U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ______________ to ______________.
Commission File No.: 000-27777
Innovation Holdings, Inc. f/k/a Blagman Media International, Inc.
-------------------------------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
Nevada 91-192-3501
---------------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
14622 Ventura Blvd., Suite 1015
Sherman Oaks, CA 91403
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 310.788.5444
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(G) of the Act:
COMMON STOCK-- $.001 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 2,621,372,639 shares of common stock
as of September 24, 2003.
Transitional Small Business Disclosure Format (check one): YES [ ] NO [X]
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAGE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF
JUNE 30, 2003 (UNAUDITED) 1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003
AND 2002 (UNAUDITED) 2
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE
30, 2003 (UNAUDITED) 3
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED) 4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS AS OF JUNE 30, 2003 (UNAUDITED) 5-12
ITEM 2. MANAGEMENT DISCUSSUIB AND ANALYSIS OR PLAN
OF OPERATIONS 12
ITEM 3. CONTROLS AND PROCEDURES 16
PART II - OTHER INFORMATION 16
ITEM 1. LEGAL PROCEEDINGS 16
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 16
ITEM 5. OTHER INFORMATION 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 17
INNOVATION HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY BLAGMAN MEDIA INTERNATIONAL, INC.)
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2003
-------------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash $ 35
Accounts receivable, net of allowance for doubtful accounts of $18,667 49,792
Prepaid expenses, media and other current assets 244,110
Assets related to discontinued operations 9,645
------------
Total Current Assets 303,582
------------
PROPERTY & EQUIPMENT - NET 87,956
------------
TOTAL ASSETS $ 391,538
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Notes and loans payable - current portion $ 162,775
Accounts payable and accrued expenses 1,527,336
Accrued compensation - officers 1,655,238
Deferred revenue 4,982
Due to officer 76,418
Capital lease obligation - current portion 33,540
Liabilities related to discontinued operations 10,400,999
------------
Total Current Liabilities 13,861,288
------------
LONG-TERM LIABILITIES
Notes and loans payable 581,950
------------
TOTAL LIABILITIES 14,443,238
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY
Preferred stock, series A, $.001 par value, super convertible redeemable preferred stock,
10,000,000 shares authorized, 0 shares issued and outstanding -
Preferred stock, series B, $.001 par value, super convertible redeemable preferred stock, 100
shares authorized, 100 shares issued and outstanding 1
Common stock, $.001 par value, 20,000,000,000 shares authorized 2,621,372,639 shares issued and
outstanding 2,621,373
Additional paid-in capital 37,900,695
Accumulated deficit (52,047,527)
Deferred stock based compensation (2,526,242)
------------
Total Stockholders' Deficiency (14,051,700)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 391,538
============
See accompanying notes to condensed consolidated financial statements.
1
INNOVATION HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY BLAGMAN MEDIA INTERNATIONAL, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(UNAUDITED)
For The Three For The Three For The Six For The Six
Months Ended Months Ended Months Ended Months Ended
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
--------------- --------------- --------------- ---------------
REVENUES - NET $ - $ 345,817 $ 78,524 $ 394,079
--------------- --------------- --------------- ---------------
OPERATING EXPENSES
Selling, general and administrative 2,187,621 3,249,159 3,068,655 6,878,515
Depreciation 7,228 4,247 14,945 8,402
--------------- --------------- --------------- ---------------
Total Operating Expenses 2,194,849 3,253,406 3,083,600 6,886,917
--------------- --------------- --------------- ---------------
LOSS FROM OPERATIONS (2,194,849) (2,907,589) (3,005,076) (6,492,838)
--------------- --------------- --------------- ---------------
OTHER INCOME (EXPENSE)
Interest expense (6,596) (14,940) (26,868) (15,758)
Interest income 4 - 4 497
--------------- --------------- --------------- ---------------
Total Other Income (Expense) (6,592) (14,940) (26,864) (15,261)
--------------- --------------- --------------- ---------------
LOSS FROM CONTINUING OPERATIONS (2,201,441) (2,922,529) (3,031,940) (6,508,099)
LOSS FROM DISCONTINUED OPERATIONS - (1,519,631) - (2,266,216)
--------------- --------------- --------------- ---------------
NET LOSS $ (2,201,441) $ (4,442,160) $ (3,031,940) $ (8,774,315)
=============== =============== =============== ===============
NET LOSS PER COMMON SHARE - BASIC AND DILUTED -
CONTINUING OPERATIONS $ (0.01) $ (0.00) $ (0.01) $ (0.00)
=============== =============== =============== ===============
NET LOSS PER COMMON SHARE - BASIC AND DILUTED -
DISCONTINUED OPERATIONS $ - $ - $ - $ -
=============== =============== =============== ===============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
- BASIC AND DILUTED 401,045,409 4,779,526,961 404,079,671 4,070,037,306
=============== =============== =============== ===============
See accompanying notes to condensed consolidated financial statements.
