Exhibit 99.1
Independent Auditors' Report F2
Consolidated Financial Statements
Consolidated balance sheets F3-F4
Consolidated statements of operations F5
Consolidated statements of stockholders' deficit F6
Consolidated statements of cash flows F7
Summary of accounting policies F8-F10
Notes to consolidated financial statements F11-F22
F-1
Independent Auditors' Report
To the Board of Directors and Stockholders of
Next Generation Media Corporation
We have audited the accompanying consolidated balance sheets of Next Generation
Media Corporation as of December 31, 1999 and 1998 and the related consolidated
statements of operations, stockholders' deficit, 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 Next Generation Media
Corporation at December 31, 1999 and 1998, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
BDO Seidman, LLP
Washington, D.C.
May 8, 2000
F-2
Next Generation Media Corporation
Consolidated Balance Sheets
December 31, 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Assets
Current
Cash and cash equivalents $ 263,517 $ 326
Notes receivable from UNICO (Note 2) - 175,500
Accounts receivable, less allowance for doubtful
accounts of $95,599 and $65,534 546,421 122,443
Inventories 107,094 -
Deferred charges (Note 11) 184,844 -
Deferred loan costs, net of accumulated amortization
of $120,000 and $53,577 (Note 6) - 66,423
Deferred offering costs (Note 11) - 185,520
Prepaid expenses and other current assets 68,177 2,253
- --------------------------------------------------------------------------------------------------------------------
Total current assets 1,170,053 552,465
- --------------------------------------------------------------------------------------------------------------------
Property and equipment, net (Note 3) 1,431,632 170,572
Intangibles, net of accumulated amortization of $182,989
and $49,315 (Notes 1 and 4) 934,447 155,862
Deferred acquisition costs (Note 9) - 1,094,167
Investment in UNICO (Note 5) - 25,537
Deposits 8,105 -
- --------------------------------------------------------------------------------------------------------------------
Total assets $ 3,544,237 $ 1,998,603
====================================================================================================================
F-3
Next Generation Media Corporation
Consolidated Balance Sheets
December 31, 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Deficit
Current liabilities
Checks issued against future deposits $ - $ 28,919
Notes payable, current portion (Note 6) 714,632 237,153
Current obligations under capital leases (Note 7) 19,427 41,425
Accounts payable 753,609 236,523
Accrued expenses 532,358 -
Wages payable 252,885 244,616
Due to related parties (Note 8) 143,466 129,570
Deferred revenue 95,941 15,787
- --------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,512,318 933,993
Notes payable (Note 6) 5,501 -
Obligations under capital leases (Note 7) - 18,339
Deferred rent 57,674 -
Accrued dividends (Notes 9 and 10) 255,319 96,569
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 2,830,812 1,048,901
- --------------------------------------------------------------------------------------------------------------------
Redeemable preferred stock Series A, par value $.01, redemption value $6 per
share, 500,000 shares authorized,
250,000 shares issued and outstanding (Note 9) 944,792 782,292
Redeemable preferred stock Series B, par value $.01, redemption value $5 per
share, 500,000 shares authorized,
65,000 and 70,000 shares issued and outstanding (Note 10) 325,000 233,333
- --------------------------------------------------------------------------------------------------------------------
Commitments (Note 14)
Stockholders' deficit (Note 11)
Common stock, $.01 par value, 50,000,000 authorized,
4,416,818 and 3,629,318 issued and outstanding 44,166 36,291
Additional paid in capital 5,181,562 3,625,363
Accumulated deficit (5,782,095) (3,727,577)
- --------------------------------------------------------------------------------------------------------------------
Total stockholders' deficit (556,367) (65,923)
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' deficit $ 3,544,237 $ 1,998,603
====================================================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-4
Next Generation Media Corporation
Consolidated Statements of Operations
Years ended December 31, 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Revenues:
Coupon sales $ 5,680,214 $ -
Franchise fees 75,800 -
Advertising revenues 1,792,198 1,505,241
Classified revenues 249,149 225,070
Commission income 68,049 78,402
- --------------------------------------------------------------------------------------------------------------------
Total revenues 7,865,410 1,808,713
- --------------------------------------------------------------------------------------------------------------------
Operating Expenses
Printing costs 3,272,043 375,143
Postage and delivery 2,344,352 504,181
Other production costs 197,612 195,622
Selling expenses 303,969 182,534
General and administrative expenses (Note 11) 2,552,708 3,204,902
Depreciation and amortization 485,755 92,139
Franchise sales and development 99,099 -
Forgiveness of stock subscription receivable (Note 12) - 329,996
- --------------------------------------------------------------------------------------------------------------------
Total operating expenses 9,255,538 4,884,517
- --------------------------------------------------------------------------------------------------------------------
Loss from operations (1,390,128) (3,075,804)
- --------------------------------------------------------------------------------------------------------------------
Other income (expense)
Interest income 39 6,014
Other income 3,934 4,409
Interest expense (Note 6) (230,446) (138,324)
- --------------------------------------------------------------------------------------------------------------------
Total other income (expense) (226,473) (127,901)
- --------------------------------------------------------------------------------------------------------------------
Loss before income tax expense (1,616,601) (3,203,705)
Income tax expense - (4,000)
- --------------------------------------------------------------------------------------------------------------------
Net loss (1,616,601) (3,207,705)
