CENTURY MEDIA, INC.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000
CENTURY MEDIA, INC.
CONTENTS
PAGE 1 INDEPENDENT AUDITORS' REPORT
PAGE 2 BALANCE SHEETS AS OF DECEMBER 31, 2001 AND 2000
PAGE 3 STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001
AND 2000
PAGE 4 STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIENCY) EQUITY FOR
THE YEARS ENDED DECEMBER 31, 2001 AND 2000
PAGE 5 STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2001
AND 2000
PAGES 6 - 19 NOTES TO FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of:
Century Media, Inc.
We have audited the accompanying balance sheets of Century Media, Inc. as of
December 31, 2001 and 2000 and the related statements of operations, changes in
stockholders' (deficiency) equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly in all
material respects, the financial position of Century Media, Inc. as of December
31, 2001 and 2000 and the results of its operations and its cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 15 to the
financial statements, the Company has a net loss of $5,960,160, a working
capital deficiency of $6,077,258, net cash used in operations of $3,194,628, and
stockholders' deficiency of $5,235,720. These matters raise substantial doubt
about the Company's ability to continue as a going concern. Management's plan in
regards to these matters is also described in Note 15. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
WEINBERG & COMPANY, P.A.
Los Angeles, California
May 10, 2002
CENTURY MEDIA, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 2001 AND 2000
2001 2000
----------- -----------
ASSETS
CURRENT ASSETS
Cash $ 302,102 $ 2,619,192
Accounts receivable, net 1,591,449 2,691,850
Prepaid and refundable income taxes 363,433 --
Prepaid media 910,513 1,067,849
Prepaid and other current assets 33,658 466,462
----------- -----------
Total Current Assets 3,201,155 6,845,353
----------- -----------
PROPERTY & EQUIPMENT - NET 560,023 790,599
----------- -----------
OTHER ASSETS
Goodwill - net 984,062 3,399,248
----------- -----------
Total Other Assets 984,062 3,399,248
----------- -----------
TOTAL ASSETS $ 4,745,240 $11,035,200
=========== ===========
LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY
CURRENT LIABILITIES
Cash overdraft $ 1,399,261 $ --
Accounts payable 3,943,349 5,275,980
Accrued expenses 629,135 485,695
Advances 287,322 --
Line of credit 400,112 1,618,420
Deferred revenue 869,244 839,418
Income taxes payable -- 30,546
Subordinated notes -- stockholders - current portion 1,555,664 748,156
Notes payable -- current portion 172,206 169,247
Capital leases -- current portion 22,120 --
----------- -----------
Total Current Liabilities 9,278,413 9,167,462
----------- -----------
LONG-TERM LIABILITIES
Subordinated notes - stockholders - net of current portion -- 271,594
Notes payable - net of current portion 685,224 761,704
Capital leases - net of current portion 17,323 --
Deferred income taxes -- 110,000
----------- -----------
Total Long-Term Liabilities 702,547 1,143,298
----------- -----------
TOTAL LIABILITIES 9,980,960 10,310,760
----------- -----------
STOCKHOLDERS' (DEFICIENCY) EQUITY
Preferred stock, 1,000,000 shares authorized, none issued -- --
Common stock, 10,000,000 shares authorized, 5,161,666 shares issued and 103,233 103,233
outstanding
Retained earnings (accumulated deficit) (5,338,953) 621,207
----------- -----------
Total Stockholders' (Deficiency) Equity (5,235,720) 724,440
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY $ 4,745,240 $11,035,200
=========== ===========
See accompanying notes to financial statements.
