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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED COMMISSION FILE NUMBER:
MARCH 31, 2000 333-49279
NEXT GENERATION NETWORK, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 41-1670450
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
11010 PRAIRIE LAKES DRIVE, SUITE 300
MINNEAPOLIS, MINNESOTA 55344
(Address of principal executive offices)
(612) 944-7944
(Issuer's telephone number)
-------------------------
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 _____
Number of shares of Common Stock outstanding as of April 30,2000: 8,460,405
Transitional Small Business Disclosure Format (Check one):
Yes _____ No X
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NEXT GENERATION NETWORK, INC.
FORM 10-QSB
TABLE OF CONTENTS
Part I. Financial Information Page
Item 1. Financial Statements.
Balance Sheets as of March 31, 2000 and December 31, 1999.......................... 3
Statements of Operations for the Three Months Ended March 31, 2000 and 1999........ 4
Statements of Stockholders' Equity for the Three Months Ended March 31,2000....... 5
Statements of Cash Flows for the Three Months Ended March 31, 2000 and 1999........ 6
Notes to Financial Statements...................................................... 7-9
Item 2. Management's Discussion and Analysis or Plan of Operations.................... 10-14
Part II. Other Information.
Item 5. Other Information............................................................. 15
Item 6. Exhibits and Reports on Form 8-K ............................................. 15
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Part I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEXT GENERATION NETWORK, INC.
BALANCE SHEETS
(UNAUDITED)
MARCH 31, DECEMBER 31,
2000 1999
------------ -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 17,921,830 $ 403,435
Accounts receivable, net 1,901,372 1,511,939
Other current assets 73,951 85,284
------------ ------------
Total current assets 19,897,153 2,000,658
------------ ------------
Property and Equipment, net 14,666,220 13,473,100
Deferred Financing Costs, net 1,355,924 2,050,481
Other Assets 132,749 191,730
------------ ------------
$ 36,052,046 $ 17,715,969
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Current maturities of long-term debt $ 25,591 $ 24,949
Accounts payable 1,882,543 2,721,429
Accrued expenses (Note 3) 2,699,818 4,848,637
------------ ------------
Total current liabilities 4,607,952 7,595,015
------------ ------------
Non-current accrued site lease expense -- 223,239
------------ ------------
Long-term Debt (Note 2) 36,629,067 49,555,649
------------ ------------
Mandatory Redeemable Preferred Stock
14.8% Series B, nonvoting; authorized 91,100 shares;
issued and outstanding 91,059 shares at December 31, 1999;
stated at liquidation value plus accrued dividends -- 11,273,351
14.8% Series C, nonvoting; authorized 90,000 shares;
issued and outstanding 75,540 shares at December 31, 1999;
stated at liquidation value plus accrued dividends -- 8,123,598
------------ ------------
-- 19,396,949
------------ ------------
Stockholders' Deficit
8.25% Series A cumulative preferred stock, nonvoting;
authorized 20,000 shares; issued and
outstanding 3,240 and 6,000 shares, respectively, stated
at liquidation value, excluding cumulative unpaid dividends
of $1,069,200 and $1,980,000, respectively 1,620,000 3,000,000
Common stock, $0.01 par value; authorized 20,000,000
shares; issued and outstanding 8,418,016
and 2,662,680 shares, respectively (Note 4) 84,180 26,627
Additional paid-in capital 70,177,985 6,574,267
Accumulated deficit (77,067,138) (68,655,777)
------------ ------------
(5,184,973) (59,054,883)
------------ ------------
$ 36,052,046 $ 17,715,969
============ ============
See notes to condensed financial statements.
