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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission File Number: 0-25667
MEDIUM4.COM, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-4037641
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1220 Collins Avenue, Suite 100, Miami Beach, FL 33139
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (305) 538-0955
-----------------
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, Par Value $0.01 Per Share
Redeemable Common Stock Purchase Warrants
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the registrant's common stock held by
non-affiliates of the Registrant on March 31, 2001 was approximately $952,096.
As of March 21, 2001, there were 11,906,196 shares of our common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K will be incorporated by reference from the
Registrant's Proxy Statement for the 2001 Annual Meeting of Stockholders to be
filed with the SEC within 120 days of December 31, 2000.
MEDIUM4.COM, INC.
FORM 10-K
TABLE OF CONTENTS
PAGE
PART I
ITEM 1. BUSINESS.....................................................................................1
ITEM 2. PROPERTIES...................................................................................7
ITEM 3. LEGAL PROCEEDINGS............................................................................8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........................................8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........................9
ITEM 6. SELECTED FINANCIAL DATA.....................................................................10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......10
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..................................17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................................17
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........17
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........................................17
ITEM 11. EXECUTIVE COMPENSATION......................................................................18
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..............................18
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................................18
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K............................18
SIGNATURES.............................................................................................21
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES....................................................F-1 to F13
PART I
ITEM 1. BUSINESS
INTRODUCTION
We were incorporated in Delaware on November 12, 1998, under the name
foreignTV.com, Inc. We were founded 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 April 1999 as a single foreign TV network
that created, produced and distributed location-specific programming on the
Internet using streaming video technology. Visitors to a Website containing this
programming were able to select and view this streaming location-specific
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. By the end of 1999 we had launched three additional
networks, each hosting and featuring numerous channels offering unique thematic
streaming audio and video content and special-interest programming, or "niche
programming." By December 31, 2000, we provided 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.
Nearly 400 constantly changing audio and video programs were available each day
in a wide variety of entertaining and informational subjects from our collection
of over 26,000 audio and video segments, ranging from brief vignettes to
full-length features. 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).
In December 1999, we changed our name from foreignTV.com, Inc. to
Medium4.com, Inc. to reflect the diversification of our programming and to
underscore the Internet's role as the fourth medium for television broadcasting,
after cable, satellite and traditional television transmission.
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
RELOCATION OF OUR OPERATIONS. In September 2000, we moved a significant
portion of our encoding, editing, production and other operating facilities from
New York City to Miami Beach, Florida. In December 2000, we completed the
relocation of our entire operation to our Miami Beach facility.
CLOSING OF OUR PARIS, FRANCE FACILITY. 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
DECREASE IN EMPLOYEES. As a result of our move to Florida, the closing of
our Paris facility, and the change in the emphasis of our business, as described
below, many of our employees ceased working for us, including our former
President and Chief Operating Officer, Mr. Graham Cannon, our Senior Vice
President -- Entertainment, Mr. Dennis Oppenheimer, our Treasurer and Principal
Financial and Accounting Officer, Mr. Harold I. Berliner, our Senior Vice
President -- International Operations and Director, Mr. Bruno Finel, and our
Vice President -- Legal Affairs, General Counsel, Secretary and Director, Mr.
Marc D. Leve. By December 31, 2000, our employees had decreased in number from
approximately 30 to 6.
CHANGE IN OUR BUSINESS FOCUS: We have recently 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. 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 will
be reorganized by topic or subject matter (e.g., pets, travel, music), and will
continue to be available in a single section of our main Medium4.com Website and
will also be directly accessible at www.Medium4Video.com.
We have also changed the way we develop our unique content. We will 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.
In a effort to focus our resources on offering SLS channels and
cost-effective entertainment content, we have ceased offering Web-based radio
programming and we have de-emphasized our streaming new production and
programming.
STREAMING TECHNOLOGY
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.
MEDIUM4.COM PLAYER
Software is required to view streaming video and many browsers currently
have built-in players, such as Microsoft's Windows Media Player(TM) or Real
Network's Real Player(TM), which can be downloaded from the Internet for free.
Our SLS channels can be viewed by using our customized Medium4.com Player,
which uses Real Player(TM) encoding. A Medium4.com Player features a channel
changer that makes it possible for a viewer to switch smoothly from one SLS
channel to the next with ease, as if the viewer were changing the channel of a
conventional TV set. We plan to offer free downloads of the Medium4.com Player
through mass e-mail distributions. An Internet user can also download the
Medium4.com Player without charge from our Medium4.com Website.
