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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:
SEPTEMBER 30, 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)
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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
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Number of shares of Common Stock outstanding as of October 31, 2000:
8,919,641
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
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Item 1. Consolidated Financial Statements.
Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999 3
Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2000 and 1999 4
Consolidated Statements of Stockholders' Equity for the Nine Months Ended September 30, 2000 5
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2000 and 1999 6
Notes to Consolidated 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.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,173,475 $ 403,435
Accounts receivable, net 2,082,240 1,511,939
Other current assets 371,925 43,159
Barter credit 1,069,992 42,125
------------ ------------
Total current assets 4,697,632 2,000,658
------------ ------------
Property and Equipment, net 17,452,482 13,473,100
Deferred Financing Costs, net 1,192,361 2,050,481
Other Assets 118,241 191,730
------------ ------------
$ 23,460,716 $ 17,715,969
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LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Current maturities of long-term debt $ 16,251 $ 24,949
Accounts payable 3,344,238 2,721,429
Accrued expenses (Note 3) 4,531,589 4,848,637
------------ ------------
Total current liabilities 7,892,078 7,595,015
------------ ------------
Non-current accrued site lease expense -- 223,239
------------ ------------
Long-term Debt (Note 2) 39,583,441 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
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 2,960 and 6,000 shares, respectively, stated
at liquidation value, excluding cumulative unpaid dividends
of $1,037,850 and $1,980,000, respectively 1,480,000 3,000,000
Common stock, $0.01 par value; authorized 20,000,000
shares; issued and outstanding 8,919,641
and 2,662,680 shares, respectively (Note 4) 89,196 26,627
Additional paid-in capital 70,537,516 6,574,267
Accumulated deficit (96,096,738) (68,655,777)
Other comprehensive income-foreign currency exchange (24,777)
------------ ------------
(24,014,803) (59,054,883)
------------ ------------
$ 23,460,716 $ 17,715,969
============ ============
See notes to condensed financial statements.
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NEXT GENERATION NETWORK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------- -------------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
Revenues:
Advertising Revenue $ 2,265,659 $ 1,692,417 $ 7,213,291 $ 3,802,700
Less agency commissions (40,379) (78,097) (114,077) (137,523)
-------------- ------------- -------------- --------------
Net advertising revenue 2,225,280 1,614,320 7,099,214 3,665,177
Network equipment sales -- 4,807 -- 4,807
Network operating revenue 210 210 630 630
-------------- ------------- -------------- --------------
2,225,490 1,619,337 7,099,844 3,670,614
-------------- ------------- -------------- --------------
Costs and expenses:
Network Operating Expenses 2,326,601 1,675,214 6,613,100 4,664,168
Selling Expenses 3,571,835 2,117,221 9,879,414 6,548,213
General and administrative expenses 3,252,889 1,459,278 7,568,286 3,863,631
Corporate overhead 784,880 748,421 2,590,088 2,355,964
Depreciation and amortization 1,181,312 719,038 3,129,628 1,925,865
Cost of network equipment sales -- 1,526 -- 1,526
-------------- ------------- -------------- --------------
11,117,517 6,720,698 29,780,516 19,359,367
-------------- ------------- -------------- --------------
Operating loss (8,892,027) (5,101,361) (22,680,672) (15,688,753)
Non operating income (expense):
Interest expense (1,643,417) (2,116,212) (5,197,763) (6,137,607)
Interest income 87,754 122,726 522,518 551,464
Other expense -- -- (85,044) (8,453)
-------------- ------------- -------------- --------------
Net loss (10,447,690) (7,094,847) (27,440,961) (21,283,349)
Preferred stock dividends -- 672,459 272,832 2,050,127
-------------- ------------- -------------- --------------
Net loss applicable to common stockholders $ (10,447,690) $ (7,767,306) $ (27,713,793) $ (23,333,476)
-------------- ------------- -------------- --------------
Basic and diluted net loss per common share $ (1.18) $ (2.92) $ (3.48) $ (8.76)
-------------- ------------- -------------- --------------
Weighted average number of common shares
outstanding 8,824,648 2,662,680 7,959,664 2,662,680
============== ============= ============== ==============
See notes to condensed financial statements.
