1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
COMMISSION FILE NUMBER 0 - 25112
ADVANCED MEDIA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 11-2899603
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
80 ORVILLE DRIVE
BOHEMIA, NEW YORK 11716
(Address of principal executive offices)
(516) 244 -1616
(Issuer's telephone number)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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___
There were 11,213,750 shares of registrant's common stock outstanding as of
October 31, 1997.
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ADVANCED MEDIA INC.
INDEX
PART I - FINANCIAL
INFORMATION PAGE
Balance Sheets 3
Statements of Operations 4
Statements of Changes in Stockholders' Equity (Deficit) 5
Statements of Cash Flows 6
Notes to Financial Statements 7-10
Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-12
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 13
Item 2 - Changes in Securities 13
Item 3 - Defaults Upon Senior Securities 13
Item 4 - Submission of Matters to a Vote of Security Holders 13
Item 5 - Other Information 13
Item 6 - Exhibits and Reports on Form 8-K 13
Signatures 14
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ADVANCED MEDIA INC.
BALANCE SHEETS
(UNAUDITED)
SEPT. 30, DEC. 31,
1997 1996
------------ ------------
ASSETS
Current assets
Cash and cash equivalents $ 13,979 $ 40,863
Accounts receivable, net of allowance for
doubtful accounts of $43,097 and $50,725, respectively 245,749 232,840
Inventories 54,194 51,669
Prepaid expenses and other current assets 161,102 78,701
------------ ------------
Total current assets 475,024 404,073
Fixed assets, net 407,577 554,169
Intangible assets, net 937,566 1,066,743
Other assets 59,049 62,907
------------ ------------
Total assets $ 1,879,216 $ 2,087,892
============ ============
LIABILITIES & STOCKHOLDERS' DEFICIENCY
Current liabilities
Accounts payable $ 790,147 $ 866,130
Accrued expenses and other liabilities 136,351 245,095
Payable to related parties 176,166 184,162
Deferred revenues 4,950 102,500
Current portion of capital lease obligations 7,422 8,840
------------ ------------
Total current liabilities 1,115,036 1,406,727
------------ ------------
Loan payable - stockholder 1,193,005 1,179,472
Capital lease obligations 18,088 23,784
Payable to related parties, long term -- 181,925
------------ ------------
Total liabilities 2,326,129 2,791,908
------------ ------------
Stockholders' deficiency:
Preferred stock, par value $.0001 per share,
Shares authorized: 10,000,000, issued 600,000 Series A
convertible shares, none and 120,000 outstanding
(entitled in liquidation to $120,000 at December 31, 1996) -- 12
Common stock, par value $.0001 per share,
Shares authorized: 100,000,000
Shares issued and outstanding:
1997 - 11,213,583
1996 - 7,569,281 1,122 7,569
Additional paid-in capital 9,773,958 8,698,698
Accumulated deficit (10,170,223) (9,345,126)
Less deferred compensation (51,770) (65,169)
------------ ------------
Total stockholders' deficiency (446,913) (704,016)
------------ ------------
Commitments and contingencies
Total liabilities and stockholders' (deficit) equity $ 1,879,216 $ 2,087,892
============ ============
The accompanying notes are an integral part of these financial statements.