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
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.
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
believe each channel distinctively reflects a particular content focus and has
its own unique style and design that is flexibly tailored to the audience
targeted by that channel. To date we are offering the following three SLS
channels:
o TranceTV.com: electronic music with psychedelic visuals;
o AllJazzTV.com: jazz music; and
o Identite'sTV.com: contemporary world music.
We plan to launch the following five channels in April 2001:
o StreamingUSA.com: travel in the United States;
o ForeignTV.com: worldwide travel;
o CultClassicTV.com: classic cult movies;
o ForeignFilmTV.com: foreign films; and
o BeachClubTV.com: beach and seascape travel.
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.
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, 2000, we were delinquent in these payments to the extent of
approximately $60,000. We intend to create programming for some but not all of
the names that we own or license. 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
ADVERTISING
In addition to rotating and permanent placement of buttons, logos and
banners, integrated gateway and multimedia banner ads on our channels, we expect
to derive revenues from the sale of advertising time on our channels, using
customized advertisements through the following methods:
o Audio and video advertising integrated into our content.
o Sponsorships sold for part or all of a channel.
o Broadcasts of "infomercials."
Advertisements on SLS channels can ranging from 10-second animated spots to
more traditional 30- and 60-second TV-like "commercials", and can be digitally
inserted into the channels' continuously streaming content at regular intervals.
We plan to continue to engage outside consultants to solicit advertisers for our
channels.
PROGRAMS
We established an affiliates program at the end of 1999. We have found
strong interest from overseas production and media organizations that may have
extensive traditional broadcasting or telecommunications experience but are
seeking branded relationship and expertise in order to develop online video
capabilities. For a monthly fee, our affiliates were entitled to utilize a site
from our collection of domain names and use our proprietary PLS streaming media
technology solutions that include content encoding, hosting and content
streaming services.
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
straight 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.
In July 2000, we entered into an agreement with our 10% held Japanese
affiliate, Foreign TV, Inc., amending our affiliate program in Japan. Under the
amended agreement, the participants agreed to double the affiliate license fees
payable under the original agreement and to pay a $300,000 lump sum on account
of the increase.
We intend to continue the affiliates program by offering specialized
content and technology through our Medium4.com Player and SLS channels.
We also plan to market video-on-demand and SLS custom channel packages for
customers ranging potentially from businesses and commercial services to
advocacy organizations and foreign governments, with their own online channel.
We will work with the customer to develop their channels with content provided
by the customer. As a result, the customer will be able to control and manage
their programming.
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 2000, we sold several encoding mechanisms
containing the PLS technology. We plan to continue to develop, sell and license
these systems.
STRATEGIC RELATIONSHIPS
During 2000, we were a strategic partner with Microsoft in their initiative
of leading broadband content and technology companies. As part of this
relationship, and in consideration for a limited license to showcase our
content, Microsoft paid us for a portion of our streaming services costs and
provided us with high-level strategic technical support and services. We were
also able to provide our viewers with the ability to download Microsoft's
Windows Media Player (TM) for their own use and to employ Windows Media
Technology to deliver our streaming video content. Microsoft, in turn, provided
summaries of some of our programming content on its Microsoft Network, MSN's Web
Events Internet site and enabled MSN viewers to access our channels from such
site by means of a link. We have been a strategic partner with Real Networks,
Inc. to showcase excerpts of our low-band content on Real Networks' "Take 5
Program." We have also entered into a number of arrangements with content
providers to acquire content at terms and costs that, we believe, are
advantageous to us. Among others, we have relationships with several content
providers that add significant audio and video programs to our collection.
MARKETING AND PROMOTION
To encourage the widespread downloading of our Medium4.com Player and the
viewing of our SLS channels, 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:
o the number of users accessing our Website;
o the demographics of our users;
o our ability to deliver focused advertising and interactivity through
our Website;
o the overall cost-effectiveness and value of advertising on our
network; and
o 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 2000, 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 Medium4.com Player and
its unique channel changing capability 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 entertainment niche 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. To protect the methods, systems and procedures that
we developed for the publishing of our content and our streaming operations, we
have filed a provisional patent application with the United States Patent and
Trademark Office in December 1999.