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NEXT GENERATION NETWORK, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-------------------------------------
2000 1999
------------ ------------
Revenues:
Advertising Revenue $ 2,329,268 $ 958,024
Less agency commissions (46,653) (24,609)
----------- -----------
Net advertising revenue 2,282,615 933,415
Network operating revenue 210 210
----------- -----------
Total revenues 2,282,825 933,625
----------- -----------
Costs and expenses:
Network operating expenses 2,130,680 1,387,434
Selling expenses 3,128,399 2,228,703
General and administrative expenses 1,766,439 1,189,289
Corporate overhead 928,806 823,792
Depreciation and amortization 918,632 572,262
----------- -----------
Total Costs and Expenses 8,872,956 6,201,480
----------- -----------
Operating loss (6,590,131) (5,267,855)
Non operating income (expense):
Interest expense (1,977,894) (1,991,010)
Interest income 226,884 252,984
Other expense (70,220) --
----------- -----------
Net loss (8,411,361) (7,005,881)
Preferred stock dividends 209,720 612,093
----------- -----------
Net loss applicable to common stockholders $(8,621,081) $(7,617,974)
=========== ===========
Basic and diluted net loss per common share $ (1.33) $ (2.86)
=========== ===========
Weighted average number of common shares outstanding 6,492,269 2,662,680
=========== ===========
See notes to condensed financial statements.
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NEXT GENERATION NETWORK, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
(UNAUDITED)
Series A
Cumulative
Preferred Stock Common Stock
Shares Amount Shares Amount
---------- ----------- ----------- -------
Balance, December 31, 1999 6,000 $ 3,000,000 2,662,680 $26,627
Issuance of common stock at
$10 per share,
net of expenses of $466,321 --- --- 3,025,017 30,250
Exchange of Series A
Preferred Stock for common
stock (2,760) (1,380,000) 169,346 1,693
Exchange of Mandatory
Redeemable Preferred Stock
for common stock --- --- 2,546,353 25,464
Exercise of stock options --- --- 14,620 146
Repurchase of PIK Notes at
a substantial discount from
carrying value from related
party --- --- --- ---
Accrued dividends on
mandatory redeemable
preferred stock --- --- --- ---
Compensation element of
stock options forfeited --- --- --- ---
Net Loss --- --- --- ---
---------- ----------- ----------- -------
Balance, March 31, 2000 3,240 $ 1,620,000 8,418,016 $84,180
========== =========== =========== =======
Additional
Paid-In Accumulated
Capital Deficit Total
------------ ------------ ------------
Balance, December 31, 1999 $ 6,574,267 $(68,655,777) $(59,054,883)
Issuance of common stock at
$10 per share,
net of expenses of $466,321 29,753,599 --- 29,783,849
Exchange of Series A
Preferred Stock for common
stock 1,378,307 --- ---
Exchange of Mandatory
Redeemable Preferred Stock
for common stock 19,581,206 --- 19,606,670
Exercise of stock options 1,316 --- 1,462
Repurchase of PIK Notes at
a substantial discount from
carrying value from related
party 13,125,421 --- 13,125,421
Accrued dividends on
mandatory redeemable
preferred stock (209,720) --- (209,720)
Compensation element of
stock options forfeited (26,411) --- (26,411)
Net Loss --- (8,411,361) (8,411,361)
------------ ------------ ------------
Balance, March 31, 2000 $ 70,177,985 $(77,067,138) $ (5,184,973)
============ ============ ============
See notes to condensed financial statements.
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NEXT GENERATION NETWORK, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
----------------------------------
2000 1999
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OPERATING ACTIVITIES:
Net Loss $ (8,411,361) $ (7,005,880)
Adjustments to reconcile net loss to net cash used in
operating activities:
Accretion of long term debt discounts 392,958 385,682
Non cash interest on PIK Notes 1,453,304 1,474,590
Amortization of deferred financing costs 126,684 123,472
Depreciation and amortization 918,632 572,262
Compensation element of stock options forfeited (26,411) --
Loss from equity method investee 18,000 --
Other 52,220 --
Changes in assets and liabilities:
Receivables (338,276) (82,805)
Other current assets 11,333 17,302
Accounts payable (838,886) (349,148)
Accrued expenses (475,362) (1,108,766)
------------ ------------
Net Cash Used In Operating Activities (7,117,165) (5,973,291)
------------ ------------
INVESTING ACTIVITIES:
Purchase of equipment and furnishings (2,163,265) (1,089,623)
Deposits and other assets (12,833) (4,425)
Proceeds from sale of equipment 1,950 --
------------ ------------
Net Cash Used in Investing Activities (2,174,148) (1,094,048)
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FINANCING ACTIVITIES:
Proceeds from common stock sales and option exercise 29,785,311 --
Redeem PIK Notes (2,927,579) --
Deferred financing costs (44,125) --
Principal payments on long-term debt and capital leases (3,899) (4,381)
------------ ------------
Net Cash Provided by (Used in) Financing Activities 26,809,708 (4,381)
------------ ------------
Net increase (decrease) in cash and cash equivalents 17,518,395 (7,071,720)
Cash and cash equivalents
Beginning 403,435 24,710,213
------------ ------------
Ending $ 17,921,830 $ 17,638,493
============ ============
Supplemental Cash Flow Information
Cash payments for interest $ 4,916 $ 7,005
Non cash activities:
Increase in mandatory redeemable preferred stock and
decrease in paid-in capital from accrued dividends 209,720 612,093
Accrued interest converted to long term debt 3,194,000 2,841,000
Increase in long term debt resulting from interest accretion 392,958 385,682
Exchange of preferred stock for common stock 20,986,670 --
See notes to condensed financial statements.