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NEXT GENERATION NETWORK, INC.
CONSOLIDATED 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 a $10
per share, net of expenses of
$466,321 -- -- 3,025,017 30,250
Exchange of Series A Preferred
Stock for common stock (3,040) (1,520,000) 186,676 1,867
Exchange of Mandatory
Redeemable Preferred Stock for
common stock -- -- 2,546,353 25,463
Exercise of stock options -- -- 16,060 161
Exercise of warrants -- -- 482,855 4,828
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 -- -- -- --
Foreign currency exchange -- -- -- --
Net Loss -- -- -- --
------------ ------------ ------------ ------------
Balance, September 30, 2000 2,960 $ 1,480,000 8,919,641 $ 89,196
============ ============ ============ ============
Additional Foreign
Paid-In Accumulated Currency
Capital Deficit Exchange Total
------------ ------------ ------------ ------------
Balance, December 31, 1999 $ 6,574,267 $(68,655,777) -- $(59,054,883)
Issuance of common stock a $10
per share, net of expenses of
$466,321 29,753,599 -- -- 29,783,849
Exchange of Series A Preferred
Stock for common stock 1,518,133 -- -- --
Exchange of Mandatory
Redeemable Preferred Stock for
common stock 19,581,206 -- -- 19,606,669
Exercise of stock options 1,445 -- -- 1,606
Exercise of warrants 219,576 -- -- 224,404
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)
Foreign currency exchange -- -- (24,777) (24,777)
Net Loss -- (27,440,961) -- (27,440,961)
------------ ------------ ------------ ------------
Balance, September 30, 2000 $ 70,537,516 $(96,096,738) (24,777) $(24,014,803)
============ ============ ============ ============
See notes to condensed financial statements.
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NEXT GENERATION NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------
2000 1999
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OPERATING ACTIVITIES:
Net Loss $(27,440,961) $(21,283,349)
Adjustments to reconcile net loss to net cash used in
operating activities:
Accretion of long term debt discounts 1,053,608 1,190,946
Non cash interest on PIK Notes 3,797,628 4,546,928
Amortization of deferred financing costs 333,962 383,896
Depreciation and amortization 3,129,628 1,925,865
Compensation element of stock options forfeited (26,411) (44,019)
Loss from equity method investee 32,824 --
Other 52,220 8,453
Changes in current assets and liabilities:
Receivables (517,609) (932,249)
Other current assets (1,356,633) 2,773
Accounts payable 622,809 (14,683)
Accrued expenses 1,310,085 410,964
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Net Cash Used In Operating Activities (19,008,850) (13,804,475)
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INVESTING ACTIVITIES:
Purchase of equipment and furnishings (7,155,212) (3,431,196)
Deposits and other assets (19,997) (96,505)
Proceeds from sale of property and equipment 1,950 5,207
------------ ------------
Net Cash Used in Investing Activities (7,173,259) (3,522,494)
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FINANCING ACTIVITIES:
Proceeds from common stock sales and option exercise 30,009,861 --
PIK Note redemption (2,927,579) --
Deferred financing costs (87,842) --
Principal payments on long-term debt and capital leases (17,514) (15,771)
------------ ------------
Net Cash (Used in) Provided by Financing Activities 26,976,926 (15,771)
------------ ------------
FOREIGN CURRENCY EXCHANGE (24,777) --
------------ ------------
Net increase (decrease) in cash and cash equivalents 770,040 (17,342,740)
Cash and cash equivalents
Beginning 403,435 24,710,213
------------ ------------
Ending $ 1,173,475 $ 7,367,473
============ ============
Supplemental Cash Flow Information
Cash payments for interest $ 12,565 $ 15,836
Non cash activities:
Increase in mandatory redeemable preferred stock and
decrease in paid-in capital from accrued dividends 209,720 1,926,377
Accrued interest converted to long term debt 5,492,000 5,853,000
Increase in long term debt resulting from interest accretion 1,053,608 1,190,947
Exchange of preferred stock for common stock 21,126,669 --
Additional paid in capital resulting from PIK Note redemption 13,125,421 --
See notes to condensed financial statements.
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Next Generation Network, Inc.