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
In connection with the move of our operations to Miami Beach, the closing
of our facility in Paris, France, and the further reduction of our staff due to
the automation and outsourcing of much of our streaming video presentation and
content development, as of December 31, 2000, we had 5 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. PROPERTIES
From January 2000 to September 2000, we maintained our executive offices in
leased premises of approximately 5,300 square feet at 120 Fifth Avenue in New
York City. During this period, we paid approximately $13,250 per month in base
rent. The lease for these premises was due to expire in May 2006. In September
2000, we moved our encoding, editing, production and other operating facilities
to offices located at 1220 Collins Avenue, Units 100, 110 and 130, Miami Beach,
Florida 33139. The rent payable by the Company for this space is approximately
$7,000 per month. We subsequently sublet the New York City premises, along with
some of our furniture and equipment. 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. We believe our facilities
are adequate for our current purposes.
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, seeking an award
declaring that the master affiliate agreement between our company and Windfire
is unenforceable and void. Windfire asserts, among other matters, that we
fraudulently induced it to enter into such agreement by misrepresenting the
state of development of wireless telecommunication capabilities on the African
continent. Windfire also asserts 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. Windfire is also seeking $500,000 and compensatory and punitive
damages that were not quantified. We have denied the material allegations
asserted by Windfire in its demand for arbitration and we have asserted a
counterclaim for payment of the $1.0 million outstanding balance of the master
license fee owed to us by Windfire.
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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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
Quarter Ended* Common Stock Warrants
- ------------------------------------ --------------------- ---------------------
High Low High Low
- ------------------------------------ ---------- ---------- ---------- ----------
June 30, 1999 (beginning 6/8/99) 5 1/4 4 1/2 1 3/16 5/8
- ------------------------------------ ---------- ---------- ---------- ----------
September 30, 1999 5 1/4 3 1/2 1 1/4 11/16
- ------------------------------------ ---------- ---------- ---------- ----------
December 31, 1999 7 3/16 3 7/8 1 5/16 3/4
- ------------------------------------ ---------- ---------- ---------- ----------
March 31, 2000 6 3/8 4 1/2 1 1/4 13/16
- ------------------------------------ ---------- ---------- ---------- ----------
June 30, 2000 6 7/8 2 7/8 1 3/8 9/16
- ------------------------------------ ---------- ---------- ---------- ----------
September 30, 2000 5 1/8 2 5/8 7/8 1/16
- ------------------------------------ ---------- ---------- ---------- ----------
December 31, 2000 2 11/16 3/16 3/8 1/64
- ------------------------------------ ---------- ---------- ---------- ----------
- --------------
*Prior to 2000, our securities were traded on the OTC Bulletin Board. This table
reflects the OTC Bulletin Board high/low bid quotations for the period prior to
this date and the high/low bid prices for the period after this date as quoted
on the American Stock Exchange.
On April 13, 2001, there were 178 and 68 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.
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 shares for
three years.
From December 31, 1999 through December 31, 2000, we used the remaining net
proceeds from our initial public offering of April 13, 1999, in which we sold
1,678,433 units of securities consisting of our common stock and warrants to
purchase our common stock.
ITEM 6. SELECTED FINANCIAL DATA
Our consolidated balance sheet and statement of operations are set forth in
this Report in the Financial Pages and Notes thereto, and are incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
We were incorporated in Delaware on November 12, 1998, under the name
foreignTV.com, Inc. We were founded 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 April 1999 as a single foreign TV network
that created, produced and distributed location-specific programming on the
Internet using streaming video technology. We then expanded our business to
provide 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. In December 1999, we changed our name from
foreignTV.com, Inc. to Medium4.com, Inc. to reflect the diversification of our
programming and to underscore the Internet's role as the fourth medium for
television broadcasting, after cable, satellite and traditional television
transmission.
We have recently 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.
