<PAGE>
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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, 1998 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 55344-3854
(Address of principal executive offices)
(612) 944-7944
(Issuer's telephone number)
MENTUS MEDIA CORP.
9531 W. 78th Street, Suite 400
Minneapolis, MN 55344
(Former name, former address and former fiscal year
if changed since last report)
-------------------------
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Number of shares of Common Stock outstanding as of November 11, 1998: 266,268
Transitional Small Business Disclosure Format (Check one):
Yes No X
--- ---
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<PAGE>
NEXT GENERATION NETWORK, INC.
FORM 10-QSB
Table of Contents
Page
----
Part I. Financial Information
Item 1. Financial Statements.
Balance Sheets as of December 31, 1997 and
September 30, 1998 2
Statements of Operations for the Three and Nine
Months Ended September 30, 1997 and 1998 3
Statement of Changes in Stockholders' Deficit for
the Nine Months Ended September 30, 1998 4
Statements of Cash Flows for the Nine Months Ended
September 30, 1997 and 1998 5
Notes to Financial Statements 6-8
Item 2. Management's Discussion and Analysis or Plan
of Operation 9-12
Part II. Other Information.
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
1
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEXT GENERATION NETWORK, INC.
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 29,370,398 $ 2,789,142
Accounts receivable, net 469,707 382,108
Other current assets 150,906 120,886
------------ ------------
Total current assets 29,991,011 3,292,136
------------ ------------
Property and Equipment, net 9,509,062 3,990,186
Deferred Financing Costs, net 2,636,597 78,603
Other Assets 205,203 174,723
------------ ------------
$ 42,341,873 $ 7,535,648
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Current maturities of long-term debt $ 21,198 $ 48,302
Accounts payable 817,750 319,405
Accrued expenses (Note 3) 2,713,080 1,663,453
------------ ------------
Total current liabilities 3,552,028 2,031,160
------------ ------------
Non-current accrued site lease expense --- 92,253
------------ ------------
Long-term Debt (Note 2) 41,752,412 3,015,208
------------ ------------
Mandatory Redeemable Preferred Stock
14.8% Series B, nonvoting; authorized
91,100 shares; issued and outstanding
91,059 shares; stated at liquidation
value plus accrued dividends 9,397,836 8,429,915
14.8% Series C, nonvoting; authorized
90,000 shares; issued and outstanding
75,540 and 75,310 shares at 1998 and
1997, respectively; stated at liquidation
value plus accrued dividends 6,771,645 6,057,115
------------ ------------
16,169,481 14,487,030
------------ ------------
Stockholders' Deficit
8.25% Series A cumulative preferred
stock, nonvoting; authorized 20,000
shares; issued and outstanding
6,000 shares, stated at liquidation
value, excluding cumulative unpaid
dividends (aggregate liquidation value
of $4,608,750 and $4,485,000 at 1998
and 1997, respectively) 3,000,000 3,000,000
Common stock, $0.01 par value; authorized
1,000,000 shares; issued and outstanding
266,268 shares 2,663 2,663
Additional paid-in capital 9,869,718 3,904,889
Accumulated deficit (32,004,429) (18,997,555)
------------ ------------
(19,132,048) (12,090,003)
------------ ------------
$ 42,341,873 $ 7,535,648
------------ ------------
------------ ------------
</TABLE>
See notes to condensed financial statements.