2
INNOVATION HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY BLAGMAN MEDIA INTERNATIONAL, INC.)
CONDENSED CONSOLIDATED STATEMENT OF CHANGES ON STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2003
--------------------------------------
(UNAUDITED)
Additional
Preferred Stock Common Stock Paid-In
Shares Amount Shares Amount Capital
-------- ------ -------------- ----------- -----------
Balance, December 31, 2002 100 $ 1 3,819,639 $ 3,819 $ 35,587,400
Stock issued for legal fees - - 6,245,000 6,245 868,055
Stock issued for consulting - - 6,570,000 6,570 1,150,475
Stock issued for wages - - 270,000 270 20,320
Stock issued for Board fees - - 631,000 631 219,869
Deferred stock compensation - - - - -
Stock issued for legal fees - - 20,000,000 20,000 40,000
Stock issued for consulting - - 2,532,888,000 2,532,889 32,465
Stock issued for wages - - 51,000,000 51,000 -
Stock cancelled in association
with Board fees - - (51,000) (51) (17,799
Deferred stock compensation - - - - -
Amortization of deferred stock
compensation - - - - -
Net loss - - - - -
-------- ------ -------------- ------------ ------------
BALANCE, JUNE 30, 2003 100 1 2,621,372,639 2,621,373 37,900,695
======== ====== ============== ============ ============
Deferred Stock
Accumulated Based
Deficit Compensation Total
------------- ------------- -----------------
Balance, December 31, 2002 $ (49,015,586) $ - $ (13,424,366)
Stock issued for legal fees - - 874,300
Stock issued for consulting - - 1,157,045
Stock issued for wages - - 20,500
Stock issued for Board fees - - 220,500
Deferred stock compensation - (933,280) (933,280)
Stock issued for legal fees - - 60,000
Stock issued for consulting - - 2,565,353
Stock issued for wages - - 51,000
Stock cancelled in association
with Board fees - - (17,850)
Deferred stock compensation - (2,526,242) (2,526,242)
Amortization of deferred stock
compensation - 933,280 933,280
Net loss (3,031,940) - (3,031,940)
------------- ------------ --------------
BALANCE, JUNE 30, 2003 (52,,047,526) (2,526,242) (14,051,700)
============= ============== ===============
See accompanying notes to condensed consolidated financial statements.
3
INNOVATION HOLDINGS, INC. AND SUBSIDIARIES
(FORMERLY BLAGMAN MEDIA INTERNATIONAL, INC.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Six For the Six
Months Ended Months Ended
June 30, 2003 June 30, 2002
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,031,940) $(8,774,316)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization 16,946 178,491
Provision for bad debt - 594,000
Loss on sale and retirement of fixed assets - 226,433
Stock issued for compensation and services 2,404,607 6,410,123
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (18,013) 911,562
Prepaid expenses, media and other current assets 97,451 350,213
Prepaid and refundable income taxes - (364,233)
Deposits 4,576 -
Increase (decrease) in:
Accounts payable and accrued expenses (15,641) 261,524
Accrued compensation - officers 340,846 815,161
Deferred revenue 4,982 -
----------- -----------
Net Cash (Used In) Provided By Operating Activities (196,186) 608,958
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposit for investment - (49,465)
Payments for deposits - (6,527)
Purchase of property and equipment - (5,240)
Payment for acquisition, net of cash acquired - (513,719)
----------- -----------
Net Cash Used In Investing Activities - (574,951)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Due to officer (36,426) -
Proceeds from notes and loans payable 249,225 -
Payment on notes and loans payable - (296,940)
Cash overdraft (decrease) increase (11,782) 110,599
Payments under capital lease obligation (4,796) -
----------- -----------
Net Cash Provided By (Used In) Financing Activities 196,221 (186,341)
----------- -----------
NET INCREASE (DECREASE) IN CASH 35 (152,334)
CASH - BEGINNING OF PERIOD - 199,924
----------- -----------
CASH - END OF PERIOD $ 35 $ 47,590
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 26,868 $ -
=========== ===========
See accompanying notes to condensed consolidated financial statements.
4
NOTE 1 BASIS OF PRESENTATION
On February 10, 2003, the stockholders of the Blagman Media
International, Inc. approved an amendment to the articles of
incorporation to change its name to Innovation Holdings, Inc.
The accompanying unaudited condensed consolidated financial statements
include the accounts of Innovation Holdings, Inc. and its subsidiaries
(the "Company"). All significant inter-company transactions and balances
have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally
accepted in the United States of America and the rules and regulations of
the Securities and Exchange Commission for interim financial information.
Accordingly, they do not include all the information necessary for a
comprehensive presentation of financial position and results of
operations.
It is management's opinion, however, that all material adjustments
(consisting of normal recurring adjustments) have been made which are
necessary for a fair financial statement presentation. The results for
the interim period are not necessarily indicative of the results to be
expected for the year.