2
CENTURY MEDIA, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000
------------ ------------
REVENUES
Media $ 11,682,195 $ 39,914,934
Consulting 1,165,477 1,763,159
Commissions 1,884,812 2,283,027
------------ ------------
Total Revenues 14,732,484 43,961,120
------------ ------------
COST OF REVENUES
Media 10,268,227 36,356,925
Consulting 1,046,307 1,365,400
------------ ------------
Total Cost Of Revenues 11,314,534 37,722,325
------------ ------------
GROSS PROFIT 3,417,950 6,238,795
------------ ------------
OPERATING EXPENSES
Salaries and payroll taxes 2,653,636 2,776,340
Loss on impairment of goodwill 2,296,146 --
General and administrative 1,064,635 997,800
Provision for bad debts 798,317 --
Computer software development 670,427 --
Management fee 504,000 488,724
Depreciation and amortization 442,189 311,175
Rent 356,772 318,612
Outside services 299,840 292,436
Professional fees 235,473 87,374
------------ ------------
Total Operating Expenses 9,321,435 5,272,461
------------ ------------
(LOSS) INCOME FROM OPERATIONS (5,903,485) 966,334
------------ ------------
OTHER (EXPENSE)
Other expense (66,449) (25,250)
Interest expense (368,584) (248,392)
------------ ------------
Total Other (Expense) (435,033) (273,642)
------------ ------------
(LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES (6,338,518) 692,692
(BENEFIT) PROVISION FOR INCOME TAXES (378,358) 285,000
------------ ------------
NET (LOSS) INCOME $ (5,960,160) $ 407,692
============ ============
NET (LOSS) INCOME PER COMMON SHARE - BASIC AND DILUTED $ (1.15) $ 0.08
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC AND DILUTED 5,161,666 5,161,666
============ ============
See accompanying notes to financial statements.
3
CENTURY MEDIA, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIENCY) EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
Retained
Preferred Stock Common Stock Earnings/
-------------------------- --------------------------- Accumulated
Shares Amount Shares Amount Deficit Total
----------- ----------- ----------- ----------- ----------- -----------
Balance, January 1, 2000 -- $ -- 5,161,666 $ 103,233 $ 213,515 $ 316,748
Net Income 2000 -- -- -- -- 407,692 407,692
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 2000 -- -- 5,161,666 103,233 621,207 724,440
Net Loss 2001 -- -- -- -- (5,960,160) (5,960,160)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE,
DECEMBER 31, 2001 -- $ -- 5,161,666 $ 103,233 $(5,338,953) $(5,235,720)
=========== =========== =========== =========== =========== ===========
See accompanying notes to financial statements.
4
CENTURY MEDIA, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(5,960,160) $ 407,692
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Provision for bad debts 798,317 --
Depreciation and amortization 442,189 311,175
Loss on impairment of goodwill 2,296,146 --
Changes in operating assets and liabilities:
Decrease (Increase) in accounts receivable 302,084 (1,911,150)
Decrease (Increase) in prepaid media 157,336 (88,630)
Decrease (Increase) in prepaid and other current assets 432,804 (432,899)
(Increase) in prepaid and refundable income taxes (363,433) --
(Decrease) Increase in accounts payable (1,332,631) 4,131,721
Increase (Decrease) in accrued expenses 143,440 (242,375)
Increase (Decrease) in unearned revenue 29,826 (754,638)
(Decrease) in income taxes payable (30,546) (29,814)
(Decrease) in deferred income tax liability (110,000) (248,865)
----------- -----------
Net Cash (Used In) Provided By Operating Activities (3,194,628) 1,142,217
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of business -- (1,015,559)
Acquisition of equipment (27,888) (76,999)
----------- -----------
Net Cash Used In Investing Activities (27,888) (1,092,558)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash overdraft 1,399,261
Exercise of stock options -- 1,233
Proceeds from line of credit -- 1,618,420
Repayments on line of credit (1,218,308) --
Bank loan payment -- (500,000)
Financing accounting equipment -- 62,986
Notes for acquisition of business -- 800,000
Note related to acquisition -- 181,637
Proceeds from subordinated notes -- stockholders 807,508 --
Repayment of subordinated notes - stockholders (271,594) (42,750)
Proceeds from notes payable 214,449 --
Principal repayments on notes payable (287,969) (113,673)
Proceeds from advances 287,322 --
Principal repayments on capital leases (25,243) --
----------- -----------
Net Cash Provided By Financing Activities 905,426 2,007,853
----------- -----------
NET (DECREASE) INCREASE IN CASH (2,317,090) 2,057,512
CASH - BEGINNING OF YEAR 2,619,192 561,680
----------- -----------
CASH - END OF YEAR $ 302,102 $ 2,619,192
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 357,043 $ 273,641
=========== ===========
Income taxes $ 54,000 $ 289,560
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During 2001, the Company acquired software totaling $64,685 under capital lease
obligations.