2
<PAGE>
NEXT GENERATION NETWORK, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ --------------------------
1998 1997 1998 1997
----------- --------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues:
Advertising Revenue $ 807,659 $ 563,716 $ 1,691,027 $ 736,417
Less agency
commissions (10,804) (20,567) (21,970) (29,852)
----------- ----------- ------------ -----------
Net advertising revenue 796,855 543,149 1,669,057 706,565
Network equipment sales --- --- 26,309 12,379
Network operating
revenue 290 102,744 1,730 485,149
----------- ----------- ------------ -----------
797,145 645,893 1,697,096 1,204,093
Costs and expenses:
Cost of network equipment
sales --- --- 9,996 11,907
Network Operating
Expenses 1,441,145 719,320 3,298,559 1,969,089
Selling Expenses 1,724,704 439,340 3,791,133 1,027,060
General and
administrative expenses 1,554,773 791,778 4,216,778 2,369,115
----------- ----------- ------------ ------------
4,720,622 1,950,438 11,316,466 5,377,171
----------- ----------- ------------ ------------
Operating loss (3,923,477) (1,304,545) (9,619,370) (4,173,078)
Non operating income (expense):
Interest expense (1,924,781) (70,705) (4,583,244) (202,011)
Interest income 444,994 17,670 1,195,740 70,758
Other expense --- (5,342) --- (5,342)
----------- ----------- ------------ ------------
Net loss (5,403,264) (1,362,922) (13,006,874) (4,309,673)
Preferred stock dividends 581,495 333,432 1,788,491 1,001,925
----------- ----------- ------------ -----------
Net loss applicable to
common stockholders $(5,984,759) $(1,696,354) $(14,795,365) $(5,311,598)
----------- ----------- ------------ -----------
Basic and diluted net
loss per common share $ (22.48) $ (6.37) $ (55.57) $ (19.95)
----------- ----------- ------------ -----------
Weighted average number
of common shares
outstanding 266,268 266,268 266,268 266,268
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
</TABLE>
See notes to condensed financial statements.
3
<PAGE>
NEXT GENERATION NETWORK, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
(UNAUDITED)
<TABLE>
<CAPTION>
Series A
Cumulative
Preferred Stock Common Stock Additional
------------------- ---------------- Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
------ ---------- ------- ------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 6,000 $3,000,000 266,268 $2,663 $3,904,889 ($18,997,555) ($12,090,003)
Accrued dividends on mandatory
redeemable preferred stock --- --- --- --- (1,664,741) --- (1,664,741)
Issuance of Warrants in
connection with PIK Notes --- --- --- --- 7,700,000 --- 7,700,000
Compensation element of
stock options forfeited --- --- --- --- (70,430) --- (70,430)
Net Loss --- --- --- --- --- (13,006,874) (13,006,874)
------ ---------- ------ ------ ---------- ------------ ------------
Balance, September 30,1998 6,000 $3,000,000 266,268 $2,663 $9,869,718 ($32,004,429) ($19,132,048)
------ ---------- ------- ------ ---------- ------------ ------------
------ ---------- ------- ------ ---------- ------------ ------------
</TABLE>
See notes to condensed financial statements.
4
<PAGE>
NEXT GENERATION NETWORK, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------
SEPTEMBER 30,
-----------------------------
1998 1997
------------- -------------
OPERATING ACTIVITIES:
<S> <C> <C>
Net Loss $($13,006,874) $($4,309,673)
Adjustments to reconcile net loss to net
cash used in operating activities:
Interest amortization and accretion on
long term debt 1,160,510 50,658
Non cash interest on PIK Notes 3,389,820 ---
Depreciation and amortization 849,122 480,851
Compensation element of stock options
forfeited (70,430) (21,129)
Loss on disposal of equipment and
furnishings --- 1,896
Other 17,710 ---
Changes in assets and liabilities:
Receivables (92,985) (384,951)
Other current assets (30,020) (38,396)
Accounts payable 498,345 (282,401)
Other accrued expenses 8,554 1,052,166
------------- ------------
Net Cash Used In Operating Activities (7,276,248) (3,450,979)
------------- ------------
INVESTING ACTIVITIES:
Purchase of equipment and furnishings (6,367,998) (1,097,683)
Deposits and other assets (25,094) (6,249)
------------- ------------
Net Cash Used in Investing Activities (6,393,092) (1,103,932)
------------- ------------
FINANCING ACTIVITIES:
Proceeds from long-term debt 37,300,000 ---
Principal payments on long-term debt
and capital leases (1,918,338) (42,182)
Proceeds from issuance of warrants 7,700,000 ---
Deferred financing costs (2,831,066) ---
Net proceeds from issuance of preferred stock --- 4,135,710
------------- ------------
Net Cash Provided by Financing Activities 40,250,596 4,093,528
------------- ------------
Net increase (decrease) in cash and
cash equivalents 26,581,256 (461,383)
Cash and cash equivalents
Beginning 2,789,142 3,821,195
------------- ------------
Ending $ 29,370,398 $ 3,359,812
------------- ------------
------------- ------------
Supplemental Cash Flow Information
Cash payments for interest $ 33,914 $ 138,173
Non cash activities:
Increase in mandatory redeemable
preferred stock and decrease in
paid-in capital from accrued dividends 1,664,741 ---
Accrued interest converted to long
term debt (Note 4) 2,441,000 ---
Increase in long term debt resulting
from interest accretion 887,438 50,658
Equipment repurchased through issuance
of notes payable --- 996,514
Equipment acquired under capital leases --- 29,364
Stockholder note converted to Series C
mandatory redeemable preferred stock --- 500,038
------------- ------------
------------- ------------
</TABLE>
See notes to condensed financial statements.
