChannel2);
- a text-only channel (Channel2Read), presently dedicated to inspiring, patriotic quotations; and
- an animation channel.
On October 30, 2001, we privately sold 1,000 shares of our newly designated Series A convertible preferred stock to Inter Asset Japan LBO No. 1 Fund, a Japanese institutional investor, for an aggregate of $1,000,000.
Each share of Series A convertible preferred stock is convertible into 20,000 shares of our common stock, or an aggregate of 20,000,000 shares if all of the Series A convertible preferred stock is converted. Had all of the shares of Series A convertible preferred stock been converted into shares of our common stock on the date of this Report, those shares would have represented an approximately 40.3% equity interest in our company. This sale represents an event which may lead to a future change of control of our company.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Not applicable
(c) NARRATIVE DESCRIPTION OF BUSINESS
STREAMING TECHNOLOGY
In contrast with video-on-demand channels, which require viewers to choose from an online portfolio of specific videos and then click onto each video clip they decide to view, viewers of SLS channel simply click on a given link to tune into a channel's in-progress, continuously-streaming entertainment programming. The viewer is then able to view/listen to and enjoy the continuous stream of music contained on the SLS channel and may continue to listen to the music even after exiting our Website and while working on or surfing the Internet. We believe SLS channels are less cumbersome and more viewer-friendly than video-on-demand channels and come closer to a true TV experience. Key portions of our video-on-demand content are being reorganized by topic or subject matter (e.g., pets, travel, music), and will be available in a single section of our main Medium4.com Website, as well as directly accessible at www.Medium4Video.com.
All of our content can be accessed through streaming technology. Streaming multimedia takes standard videotape formats and digitizes and compresses the information using encoder software. When a user opens or accesses an audio or video file, a portion of the data is downloaded in a matter of seconds into a form of computerized holding pens or "buffers" when the data starts to play, additional data is continuously downloaded to keep the holding pen full. Streaming technology thereby enables the simultaneous transmission and reception--or "broadcast"--of continuous "streams" of audio and video content.
Streaming technologies have evolved to deliver content over narrow bandwidth modems. At such narrow or "low bandwidth" the quality of broadcasts over the Internet, such as videos, are still inferior to conventional television broadcasts. Streaming technologies are now using high speed Internet access that is provided by DSL, cable modems, T1 lines, and other emerging broadband technologies. The use of high speed Internet access has helped improve the picture quality of streaming videos. We believe the continuing improvement of broadband technologies will soon allow streaming video quality to equal that of conventional TV broadcasting, and consequently will cause the number of viewers of streaming content to increase.
THE VTOOB
StreamingUSA is presented in a specially designed "player," called the vToob, which has the look and feel of a virtual appliance--specifically, an online multimedia TV set. All content is "channelized" and formatted for viewing in a single TV-like screen. The vToob is designed to make room for click-through banner advertising; TV-like advertising "spots" played before, during and after programs on the SLS channel. Our video content is encoded for high-speed (broadband) viewers only. The photos, text, and animation are encoded for low-, medium-, and high-band users. Viewers can download and install the vToob (presently at no charge) by visiting the Medium4.com website. The process takes just seconds with a high-speed (DSL, T1, cable modem) connection, and only a little longer with a dial-up connection.
Using licensed, customized, and proprietary software, the vToob is designed to be directly launched-- at the click of a mouse--from the viewer's browser toolbar, favorites menu, or computer screen desktop. This addresses the central marketing challenge confronting nearly every website today-- that a large majority of Internet traffic now goes to a handful of sites. The vToob positions StreamingUSA as an always-on-top Internet-based multimedia network with easy, one-click access. Moreover, because it is essentially a website packaged as a "player," the vToob makes it possible for a small staff of website professionals (content managers, designers, programmers, etc.) to more cost-effectively and efficiently manage and update the content.
We believe the vToob, as applied to StreamingUSA, represents a timely and appropriate content delivery solution, strategy and methodology that may have commercial potential for other content provides and publishers. We are exploring the feasibility of offering customized applications on a fee-for-service and/or joint venture basis.
As for StreamingUSA's revenue model, current banner advertisements are free and simply used to generate interest and demonstrate viability and potential. Though the world-wide advertising slump shows early signs of recovery, we believe that advertising will not be sufficient to support the network in the foreseeable future; instead, we are considering a hybrid subscription/ advertising revenue model.
PLS--PRIVATE LABEL STREAMING
In order to develop and implement our business as an Internet broadcaster, we have developed proprietary streaming media technology solutions -- PLS-Private Label Streaming -- to provide back-end content encoding, hosting and content streaming capabilities. During 2001, we sold several encoding mechanisms containing the PLS technology.
OUR VIEW OF THE INTERNET
In recent years, the World Wide Web transformed the Internet from an academic and government curiosity into a consumer mass medium for communication, entertainment and information. We believe that over the next several years, broadband, or high speed Internet connection, will transform the Internet into a commercially viable broadcasting medium that will merge, or converge, with digital/satellite TV. We believe an opportunity exists to cost-
effectively create and build broadband entertainment channels in anticipation of this transformation of the Internet and its eventual convergence with digital/satellite TV.
OUR CONTENT STRATEGY
We have changed the way we develop our unique content. We no longer engage in the costly production of content for our channels. Instead, we have begun to purchase content produced by others, which has allowed us to consolidate our facilities and reduce our staff significantly. We believe that by purchasing our content, we will reduce our operating costs and strengthen our overall business.
During 1999 and into 2000, we produced professional, worldwide news content from a facility located in Paris, France. Although this programming helped our Company evolve into one of the leaders in independent Internet broadcasting, its production required large amounts of capital. By December 31, 2000, as a result of the high cost of production, together with a shift in our business strategy away from content production in general, we ceased producing this news content and closed our Paris facility.
The experience of the cable networks as a broadcast medium has shown that they can increase revenues by narrowing the overall TV audience (i.e., with niche, or special interest, channels). This practice can be thought of as "narrowcasting" as opposed to "broadcasting." Given the growth and success of the cable TV industry, we believe there exist market opportunities to launch and build next-generation cable-style niche programming on the Internet, especially after the convergence of the Internet and digital/satellite TV.
In the last two years we have attempted to extend cable TV's successful niche program model to our SLS broadband entertainment channels and to our video-on-demand channels. We are currently providing only "American" content on our StreamingUSA network.
Currently, our programming and content is available to viewers of our channels free of charge. We are reviewing and testing the possibility of providing certain content on a pay-per-view basis or a subscriber basis.
INTERNET ADDRESSES--DOMAIN NAMES FOR PRESENT AND FUTURE CHANNELS
The Company owns or licenses more than 1,500 unique Internet addresses or domain names. We currently offer content from approximately 40 of these addresses. For the approximately 135 domain names that we license pursuant to exclusive 25-year arrangements with certain of our executive officers and their affiliates, we are required to pay annual license fees beginning at $600 per domain name, escalating to $2,500 per domain name through the 25th year. For all other domain names, we are only required to pay an annual maintenance fee of approximately $35 per name, or a current aggregate of approximately $70,000. As of December 31, 2001, we were delinquent in these payments to the extent of approximately $80,000. As part of our business strategy, we seek to protect the names that we actually use, or plan to use, by applying for trademark registration for these names.