See accompanying notes to financial statements.
5
CENTURY MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ORGANIZATION
(A) ORGANIZATION
Century Media, Inc. (the "Company") was formed on July 29, 1997 in the state of
California. The Company is a global direct response marketing and advertising
agency that produces response-driven infomercials, and provides product
placement, media buying, medical marketing, production and syndication of
television programming, and other associated transactional media business
pursuits.
As of April 14, 2000 the Company acquired from TMT Media Corporation ("TMT"),
the portion of their business defined as direct response advertising, including
the TMT name, fixed assets, contracts, media air time, customer lists and
related proprietary data. The purchase price was $1,000,000, payable $200,000
cash at closing; a non-interest bearing note for $100,000, payable 45 days from
the closing date and a note for $700,000, with interest at 9%per annum, payable
$8,867.30 per month, with the remaining principal due on the third anniversary
of the closing. Under certain conditions, there is an additional contingent
payment of $1,250,000 plus interest, which accrues at the rate of 6% commencing
on the third anniversary of the closing. The Company has not recorded this
additional contingent payment (See Note 16 (B)).
(B) USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reported period. Actual results could differ
from those estimates.
(C) CASH AND CASH EQUIVALENTS
For purposes of the cash flow statements, the Company considers all highly
liquid investments with original maturities of three months or less at the time
of purchase to be cash equivalents.
(D) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated, using the
straight-line method over the estimated economic useful lives of 5 to 7 years.
Expenditures for maintenance and repairs are charged to expense as incurred.
Major improvements are capitalized (See Note 1(E)).
6
CENTURY MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000
(E) CHANGE IN ACCOUNTING ESTIMATE
Effective January 1, 2001, the Company revised its estimate of the useful life
of computer software. Previously, all purchased computer software was amortized
on a straight-line basis over a period of five years. In order to more
accurately reflect the period in which computer software will remain in service,
the Company has elected to amortize its computer software on a straight-line
basis over three years. The result of this accounting change was to increase
current period amortization expense and net loss by $93,879 (See Notes 1(D) and
4)).
(F) GOODWILL
Goodwill arising from the acquisition of TMT Media Corporation in 2000 (See Note
1(A)) and Williams Worldwide in 1999, was being amortized on a straight-line
basis over a thirty-year period prior to its impairment during the year ended
December 31, 2001 (See Notes 1(G) and 5).
(G) IMPAIRMENT OF LONG-LIVED ASSETS
The Company has adopted Statement of Financial Accounting Standards No. 121
(SFAS 121) "Accounting for the Impairment of Long-Lived assets and for
Long-Lived Assets to be Disposed Of." Under the provisions of this statement,
the Company has evaluated its long-lived assets for financial impairment, and
will continue to evaluate them as events or changes in circumstances indicated
that the carrying amount of such assets may not be fully recoverable.
The Company evaluates the recoverability of long-lived assets not held for sale
by measuring the carrying amount of the assets against the estimated
undiscounted future cash flows associated with them. At the time such cash flows
of certain long-lived assets are not sufficient to recover the carrying value of
such assets, the assets are adjusted to their fair values.
During the year ended December 31, 2001, the Company recognized an impairment
loss on goodwill totaling $ 2,296,146 (See Notes 1(F) and 5).
(H) REVENUE RECOGNITION
The Company recognizes revenue from the sale of media time to advertising
clients 14 days prior to broadcast, at which time such revenue becomes
nonrefundable according to the terms of the underlying sales agreements.
Included in the monies received from advertising clients are amounts, which
represent the reimbursement of media time purchased on behalf of the customer
for the related advertisements. These media purchase reimbursements have been
accounted for as an offset to the related media purchases for the respective
advertisement and not as gross revenues as prescribed under EITF 99-19 and
7
CENTURY MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000
SAB 101. Monies received more than 14 days prior to the broadcast of the related
advertisement are recorded as deferred revenue.
