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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FISCAL YEAR ENDED COMMISSION FILE NUMBER:
DECEMBER 31, 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)
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Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: None
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
--- ---
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. Not applicable
State issuer's revenues for its most recent fiscal year. $2,589,690
State the market value of common equity held by non affiliates: Not
applicable
Number of shares of Common Stock outstanding as of March 19,
1999: 266,268
Transitional Small Business Disclosure Format (Check one):
Yes No X
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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; 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.
PART I
ITEM 1. BUSINESS
COMPANY OVERVIEW
The Company sells advertising space and provides programming through an
electronic out-of-home advertising network known as NGN - Next Generation
Network. The Company currently operates NGN in 18 Designated Market Areas
("DMA's") and their surrounding areas. As of December 31, 1998, the Company had
NGN Displays (defined below) installed and operating in 3,630 sites. Based on
the average of the daily transaction counts submitted to the Company by the site
operators (the "Daily Audience"), the Company estimates that NGN presently can
be viewed by approximately 4 million people daily.
NGN is an "InLine TV" network of color video monitors ("NGN Displays")
located at high traffic public locations. NGN Displays are connected by ordinary
voice-grade telephone lines and controlled from a single operations center in
Minneapolis, Minnesota. From its operations center, the Company transmits
programming and advertising to its NGN Displays, presenting a sequence of
partially animated or full motion, television-quality images.
RECENT DEVELOPMENTS
On February 18, 1998, the Company sold 45,000 units representing $45
million principal amount of 12% Series A Senior Secured PIK Notes (the "Series A
Notes") and warrants to purchase 125,240 shares of common stock (the"Warrants").
The Series A Notes mature on February 1, 2003. Interest on the Series A Notes is
payable semiannually in arrears on February 1 and August 1 of each year
commencing August 1, 1998. Interest on the Series A Notes is payable either in
cash or in additional Series A 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 at the time of issuance. The number of
shares purchasable by holders of the Warrants is subject to adjustment. The
Warrants are detachable and are exercisable to February 1, 2008.
The Series A 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-
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term debt. The Series A Notes contain certain restrictive covenants that
among other things prohibit the payment of dividends on, and the redemption
of, the Company's capital stock.
On April 2, 1998, the Company filed a Registration Statement on Form S-4
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 Notes. 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. The Registration Statement was declared effective by
the Securities and Exchange Commission on July 8, 1998. All Series A Notes were
exchanged for Series B Notes on August 19, 1998.
The Company changed its name from Mentus Media Corp. to Next Generation
Network, Inc. effective on August 31, 1998.
BUSINESS STRATEGY
By utilizing technology to reduce labor costs and provide immediacy and
flexibility to advertisers, NGN seeks to preserve the positive attributes while
avoiding the negative attributes of traditional out-of-home advertising.
Specifically, the Company seeks to achieve the high operating profit margins and
recurring cash flows inherent in the industry, while reducing fixed costs and
labor intensity, and avoiding zoning regulations that may impede expansion.
The Company's objectives are to (i) increase and diversify the physical
presence of NGN in the United States by building upon the Company's existing
site agreements and negotiating additional site agreements and (ii) utilize
NGN's flexibility as an advertising medium to sell advertisements through the
Company's dedicated sales force on a local, regional and national basis. To
achieve its objectives, the Company has adopted the following business
strategies:
- - INCREASE PHYSICAL PRESENCE OF NGN. The Company's expansion strategy is to
increase the Company's geographic presence in top markets and diversify
distribution venues. The Company intends to continue securing new site
agreements within its existing operating DMAs as well as the DMAs targeted
by the Company for expansion. The Company currently has NGN Displays in
eight of the ten top DMAs and site agreements in nine of the top ten DMAs,
and 41 of the top 50 DMAs. The Company's immediate geographic expansion
continues to focus on the top ten DMAs, with the intention of having a
presence in all of the top 25 DMAs by 2002. The Company installed 1,861 NGN
Displays during 1998, and had NGN Displays installed and operating in 3,630
sites as of December 31, 1998. The Company expects that continued
installations will be based on Management's evaluation of advertising sales
and other factors including contractual commitments.
- - INCREASE ADVERTISING REVENUEs. The Company conducts its sales efforts
through a dedicated sales force within each of the DMAs in which it
operates, which enables NGN to accommodate micro-targeted advertising needs
of local advertisers while offering both flexibility and breadth of
coverage to full-market and multi-market advertisers. By combining its
local sales presence with continued expansion and diversification of
distribution venues, the Company believes it will broaden the audience for
NGN programming and advertising, and will appeal to an increasing pool of
advertisers by providing a truly local, regional and national advertising
medium.
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INDUSTRY OVERVIEW
The Company competes in the out-of-home advertising industry.
Out-of-home advertising derives its name from reaching audiences out of their
homes, and consists primarily of billboards, transit advertising and stadium
and other signage. The Company believes that the total expenditures for the
out-of-home industry in 1997 were approximately $4.0 billion, and the
industry is growing at a faster rate than overall advertising expenditures.
The Company believes that out-of-home advertising, which has existed for over
125 years, is a proven, resilient industry. Management believes that recent
demographic and marketing trends, such as changing lifestyles and habits
associated with dual career households and the high cost and audience
fragmentation associated with in-home mass media, have created a favorable
environment for out-of-home advertising in general and NGN specifically.
Many traditional forms of out-of-home advertising are hampered by
limitations such as less desirable demographics due to zoning, long lead times
to implement advertisements, complexity of buying space nationally and high
production costs. For example, billboard advertisers are subject to numerous
state and local regulations restricting the permitted locations of
advertisements. Zoning regulations frequently restrict the height and size of
outdoor advertisements, and governmental authorities from time to time ban the
use of outdoor advertisements or order their removal. NGN Displays are placed in
privately-owned establishments primarily indoors and generally are not subject
to the same regulatory pressures affecting the placement of other out-of-home
media.
NGN SYSTEM
NGN incorporates a sophisticated telephone based communications system that
includes the NGN Displays, computers and related operating and network
management software. From a central hub facility in Minneapolis, Minnesota, the
Company creates programming and advertising that is transmitted to NGN Displays
in multiple locations by means of standard telephone lines. NGN presents a
sequence of partially animated or full motion, television-quality images that
are intended to capture audience attention in busy out-of-home environments,
thereby effectively delivering advertising and programming messages.
NGN integrates industry standard computer hardware and software with
proprietary software developed by the Company specifically for its out-of-home
advertising application. The computer architecture of NGN is intended to make
the system "scaleable" so that the network can be expanded to facilitate growth
at minimal incremental cost. The Company believes that NGN is reliable,
experiencing "up-time" (representing the daily average of functioning units) in
excess of 99%.
NGN DISPLAY SITES
The Company's objective is to place NGN Displays in thousands of locations
throughout the United States, with target sites consisting of high traffic,
public venues where people remain for several minutes, including convenience
stores, fast food restaurants, office building lobbies, pharmacies, movie
theater lobbies and self-serve gas pumps. The Company historically has targeted
convenience stores as NGN Display sites because of the existence of numerous
large regional and national chains which allow for economies of scale. Companies
currently under site agreements
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with the Company include The Southland Corporation (7-Eleven Stores),
Cumberland Farms, Jerry's Subs, Uni-Marts and Crown Central Petroleum.
As of December 31, 1998, the Company had NGN Displays operating in 3,630
sites. Based on the Daily Audience, the Company estimates that NGN presently can
be viewed by approximately 4 million people daily. Additionally, the Company
holds site agreements for approximately 4,700 additional sites. Upon completion
of installation of all sites currently subject to site agreements, collectively
with the Company's presently installed sites, NGN could be viewed by an
estimated Daily Audience of approximately 9 million people in 41 of the top 50
DMA's in the United States.
The Company is highly dependent on its agreement (the "Southland Contract")
with The Southland Corporation ("Southland"), which as of December 31, 1998
covered 2,943 of the Company's installed NGN Displays and 2,267 of the
additional sites for which the Company has agreements. The Southland Contract
expires on January 1, 2004. The Southland Contract provides that NGN Displays
may be installed in all Southland owned 7-Eleven's. In addition, Southland has
agreed to use its reasonable best efforts to solicit franchisee participation in
the program. Although there is no obligation to renew, extend or enter into a
new agreement, the Southland Contract provides that Southland and the Company
will negotiate in good faith to renew or extend the Southland Contract for at
least 5 years. Under the Southland Contract, if Southland desires to enter into
an agreement with a provider of services competitive with the Company, the
Company has a right to match the competitors terms for a substantially similar
product as the other provider. The Southland Contract provides that the Company
will pay liquidated damages of $100,000 if certain minimum installations are not
completed by December 31, 1999. Southland may terminate the Southland Contract
in the event the Company materially breaches its obligations and fails to cure
such breach within 30 days of receiving notice thereof or if minimum
installations are not completed by June 30, 2000. Either the non-renewal of the
Southland Contract or any difficulty that might arise in the Company's
relationship with Southland would have a material adverse effect on the
Company's business.
Under the site agreements with site operators, the NGN Displays are
installed, maintained and operated by the Company. The store owner generally
receives a percentage of the advertising revenues derived by the Company from
the particular site, typically at no cost to the operator (other than, in
certain circumstances, the cost of the NGN Displays). This additional source of
income provides the site operators with an incentive to renew the agreements at
the end of their terms. The Company's agreements with site operators have
varying expiration dates ranging from approximately June 2000 to December 2010.
The Company is solely responsible for the installation and maintenance of its
NGN Displays. Subject to certain exceptions, the site agreements generally
provide that the Company shall be the exclusive provider of video-based
information, entertainment and advertising services. Under the Southland
Contract, the Company is required to make minimum annual payments to Southland.
The Company has created a specialized corporate development group aimed at
increasing the Company's geographic presence by identifying and negotiating with
companies and organizations that would provide multiple potential new locations.
The corporate development group currently consists of seven full-time
professionals. The Company also intends to utilize the local knowledge of its
general managers, sales managers and sales personnel to identify locations for
further expansion in existing markets.
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PROGRAMMING
NGN Displays present repeating two-and-one-half minute sequences, or
"loops", of advertising and programming. As currently configured, the loops
consist of twelve advertising slots of approximately ten seconds each and six to
eight programming slots of approximately six seconds each. Advertising slots
currently consist of advertising principally for local and regional advertisers,
and programming slots include information such as local and national weather,
sports, news headlines and financial information, as well as Company sponsored
promotional contests. For example, a Baltimore, Maryland 7-Eleven customer
waiting in line to purchase merchandise may view the three day Baltimore
forecast, the Baltimore Oriole's baseball score and local news headlines
interspersed with advertisements for Haagen-Dazs ice cream, a Chrysler
dealership and a local dentist, among other messages.
The advertising and programming loops for each NGN Display are all created
and controlled from a central hub in Minneapolis, allowing the Company to
quickly and cost-effectively custom-tailor both the advertising and programming
content on a regional or micro-targeted basis. By utilizing the Company's
network management software, the Company customizes programming information for
local markets. Attributes such as instantaneous copy changes, minimal lead
times, negligible production costs and expedited electronic communications
distinguish NGN from other out-of-home advertising. NGN is designed so that
programming information can be provided to the Company via electronic feed from
providers of such information, such as Accu-Weather, which provides weather
information. Once the feed is received at the Company's facilities, it generally
is processed automatically and distributed to the NGN Displays over telephone
lines.