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ADVANCED MEDIA INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED THREE MONTHS ENDED
SEPT. 30, SEPT. 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
Net revenues $ 2,900,332 $ 2,709,014 $ 1,094,736 $ 1,001,620
Cost of sales 1,747,576 2,041,538 544,011 719,308
----------- ----------- ----------- -----------
Gross profit 1,152,756 667,476 550,725 282,312
----------- ----------- ----------- -----------
EXPENSES:
Development 26,806 16,222 11,214 --
Selling and marketing 428,097 456,768 108,607 188,932
General and administrative 1,236,752 1,573,588 246,371 683,973
Amortization of intangible assets 129,177 168,518 43,059 56,172
Debt conversion expense -- 309,375 -- --
Loss on conversion below market -- 36,826 -- 36,826
----------- ----------- ----------- -----------
Total expenses 1,820,832 2,561,297 409,251 965,903
----------- ----------- ----------- -----------
Profit (Loss) from operations (668,076) (1,893,821) 141,474 (683,591)
OTHER INCOME (EXPENSE):
Other revenues 25,580 36,427 5,247 (2,779)
Interest expense, net (182,601) (135,109) (82,686) (33,180)
----------- ----------- ----------- -----------
Total other income (expense) (157,021) (98,682) (77,439) (35,959)
----------- ----------- ----------- -----------
Net profit (loss) $ (825,097) $(1,992,503) $ 64,035 $ (719,550)
=========== =========== =========== ===========
Net profit (loss) per share $ (.09) $ (.32) $ .007 $ (0.11)
=========== =========== =========== ===========
Weighted average number of common
shares outstanding 9,105,942 6,080,391 9,805,411 6,337,292
=========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
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ADVANCED MEDIA INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
(UNAUDITED)
PREFERRED STOCK COMMON STOCK
-------------------------- ------------------------ ADDITIONAL
.0001 PAR .0001 PAR PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
-----------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 -- -- 5,531,981 5,532 6,179,372
Sales of common stock -- -- 186,857 187 218,357
Sales of Class A convertible preferred stock 600,000 60 -- -- 599,940
Conversion of preferred to common (480,000) (48) 737,248 737 (689)
Sales to 401K Plan -- -- 2,268 2 3,553
Issuance of common stock for:
Commission due broker -- -- 100,000 100 130,210
Consulting services -- -- 15,000 15 12,922
Rental expense -- -- 8,000 8 14.717
Public relations -- -- 35,000 35 38,215
Penalty shares -- -- 217,500 217 (217)
Acquisition revaluations -- -- 159,702 160 (160)
Issuance of stock options and warrants for:
Commission due broker -- -- -- -- 6,516
Employment agreement with officer -- -- -- -- 212,500
Legal services -- -- -- -- 7,500
Cancellation of shares due to:
Employment termination -- -- (29,275) (29) (1,187)
Offset of note receivable -- -- (5,000) (5) (6,511)
Debt conversion -- -- 610,000 610 1,283,660
Amortization of deferred compensation -- -- -- -- --
Net loss -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 120,000 12 7,569,281 7,569 8,698,698
Sales of common stock -- -- 1,564,968 1,565 588,800
Conversion of preferred to common (120,000) (12) 317,126 317 (305)
Sales to 401K plan -- -- 2,061 1 1,038
Issuance of common stock for:
Outside Services -- -- 170,000 125 77,963
Public relations -- -- 10,000 10 9,365
Services - employee -- -- 7,500 8 5,992
Services - directors -- -- 40,000 40 31,960
Penalty shares -- -- 223,125 151 (151)
Accrued interest on loan from officer -- -- 1,309,522 131 351,803
Stock split, one-for-ten -- -- -- (8,795) 8,795
Amortization of deferred compensation -- -- -- -- --
Net loss -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1997 -- -- 11,213,583 1,122 9,773,958
- ----------------------------------------------------------------------------------------------------------------------
DEFERRED TOTAL
ACCUMULATED COMPEN- DOLLAR
DEFICIT SATION AMOUNTS
----------------------------------------
BALANCE, DECEMBER 31, 1995 (6,093,555) (110,030) (18,681)
Sales of common stock -- -- 218,544
Sales of Class A convertible preferred stock -- -- 600,000
Conversion of preferred to common -- -- --
Sales to 401K Plan -- -- 3,555
Issuance of common stock for:
Commission due broker -- -- 130,310
Consulting services -- -- 12,937
Rental expense -- -- 14,725
Public relations -- -- 38,250
Penalty shares -- -- --
Acquisition revaluations -- -- --
Issuance of stock options and warrants for:
Commission due broker -- -- 6,516
Employment agreement with officer -- -- 212,500
Legal services -- -- 7,500
Cancellation of shares due to:
Employment termination -- 1,216 --
Offset of note receivable -- -- (6,516)
Debt conversion -- -- 1,284,270
Amortization of deferred compensation -- 43,645 43,645
Net loss (3,251,571) -- (3,251,571)
- ------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 (9,345,126) (65,169) (704,016)
Sales of common stock -- -- 590,365
Conversion of preferred to common -- -- --
Sales to 401K plan -- -- 1,039
Issuance of common stock for:
Outside Services -- -- 78,088
Public relations -- -- 9,375
Services - employee -- -- 6,000
Services - directors -- (32,000) --
Penalty shares -- -- --
Accrued interest on loan from officer -- -- 351,934
Stock split, one-for-ten -- -- --
Amortization of deferred compensation -- 45,399 45,399
Net loss (825,097) -- (825,097)
- ------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1997 (10,170,223) (51,770) (446,913)