- --------------------------------------------------------------------------------------------------------------------
Preferred stock dividends (158,750) (96,569)
Preferred stock deemed dividends (279,167) (328,125)
- --------------------------------------------------------------------------------------------------------------------
Loss applicable to common shareholders $ (2,054,518) $ (3,632,399)
====================================================================================================================
Basic and diluted loss per common share $ (.50) $ (1.09)
- --------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 4,132,086 $ 3,319,201
====================================================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-5
Next Generation Media Corporation
Consolidated Statements of Stockholders' Deficit
Common Stock Additional Stock
--------------------------
Paid-in Accumulated Subscription
Shares Amount Capital Deficit Receivable Total
- ------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1998 3,113,450 $31,134 $ 419,616 $ (95,178) $(359,050) $ (3,478)
Fair value of warrants
issued in connection
with issuance of
redeemable preferred
stock - - 476,622 - - 476,622
Deemed dividend in
connection with
redeemable preferred
stock - - - (328,125) - (328,125)
Preferred stock
dividends - - - (96,569) - (96,569)
Forgiveness of stock
subscription
receivable 329,996 329,996
Repayment of stock
subscription receivable - - - - 29,054 29,054
Issuance of stock options to
shareholders and directors - - 2,126,870 - - 2,126,870
Common stock issued in
exchange for services 440,368 4,402 473,010 - 477,412
Issuance of common stock
through a private
placement 75,500 755 129,245 - - 130,000
Net loss - - - (3,207,705) - (3,207,705)
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December
31, 1998 3,629,318 36,291 3,625,363 (3,727,577) - (65,923)
Deemed dividend in
connection with
redeemable preferred
stock - - - (279,167) - (279,167)
Preferred stock
dividends - - - (158,750) - (158,750)
Issuance of stock to
shareholder 100,000 1,000 199,000 - - 200,000
Non-cash issuance of
stock options to
shareholders and
directors - - 322,500 - - 322,500
Common stock issued in
exchange for services 236,000 2,360 487,640 - 490,000
Issuance of common stock
through private
placements 451,500 4,515 547,059 - - 551,574
Net loss - - - (1,616,601) - (1,616,601)
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December
31, 1999 4,416,818 $44,166 $5,181,562 $(5,782,095) $ - $ (556,367)
==============================================================================================================================
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-6
Next Generation Media Corporation
Consolidated Statements of Cash Flows (Note 18)
Years ended December 31, 1999 1998
=================================================================================================================
Operating activities
Net loss $(1,616,601) $(3,207,705)
Adjustments to reconcile net loss to net
cash used in operating activities:
Compensation expense relating to the issuance of stock and stock options 337,656 2,126,870
Stock issued for services 390,000 -
Forgiveness of stock subscription receivable - 329,996
Depreciation and amortization 485,755 92,139
Provision for doubtful accounts 21,848 34,974
Amortization of deferred loan costs 66,423 53,577
Amortization of discount on notes payable 55,352 44,648
Interest on capital lease obligations - 6,066
(Increase) decrease in assets
Accounts receivable (204,066) 12,176
Inventories 75,456 -
Prepaids and other current assets (5,323) (6,014)
Increase (decrease) in liabilities
Accounts payable (3,043) (5,377)
Accrued expenses 233,591 -
Wages payable 8,269 244,616
Deferred revenue 80,154 15,787
Deferred rent 57,674 -
- -----------------------------------------------------------------------------------------------------------------
Cash used in operating activities (16,855) (258,247)
- -----------------------------------------------------------------------------------------------------------------
Investing activities
Cash paid for acquisition of United, less cash acquired (178,084) -
Acquisition of property and equipment (45,158) (32,108)
Deferred acquisition costs - (100,000)
Due to related parties 13,896 94,173
- -----------------------------------------------------------------------------------------------------------------
Cash used in investing activities (209,346) (37,935)
- -----------------------------------------------------------------------------------------------------------------
Financing activities
Checks issued against future deposits (28,919) (15,902)
Proceeds from notes payable - 265,000
Issuance of notes receivable - (345,500)
Net proceeds from issuance of common stock 837,094 130,000
Proceeds from issuance of preferred stock and warrants - 339,955
Redemption of preferred stock (25,000) -
Payments of capital lease obligation (40,337) (31,596)
Repayment of note payable (253,446) (25,449)
Loan fees - (20,000)
- -----------------------------------------------------------------------------------------------------------------
Cash provided by financing activities 489,392 296,508
- -----------------------------------------------------------------------------------------------------------------
Increase in cash 263,191 326
Cash and cash equivalents, beginning of period 326 -
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 263,517 $ 326
=================================================================================================================
F-7
Next Generation Media Corporation
Summary of Accounting Policies
Description of Business Next Generation Media Corporation (the "Company")
operates in two business segments. The Company's
primary business is cooperative direct mail
advertising, which involves the designing, printing,
packaging, and mailing of public relations and
marketing materials and coupons for retailers who
provide goods and services. Sales are conducted
through a franchise network of cooperative
advertising specialists. The Company provides sales
support and complete production and mailing services,
on a wholesale basis, to its franchisees. At December
31, 1999, the Company had approximately 65 active
area franchise operations located throughout the
United States.