The Company earns commissions in connection with the procurement of media time
on behalf of advertising clients. Such commissions are also considered earned 14
days prior to broadcast. Under these arrangements, the Company is deemed to be
at risk and therefore records revenues and related costs at their gross amounts,
consistent with EITF 99-19 and SAB 101.
The Company has entered into contractual agreements with other advertising firms
to share revenues based upon the terms of the specific agreements. The income
produced by these revenue-sharing contracts are recognized as media or
commission income depending upon the nature of the income earned from the
agreement.
(I) INCOME TAXES
The Company accounts for income taxes under the Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes" ("Statement 109"). Under Statement 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under Statement 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
(J) CONCENTRATION OF CREDIT RISK
The Company maintains its cash in bank deposit accounts, which, at times, may
exceed federally insured limits. The Company has not experienced any losses in
such accounts and believes it is not exposed to any significant credit risk on
cash and cash equivalents.
(K) EARNINGS (LOSS) PER SHARE
Net loss per common share for the years ended December 31, 2001 and 2000 is
computed based upon the weighted average common shares outstanding as defined by
Financial Accounting Standards No. 128, "Earnings Per Share".
(L) BUSINESS SEGMENTS
The Company operates in one segment and therefore segment information is
not presented.
8
CENTURY MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000
(M) RECLASSIFICATIONS
Certain reclassifications have been made to the December 31, 2000 financial
statements to conform to the December 31, 2001 financial statement presentation.
(N) RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has recently issued several new
Statements of Financial Accounting Standards. Statement No. 141, "Business
Combinations" supersedes APB Opinion 16 and various related pronouncements.
Pursuant to the new guidance in Statement No. 141, all business combinations
must be accounted for under the purchase method of accounting; the
pooling-of-interests method is no longer permitted. SFAS 141 also establishes
new rules concerning the recognition of goodwill and other intangible assets
arising in a purchase business combination and requires disclosure of more
information concerning a business combination in the period in which it is
completed. This statement is generally effective for business combinations
initiated on or after July 1, 2001.
Statement No. 142, "Goodwill and Other Intangible Assets" supercedes APB Opinion
17 and related interpretations. Statement No. 142 establishes new rules on
accounting for the acquisition of intangible assets not acquired in a business
combination and the manner in which goodwill and all other intangibles should be
accounted for subsequent to their initial recognition in a business combination
accounted for under SFAS No. 141. Under SFAS No. 142, intangible assets should
be recorded at fair value. Intangible assets with finite useful lives should be
amortized over such period and those with indefinite lives should not be
amortized. All intangible assets being amortized as well as those that are not,
are both subject to review for potential impairment under SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of". SFAS No. 142 also requires that goodwill arising in a business
combination should not be amortized but is subject to impairment testing at the
reporting unit level to which the goodwill was assigned to at the date of the
business combination.
SFAS No. 142 is effective for fiscal years beginning after December 15, 2001 and
must be applied as of the beginning of such year to all goodwill and other
intangible assets that have already been recorded in the balance sheet as of the
first day in which SFAS No. 142 is initially applied, regardless of when such
assets were acquired. Goodwill acquired in a business combination whose
acquisition date is on or after July 1, 2001, should not be amortized, but
should be reviewed for impairment pursuant to SFAS No. 121, even though SFAS No.
142 has not yet been adopted. However, previously acquired goodwill should
continue to be amortized until SFAS No. 142 is first adopted.
Statement No. 143 "Accounting for Asset Retirement Obligations" establishes
standards for the initial measurement and subsequent accounting for obligations
associated with the sale, abandonment, or other type of disposal of long-lived
tangible assets arising from the acquisition, construction, or development
and/or normal operation of such assets. SFAS
9
CENTURY MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000
No. 143 is effective for fiscal years beginning after June 15, 2002, with
earlier application encouraged.
The adoption of these pronouncements will not have a material effect on the
Company's financial position or results of operations.