ANTICIPATED REVENUE SOURCES
- Subscription fees
- vToob applications
- Sponsorships sold for part or all of a channel.
- Sale of PLS encoding mechanisms
MARKETING AND PROMOTION
To encourage the widespread downloading of our vToob and the viewing of our SLS network, we plan to concentrate our marketing efforts and resources on hiring outside consultants to facilitate mass e-mail campaigns that target potential viewers by channel, content and interest.
COMPETITION
We compete with on-line services, other Website operators and advertising networks, as well as traditional media such as television, radio and print, for a share of advertisers' total advertising budgets and sales of advertising spots. We believe that the principal competitive factors for attracting advertisers include:
- the number of users accessing our Website;
- the demographics of our users;
- our ability to deliver focused advertising and interactivity through our Website;
- the overall cost-effectiveness and value of advertising on our network; and
- the ability of our viewers to access the Internet through high-speed connections.
There is intense competition for the sale of advertising on high-traffic Websites, which has resulted in a wide range of rates quoted by different vendors for a variety of advertising services, making it difficult to project levels of Internet advertising that will be realized generally or by any specific company. Any competition for advertisers among present and future Websites, as well as competition with other traditional media for advertising placements, could result in significant price competition. We also compete for traditional media advertising sales with national radio and television networks, as well as local radio and television stations. Such radio and television networks and stations in virtually all instances have larger and more established sales organizations than ours. These companies may also have greater name recognition and more established relationships with advertisers and advertising agencies. Such competitors may be able to undertake more extensive marketing campaigns, obtain a more attractive inventory of ad spots, adopt more aggressive pricing policies and devote substantially more resources to selling advertising inventory. Moreover, we compete against a variety of businesses that provide content through one or more mediums, such as print, radio, television, cable television and the Internet. To compete successfully, we have to provide sufficiently compelling and popular content to attract viewers and support advertising intended to reach such users. We believe that the principal competitive factors in attracting Internet users include the quality of service and the relevance, timeliness, depth and breadth of content and services offered.
The Internet broadcasting market is highly competitive. Although many of our major competitors of streaming video have ceased operations during the last year or two, we believe we will continue to compete against a variety of content-based Internet companies. Some of the principal competitive factors in this market include the ability to adapt to new technologies and enhance the quality of content transmission, the ability to deliver quality content to your target viewers, the ability to obtain advertisers and the ability to have available financial resources.
We believe that our business focus of providing entertainment niche programming on a streaming basis through the use of our vToob has differentiated us from other content-based Internet companies. We believe we do not have any direct competitors in this new market. However, we can give no assurance that other companies will not develop competing technology and business strategies and directly compete in the streaming multimedia entertainment programming.
INTELLECTUAL PROPERTY
We regard our copyrights, trademarks, trade secrets, domain name rights and similar intellectual property as significant to our growth and success. We rely upon a combination of copyright and trademark laws, trade secret protection, domain name registration agreements confidentiality and non-disclosure agreements and contractual provisions with our employees and with third parties to establish and protect our proprietary rights. We have applied for federal trademark protection for our networks and channels and intend to apply for federal trademark protection for certain of the marks and names that we use in the course of our business.
GOVERNMENT REGULATION
There are few laws or regulations directly applicable to the Internet. For example, the Digital Millennium Copyright Act, enacted into law in 1998, protects certain qualifying online service providers from copyright infringement liability, the Internet Tax Freedom Act, also enacted in 1998, placed a three year moratorium on new state and local taxes on Internet access and commerce, and under the Communications Decency Act, an Internet service provider will not be treated as the publisher or speaker of any information provided by another information content provider. The Child Online Protection Act of 1998 imposes criminal penalties and civil liability on anyone engaged in the business of selling or transferring material that is harmful to minors, by means of the Internet, without restricting access to this type of material by underage persons. Numerous states have adopted or are currently considering similar types of legislation. The nature of this and future legislation and the manner in which they may be interpreted and enforced cannot be fully determined and could subject us to potential liability, which in turn could harm our business.
The appeal of the Internet makes it likely, however, that state, national or international laws may be implemented in the future covering such issues as user privacy, defamatory speech, copyright infringement, pricing and characteristics and quality of products and services. Any new law or regulation may have the effect of limiting the use of the Internet and its growth as a new medium to communicate.
EMPLOYEES
As of December 31, 2001, we had 3 full-time employees and 1 part-time employee. None of our employees is subject to a collective bargaining agreement and we believe that our relations with our current employees are good.
Item 2.
Item 2. PROPERTIES
In December 2000, we relocated our executive offices to our Miami Beach facilities and terminated our lease for the premises located at 120 Fifth Avenue, without penalty. The rent payable by the Company for our Miami Beach offices and facilities is approximately $11,000 per month. We believe our offices and operating facilities are adequate for our current purposes.
Item 3.
Item 3. LEGAL PROCEEDINGS
As previously reported, we entered into a master affiliate agreement with Windfire International Corporation, Ltd., a British Virgin Islands corporation, pursuant to which we granted Windfire the exclusive right for an initial term of five years to grant licenses solely to persons and entities acceptable to us for the establishment and operation within the nations of Brunei, Indonesia, Kenya, Malaysia, the Philippines, Singapore, South Africa, Tanzania, Thailand and Uganda of Internet sites that will comprise discrete channels upon one or more of our network of streaming media Websites. The master affiliate agreement required Windfire to pay us a one-time master license fee of $1.5 million on or before June 30, 2000, of which $500,000 has been received to date. Windfire also agreed to pay us commissions over the term of the master affiliation agreement calculated upon specified percentages of annual gross revenues received by Windfire from its licensees.
On or about September 15, 2000, Windfire, which we believe is owned or otherwise affiliated with Mr. G. Selva Raj, initiated a demand for arbitration before the American Arbitration Association, New York Region, which sought an award declaring that the master affiliate agreement between our company and Windfire was unenforceable and void. Windfire also asserted that the agreement is void or voidable because of alleged omissions of what it categorizes as essential components of the agreement, thereby demonstrating the absence of a meeting of the minds between our companies. In addition, Windfire sought $500,000 and compensatory and punitive damages that were not quantified. We denied the material allegations asserted by Windfire in its demand for arbitration and asserted a counterclaim for payment of the $1.0 million outstanding balance of the master license fee owed to us by Windfire. This proceeding was dismissed with prejudice by mutual agreement in April 2002 at no material cost to us.
