UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
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(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended March 31, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the
transition period from _________________ to _________________
Commission file number 333-42162
VHS NETWORK, INC.
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(Exact name of small business issuer as specified in its charter)
FLORIDA 65-0656668
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
301-5170 Dixie Road
Mississauga, Ontario, Canada L4W 1E3
(Address of principal executive offices)
(905) 238-9398
(Issuer's telephone number) Copies of all
communications to:
Stewart & Associates
1 First Canadian Place, P.O. Box 160
Suite 700, 100 King Street West
Toronto, Ontario, Canada
Tel: (416) 368-7881
Fax: (416) 368-7805
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: May 11, 2001 19,560,268
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Financial Statements
For the three months ended March 31, 2001,
and the year ended December 31, 2000
VHS NETWORK, INC.CONSOLIDATEDFINANCIAL
STATEMENTSFor the three months ended
March 31, 2001, and the year ended
December 31, 2000
C O N T E N T S
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Consolidated Balance Sheets........................................3
Consolidated Statements of Operations...............................4
Consolidated Statements of Shareholders' Equity.....................5
Consolidated Statements of Cash Flows...............................6
Notes to Financial Statements......................................7-17
2
VHS NETWORK, INC.
Consolidated Balance Sheets
March 31, 2001 (unaudited) and December 31, 2000
March 31, December 31,
2001 2000
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ASSETS
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Cash $ 6,936 $ 25,205
Inventory 143,803 111,999
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Total current assets 150,739 137,204
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Property and Equipment
Furniture and Equipment 18,940 18,940
Accumulated Depreciation (3,470) (1,892)
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Total property and equipment 15,470 17,048
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Intangible assets, net 16,330 18,330
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Other Assets
Other receivables 1,198 761
Prepaids and deposits 67,774 67,774
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Total other assets 68,972 68,535
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Total assets $ 251,511 $ 241,117
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LIABILITIES
-----------
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Accounts payable $ 50,006 $ 60,650
Accrued expenses -- --
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Total current liabilities 50,006 60,650
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Management fees payable, related party 225,000 150,000
Notes payable, related party 213,320 182,027
Reserve for loss contingencies 350,000 350,000
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Total long-term liabilities 788,320 682,027
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Total liabilities 838,326 742,677
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Commitments and contingencies (note 6)
SHAREHOLDERS' EQUITY
Common stock: $0.001 par value per
share; 100,000,000 shares
authorized; 19,560,268 and
19,560,268 issued and outstanding,
respectively 19,559 19,559
Preferred stock: 25,000,000 shares authorized;
none issued or outstanding -- --
Additional paid-in-capital 3,544,408 3,544,408
Accumulated deficit (4,150,782) (4,065,527)
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Total shareholders' equity (586,815) (501,560)
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Total liabilities and shareholders' equity $ 251,511 $ 241,117
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The accompanying notes are an integral part of these
financial statements.
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VHS NETWORK, INC.
Consolidated Statements of Operations
for the three months ended March 31, 2001 and 2000 (unaudited)
and the year ended December 31, 2000
Three months Three months Year
ended ended ended
March 31, March 31, December 31,
2001 2000 2000
------------ ------------ ------------
Income:
Sales $ 146,884 $ -- $ --
Cost of goods sold (127,909) -- --
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Gross margin 18,975 -- --
------------ ------------ ------------
Operating Expenses:
Agency fees 1,332 38,679 52,557
Consulting fees 462 -- 45,640
General and administrative 6,464 10,827 32,251
Management fees 75,000 45,000 270,000
Professional fees 10,822 8,043 150,973
Office expense - China 4,580 -- 44,017
Depreciation and amortization 3,578 473 7,562
Inventory allowance -- -- 28,000
Other 102 747 23,743
Non-recurring acquisition expense -- -- 216,515
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Total operating expenses 102,340 103,769 871,258
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Loss from operations (83,365) (103,769) (871,258)
Other Income and (expense):
Interest (income) -- 98 9,516
Interest expense -- (56) (568)
Exchange (gain)/loss (1,890) -- (189)
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Total other income and (expense) (1,890) 42 8,759
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Net loss before taxes (85,255) (103,727) (862,499)
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Income taxes -- -- --
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Net loss $ (85,255) $ (103,727) $ (862,499)
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Net loss per common share - Basic $ (0.004) $ (0.009) $ (0.044)
============ ============ ============
Weighted average number of
common shares - Basic 19,560,268 11,915,352 19,469,192
============ ============ ============
Net loss per common share - Diluted $ (0.004) $ (0.009) $ (0.044)
============ ============ ============
Weighted average number of
common shares - Diluted 19,560,268 11,915,352 19,469,192
============ ============ ============
The accompanying notes are an integral part of these
financial statements.