The accompanying condensed consolidated financial statements and the
information included under the heading "Management's Discussion and
Analysis or Plan of Operation" should be read in conjunction with the
Company's Annual Report Form 10-KSB for the year ended December 31, 2002,
filed on May 16, 2003.
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of
the financial statements and revenues and expenses during the reported
period. Actual results could differ from those estimates.
5
Certain reclassifications have been made to the prior period consolidated
financial statements to conform to the current presentation.
NOTE 2 RECENT ACCOUNTING PRONOUNCEMENTS
In April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 149, "Amendment
of Statement 133 on Derivative Instruments and Hedging Activities". SFAS
No. 149 amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments embedded
in other contracts (collectively referred to as derivatives) and for
hedging activities under SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The changes in SFAS No. 149 improve
financial reporting by requiring that contracts with comparable
characteristics be accounted for similarly. This statement is effective
for contracts entered into or modified after June 30, 2003 and all of its
provisions should be applied prospectively.
The FASB has issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." The
Statement improves the accounting for certain financial instruments that,
under previous guidance, issuers could account for as equity. The new
Statement requires that those instruments be classified as liabilities in
statements of financial position.
SFAS No. 150 affects the issuer's accounting for three types of
freestanding financial instruments. One type is mandatorily redeemable
shares, which the issuing company is obligated to buy back in exchange
for cash or other assets. A second type, which includes put options and
forward purchase contracts, involves instruments that do or may require
the issuer to buy back some of its shares in exchange for cash or other
assets. The third type of instruments that are liabilities under this
Statement is obligations that can be settled with shares, the monetary
value of which is fixed, tied solely or predominantly to a variable such
as a market index, or varies inversely with the value of the issuers'
shares. SFAS No. 150 does not apply to features embedded in a financial
instrument that is not a derivative in its entirety.
In addition to its requirements for the classification and measurement of
financial instruments in its scope, SFAS No. 150 also requires
disclosures about alternative ways of settling the instruments and the
capital structure of entities, all of whose shares are mandatorily
redeemable. Most of the guidance in SFAS No. 150 is effective for all
financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. For private companies, mandatorily
redeemable financial instruments are subject to the provisions of this
Statement for the fiscal period beginning after December 15, 2003.
Management does not expect the impact from the adoption of these
statements to have a material impact on the Company's consolidated
financial position or results of operations.
6
NOTE 3 DISCONTINUED OPERATIONS
Pursuant to an Agreement and Plan of Reorganization dated March 4, 2002,
effective March 22, 2002, the Company acquired 100% of the outstanding
stock of Century Media, Inc., a California corporation ("Century") by
merging Blagman USA, Inc., into Century. Pursuant to the transaction, the
Company acquired all of the capital stock of Century for cash and common
stock of the Company, assumed current debt obligations and unexercised
option and stock appreciation rights of Century and assumed accrued and
ongoing trade and other ordinary course obligations and relationships.
Prior to the closing, the parties negotiated with the holders of portions
of the outstanding Century debt to restructure the term and payments of
such debt and in certain cases, to allow for the issuance of shares of
common stock of the Company in lieu of cash payments. Currently, the
Company remains obligated on certain contingent obligations including
$1.25 million from the TMT Media Corporation acquisition by Century in
2000.
At closing, holders of Century shares received twenty cents per Century
share, of which two and one-half cents was payable in cash and the
balance of seventeen and one-half cents was payable by the delivery of
shares of common stock of the Company, for a total of $903,292 and 14,377
options.
In relation to the acquisition, the Company recorded goodwill in the
amount of $3,048,484, of which $2,321,360 was on the balance sheet of
Century Media on the acquisition date, and recorded an intangible asset
of $5,855,286 related to the customer list acquired. The Company
evaluated the customer list and assigned it a three-year life.
The Company's management performs on-going business reviews based on
quantitative and qualitative measures and assesses the need to record
impairment losses when impairment indicators are identified. In the third
quarter of 2002, the review made by management of the Company determined
that the goodwill related to Century's business and the customer list
acquired in the acquisition were not recoverable. The Company then
recorded impairment charges of $3,048,484 and $5,599,007 (net of
amortization) related to the goodwill and customer list, respectively.
In December 2002, management of the Company determined that it would no
longer invest its capital and human resources into Century and entered
into a plan to discontinue and abandon the operations of Century.
Effective with the fourth quarter of 2002, this operating entity is
reflected as a discontinued operation.
For the six months ended June 30, 2003, Century was not operating and
therefore did not have any revenues or operating expenses. For the period
from acquisition to June 30, 2002, revenues and loss from discontinued
operations were as follows:
Revenues $ 3,327,609
Net loss from discontinued operations $ 2,266,216
7
Assets and liabilities of the discontinued operations as of June 30, 2003
were as follows:
Assets
Cash $ 313
Prepaid expenses 7,005
Deposits 2,327
---------------
Total Assets $ 9,645
---------------
Liabilities
Accounts payable $ 5,606,399
Accrued expenses 1,113,699
Deferred revenue 1,364,866
Notes payable 2,286,755
Capital lease obligation 29,280
---------------
Total Liabilities 10,400,999
---------------
Net liabilities of discontinued operations $ 10,391,354
===============
The creditors of Century Media have filed various actions for breach of
contract. The actions arose out of obligations incurred by Century Media
prior to the merger with the Company. The Company disputes these claims
and is actively seeking to resolve these matters.