The Company also operates a newspaper publishing
business distributing free newspapers, supported by
local advertising throughout New Jersey.
Basis of Presentation The consolidated financial statements include the
statements of the Company and its wholly owned
subsidiaries, United Marketing Solutions, Inc.
("United") and the Independent News, Inc. ("INI").
All significant intercompany accounts and
transactions have been eliminated.
Inventories Inventories consist primarily of paper, envelopes and
printing materials and are stated at the lower of
cost or market, with cost determined on the first-in,
first-out method.
Property and Equipment Property, plant and equipment are carried at cost.
Depreciation is computed using the straight-line
method over the following estimated useful lives:
Furniture, fixtures and equipment 10 years
Computers 3 years
Leasehold improvements are amortized over the lesser
of the lease term or the useful life of the property.
Intangibles The Company has recorded goodwill based on the
difference between the cost and the fair value of
certain purchased assets and it is being amortized on
a straight-line basis over the estimated period of
benefit, which ranges from five to ten years. The
Company periodically evaluates the goodwill for
possible impairment. The analysis consists of a
comparison of future projected cash flows to the
carrying value of the goodwill. Any excess goodwill
would be written off due to impairment. The Company
has a covenant not to compete which is being
amortized over five years.
F-8
Next Generation Media Corporation
Summary of Accounting Policies
Impairment of The Company reviews the carrying values of its long-
Long-Lived Assets lived assets for possible impairment whenever events
or changes in circumstances indicate that the
carrying amount of the assets may not be
recoverable. Any long-lived assets held for disposal
are reported at the
lower of their carrying amounts or fair value less
cost to sell.
Deferred Rent Deferred rent is recorded for the difference between
actual rental payments made and rent expense
calculated on a straight-line basis over the life of
the lease.
Income Taxes Income taxes are calculated using the liability
method specified by Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes."
Revenue Recognition The Company recognizes revenue from the design,
production and printing of coupons upon delivery.
Revenue from initial franchise fees are recognized
when substantially all services or conditions
relating to the sale have been substantially
performed. Franchise support and other fees are
recognized when billed to the franchisee. Amounts
billed or collected in advance of final delivery or
shipment are reported as deferred revenue.
Revenue from newspaper advertising is recognized upon
publication.
Cash and Cash Equivalents The Company considers all highly liquid investments
with maturities of three months or less to be cash
equivalents .
Comprehensive The Company has adopted Statement of Financial
Income Accounting Standards No. 130, "Reporting
Comprehensive Income." Comprehensive income as
defined includes all changes to equity except that
resulting from investments by owners and
distributions to owners. The Company has no items of
comprehensive income to report.
Loss Per Common Share Loss per share has been computed using the weighted
average number of shares outstanding. The outstanding
stock options and convertible preferred stock were
not considered in the computation because their
inclusion would have been anti-dilutive.
Use of Estimates The preparation of financial statements in conformity
in the Preparation with generally accepted accounting principles
of Financial requires management to make estimates and assumptions
Statements that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements
and the reported amounts of revenues and expenses
during the reporting period. Actual results could
differ from those estimates.
F-9
Next Generation Media Corporation
Summary of Accounting Policies
Risks and The Company operates in environments where intense
Uncertainties competition exists from other companies. This
competition, along with increases in the price of
paper and printing costs, can impact the Company's
pricing and profitability.
Recent In June 1998, the Financial Accounting Standards
Accounting Board issued Statement of Financial Accounting
Pronouncements Standards No. 133, "Accounting For Derivative
Instruments" ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative
instruments and for hedging activities. SFAS 133
requires that an entity recognize all derivatives as
either assets or liabilities and measure those
instruments at fair market value. Under certain
circumstances, a portion of the derivative's gain or
loss is initially reported as a component of other
comprehensive income and subsequently reclassified
into income when the transaction affects earnings.