On or about September 19, 2000, Cavendish Asset Management Ltd., a British Virgin Islands corporation, which we believe is also owned or otherwise affiliated with Mr. Raj , initiated an action against us, Jonathan Braun, our Chief Executive Officer, Marc D. Leve, our former Vice President-Legal Affairs, and others in the Supreme Court of the State of New York, County of New York. Cavendish's complaint alleges that it had entered into a term sheet with Antafin, B.V., a Netherlands corporation, calling for its acquisition of a certain political and travel publication known as Executive Class. The complaint asserts that Antafin was owned and controlled by us. Cavendish further alleges that we and Messrs. Braun and Leve, as well as certain of our former officers, fraudulently induced Cavendish to pay $1.0 million to Antafin as a down payment, and that if Cavendish and Antafin were unable to negotiate a definitive acquisition agreement, Cavendish would be entitled to its return. Cavendish asserts that no definitive agreement with respect to the sale of Executive Class was ever reached between Cavendish and Antafin and that notwithstanding its repeated demands, Antafin has refused to return Cavendish's downpayment. Cavendish seeks an injunction against us and each of the other defendants enjoining the transfer, disposition or concealment of the alleged $1.0 million downpayment, and a judgment against us and the other defendants, jointly and severally, in the amount of $1.0 million plus punitive damages, which were not quantified. We believe that the claims asserted against us by Cavendish are without merit and we intend to vigorously defend this action.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 27, 2001, we held our 2001 annual meeting of stockholders. At the meeting, our stockholders elected I. William Lane, Jonathan Braun, Junichi Watanabe and Satoru Hirai to serve as our directors for a term of one year and until their respective successors are elected by a vote of 25,349,646 shares in favor and 2,585 shares withheld. In addition, our stockholders approved the issuance of up to 20,000,000 shares of our common stock upon the conversion of our Series A convertible preferred stock by a vote of 25,427,086 shares in favor, 15,170 shares opposed and 2,691,450 shares present but not voting, and approved an amendment to our certificate of incorporation to increase the authorized number of shares of our common stock from 30,000,000 to 75,000,000 by a vote of 21,175,684 shares in favor, 2,495 shares opposed and 6,955,617 shares present but not voting.
Part II
Item 5.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Our common stock and warrants are listed on the American Stock Exchange under the symbols "MDM" and "MDM.WS". The following table sets forth the range of the high and low closing prices for such securities for the periods indicated.
Redeemable Common Stock Purchase Common Stock Warrants Quarter Ended High Low High Low - ------------------ ----- ----- ----- ----- March 31, 2000 ............ $6.38 $4.50 $1.25 $0.81 June 30, 2000 ............. 6.88 2.88 1.38 0.56 September 30, 2000 ........ 5.13 2.63 0.88 0.06 December 31, 2000 ......... 2.69 0.19 0.38 0.02 March 31, 2001 ............ 0.38 0.10 NQ NQ June 30, 2001 ............. 0.75 0.15 NQ NQ September 30, 2001 ........ 0.39 0.10 NQ NQ December 31, 2001 ......... 0.65 0.10 NQ NQ
On April 12, 2002, there were 185 and 63 recordholders of our common stock and warrants, respectively, although we believe that there are other persons who are beneficial owners held in street name. We have never paid cash dividends. We intend to retain any future earnings for the operation and the expansion of our business and do not anticipate paying any cash dividends in the foreseeable future.
(b) During the three month period ended December 31, 2001, we sold 1,000 shares of our Series A convertible preferred stock for $1,000,000 and 23,760 shares of our common stock for an aggregate of $2,376, respectively. No underwriter was involved in the sale of our Series A convertible preferred stock. Westminster Securities Corporation acted as placement agent for the sale of our common stock.
We also issued an aggregate of 1,515,000 shares of our common stock during the three month period ended December 31, 2001 to eight persons in payment for services which they rendered on our behalf. No underwriters were involved in any of these transactions.
Each recipient of our securities represented that his or its acquisition was for investment and not with a view towards a public distribution thereof. All certificates representing these securities were imprinted with an appropriate restrictive legend to such effect. Exemption from registration of these securities under the Securities Act of 1933 is claimed by reason of the provisions of Section 4(2) of that Act as transactions by an issuer not involving a public offering.
Item 6.
Item 6. SELECTED FINANCIAL DATA
Our consolidated balance sheet and statement of operations are set forth in this Report in the Financial Statements and Notes thereto, and are incorporated herein by reference.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
In view of the evolving nature of our business and our limited operating history, we believe that a description of our revenues and operating results is not necessarily meaningful and should not be relied upon as indications of future performance. Our current business plan assumes that we will not derive any significant revenues from advertising or other activities during the first half of 2002, or even later. Our business plan further assumes that, subject to cash flow availability, we will continue to invest in and disburse substantial funds to continue current operations and to develop our single network of special interest, continuously streaming broadband entertainment channels, for which purpose we will require additional capital investments.
Remaining a going concern will require additional financing until such time as sufficient cash flows are generated from operations. Anticipated non-interest bearing loans from an affiliated person, together with our limited current cash resources and operating revenues, are expected to be able to support our operations through the end of the second quarter of the year 2002. We will need to obtain substantial additional financing in order to continue and expand our operations and to sustain our cash flow needs. We do not know if additional financing, in excess of what is currently anticipated, will be available to us on commercially reasonable terms, or at all. Moreover, if we raise additional capital through borrowing or other debt financing, we would incur substantial interest expense. Sales of additional equity securities will dilute on a pro rata basis the percentage ownership of all holders of common stock. If we do raise more equity capital in the future, it is likely that it will result in substantial dilution to our present stockholders. Any inability to obtain additional financing will materially adversely affect us, including possibly requiring us to significantly curtail or cease business operations.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000; YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
We sustained a net loss of approximately $6.2 million for the year ended December 31, 2001 on revenues of $708,803, derived from licensing and advertising fees and from our sale of PLS encoding mechanisms. Our net loss for the year ended December 31, 2000 was approximately $9.5 million upon revenues of $390,354, derived from licensing and advertising fees. Our net loss for the year ended December 31, 1999 was approximately $3.8 million on revenues of $45,800, derived from advertising and the production of infomercials.
Production costs for the development of our original content for the year ended December 31, 2001 were approximately $81,000 as compared to approximately $1.5 million and $1.1 million for the two preceding years, respectively, reflecting the cessation of our own content production efforts in 2001. Production costs include (i) data communications, (ii) software license fees, (iii) content license fees, where necessary in order to acquire additional content, and (iv) expenses of hiring and compensating employees who handle production and delivery of our content.
Our selling, general and administrative expenses were approximately $6.0 million for the year ended December 31, 2001, consisting primarily of approximately $4.1 million in personnel costs, $339,705 in professional and consulting fees, $847,048 in equipment and depreciation, $248,164 in sales and marketing costs, and $363,338 in other general and administrative costs. By way of comparison, expenditures for each of these categories were $4.2 million, $917,832, $774,017, $487,669 and approximately $1.3 million, respectively, for the year ended December 31, 2000. Internet domain and Web service costs, together with miscellaneous expenses, accounted for the balance in each of the two years ended December 31, 2001. Our selling, general and administrative expenses were approximately $2.8 million for the year ended December 31, 1999, consisting primarily of $663,476 in personnel costs, $381,034 in professional and consulting fees, $335,926 in rent, overhead, equipment and depreciation, $124,823 in sales and marketing costs, and $821,169 in other general and administrative costs. Internet domain and Web service costs, together with miscellaneous expenses, accounted for the balance.
We incurred depreciation and amortization expense of $624,074, $670,225 and $145,868 for the years ended, respectively, December 31, 2001, 2000 and 1999. This was derived primarily from depreciation relating to our leasehold improvements and furniture, computer and camera equipment purchases.