NOTE 2 ACCOUNTS RECEIVABLE
Accounts receivable as of December 31, were as follows:
2001 2000
----------- -----------
Accounts receivable $ 1,986,745 $ 2,781,850
Less: allowance for doubtful accounts (395,296) (90,000)
----------- -----------
Accounts receivable, net $ 1,591,449 $ 2,691,850
=========== ===========
NOTE 3 PREPAID MEDIA
The Company recognizes prepaid media when the amounts paid to vendors for media
bookings exceed current amounts due for media bookings. Prepaid media as of
December 31, 2001 and 2000 were $910,513 and $1,067,849, respectively.
NOTE 4 PROPERTY AND EQUIPMENT
The following is a summary of property and equipment as of December 31:
2001 2000
---------- ----------
Computer software (See Note 1(E)) $ 321,394 $ 256,708
Furniture and fixtures 109,888 108,510
Office equipment 710,362 683,852
Leasehold improvements 44,774 44,774
---------- ----------
1,186,418 1,093,844
Less: Accumulated depreciation 626,395 303,245
---------- ----------
Property and equipment - net $ 560,023 $ 790,599
========== ==========
Depreciation expense was $323,149 and $197,126 in 2001 and 2000, respectively.
NOTE 5 GOODWILL
Goodwill arising from the acquisition of TMT and Williams Worldwide was being
amortized on a straight-line basis over thirty-years.
10
CENTURY MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000
Goodwill as of December 31, 2001 was as follows:
Goodwill $ 3,571,200
Loss on impairment (2,296,146)
Less accumulated amortization (290,992)
-----------
$ 984,062
===========
Amortization expense for the years ended December 31, 2001 and 2000 was $119,040
and $114,049, respectively.
During 2001, the Company incurred a major decrease in revenues, which resulted
in a substantial net loss. As a result, the Company reevaluated the carrying
value of goodwill from the TMT and William Worldwide acquisitions. For purposes
of determining future discounted cash flows of the goodwill, the Company, based
upon historical results, current projections, and internal earnings targets,
determined the discounted future cash flows of the businesses to which the
goodwill relates. Based on the measurement of goodwill, the Company recognized a
loss on goodwill impairment of $2,296,146 during the year ended December 31,
2001.
NOTE 6 ADVANCES
During 2001, the Company received $287,322 in advances from Blagman Media
International, Inc. ("Blagman"), of the total, $187,322 represented advances for
working capital and a $100,000 non-refundable payment towards the merger with
Blagman (See Note 16). The working capital advances were non-interest bearing,
due on demand and unsecured.
NOTE 7 LINE OF CREDIT
On August 28, 2000, the Company entered into a financing and security agreement
with Prinvest Financial Corp. to secure accounts receivable financing. Amounts
are advanced at 65% of accounts receivable pledged. The maximum credit limit is
$3,000,000. A credit line fee of 1% of the credit limit is paid annually. A
servicing fee of 0.2% of the credit limit is assessed monthly. Interest is
assessed on each draw and is based on the prime rate as published in the Wall
Street Journal, plus 2.25%. All accounts receivable are pledged as security for
borrowings under the agreement. As of December 31, 2001 and 2000, $400,112 and
$1,618,420, respectively, remained outstanding under the line of credit (See
Note 8).
NOTE 8 SUBORDINATED NOTES - STOCKHOLDERS
Notes relating to cash advances were executed at various dates during 2001, 2000
and 1999. Interest is payable at an average rate of 10.75% per annum. Interest
only is payable
11
CENTURY MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000
for the first eighteen months. Then principal is payable with interest in
varying amounts through 2003. Principal amounts are due as follows:
Years Ending December 31, 2001 2000
- ------------------------- ------------- -------------
2001 $ - $ 748,156
2002 1,555,664 265,594
2003 - 6,000
------------- -------------
Total $1,555,664 $1,019,750
============= =============
The notes are subordinated to all credit granted by Prinvest Financial Corp.
(See Note 7). Subordinated notes totaling $1,270,769 were converted to
1,434,762,335 shares of Blagman Media International, Inc. stock upon the closing
of the merger (See Note 16(A)).