NOTES TO FINANCIAL STATEMENTS
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(Unaudited)
NOTE 1. Basis of Presentation
The condensed balance sheet as of September 30, 2000, the condensed
statements of operations for the three and nine month periods ended September
30, 2000 and 1999, condensed statement of changes in stockholders' deficit for
the nine months ended September 30, 2000, and condensed statements of cash flows
for the nine month periods ended September 30, 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
September 30, 2000, are not necessarily indicative of the operating results to
be expected for the full fiscal year.
In December 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements". SAB No. 101 summarizes some of the staff's interpretations of the
application of generally accepted accounting principles to revenue recognition.
The Company began following the consensus reached in EITF 99-17 "Accounting for
Advertising Barter Transactions" since its adoption in 2000. The Company will
adopt SAB No. 101 when required in the fourth quarter of 2000. Management
believes the adoption of SAB No. 101 will not have a significant affect on the
Company's financial statements.
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
A summary of long-term debt is as follows:
SEPTEMBER 30, DECEMBER 31,
2000 1999
----------------- ----------------
12% Senior Secured PIK Notes due February 2003 (net of $2,704,412 and
$5,181,775 of unamortized discount attributed to warrants
issued in connection with PIK Notes.) $37,989,588 $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 588,845 529,300
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 1,005,008 905,308
Other debt - capital lease obligations 16,251 33,765
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39,599,692 49,580,598
Less current maturities 16,251 24,949
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$39,583,441 $49,555,649
================= ================
The Company issued additional Notes in payment of accrued interest on
the aforementioned PIK Notes in February 2000 ($3,194,000) and August 2000
($2,298,000).
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 $42,194,000 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:
September 30, December 31,
2000 1999
-------------------- ------------------
Site agreement fees $2,726,772 $1,382,091
Interest 814,573 2,664,945
Compensation 660,650 561,032
Legal fees 64,693 167,000
Other 264,901 73,569
-------------------- ------------------
$4,531,589 $4,848,637
==================== ==================
Note 4. Events Subsequent to December 31, 1999
COMMON STOCK AUTHORIZED: The Company amended its Certificate of
Incorporation to increase the number of authorized shares of common stock of the
Company to 25,000,000 shares in November 2000.
SALE OF COMMON STOCK: During the third quarter of 2000, 100 shares of
the Company's Series A Cumulative Preferred stock together with accumulated
unpaid dividends thereon were converted into 6,288 shares of Company common
stock.
STOCK OPTIONS: In November 2000 the Board of Directors granted options
to acquire 181,000 common shares at an exercise price of $8.45 per share to
Company employees under its 2000 Stock Incentive Plan. As of September 30, 2000,
options to purchase 1,057,482 shares were issued and outstanding, of which
217,480 were exercisable.
STOCK WARRANTS: In August 2000, warrants issued in connection with the
12% Senior Secured PIK Notes to purchase 281,872 shares of common stock at a
price of $.01 per share were exercised. In November 2000 the Company issued
warrants to purchase 316,000 shares of common stock at a price of $8.45 per
share. One third of the warrants are exercisable after November 6, 2001, the
second third after November 6, 2002 and the remainder after November 6, 2003.
The warrants must be exercised prior to November 6, 2007.
SALE OF MANDATORY REDEEMABLE PREFERRED STOCK: In November 2000 the
Board of Directors created and designated for issuance 7,500,000 shares of $1
par Series D 8% Convertible Participating Preferred Stock. On November 7, 2000,
the Company issued 3,550,296 shares of its Series D preferred stock to private
investors at $8.45 per share. Proceeds upon the issuance of this stock, net of
estimated issuance costs of approximately $2.6 million, totaled approximately
$27.4 million. In connection with this transaction, a finders fee of $300,000
was paid to a director of the Company by the investment banker.
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The Series D preferred stock is senior to all other classes of capital
stock with respect to dividend and liquidation rights. Dividends, which accrue
at 8% on an initial liquidation value of $8.45 per share, are to be paid semi
annually on June 15 and December 15. Accrued dividends, to the extent unpaid,
are compounded annually upon the stock's liquidation value.
