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 September 30,2001
-------------------------------------------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _________________ to _________________
Commission file number: 333-412162
VHS NETWORK, INC.
(Exact name of small business issuer as specified in its charter)
FLORIDA 65-0656668
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
301-5170 DIXIE ROAD
MISSISSAUGA, ONTARIO, CANADA L4W 1E3
(905) 238-9398
(Address of principal executive offices)
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: September 21, 2001, 19,560, 268
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
------
VHS NETWORK, INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001,
AND THE YEAR ENDED DECEMBER 31, 2000
C O N T E N T S
---------------
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 8-18
VHS NETWORK, INC.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
September 30, December 31,
2001 2000
-------------------- --------------------
(unaudited)
ASSETS
Current Assets
Cash $ 6,846 $ 25,205
Restricted Cash - -
Inventory 88,458 111,999
-------------------- --------------------
Total current assets 95,304 137,204
Property and Equipment
Furniture and Equipment 18,940 18,940
Accumulated Depreciation (6,626) (1,892)
-------------------- --------------------
Total property and equipment 12,314 17,048
Intangible assets, net 12,330 18,330
Other Assets
Other receivables 2,180 761
Prepaids and deposits 67,774 67,774
-------------------- --------------------
Total other assets 69,954 68,535
-------------------- --------------------
Total assets $ 189,902 $ 241,117
==================== ====================
LIABILITIES
Current Liabilities
Accounts payable $ 69,922 $ 60,650
-------------------- --------------------
Total current liabilities 69,922 60,650
Long Term Liabilities
Management fees payable, related party 317,257 150,000
Advances from related party 23,929 -
Notes payable, related party 182,027 182,027
Reserve for loss contingencies 350,000 350,000
-------------------- --------------------
Total long term liabilities 873,213 682,027
-------------------- --------------------
Total liabilities 943,135 742,677
-------------------- --------------------
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 (4,317,200) (4,065,527)
-------------------- --------------------
Total shareholders' equity (753,233) (501,560)
-------------------- --------------------
Total liabilities and shareholders' equity $ 189,902 $ 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 NINE MONTHS ENDED SEPTEMBER 30, 2001
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2001
---- ----
(UNAUDITED) (UNAUDITED)
INCOME:
Sales $ 36,212 $ 246,311
Cost of goods sold (21,717) (214,389)
------------------------- --------------------
Gross margin 14,495 31,922
------------------------- --------------------
OPERATING EXPENSES:
Agency fees 3,042 7,712
Consulting fees 1,449 5,310
General and administrative (549) 6,577
Management fees - 150,000
Professional fees 23,991 55,145
Office expense-China 4,500 14,595
Depreciation and amortization expense 3,578 10,734
Inventory allowance 30,000 30,000
Other 174 536
------------------------- --------------------
Total operating expenses 66,185 280,609
------------------------- --------------------
OTHER (INCOME) AND EXPENSES:
Currency exchange loss - 2,986
------------------------- --------------------
Total other (income) and expense - 2,986
------------------------- --------------------
Net loss before taxes (51,690) (251,673)
------------------------- --------------------
Income taxes - -
------------------------- --------------------
Net loss (51,690) $ (251,673)
========================= ====================
Net loss per common share - Basic (0.003) $ (0.013)
========================= ====================
Weighted average number of
common shares - Basic 19,560,268 19,560,268
========================= ====================
Net loss per common share - Diluted (0.003) $ (0.013)
========================= ====================
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 NINE MONTHS ENDED SEPTEMBER 30, 2001
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 2000
---- ----
(UNAUDITED) (UNAUDITED)
Income
Sales $ - $ -
Cost of goods sold - -
------------------------- --------------------
Gross margin - -
------------------------- --------------------
OPERATING EXPENSES:
Agency fees 2,861 45,390
Consulting fees 12,815 36,501
General and administrative 725 32,654
Management fees 75,000 220,000
Professional fees 10,876 87,577
Office expense-China 10,380 39,017
Depreciation and amortization expense 2,474 5,088
Non recurring expense - 216,515
------------------------- --------------------
Total operating expenses 115,131 682,742
------------------------- --------------------
OTHER (INCOME) AND EXPENSES:
Currency exchange (gain) loss 1,090 935
Interest (income) (7,724) (9,516)
Interest expense 287 505
------------------------- --------------------
Total other (income) and expense (6,347) (8,076)
------------------------- --------------------
Net loss before taxes (108,784) (674,666)
------------------------- --------------------
Income taxes - -
------------------------- --------------------
Net loss (108,784) $ (674,666)
========================= ====================
Net loss per common share - Basic (0.006) $ (0.041)
========================= ====================
Weighted average number of
common shares - Basic 19,438,747 16,526,242
========================= ====================
Net loss per common share - Diluted (0.006) $ (0.041)
========================= ====================
Weighted average number of
19,438,747 16,526,242
========================= ====================
The accompanying notes are an integral part of these financial statements.