5
<PAGE>
Next Generation Network, Inc.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The condensed balance sheet as of September 30, 1998, and the condensed
statements of operations, changes in stockholders' deficit, and cash flows
for the three and nine month periods ended September 30, 1998 and 1997 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 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, 1998 are not necessarily indicative of the
operating results to be expected for the full fiscal year.
Certain information and footnote disclosures normally included in
financial statements in accordance with generally accepted accounting
principles have been condensed or omitted.
Note 2. Long Term Debt
A summary of long-term debt is as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------- ------------
<S> <C> <C>
12% Senior Secured PIK Notes due February 2003
(net of discount attributed to warrants issued
in connection with PIK Notes) (See Note 4) $40,509,241 --
8% note payable to shareholder, due November 2003,
secured by substantially all assets of the Company -- $1,875,462
10.1% to 18.8% capital leases, due in varying
monthly installments to August 2001, secured by
equipment and bank letters of credit up to $35,000 60,631 103,507
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 445,252 400,226
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 758,486 684,315
----------- ----------
41,773,610 3,063,510
Less current maturities 21,198 48,302
----------- ----------
$41,752,412 $3,015,208
----------- ----------
</TABLE>
The long term debt outstanding at September 30, 1998 (excluding capital
lease obligations) matures as follows: $445,252 in 2001 and $41,267,727 in
2003.
6
<PAGE>
Next Generation Network, Inc.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 3. Accrued Expenses
The components of accrued expenses are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Site-lease fees $1,359,179 $1,272,017
Interest 948,820 --
Compensation 162,331 119,468
Legal fees 45,000 196,217
Other 197,750 75,751
---------- ----------
$2,713,080 $1,663,453
---------- ----------
</TABLE>
Note 4. Events Subsequent to December 31, 1997
On February 18, 1998, the Company sold 45,000 units representing $45
million principal amount of 12% Series A Senior Secured PIK Notes (the
"Notes") and warrants to purchase 125,240 shares of common stock
(the "Warrants"). The Notes mature on February 1, 2003. Interest on the
Notes is payable semiannually in arrears on February 1 and August 1 of each
year commencing August 1, 1998. Interest on the Notes is payable either in
cash or in additional Notes, at the option of the Company, until August 1,
2000, and thereafter is payable in cash. At the time of issuance, each
Warrant entitled the holder to purchase one share of common stock at an
exercise price of $0.01 per share, representing in the aggregate
approximately 20% of the common stock on a fully diluted basis. The number
of shares purchasable by holders of the Warrants is subject to adjustment.
The Warrants are detachable and are exercisable prior to February 1, 2008. For
financial reporting purposes the aforementioned Notes have been recorded net
of the value ascribed to the Warrants which is in effect an original issuance
discount on the Notes. This discount is being amortized as additional
interest expense over the five year term of the Notes using the interest
method. The value ascribed to the Warrants was $7.7 million, and was
recorded as additional paid in capital. The Warrant value was determined
based on the total estimated potential market capitalization of the Company's
common stock, on a fully diluted basis before the Warrant issuance, using an
estimated per share value of $77 per share and the percentage of such value
that the Warrants represent, if exercised. The financing costs attributable
to the sale of the Notes have been deferred and are being amortized over the
term of the Notes. In August, 1998, the Company issued additional Notes in
payment of $2,441,000 of accrued interest on the aforementioned Notes.