NOTE 9 NOTES PAYABLE
Notes payable consist of the following at December 31:
2001 2000
-------- --------
Note payable to TMT Media Corporation payable, $8,867
per month including interest at 9%, due April 2010
and unsecured (See Notes 16 (A) and (B)) $626,430 $770,291
Note payable to an individual 10% interest, due March
2003, unsecured 231,000 --
Note payable to Philips Consumer Electronics payable,
$10,000 per month. The final payment of $11,637 is
due October 2001 -- 101,637
Contract payable, payable at $2,327 per month
including interest at 19.58%, due August 2003,
secured by computer equipment. The note was
accounted for as a capital lease in 2001) (See Note
10) -- 59,023
-------- --------
857,430 930,951
Less: current portion 172,206 169,247
-------- --------
$685,224 $761,704
======== ========
Required payments of principal on notes payable at December 31, 2001, including
current maturities, are summarized as follows:
12
CENTURY MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000
2002 $172,206
2003 172,965
2004 62,855
2005 68,751
2006 and Thereafter 380,653
---------
$857,430
=========
NOTE 10 COMMITMENTS AND CONTINGENCIES
(A) CAPITAL LEASES
As of December 31, 2001 the Company had non-cancelable capital lease agreements.
Future minimum lease payments under the capital lease are as follows as of
December 31, 2001:
Total future minimum lease payments $ 48,098
Less: interest (8,655)
--------
39,443
Less: current portion 22,120
--------
Long-term obligation under capital leases $ 17,323
========
Future minimum lease payments for the capital leases as of December 31, 2001 are
as follows:
2002 $22,120
2003 17,323
-------
$39,443
=======
(B) LITIGATION
Eileen Joyce, an individual, vs. Douglas Bornstein, an individual; Anthony
Lubrano, an individual; TMT Media Corporation, a New Mexico corporation; Century
Media, Inc., a California corporation; and Does 1 through 30, inclusive (LASC BC
259814) filed on October 15, 2001
The complaint consisted of seven causes of action, and the Company was named as
defendant in two of those causes of action. Plaintiff's counsel filed a request
for dismissal, dismissing all causes of action against the Company, on April 24,
2002.
13
CENTURY MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000
See Note 16(B) for additional litigation arising from the business combination
in March 2002.
(C) COMMISSION AGREEMENTS
The Company has entered into various agreements with its customers to provide
direct response marketing services. As payment for these services, the Company
receives commissions ranging from 7.5% to 15%. Additionally, the Company has
entered into various agreements by which commissions were paid to independent
parties as referral fees. The Company pays fees ranging from 1% to 10% for such
referrals.
NOTE 11 MANAGEMENT FEES
On May 1, 1999, the Company entered into a service agreement with two
consultants for an original term of five years, which is then automatically
extended, to five successive years following the original term. The agreements
call for payments of $504,000 in 2001. The fees shall increase by an amount
equal to five percent over the prior year's fees for the term of the agreement.
As of December 31, 2001 and 2000, the Company has charged $504,000 and $488,724,
respectively, to operations.
NOTE 12 EMPLOYEE BENEFIT PLAN
The Company maintains a qualified 401(k) profit sharing plan for all eligible
employees. The Company matches contributions at the rate of 25% of employee
contributions to a maximum of 6% of each employee's compensation for the year.
Profit sharing expense for the years ended December 31, 2001 and 2000 was
$21,826 and $16,423, respectively.
NOTE 13 EMPLOYEE STOCK OPTION PLANS AND STOCK APPRECIATION RIGHTS
(A) EMPLOYEE STOCK OPTION PLAN
On May 1, 1999, the Company's Board of Directors and stockholders adopted a new
stock option plan, (the "Plan"). The Plan was developed to provide a means
whereby key employees of the Company may be granted incentive or non-qualified
stock options to purchase common stock of the Company.