- ------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
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ADVANCED MEDIA INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPT. 30,
---------------------------
1997 1996
----------- -----------
Cash flows from operating activities:
Net loss $ (825,097) $(1,992,503)
Adjustments to reconcile net loss to net
cash provided by (used for) operating activities:
Gain on sale of trademark -- (31,697)
Loss on conversion below market -- 36,826
Debt conversion expense -- 309,375
Depreciation and amortization 126,548 130,562
Amortization of intangibles 129,177 168,518
Amortization of deferred compensation 45,399 32,580
Loss on disposal of fixed assets 5,120 --
Reduction in cost of fixed assets 88,000 --
Provision for doubtful accounts 908 (323)
Write-off of note receivable from stockholder -- 93,484
Interest on loan payable - officer -- 67,385
Issuance of options to officer as compensation -- 112,500
Issuance of common stock for services and expenses 409,872 16,100
Changes in operating assets and liabilities:
Accounts receivable (13,817) (177,400)
Inventories, net (2,525) 50,810
Prepaid expenses and other current assets (55,589) (45,851)
Accounts payable (75,983) 111,826
Accrued expenses and other liabilities (108,744) 129,261
Payable to related parties (189,921) (23,469)
Deferred revenues (97,550) --
----------- -----------
Net cash used for operating activities (564,202) (1,012,016)
----------- -----------
Cash flows from investing activities:
Purchases of fixed assets (73,076) (69,784)
Net proceeds from sale of trademark -- 56,697
Payment of note receivable 24,500 (24,500)
(Increase) decrease in security deposits (11,929) (17,124)
----------- -----------
Net cash used for investing activities (60,505) (54,711)
----------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock 591,404 242,466
Proceeds from sale of preferred stock -- 600,000
Proceeds from loan payable - stockholder, net 13,533 163,944
Payments of capital lease obligations (7,114) (15,694)
----------- -----------
Net cash provided by financing activities 597,823 990,716
----------- -----------
Net decrease in cash and cash equivalents (26,884) (76,011)
Net cash, cash overdrafts and cash equivalents:
Beginning of period 40,863 151,463
----------- -----------
End of period $ 13,979 $ 75,452
=========== ===========
Cash paid during the period for:
Interest $ 5,199 $ 29,699
=========== ===========
Taxes $ 1,610 $ 1,950
=========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:
The Company exchanged 600,000 common shares for a $1,000,000 debt on March 31,
1996.
During the quarter ended June 30, 1996, the Company acquired computer equipment
pursuant to capital leases of $29,497.
During April 1997, the company exchanged 120,000 common shares for services
valued at $60,900 under an annual business development contract which is
included in prepaid expenses ($35,525 at September 30, 1997).
The accompanying notes are an integral part of these financial statements.
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ADVANCED MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
1 - BASIS OF PRESENTATION
The unaudited interim financial statements of Advanced Media, Inc. (the
"Company") for the nine months ended September 30, 1997 and 1996 have been
prepared by management and include all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the unaudited interim
periods. The results of operations for the nine months ended September 30, 1997
are not necessarily indicative of the results to be expected for the full year.
These interim financial statements should be read in conjunction with the
financial statements and related notes contained in the Company's annual report
on Form 10-KSB for the year ended December 31, 1996.
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reclassifications - Certain amounts in the prior year financial statements have
been reclassified to conform with the current year presentation.
3 - LIQUIDITY AND BUSINESS RISKS
The Company incurred a net loss of $825,097 for nine months ended September 30,
1997 and cumulative net losses of $10,170,223 since commencing operations in
August 1993. As of September 30, 1997, the Company had a working capital deficit
of $640,012 as compared to a working capital deficit of $1,002,654 at December
31, 1996. In order to meet its obligations as they become due and to continue
its operations as a going concern, the Company must raise additional capital.
The Company continues to be engaged in various discussions with potential
investors regarding possible equity transactions. $591,404 was raised during the
first nine months of 1997 through the sale of equity. Although management
believes, based on the development of the Company's business and its preliminary
discussions with various potential investors and other sources of financing,
that it may be able to raise additional capital sufficient to meet its working
capital needs over the next twelve months, no assurance can be given that it
will be successful in this respect. The Company currently has a Private Equity
Line of Credit, which is presently being restructured, for an aggregate of
$1,000,000, of which $250,000 has been received by the Company. The number of
shares under this draw down, pursuant to this agreement, have been reserved by
the Company. The Company has no other line of credit or other access to debt
financing.