The Notes are secured by a first priority lien on substantially all
assets of the Company except for certain equipment collateralizing
noninterest-bearing notes included in long-term debt. The Notes contain
certain restrictive covenants that among other things prohibit the payment of
dividends on, and the redemption of, the Company's capital stock.
7
<PAGE>
Next Generation Network, Inc.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 4. Events Subsequent to December 31, 1997 (continued)
On July 8, 1998, the Company's Registration Statement with the
Securities and Exchange Commission, relative to its Exchange Offer of Series
B 12% Senior Secured PIK Notes due 2003 ("Series B Notes") for all
outstanding Series A 12% Senior Secured PIK Notes ("Series A Notes"), was
declared effective. Generally, the form and terms of the Series B Notes are
the same as the Series A Notes except that they do not bear legends
restricting their transfer. All Series A Notes were exchanged for Series B
Notes on August 19, 1998.
8
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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 NEW SITES FOR NGN DISPLAYS (AS DEFINED); 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.
INTRODUCTION
OVERVIEW
The Company was founded in 1990 and thereafter focused its efforts on,
among other things, the development of its electronic out-of-home advertising
network known as NGN (Next Generation Network) by developing and improving
the NGN technology. At the same time, the Company concentrated its efforts
on securing site agreements for the placement of its color video monitors
("NGN Displays") as well as recruiting local sales personnel and opening
local sales offices in its initially developed Designated Market Areas ("DMAs").
The operating revenues of the Company presently are derived from the
sale of advertising on NGN. The Company's primary operating expenses are for
NGN Display operating costs and employee compensation. Advertising rates are
based upon the availability of space on the network for the location targeted
by the advertiser, the size and demographics makeup of the market served by
the NGN Displays and the availability of alternative advertising media in the
market area. Most advertising contracts are short-term. Most of the
Company's annual gross revenues are generated from local advertising, and the
remainder represents national advertising, both of which primarily are sold
directly by the Company's own sales personnel.
In 1996, the Company generated its initial revenues primarily from two
sources: (1) sales of NGN Displays and its rights under exclusive site
agreements within defined territories not then targeted by the Company; and
(2) royalties on advertising sales and network operating revenues in
owner-operator markets. At the same time, the Company continued to
concentrate its efforts on sales of advertising and establishing site
agreements for its own NGN Displays. Effective in January and August 1997,
the Company entered into agreements with these owner-operators whereby the
Company repurchased the equipment on terms that the Company considered
favorable. In addition, through this process the owner-operators forfeited
their respective territorial rights.
9
<PAGE>
In 1997, the scope of the Company's business shifted from sales of network
equipment and territorial rights to sales of advertising on the Company's own
NGN installations. During 1997, the Company generated its revenues from both
advertising revenues from its own NGN Displays and from royalties on
advertising sales and network operating revenues in owner-operator markets.
Operating revenues during 1998 were principally from advertising on NGN
Displays.
The following table presents the number of NGN installations in their
respective markets as of September 30, 1998, June 30, 1998, and December 31,
1997, respectively.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 JUNE 30, 1998 DECEMBER 31, 1997
------------------ ------------- -----------------
<S> <C> <C> <C>
MARKET:
Baltimore, MD 204 205 208
Boston, MA 154 21 21
Dallas-Ft. Worth, TX 257 228 226
Ft. Myers, FL 46 45 43
Los Angeles, CA 490 407 --
Miami, FL 86 86 87
New York, NY 340 241 --
Norfolk, VA 236 236 239
Orlando, FL 243 239 233
Philadelphia, PA 244 -- --
Sacramento, CA 58 -- --
San Diego, CA 113 -- --
San Francisco, CA 191 -- --
Tampa-Clearwater-St. Petersburg, FL 140 139 136
Washington, D.C. 509 506 502
West Palm Beach, FL 63 63 63
Other 12 12 11
---- ---- ----
TOTAL 3386 2428 1769
</TABLE>
RESULTS OF OPERATIONS
Net revenues were $797,000 for the third quarter of 1998 compared to
$646,000 for the same quarter of 1997 and were $1.7 million for the first
nine months of 1998 compared to $1.2 million for the same period of 1997. The
increase was attributable to the shift in the Company's business from
owner-operator network operating fees to sales of advertising on the
Company's own NGN installations and the opening of local sales offices. Three
sales offices were opened during the 1997 first quarter and an additional
office was opened in late 1997. Three offices were opened in former
owner-operator markets during the first quarter of 1998. The installation of
NGN Displays was substantially completed and sales offices were opened in New
York and Los Angeles during the third quarter of 1998. The Company also
began installing NGN Displays in Boston, Philadelphia, San Francisco,
Sacramento, and San Diego during the third quarter of 1998. The Company has
continued to hire sales personnel in new markets and expects to open sales
offices in Philadelphia and San Francisco during the fourth quarter.