Our net loss for the year ended December 31, 2001 included writedowns of $250,000 in fixed assets and $50,000, representing a portion of our 10% equity investment in an unconsolidated subsidiary, as well as a $534,498 writeoff of capitalized software development costs. Our net loss for the year ended December 31, 2000 includes a fixed asset write down of $334,922, primarily attributable to the closure of our Paris, France facility and the relocation of our operations from New York City to Miami Beach, Florida, offset in part by interest income of $86,809.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through sales of our equity securities in our initial public offering, from several private placements and by means of non-interest bearing loans and capital contributions from an affiliated person. Net proceeds from these sales have totaled approximately $12.2 million, with $8.8 million raised in the initial public offering and the balance raised in the private placements.
For the year ended December 31, 2001, we used approximately $(2.1) million in connection with our operating activities. Such amount was primarily attributable to net losses, offset in part by common stock and options issued for services, increases in accounts payable and deferred revenue, and depreciation, amortization and unearned compensation expenses. For the year ended December 31, 2001, approximately $440,000 and $1.6 million was provided by investing activities and financing activities, respectively.
We believe that continuation and growth of our operations will depend largely on our ability to become a leading source for continuously streaming media entertainment niche programming on the Internet. During the year ended December 31, 2001, we continued to invest in and incur significant expenditures and costs to achieve this goal. Accordingly, we intend to continue to make significant investments to acquire content, to increase the number of viewers of our SLS channels, to attract advertisers for our SLS channels, to ensure that the technology needed to provide our content stays current and to sell our PLS technology
At December 31, 2001, we had $18,380 in cash which we believe, together with anticipated non-interest bearing loans and/or additional capital contributions from an affiliated person and our limited operating revenues, will support our operations through the end of the third quarter of 2002. We will require substantial additional financing to remain a going concern and to expand our operations. We do not know if additional financing, in excess of what is currently anticipated, will be available to us or, if it is available, whether it will be available on commercially reasonable terms. Any inability to obtain additional financing will materially adversely affect us, including possibly requiring us to significantly curtail or cease business operations.
FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis above contains certain forward-looking statements and information relating to us and to our present and future business operations within the meaning of Federal securities law. We have identified these statements by using forward-looking terminology such as "may," "will," "expect," "anticipate," "estimate," "predict", "contemplate", "continue," "believe," "intend," the negative of the foregoing words, or other similar words. These words, however, are not the exclusive means by which you can identify these statements. You can also identify forward-looking statements because they discuss future expectations, contain projections of results of operations or of financial conditions, characterize future events or circumstances or state other forward-looking information.
The forward-looking statements included in Management's Discussion and Analysis are based on our beliefs as well as assumptions made using information currently available to us, and we assume no obligation to update any such forward-looking statements. We believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions. However, because these statements reflect our current views concerning future events, these statements involve certain risks, uncertainties and assumptions. Actual future results may differ materially and significantly from the results projected and discussed in the forward-looking statements.
We caution you that our business and financial performance are subject to substantial risks and uncertainties. Potential risks and uncertainties include, among others, the risk factors set forth herein.
RISK FACTORS
- WE HAVE A LIMITED OPERATING HISTORY
We have a limited operating history on which to base an evaluation of our business and prospects, having only commenced our initial business operations in April 1999. Our prospects must be considered in light of the risks, difficulties and uncertainties frequently encountered by companies in an early stage of development, particularly companies in new and rapidly evolving markets such as the market for Internet broadcasting, services and advertising. These risks include our ability to
- provide compelling and unique content to Internet users; - successfully market and sell our services; and - effectively develop new and maintain existing relationships with advertisers, content providers, business customers and advertising agencies and other persons with which do business.
As we have such a limited history of operations, investors will be unable to assess our future operating performance or our future financial results or condition by comparing these criteria against their past or present equivalents.
- WE HAVE EXTREMELY LIMITED CASH FLOW
Our business requires substantial capital to continue operations. At the present time, we have not generated material revenues from operations. To date, our cash flow has primarily come from intermittent sales of our securities and from non-interest bearing loans from an affiliated person. We also have minimal cash on hand. We can give no assurance our cash flow will be sufficient to allow us to continue our operations at present levels, if at all.
- WE EXPECT TO INCUR SIGNIFICANT LOSSES FOR THE FORESEEABLE FUTURE
We have only recently recognized material revenues from services or advertising and we have experienced net losses since inception. We expect to incur significant losses on both a quarterly and an annual basis for the foreseeable future. There can be no assurance that we will ever achieve profitability.
- WE WILL NEED SIGNIFICANT ADDITIONAL FINANCING TO CONTINUE OPERATIONS
We will require substantial additional financing in order to be able to continue operations beyond the second quarter of 2002. We have no current definitive arrangements with respect to additional financing and there can be no assurance that any such financing will be available to us on commercially reasonable terms, or at all. Moreover, if we raise additional capital through borrowing or other debt financing, we may incur substantial interest expense. Sales of additional equity securities will result in substantial pro rata dilution to our present stockholders. Our inability to obtain additional financing will materially adversely affect us, including possibly requiring us to significantly curtail operations or to cease operations altogether. Technological stock in general have recently experienced significant downturns on the financial markets, and the trend is expected to continue indefinitely. Negative investor sentiment for technology stocks will adversely affect our ability to secure additional financing.
- LOW PRICE AND TRADING VOLUME IN OUR STOCK MAY RESULT IN DELISTING OF TRADING ON THE AMERICAN STOCK EXCHANGE
The price and volume at which our stock has recently traded on the American Stock Exchange does not meet its criteria for continued listing. Although the AMEX has not officially communicated any intention to us to delist our stock, if our stock were to be delisted, it would materially affect the ability of an investor to dispose of their shares of our stock, and further reduce the liquidity of their investment.
- WE WILL BE UNABLE TO ATTRACT VIEWERS TO OUR NETWORKS AND THEIR CHANNELS IF THE PUBLIC REJECTS STREAMING TECHNOLOGY
Our success will depend upon market acceptance of streaming technology as an alternative to broadcast television. Without streaming technology, viewers would not be able to initiate playback of our programming until such programming is downloaded in its entirety, resulting in significant waiting times. The acceptance of streaming technology will depend upon a number of factors, including market acceptance of streaming players such as Microsoft's Windows Media Player (TM) , Real Networks' Real Player(TM), and Medium4.com Player, technological improvements to the Internet infrastructure to allow for improved video and audio quality and a reduction in Internet usage congestion. In addition, Internet congestion may interrupt audio and video streams, resulting in user dissatisfaction. Our prospects will be adversely affected if streaming media technology fails to achieve or maintain broad acceptance.
- WE ARE DEPENDENT ON PROVIDERS OF STREAMING MEDIA PRODUCTS
We currently license software products that enable the broadcast of streaming media from such companies and others. We may need to acquire additional licenses to meet our future needs. Users are currently able to download electronically copies of Microsoft's Windows Media Player(TM), Real Network's Real Player(TM), and our Medium4.com software free of charge. If providers of streaming media products substantially increase license fees charged to us for the use of their products or refuse to license such products to us, our ability to provide streaming audio and video will be adversely affected.