4 - DEBT AND EQUITY TRANSACTIONS
On September 30, 1997 the Company issued 1,309,522 shares of its common stock to
its Chief Executive Officer as payment for accrued interest on a loan from such
officer.
On June 23, 1997, the Board of Directors declared a one-for-ten common stock
split effective June 30, 1997. In connection with the reverse stock split, all
references in the financial statements to the number of shares, per share
amounts, and market prices of the Company's common stock have been restated.
The Company issued a total of 600,000 shares of common stock in exchange for an
aggregate $280,000 in the first quarter of 1997. As a condition of two of these
placements, the Company agreed to register 200,000 shares by April 30, 1997.
Failure to register the 200,000 shares cause the Company to pay a penalty of
5,000 shares to each of the parties, i.e., 10,000 total, for each thirty-day
period thereafter for which a registration statement is not filed. Through June
30, 1997, 30,000 shares have been reserved as penalty shares under this
agreement. Such penalty shares are required to be registered as contingency
shares in the registration statement. Furthermore, as consideration for the
investors not disposing of the 200,000 shares between April 30, 1997 and June
30, 1997, which condition has been met, the agreement provides for additional
contingency shares to be registered if the Company has not met a value guaranty
provision ensuring that the 200,000 shares will be equivalent in value to
$175,000 after the registration becomes effective.
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ADVANCED MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
4 - DEBT AND EQUITY TRANSACTIONS (CONT.)
In March 1997, the Board of Directors of the Company resolved to issue warrants
to purchase an aggregate 500,000 shares of common stock to Suan Investments
Corporation ("Suan") and its assignee, Stourbridge Investments ("Stourbridge"),
to be divided equally. The warrants become exercisable on September 30, 1997 at
an exercise price of $.65, and expire on December 31, 1998. In consideration of
the issuance of warrants to purchase 250,000 shares of common stock the
aforementioned parties have agreed to extend to June 30, 1997 the interest
payment due originally at the time of the conversion of the Suan Investment note
to equity. Further, upon payment of the interest the security interest in
substantially all of the assets of the Company which collateralizes the
Company's obligations will be terminated. The value of the warrants to purchase
the balance of the 250,000 shares will be applied against the Company's
obligation to provide a value guarantee for 600,000 shares previously issued to
Suan and Stourbridge. Payable to related parties includes accrued interest of
$131,520 and $96,899 at September 30, 1997 and December 31, 1996, respectively.
The Company made a $25,000 payment to the aforementioned investors in July 1997
towards the interest due at June 30, 1997. The Company is presently in default
of this agreement and discussing various options to remedy the default.
In April 1997, the Company issued 202,690 shares of its common stock for which
the Company received $101,345 before $15,201 in commissions. The Company agreed
to attempt to have declared effective by the Securities & Exchange Commission a
registration statement on Form S-3 for these shares by July 15, 1997 or be
subject to a cumulative penalty of 10% of the amount of shares subscribed. The
penalty continues for each thirty-day period for which the registration is not
effective. The shares have not been registered to date. Therefore the Company is
obligated to issue an additional 40,538 shares as of September 30, 1997. The
Company has also agreed that if the value of these shares is not $1.10 on the
effective date of the registration statement, it will issue additional shares of
equivalent value to such subscribers. The Company is presently in discussions to
renegotiate the aforementioned penalties and value guaranty.
On June 9, 1997, the Company entered into a Private Equity Line of Credit
Agreement (PELOC) with an Investor Agent for an aggregate purchase price of up
to $1,000,000 through June 30, 1998. Under this agreement, the Company issued
699,301 shares of its common stock for $250,000 before commissions and legal
fees of $45,900 and 22,727 shares of common stock. The Company has agreed to
continue to reserve its stock to satisfy any obligation to issue shares incident
to the PELOC. Upon the effectiveness of a registration statement covering the
shares to be issued under the PELOC, the Company has the option to set the date
of each draw down ("call") provided that the average trading volume over the
course of the previous six months preceding each call must be greater than
20,000 shares per trading day. Additional investments or calls under this line,
above the $250,000 already drawn down, are at 70% of the average closing bid
price of the Company's common stock on the ten days preceding the call date.