The Series D preferred stock and all accrued unpaid dividends are
convertible, in whole or in part, at the option of the holder into common stock
at a conversion price of $8.45. The stock is convertible at the option of the
Company in the event of a qualifying public offering prior to the mandatory
redemption date, which is November 7, 2005.
If the Company consummates an IPO prior to December 31, 2001 that does
not yield at least a 100% annualized return to the Series D holders, the Company
has agreed to issue to each Series D holder, warrants to purchase additional
shares of preferred stock at $.001 per share such that the holder would yield a
100% return. In addition, if the Company fails to consummate a qualifying IPO
prior to December 31, 2001, the Company has agreed to issue warrants to purchase
additional shares of preferred stock at $.001 per share such that the effective
initial price per share of the preferred stock could be adjusted down to $7.60
per share.
The Company is also required to and has reserved from its authorized
but unissued shares of common stock, solely for the conversion of Series D
preferred stock, the full number of shares of common stock issuable if all
outstanding Series D shares and warrants were to be converted in full.
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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. During the third quarter of 2000, initial installations of
E*billboards were completed in Paris, France and Sydney, Australia.
We have organized our network rollout strategy on a market by market
basis, concentrating on major U.S. advertising markets. As of September 30,
2000, we have installed E*billboards at 6,442 sites and we have secured
long-term site rights covering approximately 4,500 additional sites that are
pending installation. The historic build-out of our network is illustrated in
the following table.
INSTALLED E*BILLBOARD SITES
DMA DEC. 31, JUNE 30, SEP. 30, DEC 31, JUNE 30, SEP. 30,
RANK MARKET 1998 1999 1999 1999 2000 2000
- --------- ------------------------- -------- -------- -------- ------- -------- ---------
1 New York 447 882 1,102 1,317 1,699 1,750
2 Los Angeles 490 500 515 578 605 608
3 Chicago 71 130 142 172 242 269
4 Philadelphia 247 286 291 307 365 379
5 San Francisco 197 202 215 245 344 378
6 Boston 179 189 217 241 272 297
7 Dallas 263 281 279 306 335 359
8 Washington DC 510 509 517 519 523 522
12 Seattle 41 149
14 Tampa 141 158 159 165 168 171
16 Miami 86 88 98 117 137 144
18 Denver 116 136
20 Sacramento 62 62 63 64 69 71
22 Orlando 243 251 257 257 257 256
24 Baltimore 202 204 204 204 209 210
26 San Diego 133 140 141 157 163 165
40 Norfolk 238 240 240 237 239 239
44 West Palm Beach 63 65 65 67 84 95
50 Providence 10 10 13 14
60 Austin 34 38
61 Richmond 46
83 Ft. Myers 46 51 52 54 57 57
Paris, France 11
Sydney, Australia 54
Developmental Markets(1) 12 16 8 14 21 24
--- --- ----- ----- ----- -----
TOTAL SITES 3,630 4,254 4,575 5,031 5,933 6,442
===== ===== ===== ===== ===== =====
(1) 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 25 largest
U.S. markets and major international cities including Paris, Sydney and London.
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 77,000 advertising slots available for sale
on a daily basis. We charge a fixed daily rate for advertising slots which
currently averages approximately $3.00. 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 has
increased, we have recently been able to attract more national and regional
advertisers to our network, thereby increasing the expected contribution of
national and regional advertising revenue to our total advertising revenue in
the future. As a part of the trend toward larger advertisers, we recently
reorganized the selling organization into regional sales offices located in New
York, Washington, Miami, Dallas, Chicago, and Los Angeles.
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. Revenue also includes barter
transactions, which represent the exchange of E*billboard advertising for goods,
advertising, or other services, which is recognized at estimated fair value of
the products or services received, or in the case of advertising transactions,
revenue is based on the average cash sales price of similar advertising in the
six month period prior to the transaction. During the first nine months of 2000,
barter revenue represented approximately 20% of total revenue and was used
primarily in connection with a national advertising campaign for E*billboards.
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 $60 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 September 30, 2000, we are
committed to minimum site agreement fees of approximately $3.7 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 third quarter of 2000 and 1999, the
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commission portion of compensation was 8.2% and 13.5% of net revenues,
respectively. For the nine months ended September 30, 2000 and 1999, commissions
were 11.1% and 14.0% 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.