- WE ARE DEPENDENT ON PROVIDERS OF BROADBAND AND HIGH SPEED INTERNET ACCESS
We rely on providers of broadband and high speed Internet access to facilitate the viewing of our SLS channels. Because our Medium4.com Player, which is the software used to play the SLS channels, can only play SLS channels using high speed Internet access, without such access viewers would not be able to download our SLS programming. If providers of broadband and high speed Internet access do not sustain existing operations, or fail to maintain current access speeds, our ability to provide streaming video will be adversely affected.
- WE MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY RIGHTS
We regard our copyrights, trade secrets, trademarks, patents, and similar intellectual property as significant to our growth and success. We rely upon a combination of copyright and trademark laws, trade secret protection, confidentiality and non-disclosure agreements and contractual provisions with our employees and with third parties to establish and protect our proprietary rights. We have applied for federal trademark protection for our networks and other channels and brands and intend to apply for federal trademark protection for other marks and names used in our business. Legal standards relating to the validity, enforceability and scope of protection of certain proprietary rights in Internet-related industries are uncertain and still evolving. We are unable to assure investors as to the future viability or value of any of our proprietary rights or those of other companies within the industry. We are also unable to assure investors that the steps taken by us to protect our proprietary rights will be adequate. Furthermore, we can give no assurance that our business activities will not infringe upon the proprietary rights of others, or that other parties will not assert infringement claims against us.
- GOVERNMENT REGULATION OF THE INTERNET COULD HARM OUR BUSINESS
There are few laws or regulations directly applicable to the Internet. For example, the Digital Millennium Copyright Act, enacted into law in 1998, protects certain qualifying online service providers from copyright infringement liability, the Internet Tax Freedom Act, also enacted in 1998, placed a three year moratorium on new state and local taxes on Internet access and commerce, and under the Communications Decency Act, an Internet service provider will not be treated as the publisher or speaker of any information provided by another information content provider. The appeal of the Internet makes it likely, however, that state, national or international laws may be implemented in the future covering such issues as user privacy, defamatory speech, copyright infringement, pricing and characteristics and quality of products and services. Any new law or regulation may have the effect of limiting the use of the Internet and its growth as a new medium to communicate could harm our business.
We currently do not collect sales or other taxes with respect to the sale of services or products in states and countries where we believe we are not required to do so. One or more states or countries have sought to impose sales or other tax obligations on companies that engage in online commerce within their jurisdictions. A successful assertion by one or more states or countries that we should collect sales or other taxes on products and services, or remit payment of sales or other taxes for prior periods, could adversely affect our business.
The Child Online Protection Act of 1998 imposes criminal penalties and civil liability on anyone engaged in the business of selling or transferring material that is harmful to minors, by means of the Internet, without restricting access to this type of material by underage persons. Numerous states have adopted or are currently considering similar types of legislation. The imposition upon us of potential liability for broadcasting content that is harmful to minors could require us to implement measures to reduce exposure to liability, which may require the expenditure of substantial resources., or to discontinue various content offerings. Further, the costs of defending against any claims and potential adverse outcomes of these claims could have a material adverse effect on our business.
- WE ARE DEPENDENT ON CERTAIN THIRD PARTY PROVIDERS
Our future success depends upon our ability to aggregate and deliver compelling content over the Internet. We rely exclusively on third party content providers, such as television stations and networks, businesses and other organizations, film producers and distributors, and record labels for compelling and entertaining content. Our ability to maintain and build relationships with content providers is critical to our success. Although many of our agreements with third party content providers are for initial terms of more than one year, such agreements may not be renewed or may be terminated prior to the expiration of their terms if we do not fulfill our contractual obligations. Our inability to secure licenses from content providers or the termination of a significant number of content provider agreements would decrease the availability of content that we can offer users. Such inability or termination may result in decreased traffic on our Websites and, as a result, decreased advertising revenue, which could adversely affect our business.
We also rely on certain technologies we license from third parties. There can be no assurance these third-party technology licenses will continue to be available to us on commercially reasonable terms. The loss of such technology could require us to obtain substitute technology of lower quality or performance standards or at greater cost, which could harm our business. However, other than our trademarks and service marks, we do not believe that the loss of any particular one of our intellectual property rights would materially harm our business.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not engage in trading market risk sensitive instruments and do not purchase hedging instruments or "other than trading" instruments that are likely to expose us to market risk, foreign currency exchange, commodity price or equity price risk. We have purchased no options and entered into no swaps. We have no bank borrowing facility that could subject us to the risk of interest rate fluctuations.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The report of our independent auditors and our Consolidated Financial Statements and Related Notes thereto appear on pages through of this report and are incorporated herein by reference.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Part III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Item 10 is hereby incorporated by reference from our definitive Proxy Statement to be filed within 120 days of December 31, 2001.
Item 11.
Item 11. EXECUTIVE COMPENSATION
Item 11 is hereby incorporated by reference form our definitive Proxy Statement to be filed within 120 days of December 31, 2001.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Item 12 is hereby incorporated by reference from our definitive Proxy Statement to be filed within 120 days of December 31, 2001.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13 is hereby incorporated by reference form our definitive Proxy Statement to be filed within 120 days of December 31, 2001.
Part IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES: ------------------------------------------------------- (i) Financial Statements:
Report of Independent Auditors
Consolidated Balance Sheet as of December 31, 2001 and 2000
Consolidated Statements of Operations for the Years Ended December 31, 2001, 2000 and 1999
Consolidated Statements of Stockholders' Deficiency for the Years Ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements
(ii) Financial Statement Schedules:
All financial statement schedules are omitted because the conditions requiring their filing do not exist or the information required thereby is included in the Financial Statements contained herein, including the Notes thereto.
(b) REPORT ON FORM 8-K: ------------------ We filed one current report on Form 8-K during the fourth quarter of the year ended December 31, 2001, as follows:
- On November 8, 2001, we reported the sale of 1,000 shares of our Series A convertible preferred stock (Items 1 and 7) and the issuance of 10,000,000 shares of our common stock (Item 5).
(c) EXHIBITS: -------- 3.1 Certificate of Incorporation of the Registrant, as amended (1)
3.2 Certificate of Designation of Preferences and Rights of the Registrant's Series A convertible preferred stock (2)
3.3 By-laws of the Registrant, as amended (3)
4.1 Form of Certificate evidencing shares of Common Stock (1)
10.1* 1999 Stock Option Plan (1)
10.2 License Agreement between Registrant and the Center for Contemporary Diplomacy, Inc. (1)
10.3 License Agreement between Registrant and Jonathan Braun (1)
10.4* Employment Agreement between Registrant and Jonathan Braun (1)
21.1 Subsidiaries of the Registrant (4) - --------------- * Indicates management contract or compensatory plan or arrangement.
(1) Denotes documents filed as an exhibit to Registrant's Registration Statement on Form S-1, as amended (File No. 333-71733), and incorporated herein by reference.
(2) Denotes document filed as an exhibit to Registrant's Current Report on Form 8-K, filed November 8, 2001, incorporated herein by reference.
(3) Denotes document filed as an exhibit to Registrant's Registration Statement on Form 8-A (File No. 0-15863), incorporated herein by reference.
(4) Denotes document filed as an exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1999, incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: April 12, 2002 Medium4.com, Inc.