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VHS NETWORK, INC.
Consolidated Statements of Shareholders' Equity for the three
months ended March 31, 2001 and the year ended December 31, 2000
Common Preferred
Stock Stock
------------------------- ---------------------- Additional Accumulated
Shares Amount Shares Amount paid-in-capital Deficit Total
----------- ----------- ---------- ----------- ----------- ----------- -----------
Balance December 31, 1999 10,929,435 $ 10,929 -- $ -- $ 1,231,170 $(3,203,028) $(1,960,929)
----------- ----------- ---------- ----------- ----------- ----------- -----------
Sale of common stock 2,633,333 2,633 -- -- 1,057,367 -- 1,060,000
Conversion of note
payables, related party 2,500,000 2,500 -- -- 863,368 -- 865,868
Common stock issued for services 57,500 57 -- -- 25,693 -- 25,750
Common stock issued for expenses 25,000 25 -- -- 22,725 -- 22,750
Acquisition of
China e-mall Corp. 2,100,000 2,100 -- -- 21,900 -- 24,000
Acquisition of Exodus
Acquisition Corp. 500,000 500 -- -- 124,500 -- 125,000
Conversion of debt
into common stock 10,000 10 -- -- 21,990 -- 22,000
Exercise of warrants 250,000 250 -- -- 104,750 -- 105,000
Conversion of wages
payable to officers
into common stock 555,000 555 -- -- 70,945 -- 71,500
Net loss for the period -- -- -- -- -- (862,499) (862,499)
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Balance December 31, 2000 19,560,268 $ 19,559 -- $ -- $ 3,544,408 $(4,065,527) $ (501,560)
----------- ----------- ---------- ----------- ----------- ----------- -----------
Net loss for the period -- -- -- -- -- (85,255) (85,255)
----------- ----------- ---------- ----------- ----------- ----------- -----------
Balance March 31, 2001 19,560,268 $ 19,559 -- $ -- $ 3,544,408 $(4,150,782) $ (586,815)
----------- ----------- ---------- ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these
financial statements.
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VHS NETWORK, INC.
Consolidated Statements of Cash Flows for the three months
ended March 31, 2001 and 2000 (unaudited)
and the year ended December 31, 2000
Three Months Three Months
Ended Ended Year Ended
March 31, March 31, December 31,
2001 2000 2000
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Net income (loss) $ (85,255) $ (103,727) $ (862,499)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Issuance of common stock for services -- 750 25,750
Issuance of common stock for expenses -- -- 22,750
Acquisition of Exodus Corporation -- -- 125,000
Inventory valuation allowance -- -- 28,000
Amortization of intangible assets 2,000 -- 5,670
Depreciation 1,578 473 1,892
$ (81,677) $ (102,504) $ (653,437)
Cash flow from operating activities:
Changes in assets and liabilities
Receivables $ (437) $ -- $ (761)
Inventory (31,804) -- --
Prepaid and deposits -- (18,514) --
Accounts payable (10,644) (10,174) (4,217)
Accrued expenses -- (10,380) (15,000)
Cash flow used in operating activities $ (124,562) $ (141,572) $ (673,415)
Cash flow from investing activities:
Purchase of furniture and equipment $ -- $ (18,940) $ (18,940)
Net cash used in investing activities $ -- $ (18,940) $ (18,940)
Cash flow from financing activities:
Management fees payable, related party $ 75,000 $ 45,000 $ 150,000
Payments on notes payable, related party -- -- (597,973)
Proceeds from notes payable, related party 31,293 -- --
Proceeds from exercise of warrants -- -- 105,000
Proceeds from sale of stock -- 950,000 1,060,000
Net cash generated by financing activities $ 106,293 $ 995,000 $ 717,027
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(Decrease) Increase in cash and cash equivalents (18,269) 834,488 24,672
Balance at beginning of year 25,205 533 533
Balance at end of year $ 6,936 $ 835,021 $ 25,205
Supplementary disclosure:
Cash paid for interest $ -- $ 56 $ 568
Cash paid for taxes $ -- $ -- $ --
Conversion of payables into common Stock $ -- $ -- $ 93,500
Common stock issued for acquisitions $ -- $ -- $ 149,000
Conversion of notes payable into common stock $ -- $ 865,868 $ 865,868
Common stock issued for services and expenses $ -- $ 750 $ 48,500
The accompanying notes are an integral part of these
financial statements.