In view of the rapidly 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 2001, 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. Although we anticipate
certain additional debt and equity financing, there can be no assurances that we
will be able to obtain such financing to execute our business model. Cash
available at December 31, 2000, together with cash from anticipated financing
and revenues, is expected to be able to support our operations through the end
of the third quarter of the year 2001. We will need to obtain substantial
additional financing in order to continue, expand our operations and to sustain
our cash flow. 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 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, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
We sustained a net loss of approximately $9.5 million for the year ended
December 31, 2000 on revenues of $390,354, derived from licensing fees 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, 2000 were approximately $1.2 million as compared to
approximately $1.1 million for the prior year. This amount includes the cost of
(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 $8.0
million for the year ended December 31, 2000, consisting primarily of
approximately $4.2 million in personnel costs, $917,832 in professional and
consulting fees, $774,017 in equipment and depreciation, $487,669 in sales and
marketing costs, and approximately $1.3 million in other general and
administrative costs. Internet domain and Web service costs, together with
miscellaneous expenses, accounted for the balance. 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 $670,225 and $145,868
for the years ended, respectively, December 31, 2000 and 1999. This was derived
primarily from depreciation relating to our leasehold improvements and furniture
and computer and camera equipment purchases.
Our net loss for the year ended December 31, 2000 includes a fixed asset
write down of $344,922, 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 common stock and warrants in our initial public offering and from several
private placements. Net proceeds from these sales have totaled approximately
$10.6 million, with $8.8 million raised in the initial public offering and $1.9
million raised in the private placements. The amount of $200,000 has been
received on account of a $600,000 financing commitment and the total financings
immediately anticipated for the first half of 2000 are expected to be at least
$650,000.
For the year ended December 31, 2000, we used approximately $(4.7) 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, 2000, we used approximately $3.2 million for investing
activities.
We have recently relocated our executive offices from New York City to
Miami Beach, Florida, where we have maintained our operations center since
December 2000. We anticipate that this move will reduce our monthly office
rental expense from approximately $13,250 to approximately $7,000. We incurred
no penalty in terminating the lease upon our New York City facility, and
recovered $35,000 of our security deposit. We concurrently reduced our staff
from approximately 33 employees to 6, which has reduced our monthly personnel
expense from approximately $295,000 to $80,000. This reduction was made possible
when we automated and outsourced much of our streaming video presentation and
content development and moved our operations to Miami Beach, Florida.
We believe that our success 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, 2000, 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 and develop unique niche programming, to encourage mass downloading of
our Medium4.com Player, 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 continue to market our
affiliates program and sell our PLS technology
At December 31, 2000, we had $50,462 in cash and cash equivalents which we
believe, together with cash from anticipated financings and revenues, will
support our operations through the end of the third quarter of 2001. 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
o provide compelling and unique content to Internet users;
o successfully market and sell our services; and
o effectively develop new and maintain existing relationships with
companies in our affiliate program, advertisers, content providers,
business customers and advertising agencies and other persons with
which do business.
As we have so little 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 is in a developmental stage and 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. We also have minimal cash and cash
equivalents. We can give no assurance our cash flow will be sufficient to allow
us to continue our operations at the present, 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. In the event that we are unable to secure such financing,
we will be forced to sell assets to generate cash. 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 would 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 TRADING VOLUME IN OUR STOCK MAY RESULT IN DELISTING OF TRADING ON THE
AMEX
The price and volume at which our stock has recently traded on the American
Stock Exchange does not meet the AMEX 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 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.
OUR LARGE NUMBER OF SHARES AVAILABLE FOR FUTURE SALE COULD ADVERSELY AFFECT
THE PRICE OF OUR SECURITIES
Shares of our common stock owned by our affiliates, as this term is defined
in the Securities Act, will be restricted and subject to the limitations of SEC
Rule 144. Subject to certain contractual limitations, holders of restricted
shares generally will be entitled to sell these shares in the public market
without registration either pursuant to Rule 144 or any other applicable
exemption under the Securities Act. As of December 31, 2000, certain lock-up
agreements with our founders and employees, restricting the sale of common stock
owned by these founders and employees, have expired, or are due to expire in the
near future. Sales of substantial amounts of restricted shares, such as
locked-up shares, when they become available for public sale, or the
anticipation of such sales, could adversely affect the then prevailing market
price of our common stock and may also impair our future ability to raise equity
capital. Additionally, outstanding options and warrants covered approximately
11,458,619 shares of common stock. Future sales of any shares underlying our
outstanding options and warrants, or the anticipation of such sales, could
adversely affect the market price of our securities and could materially impair
our future ability to raise capital through an offering of equity securities.