NOTE 4 NOTES AND LOANS PAYABLE
The following schedule reflects notes and loans payable as of June 30,
2003:
Note payable, interest at 6% due March 31, 2001. The holder of the note is $ 50,000
currently not demanding payment and the note continues to accrue interest.
Note payable - related party, interest at 6%, due March 30, 2006 163,500
Note payable - stockholder, interest at 6%, due April 2, 2006 85,000
Note payable - stockholder, interest at 6%, due April 9, 2006 197,000
Note payable, interest at 3.8%, due January 10, 2004 86,450
Note payable, interest at 4%, due January 27, 2004 24,700
Note payable, interest at 2.8%, principal and interest due February 11, 2004 10,000
Note payable, interest at 4%, principal and interest due April 2, 2004, face
amount $45,000 33,075
Note payable, interest at 4%, principal and interest due June 24, 2004, face
amount $100,000 95,000
-------------------
744,725
Less current portion (162,775)
-------------------
Notes and loans payable $ 581,950
===================
8
On January 10, 2003, the Company entered into a note payable whereby the
lender agreed to fund the Company on an as needed basis up to $100,000 at
an interest rate of 3.8% per annum. Principal and interest are due no
later than January 10, 2004.
On January 27, 2003, the Company entered into a note payable whereby the
lender agreed to fund the Company on an as needed basis up to $75,000 at
an interest rate of 4% per annum. Principal and interest are due no later
than January 27, 2004.
On June 24, 2003, the Company entered into a note payable whereby the
lender agreed to fund the Company on an as needed basis up to $100,000 at
an interest rate of 4% per annum. Principal and interest are due no later
than June 24, 2004.
On April 2, 2003, the Company entered into a note payable whereby the
lender agreed to fund the Company on an as needed basis up to $45,000 at
an interest rate of 4% per annum. Principal and interest are due no later
than April 2, 2004.
NOTE 5 STOCKHOLDERS' DEFICIENCY
In February 2003, the Board of Directors authorized a 5,000 for 1 reverse
stock split. All share and per share amounts in the accompanying
condensed consolidated financial statements and footnotes have been
restated to give effect to such reverse stock split.
In March 2003 and on May 5, 2003, 6,245,000 and 20,000,000 shares of
common stock were issued to the Company's attorney for services valued at
$934,300. The amount has been expenses to selling, general and
administrative expenses in the accompanying condensed consolidated
statement of operations for the six months ended June 30, 2003. The fair
value of the issued shares was based upon the market price of the
Company's stock on the date of grant.
During the six months ended June 30, 2003, the Company issued
2,536,658,534 shares of common stock for consulting services valued at $
3,697,198. The fair value of the issued shares was based upon the market
price of the Company's stock on the date of grant. Of the total value,
$1,284,256 has been expensed to selling, general and administrative
expenses in the accompanying condensed consolidated statement of
operations for the six months ended June 30, 2003 and $2,526,242 is
presented as deferred stock based compensation in the accompanying
condensed consolidated balance sheet.
During the six months ended June 30, 2003, the Company issued
approximately 6,300,000 shares of restricted common stock to the Chief
Executive Officer and subsequently cancelled and rescinded the issuance.
Accordingly, the Company has not included these shares in its equity. The
Company also issued 630,000 shares of common stock to three directors of
the Company for services valued at $220,500. The fair value of the issued
shares was based upon the market price of the Company's stock on the date
of grant. The amount was expensed to selling, general and administrative
expenses in the accompanying condensed statement of operations for the
six months ended June 30, 2003.
During the six months ended June 30, 2003 the Company issued 51 million
shares of common stock for employee bonus compensation valued at $49,000.
The fair value of the issued shares was based upon the market price of
the Company's stock on the date of grant. The amount was expensed to
selling, general and administrative expenses in the accompanying
condensed statement of operations for the six months ended June 30, 2003.
9
Pursuant to the terms and conditions of two separate trust agreements,
shares of the Company's common stock were transferred in trust to an
attorney who will act as trustee of the Innovative Holdings, Inc.
Shareholder and Creditor Trusts ("Shareholder Trust" or "Creditor
Trust"). In addition to the shares, the Company has assigned to the
trusts the results and possible proceeds of pending future litigation.
The Shareholder Trust has been established to respond to the Company's
concern that shareholders of record as of January 1, 2002 through July
31, 2002 were adversely affected by the action of outside parties
effecting the share price and value of the Company throughout these
dates. The Company intends to provide some measure of compensation to its
shareholders for their related losses.