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VHS NETWORK, INC.
Notes to Financial Statements
March 31, 2001
1 NATURE OF OPERATIONS
Company History
VHS Network, Inc. (the "Company" or "VHSN") was incorporated in the
State of Florida on December 18, 1995 as Ronden Vending Corp. On
December 24, 1996, the Company incorporated a wholly owned subsidiary
called Ronden Acquisition, Inc. a Florida corporation. Ronden
Acquisition, Inc. then merged with Video Home Shopping, Inc. (a
Tennessee corporation), and Ronden Acquisition, Inc. was the surviving
Florida Corporation. In 1996, Video Home Shopping, Inc. was a network
marketing and distribution company which offered a wide range of
products and services to consumers through the medium of video tape,
however, after the merger the Company decided not to continue with the
network marketing and distribution operations of Video Home Shopping,
Inc. of Tennessee.
On January 9, 1997, articles of merger were filed for the Company as
the surviving corporation of a merger between the Company and its
wholly owned subsidiary Ronden Acquisitions, Inc. This step completed
the forward triangular merger between Video Home Shopping, Inc., Ronden
Acquisition, Inc. and the Company.
On January 9, 1997, articles of amendment were filed to change the name
of the Company from Ronden Vending Corp. to VHS Network, Inc. On April
9, 1997, the Company incorporated VHS Acquisition, Inc. as a wholly
owned subsidiary.
In April 1997, the Company was restructured by way of a reverse
take-over involving its wholly owned subsidiary, VHS Acquisition, Inc.
a Florida company, and VHS Network Inc., a Manitoba and Canadian
controlled private corporation.
On April 12, 2000, the Company acquired all the outstanding common
shares of China eMall Corporation, an Ontario private company. This
represents a 100% voting interest in China eMall Corporation.
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VHS NETWORK, INC.
Notes to Financial Statements
March 31, 2001
1. NATURE OF OPERATIONS (continued)
Operations
The Company is continuing to reposition itself to identify technologies
and market opportunities in the United States, Canada and abroad in
Internet and electronic commerce interactive media, and SmartCARD
loyalty marketing. The Company will operate and/or develop two lines of
business as follows:
China eMall Corporation ("China eMall"): Through its acquired
subsidiary, China eMall Corporation, an Ontario, Canada corporation,
the Company provides Internet marketing and information services to
facilitate trade between Chinese and western businesses. The Company's
primary focus will be to establish an on-line presence to facilitate
the export of Chinese products. Through its multi-functional portal,
Chinese suppliers can post their products and services in a format that
is easy for searching, quoting and tracking, and that gives a western
buyer access to multiple suppliers for the best quality and price, and
direct communication. Realizing the difference in business culture and
financial systems, China eMall will allocate a substantial amount of
resources in assisting in the communications, export/import processing,
financial transaction and product services. China eMall's business will
make use of Internet technology to speed up the export process and
broaden the sales channels for Chinese goods and services, and more
importantly, bring customers into direct contact with Chinese producers
who can constantly upgrade their products to meet customers' needs.
China eMall has an agreement with Wangfujing Department Store Ltd., a
large Chinese retailer, as its prime product supplier.