ASSEMBLY, INSTALLATION AND MAINTENANCE
The Company has designed its NGN Displays so that their component parts are
readily available from a number of suppliers. All of the NGN Displays are
assembled and tested prior to installation by a third party contractor. The
principal components of NGN Displays, the monitor and embedded computer, are
purchased from separate third party contractors, with three-year warranties. All
components for NGN Displays, including electronic and computer-related
equipment, are available from a number of well-established suppliers. The
Company intends to continue to rely on its contractors for the assembly of its
NGN Displays for the foreseeable future. Although the Company to date has not
experienced any difficulties or delays in obtaining the desired quantities of
NGN Displays, there can be no assurance that assembly delays will not result in
delays in obtaining the necessary quantities of NGN Displays in the future. The
Company has utilized the services of its contractors for several years and has
maintained a good relationship. However, the Company does not have any formal
long-term agreement with such contractors.
The Company has a contractual arrangement with an independent contractor
for the nationwide installation and maintenance of most of its NGN Displays. The
independent contractor has a network of offices and subcontractors throughout
the United States, and has been able to adequately satisfy all of the Company's
installation and maintenance needs to date. Pursuant to its agreement with the
independent contractor, the Company pays a fee for each installation and a fixed
monthly maintenance fee based on the number of existing NGN Display
installations. The independent contractor maintains an inventory of spare parts
for NGN Displays at local warehouses within the vicinity of NGN Display sites.
If an NGN Display cannot be repaired on-site, it is exchanged with a new one.
Since the independent contractor is an authorized repair center for the
Company's computer manufacturer, if the malfunctioning component is the embedded
computer, it
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can generally be repaired at no additional cost to the Company. The agreement
with the independent contractor expires in June 1999. The Company is
negotiating with the independent contractor for a renewal or extension of the
existing agreement and is evaluating alternative providers. The Company
believes that performance under its existing agreement has been satisfactory,
and the Company does not foresee any difficulties in obtaining these services
in the future.
The Company believes it can find other outside sources to adequately
satisfy its assembly, installation and maintenance needs. However, there can be
no assurance that it will be able to do so in a timely manner or that such new
outside sources would be able to meet the Company's requirements. Although to
date the Company has not experienced any material adverse effects due to such
risks, there can be no assurance that the business of the Company will not be
adversely affected by such risks in the future.
ADVERTISING SALES AND MARKETING
The Company seeks to take advantage of its inherent flexibility of
geographically targeted advertising by emphasizing sales to local advertisers,
the traditional area of strength for out-of-home advertising. The Company
believes that in 1997, an estimated 60-70% of all out-of-home advertising
revenue (comprised principally of outdoor advertising) was derived from local
advertisers. The Company conducts its advertising sales efforts through a
dedicated, local sales force within each of the DMA's in which it operates NGN
Displays. The local sales force is thereby able to work closely with each of the
Company's advertisers to develop advertising campaigns that match specifically
targeted audience segments with the advertisers' overall marketing strategies.
The Company currently has local sales offices serving each market, each staffed
with a general manager and generally with between 4 and 10 sales persons. The
size of the sales staff depends on various factors, including the physical size
of the DMA and the number of NGN locations within the DMA. In early 1997, the
Company realized its first operating revenues from advertising sales in markets
where the Company has a dedicated sales force.
The Company generally attracts candidates for its general manager and sales
representative positions from existing media sales personnel in the local areas,
including from radio and broadcasting and cable television operators as well as
from outdoor advertising and various print media companies. The Company believes
that, as NGN expands, the Company will continue to attract qualified sales and
sales management personnel.
All graphic design, network management, billing and other functions are
handled from the Company's main corporate headquarters in Minneapolis.
Through local links to the main database and the use of modem-equipped laptop
computers, the local offices can utilize the Company's sophisticated
technology and dedicated technical and creative staff to support local
selling efforts. The laptop computers can be linked to the Company's main
database and include the Company's proprietary proposal generating software.
Such software was developed by the Company to allow a sales person to
customize advertising proposals instantly to accommodate the stated
preferences of the advertiser. For example, a sales person can generate
proposals based on a location within a specified radius, or site by site
purchases. The proposals can specify cost (as well as other schedule
information) and can prepare maps and location lists to show the exact NGN
Display locations on which an advertisement will appear.
While the Company believes that achieving its growth strategy requires
concentration on local advertisers, the Company also intends to target national
advertisers. The Company has a
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contract with Capital Cities/ABC as its exclusive agent for national
advertising sales for NGN until March 28, 2002. To date, the Company has not
recognized any sales through this agreement. The Company does not anticipate
generating significant national sales through Capital Cities/ ABC, and the
Company currently plans to handle national sales internally. The Company has
internal sales personnel headquartered in New York to concentrate on national
sales. The Company believes that with its current distribution of sites, it
will be able to generate national advertising sales revenues.
The Company charges a fixed daily rate for the advertising slots provided
to advertisers on its NGN Displays. Based on traffic counts at NGN Display
sites, the present cost to the Company's advertisers per thousand impressions
("CPM") is between $3 and $4. By comparison, the Company believes that radio,
newspaper and television advertising has a CPM of between $7 and $20.
Traditional outdoor advertising, which bases impressions on the number of
vehicles which pass a site, has a CPM of between $1.60 to $3.50 depending on the
size, type and location of the display surface, plus substantial production
costs. While enjoying a substantial cost advantage over television, radio and
print advertising, the Company believes it can compete effectively with
traditional outdoor advertising because of the flexibility and efficiencies
inherent in the Company's display medium and centrally controlled network.
COMPETITION
The advertising and promotional industries are intensely competitive. The
Company competes for advertising dollars directly with advertising and
promotional vehicles such as broadcast and cable television, internet, radio,
magazines, newspapers, billboards, direct mail marketers and others. In
addition, the Company also competes with a wide variety of out-of-home
advertising, including highway logo signs, advertising in shopping centers and
malls, airports, stadiums, movie theaters and supermarkets, as well as on taxis,
trains, buses and subways. Management believes that the out-of-home advertising
industry is attracting numerous alternative media products, many of which will
compete directly or indirectly with NGN. These products may be offered by
companies with greater resources and with greater industry recognition than the
Company. The Company is aware of other companies that place displays that look
similar to NGN Displays in specific venues for commercial purposes, such as in
airports and subways. Although the Company believes that these companies are not
competing in the venues targeted by the Company, there can be no assurance that
such companies will not commence marketing in the same venues and within the
same DMA's targeted by the Company. While Management believes that NGN is
favorably differentiated from other available media, in competing with existing
media for advertising sales the Company encounters media that is more
established and recognized by potential advertisers and advertising agencies.
PROTECTION OF TECHNOLOGY
The Company does not have patent or registered copyright protection on any
of the software technology that the Company utilizes in connection with NGN, and
such technology might not be eligible for patent protection. The Company
believes that significant portions of its software are entitled to copyright
protection in the United States. Should the Company seek and obtain federally
registered copyright protection for any of its software in the future, no
assurance can be given that the copyright application would be accepted or that
a capable and adequately financed competitor could not lawfully develop software
that would perform the same function.
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The Company views the computer software technology that it has developed
as proprietary, and attempts to protect its technology and trade secrets
through the use of confidentiality and non-disclosure agreements and by other
security measures. The protection offered by trade secret law and
confidentiality agreements is limited in comparison to patent protection.
Confidentiality and non-disclosure agreements may be difficult to enforce,
and the Company's products might be subject to reverse engineering.
Consequently, no assurance can be given that competitors will not be able to
develop or obtain technology similar to the Company's and produce products
similar to those the Company is utilizing.
The Company has received several federal registrations of trademarks,
including "NGN," and "Out of Home That's In Your Face." In addition, the
Company has applied for several additional federal registrations of
trademarks, including " Next Generation Network", "Proposal Machine", "Look
Up and Win", and "InLine TV". While no assurance can be given that the
trademarks will be issued on the pending applications, the Company is not
aware that the trademarks for which federal registration is sought infringe
on existing trademarks.
GOVERNMENT REGULATION
The Company is not aware of any material legal or other regulatory
restrictions which may adversely affect its business, other than those that
affect businesses generally. The furnishing of in-store marketing services is
subject to compliance with the Robinson-Patman Act. In general, the
Robinson-Patman Act prohibits price discrimination and discriminatory
promotional allowances and services between different purchasers of
commodities of like grade and quality, the effect of which may be
substantially to lessen competition in any line of commerce.
The Company's use of telephone lines to transmit messages to its NGN
Displays subjects the Company to regulation by the Federal Communications
Commission ("FCC") as well as laws and regulations affecting the advertising
industry generally. While the Company has not sought determination on the
issues, the FCC may attempt to prohibit the Company from transmitting tobacco
advertisements on NGN. In addition, certain state statutes restrict
advertising of alcoholic beverages on NGN.
EMPLOYEES
As of December 31, 1998 the Company had 155 employees, of which 13 were
involved in engineering, purchasing, corporate development, and field
operations, 26 were involve in network operations, marketing and creative
service, 8 were involved in management and administration, 20 were involved
in management information systems and accounting, and 88 were employed in the
regional sales offices. The Company's employees are not represented by a
collective bargaining agreement. Management considers relations with the
Company's employees to be very good.
ITEM 2. PROPERTIES
The Company's headquarters are located in approximately 24,200 square
feet of office space in Eden Prairie, Minnesota, a suburb of Minneapolis. The
Company also leases 2,150 square feet of warehouse space in Minneapolis. In
addition, the Company has a regional sales office in each of New York, New
York (5,779 square feet); Los Angeles, California (4,421 square feet);
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Philadelphia, Pennsylvania (3,588 square feet); San Francisco, California
(3,392 square feet); Boston, Massachusetts (2,362 square feet); Dallas, Texas
(7,200 square feet); Washington, D.C. (2,250 square feet); Norfolk, Virginia
(1,523 square feet); Baltimore, Maryland (1,680 square feet); Orlando,
Florida (2,399 square feet); Fort Lauderdale, Florida (1,893 square feet);
and Tampa, Florida (1,964 square feet). The Company's leases expire on
various dates, ranging from April 30, 2000 to December 31, 2006, and many
provide for renewal options.
ITEM 3. LEGAL PROCEEDINGS.
Although the Company may be subject to litigation from time to time in
the ordinary course of its business, it is not party to any pending legal
proceedings that it believes will have a material impact on its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to the holders of the Series B Notes during the
three months ended December 31, 1998.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There is no public trading market for the Company's common equity. The
approximate number of holders of the Company's Common Stock is 33.
The Company has not paid cash dividends on its Common Stock since
inception, and does not anticipate paying dividends on its Common Stock in
the foreseeable future. The Company is restricted from paying dividends under
its Indenture covering the Series B Notes, as well as under its Certificates
of Designation for its 8.25% Series A Cumulative Preferred Stock ("Series A
Preferred Stock"), Series B Senior Cumulative Compounding Convertible
Redeemable Preferred Stock ("Series B Preferred Stock"), and Series C Senior
Cumulative Compounding Convertible Redeemable Preferred Stock ("Series C
Preferred Stock").