The Plan authorizes the issuance of options to purchase up to an aggregate of
400,000 shares of the Company's common stock. Incentive stock options granted
under the Plan must have an exercise price of not less than 100% of the fair
market value of the common stock on the date the option is granted and must be
exercised, if at all, within ten years from the date of grant. All options are
exercisable at $.02 per share, and may be exercised one-third each year
beginning one year after the date of grant.
14
CENTURY MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000
A summary of the options issued to key employees as of December 31, 2001 and
2000 is presented below:
2001 2000
------------------- -------------------
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Options Price Options Price
-------- -------- -------- --------
Stock Options
Balance at beginning of period 318,333 $.02 318,333 $.02
Granted -- -- -- --
Cancelled -- -- -- --
Exercised -- -- -- --
Forfeited/expired -- -- -- --
-------- ---- -------- ----
Balance at end of period 318,333 $.02 318,333 $.02
-------- ---- -------- ----
Options exercisable at end of
period 318,333 $.02 318,333 $.02
-------- ---- -------- ----
Weighted average fair value of
options granted during the
period $ -- $ --
The following table summarizes information about stock options outstanding at
December 31, 2001:
Options Outstanding Options Exercisable
- ------------------------------------------------------ ---------------------------
Weighted Number
Number Average Weighted Exercisable Weighted
Range Of Outstanding At Remaining Average At Average
Exercise December 31, Contractual Exercise December, 31, Exercise
Price 2001 Life Price 2001 Price
- -------- -------------- ----------- --------- ------------- ----------
$ .02 318,333 7.33 .02 318,333 .02
-------------- ----------- --------- ------------- ----------
318,333 7.33 .02 318,333 .02
============== =========== ========= ============= ==========
At the date of the business combination discussed in Note 16, all holders of the
employee incentive stock options of the Company elected to receive Blagman stock
options under its existing stock option plan. For each option to buy one share
of Century stock, option holders received options to purchase 225.81 Blagman
shares (equivalent to the difference in value between one Company share and one
Blagman share).
15
CENTURY MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000
(B) STOCK APPRECIATION RIGHTS
The Company has granted to employees 320,000 options in the form of stock
appreciation rights. These options are not exercisable into stock of the
Company. On exercise, the participant becomes entitled to the growth in value he
or she would have benefited from if the shares would have been actually issued.
At the date of the business combination discussed in Note 16, these stock
appreciation rights were exercised and the holders received $25,600 and
36,129,653 shares of Blagman common stock.
NOTE 14 INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 2001 and 2000 is
summarized as follows:
2001 2000
--------- ---------
Current:
Federal $(268,358) $ 222,000
State -- 63,000
Deferred - Federal and State (110,000) --
--------- ---------
Income tax expense (benefit) $(378,358) $ 285,000
========= =========
The Company's tax expense differs from the "expected" tax expense for the years
ended December 31, 2001 and 2000 as follows:
2001 2000
------------- -------------
Expected U.S. Federal income tax (benefit) expense $ (921,700) $ 235,000
Effect of State taxes - (21,500)
Effect of non-deductible expenses - 8,500
Effect of unused net operating loss carryforward $ 921,700 $ -
------------- -------------
- 222,000
============= =============
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and liabilities as of December 31, 2001 and 2000 are as
follows:
16
CENTURY MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000
2001 2000
------------- -------------
Deferred tax assets (liability):
Net operating loss carryforward $ 921,700 $ -
Tax effects of temporary differences arising from
bad debts, depreciation and amortization - (110,000)
------------- -------------
Total gross deferred tax assets (liability) 921,700 (110,000)
Less valuation allowance (921,700) -
------------- -------------
Net deferred tax assets (liability) $ - $ (110,000)
============= =============
As of December 31, 2001, after carrying back the current year's net operating
loss to 1999 and 2000 which results in a tax benefit of $268,358, the Company
has a net operating loss carryforward of approximately $2,711,000 for U.S.
Federal income tax purposes available to offset future taxable income expiring
on various dates beginning in 2021.
There was no valuation allowance as of January 1, 2001. The net increase in the
valuation allowance during the year ended December 31, 2001 was $921,700.