By: /S/ JONATHAN BRAUN ------------------------ Jonathan Braun Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Jonathan Braun Chief Executive Officer, April 12, 2002 - ------------------- Principal Financial and Jonathan Braun Accounting Officer and Director
/s/ I. William Lane Chairman of the Board, April 12, 2002 - ------------------- Director I. William Lane
/s/Junichi Watanabe Director April 12, 2002 - ------------------- Junichi Watanabe
/s/ Director April , 2002 - ------------------- Satoru Hirai
INDEPENDENT AUDITOR'S REPORT
March 18, 2002
Shareholders and Directors Medium4.com, Inc.
We have audited the accompanying consolidated balance sheets of Medium4.com, Inc. (A development stage enterprise) as of December 31, 2001 and 2000, and the related consolidated statements of operations, shareholders' deficiency and cash flows for each of the three years ended December 31, 2001, 2000, 1999 and the cumulative period November 12, 1998 (inception) to December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Medium4.com, Inc. as of December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years ended December 31, 2001, 2000, 1999, and the cumulative period November 12, 1998 (inception) to December 31, 2001 in conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has suffered recurring losses from operations, including a net loss of approximately $6.2 million for the year ended December 31, 2001, and has a working capital deficiency as of December 31, 2001. These factors raise substantial doubt the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Radin, Glass & Co., LLP Certified Public Accountants New York, New York
MEDIUM4.COM, INC. AND SUBSIDIARIES (A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEET
December 31, ---------------------------- 2001 2000 ------------ ------------ ASSETS
CURRENT ASSETS: Cash ......................................... $ 18,380 $ 50,462 Marketable securities .......................... - 220 Other current assets ......................... 376 14,137 ------------ ------------ Total Current Assets ....................... 18,756 64,818
INVESTMENT IN AFFILIATE ........................ 100,000 159,000
LEASEHOLD IMPROVEMENTS AND EQUIPMENT, NET ...... 93,511 686,582
SOFTWARE, NET .................................. - 890,967
OTHER ASSETS ................................... 27,569 330,659 ------------ ------------ $ 239,836 $ 2,132,026 ============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES: Accounts payable ............................. $ 343,960 $ 514,639 Accrued expenses ............................. 211,843 353,498 ------------ ------------ Total Current Liabilities .................. 555,802 868,136
LONG-TERM LIABILITIES: Loan payable - related party ................. 243,479 50,000 Deferred Revenue ............................. 305,000 785,000 ------------ ------------ Total Long-Term Liabilities ................ 548,479 835,000
STOCKHOLDERS' DEFICIENCY Preferred stock $.01 par value 5,000 shares authorized, 1,000 and -0- issued and outstanding ....................... 10 - Common stock, $.01 par value; 30,000,000 shares authorized, 29,672,556 and 12,266,196 issued and outstanding,respectively .......... 296,726 122,662 Paid in capital ................................ 18,664,745 14,998,143 Deficit accumulated during development stage ... (19,530,138) (13,291,247) Unearned compensation expense .................. (245,788) (1,400,668) Treasury stock ................................. (50,000) - ------------ ------------ Total Stockholder's deficiency ............. (864,446) 428,890 ------------ ------------ $ 239,836 $ 2,132,026 ============ ============
See Notes to Consolidated Financial Statements
MEDIUM4.COM, INC. AND SUBSIDIARIES (A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
See Notes to Consolidated Financial Statements
MEDIUM4.COM, INC. AND SUBSIDIARIES (A Development Stage Enterprise)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S DEFICIENCY
Continued
See Notes to Consolidated Financial Statements
MEDIUM4.COM, INC. AND SUBSIDIARIES (A Development Stage Enterprise)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S DEFICIENCY Continued
See Notes to Consolidated Financial Statements
MEDIUM4.COM, INC. AND SUBSIDIARIES (A Development Stage Enterprise)
CONSOLIDATED STATEMENT OF CASH FLOWS
See Notes to Consolidated Financial Statements
MEDIUM4.COM, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 2001
Note 1. BUSINESS
Medium4.com, Inc. and Subsidiaries (the "Company) formerly known as foreignTV.com, Inc. is a Delaware corporation formed on November 12, 1998. The Company was organized to develop opportunities as an Internet broadcaster of international and niche content. In 2000, the Company relocated its corporate offices to Miami, Florida.
Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
GOING CONCERN
These financial statements have been prepared assuming the Company will continue as going concern. The Company has suffered recurring losses in the years ending December 31, 2001, 2000, and 1999 amounting to $6.2 million, $9.5 million, and $3.8 million for each of the last three years, respectively.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany items and transactions have been eliminated in consolidation.
DEVELOPMENT STAGE ENTERPRISE
Due to the start-up nature of the business, the financial statements are being presented as a development stage enterprise pursuant to Statement of Financial Accounting Standards No. 7. There were no operations to report for 1998.
CASH
The Company classifies highly liquid temporary investments with an original maturity of three months or less when purchased as cash equivalents.
LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Leasehold improvements and equipment are stated at cost. Maintenance and repairs are charged to expenses as incurred. Depreciation is provided for over the estimated useful lives of the individual assets using straight-line methods.
SOFTWARE DEVELOPMENT COSTS
The Company capitalized software development costs in accordance with SFAS 86 and EITF 00-2 and SOP 98-1. At December 31, 2000, the Company capitalized $833,649 of such software development costs, net of accumulated amortization. The costs are amortized over 30 months period on a straight-line basis. At December 31, 2001, such costs were written off.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Total advertising costs charged to operations at December 31, 2000 amounted to $155,740. There were no advertising costs incurred for the year ending December 31, 2001.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for cash, receivables, and accrued expenses approximate fair value based on the short-term maturity of these instruments.
STOCK BASED COMPENSATION
The Company accounts for employee stock options in accordance with APB Opinion No. 25, "Accounting For Stock Issued To Employees" and has adopted the disclosure-only option under SFAS No. 123, as of December 31, 1998.
COMPREHENSIVE INCOME
The Company adopted SFAS No. 130 Reporting Comprehensive Income. This statement establishes rules for the reporting of comprehensive income and its components. Comprehensive income consists of net income and foreign currency translation adjustments and is presented in the Statements of Operations.
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes as set forth in SFAS 109, "Accounting for Income Taxes." Under the liability method, deferred taxes are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company has a net operating loss carryforward of approximately $15 million, which expire at various times through the year 2021. The Company has recorded approximately $5.1 million valuation allowance on the deferred tax asset.
NET LOSS PER SHARE
The Company has adopted SFAS 128, "Earnings per Share." Loss per common share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period.
ACCOUNTING FOR LONG-LIVED ASSETS
The Company reviews long-lived assets, certain identifiable assets and any goodwill related to those assets for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recoverable. At December 31, 2001 and 2000, respectively, the Company believes that there has been no impairment of long-lived assets, after recording the write down of equipment and the investment in affiliate during the year ended December 31, 2001.
INVESTMENT IN AFFILIATE
Investments in affiliate represent a 10% ownership in foreignTV, Inc., which management has recorded utilizing the cost method. See Note 9. Management does not exercise significant influence over the operating or financial policies over the affiliate. A portion of such investment is believed to be unrecoverable by management and is therefore was partially written down in 2001.