The Creditor Trust has been established to return the maximum amount to
Century Media's creditors (assumed by the Company as a result of the
Century Media acquisition) and to allow the Company to continue to
operate without interruption.
Following the submission of claims and validation of such claims, the
trustee will liquidate the trust property and distribute the proceeds to
the trust beneficiaries in a manner the trustee deems most beneficial.
During the quarter ended June 30, 2003, the Company issued 1 billion
shares of restricted stock to the trusts. The trust shares are not
included in the outstanding shares because they are being held in escrow
by the trustee. Additional stock will be required to be issued to achieve
this financial goal (See Note 9).
NOTE 6 LITIGATION
The Company is a party to a number of lawsuits and claims, which have
been disclosed in the Company's Form 10-KSB for the year ended December
31, 2002 filed on May 16, 2003. In the opinion of management and external
legal counsel, the status of the pending lawsuits and claims have not
materially changed from what was disclosed in the Company's Form 10-KSB.
10
NOTE 7 CAPITAL LEASE OBLIGATIONS
The Company is in default of its capital lease agreement at June 30,
2003. The Company is also in discussions with the lessor to settle the
matter. The entire amount due under the lease has been classified as
current in the accompanying condensed consolidated balance sheet.
NOTE 8 GOING CONCERN
The Company's condensed consolidated financial statements for the six
months ended June 30, 2003 have been prepared on a going concern basis,
which contemplated the realization of assets and the satisfaction of
liabilities and commitments in the normal course of business. The Company
incurred a net loss of $3,031,940 and a negative cash flow from
operations of $196,186 for the six months ended June 30, 2003, and has a
working capital deficiency of $13,557,706 and a stockholders deficiency
of $14,051,700 as of June 30, 2003. The Company's working capital
deficiency as of June 30, 2003 may not enable it to meet such objectives
as presently structured. The condensed consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
The ability of the Company to continue as a going concern is dependent on
the Company's ability to raise additional capital, and implement its
business plan. Management believes that actions presently taken to obtain
additional funding provide the opportunity for the Company to continue as
a going concern. The Company is also actively seeking businesses to
acquire.
NOTE 9 SUBSEQUENT EVENTS
During August 2003, the Company issued an additional 2 billion shares of
restricted stock that were also placed in trust for the sole purpose of
the shareholder fund previously discussed in Note 5.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
Innovation Holdings, Inc. f/k/a Blagman Media International, Inc. is a Nevada
corporation (collectively with its subsidiaries, the "Company"), which is the
successor to a corporation founded in 1961. We are a direct marketing, direct
response and media enterprise based in Century City, California which
principally provides direct market services and media buying for our clients and
their products and services through television, radio, Internet, print and
outdoor advertising media. In addition, we organize direct response media
campaigns on radio, television and in print and provide assistance in backend
marketing and creative production.
We began operations in 1994 as a sole proprietorship and formed a corporation,
Blagman Media International, Inc., in early 1999. On August 2, 1999, we
completed a reverse acquisition with Unisat, Inc., an inactive, public
non-reporting company, founded in 1961 and formerly known as Combined Companies,
Inc. On the same date, Unisat, Inc. changed its name to Blagman Media
International, Inc. and we therefore have two Nevada entities with the same
name. The transaction was structured as a share exchange, in which Robert
Blagman exchanged all of his shares in the privately held entity for 8,200,000
common shares of Unisat, Inc. In April 2000, we entered into a share exchange
agreement with MNS Eagle Equity Group I, an inactive, reporting Nevada
corporation, which resulted in our becoming the parent reporting company.
The primary purpose of these transactions was to give us access to a public
market, to create a new corporate vehicle with which to build a more expansive
media-buying infrastructure, thereby allowing us to leverage our direct
marketing and direct response efforts. Currently, we are actively pursuing
acquisitions and various strategic and working relationships which, if
successful, will allow us to create a "network" of alliance partners with the
capacity to deliver a broader range of services in a more cost-efficient manner.
In 2001, internally we focused on our core competencies by making quantitative
media buys and in assisting our clients in implementing traditional radio,
television and out of home media strategies. Given the general uncertainties in
Internet advertising and Internet business models that developed in late 2000,
and which continue, we plan to monitor the use and styles of Internet
advertising. In this way, we can assess the opportunities available to us in
Internet advertising while not making any firm financial commitments to an
Internet strategy. In addition to considering merger and acquisition
opportunities for consolidation and industry growth, we are continuing to pursue
an expansion in the television production field through strategic alliances.
In 2001, we also actively pursued acquisitions and completed our first industry
acquisition transaction in March 2002 when Century Media, Inc. ("Century")
became a wholly-owned subsidiary under the name Blagman-Century Media, Inc.
