UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 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.
(Exact name of small business issuer as specified in its charter)
FLORIDA 65-0656668
------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
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:
Carbonaro Stewart Kligerman Sugar, LLP
390 Bay Street, Suite 1600,
Toronto, Ontario, Canada
Tel: (416) 368-2500
Fax: (416) 368-0909
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: June 13, 2001 19,560,268
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
VHS NETWORK, INC.
CONSOLIDATED
FINANCIAL STATEMENTS
For the three and six months ended June 30, 2001,
and the year ended December 31, 2000
Consolidated Balance Sheets........................................2
Consolidated Statements of Operations............................3-4
Consolidated Statements of Shareholders' Equity....................5
Consolidated Statements of Cash Flows............................6-7
Notes to Financial Statements...................................8-19
VHS NETWORK, INC.
Consolidated Balance Sheets
As of June 30, 2001 and December 31, 2000
June 30, December 31,
2001 2000
----------- -----------
(unaudited)
ASSETS
Current Assets
Cash $ 18,644 $ 25,205
Inventory 111,999 111,999
----------- -----------
Total current assets 130,643 137,204
Property and Equipment
Furniture and Equipment 18,940 18,940
Accumulated Depreciation (5,048) (1,892)
----------- -----------
Total property and equipment 13,892 17,048
Intangible assets, net 14,330 18,330
Other Assets
Other receivables 1,626 761
Prepaids and deposits 67,774 67,774
----------- -----------
Total other assets 69,400 68,535
----------- -----------
Total assets $ 228,265 $ 241,117
=========== ===========
LIABILITIES
Current Liabilities
Accounts payable $ 50,006 $ 60,650
----------- -----------
Total current liabilities 50,006 60,650
Long Term Liabilities
Management fees payable, related party 300,000 150,000
Advances from related party 47,775 --
Notes payable, related party 182,027 182,027
Reserve for loss contingencies 350,000 350,000
----------- -----------
Total long term liabilities 879,802 682,027
----------- -----------
Total liabilities 929,808 742,677
SHAREHOLDERS' EQUITY
Common stock: 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 (4,265,510) (4,065,527)
----------- -----------
Total shareholders' equity (701,543) (501,560)
----------- -----------
Total liabilities and shareholders' equity $ 228,265 $ 241,117
=========== ===========
The accompanying notes are an integral part of these financial statements.
- 2 -
VHS NETWORK, INC.
Consolidated Statements of Operations
for the three months and six months ended June 30, 2001 and 2000, and
the year ended December 31, 2000
Three months Six months
ended ended
June 30, June 30,
2001 2001
------------ ------------
(unaudited) (unaudited)
Income:
Sales $ 63,215 $ 210,099
Cost of goods sold (64,763) (192,672)
------------ ------------
Gross margin (1,548) 17,427
------------ ------------
Operating Expenses:
Agency fees 3,338 4,670
Consulting fees 3,399 3,861
General and administrative 662 7,126
Management fees 75,000 150,000
Professional fees 20,332 31,154
Office expense-China 5,515 10,095
Depreciation and amortization expense 3,578 7,156
Inventory allowance -- --
Other 260 362
Non-recurring expense -- --
------------ ------------
Total operating expenses 112,084 214,424
------------ ------------
Other (Income) and Expenses:
Currency exchange loss 1,096 2,986
Interest (income) -- --
Interest expense -- --
------------ ------------
Total other (income) and expense 1,096 2,986
------------ ------------
Net loss before taxes 114,728 199,983
------------ ------------
Income taxes -- --
------------ ------------
Net loss $ 114,728 $ 199,983
============ ============
Net loss per common share - Basic $ 0.006 $ 0.010
============ ============
Weighted average number of
common shares - Basic 19,560,268 19,560,268
============ ============
Net loss per common share - Diluted $ 0.006 $ 0.010
============ ============
Weighted average number of
common shares - Diluted 19,560,268 19,560,268
============ ============
The accompanying notes are an integral part of these financial
statements.
- 3 -
VHS NETWORK, INC.