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Next Generation Network, Inc.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. Basis of Presentation
The condensed balance sheet as of March 31, 2000, the condensed statements
of operations, condensed statement of changes in stockholders' deficit, and
condensed statements of cash flows for the three month periods ended March 31,
2000 and 1999, have been prepared by the Company without audit. In the opinion
of management, all adjustments (consisting only of normal recurring accruals)
necessary to present fairly the consolidated financial position, results of
operations and cash flows at and for all periods presented have been made. The
operating results for the period ended March 31, 2000, are not necessarily
indicative of the operating results to be expected for the full fiscal year.
Certain information and footnote disclosures normally included in
financial statements in accordance with generally accepted accounting principles
have been condensed or omitted.
Note 2. Long Term Debt
Long-term debt: A summary of long-term debt is as follows:
MARCH 31, DECEMBER 31,
2000 1999
---------------------------------
12% Senior Secured PIK Notes due February 2003 (net of $3,257,826
and $5,181,775 of unamortized discount attributed to warrants
issued in connection with PIK Notes.) $35,138,174 $48,112,225
Noninterest-bearing note payable, discounted at 15%, total of
$700,000 payable based on certain cash flows, if any, with
balance due December 2001, secured by equipment 549,148 529,300
Noninterest-bearing note payable, discounted at 15%, total of
$1,500,000 payable August 2003, plus 10% of certain net
revenues, if any, secured by equipment 937,469 905,308
Other debt - capital lease obligations 29,867 33,765
---------------------------------
36,654,658 49,580,598
Less current maturities 25,591 24,949
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$36,629,067 $49,555,649
=================================
In February 2000 the Company issued additional Notes in payment of
$3,194,000 of accrued interest on the aforementioned PIK Notes.
The long term debt excluding capital lease obligations and assuming full
accretion of the related discounts is payable as follows: $700,000 in 2001 and
$39,896,000 in 2003.
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Next Generation Network, Inc.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 3. Accrued Expenses
The components of accrued expenses are as follows:
March 31, December 31,
2000 1999
-----------------------------------
Site agreement fees $1,260,731 $1,382,091
Interest 768,249 2,664,945
Compensation 316,046 561,032
Legal fees 49,693 167,000
Other 305,099 73,569
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$2,699,818 $4,848,637
===================================
Note 4. Events Subsequent to December 31, 1999
LICENSE AGREEMENT: On January 17, 2000 the Company entered into a ten year
agreement with an unrelated company (licensee) for the worldwide rights to
license and distribute the E*billboard System in and around elevator and shuttle
installations and immediately adjacent to escalators and moving walkways. The
licensee shall be responsible for the installation, maintenance and
configuration of the E*billboard equipment and software, as well as acquiring
and contracting with customers (locations), in the aforementioned venues. Under
this arrangement, the Company will be responsible for, among other things,
operation of the NGN System and selling, producing and delivering advertisements
on the E*billboards in the licensee's venues. The Company and the licensee have
a sharing arrangement for advertising or other revenues generated under this
arrangement.