SFAS 133 is effective for all fiscal quarters
beginning after June 15, 2000 and requires
application prospectively. Presently, the Company
does not use derivative instruments either in hedging
activities or as investments. Accordingly, the
Company believes that adoption of SFAS 133 will have
no material impact on its financial position or
results of operations.
Reclassifications Certain prior year amounts have been reclassified to
conform to the current year presentation.
F-10
Next Generation Media Corporation
Notes to Consolidated Financial Statements
1. Purchase of On April 1, 1999, the Company acquired all of the outstanding common stock of
United Marketing United for cash of $336,665 and assumption of debt. In addition, the Company
Solutions, Inc. accounted for certain debt forgiveness to UNICO, the former parent of United,
as additional consideration and, accordingly, such amounts increased the goodwill
related to the acquisition by $1,295,204. United is engaged in the cooperative
direct mail marketing business. The acquisition was accounted for as a purchase.
Net assets were recorded at fair value and the Company recorded goodwill of
$912,259 related to the acquisition. The financial statements include the
operations of United subsequent to the acquisition date.
The following unaudited pro forma summary presents the consolidated results of
operations as if the acquisition had been completed at January 1, 1998. These
results do not necessarily reflect what would have occurred had the acquisition
actually been made as of such dates and is not necessarily indicative of results
which may be obtained in the future.
Year ended December 31, 1999 1998
------------------------------------------------------------------------------
Revenues $ 9,698,758 $ 7,563,126
Net loss (1,561,610) (3,692,392)
Net loss applicable to common
shareholders (1,999,527) (4,117,086)
Basic and diluted loss per common
share attributable to common
shareholders $ (.48) $ (1.23)
==============================================================================
2. Notes Receivable On May 12, 1998, the Company executed an unsecured promissory note with UNICO,
Inc. for $175,500 bearing interest at 5.83%. The note for $175,500 was forgiven
in conjunction with the acquisition of United.
3. Property and Property and equipment consists of the following:
Equipment
December 31, 1999 1998
---------------------------------------------------------------------------------
Furniture, fixtures and equipment $1,484,504 $ 41,788
Computer equipment 240,822 129,997
Leasehold improvements 116,201 56,600
---------------------------------------------------------------------------------
1,841,527 228,385
Accumulated depreciation
and amortization 409,895 57,813
---------------------------------------------------------------------------------
Net property and equipment $1,431,632 $ 170,572
=================================================================================
Depreciation expense was $352,082 and $55,354 for the years ended December 31,
1999 and 1998, respectively.
F-11
Next Generation Media Corporation
Notes to Consolidated Financial Statements
Computer equipment recorded under capital leases amounted to $85,294.
Accumulated amortization on those assets was $47,214 and $18,783 at December
31, 1999 and 1998.
4. Intangible Intangible assets consist of the following items:
Assets
December 31, 1999 1998
------------------------------------------------------------------------------
Goodwill $1,482,027 $190,177
Covenant not to compete 15,000 15,000
------------------------------------------------------------------------------
1,497,027 205,177
Less accumulated amortization 182,989 49,315
------------------------------------------------------------------------------
Intangible assets, net $1,314,038 $155,862
==============================================================================
Amortization expense was $133,674 and $36,786 or the years ended December 31,
1999 and 1998, respectively.
5. Investment in In May 1998, the Company purchased 359,931 shares of common stock (approximately
UNICO a 6% ownership interest) of UNICO, Inc., an unrelated third party. The Company
accounted for this investment using the cost method in accordance with generally
accepted accounting principles. In April 1999, this investment was sold in
conjunction with the acquisition of United (Note 1).
F-12
Next Generation Media Corporation
Notes to consolidated Financial Statements
6. Notes Payable Notes payable consist of the following:
and Line of Credit
December 31, 1999 1998
---------------------------------------------------------------------------------
Notes payable, net of discount of $0
and $27,676, interest at 18%
(effective rate of 67%), due on
October 14, 1998, unsecured (a) $ 100,000 $ 72,324
Notes payable, net of discount of
$0 and $27,676, interest at 18%
(effective rate of 67%), due on
November 5, 1998, unsecured (a) 50,000 72,324
Note payable, interest at 18%, due
on December 9, 1998, unsecured 5,000 5,000
Note payable to a bank, interest at
prime +1% (9.5% at December 31,
1999), monthly payments of principal
and interest of $12,500, collateralized
by the assets of United, due on
September 15, 2000 285,525 -
Notes payable, interest at 10%, monthly
payments of principal and interest of
$8,989, due in May 2000 and January
2001, collateralized by the
equipment of United 86,372 -
Note payable, non-interest bearing,
monthly payments of $6,945, due in
February 2000 5,731 -
Line of credit from a bank in the amount of
$100,000, interest at prime (8.5% at
December 31, 1999), guaranteed by the
president of the Company, due in
September, 2000 100,000 -
Note payable to a bank, interest at
prime +.50% (9.0% at December 31,
1999), due on April 30, 2000,
collateralized by the assets of INI 60,000 60,000
Note to a factor, interest at 8%,
collateralized by the assets of INI,
due January 1, 1999 27,505 27,505
---------------------------------------------------------------------------------
720,133 237,153
Less: Current portion 714,632 237,153
---------------------------------------------------------------------------------
$ 5,501 $ -
=================================================================================
F-13
Next Generation Media Corporation
Notes to Consolidated Financial Statements
(a) In conjunction with the issuance of these
notes, the Company issued 50,000 common shares,
which have been valued at $2 based on private
sales to unrelated investors. The notes payable
were reduced and common stock and additional paid
in capital were increased in the aggregate by
$100,000. The Company paid $20,000 and issued
50,000 common shares as a finder's fee for
introducing the Company to the above noteholders.