- 4 -
VHS NETWORK, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 (UNAUDITED) AND THE YEAR ENDED
DECEMBER 31, 2000
Preferred
Common 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)
---------- ------- ------ ------ --------------- ----------- ------------
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 19,560,26 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)
---------- ------- ------ ------ --------------- ----------- ------------
Net loss for the period - - - - - (51,690) (51,690)
---------- ------- ------ ------ --------------- ----------- ------------
BALANCE SEPTEMBER 30, 2001 19,560,268 $ 19,559 - $ - $ 3,544,408 $(4,317,200) $(753,233)
---------- ------- ------ ------ --------------- ----------- ------------
The accompanying notes are an integral part of these financial statements.
-5-
VHS NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000, AND THE YEAR ENDED
DECEMBER 31, 2000
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000
------------------------ --------------------
Net income (loss) $ (251,673) $ (674,666)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Issuance of common stock for services - 25,750
Issuance of common stock for expenses - -
Acquisition of Exodus Corporation - 125,000
Inventory valuation allowance 30,000 -
Amortization of intangible assets 6,000 3,669
Depreciation 4,734 1,419
------------------------ --------------------
Cash flow from operating activities:
Changes in assets and liabilities
Receivables $ (1,419) $ (11,717)
Inventory (6,459) -
Accounts payable 9,272 (12,951)
Accrued expenses - (37,000)
------------------------ --------------------
CASH FLOW USED IN OPERATING ACTIVITIES $ (209,545) $ (580,496)
------------------------ --------------------
Cash flow from investing activities:
Purchase of furniture and equipment - $ (18,940)
------------------------ --------------------
NET CASH USED IN INVESTING ACTIVITIES - $ (18,940)
------------------------ --------------------
Cash flow from financing activities:
Management fees payable, related party $ 150,000 $ 150,000
Borrowings under notes payable, related party - 70,000
Payments on notes payable, related party - (320,973)
Advances from related party 78,557 -
Payments on advances from related party (37,371) -
Restricted cash - (400,000)
Proceeds from exercise of warrants - 105,000
Proceeds from sale of stock - 1,060,000
------------------------ --------------------
NET CASH GENERATED BY FINANCING ACTIVITIES $ 191,186 $ 664,027
------------------------ --------------------
(Decrease) Increase in cash and cash equivalents (18,359) 64,591
Balance at beginning of year 25,205 533
------------------------ --------------------
Balance at end of year $ 6,846 $ 65,124
======================== ====================
The accompanying notes are an integral part of these financial statements.
-6-
VHS NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000, AND THE YEAR ENDED
DECEMBER 31, 2000 (CONTINUED)
SUPPLEMENTARY DISCLOSURE:
Cash paid for interest $ - $ 505
----------------------- ----------------------
Cash paid for taxes - -
----------------------- ----------------------
Common Stock issued for compensation - $ 71,500
----------------------- ----------------------
Conversion of debt into common stock - $ 22,000
----------------------- ----------------------
Common stock issued for acquisitions - $ 149,000
----------------------- ----------------------
Conversion of notes payable related party into common stock - $ 865,868
----------------------- ----------------------
Common stock issued for services and expenses - $ 25,750
----------------------- ----------------------
The accompanying notes are an integral part of these financial statements.
-7-
VHS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 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 that offered a wide range of products and
services to consumers through the medium of videotape. 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.
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:
VHS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
1. NATURE OF OPERATIONS (CONTINUED)
Operations (continued)
- -----------------------
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.
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.
VHS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Principles of Consolidation (continued)
- ------------------------------------------
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 September 30, 2001 and December 31,
2000 were $6,846 and $25,205, respectively.
Inventories
- -----------
Inventories are stated at the lower of cost (first in, first out method) or
market.
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 nine month period ending September
30, 2001 was $1,578 and 4,734, respectively, and for the year ended December 31,
2000 was $1,892.