SALE OF COMMON STOCK: Through a Stock Purchase Agreement dated January 28,
2000 the Company sold 3,025,017 shares of its common stock at $10 per share to
an entity affiliated with the aforementioned licensee. This sale represented
approximately thirty percent of the Company's common stock, as calculated on a
fully diluted basis, immediately after giving effect to the issuance of the
shares.
Concurrent with and as a condition precedent to the January 28, 2000 stock
sale all of the outstanding shares of the Company's Series B and C Senior
Cumulative Compounding Convertible Redeemable Preferred Stock together with all
accrued and unpaid dividends were converted into 2,546,353 shares of Company
common stock. In addition, 2,760 shares of the Company's Series A Convertible
Exchangeable Preferred stock together with accumulated unpaid dividends thereon
were converted into 169,346 shares of Company common stock.
In connection with the Stock Purchase Agreement: amended and restated
Certificates of Incorporation and Amended and Restated Bylaws were adopted;
Restated Stockholders and Restated Registration Rights agreements were executed;
and certain preemptive and antidilution rights relative to shares and warrants
were terminated, or waived for this transaction.
In April, 2000, warrants issued in connection with a 1995 financing
arrangement to purchase 31,000 shares of common stock at a price of $7.143 per
share were exercised.
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SENIOR SECURED NOTE REPURCHASE: On February 25, 2000, the Company
repurchased $18,092,000 face amount of its senior secured notes from the
noteholder, who is also a stockholder of the Company, for $2,927,579. As of the
date of this transaction the repurchased senior secured notes and related
accrued interest, net of unamortized discount, had a net book value of
$16,665,000 and related deferred financing costs of $612,000. The difference
between the net carrying value of the debt and the repurchase price has been
reflected as an increase in additional paid-in capital.
STOCK OPTIONS: In February 2000, the Company adopted the 2000 Stock
Incentive Plan and reserved 1,300,000 shares of common stock for use in
connection with the plan. In addition, the Company's Board of Directors granted
666,000 stock options to management. These grants will be effective with the
completion of an initial public offering and each option will have an exercise
price equal to the initial public offering price per share. At the same time the
Board of Directors also granted options to acquire 278,000 shares at an exercise
price of $10.00 per share to Company employees under its other stock option
plans.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
The forward-looking statements in this report involve known and unknown
risks, uncertainties and other important factors that could cause the actual
results, performance or achievements of the Company, or industry results, to
differ materially from any future results, performance or achievements expressed
or implied by such forward-looking statements. Such risks, uncertainties and
other important factors include, among others: advertising rates; the ability to
secure advertising contracts; the ability to secure new sites for E*billboards;
the loss of key existing site agreements; changes in the political and
regulatory climate; out-of-home advertising industry trends; competition;
changes in business strategy or development plans; availability of qualified
personnel; changes in, or the failure or inability to comply with, government
regulations; and other factors referenced in this report.
GENERAL
We are the leader in the emerging digital out-of-home media industry. We
are currently implementing a rapid build-out of the world's largest network of
digital video advertising displays, which we call E*billboards. Since our
inception, we have developed our proprietary technology platform to deliver
digital advertising and other media across our growing network of E*billboards
in the U.S.
We have organized our network rollout strategy on a market by market basis,
concentrating on major U.S. advertising markets. As of March 31, 2000, we have
installed E*billboards at 5,399 sites and we have secured long-term site rights
covering approximately 5,000 additional sites that are pending installation. The
historic build-out of our network is illustrated in the following table.
INSTALLED E*BILLBOARD SITES
DMA
RANK MARKET(1) DEC. 31, 1998 MARCH 31, 1999 DEC 31, 1999 MARCH 31, 2000
- ------- ---------------------- ---------------- ----------------- --------------- ------------------
1 New York 447 633 1,317 1,482
2 Los Angeles 490 490 578 596
3 Chicago 71 120 172 218
4 Philadelphia 247 269 307 327
5 San Francisco 197 198 245 300
6 Boston 179 177 241 259
7 Dallas 263 280 306 320
8 Washington DC 510 507 519 517
14 Tampa 141 150 165 168
16 Miami 86 91 117 130
20 Sacramento 62 62 64 67
22 Orlando 243 248 257 259
24 Baltimore 202 203 204 201
26 San Diego 133 134 157 162
40 Norfolk 238 241 237 238
44 West Palm Beach 63 64 67 72
83 Ft. Myers 46 51 54 55
Developmental Markets(2) 12 16 24 28
-- -- -- --
TOTAL SITES 3,630 3,934 5,031 5,399
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(1) In contiguous markets, such as Washington, D.C. and Baltimore,
San Francisco and Sacramento, Miami and West Palm Beach and
Tampa and Ft. Myers, we have a single sales office that
supports both markets.