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 estimated useful lives of three to seven years. Leasehold
improvements are amortized over the terms of the respective leases.
RESULTS OF OPERATIONS
Net Revenues. Net revenues increased to approximately $2.2 million for
the third quarter of 2000 compared to $1.6 million for the same quarter of 1999
and were $7.1 million for the nine months ended September 30, 2000 compared to
$3.7 million for the same period of 1999. The increase was attributable to an
increase in the average number of sites operating during the periods (which
increased 40% and 39% during the three and nine month periods ended September
30, 2000 compared to the average sites during the comparable 1999 periods),
increased occupancy levels of advertising slots sold (which increased 31% and
71% during the three and nine months ended September 30, 2000 compared to the
comparable 1999 periods) and increased barter revenue offset by a decrease in
the average daily rate for advertising slots sold.
Network Operating Expenses. Network operating expenses increased to
approximately $2.3 million for the third quarter of 2000 compared to $1.7
million for the same quarter of 1999 and were $6.6 million for the nine months
ended September 30, 2000 compared to $4.7 million for the same period of 1999.
The increase was due primarily to the increase in the average number of
installed E*billboard sites, which increased approximately 39% from 1999 to
2000. Major components of network operating expenses for the respective periods
are:
3 months ended 3 months ended 9 months ended 9 months ended
Sep. 30, 2000 Sep. 30, 1999 Sep. 30, 2000 Sep. 30, 1999
------------- ------------- ------------- -------------
Site agreement expense $958,000 $827,000 $3,044,000 $2,426,000
Telecommunications expense 1,024,000 650,000 2,690,000 1,725,000
Maintenance expense 344,000 198,000 879,000 513,000
Selling Expenses. Selling expenses increased to approximately $3.6
million for the third quarter of 2000 compared to $2.1 million for the same
quarter of 1999 and were $9.9 million for the nine months ended September 30,
2000 compared to $6.5 million for the same period of 1999. The increase resulted
primarily from increased compensation costs due to the addition of sales staff
(average 2000 headcount of 98 and 96 for the three and nine months ended
September 30, 2000 compared to an average of 84 and 85 for the comparable 1999
periods), additional training and travel costs for a
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company wide sales conference, employment fees, increased graphic production
costs and higher bad debt expense in line with the increased revenues. Selling
costs also include $235,000 related to operations in Paris and Sydney as a
result of the opening of sales offices in those markets during the third
quarter. During the third quarter, we also completed a strategic reorganization
of the sales organization resulting in the closing of several local sales
offices and a reduction in headcount of approximately 50. This was done as part
of the strategy to move toward more regional and national advertisers and rely
less on local advertisers as our network expands. Approximately $400,000 of
costs were incurred during the third quarter in connection with the
reorganization. The reorganization will result in substantial savings beginning
in the fourth quarter.
General and Administrative Expenses. General and administrative
expenses increased to approximately $3.3 million for the third quarter of 2000
compared to $1.5 million for the same quarter of 1999 and were $7.6 million for
the nine months ended September 30, 2000 compared to $3.9 million for the same
period of 1999. The major component of the increase was costs attributed to a
national media advertising campaign. Advertising costs were $989,000 and $1.5
million during the three and nine months ended September 30, 2000 compared to
$27,000 and $63,000 during the comparable 1999 periods. The increase was also
attributable to employee compensation and related costs, the largest component
of general and administrative expense, which increased to $1.4 million and $3.8
million during the three and nine months ended September 30, 2000 compared to
$936,000 and $2.5 million during the comparable 1999 periods. Travel expenses
also increased to $244,000 and $630,000 during the three and nine months ended
September 30, 2000 compared to $55,000 and $176,000 during the comparable 1999
periods. Research and development costs were to $40,000 and $122,000 during the
three and nine months ended September 30, 2000 compared to $21,000 and $164,000
during the comparable 1999 periods. We capitalized $204,000 and $659,000 of
software costs developed or obtained for internal use during the three and nine
months periods ended September 30, 2000. There were no significant capitalizable
internal use software costs in the three and nine months ended September 30,
1999.