VHS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
In March 2000, the FASB released Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation." This Interpretation addresses
certain practice issues related to APB Opinion No. 25. The provisions of this
Interpretation are effective July 1, 2000, and except for specific transactions
noted in paragraphs 94-96 of this Interpretation, shall be applied prospectively
to new awards, exchanges of awards in business combinations, modifications to an
outstanding award, and exchanges in grantee status that occur on or after that
date. Certain events and practices covered in this Interpretation have different
application dates, and events that occur after an application date but prior to
July 1, 2000, shall be recognized only on a prospective basis. Accordingly, no
adjustment shall be made upon initial application of the Interpretation to
financial statements for periods prior to July 1, 2000. Thus, any compensation
cost measured upon initial application of this Interpretation that is attributed
to periods prior to July 1, 2000 shall not be recognized. The adoption of this
interpretation had no impact.
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.
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. Foreign
currency translation gains and losses were de minimis during the three months
ended September 30, 2001.
Revenue
- -------
Sales are recorded for products upon shipment of product to customers and
transfer of title under standard commercial terms.
VHS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 nine-month periods ended September 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.
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.
VHS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Advertising Costs
- ------------------
The Company expenses advertising costs as they are incurred. Advertising costs
for the three-month and nine-month period ending June 30, 2001 were $-0- and
$615, respectively, 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.
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.
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ('SFAS 141"), "Business Combinations"
which supersedes Accounting Principles Board ("APB") Opinion No. 16, "Business
Combinations." SFAS 141 requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. In addition, SFAS 141 establishes specific
criteria for the recognition of intangible assets separately from goodwill and
requires unallocated negative goodwill to be written off immediately as an
extraordinary gain. The provisions of SFAS 141 are required to be adopted
July 1, 2001. The adoption of SFAS 141 will not change the method of
accounting used in previous business combinations including those the Company
accounted for under the pooling-of-interests method.
VHS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recently Issued Accounting Pronouncements (continued)
- ---------------------------------------------------------
In July 2001, the FASB also issued Statement of Financial Accounting Standards
No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," which is effective
for fiscal years beginning after December 15, 2001. Certain provisions shall
also be applied to acquisitions initiated subsequent to June 30, 2001. SFAS 142
supercedes APB Opinion No. 17 "Intangible Assets" and requires, among other
things, the discontinuance of amortization related to goodwill and indefinite
lived intangible assets. These assets will then be subject to an impairment
test at least annually. In addition, the standard includes provisions upon
adoption for the reclassification of certain existing recognized intangibles as
goodwill, reassessment of the useful lives of existing recognized intangibles
and reclassification of certain intangibles out of previously reported goodwill.
The Company will adopt SFAS 142 effective January 1, 2002. Currently, The
Company does not have any goodwill or indefinite lived intangible assets.
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 an additional reserve of $30,000 to reflect estimated
fair value of the printed art reproductions.
Inventory also consists of accessories for cell phones. The value of these
items at September 30, 2001 was $6,458.
4. INCOME TAXES
No provision for federal and state taxes has been recorded for the three- and
nine-month periods ended September 30, 2001 and 2000, and the year ended
December 31, 2000, since the Company incurred net operating losses for these
periods.
VHS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
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 nine months
ending September 30, 2001, the Company incurred management fees of $-0- and
150,000, respectively. For the three and nine months period ending September
30, 2000, the Company incurred $75,000 and $220,000, respectively.
Amounts due Groupmark pursuant to this management service agreement and other
borrowings as of September 30, 2001 and December 31, 2000 are $523,213 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 nine months ending
September 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. $2,000 and $8,000 during the
three- and nine-month periods ending September 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.
VHS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Video Home Shopping, Inc., a Tennessee Corporation (continued)
- ---------------------------------------------------------------------
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.
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 potential liability. As of November 6, 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.
VHS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Going Concern Uncertainties (continued)
- ------------------------------------------
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.
7. INTANGIBLE ASSETS
Intangible assets at September 30, 2001 consist of the following:
Domain name $ 24,000
Less: Accumulated amortization (11,670)
-------------
$ 12,330
=============
Amortization expense for the three and nine months ended September, 2001was
$2,000 and $6,000, respectively. Amortization expense for the three and six
months ended June 2000 was $1,670 and $0, respectively.
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.
VHS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
9. MAJOR CUSTOMER
All of the revenue for the three and nine months ending September 30, 2001 were
primarily from one customer.
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.
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 (the "Corporation" or "we" or "our") 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 purchasers of
its products and develop its 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 for three months ended September 30, 2001.