(2) Developmental markets consist of markets in which we have
installed 10 or less E*billboards.
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Our current geographic expansion is primarily focused on the ten largest
U.S. markets, with the intention of having a significant presence in the 25
largest U.S. markets by 2002.
We generate revenues principally through the sale of advertising on our
network. E*billboards present repeating sequences, or loops, of advertising and
programming. As currently configured, the loops consist of twelve ten-second
advertising slots and six to eight six-second programming slots, which currently
provide our network with more than 60,000 advertising slots available for sale
on a daily basis. We charge a fixed daily rate for advertising slots which
averages approximately $4.00. Advertising rates are based upon the availability
of space on the network for the desired location, the size and demographic
makeup of the market served by the E*billboards and the availability of
alternative advertising media in the area. Most advertising contracts are
short-term, typically for periods of one to three months, and are with local and
regional advertisers. As the number and geographic diversity of our sites
increases, we believe we will be able to attract more national advertisers to
our network, thereby increasing the contribution of national advertising revenue
to our total advertising revenue in the future.
We recognize advertising revenues at the time the advertisement appears on
our network. We bill advertisers monthly for contracts that exceed one month in
length, and on the first day of the month during which the advertisement appears
on our network for contracts for shorter periods. When advertising agencies are
involved, they deduct a commission, which typically is 15% of gross revenue, and
remit only the net amount to us.
Installation costs for a new site include the cost of acquiring hardware
and the cost to install the equipment, which are capitalized and depreciated
over five years. The fully installed average per site cost for a typical site
with a single E*billboard is approximately $2,500. At some sites, more than one
E*billboard is installed; at those sites, we may receive higher advertising
rates.
Network operating expenses are costs associated with the daily operation,
maintenance and depreciation of E*billboards, as well as the site agreement fees
paid to site owners. Most network operating expenses generally increase
proportionally with the number of installed sites. On a site by site basis,
telecommunication and maintenance costs remain relatively fixed, averaging
approximately $55 to $65 per month. Accordingly, we expect that these
telecommunication and maintenance expenses as a percentage of advertising
revenues will decrease as our advertising revenues increase. In addition, site
agreements generally provide the site operator with a percentage of the
advertising revenues (typically 10% per site) derived from the E*billboards at
the particular site. Some site agreements provide for a minimum annual site fee.
Based on the number of E*billboards installed on March 31, 2000, we are
committed to minimum site agreement fees of approximately $3.3 million annually
through 2003. We incur network operating expenses in connection with the
E*billboards prior to generating revenues from the sites.
Selling expenses include all costs associated with operating our sales
offices. The majority of these expenses are related to compensation and related
benefits for sales personnel. We pay our sales personnel fixed salaries and
sales commissions. During the first quarter of 2000 and 1999, the commission
portion of the compensation was 14.7% and 14.9% of net revenues, respectively.
General and administrative expenses include rent for our headquarters and
compensation and related benefits for personnel involved in corporate
development, field operations, network operations, marketing, creative services,
management information systems and accounting.
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Corporate overhead includes compensation and related benefits for senior
management and administrative personnel, legal, accounting and other
professional fees, travel, insurance and telecommunications.
Costs of acquiring hardware and installing it in new sites are capitalized
and depreciated over five years. Other equipment and furnishings are depreciated
over their lives of three to seven years. Leasehold improvements are amortized
over the terms of the respective leases.