On February 18, 1998, the Company issued warrants to purchase 125,240
shares of Common Stock in connection with the sale of the Series A Notes. See
"Business-Recent Developments".
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
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 NGN Displays as well as
recruiting local sales personnel and opening local sales offices in its
initially developed 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 demographic 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 are primarily 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.
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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 DMAs as of December 31, 1998, 1997 and 1996, respectively:
<TABLE>
<CAPTION>
December 31,
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Market: 1998 1997 1996
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<S> <C> <C> <C>
Washington, D.C. 510 502 183
Dallas-Ft. Worth, TX 263 226 47
Tampa-Clearwater-St. Petersburg, FL 141 136 135
Miami, FL 86 87 90
Orlando, FL 243 233 220
Baltimore, MD 202 208 111
Norfolk, VA 238 239 244
West Palm Beach, FL 63 63 65
Ft. Myers, FL 46 43 40
New York, NY 447 - -
Los Angeles, CA 490 - -
Philadelphia, PA 247 - -
San Francisco, CA 197 - -
Boston, MA 179 21 -
Chicago, IL 71 - -
San Diego, CA 133 - -
Sacramento, CA 62 - -
Other 12 11 4
----------------------------------------------
Total 3,630 1,769 1,139
----------------------------------------------
----------------------------------------------
</TABLE>
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31,1997
Total revenues for the year ended December 31, 1998 were $2.6 million,
an increase of $0.8 million, or 42%, compared to $1.8 million for the year
ended December 31, 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 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, Los
Angeles, Philadelphia, San Francisco, Sacramento, and San Diego during the
last six months of 1998. Advertising revenues from newly opened markets were
minimal since efforts were concentrated on staff hiring and training.
Advertising revenues increased to $2.6 million during 1998 compared to $1.2
million in 1997. Network operating revenues were minimal during 1998 due to
the termination of owner-operator agreements as discussed above. During 1998
the Company had equipment sales and network operating revenues from site
owners of $28,000 compared to $623,000 during 1997. Barter revenue, which was
$257,000 during 1998 compared to $158,000 in 1997, is included in advertising
revenue.
Costs and expenses for the year ended December 31, 1998 were $17.3
million, an increase of $9.3 million, or 115%, compared to $8.0 million for
the year ended December 31, 1997.
11
<PAGE>
Network operating expenses increased $2.5 million, or 88%, 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 agreement expense related to the NGN Displays. The increase in site
agreement expense was due to the repurchase of equipment in former
owner-operator markets in August 1997, and also due to additional NGN
installations. Site agreement expense was recorded net of reimbursement from
owner-operators so the Company expense increased when the owner-operators
forfeited their territorial rights. Site agreements 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
agreement 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 $6.1 million during 1998
compared to $1.8 million for 1997. The increases resulted primarily from the
addition of sales office staff (88 at December 31, 1998 compared to 32 at
December 31, 1997) and costs associated with opening additional regional
sales offices as noted above. General and administrative expenses were $6.0
million during 1998 compared to $3.4 million 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
increased to $430,000 in 1998 compared to $363,000 in 1997.
Interest expense was $6.5 million in 1998 compared to $281,000 for 1997.
The increase in 1998 was due to the issuance of $45 million of 12% Senior
Secured PIK Notes (the "Notes") in February 1998. Interest income increased
to $1.6 million in 1998 compared to $113,000 in 1997. The increase was due to
investing the unused proceeds from the Notes.
The net loss for the year ended December 31, 1998 increased to $19.7
million, from $6.4 million in 1997, primarily as a result of the items
discussed above. The Company expects to incur additional costs to install
additional NGN Displays and for operating costs to expand NGN. The Company
expects to incur a net loss for 1999 and expects to operate at a loss for the
foreseeable future.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31,1996
As discussed above, in 1996 the Company entered into agreements with two
owner-operators for the installation of NGN Displays. Net revenues generated
during 1996, the first year of network operations, were approximately $3.2
million, including $2.7 million resulting from sales of network equipment and
territorial rights. The remaining $490,000 of revenues were network operating
revenues received from two network owner-operators.
Net revenues for the year ended December 31, 1997 were $1.8 million, a
decrease of $1.4 million, or 43% compared to $3.2 million for the year ended
December 31, 1996. The decrease was attributable to the shift in the
Company's business from sales of network equipment and territorial rights to
sales of advertising on the Company's own NGN installations. During 1997, the
Company realized the first net advertising revenues from Company owned
installations of approximately $1.2
12
<PAGE>
million and had equipment sales of approximately $137,000, primarily to site
owners. Although the Company does not anticipate any future equipment and
territorial rights sales to owner-operators, sales of equipment to site
owners may continue. Network operating revenues from owner-operators were
approximately the same at $490,000 in 1996 and $485,000 in 1997 as a result
of equivalent months of network operating fees from owner-operators. The
owner-operators forfeited the territories and the Company repurchased the NGN
equipment in 1997. The Company does not anticipate any future owner-operator
network operating revenues. Barter revenue was $158,000 during 1997 and is
included in advertising revenue. There was no barter revenue in 1996.
Costs and expenses for the year ended December 31, 1997 were $8.0
million, an increase of $3.0 million, or 58%, compared to $5.1 million for
the year ended December 31, 1996. Network operating expenses increased $2.4
million due to the increase in both the number of NGN Display installations
and equivalent months in operation. Site lease expense accounted for $1.1
million of the increase since the first Company owned units were not
installed until December, 1996. Selling expenses of $1.8 million were
incurred for the first time during 1997 as the result of the addition of
sales staff and the opening of seven regional sales offices and the
generation of the first advertising revenues from Company owned NGN
installations. General and administrative expenses increased approximately
$921,000. Compensation costs increased $286,000 primarily due to additional
administrative staff in computer operations, graphic creation, and accounting
added to support the sales offices and increased advertising revenues.
General and administrative expenses also increased due to increases in
marketing costs such as printing, market research, sales promotion, and
public relations ($266,000), and increases of $189,000 in professional fees
due primarily to increased computer related consulting fees. The cost of
network equipment sales decreased $2.2 million due to the change in scope of
the Company's business as mentioned above. Research and development costs
increased to $363,000 for 1997, compared to $222,000 for 1996, primarily due
to the Company's efforts in the area of software development.
Interest expense for 1997 was $49,000 higher than in 1996 due to
slightly higher average levels of long term debt and capital lease
obligations. Interest income increased $31,000 from 1996 to 1997 due to
investing the unused proceeds from the issuance of the Company's 14.8% Series
B and Series C Mandatory Redeemable Preferred Stock.
The net loss for the year ended December 31, 1997 increased to $6.4
million, from $2.1 million in 1996, primarily as a result of the items
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Through December 31, 1998, the Company's primary source of liquidity has
been proceeds from the sale of equity and debt securities.
As of December 31, 1998, total cash and cash equivalents were $24.7
million compared to $2.8 million as of December 31, 1997. The increase in
cash was a result of financing activities, including $40.2 million of net
cash provided by the sale of units ("Units") consisting of Senior Secured PIK
Notes (the "Notes") and warrants ("Warrants") after offering expenses ($42.1
million) and repayment of long term debt ($1.9 million) offset by $10.5
million of cash used in operating activities (due to the loss from
operations) and $7.8 million of cash used in investing activities (primarily
for capital expenditures related to the expansion of the NGN network). The
Company expects that increasing sales volume will require the use of
additional cash to fund increased receivable levels.
13
<PAGE>
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 and in the amount of
$2,841,000 for the interest payment due February 1, 1999. 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 $24.7 million of cash and its operating
cash flow will be sufficient to finance the operating requirements of the
Company and anticipated capital expenditures primarily related to the
expansion of NGN through 1999. The Company's cash flow is dependent on the
Company's ability to increase advertising revenues and is subject to
financial, economic and other factors, some of which are beyond its control.
If the Company is unable to increase revenues as anticipated or operating
expenses are higher than anticipated, the Company will need to raise
additional capital to satisfy its obligations. 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
BACKGROUND, ISSUES AND STATE OF READINESS
Year 2000 (Y2K) issues are the result of computer programs being written
using two digits to define year dates. Computer programs running
date-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in systems failure or
miscalculations causing disruption of operations.
The Company's overall goal is to be Y2K ready. To accomplish this goal,
the Company has been addressing the issue with respect to both its
information technology (IT) and non-IT systems, as well as its business
relationships with key third parties. To be ready, the Company needs to
evaluate the Y2K issues and fix any problems it can so that all of its
systems and relationships will be suitable for continued use into and beyond
the Year 2000.
The Company began addressing the Year 2000 issue in 1998 by establishing
a Y2K team (the "Team") comprised of individuals from the following
disciplines: technical support, software development, database
administration, networking, and management. To deal with Y2K the Team is
using a multi-step approach, including assessment, remediation and testing,
and contingency planning. The Company began by assessing its major internal
software systems that were susceptible to systems failure or processing
errors as a result of the Y2K issue. This assessment is currently in the
discovery phase. There are two discovery methods being exercised at this
time: 1) A manual check and double check of all internally generated
databases, scripts, and compiled applications; and 2) An automated check of
commercial, shareware and freeware applications in addition to the documents
generated for or by those applications.
14
<PAGE>
The remaining estimated time to complete the aforementioned project is
approximately 60 days of effort, distributed across the Team. A trial run or
preliminary screening of software and hardware making up 10% of the Company's
systems yielded no business critical issues. The Team's Y2K efforts have also
included assessment of "embedded" systems (such as building security,
telephone systems and elevator systems).
As part of the assessment phase, the Team members have also been working
with vendors of business critical hardware and software to identify any Y2K
compliance issues. The Team has gathered many certificates and/or statements
of compliance. Physical statements are filed by vendor and by product.
Electronic or online statements of compliance or references to statements of
compliance are being stored in a Y2K assessment database. This activity has
and will continue to include statements from business critical and
non-business critical vendors. In addition, the Team 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. The Company cannot predict the outcome
of other companies' remediation efforts and there can be no assurance that
those third party vendors and service providers will complete their Y2K
compliant projects in a timely manner and that failure to do so would not
have an adverse impact on the Company's business.
YEAR 2000 COSTS
The Company is actively working on its Y2K compliance plan which is
scheduled to be substantially complete by June 1999. As of December 31, 1998,
the Company incurred and expensed less than $10,000 on matters directly
related to addressing Y2K issues and does not expect to spend more than an
additional $20,000 in connection with becoming Year 2000 compliant. The
remaining costs will be expensed as incurred over the next year. The cost of
the project and the date on which the Company plans to complete Year 2000
assessment and modifications are based on the Team's best estimates, which
were derived utilizing numerous assumptions of future events including the
availability of certain resources, third parties' Year 2000 readiness and
other factors.
RISK ASSESSMENT AND CONTINGENCY PLANS
At this point in time the Company's topic of greatest concern relative
to Y2K is the potential failure or partial failure of the national phone
network. In event of such a failure, the Company's NGN field units would
continue to run based on resident information. This type of event could
affect some long-term advertising contracts. There is also some probability
of the need to make refunds or to make-good any missed advertising due to
missed updates or uploads that would otherwise have happened during a phone
network outage. Complete or partial failure of the national phone network
could have a material adverse impact on the Company's results of operations,
financial condition and cash flows if it lasted for an extended period of
time.