During the three months ended September 30, 2001, we had sales in North America
of finished goods, which were sourced primarily from China. We also developed
sales of finished goods which were sourced in North America.
For the three months ended September 30, 2001 we had revenues of $36,212 and for
the nine months ended September 30, 2001 we reported revenues of $246,311 with a
gross margin on sales of $31,922. We anticipate that this margin of
approximately 13% will increase substantially to approximately 25% as sales
volume increases.
Operating expenses for the three months ended September 30, 2001 were $66,185
compared to operating expense of $115,131 for the three months ended September
30, 2000. This decrease in operating expenses is attributed primarily to the
fact that we did not incur additional management fees to Groupmark Canada
Limited during the three month period ended September 30, 2001, however this was
offset by the fact that there were increased professional fees incurred in
connection with the filing of a registration statement with the U.S. Securities
and Exchange Commission.
Management and administrative functions of the Corporation are provided by
Groupmark Canada Limited. Management and administrative fees totaled $150,000
for the nine months ended September 30, 2001. Amounts due to Groupmark Canada
Limited as at September 30, 2001 were $523,213. The amount owed to Groupmark
Canada Limited is comprised of accrued management fees of $317,257, advances of
$23,929 and notes payable of $182,027.
Results for the nine months ended September 30, 2001.
For the nine months ended September 30, 2001, we had revenues of $246,311, most
of which were attributable to the six month period from January 1, 2001 through
June 30, 2001, while revenues for the nine month period ended September 30, 2000
was $0. The sales were primarily to one customer.
Operating expenses for the nine months ended September 30, 2001 were $280,609 as
compared to $682,742 for the nine months ended September 30, 2000. The reduction
in operating expenses is largely attributable to lower management fees of
$150,000 compared to $220,000 and non-recurring expense of $536 for the current
period as compared to $216,515 for the nine months September 30, 2000.
Non-recurring expenses in the prior period was related to one-time acquisition
costs.
Liquidity and Capital Resources
Although revenues were considerably higher during the nine month period ended
September 30, 2001, we experienced a loss of $251,673 from operations, as
compared to $674,666 for the nine month period ended September 30, 2000. For
the nine month period ended September 30, 2001, cash flow used in operating
activities was ($209,545), while cash flow used in operating activities was
($580,496) for the nine month period ended September 30, 2000. A significant
component of the cash provided for operations is from advances from Grourpmark
Canada Limited, which totaled, $78,557 for the nine month period ended September
30, 2001, and we made payments on these advances totaling $37,371, during the
nine month period ended September 30, 2001. We believe the general improvement
in our cash flow and liquidity will continue as we reach our sales targets in
the future.
We believe that our ability to continue as a going concern is dependent upon our
ability to increase sales and to obtain capital funding as needed to fund our
operations.
Changes in Financial Position
There has been no issuance of stock during this fiscal period.
Total assets decreased to $189,902 on September 30, 2001 compared with total
assets of $228,265 on June 30, 2001. The decrease is due primarily to a
reduction in market value of inventories and a decrease in cash.
Total liabilities increased to $943,135 on September 30, 2001 from $929,265 on
June 30, 2001. The increase in total liabilities is due primarily to unpaid
management fees to date and short-term borrowings necessary for the financing of
operations. Shareholders equity decreased from ($701,543) to ($753,233) during
the third quarter of 2001.
Future Prospects
We continue to focus on increasing our operational efficiencies in order to
minimize our deficit.
We believe that we have made significant progress during the first nine months
of the current fiscal year. During this period we negotiated several new
contracts with new clients for our products and services which should result in
future revenue. We believe that our future sales forecasts will be in line with
our budgeted forecasts. This may allow us to achieve positive cash flow in the
future.
We believe that the general downturn in the economy, along with the events of
September 11, 2001, have resulted in a slowdown of purchases by merchants. This
is a growing concern for all Business-to-Business e-commerce companies. We
believe, however, that this climate may assist us in the delivery of products on
an "as needed" basis. Thus, we believe that we are experiencing an increase in
the volume of traffic to our internet site from potential and existing customers
who are reluctant to travel great distances to trade shows or to foreign
exhibits.
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.
None
Item 6. Exhibits and Reports.
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.
(Registrant)
/s/Elwin Cathcart
Elwin Cathcart, Chief Executive Officer
(principle financial and accounting
officer and duly authorized signing officer)
Date: November 9, 2001