Under no circumstances will shares in excess of 20% of the Company's current
outstanding shares be issued pursuant to this agreement. In the event $500,000
is not drawn down by June 30, 1998, the Company is obligated to issue 100,000
shares of common stock to the investor without further consideration. Under the
Registrations Rights Agreement, all shares issued pursuant to the PELOC must be
registered for sale under a registration statement to be declared effective by
September 30, 1997. In the event the Company fails to obtain or maintain the
effectiveness of a registration statement on or before September 30, 1997, the
Company shall pay $5,000, and then $7,500 for each thirty-day period commencing
November 1, 1997. The Company has committed to draw down an additional minimum
$250,000 under this PELOC. The Company is currently negotiating the elimination
of the registration requirement since the $250,000 sale of common stock pursuant
to the PELOC qualifies for an exemption from registration pursuant to Regulation
S.
The PELOC contains an antidilution provision which requires the Company to
obtain prior written consent of the Investor Agent in the event the Company
desire to issue shares of common stock at a price per share less than the daily
closing bid price on the date of issue, issue options, rights or warrants to
subscribe for or purchase common stock (or securities convertible into common
stock) without consideration or at a price per share (or having a conversion
price per share, if a security convertible into common stock) less than the
daily closing bid price of the common stock on the date of issue, or in the case
of securities convertible into common stock having a conversion price less than
the daily closing bid price of the common stock on the date of conversion.
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ADVANCED MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
4 - DEBT AND EQUITY TRANSACTIONS (CONT.)
In June 1997, the Company issued 44,250 shares of its common stock for which the
Company received $22,125.
In September 1997 and November 1997 the Company refunded $8,500 to certain
investors for 17,000 shares of its common stock, which were returned to the
Company, due to each investor's inability to qualify as an "accredited investor"
and failure to provide appropriate paperwork.
5 - ACCOUNTS RECEIVABLE
Accounts receivable are comprised of the following:
Receivables assigned to factor $ 640,784
Less advances from factor 398,543
Due from factor 242,241
Unfactored accounts receivable 46,605
Allowance for doubtful accounts (43,097)
---------
$ 245,749
=========
Pursuant to a factoring agreement the majority of the Company's receivables are
assigned on a recourse basis. The factoring charge amounts to 4.25% of the
receivables assigned.
6 - RELATED PARTY TRANSACTIONS
Revenue included $75,000 from a corporation who is a shareholder of the Company.
7 - SIGNIFICANT CUSTOMERS
One customer accounted for approximately 50% and 45% of the Company's net
revenues during the nine and three months ended September 30, 1997.
8 - INCOME TAXES
At September 30, 1997 the Company has net operating loss carryforwards for tax
purposes of approximately $5,900,000, which expire through 2011. Deferred tax
assets are comprised of the following:
SEPTEMBER 30, DECEMBER 31,
1997 1996
Gross deferred tax assets $ 2,139,875 $ 2,315,939
Valuation allowance (2,139,875) (2,315,939)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
The gross deferred tax assets arise primarily from net operating loss
carryforwards and differences in the valuation of receivables, accruals and
deferred compensation. The Company has provided a full valuation allowance
against the gross deferred tax assets because, in management's judgement, it is
more likely than not that such benefits will not be realized.
The Company had a several changes in ownership since commencing operations in
1993, which has resulted in a restriction on the prospective annual utilization
of the loss carryforwards. Future changes in ownership may also result in
further limitations on the annual utilization of the loss carryforwards.