These costs have been deferred and are being
recorded as interest expense over the term of the
notes. Interest expense of $66,423 and $53,577 was
recognized in the year ended December 31, 1999 and
1998, respectively.
Subsequent to December 31, 1999, these notes and
all accrued interest have been repaid.
7. Obligations Under The Company leases computer equipment under
Capital Leases capital leases. Following is a summary of future
minimum lease payments under capital leases:
Year ending December 31, 2000
--------------------------------------------------------------------------------
Total minimum lease payments 21,649
Imputed interest (2,222)
--------------------------------------------------------------------------------
Present value of minimum capital lease payments 19,427
--------------------------------------------------------------------------------
Less: current portion 19,427
--------------------------------------------------------------------------------
$ -
================================================================================
8. Due to Related Due to related parties consists of the following:
Parties
1999 1998
---------------------------------------------------------------------------------
Advances made by former shareholders of INI $ 35,921 $ 94,070
Due to affiliated company 58,945 -
Consulting fees payable 48,600 27,000
Net advances from directors and shareholders - 8,500
---------------------------------------------------------------------------------
Total $143,466 $129,570
=================================================================================
F-14
Next Generation Media Corporation
Notes to Consolidated Financial Statements
In May 1998, a significant shareholder executed a
consulting agreement with the Company. The
agreement has a two-year term and provides for
annual compensation of $78,000. An amount of
$48,600 and $27,000 is payable at December 31,
1999 and 1998 in accordance with this agreement.
One of the Company's franchisees is owned and
operated by the wife of the Company's President.
Total sales to that franchisee were $82,939 for
the year ended December 31, 1999.
9. Redeemable On May 7, 1998, the Company executed an agreement
Preferred Stock with the holders of certain subordinated
Series A debentures of UNICO, Inc. to purchase these
debentures, with an outstanding balance of
$1,034,000, in exchange for $100,000 in cash and
250,000 shares of the Company's Callable
Cumulative Convertible Preferred Stock, (the
"Series A Preferred Stock"), par value $.01. The
Series A Preferred Stock is callable at the option
of the holder five years from the date of issuance
at $6 per share. The fair market value of the
preferred stock was determined to be $2.75 per
share based on an independent appraisal.
Accordingly, the Company recorded the Series A
Preferred Stock at $687,500.
The Company will record a deemed dividend to
increase the carrying value of the preferred stock
to the redemption value of $1,500,000 over the
period from the date of issuance to the redemption
due. The deemed dividend was $162,500 and $94,792
for the year ended December 31, 1999 and 1998.
The shares have a conversion price which is the
lesser of $4.50 and 110% of the price of the
common stock in a public or private offering. The
shares have a $5 per share preference on
liquidation or dissolution of the Company.
The Series A Preferred Stock pays a dividend of
$.30 per share per annum for the first six months
and $.50 per annum thereafter and are not payable
until eighteen months following the date of issue.
Accrued dividends amounted to $198,459 and $73,459
at December 31, 1999 and 1998.
Each 1 1/2 shares of the Company's Series A
Preferred Stock was accompanied by one stock
purchase warrant (subject to adjustment) which
entitles the holder to purchase one share of the
Company's common stock for $0.16, valid for five
years from May 7, 1998. Based on private sales of
common stock to unrelated investors, the fair
market value of each warrant was determined to be
$2. Accordingly, the Company recorded additional
paid in capital related to these warrants of
$306,667.
F-15
Next Generation Media Corporation
Notes to Consolidated Financial Statements
Effective May 8, 1998, the Company cancelled
UNICO's obligation to the Company arising from its
assumption of UNICO's subordinated debt. The
assumption of UNICO's subordinated debt was
required to complete the acquisition of United
(Note 1). Therefore, the total of cash paid and
the value assigned to the preferred stock and
warrants of $1,094,167 had been recorded as a
deferred acquisition cost at December 31, 1998 and
was included in the cost of the acquisition in
1999 (see Note 1).