SmartCARD: The Company is developing computer chip-based plastic access
cards that utilize proprietary SmartCARD technology, which is licensed
from Groupmark Canada Limited, a related party. This technology enables
the cards to be used for identification purposes and as debit or charge
cards. The Company intends to focus its marketing efforts on companies
that wish to distribute these cards to their customers as a reward for
their loyalty. Groupmark Canada Limited owns the registered trademark
"SmartCARD" in Canada and has a pending application in the United
States. Groupmark Canada has granted the Company a license to use the
trademark "SmartCARD." Pursuant to the terms of the license agreement,
the Company will pay to Groupmark a royalty of 5% of net sales of
products using the SmartCARD trademark and technology.
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VHS NETWORK, INC.
Notes to Financial Statements
March 31, 2001
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States. The
following is a summary of the significant accounting policies followed
in the preparation of these consolidated financial statements.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and all of its subsidiary companies. Intercompany accounts and
transactions have been eliminated on consolidation.
These consolidated financial statements reflect all adjustments, which
are, in the opinion of management, necessary for a fair presentation of
the results for the interim periods.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and cash deposited
with financial institutions, including money market accounts, and
commercial paper purchased with an original maturity of three months or
less.
Concentration of Cash
The Company at times maintains cash balances in accounts that are not
fully federally insured. Uninsured balances as of March 31, 2001 and
December 31, 2000 were $7,743 and $25,205, respectively.
Inventories
Inventories are stated at the lower of cost (first in, first out
method) or market.
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VHS NETWORK, INC.
Notes to Financial Statements
March 31, 2001
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Property and Equipment
Property and equipment are stated at cost or, in the case of leased
assets under capital leases, at the present value of future lease
payments at inception of the lease. Major improvements that materially
extend the useful life of property are capitalized. Depreciation is
calculated on a straight-line basis over the estimated useful lives of
the various assets, which range from three to seven years. Leasehold
improvements and leased assets under capital leases are amortized over
the life of the asset or the period of the respective lease using the
straight-line method, whichever is the shortest. Expenditures for
repairs and maintenance are charged to expense as incurred.
Depreciation expense for the three-month period ending March 31, 2001
was $1,578 and for the year ended December 31, 2000 was $1,892.
Stock-based Compensation
The Company accounts for its stock-based compensation plan based on
Accounting Principles Board ("APB") Opinion No. 25. In October 1995,
the Financial Accounting Standards Board ("FASB") issued SFAS No. 123,
"Accounting for Stock-Based Compensation." The Company has determined
that it will not change to the fair value method and will continue to
use APB Opinion No. 25 for measurement and recognition of any expense
related to employee stock based transactions.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes". Income taxes are provided for the tax
effects of transactions reported in the consolidated financial
statements and consist of deferred taxes related to differences between
the basis of assets and liabilities for financial and income tax
reporting. The deferred tax assets and liabilities represent the future
tax return consequences of those differences, which will be either
taxable or deductible when the assets and liabilities are recovered or
settled. Deferred taxes are also recognized for operating losses that
are available to offset future taxable income.
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VHS NETWORK, INC.
Notes to Financial Statements
March 31, 2001
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Foreign Currency Translation
Transactions are translated into the functional currency at the
exchange rates in effect at the time the transactions occur. Exchange
gains and losses arising on translation are included in the operating
results for the year.
Revenue
Sales are recorded for products upon shipment of product to customers
and transfer of title under standard commercial terms.
Comprehensive Income
In 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income and its components in a full set
of financial statements. Comprehensive income is presented in the
consolidated statements of shareholders' equity and comprehensive
income, and consists of net income and unrealized gains (losses) on
available for sale marketable securities; foreign currency translation
adjustments and changes in market value of futures contracts that
qualify as a hedge; and negative equity adjustments recognized in
accordance with SFAS 87. SFAS No. 130 requires only additional
disclosures in the consolidated financial statements and does not
affect the Company's financial position or results of operations. The
elements of comprehensive income for the three-month period ended March
31, 2001 and 2000, and the year ended December 31, 2000 are de minimis.