The Company is developing a formal contingency plan so that the
Company's critical business processes can be expected to continue to function
on January 1, 2000 and beyond. The Company's contingency plans will be
structured to address both remediation of systems and their components and
overall business operating risks. These plans are intended to mitigate both
internal risks as well as potential risks with third parties, and will likely
include identifying and securing alternative suppliers. The Company also
intends to have its contingency plans substantially finalized by June 1999.
15
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
The financial statements follow Item 13 in this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
16
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The directors, executive officers and significant employees of the
Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Gerard P. Joyce......................................47 Chairman of the Board of Directors and
President
Thomas M. Pugliese...................................36 Vice Chairman of the Board of Directors,
Chief Executive Officer and Secretary
Timothy P. Hartman...................................60 Director
Malcolm Lassman......................................61 Director
Michael J. Marocco...................................40 Director
Susan Molinari.......................................40 Director
David R. Voelker.....................................45 Director
Thomas J. Davis......................................51 Director
Alejandro Zubillaga..................................30 Director
Carol A. Lundstrom...................................47 Executive Vice President
Michael J. Kolthoff..................................46 Treasurer and Assistant Secretary
Dennis Reese.........................................46 Vice President-Sales
Thomas Mosher........................................57 Vice President-Sales
</TABLE>
GERARD P. JOYCE. Mr. Joyce founded the Company in 1990 and has served as
the Company's Chairman of the Board of Directors since inception and as its
President since December 1991. Prior to founding the Company, Mr. Joyce was
Chairman and Chief Executive Officer of the Patrick Media Group, Inc. a
successor to a company he formed in 1969. The Patrick Media Group, Inc.
through internal growth and a series of acquisitions, became the largest
out-of-home advertising company in the United States. Mr. Joyce sold his
controlling interest in the Patrick Media Group, Inc. in September 1989.
Mr. Joyce is Thomas Davis' brother-in-law.
THOMAS M. PUGLIESE. Mr. Pugliese founded the Company together with
Gerard Joyce in 1990 and has served as the Company's Vice Chairman of the
Board of Directors since its inception. From 1988 to 1990, Mr. Pugliese was
President of Thomas More & Company, Inc., a private investment banking firm.
From 1984 through 1988, Mr. Pugliese was an investment banker with Shearson,
Lehman, Hutton Inc. and its predecessor form, E. F. Hutton & Company, Inc.
where he held various positions in New York and London, including as American
representative for the firm's international investment banking operations.
TIMOTHY P. HARTMAN. Mr. Hartman has been a director of the Company since
1996. Mr. Hartman was employed by NationsBank Corporation from 1982 until his
retirement in 1996, at which time he served as Vice Chairman and as a
director as well as the Chairman of the Board of its subsidiary, NationsBank
of Texas. He is currently a private investor. Mr. Hartman serves as a
17
<PAGE>
Director of Sensormatic Electronics Corporation, a public company listed on
the New York Stock Exchange ("NYSE"), and chairs its Finance Committee.
MALCOLM LASSMAN. Mr. Lassman was elected as a director of the Company in
1998. Mr. Lassman is a managing partner of the Washington office of Akin, Gump,
Strauss, Hauer & Feld, L.L.P., a leading international law firm, a position he
has held since 1970.
MICHAEL J. MAROCCO. Mr. Marocco has been a director of the Company since
1996. Since 1989, he has been employed with Sandler Capital Management, a
communications specific capital management firm, managing approximately $1
billion invested in both public and private companies. He is a general
partner with primary responsibility for private investment activities. He
serves as a director for Source Media Inc., which is a public company listed
on Nasdaq.
SUSAN MOLINARI. Ms. Molinari was elected a director of the Company in
1999. Ms. Molinari is a prominent Republican political figure whose political
career began with her election to the New York City Council where she served
from 1986 to 1990. She served as a member of the United States House of
Representatives from 1990 to 1997. She also hosted the CBS Morning Show from
1997 to 1998.
DAVID R. VOELKER. Mr. Voelker has been a director of the Company since
1996. Since 1993, Mr. Voelker has been a partner of Frantzen/Voelker
Investments, LLC, and is a private investor with interests in real estate,
oil & gas, media and restaurants. From 1988 until founding Frantzen/Voelker
Investments, LLC, Mr. Voelker was a partner in Johnson Rice and Company, a
New Orleans, Louisiana investment brokerage firm. He is a Director of several
companies including Stone Energy Corporation, which is listed on the NYSE.
THOMAS J. DAVIS, CPA. Mr. Davis has been a director of the Company since
1996. Mr. Davis is an executive with Piaker & Lyons, P.C., a New York
accounting firm where he has been employed since 1972. Mr. Davis's practice
specializes in auditing, financial reporting and planning for closely held
businesses in the communications and other industries. Mr. Davis is a
Certified Public Accountant in the State of New York. Mr. Davis is Gerard
Joyce's brother-in-law.
ALEJANDRO ZUBILLAGA. Mr. Zubillaga was elected as a director in January
1998. He is the founder and Chairman of Veninfotel LLC, Venezuela's leading
provider of cable television and other telecom services. Mr. Zubillaga is
also the Chief Executive Officer of Grupo Zubillaga, a family holding company
which holds interests in real estate and mining.
CAROL A. LUNDSTROM. Ms. Lundstrom currently serves as Executive Vice
President of the Company. She has been an employee of the Company since its
inception in 1990. From 1989 until 1990, she was a Marketing and
Administration Executive with Electric Avenue, Inc. From 1981 to 1989, she
was an executive with Apache Corporation, an asset management company, and
held positions including Project Manager, Manager of Investor Relations,
Reporting, Systems and Accounting.
MICHAEL J. KOLTHOFF. Mr. Kolthoff currently serves as the Company's
Treasurer and Assistant Secretary. From 1993 until he joined the Company in
July 1995, Mr. Kolthoff was Chief Financial Officer for ONYX Real Estate
Services. From May 1985 until November 1992, he was Chief Financial Officer
of Maico Hearing Instruments. Prior to that time, he was Corporate Controller
for Econo-Therm Energy Systems Corporation and held various senior audit
positions with Coopers & Lybrand. Mr. Kolthoff is a Certified Public
Accountant in the State of Minnesota.
18
<PAGE>
DENNIS REESE. Mr. Reese currently serves as Vice President of Sales,
Eastern Region. Mr. Reese has been an employee of the Company since 1996.
From June 1996 to December 1996, Mr. Reese was National Sales Manager for an
Evergreen Media radio station. He was a General Sales Manager with Greater
Media from 1992 to 1996.
THOMAS MOSHER. Mr. Mosher currently serves as Vice President of Sales,
Western Region. He has been an employee of the Company since 1998, and
previously served as General Manager of the Company's Los Angeles office.
From 1993 to 1998, Mr. Mosher was President of Media Marketing Resources.
Prior to that time, Mr. Mosher held the position of General Manager at
numerous radio stations across the country in markets such as Los Angeles
(KGIL, KMGX), Orlando (KLITE, WXXL), Detroit (WDRQ), Colorado Springs (KSPZ)
and Providence (WSNE).
The Company does not have any class of equity securities registered
pursuant to Section 12 of the Exchange Act.
ITEM 10. EXECUTIVE COMPENSATION
The following table summarizes the compensation for services rendered to
the Company paid to the Chief Executive Officer and the Company's executive
officers as to whom the total annual salary and bonus exceeded $100,000 in
1998 or 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------------------
RESTRICTED
SALARY BONUS STOCK AWARD
Name and Principal Position YEAR ($) ($) ($)
- --------------------------- ---- ------------------------ -----------
<S> <C> <C> <C> <C>
Gerard P. Joyce...............................................1998 $251,741 $60,000
Chairman of the Board of Directors, President 1997 251,741 60,000
Thomas M. Pugliese............................................1998 250,000 50,000 $17,710
Vice Chairman, Chief Executive Officer, Secretary.............1997 212,587
Carol A. Lundstrom............................................1998 100,000 10,000
Executive Vice President......................................1997 67,000
Dennis Reese..................................................1998 147,534 10,000
Vice President-Sales
</TABLE>
Non-employee directors of the Company receive a director's fee of $1500
for each Board of Directors meeting attended in person, and for each separate
committee meeting attended in person.
EMPLOYMENT AGREEMENTS
19
<PAGE>
The Company has an employment agreement with Gerard Joyce, its Chairman
of the Board of Directors and President. The term of Mr. Joyce's employment
agreement expires on December 31, 1999. Under the agreement, Mr. Joyce is
entitled to an annual base salary of $251,741 and an annual bonus of $60,000
payable after each calendar year based on criteria to be established by
agreement between Mr. Joyce, the Company and the Series B Director, currently
designated as Mr. Marocco. In addition, the agreement requires the Company to
provide if requested by him a life insurance policy payable to his designated
beneficiary, with a death benefit of at least $1,000,000. The Company has
agreed to acquire a life insurance policy with a death benefit of $10,000,000
payable to Mr. Joyce's designated beneficiary. Subject to certain exceptions,
Mr. Joyce has agreed during the term of the agreement and for a period of two
years thereafter not to engage in certain competitive business activities and
not to solicit any employee of the Company to leave the Company's employ.
Pursuant to his employment agreement, Mr. Joyce has been granted 8,831 shares
of the Company's Common Stock which are subject to forfeiture if Mr. Joyce's
employment with the Company is terminated by him, or by the Company for
cause, prior to December 31, 2006 or the earlier happening of certain other
events. Such forfeiture provisions will be removed December 31, 2006 or
earlier upon the occurrence of such events, which include death, disability,
a public offering of the Company's Common Stock in which such shares are
registered for resale, and the merger, consolidation or sale of substantially
all of the Company's assets.
Thomas Pugliese, the Company's Vice Chairman of the Board of Directors
and Chief Executive Officer, is party to a similar employment agreement with
the Company, providing for a term expiring on December 31, 1999, an annual
base salary of $250,000 and the grant of 4,983 shares of Common Stock, which
are similarly subject to forfeiture. Under the agreement Mr. Pugliese
received 230 shares of Series C Preferred Stock in 1998, subject to
forfeiture provisions similar to those applicable to the grant of Common
Stock. The agreement also provides for life insurance and disability benefits
for Mr. Pugliese similar to those received by Mr. Joyce, and the Company has
agreed to acquire a life insurance policy with a $10,000,000 death benefit
payable to Mr. Pugliese's designated beneficiary.
401 (k) PLAN
The Company maintains a retirement plan (the "401 (k) Plan") established
in conformity with Section 401 (k) of the Internal Revenue Code of 1986, as
amended (the "Code"), covering all of the eligible employees of the Company.
Pursuant to the 401 (k) Plan, employees may elect to defer up to 15% of their
current pre-tax compensation and have the amount of such deferral contributed
to the 401 (k) Plan. The maximum elective deferral contribution was $10,000
in 1998, subject to adjustment for cost-of-living in subsequent years.