10. Redeemable In May 1998, the Company issued 70,000 shares of
Preferred Stock Redeemable Cumulative Convertible Preferred Stock,
Series B (the "Series B Preferred Stock") par value $.01
with a redemption price of $5.00 per share. The
original agreement was amended and restated in
December 1998. Under the restated agreement, the
holder can redeem the Series B Preferred Stock
after May 4, 1999. The Company also issued 250,000
warrants for the purchase of one share of common
stock at an exercise price of $.16 per warrant,
valid for five years from May 1998. Gross proceeds
from the original issuance, net of expenses, were
$339,955. In conjunction with amending the
original agreement, the Company sold 1,800,000
shares of common stock of UNICO, Inc. to the
preferred stockholder for $1. The fair market
value at the date of the transaction of these
shares was determined to be $170,000. This amount
has been recorded as an additional reduction of
proceeds in conjunction with the issuance of the
Series B Preferred Stock. Thus, adjusted net
proceeds are $169,955.
Based on private sales of common stock to
unrelated investors at $2, the fair market value
of the warrants was determined to be in excess of
the net proceeds and therefore the entire net
proceeds have been allocated to the warrants.
The Company will record a deemed dividend to
increase the carrying value of the preferred stock
to the redemption value of $350,000 over the
period from the date of issuance to the redemption
date. The deemed dividend was $116,667 and
$233,333 for the years ended December 31, 1999 and
1998.
The Series B Preferred Stock has a conversion
price which is the lesser of $4.50 and 110% of the
price of the common stock in a public or private
offering. The shares have a $5 per share
preference on liquidation or dissolution of the
Company.
The Series B Preferred Stock pays a dividend of
$.50 per annum which is only payable upon
redemption of the Series B Preferred Stock.
Accrued dividends amounted to $56,860 and $23,110
at December 31, 1999 and 1998.
During the year ended December 31, 1999, the
Company redeemed 5,000 shares of Series B
Preferred Stock for $25,000.
F-16
Next Generation Media Corporation
Notes to Consolidated Financial Statements
11. Common Stock In accordance with a consulting agreement with a
significant shareholder, on May 1, 1998 the
shareholder was granted 250,000 options to
purchase shares of common stock at a price of $.02
per share. The market value of the stock was
determined to be $2 based on private stock sales
to unrelated investors. Accordingly, the Company
recorded compensation expense of $495,000 in 1998.
On May 7, 1998, the Company granted 450,000
options to a significant shareholder to purchase
shares of common stock at a price of $.50 per
share. The market value of the stock was
determined to be $2 based on private sales to
unrelated investors. The Company recorded
compensation expense of $675,000.
On May 12, 1998, the Company issued 79,281 shares
of common stock in exchange for a note receivable
in the amount of $12,000, plus accrued interest of
$1,400, and 359,931 common shares of UNICO, Inc.
stock with a fair value of $25,537.
Also on May 12, 1998, the Company issued 137,587
shares of common stock in exchange for the
cancellation of various notes payable to officers
of the Company amounting to $45,954. The market
value of the stock was determined to be $2 based
on private sales to unrelated investors. The
Company recorded compensation expense of $229,220
based on the difference between the fair market
value of the stock and the consideration.
During July and August 1998, the Company issued
100,000 shares of common stock in conjunction with
notes payable (Note 8). The common stock was
valued at $2 based on private sales to unrelated
investors.
During December 1998, the Company issued 75,500
shares of common stock through a private placement
to various individual investors at $2 per share.
Net proceeds from the private placement amounted
to $75,520.
During December 1998, the Company granted 367,500
options to directors to purchase shares of common
stock at a price of $.02 per share. The market
value of the stock was determined to be $2 based
on private sales to unrelated investors. The
Company recorded compensation expense of $727,650.
From March to May 1999, the Company issued 331,500
shares of common stock through a private placement
to various individual investors at $2 per share.
Net proceeds from the private placement after
deductions for both cash and non-cash issuance
expenses, amounted to $385,943.
In April 1999, the Company issued 200,000 shares
of common stock in exchange for consulting
services to be rendered over a one year period.
The common stock was valued at $2 based on private
sales to unrelated investors. An amount of
$100,000 of deferred consulting fees is recorded
at December 31, 1999 relating to this issuance.
F-17
Next Generation Media Corporation
Notes to Consolidated Financial Statements
During April 1999, a majority shareholder
contributed $100,000 to additional paid in capital
in exchange for 1,000 shares of stock, or $1 per
share. The market price was determined to be $2
based on private sales to unrelated investors. The
Company recorded compensation expense of $100,000.