Income (loss) per common share
Income (loss) per common share is computed on the weighted average
number of common or common and common equivalent shares outstanding
during each year. Basic Earnings-per-Share ("EPS") is computed as net
income (loss) applicable to common stockholders' divided by the
weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur from
common shares issuable through stock options, warrants, and other
convertible securities when the effect would be dilutive. The Company
had no dilutive securities.
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VHS NETWORK, INC.
Notes to Financial Statements
March 31, 2001
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Long-lived assets
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121, the Company reviews the carrying value of its long-lived
assets and identifiable intangibles for possible impairment whenever
events or changes in circumstances indicate the carrying amount of
assets to be held and used may not be recoverable.
Use of Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles necessarily requires
management to make estimates and assumptions that effect 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 revenue and expenses during the reporting periods.
Actual results could significantly differ from those estimates.
Advertising Costs
The Company expenses advertising costs as they are incurred.
Advertising costs for the three month period ending March 31, 2001 were
$615 and for the year ending December 31, 2000 were $45,390. The
Company did not incur any advertising costs during the three month
period ending March 31, 2000.
Segments of an Enterprise and Related Information
The Company follows SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 requires that a
public business enterprise report financial and descriptive information
about its reportable operating segments on the basis that is used
internally for evaluating segment performance and deciding how to
allocate resources to segments. Currently, the Company operates in only
one segment.
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VHS NETWORK, INC.
Notes to Financial Statements
March 31, 2001
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Intangibles
Intangible assets are recorded at cost. Capitalized web-site
development costs associated with the purchase of China eMall are
amortized on a straight-line basis over a period of 3 years.
Recently Issued Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires recognition
of all derivative financial instruments as either assets or liabilities
in consolidated balance sheets at fair value and determines the method
(s) of gain/loss recognition. The FASB issued SFAS No. 137, "Deferral
of the Effective Date of FASB Statement No. 133" in June 1999 to defer
the effective date of SFAS No. 133 to fiscal years beginning after June
15, 2000. The Company does not have derivative instruments and does not
conduct hedging activities.
3. INVENTORIES
On April 29, 1998, the Company acquired approximately 32,000 sets of
printed art reproductions. Each set consists of four full-color prints
from "The Andover Series" by artist Jim Perleberg. Each image has a
title narrative printed in the margin and is re-signed, in the plate,
by the artist. The management of the Company has evaluated the market
value of the prints and determined that the market value of the prints
is not below their acquisition cost. The prints are by a noted artist,
and the original Andover Series S/N Limited Edition lithographs were
fully sold.
The Company acquired these sets of prints in exchange for 1,399,992
shares of its common stock valued at $139,999. The Company will be
offering these prints for sale through its own web site and other
Internet web sites.
The Company has recorded a valuation allowance of $28,000 in 2000 to
reflect the fair value of the inventory.
The Company has inventory of patio furniture valued at $31,804.
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VHS NETWORK, INC.
Notes to Financial Statements
March 31, 2001
4. INCOME TAXES
No provision for federal and state taxes has been recorded for the
three months period ended March 31, 2001 and 2000, and the year ended
December 31, 2000, since the Company incurred net operating losses for
these periods.
5. RELATED PARTY TRANSACTIONS
Groupmark Canada Limited
In 1997, the Company entered into a management service agreement with
Groupmark Canada Limited ("Groupmark"), of which the Chairman and Chief
Executive Officer of the Company is the sole shareholder. Under this
agreement, Groupmark provides the Company all management, daily
administrative functions, financial and business advisory services.
Groupmark was also contracted to assist in the technological
development of the "SmartCARD." Contractually, charges for these
services are not to exceed $56,000 per month. For the three months
ending March 31, 2001 and 2000, the Company incurred management fees of
$75,000 and $45,000, respectively.
Amounts due Groupmark pursuant to this management service agreement and
other borrowings as of March 31, 2001 and December 31, 2000 are
$438,320 and $332,027, respectively. Groupmark has the option to accept
payment by way of the Company's common stock at fair market value in
lieu of cash.
Transactions with Corporate Officers and Directors
Dr. Gang Chai, a member of the Board of Directors and the original
founder of China e-Mall, is a majority shareholder in McVicar Minerals
Corporation. McVicar Minerals provided services to the Company through
a consulting agreement. The Company paid McVicar Minerals Corp. $4,000
during the three month period ended March 31, 2001.