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ADVANCED MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
9 - CONTINGENCIES
Legal Proceedings
On September 29, 1995, a former employee and owner of a business acquired by the
Company, Decision Vision ("Decision"), and his wife, also a former employee of
Decision, initiated a lawsuit seeking damages of approximately $1,000,000 from
the Company, and certain present and former officers. The lawsuit was based on
claims arising out of the employees' termination, and also arising out of the
sale of the assets of Decision to the Company. The most significant aspect of
the lawsuit, pertaining to the acquisition of the assets of Decision by the
Company, was dismissed by the court in which the action had been filed, the
Superior Court of the State of California, County of San Diego, in a series of
rulings between December 1996 and February 1997, when the court dismissed
numerous causes of action and the action against all individual defendants and
eliminated any possible punitive damages award. The court also dismissed certain
aspects of the wrongful termination claims of one of the plaintiffs. The
remaining claims, including the rest of the wrongful termination claims of both
plaintiffs, relatively insignificant in scope in comparison with the claims
pertaining to the acquisition of assets, have been settled and payment by the
Company of the total sum of $42,500 has been made. This partial settlement
precludes a trial and concludes this matter as to these remaining issues and
also concludes the cross-action that the Company had previously filed against
the former employee who was the principal stockholder of Decision seeking
approximately $53,000 in damages for alleged breaches arising from the same
acquisition. The settlement arrangement allows that plaintiffs to appeal the
dismissal of the primary claims pertaining to the acquisition to the California
Court of Appeal. On March 25, 1997, the plaintiffs filed an appeal regarding the
above claims. On August 14, 1997, the Court of Appeals, Fourth Appellate
District for the State of California, issued a stipulated settlement agreement
regarding the above mentioned claims. This settlement stipulates that the
Company pay the plaintiffs $8,000 on October 1, 1997 and $5,000 per month for
twelve(12) months commencing November 1, 1997. The Company will receive and
return to treasury all original shares issued for the acquisition as well as all
penalty shares issued under the value guarantee provisions. As of the date of
this filing, the Company has complied with the aforementioned settlement
agreement. This settlement concludes this matter as to all remaining issues.
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ADVANCED MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto appearing elsewhere in this Form 10-QSB.
RESULTS OF OPERATIONS
NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Revenue for the nine and three months ended September 30, 1997 increased
$191,318 and $93,116, or 7.1% and 9.3%, respectively, as compared to the prior
nine and three month period. The increase in revenue is primarily attributable
to growth in the Company's sales of interactive system solutions. Additionally
the Company's Electronic Commerce division recorded $90,000 of revenue for the
nine month period ended September 30, 1997.
Gross profit for the nine and three months ended September 30, 1997 increased
$485,280 and $268,413, or 72.7% and 95.1%, respectively, as compared to the
prior nine and three month period. Gross margin for the nine and three months
ended September 30, 1997 was 39.7% and 50.3%, respectively, versus 24.6% and
28.1%, for the comparable respective periods in 1996. The increase and
improvement in gross profit is a direct result of management's ability to
transfer its technologies more efficiently from project to project. The increase
and improvement is also attributable to the Company's cost-cutting initiatives,
reduced legal fees and overall improved productivity.
Expenses for the nine and three months ended September 30, 1997 declined
$740,465 and $556,652, or 28.9% and 57.6%, respectively. The majority of the
variance was caused by a non-recurring charge for debt conversion expense,
$309,375, related to the costs associated with inducing Suan Investments
Corporation to retire their outstanding debt in the first quarter of 1996 in
exchange for the Company's equity. The decline is also attributable to the
Company's cost-cutting initiative and increase in employee productivity. Selling
and marketing expense for the nine and three months ended September 30, 1997
decreased $28,671 and $80,325, or 6.3% and 42.5%, respectively, of which $37,591
and $11,096 reflects selling costs incurred in the new electronic commerce
division for the respective nine and three months periods ended which started up
in September 1996. General and administrative expenses for the nine months ended
September 30, 1997 decreased $336,836 or 21.4% and $437,602, or 64.0% for the
three months ended September 30, 1997, of which $161,174 and $46,479 reflects
costs related to the Company's new electronic commerce division for the
respective nine and three month period in 1997. Legal expenses declined
approximately $113,000 for the three month period ended September 30, 1997 as
compared to the same period ended September 30, 1996 resulting in the overall
decrease in general and administrative expenses during the quarter. The decrease
of $39,341 and $13,113, or 23.3% for both periods, in amortization of intangible
assets is related to the reduction in goodwill recorded by the Company in the
fourth quarter of 1996 and is reflected as an impairment loss.
Other income (expense) reflects higher interest charges during the quarter ended
September 30, 1997 versus the same period in 1996 related to interest on
advances to the chief executive officer at an increased interest rate of 14%
retroactive to January 1, 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, l997, the Company had a net capital deficiency of $825,097,
a working capital deficit of $640,012 and has sustained cumulative losses of
$10,170,223 since commencing operations in August 1993. In order to meet its
obligations as they become due and to continue its operations as a going
concern, the Company must raise additional capital. The Company continues to be
engaged in various discussions with potential investors regarding additional
equity transactions. $591,404 was raised during the first nine months of 1997
through the sale of equity.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
LIQUIDITY AND CAPITAL RESOURCES (CONT.)