Advertising revenues from newly opened markets were minimal since efforts
were concentrated on staff hiring and training. Advertising revenues
increased to $797,000 during the third quarter of 1998 compared to $543,000
in 1997. Advertising revenues for the first nine months of 1998 were $1.7
million compared to $707,000 for the comparable period of 1997. Network
operating revenues were minimal during the first nine months 1998 due to the
termination of owner-operator agreements as discussed above. For the nine
months ended September 30,1998, the Company had equipment sales and network
operating revenues from site owners of $28,000 compared to $498,000 during
the comparable period of 1997. Barter revenue, which was
10
<PAGE>
$65,000 during the third quarter of 1998 compared to $64,000 for the same
quarter in 1997 and was $217,000 for the first nine months of 1998 compared
to $64,000 for the same period in 1997, is included in advertising revenue.
Costs and expenses were $4.7 million for the third quarter of 1998
compared to $2.0 million for the same quarter of 1997 and were $11.3 million
for the first nine months of 1998 compared to $5.4 million for the same
period of 1997.
Network operating expenses increased $722,000 and $1,329,000 during the
three and nine month periods ended September 30, 1998, respectively, from the
comparable periods in 1997. This increase is due to the increase in both
the number of NGN Display installations and the number of months in
operation. Major components of network operating expenses include local
telephone service, telephone long distance, depreciation, maintenance, and
site lease expense related to the NGN Displays. The increase in site lease
expense was due to the repurchase of equipment in former owner-operator
markets in August, 1997, and also due to additional NGN installations. Site
lease expense was recorded net of reimbursement from owner-operators so the
Company expense increased when the owner-operators forfeited their
territorial rights. Site leases generally provide the site operator with a
percentage of the advertising revenues derived from the NGN Display at the
particular site. The Company accrues monthly site lease expenses which are
the greater of the computed amount based on a percentage of revenue or, where
applicable, the appropriate portion of an annual minimum. Most network
operating expenses are fixed. Accordingly, the Company expects that such
expenses as a percentage of advertising revenues will decrease as the
Company's advertising revenues increase. Currently, network operating
expenses exceed advertising revenues due to the Company's limited operating
history.
Selling expenses in regional sales offices were $1.7 million for the
third quarter of 1998 compared to $439,000 for the same quarter of 1997 and
were $3.8 million for the first nine months of 1998 compared to $1.0 million
for the same period in 1997. The increases in each period resulted primarily
from the addition of sales staff and costs associated with opening additional
regional sales offices as noted above. General and administrative expenses
were $1.6 million for the third quarter of 1998 compared to $800,000 for the
same quarter of 1997 and were $4.2 million for the first nine months of 1998
compared to $2.4 million for the same period in 1997. The increases were due
to the additional administrative staff in computer operations, graphic
creation, marketing, and accounting that were added to support the sales
offices and increased advertising volume, as well as to marketing efforts
such as printing expenses related to promotional material, market research,
sales promotion, and public relations expenses. Research and development
costs were $164,000 for the third quarter of 1998 compared to $69,000 for the
same quarter in 1997 and were $335,000 for the first nine months of 1998
compared to $275,000 for the same period in 1997.