- 14 -
VHS NETWORK, INC.
Notes to Financial Statements
March 31, 2001
6. COMMITMENTS AND CONTINGENCIES
Legal
The Company is not currently aware of any legal proceedings or claims
that the Company believes will have, individually or in the aggregate,
a material adverse effect on the Company's financial position or
results of operations.
Video Home Shopping, Inc., a Tennessee Corporation
In December 1996, the Company was merged with Video Home Shopping,
Inc., a Tennessee corporation. Subsequent to the merger, the new
management of the Company decided not to continue with the business
operations of Video Home Shopping, Inc.
The Company has recorded a $350,000 liability for loss contingencies.
This reserve was established because of a potential liability of the
Company to the Internal Revenue Service (IRS). Management discovered
from reviewing the 1996 financial statements of Video Home Shopping
Inc., a predecessor to the Company, of the nature of this liability.
The footnotes to those financial statements stated the following:
"The Company has outstanding payroll taxes totaling $ 206,385 as of
July 31, 1996. The outstanding balance consists of Federal
Withholdings, Social Security and Medicare taxes and Unemployment taxes
for the quarters ended December 31, 1995, March 31, 1996 and June 30,
1996. The Company also did not make the necessary payroll tax deposits
for the month ending July 31, 1996. Management believes the Company
will be able to file and remit the outstanding payroll tax returns
during the current period. As the Internal Revenue Service assesses
substantial civil penalties and interest for the failure to file and
remit payroll related taxes, the total amount due could increase
significantly..."
Management believes that these Federal Withholding taxes, Social
Security and Medicare taxes, employer's taxes, and other payroll taxes
may not have been remitted to date; however, the Company has not been
able to confirm whether payment was made.
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VHS NETWORK, INC.
Notes to Financial Statements
March 31, 2001
6. COMMITMENTS AND CONTINGENCIES (continued)
Furthermore, in March 2000, the Company learned of an IRS investigation
relating to the affairs of a former principal of Video Home Shopping
Inc. The Company learned of this investigation from its transfer agent,
and has not been contacted by the IRS. Management of the Company has,
however, contacted the IRS for information and has no indication that
the investigation concerns the Company directly. Management,
nevertheless, believes that said IRS investigation may relate, in part,
to these unpaid Federal Withholding taxes, Social Security and Medicare
taxes, employer's taxes, and other payroll taxes.
While management views that any liability in this regard is the
responsibility of the former principal of Video Home Shopping, Inc. and
is not necessarily the liability of the Company, out of prudence, the
Company has elected to provide a reserve of $350,000 to provide for the
possibility of such liability to the IRS. Management is currently in
process of determining the course of further action regarding this
liability. As of May 15, 2001, the IRS has not notified Management
regarding the status of the investigation.
Going Concern Uncertainties
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern. However, the Company
has experienced recurring operating losses and negative cash flows from
operations. The Company's continued existence is dependent upon its
ability to increase operating revenues and/or raise additional equity
financing.
In view of these matters, management believes that actions presently
being taken to expand the Company's operations and to continue its
web-site development activity provide the opportunity for the Company
to return to profitability. The continued focus on strategic
technological investments will improve the Company's cash flow,
profitability, and ability to raise additional capital so that it can
meet its strategic objectives.
Management is currently in the process of negotiating additional equity
financing with potential investors. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
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VHS NETWORK, INC.
Notes to Financial Statements
March 31, 2001
7. INTANGIBLE ASSETS
Intangible assets at March 31, 2000 consist of the following:
Domain name $ 24,000
Less: Accumulated amortization ( 7,670)
-------------------
$ 16,330
==================
Amortization expense for the three months ended March 31, 2001and 2000
was $2,000 and $0, respectively, and for year ended December 31, 2000
was $5,670.