Further, the exercise of certain of these options and warrants will cause our
stockholders to incur substantial dilution in future earning per share, if any.
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. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The report of our independent auditors and our Consolidated Financial
Statements and Related Notes thereto appear on pages F-1 - F-13 of this report
and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
We refer you to our Current Report on Form 8-K, filed with the SEC on July
26, 1999, for certain information pertaining to our retention of Radin, Glass &
Co., LLP as our independent auditors, as well as certain information attendant
to the discharge of our prior independent auditor.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Item 10 is hereby incorporated by reference form our definitive Proxy
Statement to be filed within 120 days of December 31, 2000.
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, 2000.
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, 2000.
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, 2000.
PART IV
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, 2000 and 1999
Consolidated Statements of Operations for the Years Ended December
31, 2000, 1999 and 1998
Consolidated Statements of Stockholders' Equity for
the Years Ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2000, 1999 and 1998
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) Reports on Form 8-K:
The following current reports on Form 8-K were filed during the year ended
December 31, 2000:
o The Company filed a Current Report on Form 8-K, dated May 15, 2000,
reporting under Item 5 that they entered into a master affiliate
agreement, dated May 15, 2000, with Windfire International
Corporation, Ltd., pursuant to which the Company granted Windfire, for
a one time fee of $1,500,000 and certain commissions, the exclusive
right for an initial term of five years to grant licenses for the use
of our network and channels.
o The Company filed a Current Report on Form 8-K, dated October 31,
2000, reporting under Item 5 a dispute between the Company and
Windfire International Corporation, Ltd. relating to the master
affiliate agreement, dated May 15, 2000, by and among the Company and
Windfire. This Form 8-K also reports an action initiated against the
Company and several of our officers on or about September 19, 2000, by
Cavendish Asset Management Ltd. relating to an alleged acquisition of
a political and travel publication known as Executive Class.
(c) Exhibits:
3.1 Certificate of Incorporation of the Registrants, as amended. (1)
3.2 By-laws of the Registrant, as amended. (2)
4.1 Form of Certificate evidencing shares of Common Stock. (1)
4.2 Form of Certificate evidencing Common Stock Purchase Warrants. (1)
4.3 Form of Unit Purchase Option between Registrant and Westminster
Securities Corporation. (1)
4.4 Form of Warrant Agreement between Registrant and American Stock
Transfer & Trust Company, as warrant agent. (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)
10.5 Assignment, Assumption and Modification of Lease for premises at 1220
Collins Avenue, Suite 100, Miami Beach, FL 33139.
10.6 Master Affiliate Agreement, between Registrant and Windfire
International Corporation, Ltd. (3)
16.1 Letter from Martin S. Weiselberg, CPA, regarding change in certifying
accountant. (4)
21.1 Subsidiaries of the Registrant. (5)
----------------
* 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 Registration
Statement on Form 8-A (File No. 0-15863), incorporated herein by
reference.
(3) Denotes document filed as an exhibit to Registrant's Current Report on
Form 8-K, filed May 15, 2000, incorporated herein by reference.
(4) Denotes document filed as an exhibit to Registrant's Current Report on
Form 8-K, filed July 26, 1999, incorporated herein by reference.
(5) 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.
Medium4.com, Inc.
By: /S/ JONATHAN BRAUN
-----------------
Jonathan Braun,
Chief Executive Officer
Dated: April 16, 2001
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, Principal April 16, 2001
------------------
Jonathan Braun Financial and Accounting Officer and
Director
/S/ WILLIAM LANE Chairman of the Board, Director April 16, 2001
----------------
William Lane
- -------------------- Director
Stanley S. Canter
/S/ JUNICHI WATANABE Director April 16, 2001
- --------------------
Junichi Watanabe
INDEPENDENT AUDITOR'S REPORT
----------------------------
February 27, 2001
Shareholders and Directors
Medium4.com, Inc.