Certain highly compensated employees may be subject to a lesser limit on
their maximum elective deferral contribution. The 401 (k) Plan permits, but
does not require, matching contributions and non-matching (profit sharing)
contributions to be made by the Company up to a maximum dollar amount or
maximum percentage of participant contributions, as determined annually by
the Company. The Company presently does not match employee contributions. The
401 (k) Plan is qualified under Section 401 of the Code so that contributions
by the employees and employer, if any, to the 401 (k) Plan, and income earned
on plan contributions, are not taxable to employees until withdrawn from the
401 (k) Plan, and so that contributions by the Company, if any, will be
deductible by the Company when made.
STOCK OPTION PLANS AND OTHER EMPLOYEE INCENTIVE PLANS
20
<PAGE>
The Company has adopted three Stock Option Plans (the "Plans") for the
purpose of advancing the interests of the Company and its stockholders by
strengthening the Company's ability to attract and retain competent
employees, to make service on the Board of Directors of the Company more
attractive to present and prospective non-employee directors and to provide a
means to encourage stock ownership and proprietary interest in the Company by
officers, non-employee directors and valued employees and other individuals
upon whose judgment, initiative and efforts the financial growth of the
Company largely depend. The Plans are currently, and have been since their
adoption, administered by the Board of Directors and the compensation
committee of the Board.
Incentive stock options ("ISOs") may be granted only to officers and key
employees of the Company. Nonqualified stock options may be granted to such
officers and employees as well as to agents and directors of and consultants
to the Company, whether or not otherwise employees of the Company. In
determining the eligibility of an individual for grants under the Plans, as
well as in determining the number of shares to be optioned to any individual,
the Board takes into account the position and responsibilities of the
individual being considered, the nature and value to the Company of his or
her service or accomplishments, his or her accomplishments, his or her
present or potential contribution to the success of the Company and such
other factors as the Board may deem relevant.
Plans with respect to 12,000 of the options provide for the granting of
ISOs to purchase the Company's Common Stock at not less than the fair market
value on the date of the option grant and the granting of nonqualified
options with any exercise price. The total number of shares with respect to
which options may be granted under the Plans is 94,000. As of December 31,
1998, options for an aggregate of 5,106 shares have been granted to various
individuals. To date, all options issued under the Plans have been
nonqualified options. The Plans providing for the potential grant of ISOs
contain certain limitations applicable only to ISOs granted thereunder. To
the extent that the aggregate fair market value, as of the date of grant, of
the shares to which ISOs become exercisable for the first time by an optionee
during the calendar year exceeds $100,000, the option will be treated as a
nonqualified option. In addition, if any optionee owns more than 10% of the
total voting power of the Company's stock at the time the individual is
granted an ISO, the option price per share cannot be less than 110% of the
fair market value per share and the term of the ISO cannot exceed five years.
No option may be granted under the Plans after January 1, 2004 with respect
to 4,000 of the options and January 1, 2005 with respect to 90,000 of the
options, and no option may be outstanding for more than four years thereafter.
Upon the exercise of an option, the holder must make payment of the full
exercise price. Such payment may be made under certain circumstances in
shares of Common Stock. The Plans may be terminated at any time by the Board
of Directors, which may also amend the Plans.
In addition to the Plans, the Company intends to implement additional
incentive plans which may include stock options, stock appreciation rights,
profit sharing or similar type plans.
Set forth below is information concerning options that are held by
Executive Officers listed in the Summary Compensation Table:
21
<PAGE>
<TABLE>
<CAPTION>
Number of Shares of Common Stock Underlying
Unexercised Options
---------------------------------------------
Name Exercisable Unexercisable
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Carol Lundstrom 591 ---
Dennis Reese 200 800
</TABLE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of December 31, 1998
with respect to the beneficial ownership of the outstanding shares of Common
Stock by (i) any stockholder known by the Company to beneficially own more than
five percent of such outstanding shares, (ii) the Company's directors and
executive officers and (iii) the directors and executive officers of the Company
as a group. Except as otherwise indicated, the address of each beneficial owner
of five percent or more of such Common Stock is the same as the Company. Shares
of Common Stock included in the table which are issuable upon conversion of
shares of Preferred Stock give effect to the accrual of dividends added to the
liquidation value. The Company's outstanding Preferred Stock may be converted at
any time at the holder's option.
<TABLE>
<CAPTION>
Amount
Name and Address of Beneficially Ownership
Beneficial Owner Owned Percentage
------------------- ------------ ----------
<C> <C> <C>
Gerard P. Joyce...................................... 158,899 (1) 54.9%
Thomas M. Pugliese................................... 70,154 (2) 26.2
Thomas J. Davis...................................... 1,804 (3) *
David Voelker........................................ 9,922 (4) 3.7
Timothy P. Hartman................................... 18,582 (5) 6.6
Carol Lundstrom....................................... 591 (6) *
Michael J. Marocco................................... 106,064 (7) 28.4
Alejandro Zubillaga.................................. 15,330 (8) 5.4
John Strauss......................................... 17,700 6.6
200 Crescent Court
Dallas, Texas 75201
Pulitzer Publishing Company.......................... 31,562 (9) 10.6
900 North Tucker Boulevard
St. Louis, Missouri 64101
Western Asset........................................ 43,941 (10) 14.2
117 East Colorado Boulevard
Pasadena, CA 91105
Sun America Investments, Inc......................... 29,294 (10) 9.9
1 Sun America Center
38th Floor
Century City
Los Angeles, CA 90067-6022
All directors and executive officers
as a Group (13 persons)............................. 382,746 88.5
</TABLE>
- --------------------------
* Less than 1%
22
<PAGE>
(1) Includes 23,401 shares of Common Stock issuable upon conversion of shares
of Series A Preferred Stock and Series C Preferred Stock.
(2) Includes 1,098 shares of Common Stock issuable upon conversion of shares of
Series A, B, and C Preferred Stock.
(3) Includes 904 shares of Common Stock issuable upon conversion of shares of
Series B Preferred Stock and 200 shares issuable upon exercise of warrants.
(4) Represents shares owned by Frantzen/Voelker Investments, LLC, of which Mr.
Voelker is a manager, including 1,972 shares of Common Stock issuable upon
conversion of shares of Series C Preferred Stock.
(5) Includes 15,082 shares of Common Stock issuable upon conversion of shares
of Series B Preferred Stock and Series C Preferred Stock.
(6) Includes 591 shares of Common Stock issuable upon exercise of stock
options.
(7) Represents shares of Common Stock issuable upon conversion of shares of
Series B Preferred Stock and Series C Preferred Stock owned by affiliates
of 21st Century Communications Partners, each of which is a limited
partnership of which Sandler Investment Partners, L.P. is a general
partner. Mr. Marocco is a general partner of Sandler Investment Partners,
L.P.
(8) Represents shares of Common Stock issuable upon conversion of shares of
Series C Preferred Stock owned be Elektra Investments A.V.V., which is
controlled by Mr. Zubillaga.
(9) Represents shares of Common Stock issuable upon conversion of shares of
Series C Preferred Stock.
(10) Represents shares of Common Stock issuable upon exercise of Warrants
issued in the Units Offering.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On September 15, 1993, Gerard P. Joyce, the Chairman of the Board of
Directors and President of the Company, loaned $2,375,000 to the Company, and
the Company granted to Mr. Joyce a security interest in all of the Company's
assets as security for its obligation. On August 29, 1997, in consideration for
the issuance of shares of Series C Preferred Stock to Mr. Joyce, the principal
amount of the obligation was reduced by $500,038. In February 1998, the Company
repaid such indebtedness in the amount of $1,875,462 to Mr. Joyce in full with
the net proceeds of the Units offering and the security interest held by Mr.
Joyce was terminated.
23
<PAGE>
<TABLE>
<CAPTION>
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K:
<S> <C>
a) Exhibits
3.1(a) Certificate of Incorporation, filed June 7, 1990(1)
3.1(b) Certificate of Amendment, filed October 24, 1990 (1)
3.1(c) Certificate of Designation, filed November 13, 1990 (Preferred Stock) (1)
3.1(d) Certificate of Correction, filed June 13, 1991 (1)
3.1(e) Certificate of Amendment, filed June 13, 1991 (1)
3.1(f) Certificate of Amendment, filed February 5, 1993 (1)
3.1(g) Certificate of Amendment, filed September 25, 1996 (Series A Preferred Stock) (1)
3.1(h) Certificate of Designation, filed September 25, 1996 (Series A Preferred Stock) (1)
3.1(i) Certificate of Designation, filed September 25, 1996 (Series B Preferred Stock) (1)
3.1(j) Certificate of Correction, filed December 6, 1996 (1)
3.1(k) Certificate of Amendment, filed January 7, 1997 (1)
3.1(l) Certificate of Amendment, filed August 28, 1997 (1)
3.1(m) Certificate of Designation, filed August 28, 1997 (Series C Preferred Stock) (1)
3.1(n) Certificate of Amendment, filed August 28, 1997 (Series A Preferred Stock) (1)
3.1(o) Certificate of Amendment, filed August 28, 1997 (Series B Preferred Stock) (1)
3.1(p) Certificate of Correction, filed August 29, 1997 (1)
3.1(q) Certificate of Correction, filed August 29, 1997 (Series A Preferred Stock) (1)
3.1(r) Certificate of Correction, filed August 29, 1997 (Series B Preferred Stock) (1)
3.1(s) Certificate of Amendment, filed February 4, 1998 (Series B Preferred Stock) (1)
3.1(t) Certificate of Amendment, filed February 4, 1998 (Series C Preferred Stock) (1)
3.1(u) Certificate of Amendment, filed February 18, 1998 (Series B Preferred Stock) (1)
3.1(v) Certificate of Amendment, filed February 18, 1998 (Series C Preferred Stock) (1)
3.1(w) Certificate of Amendment dated as of August 31, 1998 (2)
3.1(x) Certificate of Amendment, filed December 22, 1998 (Series B Preferred Stock)
3.1(y) Certificate of Amendment, filed December 22, 1998 (Series C Preferred Stock)
3.2(a) By-Laws of the Company (1)
3.2(b) Amendment to By-Laws (1)
3.2(c) Amended and Restated By-Laws
4.1(a) Indenture dated February 18, 1998 between the Company and the Trustee (1)
4.1(b) Exchange and Registration Rights Agreement dated February 18, 1998 between the Company and the Initial
Purchaser (1)
4.1(c) Pledge Agreement dated February 18, 1998 between the Company and the Initial
Purchaser (1)
4.1(d) Security Agreement dated February 18, 1998 between the Company and the Initial