Although management believes, based on the development of the Company's business
and its preliminary discussions with various potential investors and other
sources of financing, that it may be able to raise additional capital sufficient
to meet its working capital needs over the next twelve months, no assurance can
be given that it will be successful in this respect. The Company currently has a
Private Equity Line of Credit, which is presently being restructured, for an
aggregate of $1,000,000, of which $250,000 has been received by the Company. The
number of shares under this draw down, pursuant to this agreement, have been
reserved by the Company. The Company has no other line of credit or other access
to debt financing.
The Company's stock price has steadily declined since January 1996, which has
made it difficult for the Company to raise additional equity capital without
significant dilution to present shareholders. The Company is further hampered by
its inability to obtain bank financing and the fact that all of its assets are
pledged as collateral to Suan Investments and its assignee, Stourbridge
Investments.
The Company is hopeful that anticipated improvements in the Company's operations
resulting from the sales and installation of interactive kiosks pursuant to the
Rollout Contract with GNC and the Company's improvements in the areas of
Electronic Commerce, including 21SoftwareDrive and its multiple
transaction-driven vertical applications, will result in an increase in the
market price of the Company's common stock used to raise additional equity
capital, although there can be no assurance it will do so.
Any forward looking statements contained in this document reflect management's
current intentions and expectations. Actual future results could vary materially
depending on certain risks and uncertainties, including factors such as
financing, operational spending, revenue levels, and the other factors referred
to in this document.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On September 29, 1995, a former employee and owner of a business acquired by the
Company, Decision Vision ("Decision"), and his wife, also a former employee of
Decision, initiated a lawsuit seeking damages of approximately $1,000,000 from
the Company, and certain present and former officers. The lawsuit was based on
claims arising out of the employees' termination, and also arising out of the
sale of the assets of Decision to the Company. The most significant aspect of
the lawsuit, pertaining to the acquisition of the assets of Decision by the
Company, was dismissed by the court in which the action had been filed, the
Superior Court of the State of California, County of San Diego, in a series of
rulings between December 1996 and February 1997, when the court dismissed
numerous causes of action and the action against all individual defendants and
eliminated any possible punitive damages award. The court also dismissed certain
aspects of the wrongful termination claims of one of the plaintiffs. The
remaining claims, including the rest of the wrongful termination claims of both
plaintiffs, relatively insignificant in scope in comparison with the claims
pertaining to the acquisition of assets, have been settled and payment by the
Company of the total sum of $42,500 has been made. This partial settlement
precludes a trial and concludes this matter as to these remaining issues and
also concludes the cross-action that the Company had previously filed against
the former employee who was the principal stockholder of Decision seeking
approximately $53,000 in damages for alleged breaches arising from the same
acquisition. The settlement arrangement allows that plaintiffs to appeal the
dismissal of the primary claims pertaining to the acquisition to the California
Court of Appeal. On March 25, 1997, the plaintiffs filed an appeal regarding the
above claims. On August 14, 1997, the Court of Appeals, Fourth Appellate
District for the State of California, issued a stipulated settlement agreement
regarding the above mentioned claims. This settlement stipulates that the
Company pay the plaintiffs $8,000 on October 1, 1997 and $5,000 per month for
twelve(12) months commencing November 1, 1997. The Company will receive and
return to treasury all original shares issued for the acquisition as well as all
penalty shares issued under the value guarantee provisions. As of the date of
this filing, the Company has complied with the aforementioned settlement
agreement. This settlement concludes this matter as to all remaining issues.
Item 2. Changes in Securities
On June 23, 1997, the Board of Directors declared a one-for-ten common
stock split effective June 30, 1997.
Item 3. Defaults Upon Senior Securities
The Company is in default of an interest payment to Suan Investments
Corporation, and its assignee, Stourbridge Investments, in the
approximate amount of $80,000 at July 31, 1997. The Company is currently
in negotiations with such investors to remedy such default.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the quarter ended
September 30, 1997.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ADVANCED MEDIA, INC.
Date: 11/14/97 By /s/ Hans Kaemmlein
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Hans Kaemmlein, Chairman of the Board,
President and Chief Executive Officer
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