ACCOUNTING ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 141, "Business Combination", SFAS No. 142, "Goodwill and Other Intangible Assets" and SFAS No. 143, "Accounting for Asset Retirement Obligations",. SFAS No. 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interest method of accounting for business combinations initiated after June 30, 2001. It also requires that the Company recognize acquired intangible assets apart from goodwill. SFAS No. 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS No. 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. SFAS No. 143 establishes accounting standards for recognition and measurement of a liability for an asset retirement obligation and the associated asset retirement cost, which will be effective for financial statements issued for fiscal years beginning after June 15, 2002.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which basically further clarifies SFAS No. 121 and methods of quantifying potential impairments or disposal of assets as well as the related reporting of such impairments or disposals.
The adoption of SFAS No. 141, SFAS No. 142, SFAS No. 143 and SFAS No. 144 is not expected to have a material effect on the Company's financial position, results of operations and cash flows.
Note 3. MARKETABLE SECURITIES
Marketable securities consist of mutual fund shares, which invest in US Government securities and are classified as available for sale securities. As of December 31, 2001, there were no marketable securities outstanding.
Note 4. LEASEHOLD IMPROVEMENTS AND EQUIPMENT
At December 31, leasehold improvements and equipment consist of the following:
2001 2000 ----------- ----------- Leasehold improvements .......... $ 25,053 $ 24,723 Furniture & fixtures ............ 262,558 262,558 Computer equipment .............. 421,946 421,946 Camera equipment ................ 178,424 178,424 Other equipment ................. 315,760 317,760 ----------- ----------- 1,203,741 1,205,411 Less: accumulated depreciation . (860,230) (518,829) Less: impairment of fixed assets (250,000) - ----------- ----------- $ 93,511 $ 686,582 =========== ===========
Leasehold improvements are depreciated over 7 years. Furniture, fixtures and equipment are depreciated over 3 to 7 years. In 2000, $334,922 of assets has been written off due to the abandonment of leasehold improvements in the New York office and the estimated loss on disposal of certain equipment located in the France office. In 2001, reserve for fixed assets has been set up due to its impairment.
Note 5. OTHER ASSETS
As of December 31, 2001 and 2000, other assets include security deposits of $27,569 and $133,324, respectively. At December 31, 2000, included in other assets were intangible assets comprised of domain names of $121,140. The costs of domain names are being amortized over 24 months. The unamortized portion at December 31, 2000 was $49,585. At December 31, 2001, such costs have been fully amortized.
Note 6. LOAN PAYABLE - RELATED PARTY
As of December 31, 2000, an employee of the Company made an advance of $50,000, bearing interest at 6% per annum and payable by March 21, 2002. The same employee made additional advances to the Company during calendar 2001 aggregating to $281,000. Approximately $152,000 of such advances were repaid during the year 2001. The remaining balance of such advances at December 31, 2001 was $178,759. In addition an officer of the Company advanced $64,720 to the Company during 2001. These advances are due on demand and bear interest at 6% per annum.
Note 7. EQUITY TRANSACTIONS
a. In November 1998, the founders of the Company issued 8,300,000 shares of common stock to themselves for $83,000. Such monies were received in 1999.
b. In April and May 1999 the Company sold 1,678,433 shares of common stock pursuant to an initial public offering registration at $6.00 per unit. Each unit consisted of one share of common stock and one warrant to purchase one share of common stock at an exercise price of $9.00. There are 1,678,433 of such warrants outstanding as of December 31, 2000 and 1999. The warrants will be exercisable at any time, until they expire three years after the effective date of the Proposed Offering. The warrants may be redeemed by the Company, in whole or in part, at any time upon at least 30 days prior written notice to the registered holders, at a price of $.05 per warrant, provided that the closing bid price of the Common Stock was at least $12.00 for the 20 consecutive trading days ending on the third business day preceding the date of the Company's giving of notice of redemption to the warrant holders, and provided there is then a current registration statement in effect for the shares underlying the warrants. In connection with the initial public offering 167,843 units were issued to the underwriter with an exercise price of $6.60 for one share of common stock and a warrant to purchase another share of common stock at $9.00, expiring in May 2004. There were costs of $1,278,046 applied as a reduction to such offering proceeds.
c. During the fourth quarter of 1999, the Company sold 200,000 shares of common stock for $3.00 per share pursuant to a private placement for the sale of such unregistered securities. The Company received $459,000 of the sale of stock proceeds in 1999 and the remaining $141,000 by January 14, 2000. The $141,000 stock subscription is recorded as an other current asset.
d. During the first and second quarter of 2000, the Company sold 77,500 shares of common stock pursuant to a private placement at $3.00 per share. During the third quarter, the Company sold 45,000 shares of common stock pursuant to a private placement at $2.00 per share.
e. In March 2000, the Company entered into an "Investment Agreement", whereby an unaffiliated entity has purchased 105,263 shares of common stock for $4.75 and warrants to purchase another 105,263 shares of common stock for $9.00 per share over a period of four years. In addition this entity was issued warrants to purchase 600,000 shares of common stock for $1.00 per share subject to certain performance criteria, hereafter referred to as the "Performance Warrants". These Performance Warrants vest based on certain future performance criteria, therefore will be valued at the time such warrants vest based on the then trading prices of the Company's common stock.
f. In June 2000, the Company began offering the sale of equity units in the Company pursuant to a Confidential Private Placement Memorandum. The Company has raised $840,000 through the sale of these units. The modified terms of the sale of units resulted in the sale of 1,500,000 shares of common stock and 1,500,000 Series A redeemable common stock purchase warrants for $3.00 per share for three years and the issuance of units providing for the purchase 150,000 shares of common stock and 195,000 Series A redeemable common stock.
g. During the first quarter of 2001, the Company sold 297,600 shares of common stock to a related party at $.25 per share.
h. The Company issued 14,585,000 shares of common stock for services rendered at $.15 - $.50 per share during year 2001. The Company recorded $2,369,900 of compensation expense relating to such issuance.
i. In the second, third and fourth quarters, the Company sold 2,000,000 shares of common stock pursuant to a private placement at $.15 per share, 400,000 shares at $.20 per share, 100,000 shares at $.20 per share and 23,760 at $.10 per share all expenses relating to the shares sold have been deducted as a cost of raising such capital.
j. On October 30, 2001, the Company sold 1,000 shares of Series A Convertible Preferred Stock to an institutional investor for $1,000,000. Each share of Series A Convertible Preferred Stock is convertible at any time or from time to time into 20,000 shares of common stock, or an aggregate of 20,000,000 shares of common stock if all of the Series A Convertible Preferred Stock is converted. Currently, the Company does not have sufficient authorized and unissued common shares to be able to allow for the Series A Convertible Preferred stock to be converted to common stock. A shareholder vote will be required to increase the authorized shares in order to allow for such a conversion.
Note 8. Stock Option Plan
The Company has two incentive stock option plans, which are authorized to issue up to 500,000 and 1,000,000 shares of common stock, respectively, subject to approval by the stockholders.
The Company accounts for its stock option plan under APB Opinion No. 25, "Accounting for Stock Issued to Employees", under which no compensation expense is recognized. The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation", for disclosure purposes; accordingly, no compensation expense is recognized in the results of operations for options granted at fair market value as required by APB Opinion No. 25.