Interest expense was $1.9 million for the third quarter of 1998 compared
to $71,000 for the same quarter of 1997 and was $4.6 million for the first
nine months of 1998 compared to $202,000 for the same period in 1997. The
increase in both 1998 periods was due to the issuance of $45 million of 12%
Senior Secured PIK Notes (the "Notes") in February 1998. Interest income
increased to $445,000 for the third quarter of 1998 compared to $18,000 for
the same quarter in 1997 and was $1.2 million for the first nine months of
1998 compared to $71,000 for the comparable period in 1997. The increase was
due to investing the unused proceeds from the Notes.
The net loss for the quarter ended September 30, 1998 increased to $5.4
million, from $1.4 million in the same quarter of 1997, and to $13.0 million
for the first nine months of 1998 compared to $4.3 million for the same
period in 1997, primarily as a result of the items discussed above.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Through September 30, 1998, the Company's primary source of liquidity
has been proceeds from the sale of equity and debt securities.
As of September 30, 1998, total cash and cash equivalents were $29.4
million compared to $2.8 million as of December 31, 1997 and $35.2 million as
of June 30, 1998. The increase in cash was a result of $7.3 million of cash
used in operating activities and $6.4 million of cash used in investing
activities (primarily for capital expenditures related to the expansion of
the NGN network) being offset by $40.3 million of net cash provided by the
sale of Notes and Warrants after offering expenses and repayment of long term
debt. The Company's expects that increasing sales volume will require
the use of additional cash to fund increased receivable levels.
The decrease in cash during the first nine months of 1997 resulted from
$3.5 million used in operating activities and net cash used in investing
activities of $1.1 million, (primarily for capital expenditures to expand the
Company's NGN network) being substantially offset by the $4.1 million net
proceeds from the issuance of Series C Preferred Stock.
Interest on the Notes is payable on February 1 and August 1 of each
year, commencing August 1, 1998. Interest on the Notes is payable either in
cash or additional Notes, at the option of the Company through August 1,
2000, and thereafter is payable in cash. Accordingly, the Company will not be
required to pay cash interest payments on the Notes until the February 1,
2001 interest payment date. Additional Notes were issued in the amount of
$2,441,000 for the interest payment due August 1, 1998. The Company expects
to pay interest through August 1, 2000, by issuing additional Notes, which
would increase the $45 million principal amount of the Notes to approximately
$60.2 million.
The Company anticipates that its $29.4 million of cash and its operating
cash flow will be sufficient to finance the operating requirements of the
Company and anticipated capital expenditures through 1999. However, if
advertising revenues do not increase as anticipated or operating expenses are
higher than anticipated, the Company may need to raise additional capital.
There can be no assurance that the additional funds will be available, or if
available, will be available on terms acceptable to the Company. The Company
believes that the current installed base of NGN Displays is large enough to
attain profitable operations when advertising revenues reach desired levels.
The Company does not believe it has any significant risk related to
interest rate fluctuation since it has only fixed rate debt.
YEAR 2000
The Company has performed a review of its Year 2000 preparedness
relative to its products and systems, its accounting software and its
computer hardware. The Company believes that it will not incur material costs
in connection with becoming Year 2000 compliant. In addition, the Company has
received communications from its significant third party vendors and service
providers stating that they are generally on target to become Year 2000
compliant in 1999 if they have not already done so. There can be no assurance
that these third party vendors and service providers will complete their own
Year 2000 compliant projects in a timely manner and that failure to do so
would not have an adverse impact on the Company's business.
12
<PAGE>
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
Pursuant to an Action by Written Consent of Stockholders of the Company In
Lieu of a Meeting, effective as of August 27, 1998, stockholders of the
Company representing a majority of the shares of Common Stock approved and
adopted an amendment to the Company's Certificate of Incorporation to change
the Company's name to Next Generation Network, Inc. The number of shares
consenting to the action was 203,814.
Pursuant to an Action by Written Consent of the Stockholders of the Company
In Lieu of a Meeting, effective as of August 27, 1998, stockholders of the
Company representing a majority of the shares of Common Stock elected the
following persons as directors of the Company: Gerard P. Joyce; Thomas M.