NOTE 15 GOING CONCERN
The Company's financial statements for the year ended December 31, 2001 have
been prepared on a going concern basis which contemplated the realization of
assets and the settlement of liabilities and commitments in the normal course of
business. The Company incurred a net loss of $5,960,160, a working capital
deficiency of $6,077,258, net cash used in operations of $3,194,628 and a
stockholders deficiency of $5,235,720 as of December 31, 2001. The Company's
working capital deficiency as of December 31, 2001 may not enable it to meet
such objectives as presently structured. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
The ability of the Company to continue as a going concern is dependent on the
Company's ability to raise additional capital, and implement its business plan.
Management believes that actions presently taken to obtain additional funding
and the potential for an increase in advertising media billings, provide the
opportunity for the Company to continue as a going concern.
NOTE 16 SUBSEQUENT EVENT
(A) BUSINESS COMBINATION
Pursuant to an Agreement and Plan of Reorganization dated March 4, 2002,
effective March 22, 2002, Blagman Media International, Inc. ("Blagman") acquired
100% of the outstanding stock of the Company by merging Blagman USA, Inc., a
California corporation and wholly owned subsidiary of Blagman, into the Company.
The surviving entity operates on a combined basis under the industry name
Blagman-Century Media. The consolidation of the two companies results in a full
service integrated direct marketing
17
CENTURY MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000
venture. Certain principals of the Company have entered into consulting
arrangements for services after closing and the professional staffs of the two
entities were combined.
Pursuant to the transaction, Blagman acquired all of the capital stock of the
Company for cash and common stock of Blagman, assumed current debt obligations
and unexercised option and stock appreciation rights of the Company and assumed
accrued and ongoing trade and other ordinary course obligations and
relationships. Prior to the closing, the parties negotiated with the holders of
portions of the outstanding debt of the Company to restructure the term and
payments of such debt and in certain cases, to allow for the issuance of shares
of common stock of Blagman in lieu of cash payments. Currently, Blagman Century
remains obligated on $1.5 million of affiliate and third party debt, trade and
similar payables, (including some deferred payables which are being discharged
over extended payout periods) and certain contingent obligations including $1.25
million from the TMT Media Corporation acquisition by the Company in 2000 (See
Note 1(A) and 16 (B)).
At closing, holders of the Company's shares received twenty cents per share, of
which two and one-half cents was payable in cash and the balance of seventeen
and one-half cents was payable by the delivery of shares of common stock of
Blagman, for a total of up to $1,160,000, depending on the number of options
exercised prior to closing. Holders of the Company's debentures (approximately
$750,000) also received shares of the common stock of Blagman. All of the common
stock to be issued in the transaction was issued as restricted securities and
has been valued based on the OTC BB closing bid price for the seven days prior
to the date of the agreement or $0.0008857 per share. Holders of the common
stock issued in the transaction are entitled to certain piggyback registration
rights in certain offerings of Blagman for two years after closing. Blagman is
not pursuing any new stock offering to finance the economic requirements of the
transaction and expects to fund the ongoing requirements from operating cash
flow.
As of December 31, 2001, in connection with the above merger, Blagman had
advanced the Company $287,322 for operating expenses which is included in
current liabilities. Of the total advance, $100,000 represented a non-refundable
advance from Blagman in connection with the closing of the merger (See Note 6).
(B) LITIGATION
Subsequent to the Blagman Century merger transaction described above, TMT Media
Corporation has asserted that under the April 2000 acquisition agreement, as a
result of the transaction between Blagman and the Company, it is entitled, as of
April 22, 2002, to the $1,250,000 contingent amount and to the payment in full
of the balance of $609,564 due on the $700,000 note delivered in the 2000
acquisition (See Note 1(A)).
Blagman and the Company dispute this position. In May 2002, TMT initiated a
proceeding TMT Media Corporation vs. Blagman Century Media, Inc. et al.
(Superior Court of
18
CENTURY MEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000
California, County of Los Angeles, Case BC273368) against Blagman, the Company
and Robert Blagman personally, claiming the accelerated amount of $1,859,564.
Management intends to answer and defend the matter in applicable time periods.
19