8. REGISTRATIONS STATEMENT
The Securities and Exchange Commission issued a no further comment
letter on February 14, 2001, and the Company's Registration Statement,
Form SB-2, was deemed effective as of that date. This Registration
Statement, Form SB-2, pertains to the sale of 6,830,812 shares of its
common stock, of which 3,755,828 shares are issued and outstanding, and
3,074,984 shares are issuable upon exercise of options and other
conversion privileges to acquire common stock. The shares were issued,
or are issuable upon conversion or exercise of securities, which were
issued, by the Company in private placement transactions.
The Company will not receive any proceeds upon the sale of shares by
the Selling Securityholders. However, this registration statement
relates to the sale of up to 299,230 shares of the Company's common
stock that may be issued in the event of the exercise of outstanding
options held by Selling Securityholders. If all such options were
exercised, the Company would receive proceeds of $104,730.
9. Major Customer
All of the revenue for the three months ending March 31, 2001 were from
one customer.
- 17 -
VHS NETWORK, INC.
Notes to Financial Statements
March 31, 2001
10. Subsequent Event
On May 6, 2001, the Company entered into an agreement and plan of reorganization
(the "Agreement") with Branson Holdings, Inc. ("Branson") to acquire all the
issued and outstanding shares of Branson. The Agreement provides that all the
shareholders of Branson shall exchange all of the outstanding shares of common
stock of Branson, constituting a total of 10,072 shares, for a total of
10,072,000 common shares of VHSN and Branson shall thereafter operate as a
wholly-owned subsidiary of VHSN. One of the conditions precedent to closing is
that the board of directors of VHSN, must prior to the issuance of the
10,072,000 common shares, authorize and effect a reverse stock split of 20 to 1
of the Company's total issued and outstanding shares to bring the total issued
and outstanding shares of VHSN equal to 978,013 from 19,560,268. On completion
of the transaction and after giving effect to the issuance of 10,072,000 there
would be 11,050,013 common shares of VHSN outstanding on a non-diluted basis.
The Agreement further provides that on closing the board of directors of VHSN
will be reduced to 3 and 2 nominees of Branson will be added to make a total
number of directors of 5. The Management of the Company is continuing to
negotiate with Branson regarding this agreement, including the potential of a 20
for 1 reverse stock split. The financial statements do not include any
adjustments that might result from the outcome of these negotiations.
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Item 2. Management's Discussion and Analysis or Plan of Operation. General The
information in this section should be read together with the consolidated,
unaudited, interim financial statements that are included elsewhere in this Form
10-QSB. VHSN's goals and objectives are centered on the ability to identify
technologies and market opportunities in the United States, Canada and abroad in
internet and interactive media e-commerce and smartCARD loyalty marketing. To
achieve its goals, VHSN is developing its supplier base and its web site,
www.china-emall.com, so that it will be in a position to attract purchasing and
revenues. It is at the same time investigating companies from which it can
acquire technology with proven financial performance, where joint ventures or
acquisitions may also be possible.
Results of Operations
Results of three months ended March 31, 2001. For the three months ended March
31, 2001 VHSN had revenues of $146,884 and for the three months ended March 31,
2000, VHSN had no revenues. The gross margin on sales was $18,975. The three
months ended March 31, 2001 marked the commencement of revenues for VHSN. All of
the revenues received came from one customer that were sourced from the website
but negotiated by local sales people. Management of VHSN anticipates that future
sales will be made to the same customer. Operating Expenses for the three months
ended March 31, 2001 were $102,340 compared with Operating Expenses of $103,769
for the three months ended March 31, 2000.
Liquidity and Capital Resources
VHSN achieved no revenues from operations in the 2000 fiscal year. Revenues
during the three months ended March 31, 2001 were $146,884 with a gross margin
of $18,975. The continued existence and ability of VHSN to continue as a going
concern are dependent upon its ability to increase revenues and obtain capital
funding as required to fund its operations.
Changes in Financial Position
Total assets increased to $251,511 on March 31, 2001 compared with total assets
of $241,117 on December 31, 2000. The increase is due primarily as a result of
acquiring inventory. The inventory consists of patio furniture acquired through
Chinese suppliers.