Stock option activity for the year ended December 31, 2001, 2000 and 1999 is summarized as follows:
Employee Stock Option Plan:
Weighted Average Shares Exercise Price --------- ---------------- Outstanding at December 31, 1998 - $ - Granted ..................... 499,500 6.30 Exercised ................... - - Expired or cancelled ........ - - --------- ----- Outstanding at December 31, 1999 499,500 $6.30 Granted ..................... 1,735,000 6.28 Exercised ................... - - Expired or cancelled ........ - - --------- ----- Outstanding at December 31, 2000 2,234,500 $6.29 Granted ..................... - - Exercised ................... - - Expired or cancelled ........ 1,224,500 5.55 --------- ----- Outstanding at December 31, 2001 1,010,000 $7.18 ========= =====
Non - Employee Stock Option Plan:
Weighted Average Shares Exercise Price --------- ---------------- Outstanding at December 31, 1998 - $ - Granted ..................... 723,500 6.63 Exercised ................... - - Expired or cancelled ........ - - --------- ----- Outstanding at December 31, 1999 723,500 $6.63 Granted ..................... 1,826,500 5.33 Exercised ................... - - Expired or cancelled ........ - - --------- ----- Outstanding at December 31, 2000 2,550,000 $5.98 Granted ..................... - - Exercised ................... - - Expired or cancelled ........ - - --------- ----- Outstanding at December 31, 2001 2,550,000 $5.98 ========= =====
Currently, the Company does not have sufficient authorized and unissued common shares to be able to allow for the Series A Convertible Preferred stock to be converted to common stock. A shareholder vote will be required to increase the authorized shares in order to allow for such a conversion.
Information, at date of issuance, regarding stock option grants for the year ended December 31, 2001, 2000 and 1999:
Weighted Weighted Average Average Exercise Fair Shares Price Value --------- -------- -------- Year ended December 31, 1999: Exercise price exceeds market price ...... 590,500 $ 6.39 $ 3.04 Exercise price equals market price ....... 632,500 6.59 3.15 Exercise price is less that market price . - - -
Year ended December 31, 2000: Exercise price exceeds market price ...... 3,441,500 $ 6.00 $ 1.36 Exercise price equals market price ....... 20,000 5.13 2.35 Exercise price is less that market price . 100,000 1.00 4.17
Year ended December 31, 2001: Exercise price exceeds market price ...... - $ - $ - Exercise price equals market price ....... - - - Exercise price is less that market price . - - -
For disclosure purposes in accordance with SFAS No. 123, the fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for stock options granted during the year ended December 31, 2001, 2000 and 1999: annual dividends of $0.00, expected volatility of 99%, risk-free interest rate of 5.75% and expected life of five years for all grants.
If the Company recognized compensation cost for the vested portion of the employee stock option plan in accordance with SFAS No. 123, the Company's pro-forma net loss and loss per share for the years ended December 31, 2001, 2000 and 1999, would have been approximately, $7,726,394 and $(.41), $12,646,053 and $(1.20), $4,409,986 and $(.48), respectively.
The non-employee stock options outstanding are fully vested. The compensation expense attributed to the issuance of these stock options will be amortized over 24 months. These stock options are exercisable for five years from the grant date.
The employee stock option plan stock options are exercisable for five years from the grant date and vest over various terms from three to five years. As of December 31, 2000 and 1999, 705,500 and 224,667, respectively, of these stock options were vested. During 2001, most of the Company's employees have been terminated which resulted in the cancellation of the stock options.
Note 9. LICENSE AGREEMENTS
a. The Company entered into two license agreements with related parties for the sole and absolute use of certain Internet domain names. One of the agreements is with an officer and director of the Company and the other is with a not-for-profit organization whose board of directors is substantially identical to that of the Company. The term of the agreements is twenty-five years through December 31, 2023 with an additional renewal period of twenty-five years thereafter. The agreements require the Company to pay license fees, which begin at $600 per domain name and escalate to $2,500 per domain name through the twenty fifth year of the agreement. Thereafter, the fee increase is based on the Consumer Price Index. The agreement with the not-for-profit organization also requires the Company to provide office space, on its premises, for up to four employees of the not-for-profit organization for up to three years. The director and the not-for-profit organization have waived all the rights to collection on past due amounts through December 31, 2001.
b. In May 2000, the Company entered into a master affiliate agreement with Windfire International Corporation, Ltd."Windfire", a British Virgin Islands Corporation, pursuant to which the Company granted Windfire the exclusive right for an initial term of five years to grant licenses solely to persons and entities acceptable to the Company for the establishment and operation within the nations of Brunei, Indonesia, Kenya, Malaysia, the Philippines, Singapore, South Africa, Tanzania, Thailand and Uganda of Internet sites that will comprise discrete channels upon one or more of our network of web sites.
The master affiliate agreement required Windfire to pay us a one time fee of $1,500,000, of which $500,000 has been received to date. Revenues are being recognized on a straght line basis over the term of this agreement. The Company is currently in litigation over payment of the remaining fees for this master affiliate agreement. Management believes litigation will be settled in 2002.
c. In 2001, the Company has received $34,000 for the purchase of a foreignTV network. Such monies have been recorded as deferred revenue until a definite sales agreement is in place.
Note 10. COMMITMENTS AND CONTINGENCIES
a. The Company leases office space pursuant to a lease agreement, which expires on May 30, 2006. The office space has been subleased since August 31, 2000. The Company has terminated such lease subsequent to December 31, 2000, and relinquished approximately half of their security deposit. In addition, the related leasehold improvements have been written off in calendar year 2000. The Company has ceased leasing space in certain countries abroad.
Rent expense for the year ended December 31, 2001, 2000 and 1999 was $129,451, $157,688 and $180,161, respectively.
b. In 2000, the Company relocated its corporate offices. The Company leases office space in Miami, pursuant to a lease agreement, which expires on July 31, 2003. The future minimum lease commitments are as follows:
2002 $79,362 2003 47,607
c. The Company leases a corporate apartment in Miami, pursuant to a lease agreement, which expires March 15, 2002. The future minimum lease commitments are as follows:
2002 $ 9,250
d. In April 1999, the Company entered into a one year consulting and finders agreement with a foreign entity to render public and investor relations in Asia, promote the business of Company and locate a Japanese strategic partner among other services. The consultant will be compensated at a monthly rate plus a fixed rate of non-accountable out of pocket expenses and a finders fee of 7.5% of the value of a strategic partner relationship.
The consultant was paid $500,000 during 1999, which represents a $159,000 finders fee for the 10% equity ownership in foreignTV, Inc. (Japan), $218,750 of consulting fees and out of pocket expenses and $106,250 of prepaid consulting fees and out-of-pocket expenses for 2000.
e. The Company also had employment agreements with several of their officers and employees with terms up to five years. The Company currently only has one officer. The terms of the agreements may include cash, compensation, stock options, car allowance and other traditional employee benefits.
f. The Company is subject to litigation from time to time arising in the ordinary course of its business. Other than the Windfire dispute discussed in Noted 9 (b), the Company does not believe that any such litigation is likely, individually or in the aggregate, to have a material adverse effect on the financial condition of the Company.