("Blagman-Century"), subsequently renamed Century Media, Inc. We had been
negotiating since early 2001 to acquire Century Media, a Santa Monica based
advertising agency in business for over ten years with historical billings and
placements that ranged from $35 million to $110 million. In 2001, we entered
into agreements to acquire all of the outstanding stock of Century, but certain
requirements were not satisfied. In October 2001, we concluded that the purchase
price for Century, which was then set at $5.7 million cash plus the assumption
of significant debt, needed to be substantially reduced as a result of our due
diligence conclusions.
In March 2002, we completed the transaction through a merger of a wholly-owned
special purpose subsidiary into Century in exchange for the payment of the
equivalent of $0.20 per share to the shareholders of Century ($0.025 in cash and
the balance in shares of the common stock of the parent company (hereafter
"Common Shares"), repayment of $749,778 in debentures through the issuance of
Common Shares, and the recognition of debts. As a result, at closing
approximately $600,000 in cash and $2.2 million in restricted Common Shares were
distributed to holders of existing Century shares, debentures, and certain stock
rights. Under the merger agreement, the Common Shares were valued at the closing
bid price over the seven days prior to the date of the agreement or $0.0008857,
resulting in the issuance of 2,555,651,387 new Common Shares to the holders of
Century shares, debentures and certain stock rights. Century also had continuing
debt obligations due to affiliates and third parties of approximately $1.6
million, exclusive of trade and contingency obligations. In connection with our
interest in the Century transaction, we provided management services to Century
from late 2001 to early 2002, essentially on a reimbursement basis. As a result
of the overwhelming debt and departures by members of Century, we no longer
consider this acquisition viable. We are in the process of resolving all issues
related to the Century acquisition.
12
Following the acquisition of Century Media in March 2002, the Company has
determined that Century Media was not strategic to the Company's ongoing
objectives and has discontinued capital and human resource investment in Century
Media effective as of December 2002.
RESULTS OF OPERATIONS
NET REVENUES
Net Revenues (principally from advertising placements, commissions and revenue
sharing arrangements) for the six months ended June 30, 2003 as compared to the
six months ended June 30, 2002 decreased from $394,079 to $78,524. The decrease
in revenues is attributed to the Company's inability to continue to outsource
functions and service clients with reduced staffing.
OPERATING EXPENSES
Total operating expenses decreased from $6,886,917 in 2002 to $3,083,600 in
2003. Included in operating expenses are general and administrative expenses
which decreased from $6,878,515 for the six month period ended June 30, 2002 to
$3,068,655 for the six month period ended June 30, 2003.
The total net loss of the Company in 2003 was $3,031,940 compared to $8,774,315
for 2002.
OTHER INCOME (EXPENSES)
Other income expenses increased from $15,758 in 2002 to $26,868 in 2003,
primarily due to interest expense incurred from additional costs the Company has
incurred.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 2003, the Company's available cash decreased
significantly. In connection with the various initiatives proposed by management
to expand the Company's operations internally and through strategic alliances or
acquisitions with other industry partners, additional capital funding will be
required. The Company hopes to raise these funds through an increase in general
business profits due to a shift in the main focus of its core business. The
Company plans to pass low profit making activity such as media buying to third
party contracted companies. The Company also plans to invest in product
ownership and development as well as actively pursue opportunities to expand the
marketing aspects of these products. As the advertising industry goes through
it's transitions, the Company plans to react by adjusting its focus away form
pure media buying to product development. Product development continues to be a
strong avenue for the direct response advertising business. Affiliations and
associations with other advertising agencies will also expand the Company's
ability to increase cash flow and revenues without adding staff.
Throughout 2002 and in the current quarter, the market price of our common
shares has continued to dropped precipitously. We believe that there are two
underlying causes. First, we apparently were one of the companies targeted in an
organized pattern of depressing prices through "shorting" by a group pursuing a
coordinated effort to effect and profit from a falling share price and from
attempts to extort favorable stock issuances from the Company without fair
consideration. Management initiated referrals to appropriate regulatory agencies
for their action. While actions from these referrals may reduce future
manipulation, it cannot eliminate the impact of the downward price spiral. The
second factor apparently affecting our price was the market reaction to the
increase in authorized and issued common shares which we undertook to compensate
consultants in our industry, to support Company growth and, more recently, to
effect the Century transaction. Following the acquisition of Century Media in
March 2002, the Company has determined that Century Media was not strategic to
the Company's ongoing objectives and has discontinued capital and human resource
investment in Century Media effective as of December 2002.
13
Management is currently unwinding the Century transaction, evaluating other
opportunities and pursuing other initiatives to expand the Company's operations
internally and through strategic alliances or acquisitions with other industry
partners. These endeavors will be funded in part from operations but will also
require additional capital funding which the Company hopes to raise through debt
or equity financing arrangements, if appropriate financing is available, on
reasonable and acceptable terms.