Consolidated Statements of Operations
for the three months and six months ended June 30, 2001 and 2000, and
the year ended December 31, 2000 (continued)
Three months Six months
ended ended Year ended
June 30, June 30, December 31,
2000 2000 2000
------------ ------------ ------------
(unaudited) (unaudited)
Income:
Sales $ -- $ -- $ --
Cost of goods sold -- -- --
------------ ------------ ------------
Gross margin -- -- --
------------ ------------ ------------
Operating Expenses:
Agency fees 3,850 42,529 52,557
Consulting fees 23,686 23,686 45,640
General and administrative 21,102 31,929 32,251
Management fees 75,000 120,000 270,000
Professional fees 93,658 101,701 150,973
Office expense-China 28,637 28,637 44,017
Depreciation and amortization expense 2,143 2,616 7,562
Inventory allowance -- -- 28,000
Other -- -- 23,743
Non-recurring expense 216,515 216,515 216,515
------------ ------------ ------------
Total operating expenses 464,591 567,613 871,258
------------ ------------ ------------
Other (Income) and Expenses:
Currency exchange (gain)/loss (902) (155) (9,516)
Interest (income) (1,694) (1,792) 568
Interest expense 162 218 189
------------ ------------ ------------
Total other (income) and expense (2,434) (1,729) (8,759)
------------ ------------ ------------
Net loss before taxes 462,157 565,884 862,499
------------ ------------ ------------
Income taxes -- -- --
------------ ------------ ------------
Net loss $ 462,157 $ 565,884 $ 862,499
============ ============ ============
Net loss per common share - Basic $ 0.025 $ 0.038 $ 0.044
============ ============ ============
Weighted average number of
common shares - Basic 18,229,824 15,052,283 19,469,192
============ ============ ============
Net loss per common share - Diluted $ 0.025 $ 0.038 $ 0.044
============ ============ ============
Weighted average number of
common shares - Diluted 18,229,824 15,052,283 19,469,192
============ ============ ============
The accompanying notes are an integral part of these financial
statements.
- 4 -
VHS NETWORK, INC.
Consolidated Statements of Shareholders' Equity for the six months
ended June 30, 2001 (unaudited) and
the year ended December 31, 2000
Common Preferred Additional
Stock Stock paid-in- Accumulated
Shares Amount Shares Amount 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)
----------- ----------- ------------ -------- ----------- ----------- -----------
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)
----------- ----------- ------------ -------- ----------- ----------- -----------
Net loss for the period -- -- -- -- -- (114,728) (114,728)
----------- ----------- ------------ -------- ----------- ----------- -----------
Balance June 30, 2001 19,560,268 $ 19,559 $ -- $ -- $ 3,544,408 $(4,265,510) $ (701,543)
----------- ----------- ------------ -------- ----------- ----------- -----------
The accompanying notes are an integral part of these financial statements.
- 5 -
VHS NETWORK, INC.
Consolidated Statements of Cash Flows
for the six months ended June 30, 2001 and 2000, and the year ended December 31, 2000
Six months Six months
ended ended Year ended
June 30, June 30, December 31,
2001 2000 2000
----------- ----------- -----------
Net income (loss) $ (199,983) $ (565,884) $ (862,499)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Issuance of common stock for services -- 25,750 25,750
Issuance of common stock for expenses -- -- 22,750
Acquisition of Exodus Corporation -- 125,000 125,000
Inventory valuation allowance -- -- 28,000
Amortization of intangible assets 4,000 1,670 5,670
Depreciation 3,156 946 1,892
----------- ----------- -----------
Cash flow from operating activities:
Changes in assets and liabilities
Receivables $ (865) $ (15,976) $ (761)
Accounts payable (10,644) (12,436) (4,217)
Accrued expenses -- (15,000) (15,000)
----------- ----------- -----------
Cash flow used in operating activities $ (204,336) $ (455,930) $ (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 $ 150,000 $ -- $ 150,000
Borrowings under notes payable, related party -- 145,000 --
Payments on notes payable, related party -- (217,568) (597,973)
Advances from related party 85,146 -- --
Payments on advances from related party (37,371) -- --
Restricted cash -- (400,000) --
Proceeds from exercise of warrants -- 105,000 105,000
Proceeds from sale of stock -- 1,060,000 1,060,000
----------- ----------- -----------
Net cash generated by financing activities $ 197,775 $ 692,432 $ 717,027
----------- ----------- -----------
(Decrease) Increase in cash and cash equivalents (6,561) 217,562 24,672
Balance at beginning of year 25,205 533 533
----------- ----------- -----------
Balance at end of year $ 18,644 $ 218,095 $ 25,205
=========== =========== ===========
The accompanying notes are an integral part of these financial statements
- 6 -
VHS NETWORK, INC.