Total liabilities increased to $838,326 on March 31, 2001 compared with total
liabilities of $742,677 on December 31, 2000. The increase is due to accrued
management fees to Groupmark. Canada Limited The number of issued common shares
of VHSN was 19,560,268 on December 31, 2000 and remained the same on May 11,
2001. Shareholders' equity decreased from ($501,560) to ($586,815) during the
first three months of 2001.
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PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities/Recent Sales of Unregistered Securities. On
October 19, 2000 VHSN issued an aggregate of 25,000 common shares to Patricia
Gajewski, John O. Beicher and Philip C. Anderson in partial settlement of an
outstanding debt.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
On May 6, 2001 VHSN entered into an agreement and plan of reorganization (the
"Agreement") with Branson Holdings, Inc. ("Branson") to acquire all the issued
and outstanding shares of Branson. The Agreement provides that all the
shareholders of Branson not dissenting shall exchange all of the outstanding
shares of common stock of Branson constituting a total of 10,072 shares for a
total of 10,072,000 common shares of VHSN and Branson shall thereafter operate
as a wholly-owned subsidiary of VHSN. Conditions precedent to closing for the
benefit of VHSN are:
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(i) all the warranties and representations of Branson shall be true and
correct;
(ii) the stockholders of Branson shall have approved the Agreement and the
acquisition thereunder;
(iii)there shall not be any litigation to restrain or invalidate the
transactions contemplated in the Agreement and there shall not be any
governmental proceeding, claim or other litigation pending or threatened to
restrain or invalidate the exchange, or which, if adversely decided, could
adversely affect VHSN;
(iv)Branson shall have filed all tax returns and paid or made adequate
provision for the payment of all taxes, fees and assessments;
(v) VHSN shall have been given opportunity to review and copy tax returns,
corporate minute book and all other corporate, business and financial records of
Branson; and
(vi) Branson and VHSN shall have exchanged all of the information, Schedules and
Exhibits referred to in the Agreement. Conditions precedent to closing for the
benefit of Branson are:
(i) the Board of Directors of VHSN must authorize and effect a reverse
stock split of 20 to 1 of VHSN's total issued and outstanding shares to bring
the total issued and outstanding shares of VHSN equal to 978,013 from
19,560,268;
(ii) all the warranties and representations of VHSN shall be true and
correct;
(iii) there shall not be any litigation to restrain or invalidate the
transactions contemplated in the Agreement and there shall not be any
governmental proceeding, claim or other litigation pending or threatened to
restrain or invalidate the exchange, or which, if adversely decided, could
adversely affect Branson; and
(iv) the shareholders and/or the directors of VHSN shall have approved
the Agreement and the acquisition thereunder.
The Agreement further provides that on closing the board of directors of VHSN
will be reduced to 3 and 2 nominees of Branson will be added to make a total
number of directors of 5. The Agreement may be terminated or abandoned at any
time prior to the Closing upon the following conditions:
(i) by mutual consent of the Boards of Directors of VHSN and Branson;
or
(ii) by the Board of Directors of either VHSN or Branson if in the bona
fide judgment of such Board there shall have been a material violation of any
covenant or agreement set forth herein; or if any warranty or representation
shall be untrue; or such Board of Directors should, in its bona fide judgment
deem the acquisition inadvisable or impractical by reason of any defect which,
in the opinion of counsel for the company whose Board of Directors has made such
a determination, constitutes a material part of its assets or there exists or
there is a threat of material liability or obligation of such other company not
previously known at the time of this Agreement; or
(iii) by election of either party in the event that all of the
conditions precedent to closing have not been complied with within 90 days
following the date hereof, unless extended by mutual consent of the parties.
With respect to consideration of this transaction by the shareholders of VHSN,
VHSN shall comply with any and all requirements of Section 14 of the Securities
Exchange Act of 1934 as amended, that are applicable. Item 6. Exhibits and
Reports on Form 8-K. (a) Exhibits None. 27. Financial Data Schedule (b) Reports
on Form 8-K. None.
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SIGNATURES
----------
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
VHS NETWORK, INC.
(the "Registrant")
Date: May 18, 2001 /s/ Elwin Cathcart
------------------
Elwin Cathcart
Chief Executive Officer
(principal financial
and accounting officer
and duly authorized
signing officer)
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