The Company intends to continue to seek additional working capital to meet its
operating requirements and to provide further capital for expansion,
acquisitions or strategic alliances with businesses that are complementary to
the Company's long term business objectives. Additional capital will be needed
to maintain the growth plans of the Company.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities". SFAS No. 149
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities". The changes in SFAS No. 149 improve financial reporting by
requiring that contracts with comparable characteristics be accounted for
similarly. This statement is effective for contracts entered into or modified
after June 30, 2003 and all of its provisions should be applied prospectively.
The FASB has issued SFAS No. 150, "Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity." The Statement improves the
accounting for certain financial instruments that, under previous guidance,
issuers could account for as equity. The new Statement requires that those
instruments be classified as liabilities in statements of financial position.
SFAS No. 150 affects the issuer's accounting for three types of freestanding
financial instruments. One type is mandatorily redeemable shares, which the
issuing company is obligated to buy back in exchange for cash or other assets. A
second type, which includes put options and forward purchase contracts, involves
instruments that do or may require the issuer to buy back some of its shares in
exchange for cash or other assets. The third type of instruments that are
liabilities under this Statement is obligations that can be settled with shares,
the monetary value of which is fixed, tied solely or predominantly to a variable
such as a market index, or varies inversely with the value of the issuers'
shares. SFAS No. 150 does not apply to features embedded in a financial
instrument that is not a derivative in its entirety.
In addition to its requirements for the classification and measurement of
financial instruments in its scope, SFAS No. 150 also requires disclosures about
alternative ways of settling the instruments and the capital structure of
entities, all of whose shares are mandatorily redeemable. Most of the guidance
in SFAS No. 150 is effective for all financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. For private companies,
mandatorily redeemable financial instruments are subject to the provisions of
this Statement for the fiscal period beginning after December 15, 2003.
Management does not expect the impact from the pronouncements in these
statements to have a material impact on the Company's consolidated financial
position or results of operations.
FORWARD-LOOKING STATEMENTS
Safe Harbor statement under the Private Securities Litigation Reform Act of
1995: Except for historical information contained herein, the matters discussed
in this filing are forward-looking statements that involve risks and
uncertainties, including but not limited to economic, competitive, governmental
and technological factors affecting the Company's operations, markets, products
and prices and other factors discussed in the Company's various filings with the
Securities and Exchange Commission.
14
CRITICAL ACCOUNTING POLICIES.
The Securities and Exchange Commission ("SEC") recently issued Financial
Reporting release No. 60, "Cautionary Advice Regarding Disclosure About Critical
Accounting Policies" (FRR 60"), suggesting companies provide additional
disclosure and commentary on their most critical accounting policies. In FRR 60,
the SEC defined the most critical accounting policies as the ones that are most
important to the portrayal of a company's financial condition and operating
results, and require management to make its most difficult and subjective
judgments, often as a result of the need to make estimates of matters that are
inherently uncertain.
Based upon the foregoing definition, the registrant's most critical accounting
policies include:
REVENUE RECOGNITION
The Company recognizes revenue from the sale of media time to advertising
clients when the related advertisement is broadcasted. Included in the monies
received from advertising clients are amounts which represent the reimbursement
of media time purchased on behalf of the customer for the related
advertisements. These media purchase reimbursements have been accounted for as
an offset to the related media purchases for the respective advertisement and
not as gross revenues as required under EITF 99-19 and SAB 101. Monies received
prior to the broadcast of the related advertisement are recorded as deferred
revenue. In addition, the Company earns commissions in connection with the
procurement of media time on behalf of advertising clients. Such commissions are
also considered earned when the underling advertisement is broadcasted.
Additionally, the Company has entered into contractual agreements with other
advertising firms to share revenues based upon the terms of the specific
agreements. The income produced by these revenue-sharing contracts are
recognized as media or commission income depending upon the nature of the income
earned from the agreement.
GOODWILL
In July 2001, the FASB issued SFAS No. 142, 'Goodwill and Other Intangible
Assets,' which was required to be adopted for fiscal 2002. SFAS No. 142
established accounting and reporting standards for goodwill and intangible
assets resulting from business combinations. SFAS No. 142 included provisions
discontinuing the periodic amortization of, and requiring the assessment of the
potential impairments of, goodwill (and intangible assets deemed to have
indefinite lives). As SFAS No. 142 replaced the measurement guidelines for
goodwill impairment, goodwill not considered impaired under previous accounting
literature may be considered impaired under SFAS No. 142. SFAS No. 142 also
required that the Company complete a two-step goodwill impairment test. The
first step compared the fair value of each reporting unit to its carrying
amount, including goodwill. If the fair value of a reporting unit exceeded its
carrying amount, goodwill is not considered to be impaired and the second step
was not required. SFAS 142 required completion of this first step within the
first six months of initial adoption and annually thereafter. If the carrying
amount of a reporting unit exceeded its fair value, the second step is performed
to measure the amount of impairment loss. The second step compared the implied
fair value of goodwill to the carrying value of a reporting unit's goodwill. The
implied fair value of goodwill is determined in a manner similar to accounting
for a business combination with the allocation of the assessed fair value
determined in the first step to the assets and liabilities of the reporting
unit. The excess of the fair value of the reporting unit over the amounts
assigned to the assets and liabilities is the implied fair value of goodwill.