We have audited the accompanying consolidated balance sheets of Medium4.com,
Inc. as of December 31, 2000 and 1999, and the related consolidated statements
of operations, shareholders' deficiency and cash flows for each of the three
years ended December 31, 2000, 1999, 1998 and the cumulative period November 12,
1998 (inception) to December 31, 2000. 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, 2000 and 1999, and the results of its operations and its
cash flows for each of the three years ended December 31, 2000, 1999, 1998 and
the cumulative period November 12, 1998 (inception) to December 31, 2000 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 $9.5 million for
the year ended December 31, 2000, and has a working capital deficiency as of
December 31, 2000. These factors raise substantial doubt the Company has the
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,
--------------------------
2000 1999
-------------- ------------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 50,462 $ 103,364
Marketable securities 220 4,159,418
Accounts receivable - 12,800
Other current assets 14,137 378,823
----------- ------------
Total Current Assets 64,818 4,654,406
INVESTMENT IN AFFILIATE 159,000 159,000
LEASEHOLD IMPROVEMENTS AND EQUIPMENT, NET 686,582 1,130,610
SOFTWARE, NET 890,967 354,582
OTHER ASSETS 330,659 183,458
----------- ------------
$ 2,132,026 $ 6,482,056
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 514,639 $ 256,394
Accrued expenses 353,498 233,307
----------- -----------
Total Current Liabilities 868,136 489,701
LONG-TERM LIABILITIES:
Loan payable - officer 50,000 -
Deferred Revenue 785,000 -
----------- -----------
Total Long-Term Liabilities 835,000 -
STOCKHOLDERS' EQUITY
Preferred stock $.01 par value 5,000
shares authorized issued and
outstanding -0- shares - -
Common stock, $.01 par value;
30,000,000 shares authorized,
12,266,196 and 10,178,433 issued
and outstanding, respectively 122,662 101,784
Paid in capital 14,998,143 11,789,014
Deficit accumulated during development
stage (13,291,247) (3,760,176)
Unearned compensation expense (1,400,668) (2,121,215)
Accumulated other comprehensive income - (17,052)
----------- -----------
Total Stockholder's Equity 428,890 5,992,355
----------- -----------
$ 2,132,026 $ 6,482,056
=========== ===========
See notes to consolidated financial statements
F-2
MEDIUM4.COM, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
Cumulative
November 12,
1998
(inception) to
For the Years Ended December 31, December 31,
-------------------------------------
2000 1999 2000
----------------- ---------------- ----------------
REVENUE $ 390,354 $ 45,800 $ 436,154
COST OF SALES 414,418 - 414,418
----------------- ----------------- ----------------
GROSS PROFIT (24,064) 45,800 21,736
EXPENSES:
Production 1,222,343 1,101,059 2,323,402
Selling, general and administrative expenses 8,036,551 2,771,792 10,808,343
----------------- ----------------- ----------------
Total expenses 9,258,894 3,872,851 13,131,745
----------------- ----------------- ----------------
LOSS FROM OPERATIONS (9,282,958) (3,827,051) (13,110,009)
OTHER INCOME (LOSS):
Interest income 86,809 203,707 290,517
Write down of fixed assets (334,922) - (334,922)
Loss on marketable securities - (125,445) (125,445)
Other income - 2,613 2,613
----------------- ----------------- ----------------
Total other income (248,113) 80,875 (167,238)
----------------- ----------------- ----------------
LOSS BEFORE TAXES (9,531,071) (3,746,176) (13,277,247)
INCOME TAX EXPENSE - 14,000 14,000
----------------- ----------------- ----------------
NET LOSS $ (9,531,071) $ (3,760,176) $ (13,291,247)
================= ================= ================
Other comprehensive income, net of tax:
Foreign currency translation adjustments - (17,052) (17,052)
Comprehensive Income $ (9,531,071) $ (3,777,228) $ (13,308,299)
================== ================ =================
Weighted average shares of common stock
outstanding 10,494,789 9,139,217
Net loss per share $ (0.91) $ (0.41)
================== ================
See notes to consolidated financial statements
F-3
MEDIUM4.COM, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
Accumu-
lated
Other Unearned Total
Additional Compre- Compen- Stock-
Common Stock Paid in Accumulated Subscription hensive sation holders
Shares Amount Capital Deficit Receivable Income Expense Equity
----------- --------- ------------ ------------ ---------- ------- --------- ---------
Balance as of November
12, 1998 (inception) 8,300,000 $ 83,000 $ - $ - $ (83,000) $ - $ - $ -
----------- --------- ------------ ------------ ---------- ------- --------- ---------