During June 1999, the Company issued 122,500
options to employees and directors to purchase
common stock at a price of $.50 per share. These
options vested immediately. In addition, 92,500
options were issued to purchase common stock at a
price of $.50 per share which vest over a two year
period. The market value of the stock was
determined to be $2 based on private sales to
unrelated investors. The Company recorded
compensation expense of $183,750 in relation to
the vested options and deferred the remaining
$138,750 for unvested options, which will be
recorded as compensation expense over the vesting
period.
From July through December 1999, the Company
issued 120,000 shares of common stock through a
private placement to various individuals investors
at $2.50 per share. Net proceeds from the private
placement after deductions for issuance expenses
amounted to $165,631.
In December 1999, the Company issued 36,000 shares
of common stock in exchange for services rendered.
The common stock was valued at $2.50 based on
private sales to unrelated investors, amounting to
a charge of $90,000.
The following summary represents activity under
the Company's stock option plan:
Number of Exercise Expiration
Shares Price Date
--------------------------------------------------------------------------------
At January 1, 1997 - - -
Options granted 37,500 $.60 12-31-99
--------------------------------------------------------------------------------
Balance outstanding
December 31, 1997 37,500
Options granted 250,000 $.02 05-01-08
Options granted 450,000 $.50 05-07-08
Options granted 367,500 $.02 12-30-08
--------------------------------------------------------------------------------
Balance outstanding December 31, 1998
1,105,000
Options granted 215,000 $.50 06-09-09
Expired (37,500)
--------------------------------------------------------------------------------
Balance outstanding December 31, 1999
1,282,500 $.02-$.50
--------------------------------------------------------------------------------
Balance exercisable at December 31,
1999 1,190,000 $.02-$.50
================================================================================
These shares have a weighted average remaining
contractual life of 8.75 years and a weighted
average exercise price of $.27.
F-18
Next Generation Media Corporation
Notes to Consolidated Financial Statements
The Company has adopted the disclosure only
provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for
Stock Based Compensation" ("SFAS 123"), but
it continues to measure compensation cost for
the stock options using the intrinsic value
method prescribed by APB Opinion No. 25. As
allowable under SFAS 123, the Company used
the "Minimum Value" method to measure the
compensation cost of stock options, granted
in 1999 and 1998. For the options granted in
1999, the following assumptions were used:
risk-free interest rate of 5.87%, a dividend
payout rate of zero, volatility of zero, and
an expected option life of ten years. For the
options granted in 1998, the following
assumptions were used: risk-free interest
rate of 5.67%, volatility of 45%, a dividend
payout rate of zero, and an expected option
life of ten years. There were no adjustments
made in calculating the fair value to account
for non-transferability.
Under these assumptions, the fair value of
stock options granted in 1999 and 1998 is
$366,744 and $1,380,568. The fair value of
stock options granted in 1999 is $1.72. The
fair value of stock options granted in 1998
ranges from $0.33 to $1.99.
Because the Company's employee stock options
have characteristics significantly different
from those of traded options, and because
changes in the subjective input assumptions
can materially affect the fair value
estimate, in management's opinion, the
existing models do not necessarily provide a
reliable single measure of the fair value of
its employee stock options.
If the Company had elected to recognize
compensation cost based on the value at the
grant dates with the method prescribed by
SFAS 123, net income would have been changed
to the pro forma amounts indicated below:
Year ended December 31,
1999 1998
---------------------------------------------------------
As Pro As Pro
Reported Forma Reported Forma
---------------------------------------------------------
Loss applicable to common
shareholders $(2,054,518) $(2,100,762) $(3,632,054) $(3,783,705)
Basic and diluted loss per share $ (0.50) $ (0.51) $ (1.09) $ (1.14)
==============================================================================================
12. Forgiveness of On May 12, 1998, $156,145 of the stock
Stock Subscription subscription receivable from a significant
Receivable shareholder of the Company was transferred
into a promissory note receivable from a
director of UNICO, Inc. and was subsequently
cancelled. Also, the Company forgave
$152,905, plus accrued interest of $20,946
due from the director. These amounts
aggregate to $329,996, which has been
included in operating expenses in the
accompanying statement of operations.
F-19
Next Generation Media Corporation
Notes to Consolidated Financial Statements
13. Income Taxes Significant components of the Company's
deferred tax assets at December 31, 1999 and
1998, are as follows:
December 31, 1999 1998
---------------------------------------------------------------------------------
Deferred tax assets
Net operating loss carryforwards
for income tax purposes $ 739,000 $ 327,000
Stock options granted 899,000 808,000
Accrued compensation expense
and consulting fees 105,000 97,000
Accumulated amortization 55,000 8,000
Reserve for doubtful accounts 8,000 -
---------------------------------------------------------------------------------
Total deferred tax assets 1,806,000 1,240,000
Less valuation allowance (1,806,000) (1,240,000)
---------------------------------------------------------------------------------
Total $ - $ -
=================================================================================
Management has provided a valuation allowance
for net deferred tax assets as of December
31, 1999 and 1998, as they believe that it is
not more likely than not that the entire
amount of deferred tax assets will be
realized.