Consolidated Statements of Cash Flows
for the six months ended June 30, 2001 and 2000, and the year ended December 31, 2000 (continued)
Supplementary disclosure:
Cash paid for interest $ - $ 218 $ 568
------------------ ------------------ ------------------
Cash paid for taxes $ - $ - $ -
------------------ ------------------ ------------------
Conversion of payables into common Stock $ - $ - $ 93,500
------------------ ------------------ ------------------
Conversion of debt into common stock $ - $ 22,000 $ -
------------------ ------------------ ------------------
Common stock issued for acquisitions $ - $ 149,000 $ 149,000
------------------ ------------------ ------------------
Conversion of notes payable related party into common stock $ - $ 865,868 $ 865,868
------------------ ------------------ ------------------
Common stock issued for services and expenses $ - $ 25,750 $ 48,500
------------------ ------------------ ------------------
The accompanying notes are an integral part of these financial statements
- 7 -
VHS NETWORK, INC.
Notes to Financial Statements
June 30, 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.
After the merger, however, 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.
-8-
VHS NETWORK, INC.
Notes to Financial Statements
June 30, 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.
-9-
VHS NETWORK, INC.
Notes to Financial Statements
June 30, 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 June 30, 2001 and
December 31, 2000 were $20,281 and $25,205, respectively.
Inventories
-----------
Inventories are stated at the lower of cost (first in, first out
method) or market.
-10-
VHS NETWORK, INC.
Notes to Financial Statements
June 30, 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 and six month period ending
June 30, 2001 was $1,578 and 3,156, respectively, 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.
-11-
VHS NETWORK, INC.
Notes to Financial Statements
June 30, 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 and six-month
periods ended June 30, 2001 and 2000, and the year ended December 31,
2000, were 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.
-12-
VHS NETWORK, INC.
Notes to Financial Statements
June 30, 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 and six-month period ending June
30, 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 and six-month period ending June 30, 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.
-13-
VHS NETWORK, INC.
Notes to Financial Statements
June 30, 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.
-14-
VHS NETWORK, INC.
Notes to Financial Statements
June 30, 2001
4. INCOME TAXES
No provision for federal and state taxes has been recorded for the
three and six months periods ended June 30, 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 and six
months ending June 30, 2001, the Company incurred management fees of
$75,000 and 150,000, respectively. For the three and six months period
ending June 30, 2000, the Company incurred $75,000 and $120,000,
respectively.
Amounts due Groupmark pursuant to this management service agreement and
other borrowings as of June 30, 2001 and December 31, 2000 are $529,802
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. The Company made payments to Groupmark totaling $37,371 during
the three months ending June 30, 2001
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. $6,000
and $2,000 during the three and six month period ending June 30, 2001.
-15-
VHS NETWORK, INC.
Notes to Financial Statements
June 30, 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.
-16-
VHS NETWORK, INC.
Notes to Financial Statements
June 30, 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 August 10, 2001, the IRS has not notified Management
regarding the status of the investigation. Management is in the process
of achieving resolution regarding this matter.
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.
-17-
VHS NETWORK, INC.
Notes to Financial Statements
June 30, 2001
7. INTANGIBLE ASSETS
Intangible assets at March 31, 2000 consist of the following:
Domain name $ 24,000
Less: Accumulated amortization (9,670)
-------------------
$ 14,330
==================
Amortization expense for the three and six months ended June, 2001was
$4,000 and $2,000, respectively. Amortization expense for the three and
six months ended June 2000 was $1,670 and $0, respectively, and for the
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
Revenues for the three and six months ending June 30, 2001 were
primarily from one customer.
-18-
VHS NETWORK, INC.
Notes to Financial Statements
June 30, 2001
10. Plan of Reorganization
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.
-19-
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 June 30, 2001.
We had sales in North America of finished goods which we sourced in China.
For the three months ended June 30, 2001 we had revenues of $63,215 and for the
six months ended June 30, 2000, VHSN had revenues of $210,099. The gross margin
on sales was a deficit of $1,548. This negative position was due primarily to
returns of merchandise. A significant portion of the revenues received came from
one customer that were sourced from the website but negotiated by local sales
people. We anticipate that future sales will be made to the same customer.