Pugliese; David Voelker; Thomas J. Davis, Timothy P. Hartman; and James P.
Sheehan. The number of shares of Common Stock represented by the written
consents in favor of each director was 203,814.
Pursuant to an Action by Written Consent of Stockholders In Lieu of a
Meeting, effective as of August 25, 1998, the holders of a majority of the
Company's Series B Senior Cumulative Compounding Convertible Redeemable
Preferred Stock ("Series B Stock") elected Michael Marocco as a director of
the Company. The number of shares of Series B Stock represented by the
written consents in favor of Mr. Marocco was 64,935.
Pursuant to an Action by Written Consent of Stockholders In Lieu of a
Meeting, effective as of August 25, 1998, the holders of a majority of the
Company's Series C Senior Cumulative Compounding Convertible Redeemable
Preferred Stock ("Series C Stock") elected Alejandro Zubillaga as a director
of the Company. The number of shares of Series C Stock represented by the
written consents in favor of Mr. Zubillaga was 51,948.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K:
a) Exhibits
3.1 Certificate of Amendment dated as of August 31, 1998.
27.1 Financial Data Schedule
b) Reports on Form 8-K
None
13
<PAGE>
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 16, 1998 By: /s/ Thomas M. Pugliese
------------------ --------------------------
Thomas M. Pugliese
Chief Executive Officer
Date: November 16, 1998 By: /s/ Michael J. Kolthoff
------------------ --------------------------
Michael J. Kolthoff
Treasurer and Assistant Secretary
(Principal Financial and
Accounting Officer)
14
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
MENTUS MEDIA CORP.
PURSUANT TO SECTION 242 OF THE
DELAWARE GENERAL CORPORATION LAW
---------------------------
MENTUS MEDIA CORP. (the "Corporation"), a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware, does hereby certify:
FIRST: That the board of directors of the Corporation duly
adopted resolutions setting forth a proposed amendment to the Certificate of
Incorporation of the Corporation, declaring such amendment to be advisable
and referring the proposed amendment to the stockholders of the Corporation
entitled to vote thereon for their consideration. The resolution setting
forth the proposed amendment is as follows:
RESOLVED, that the Corporation shall amend Article 1 of its
Certificate of Incorporation in its entirety to read as follows:
"1. NAME. The name of the Corporation is Next Generation
Network, Inc."
SECOND: That the appropriate stockholders of the Corporation
approved such amendment by written consent in accordance with Section 228 of
the General Corporation Law of the State of Delaware.
THIRD: That such amendment was duly adopted in accordance with
the provisions of Section 242 of the General Corporation Law of the State of
Delaware.
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
signed by duly authorized officers of the Corporation this 27TH day of
August, 1998.
By:
-----------------------------------
Name: Thomas M. Pugliese,
Vice-Chairman and CEO
By:
-----------------------------------
Michael Kolthoff, Assistant Secretary
STATE OF MINNESOTA )
) ss.
County of Hennepin )
On this 27TH day of August, 1998, before me, the undersigned officer,
personally appeared Thomas M. Pugliese, who acknowledged himself to be the
Vice Chairman and Chief Executive Officer of Mentus Media Corp., a Delaware
corporation, and that he in such capacity, being authorized so to do,
executed the foregoing instrument for the purposes therein contained by
signing the name of the Corporation by himself, and that the facts stated
therein are true.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
-----------------------------------
Notary Public
My Commission Expires:
- ---------------------------
2
<PAGE>
STATE OF MINNESOTA )
) ss.
County of Hennepin )
On this 27TH day of August, 1998 before me, the undersigned officer,
personally appeared Michael Kolthoff, who acknowledged himself to be the
Assistant Secretary of Mentus Media Corp., a Delaware corporation, and that
he in such capacity, being authorized so to do, executed the foregoing
instrument for the purposes therein contained by signing the name of the
Corporation by himself, and that the facts stated therein are true.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
-----------------------------------
Notary Public
My Commission Expires:
- ---------------------------
3
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