Corporate Overhead. Corporate overhead increased to approximately
$785,000 for the third quarter of 2000 compared to $748,000 for the same quarter
of 1999 and was $2.6 million for the nine months ended September 30, 2000
compared to $2.4 million for the same period of 1999. The increase in the third
quarter and nine month periods was primarily due to increased compensation costs
and professional fees offset by reductions in travel costs.
Depreciation and Amortization. Depreciation and amortization increased
to approximately $1.2 million for the third quarter of 2000 compared to $719,000
for the same quarter of 1999 and was $3.1 million for the nine months ended
September 30, 2000 compared to $1.9 million for the same period of 1999.
Depreciation expense relating to our E*billboard equipment was $895,000 for the
third quarter of 2000 compared to $589,000 for the same quarter of 1999 and was
$2.4 million for the nine months ended September 30, 2000 compared to $1.6
million for the same period of 1999.
Operating Loss. As a result of the above factors, operating loss
increased to approximately $8.9 million for the third quarter of 2000 compared
to $5.1 million for the same quarter of 1999 and was $22.7 million for the nine
months ended September 30, 2000 compared to $15.7 million for the same period of
1999.
Net Interest Expense. Net interest expense decreased to approximately
$1.6 million for the third quarter of 2000 compared to $2.0 million for the same
quarter of 1999 and was $4.7 million for the nine months ended September 30,
2000 compared to $5.6 million for the same period of 1999. The
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reduction in interest was primarily due to the repurchase of $18.1 million face
amount of PIK Notes in February 2000.
Net Loss. As a result of the above factors, the net loss increased to
approximately $10.4 million for the third quarter of 2000 compared to $7.1
million for the same quarter of 1999 and was $27.4 million for the nine months
ended September 30, 2000 compared to $21.3 million for the same period of 1999.
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 September 30, 2000, our primary source of liquidity has been
proceeds from the sale of equity and debt securities.
As of September 30, 2000, total cash and cash equivalents were $1.2
million compared to $403,000 as of December 31, 1999. The increase in cash was a
result of $19.0 million of cash used in operating activities (due primarily to
the loss from operations offset by noncash expenses for depreciation,
amortization, accretion and interest) and $7.2 million of cash used in investing
activities (primarily for capital expenditures related to the expansion of our
network) offset by $27.0 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.
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. On
August 1, 2000 we issued additional Notes in payment of $2,298,000 of accrued
interest on the PIK Notes. Beginning on February 1, 2001, our semi-annual cash
interest requirements on the PIK Notes will be approximately $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. In November
2000, we received net proceeds of approximately $27.4 million from the sale of
mandatory redeemable preferred stock. 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 three and nine
month periods ended September 30, 2000 and 1999. We cannot assure you that
future inflation will not have an adverse impact on our operating results and
financial condition.
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PART II. OTHER INFORMATION
ITEM 5. Other Information.
David Pecker, one of our directors, is affiliated with American Media
Operations, Inc. For the three and nine month periods ended September 30, 2000,
we recognized revenues of $219,783 and $419,772 from American Media. During the
three and nine months ended September 30, 2000, we incurred advertising expenses
of $21,250 from American Media.
ITEM 6. Exhibits and Reports on Form 8-K:
a) Exhibits
3.1(a) Amended and Restated Certificate of Incorporation
3.2(a) Amended and Restated By-Laws
4.1(a) Preferred Stock Purchase Agreement dated November 6, 2000
between the Company and CDPQ Capital Communications, Inc.
4.1(b) Amended and Restated Registration Rights Agreement among the
Company and certain of its security holders dated as of
November 6, 2000
4.1(c) Amended and Restated Stockholders' Agreement among the Company
and certain of its securities holders dated as of November 6,
2000
10.1(a) Amendment to E*Display Agreement dated November 3, 2000
between the Company and Otis Elevator Company
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: November 14, 2000 By: /s/ Thomas M. Pugliese
----------------------------------
Thomas M. Pugliese
Chief Executive Officer
Date: November 14, 2000 By: /s/ Michael R. Robinson
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Michael R. Robinson
Chief Financial Officer
(principal financial officer)
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