Balance as of December 8,300,000 83,000 - - (83,000) - - -
31, 1998
Receipt of stock subscription - - - - 83,000 - - 83,000
Sale of common stock - initial
public offering 1,678,433 16,784 8,766,768 - - - - 8,783,552
Sale of common stock -
private placement 200,000 2,000 598,000 - - - - 600,000
Stock options issued for - - 2,424,246 - - - - 2,424,246
services
Accumulated other comprehensive
income - - - - - (17,052) - (17,052)
Unearned Compensation
expense - - - - - - (2,121,215) (2,121,215)
Net loss - - - (3,760,176) - - - (3,760,176)
----------- --------- ------------ ------------ ---------- -------- ----------- ----------
Balance as of December
31, 1999 10,178,433 $101,784 $11,789,014 $ (3,760,176) $ - $(17,052) $(2,121,215) $5,992,355
Proceed from sale of common
stock, net of expenses 1,727,763 17,278 1,363,104 - - - - 1,380,382
Stock issued for services 360,000 3,600 356,400 - - - - 360,000
Stock options issued for
services - - 1,489,625 - - - - 1,489,625
Accumulated other comprehensive
income - - - - - 17,052 - 17,052
Unearned Compensation
expense - - - - - - 720,547 720,547
Net loss - - - (9,531,071) - - - (9,531,071)
----------- --------- ------------ ------------ ---------- --------- ----------- ----------
Balance as of December
31, 2000 12,266,196 $122,662 $14,998,143 $(13,291,247) - $ - $(1,400,668) $ 428,890
=========== ========= ============ ============ ========== ========= =========== ==========
See notes to consolidated financial statements
F-4
MEDIUM4.COM, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONSOLIDATED STATEMENT OF CASH FLOWS
Period Cumulative
November 12, November 12,
1998 1998
Year ended Year ended (inception) to (inception) to
December 31, December 31, December 31, December 31,
2000 1999 1998 2000
--------------- --------------- --------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (9,531,071) $ (3,760,176) $ - $ (13,291,247)
Adjustments to reconcile net loss to net cash used in
operating activites:
Depreciation 372,961 125,001 - 497,962
Amortization 297,264 20,867 - 318,131
Unearned compensation expense 720,547 - - 720,547
Common stock and options issued for services 1,849,625 303,031 - 2,152,656
Accounts receivable 12,800 (12,800) - -
Other current assets 364,686 (378,823) - (14,137)
Accounts payable 258,245 256,394 - 514,639
Accrued expenses 120,191 233,307 - 353,498
Deferred revenue 785,000 - - 785,000
Due to related parties - (6,670) 6,670 -
--------------- --------------- -------------- --------------
NET CASH USED (PROVIDED) BY OPERATIONS (4,749,752) (3,219,869) 6,670 (7,962,951)
--------------- --------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deferred offering costs - - (6,670) (6,670)
Investment in affiliate - (159,000) - (159,000)
Other assets (147,201) (176,788) - (323,989)
Purchases of capital expenditures (762,582) (1,631,060) - (2,393,642)
Marketable securities 4,159,198 (4,159,418) - (220)
--------------- --------------- -------------- --------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 3,249,416 (6,126,266) (6,670) (2,883,521)
--------------- --------------- -------------- --------------
CASH PROVIDED BY FINANCING ACTIVITIES:
Sale of common stock 1,380,382 9,383,552 83,000 10,846,934
Change in subscription receivable - 83,000 (83,000) -
Loan payable 50,000 - - 50,000
Accumulated other comprehensive income 17,052 (17,052) - -
--------------- --------------- -------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,447,434 9,449,500 - 10,896,934
--------------- --------------- -------------- --------------
NET (DECREASE) INCREASE IN CASH (52,903) 103,364 - 50,462
CASH, beginning of the period 103,364 - - -
--------------- --------------- -------------- --------------
CASH, end of the period $ 50,462 $ 103,364 $ - $ 50,462
=============== =============== ============== ==============
Supplemental disclosures of cash flow information:
Interest paid $ - $ - - -
Taxes paid 4,600 - - -
Non cash financing activities:
Stock options issued for services $ 1,489,625 $ 2,424,246 -
See notes to consolidated financial statements
F-5
MEDIUM4.COM, INC. AND SUBSIDIARIES
----------------------------------
(A DEVELOPMENT STAGE ENTERPRISE)
--------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
THREE YEARS ENDED DECEMBER 31, 2000
-----------------------------------
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 a going concern. The Company has suffered recurring losses amounting to $9.5
million and $3.8 million for the years ending December 31, 2000 and December 31,
1999, 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 AND CASH EQUIVALENTS
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.