Consistent with our expansion strategy, we formed an alliance with Otis
Elevator Company (Otis) in January 2000. The agreement provides that Otis has
the exclusive rights to place E*billboards in elevators, escalators, walkways
and shuttles throughout the world. Currently, Otis has agreements to maintain
more than 1.2 million elevators in such buildings. Otis is responsible for the
negotiation of site agreements and the installation and maintenance of
E*billboards. We are not responsible for any capital expenditures related to the
installation of E*billboards at any of these sites because Otis may either sell
the equipment to the site owner or may fund those expenditures. As
consideration, Otis receives a percentage of the advertising revenues that we
derive from each E*billboard on a site by site basis, a portion of which Otis
may remit to the relevant site operator. The agreement also provides Otis with
incentive payments upon the attainment of certain installation goals. We are
responsible for on-going network operations, including advertising sales and
content generation. Typically, we intend to place an E*billboard in every
elevator at each site and as a result, we expect to charge a higher advertising
rate per site than we currently receive for a typical site with only one
E*billboard.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2000 compared to Three Months Ended March 31,
1999
Net Revenues. Net revenues increased to approximately $2.3 million for the
three months ended March 31, 2000, from approximately $0.9 million for the three
months ended March 31, 1999, or 144.5%. The increase was attributable to an
increase in the average number of sites operating during the quarter (5,215 in
2000 compared to 3,782 in 1999) and increased occupancy levels of advertising
slots sold (a 93% increase over the first quarter of 1999).
Network Operating Expenses. Network operating expenses increased to
approximately $2.1 million for the three months ended March 31, 2000, from
approximately $1.4 million for the three months ended March 31, 1999, or 53.6%.
The increase was due primarily to the increase in the average number of
installed E*billboard sites, which increased 37.9% from 1999 to 2000. Major
components of network operating expenses for the respective periods are:
Three Months ended March 31,
-------------------------------------
2000 1999
---- ----
Site agreement expense $1,068,000 $756,000
Telecommunications expense 787,000 510,000
Maintenance expense 275,000 121,000
Selling Expenses. Selling expenses increased to approximately $3.1
million for the three months ended March 31, 2000, from approximately $2.2
million for the three months ended
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March 31, 1999, or 40.4%. The increase resulted primarily from increased
compensation costs due to the addition of sales office staff (average 2000
headcount of 92 compared to 1999 average of 86) and increased commissions due to
increased sales, additional training and travel costs for a company wide sales
conference, and increased graphic production costs.
General and Administrative Expenses. General and administrative expenses
increased to approximately $1.8 million for the three months ended March 31,
2000, from approximately $1.2 million for the three months ended March 31, 1999,
or 48.5%. The increase was primarily attributable to employee compensation and
related costs, the largest component of general and administrative expense,
which increased to $1.2 million in 2000 compared to $754,000 in 1999. The
compensation increases were due to the additional administrative staff in
marketing and accounting and increased corporate development staff to assist in
securing additional venues. Research and development costs decreased to $41,000
in 2000 compared to $72,000 in 1999. The decrease in research and development
costs was due to the substantial completion of our network technology platform
during 1999. We capitalized $110,000 of software costs developed or obtained for
internal use during the first quarter of 2000. There were no significant
capitalizable internal use software costs in the three months ended March 31,
1999.
Corporate Overhead. Corporate overhead increased to approximately $929,000
for the three months ended March 31, 2000, from approximately $824,000 for the
three months ended March 31, 1999, or 12.7%. This increase was primarily due to
increased legal, accounting, and other professional fees ($306,000 in 2000
compared to $109,000 in 1999), offset by a reduction in compensation and related
costs ($363,000 in 2000 compared to $434,000 in 1999) primarily due to a
reduction in training costs.
Depreciation and Amortization. Depreciation and amortization increased to
approximately $919,000 for the three months ended March 31, 2000, from
approximately $572,000 for the three months ended March 31, 1999, or 60.5%.
Depreciation expense relating to our E*billboard equipment was $711,000 in 2000
compared to $466,000 in 1999.
Operating Loss. As a result of the above factors, operating loss increased
to approximately $6.6 million for the three months ended March 31, 2000, from
approximately $5.3 million for the three months ended March 31, 1999, or 25.1%.
Net Interest Expense. Net interest expense increased to approximately $1.8
million for the three months ended March 31, 2000, from approximately $1.7
million for the three months ended March 31, 1999.