Purchaser (1)
4.1(e) Purchase Agreement dated February 18, 1998 between the Company and the Initial
Purchaser (1)
4.1(f) Unit Agreement dated February 18, 1998 between the Company and the Initial Purchaser
(1)
24
<PAGE>
10.1(a) Form of Co-Investment Agreement relating to issuances of Preferred
Stock in 1997 (1)
10.1(b) Stock Purchase Agreement dated September 25, 1996 between the
Company and 21st Century Communication Partners, L.P., 21st
Century Communications T-E Partners, L.P. and 21st Century
Communications Foreign Partners, L.P. (1)
10.1(c) Amended and Restated Registration Rights Agreement between the
Company and Stephen Adams (1)
10.1(d) Stock Purchase Agreement dated August 29, 1997 between the Company
and 21st Century Communication Partners, L.P., 21st Century
Communications T-E Partners, L.P. and 21st Century Communications
Foreign Partners, L.P., and Pulitzer Publishing (1)
10.1(e) Registration Rights Agreement dated September 25, 1996 between the
Company, 21st Century Communication Partners, L.P., 21st Century
Communications T-E Partners, L.P. and 21st Century Communications
Foreign Partners, L.P., and certain holders of the Company's
Series B Cumulative Compounding Convertible Redeemable Preferred
Stock and certain other shareholders of the Company (1)
10.1(f) First Amendment to Registration Rights Agreement dated August 29,
1997 between the Company, 21st Century Communication Partners,
L.P., 21st Century Communications T-E Partners, L.P. and 21st
Century Communications Foreign Partners, L.P., and certain holders
of the Company's Series B Cumulative Compounding Convertible
Redeemable Preferred Stock and certain other shareholders of the
Company and the Series C Stockholder (1)
10.1(g) Second Amendment to Registration Rights Agreement entered into on
February 18, 1998 between the Company, 21st Century Communication
Partners, L.P., 21st Century Communications T-E Partners, L.P. and
21st Century Communications Foreign Partners, L.P (1)
10.1(h) Preemptive Rights Agreement dated September 25, 1996 between the
Company, 21st Century Communication Partners, L.P., 21st Century
Communications T-E Partners, L.P. and 21st Century Communications
Foreign Partners, L.P. (1)
10.1(i) First Amendment to Preemptive Rights Agreement dated August 29,
1997 between the Company, 21st Century Communication Partners,
L.P., 21st Century Communications T-E Partners, L.P. and 21st
Century Communications Foreign Partners, L.P., and certain holders
of the Company's Series B Cumulative Compounding Convertible
Redeemable Preferred Stock and certain other shareholders of the
Company (1)
10.1(j) Joinder Agreement dated December 26, 1995 by and between Stephen
Adams, Gerard P. Joyce and Thomas M. Pugliese (1)
10.1(k) Stockholder Agreement dated September 25, 1996 by and among
the Company and 21st Century Communication Partners, L.P., 21st
Century Communications T-E Partners, L.P. and 21st Century
Communications Foreign Partners, L.P., Gerard P. Joyce and Thomas
Pugliese. (1)
10.1(l) First Amendment to Stockholders Agreement dated August 29, 1997
between the Company and 21st Century Communication Partners, L.P.,
21st Century Communications T-E Partners, L.P. and 21st Century
Communications Foreign Partners, L.P., Gerard P. Joyce, Thomas
Pugliese and Pulitzer Publishing (1)
10.1(m) Stock Purchase Agreement dated December 26, 1995 by and between
Stephen Adams and the Company (1)
10.1(n) Letter Agreement dated March 19, 1996 by and between Stephen Adams
and the
25
<PAGE>
Company (1)
10.1(o) Amendment for Consents and Waivers dated as of January 21, 1998 by
21st Century Communication Partners, L.P., 21st Century
Communications T-E Partners, L.P. and 21st Century Communications
Foreign Partners, L.P. and Pulitzer Publishing (1)
10.1(p) Form of Registration Rights Agreement between the Company and
certain holders of common stock (1)
10.1(q) Form of Registration Rights Agreement between the Company and
Warrant Holders for the exercise of Warrant Shares (1)
10.1(r) Second Amendment to Stockholders Agreement between the Company and
21st Century Communication Partners, L.P., 21st Century
Communications T-E Partners, L.P. and 21st Century Communications
Foreign Partners, L.P., Gerard P. Joyce, Thomas Pugliese and
Pulitzer Publishing (1)
10.1(s) Third Amendment to Stockholders Agreement between the Company and
21st Century Communication Partners, L.P., 21st Century
Communications T-E Partners, L.P. and 21st Century Communications
Foreign Partners, L.P., Gerard P. Joyce and Thomas Pugliese
10.2(a)* Employment Agreement dated August 1, 1990 between the Company and
Gerard P. Joyce (1)
10.2(b)* Amendment to Employment Agreement entered into September 25, 1996
between the Company and Gerard P. Joyce (1)
10.3(a)* Employment Agreement dated August 1, 1990 between the Company and
Thomas M. Pugliese (1)
10.3(b)* Amendment to Employment Agreement entered into September 25, 1996
between the Company and Thomas M. Pugliese (1)
10.3(c)* Second Amendment to Employment Agreement entered into August 29,
1997 between the Company and Thomas M. Pugliese (1)
10.3(d)* Third Amendment to Employment Agreement between the Company and
Thomas M. Pugliese
10.4(a)** Media Network Services Agreement by and between The Southland
Corporation and the Company ("Southland Contract") (1)
10.4(b)** Amendment No. 1 to Southland Contract
27.1 Financial Data Schedule
</TABLE>
* Management contract or compensatory plan or arrangement
** Portions of this Exhibit have been omitted and filed separately with the SEC
pursuant to a request for Confidential Treatment.
(1) Such Exhibit was filed with the Company's Registration Statement on Form
S-4 (File No.333-49279) and is incorporated herein by reference.
(2) Such Exhibit was filed with the Company's Quarterly Report on Form 10-QSB
for the period ended September 30, 1998 and is incorporated herein by
reference.
b) Reports on Form 8-K
None
26
<PAGE>
INDEX TO FINANCIAL STATEMENTS
NEXT GENERATION NETWORK, INC.
CONTENTS
<TABLE>
<S> <C>
Independent Auditor's Report..........................................................................28
Balance Sheets as of December 31, 1998 and 1997.......................................................29
Statements of Operations for Year Ended December 31, 1998, 1997 and 1996..............................30
Statements of Changes in Stockholders' Deficit for the Years Ended
December 31, 1998, 1997 and 1996....................................................................31
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996.........................32
Notes to Financial Statements.........................................................................33
</TABLE>
27
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Next Generation Network, Inc.
Eden Prairie, Minnesota
We have audited the accompanying balance sheets of Next Generation
Network, Inc. as of December 31, 1998 and 1997, and the related statements of
operations, changes in stockholders' deficit, and cash flows for each of the
three years in the period ended December 31, 1998. 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
Network, Inc. as of December 31, 1998 and 1997, and the result of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
McGLADREY & PULLEN, LLP
Minneapolis, Minnesota
February 17, 1999
28
<PAGE>
NEXT GENERATION NETWORK, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
ASSETS (Note 2)
Current Assets:
Cash and cash equivalents $ 24,710,213 $ 2,789,142
Trade accounts receivable, less allowance of $119,000
in 1998 and $45,000 in 1997 468,725 382,108
Other current assets 91,159 120,886
------------ ------------
Total current assets 25,270,097 3,292,136
------------ ------------
Equipment and Furnishings, at cost (Notes 3 and 7)
Equipment 11,792,069 4,719,812
Office furniture and equipment 888,951 381,493
Equipment under capitalized lease 276,546 276,546
Leasehold improvements 319,764 -
------------ ------------
13,277,330 5,377,851
Less accumulated depreciation 2,759,624 1,387,665
------------ ------------
10,517,706 3,990,186
------------ ------------
Other Assets
Deferred financing costs (net of accumulated
amortization of $390,072 in 1998) 2,519,597 78,603
Noncurrent trade accounts receivable 89,562 51,562
Deposits 56,409 44,052
Other - 79,109
------------ ------------
2,665,568 253,326
------------ ------------
$ 38,453,371 $ 7,535,648
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Current maturities of long-term debt $ 21,439 $ 48,302
Accounts payable 1,211,742 319,405
Accrued expenses (Note 9) 4,516,000 1,663,453
------------ ------------
Total current liabilities 5,749,181 2,031,160
------------ ------------
Non-current accrued site lease expense 207,712 92,253
------------ ------------
Long-term Debt, including capital leases, less current
maturities (Notes 2,3 and 4) 42,115,147 3,015,208
------------ ------------
Commitments (Notes 3,4 and 5)
Mandatory Redeemable Preferred Stock (Note 5)
14.8% Series B, nonvoting; authorized 91,100 shares;
issued and outstanding 91,059 shares; stated at
liquidation value plus accrued dividends 9,748,507 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 7,024,323 6,057,115
------------ ------------
16,772,830 14,487,030
------------ ------------
Stockholders' Deficit (Notes 5 and 6)
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 $4,732,500 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 9,266,369 3,904,889
Accumulated deficit (38,660,531) (18,997,555)
------------ ------------
(26,391,499) (12,090,003)
------------ ------------
$ 38,453,371 $ 7,535,648
------------ ------------
------------ ------------
</TABLE>
See notes to financial statements.
29
<PAGE>
NEXT GENERATION NETWORK, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------
1998 1997 1996
-------------- ------------ -------------
<S> <C> <C> <C>
Revenues (Note 7):
Advertising revenues $ 2,609,512 $ 1,243,868 $ ---
Less agency commissions (47,851) (39,325) ---
-------------- ------------ -------------
Net advertising revenues 2,561,661 1,204,543 ---
Network equipment and territorial rights sales 26,309 137,279 2,688,455
Network operating revenues 1,720 485,299 489,512
-------------- ------------ -------------
Total revenues 2,589,690 1,827,121 3,177,967
-------------- ------------ -------------
Costs and expenses:
Cost of network equipment sales 9,996 60,893 2,213,772
Network operating expenses 5,272,793 2,799,498 362,889
Selling expenses 6,062,770 1,757,523 ---
General and administrative expenses 5,976,388 3,428,649 2,507,134
-------------- ------------ -------------
Total costs and expenses 17,321,947 8,046,563 5,083,795
-------------- ------------ -------------
Operating loss (14,732,257) (6,219,442) (1,905,828)
Non operating income (expense):
Interest expense (Note 2) (6,494,147) (280,806) (231,355)
Interest income 1,563,427 113,037 81,679
Other expense --- (1,273) ---
-------------- ------------ ------------
Net loss (19,662,977) (6,388,484) (2,055,504)
Preferred stock dividends (Note 5) 2,515,590 1,630,836 540,802
-------------- ------------ ------------
Net loss applicable to common stockholders $ (22,178,567) $(8,019,320) $ (2,596,306)
-------------- ------------ ------------
-------------- ------------ ------------
Basic and diluted net loss per common share $ (83.29) $ (30.12) $ (10.16)
-------------- ------------ ------------
-------------- ------------ ------------
Weighted average number of common shares outstanding 266,268 266,268 255,538
-------------- ------------ ------------
-------------- ------------ ------------
</TABLE>
See notes to financial statements.