At December 31, 1999, the Company had net
operating loss carryforwards for federal
income tax purposes of approximately
$2,200,000, which are available to offset
future federal taxable income, if any,
through 2014. These net operating loss
carryforwards are subject to annual
limitations as a result of changes in
ownership.
14. Commitments and The Company has a lease for office space in
Contingencies Pompton Lakes, New Jersey. The lease has a
sixty-four month term commencing on September
15, 1997. Annual future minimum lease
payments under this operating lease are as
follows:
Year ending December 31:
--------------------------------------------------------------------------------
2000 $458,850
2001 490,473
2002 521,761
2003 529,289
2004 560,577
Thereafter 337,650
--------------------------------------------------------------------------------
F-20
Next Generation Media Corporation
Notes to Consolidated Financial Statements
Rent expense for the year ended December 31,
1999 and 1998 was $418,601 and $19,800,
respectively.
The Company has an employment agreement with
the President which provides for
approximately $150,000 in base annual
compensation, plus incentive compensation
based upon the earnings of the Company.
The Company is party to various legal matters
encountered in the normal course of business.
In the opinion of management and legal
counsel, the resolution of these matters will
not have a material adverse effect on the
Company's financial position or the future
results of operations.
15. Segment The Company has two reportable segments for
Information the year ended December 31, 1999: United and
INI. United was acquired on April 1, 1999.
Each entity is a wholly-owned subsidiary,
with different management teams and different
products and services. INI operates a
newspaper publishing business and United
operates a direct mail marketing business.
The accounting policies of the reportable
segments are the same as those set forth in
the Summary of Accounting Policies.
Summarized financial information concerning
the Company's reporting segments for the year
ended December 31, 1999 is presented below.
The Company has no sales outside of the
United States. The Company operated in one
segment for the year ended December 31, 1998.
Year ended
December 31, 1999 United INI Parent Eliminations Total
---------------------------------------------------------------------------------------------------
Revenues from
external customers $5,756,014 $2,109,396 $ - $ - $ 7,865,410
Segment profit (loss) (284,813) (88,938) (1,242,850) - (1,616,601)
Segments assets 2,118,814 400,387 1,974,132 (569,505) 3,923,828
Depreciation and
amortization 289,212 85,503 111,040 - 485,755
Capital expenditures 43,604 1,554 - - 45,158
16. Subsequent Events On May 1, 2000, certain shareholders of the
Company entered into a stock purchase
agreement whereby they exchanged common and
preferred stock and options to purchase
common stock representing approximately 52%
of the Company's fully diluted common shares
for common shares and, in certain instances,
options to purchase common shares of The
BigHub.com, Inc. As part of this transaction,
the Company obtained a loan from The
BigHub.com, Inc. in the amount of $500,000
which was used in part to liquidate certain
trade payables and accrued liabilities.
F-21
Next Generation Media Corporation
Notes to Consolidated Financial Statements
17. Liquidity and Future During the year ended December 31, 1999, the
Prospects Company experienced a significant loss and
has a working capital deficit at year-end. A
large portion of its trade payables and
accrued liabilities are significantly past
due. Additional short-term borrowing to fund
the Company's commitments is limited.
During March 2000, the Company received a
$500,000 loan from The BigHub.com, Inc. (see
Note 16). Approximately $250,000, was used to
liquidate certain overdue trade payables and
accrued liabilities. The BigHub.com, Inc. has
committed to fund the Company's working
capital needs during the year ended December
31, 2000.
Management plans to improve the liquidity of
the Company during the year ended December
31, 2000 through an increase in revenues from
its internet site, ISHOPOL.com, an increase
in printing revenue from national accounts,
reduced debt service commitments and the sale
of INI.
18. Supplemental Cash
Flow Information
1999 1998
---------------------------------------------------------------------------------
Cash paid during the year for interest $ 61,264 $ 40,099
Non-cash operating activities:
Deferred consulting fees 100,000 -
Non-cash financing activities:
Preferred stock issued for future
acquisition - 687,500
Warrants issued for future acquisition - 306,667
Deemed preferred stock dividends 279,167 328,125
Accrued dividends 158,750 96,569
Non-cash investing activities:
Equipment acquired under capital leases - 85,294
Leasehold improvements
acquired through barter - 40,472
Acquisition:
Total consideration for acquisition $2,007,933 -
Book value of assets acquired
less liabilities assumed 716,083 -
---------------------------------------------------------------------------------
Goodwill $1,291,850 $ -
=================================================================================
F-22