Net Loss. As a result of the above factors, the net loss increased to
approximately $8.6 million for the three months ended March 31, 2000, from
approximately $7.6 million for the three month ended March 31, 1999, or 13.2%.
The Company expects to incur additional costs to install additional
E*billboards and for operating costs to expand NGN. As a result, the Company
expects to incur a net loss for 2000 and expects to continue to operate at a
loss for the foreseeable future.
LIQUIDITY AND CAPITAL RESOURCES
Through March 31, 2000, our primary source of liquidity has been proceeds
from the sale of equity and debt securities.
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As of March 31, 2000, total cash and cash equivalents were $17.9 million
compared to $403,000 as of December 31, 1999. The increase in cash was a result
of $7.1 million of cash used in operating activities (due primarily to the loss
from operations) and $2.2 million of cash used in investing activities
(primarily for capital expenditures related to the expansion of our network)
offset by $26.8 million of cash provided by financing activities. The financing
activities included net proceeds from the sale of common stock to a subsidiary
of United Technologies Corporation less the repurchase of senior secured notes.
Interest on the senior secured notes is payable either in cash or
additional senior secured notes, at our option, through August 1, 2000. On
February 25, 2000, we purchased $18.1 million aggregate face amount of senior
secured notes from a note holder for $2.9 million, leaving an aggregate face
amount of senior secured notes outstanding of $38.4 million. We expect to pay
interest through August 1, 2000, by issuing additional senior secured notes.
Thereafter, our semi-annual cash interest requirements will be $2.4 million
until the notes mature on February 1, 2003.
Our primary uses of cash are capital expenditures for E*billboards and for
our working capital requirements. We anticipate capital expenditures of at least
$30 million related to the purchase and installation of our E*billboards over
the next two years. To the extent we are successful at securing more sites than
anticipated, our capital expenditures and working capital requirements could be
significantly larger than anticipated. Our cash flow is dependent on our ability
to increase advertising revenues and is subject to financial, economic and other
factors, some of which are beyond our control. We will need to raise additional
capital to satisfy our obligations and to attain our current business plan. We
cannot assure you that the additional funds will be available, or if available,
will be available on terms acceptable to us.
SEASONALITY
Our business is in a growth phase as we continue to expand our footprint.
Consequently, we have not experienced any material seasonal factors which have
affected our advertising revenues to date. We do expect, however, that seasonal
revenue fluctuations caused by variations in advertising expenditures by local,
regional and national advertisers, may effect our revenues in the future as we
achieve a larger installed base of E*billboard sites.
MARKET RISK AND IMPACT OF INFLATION
We do not believe we have any significant risk related to interest rate
fluctuations since we have only fixed rate debt. We believe that inflation has
not had a material impact on our results of operations for the quarters ended
March 31, 2000 and 1999. We cannot assure you that future inflation will not
have an adverse impact on our operating results and financial condition.
YEAR 2000
To date, we have not experienced any material difficulties associated with
the Year 2000 issue. To our knowledge, no third party upon which we depend has
experienced a material Year 2000 problem. However, it is still possible that
errors or defects may remain undetected, or that dates other than January 1 or
February 29, 2000, may trigger Year 2000 problems. If this occurs with respect
to our software or computer systems, or those of third parties on which we rely,
our reputation, business, operating results and financial condition could
suffer.
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PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
Effective in February 2000, the Company expanded its Board of Directors by
one director and David Voelker and Timothy Hartman resigned as Directors. In
February 2000, Ari Bousbib, Anthony Bonacci and William Grimes joined the Board
as Directors of the Company.
ITEM 6. Exhibits and Reports on Form 8-K:
a) Exhibits
27.1 Financial Data Schedule
b) Reports on Form 8-K
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on behalf by the undersigned, thereto duly
authorized.
NEXT GENERATION NETWORK, INC.
Date: May 12, 2000 By: /s/ Thomas M. Pugliese
--------------------------------------
Thomas M. Pugliese
Chief Executive Officer
Date: May 12, 2000 By: /s/ Michael J. Kolthoff
--------------------------------------
Treasurer and Assistant Secretary
(principal financial and accounting officer)
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