30
<PAGE>
NEXT GENERATION NETWORK, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
<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 31,1995 6,000 $3,000,000 250,892 $2,509 $ 4,649,574 $(10,553,567) $ (2,901,484)
Issuance of common stock
at $71 per share (Note 5) --- --- 1,562 16 111,547 --- 111,563
Contribution of deferred
Compensation to additional
paid-in capital and
subsequent issuance of
common stock (Note 4) --- --- 13,814 138 1,063,518 --- 1,063,656
Compensation element of stock
options granted (Note 6) --- --- --- --- 70,430 --- 70,430
Accrued dividends on
mandatory redeemable
preferred stock --- --- --- --- (293,302) --- (293,302)
Series B mandatory
redeemable preferred stock
issuance costs --- --- --- --- (136,847) --- (136,847)
Net loss --- --- --- --- --- (2,055,504) (2,055,504)
--------- ---------- ---------- ----------- ---------- ------------- -----------
Balance, December 31,1996 6,000 3,000,000 266,268 2,663 5,464,920 (12,609,071) (4,141,488)
Accrued dividends on
mandatory redeemable
preferred stock --- --- --- --- (1,383,336) --- (1,383,336)
Series C mandatory
redeemable preferred stock
issuance costs --- --- --- --- (155,566) --- (155,566)
Compensation element of stock
options forfeited (Note 6) --- --- --- --- (21,129) --- (21,129)
Net loss --- --- --- --- (6,388,484) (6,388,484)
--------- ---------- ---------- ----------- ---------- ------------- -----------
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 --- --- --- --- (2,268,090) --- (1,664,741)
Issuance of Warrants in
connection with PIK
Notes (Note 2) --- --- --- --- 7,700,000 --- 7,700,000
Compensation element of stock
options forfeited (Note 6) --- --- --- --- (70,430) --- (70,430)
Net Loss --- --- --- --- --- (19,662,977) (19,662,977)
--------- ---------- ---------- ----------- ---------- ------------- -----------
Balance, December 31,1998 6,000 $3,000,000 266,268 $2,663 $ 9,266,369 $(38,660,531) $(26,391,499)
--------- ---------- ---------- ----------- ---------- ------------- -----------
--------- ---------- ---------- ----------- ---------- ------------- -----------
</TABLE>
See notes to financial statements.
31
<PAGE>
NEXT GENERATION NETWORK, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Operating Activities:
Net Loss $ (19,662,977) $ (6,388,484) $ (2,055,504)
Adjustments to reconcile net loss to net cash used in
operating activities:
Accretion of long term debt discounts 1,255,840 88,027 ---
Noncash interest on PIK Notes 4,813,050 --- ---
Amortization of deferred financing costs 390,072 --- ---
Depreciation and amortization 1,371,959 713,892 211,368
Compensation element of stock options granted (forfeited) (70,430) (21,129) 70,430
Other 17,710 1,896 ---
Changes in assets and liabilities:
Receivables (124,617) (270,530) (163,140)
Other current assets 29,728 (120,886) ---
Accounts payable 892,337 (198,148) 339,815
Other accrued expenses 595,956 1,543,107 145,451
------------ ------------ ------------
Net Cash Used In Operating Activities (10,491,372) (4,652,255) (1,451,580)
------------ ------------ ------------
Investing Activities:
Purchases of equipment and furnishings (7,899,479) (1,278,775) (2,140,886)
Deposits and other assets 66,752 (109,516) (2,113)
------------ ------------ ------------
Net Cash Used in Investing Activities (7,832,727) (1,388,291) (2,142,999)
------------ ------------ ------------
Financing Activities:
Borrowings under bridge loans and PIK Notes 37,300,000 --- 450,000
Principal payments on long-term debt and capital leases (1,923,764) (56,149) (174,936)
Net proceeds from issuance of preferred stock --- 5,143,245 6,374,696
Proceeds from issuance of warrants 7,700,000 --- ---
Deferred financing costs (2,831,066) (78,603) ---
Payment received on stock subscription receivable --- --- 500,000
Net decrease in short-term shareholder debt --- --- (126,663)
------------ ------------ ------------
Net Cash Provided by Financing Activities 40,245,170 5,008,493 7,023,097
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents 21,921,071 (1,032,053) 3,428,518
Cash and cash equivalents
Beginning 2,789,142 3,821,195 392,677
------------ ------------ ------------
Ending $ 24,710,213 $ 2,789,142 $ 3,821,195
------------ ------------ ------------
------------ ------------ ------------
Supplemental Cash Flow Information
Cash payments for interest $ 35,243 $ 192,779 $ 219,479
Non cash activities:
Increase in mandatory redeemable preferred stock and
decrease in paid-in capital from accrued dividends 2,268,090 1,383,336 293,302
Accrued interest converted to long term debt (Note 2) 2,441,000 --- ---
Increase in long term debt resulting from interest accretion 1,255,840 --- ---
Reduction in paid-in capital from issuance costs on
mandatory redeemable preferred stock --- 155,566 136,847
Equipment repurchased through issuance of notes payable --- 996,514 ---
Equipment acquired under capital leases --- 29,364 73,245
Stockholder note converted to Series C mandatory
redeemable preferred stock (Note 5) --- 500,038 ---
Bridge loan converted to Series B mandatory redeemable
preferred stock (Note 5) --- --- 500,000
Bridge loan converted to common stock (Note 5) --- --- 111,563
Deferred compensation contributed to capital (Note 4) --- --- 1,063,656
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See notes to financial statements.
32
<PAGE>
NEXT GENERATION NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: Next Generation Network, Inc. (the Company) sells
advertising space and programming through an electronic out-of-home
advertising network, known as the Next Generation Network (NGN). The Company
was founded in 1990 and thereafter focused its efforts, among other things,
on the development of NGN by developing and improving the NGN technology. At
the same time, the Company concentrated its efforts on securing site
agreements for the placement of NGN Displays as well as recruiting local
sales personnel and opening local sales offices in designated market areas.
Prior to 1996 the Company was in the development stage. During 1996, the
Company commenced operations and, based on agreements for the placement of its
monitors with convenience store chains representing over 8,000 stores, the
Company began the installation of NGN in these stores. As of December 31,
1998 the NGN displays have been installed in approximately 3600 sites in
seventeen market areas, principally in major cities. The Company currently
generates revenue principally through the sale of advertising on NGN and
previously by selling equipment and exclusive territorial rights to NGN
within certain markets (owner-operator networks). During 1997, the Company
repurchased all NGN equipment from the owner-operators who, in turn,
forfeited their territorial rights (see Note 7).
CHANGE OF COMPANY NAME: During 1998 the Company amended its certificate
of incorporation to change its name from Mentus Media Corp. to Next
Generation Network, Inc.
A summary of the Company's significant accounting policies follows:
REVENUE RECOGNITION: Revenue from network equipment and territorial
rights sales was recognized upon installation of the equipment in the
territory. Network operating revenues, which consist of network operating
fees and advertising revenue for owner-operator networks, and advertising
revenues for Company networks are recognized in the period the service is
provided. A full month's advertising revenue is recognized in the first month
of each advertising service or contract period. Costs incurred for the
production of media advertising are recognized in the initial month of the
advertising service or contract period or as incurred during the advertising
service period. Advertising revenues are reduced by agency commissions on the
statements of operations. In addition, the Company provides allowances for
uncollectible revenues receivable based on Management's periodic assessment
of the need for such allowances. Such allowances charged to expense amounted
to $100,640 in 1998 and $45,363 in 1997. No similar allowances were necessary
in 1996.
BARTER TRANSACTIONS: Barter transactions, which represent the exchange
of NGN advertising for goods or services, are recorded at the estimated fair
value of the products or services received, not to exceed the estimated fair
value of the NGN advertising provided. The Company has valued all bartered
advertising credits received at a substantial discount from both the outside
advertising media's and the Company's standard rates. Barter revenues are
recognized as barter credit on the
33
<PAGE>
balance sheet when NGN advertising services are rendered, and barter expense
is recognized when the related products or services are received or used.
Barter revenues were $257,142 during 1998 and $158,076 during 1997, of which
$47,738 and $104,407 are included in other current assets on the balance
sheets at December 31, 1998 and 1997, respectively. There were no barter
revenues prior to 1997.
CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, the
Company considers any Treasury bills, commercial paper, certificates of
deposit, and money market funds with an original maturity of three months or
less to be cash equivalents. 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.
RESEARCH AND DEVELOPMENT COSTS: Expenditures for research and development
activities performed by the Company are charged to operations as incurred.
Research and development expense was approximately $430,000, $363,000 and
$222,000 for the years ended December 31, 1998, 1997 and 1996 respectively.
SOFTWARE DEVELOPMENT COSTS: The majority of the Company's software
development costs are associated with the internal development and
enhancement of the NGN technology and software. The Company's policy is to
expense these costs as incurred and include them with the aforementioned
research and development costs.
DEPRECIATION: It is the policy of the Company to provide depreciation
based on estimated useful lives of five to seven years for its equipment and
furnishings using the straight-line method. Leasehold improvements are being
amortized over the terms of the respective leases.
ACCOUNTING FOR LONG-LIVED ASSETS: The Company began generating operating
revenue with its long-lived assets in 1996 and is in the process of building
up an acceptable revenue base and related cash flows. Management has and will
continue, on a periodic basis, to closely evaluate its equipment to determine
potential impairment by comparing its carrying value with the estimated
future net undiscounted cash flows expected to result from the use of the
assets, including cash flows from disposition. Should the sum of the expected
future net cash flows be less than the carrying value, the Company would
recognize an impairment loss at that date. An impairment loss would be
measured by comparing the amount by which the carrying value exceeds the fair
value (estimated discounted future cash flows or appraisal of assets) of the
long-lived assets. To date, management has determined that no impairment of
long-lived assets exits.
DEFERRED FINANCING COSTS: In connection with the issuance of Senior
Secured PIK Notes in 1998 the company incurred approximately $2,910,000 of
financing costs which have been deferred and are being amortized over the
five year term of the Notes using the interest method.
BASIC AND DILUTED NET LOSS PER SHARE: Basic per share amounts are
computed, generally, by dividing net income or loss by the weighted-average
number of common shares outstanding. Diluted per share amounts assume the
conversion, exercise, or issuance of all potential common stock instruments
unless their effect is antidilutive, thereby reducing the loss or increasing
the income per common share.
Loss per share has been adjusted for undeclared, cumulative dividends on
the Company's Series A cumulative preferred stock which totaled $247,500 for
each of the years ended December 31, 1998, 1997, and 1996, and the dividends
accrued on the Series B and C mandatory redeemable
34
<PAGE>
preferred stock of $2,268,090, $1,383,336, and $293,302 for the years ended
December 31, 1998, 1997, and 1996, respectively. As described in Note 6, the
Company has options and warrants outstanding to purchase shares of common
stock, and the Series A, B, and C preferred stock is convertible into common
stock. However, because the Company has incurred losses in all periods
presented, the inclusion of those potential common shares in the calculation
of diluted loss per share would have an antidilutive effect. Therefore, basic
and diluted loss per share amounts are the same in each period presented.
INCOME TAXES: The Company accounts for deferred taxes on an asset and
liability method whereby deferred tax assets are recognized for deductible
temporary differences and operating loss and tax credit carryforwards and
deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of
assets and liabilities and their tax basis. Deferred tax assets are reduced
by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will not
be realized. Deferred tax assets and liabilities are adjusted for the effects
of changes in tax laws and rates on the date of enactment.
ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The financial statements include
the following financial instruments and the methods and assumptions used in
estimating their fair value: for cash and cash equivalents, the carrying
amount is fair value; for trade accounts receivable and accounts payable, the
carrying amounts approximate their fair values due to the short term nature
of these instruments; and for the fixed rate notes payable fair value has
been estimated based on discounted cash flows using interest rates being
offered for similar borrowing. No separate comparison of fair values versus
carrying values is presented for the aforementioned financial instruments
since their fair values are not significantly different than their balance
sheet carrying amounts. In addition, the aggregate fair values of the
financial instrument would not represent the underlying value of the Company.