F-6
SOFTWARE DEVELOPMENT COSTS
The Company capitalized software development costs in accordance with SFAS 86,
EITF 00-2 and SOP 98-1. At December 31, 2000 and December 31, 1999, the Company
capitalized $833,649 and $354,583, respectively, of such software development
costs, net of accumulated amortization. The costs are amortized over a 30
month-period on a straight-line basis.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Total advertising costs charged to
operations at December 31, 2000 and December 31, 1999 amounted to $155,740 and
$19,800, respectively.
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 $11 million,
which expires at various times through the year 2020. The Company has recorded
approximately $4.5 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
are computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding during the period.
F-7
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, 2000, 1999 and 1998 respectively, the
Company believes that there has been no impairment of long-lived assets.
INVESTMENT IN AFFILIATES
Investments in affiliates 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 of
the affiliate.
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.
NOTE 3. MARKETABLE SECURITIES
Marketable securities at December 31, 2000 and 1999 consist of mutual fund
shares, which invest in US Government securities and are classified as available
for sale securities.
NOTE 4. LEASEHOLD IMPROVEMENTS AND EQUIPMENT
At December 31, leasehold improvements and equipment consist of the following:
2000 1999
--------------- ----------------
Leasehold improvements $ 373,776 $ 329,643
Furniture & fixtures 347,547 307,143
Computer equipment 421,946 272,453
Camera equipment 178,424 76,446
Other equipment 317,760 290,793
--------------- ----------------
1,641,453 1,276,478
Less: accumulated depreciation (617,949) (145,868)
Less: write down of assets (334,922) -
--------------- ----------------
$ 686,582 $ 1,130,610
=============== ================
Leasehold improvements are depreciated over 5 years. Furniture, fixtures and
equipment are depreciated over 3 to 7 years. The write down of assets in
calendar year 2000 relates 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.
F-8
NOTE 5. OTHER ASSETS
As of December 31, 2000 and 1999, other assets include security deposits of
$133,324 and $112,413, respectively, and intangible assets comprised of domain
names of $121,140 and $86,880, respectively. The costs of domain names are being
amortized over 24 months. The unamortized portion at December 31, 2000 and 1999
is $49,585 and $71,045, respectively.
NOTE 6. LOAN PAYABLE
As of December 31, 2000, an officer of the Company made an advance of $50,000 to
the Company. The loan must be repaid by March 21, 2002 and bears interest at 6%
per annum until repayment.
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 were 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 this 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.
F-9
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.
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, 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
================ ===================
F-10
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
================ ===================
Information, at date of issuance, regarding stock option grants for the year
ended December 31, 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
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, 1999: annual dividends
of $0.00, expected volatility of 99% at December 31, 2000 and 1999, 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, 2000 and
1999, would have been approximately, $12,646,053 and $(1.20), and $4,409,986 and
$(.48), respectively.
F-11
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.
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.
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 straight 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.
Windfire has also agreed to pay the Company commissions over the term of
the master affiliation agreement calculated upon specified percentages of
annual gross revenues, as defined in the agreement, received by Windfire
from its licensees. These commissions, which are payable on a
quarter-annual basis, will range from 10% to 30% of annual gross revenues,
depending on the specific nation for which a license has been granted and
the year during the term of the agreement to which such revenues are
attributable.
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 also leases space in certain countries
abroad. Rent expense for the year ended December 31, 2000 and 1999 was
$157,688 and $180,161, respectively.
F-12
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:
2001 $ 75,570
2002 79,362
2003 47,607
Rent expense for the year ended December 31, 2000 was $32,850.
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:
2001 $ 43,355
2002 9,250
Rent expense for the year ended December 31, 2000 was $29,790.
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 the 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 has employment agreements with several of their officers
and employees with terms up to five years. 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 Note 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.
NOTE 11.
The Company has received a significant amount of cash since December 31, 2000
from foreignTV Japan, Inc. for the payment of license fees as discussed earlier
and advances, which are to be negotiated for the purchase of the foreignTV
network or additional licensing arrangements and technical support for content
not previously licensed.
F-13