Operating Expenses for the three months ended June 30, 2001 were $112,084
compared with Operating Expenses of $464,591 for the three months ended June 30,
2000. The significantly lower operating expenses for the three months ended June
30, 2001 are attributable to a number of factors. As we have completed the China
eMall and Exodus acquisitions, we have not incurred the professional fees that
were incurred for the three month period ended June 30, 2000 and which were
associated with the acquisitions. For the three months ended June 30, 2001
professional fees were $20,332 and for the three months ended June 30, 2000 they
were $93,658. Further, our general office expenses in China have also decreased
to $5,515 from $28,637 primarily due to one-time set up costs in the China
offices. We incurred management fees of $75,000 for the three months ended June
30, 2001 and $150,000 for the six months ended June 30, 2001. These management
fees cover most administrative and management functions. Groupmark provides the
administrative and management support to us. Amounts due to Groupmark Canada
Limited as of June 30, 2001 were $529,802 and for December 31, 2000 were
$332,027. We had borrowed $85,146 from Groupmark Canada Limited to finance our
operations. We made payments of $37,371 during the three months ended June 31,
2001 against that obligation.
Dr. Gang Chai is a member of the Board of Directors and the original founder of
China e-Mall and is also a majority shareholder of McVicar Minerals Corp.
McVicar has provided services to VHSN through a consulting agreement and has
been paid $6,000 and $2,000 during the three and six month period ended June 30,
2001.
Results of the six months ended June 31, 2001.
Revenues for the six month period ended June 30, 2001 were $210,099. During the
six month period ended June 30, 2000 we had no operations and as a result
revenues for the six month period ended June 30, 2000 were $0.
Operating expenses for the six months ended June 30, 2001 were $214,424.
Operating expenses for the six months ended June 30, 2000 were $567,613. Our
operating expenses were significantly lower for the six months ended June 20,
2001 because we did not incur the non-recurring expenses related to
acquisitions, nor did we incur the professional and management fees associated
with the acquisitions. Professional fees for the six months ended June 30, 2001
were $31,154 and for the six months ended June 30, 2000 they were $101,701. Our
operating expenses in China decreased to $10,095 from $28,637 for the six months
ended June 30, 2000 because we are no longer incurring one-time set up fees of
our office.
Liquidity and Capital Resources
We achieved no revenues from operations in the 2000 fiscal year. Revenues during
the three months ended June 30, 2001 were $63,215 with a deficit of $1,548. This
negative position was due primarily to returns of merchandise.
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
There have been no issuances of stock since December 31, 2001. Total assets
decreased to $228,265 on June 30, 2001 compared with total assets of $241,117 on
December 31, 2000. The decrease is due primarily as a result of depreciation on
assets and depletion of cash reserves.
Total liabilities increased to $929,808 on June 30, 2001 compared with total
liabilities of $742,677 on December 31, 2000. The increase is due primarily to
unpaid management fees accrued to date and borrowings to finance operations. The
number of issued common shares of VHSN was 19,560,268 on December 31, 2000 and
remained the same on August 13, 2001. Shareholders' equity decreased from
($501,560) to ($701,543) during the first six months of 2001.
Future Prospects
For the three months ended June 30, 2001, a significant portion of our revenues
were derived from one customer. However, we also had revenue from three new
clients, and we are currently engaged in negotiations and quotes for other
prospective clients. In the past, our revenue was derived solely from one
customer. We believe that the internet web site of VHSN has recently attracted
increased exposure and interest.
We are of the view that VHSN has demonstrated modest growth potential as
measured against the general downturn in the Internet/e-commerce economy. We
also believe that growth will continue, due in part to increased web site
interest and sales efforts.
We are focused on finding operational efficiencies in the future in order to
minimize our operating deficit.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities/Recent Sales of Unregistered Securities.
None.
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. The essential terms of the Agreement are
noted in the 10-QSB of VHSN filed for the quarter ended March 31, 2001.
Management of VHSN has recently put the Branson Agreement on hold. Management
has reconsidered the terms of the Agreement, in particular the 20 to 1 reverse
stock split, and its impact on shareholders of VHSN. Accordingly, management is
reviewing all available options including termination and abandonment of the
Branson Agreement or an amendment of its key terms and conditions.
Item 6. Exhibits and Reports on Form 8-K.
---------
(a) Exhibits
None.
27. Financial Data Schedule
(b) Reports on Form 8-K.
None.
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: August 13, 2001 By: /s/ Elwin Cathcart
- --------------------- ----------------------
Elwin Cathcart, Chief Executive Officer
(principal financial and accounting officer
and duly authorized signing officer)