This allocation process was only performed for purposes of evaluating goodwill
impairment and did not result in an entry to adjust the value of any assets or
liabilities. An impairment loss is recognized for any excess in the carrying
value of goodwill over the implied fair value of goodwill. Upon the initial
adoption, any impairment loss identified was presented as a change in accounting
principle, net of applicable income tax benefit, and recorded as of the
beginning of that year. Subsequent to the initial adoption, any impairment loss
recognized would be recorded as a charge to income from operations.
ASSET IMPAIRMENT
The Company reviews its long-lived assets and identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. In performing the review
for recoverability, the Company estimates the future cash flows expected to
result from the use of the asset and its eventual disposition. If the sum of the
expected future cash flows (undiscounted and without interest charges) is less
than the carrying amount of the asset, an impairment loss is recognized.
15
Otherwise, an impairment loss is not recognized. Measurement of an impairment
loss for long-lived assets and identifiable intangibles would be based on the
fair value of the asset.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
The Registrant carried out an evaluation of the effectiveness of the design and
operation of its disclosure controls and procedures pursuant to Rule 13a-14
under the Securities and Exchange Act of 1934 ("Exchange Act"). This evaluation
was done under the supervision and with the participation of the Registrant's
President. Based upon that evaluation, they concluded that the Registrant's
disclosure controls and procedures are effective in gathering, analyzing and
disclosing information needed to satisfy the Registrant's disclosure obligations
under the Exchange Act.
(b) Changes in internal controls.
There were no significant changes in the Registrant's internal controls or in
its factors that could significantly affect those controls since the most recent
evaluation of such controls.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There have been no material changes in any pending legal proceedings to include
on this report.
ITEM 2. CHANGES IN 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 ON FORM 8-K
Exhibits.
Exhibits included or incorporated by reference herein are set forth in the
attached Exhibit Index.
Reports on Form 8-K.
16
The Company made one filing on Form 8-K during the second quarter of the fiscal
year covered by this Form 10-QSB.
June 10, 2003 The Company disclosed on Form 8-K that it had engaged
the services of Catalyst Capital LLC, a financial
management consulting firm.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Issuer has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
INNOVATION HOLDINGS, INC.
F/K/A BLAGMAN MEDIA
INTERNATIONAL, INC.
Dated: September 25, 2003 /s/ ROBERT BLAGMAN
--------------------------------
Robert Blagman, President
17
EXHIBIT LIST
2.11 Agreement and Plan of Reorganization (Incorporated by reference; Form
8-K filed on March 11, 2002)
3.1 Articles of Incorporation (Incorporated by reference; Form 8-K of MNS
Eagle Equity Group I, Inc. filed on April 27, 2000)
3.2 Bylaws (Incorporated by reference; Form 8-K of MNS Eagle Equity Group
I, Inc. filed on April 27, 2000)
3.3 Certificate of Designation for Series B Convertible Preferred Stock
(Incorporated by reference; Form 8-K of MNS Eagle Equity Group I, Inc.
filed on April 27, 2000)
10.1 Employment Agreement with Robert Blagman (Incorporated by reference;
Form 10-KSB/A filed on April 30, 2001)
10.2 Employment Agreement with Leslie Blagman (Incorporated by reference;
Form 10-KSB/A filed on April 30, 2001)
10.3 Equity Line of Credit Agreement dated July 12, 2001 with GazelleGroup
LLP and DRH Investment Company LLP (Incorporated by reference; Form
SB-2/A filed on November 1, 2001)
10.4 Registration Rights Agreement dated July 12, 2001 with GazelleGroup LLP
and DRH Investment Company LLP (Incorporated by reference; Form SB-2/A
filed on November 1, 2001)
10.5 Securities Purchase Agreement dated July 12, 2001 with certain named
buyers (Incorporated by reference; Form SB-2/A filed on November 1,
2001)
10.6 Placement Agent Agreement dated July 12, 2001 with May Davis Group,
Inc. (Incorporated by reference; Form SB-2/A filed on November 1, 2001)
10.7 Registration Rights Agreement dated July 12, 2001 with certain named
persons (Incorporated by reference; Form SB-2/A filed on November 1,
2001)
10.8 2000 Employee Stock Compensation Plan (Incorporated by reference; Form
S-8 for MNS Eagle Equity Group I, Inc. filed on September 11, 2000)
10.9 2001 Employee Stock Option Plan (Incorporated by reference; Form S-8
filed on August 27, 2001)
21.1 List of Subsidiaries (Incorporated by reference, Form 10KSB, as amended
filed on April 15, 2002)
31 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(filed herewith)
32 Certification Pursuant to 18 U.S. C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes Oxley Act of 2002 (filed herewith)
18