SEGMENTS: Effective January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 requires that a
company report financial and descriptive information about its reportable
operating segments, defined as those components of an enterprise about which
separate financial information is available and is evaluated regularly by
management in deciding how to allocate resources and in assessing
performance. The adoption of SFAS No. 131 did not affect the Company's
results of operations or financial position. The Company believes that is has
one operating segment, although certain separate financial information by the
Company's 17 market areas is available. That is, the services being provided,
the development of the services, the method in which the services are being
delivered and the customers the services are being provided to, are similar.
REPORTING COMPREHENSIVE INCOME: As of January 1, 1998, the Company
adopted Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 130 establishes new rules for the
reporting and display of comprehensive income and its components. SFAS 130
requires certain items, which prior to adoption were reported separately in
35
<PAGE>
stockholders' equity, to be included in other comprehensive income. For the
Company, reporting comprehensive income is equivalent to reporting operating
results in the statement of operations.
NOTE 2. LONG-TERM DEBT:
On February 18, 1998, the Company issued 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 at the time of issuance. The number of
shares purchasable by holders of the Warrants is subject to antidilution
adjustments. The Warrants are detachable and are exercisable anytime 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. In
August, 1998, the Company issued additional Notes in payment of $2,441,000 of
accrued interest on the aforementioned Notes.
On August 19, 1998, all Series A Senior Secured PIK Notes were exchanged
for Series B 12% Senior Secured PIK Notes due 2003. 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.
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.
A summary of long-term debt at December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
12% Series B Senior Secured PIK Notes due February 2003 (net of
$6,606,331 of unamortized discount attributed to warrants
issued in connection with PIK Notes) (See above) $40,834,669 ---
8% note payable to shareholder, repaid in 1998 --- $1,875,462
10.1% to 18.8% capital leases, due in varying monthly installments
to August 2001, secured by equipment (Note 3) 55,205 103,507
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 (Note 7) 460,260 400,226
36
<PAGE>
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 (Note 7) 786,452 684,315
----------- ----------
42,136,586 3,063,510
Less current maturities 21,439 48,302
----------- ----------
$42,115,147 $3,015,208
----------- ----------
----------- ----------
</TABLE>
The long term debt excluding capital lease obligations and assuming full
accretion of related discounts is payable as follows: $700,000 in 2001 and
$48,941,000 in 2003.
Interest expense on the 8% note payable to shareholder was approximately
$20,000, $176,000 and $190,000 for the years ended December 31, 1998, 1997
and 1996, respectively. This note was repaid in full on February 18, 1998,
with a portion of the proceeds from the sale of Senior Secured PIK Notes (see
above).
NOTE 3. LEASE COMMITMENTS
CAPITAL LEASES: The Company leases various equipment under capital leases.
Approximate future minimum lease payments under capital leases and the
aggregate present value of the net minimum lease payments at December 31, 1998,
were as follows:
<TABLE>
<S> <C>
Years ending December 31:
1999 $28,339
2000 28,339
2001 9,133
-------
$65,811
Less amounts representing interest 10,606
-------
$55,205
-------
-------
</TABLE>
The following is a summary of equipment under capital lease as of
December 31, 1998:
<TABLE>
<S> <C>
Cost $276,546
Accumulated depreciation 180,991
--------
$ 95,555
--------
--------
</TABLE>
OPERATING LEASES: The Company leases its offices and warehouse facilities
under noncancelable operating leases, which require various monthly payments
including operating costs. The approximate future minimum lease payments under
operating leases at December 31, 1998 are as follows:
<TABLE>
<S> <C>
Years ending December 31:
1999 $1,221,000
2000 1,215,000
2001 966,000
2002 926,000
2003 705,000
Thereafter 1,292,000
----------
$6,325,000
----------
----------
</TABLE>
37
<PAGE>
Rent expense amounted to approximately $623,000, $303,000, and $184,000
for the years ended December 31, 1998, 1997, and 1996 respectively. Letters of
credit in the amount of approximately $200,000 are outstanding at December 31,
1998 as security for certain of these leases.
SITE AGREEMENTS: In connection with NGN, the Company enters into site
agreements that provide for revenue-sharing arrangements (based on percentage
of net advertising revenues) with the operators of the sites in which its NGN
displays are located. The Company accrues as monthly site agreement expense
the greater of computed amount based on a percent of revenue or, where
applicable, the appropriate portion of an annual minimum.
At December 31, 1998, in connection with the aforementioned arrangements,
the Company was committed to certain minimum site agreement fees of
approximately $2,943,000 annually through the year 2003, based on NGN displays
installed as of December 31,1998. The Company is highly dependent upon one
multistore site agreement and 81 percent of the Company's NGN displays are
located in sites covered by this agreement which expires on January 1, 2004,
if not renewed.
Site agreement expenses included in the statements of operations were
$2,087,945, $1,120,431 and $7,917, for the years ended December 31, 1998, and
1997 and 1996 respectively.
NOTE 4. EMPLOYMENT AGREEMENTS AND DEFERRED COMPENSATION AGREEMENT
The Company has employment agreements with two officers of the Company.
These agreements, which extend to 1999, provide for an annual base salary which
is not subject to annual increases.
The agreement with one officer, who is a major shareholder, provides for
an annual base salary of $251,741 and an annual bonus of $60,000 to be paid to
the officer if certain criteria are met. The agreement with the other officer
provides for an annual base salary of $250,000. Also, under this agreement the
officer received 230 shares (valued at $17,710) of Series C Preferred Stock in
1998.
The Company previously had agreements with the two officers to defer a
portion of their compensation under prior employment agreements. The accrued
balance outstanding under these agreements at December 31, 1995, was
$1,063,656. In conjunction with the 1996 Series B preferred stock
transaction, the officers agreed to terminate these agreements and to
contribute the accrued balance outstanding to paid-in capital of the Company,
and the Company simultaneously issued 8,831 shares of restricted common stock
to one officer and 4,983 shares of restricted common stock to the other
officer, effectively in exchange (at $77 per share) for the deferred
compensation obligations to them. The shares become unrestricted in years 2006
and 2017, respectively, or upon the occurrence of death, disability, or a
qualifying public offering.
NOTE 5. COMMON AND PREFERRED STOCK
PREEMPTIVE RIGHTS: As of December 31, 1998, holders of 176,593 shares of
Common Stock (including shares issuable upon exercise of outstanding warrants
or upon conversion of
38
<PAGE>
Preferred Stock), or their transferees, are entitled to certain rights
permitting them to maintain their percentage common equity interest in the
Company (on a fully diluted basis).
PREFERRED STOCK: The Company's Board of Directors has authorized 500,000
shares of preferred stock for designation and issuance, of which 298,900 shares
were not designated as of December 31, 1998.
DIVIDEND RESTRICTIONS: The Company is restricted from paying dividends
under its indenture covering the Series B Notes, as well as under its Series A,
Series B, and Series C Preferred Stock.
SERIES A CUMULATIVE PREFERRED STOCK: The Company's 8.25% Series A
cumulative preferred stock is convertible at the option of the holder into
Common Stock, at any time prior to the close of business on the tenth day
prior to the date fixed for a redemption or exchange by the Company, at a
conversion price of $135.27 per common share (equivalent to a conversion rate
of 3.696 shares of common stock for each share of preferred stock).
The Series A preferred stock is redeemable at the option of the Company,
if not previously converted into common stock, in whole or in part, at $500
per share, plus accrued and unpaid dividends to the redemption date.
Dividends of $247,500 for each of the years ended December 31, 1998, 1997,
and 1996 were not declared nor paid. Dividends in arrears totaled $1,732,500
and $1,485,000 at December 31, 1998 and 1997, respectively. The dividends in
arrears are also convertible into common stock at a conversion price of $135.27
per common share.
SERIES B MANDATORY REDEEMABLE PREFERRED STOCK: During 1996, the Company's
Board of Directors created and designated for issuance 91,100 shares of $1 par
Series B Senior Cumulative Compounding Convertible Redeemable Preferred Stock.
On September 25, 1996, the Company issued 91,059 shares of its Series B
Preferred Stock to private investors at $77 per share. Proceeds upon the
issuance of this stock, net of issuance costs of approximately $137,000,
totaled approximately $6,875,000, which consisted of approximately $6,375,000
in cash and conversion of bridge loans totaling $500,000 at $77 per share.
The Series B Preferred Stock is equal in all respective rights with the
Series C Preferred Stock and senior to all other classes of capital stock
with respect to dividend and liquidation rights. Dividends, which accrue at
14.8% on an initial liquidation value of $77 per share, are to be paid
quarterly on March 1, June 1, September 1, and December 1. On each dividend
payment date, accrued dividends, to the extent unpaid, are compounded upon
the stock's liquidation value. For the years ended December 31, 1998, 1997,
and 1996, dividends of $1,318,592, $1,125,070, and $293,302 respectively,
have been accrued and are unpaid.
The Series B Preferred Stock and all accrued unpaid dividends are
convertible, in whole or in part, at the option of the holder into common
stock at a conversion price of $77 per share (representing 126,604, 109,479,
and 94,671 shares of common stock at December 31, 1998, 1997, and 1996,
respectively). The stock is convertible at the option of the Company in the
event of a qualifying public offering. The stock is also redeemable in whole,
but not in part, at the option of the Company at a redemption price of $308 per
share at any time prior to the mandatory redemption date, which is September
2003. At that time, the Company is required to redeem all outstanding
39
<PAGE>
shares of the Series B preferred stock at a redemption price of $77 per share,
adjusted for cumulative compounded unpaid dividends.
In addition, upon a qualifying change in ownership control or
reorganization event, the majority Series B preferred stockholders may require
the Company to redeem all outstanding Series B Preferred Stock at certain
redemption prices.
The Company is also required to and has reserved from its authorized but
unissued shares of common stock, solely for the conversion of Series B
preferred stock, the full number of shares of common stock issuable if all
outstanding Series B shares were to be converted in full.
SERIES C MANDATORY REDEEMABLE PREFERRED STOCK: During 1997, the
Company's Board of Directors created and designated for issuance 90,000
shares of $1 par Series C Senior Cumulative Compounding Convertible
Redeemable Preferred Stock. This preferred stock contains terms and
provisions that are virtually identical to the Series B Preferred Stock
except for the mandatory redemption date, which is March 2003 for Series C.
During 1997, the Company issued 75,310 shares of Series C Preferred
Stock to private investors at $77 per share. Proceeds upon issuance of this
stock, net of issuance costs of approximately $156,000 totaled approximately
$5,643,000, which consisted of approximately $5,143,000 in cash and conversion
of a stockholder note of $500,038. For the years ended December 31, 1998 and
1997, dividends of $949,498, and $258,266, respectively, have been accrued
and are unpaid on this preferred stock.
The Series C Preferred Stock and all accrued unpaid dividends are
convertible into common stock at a conversion price of $77 (representing 91,225
and 78,664 shares of common stock at December 31, 1998 and 1997, respectively).
The terms are similar to the Series B Preferred Stock.
STOCKHOLDERS AGREEMENT: The Company is party to a stockholders agreement
among certain holders of Common Stock and Series B and Series C Preferred
Stock, which requires the approval of a majority of the preferred stockholders
who are party to the Agreement, for certain significant corporate transactions.
In addition, the holders of preferred stock are entitled to elect up to three
directors as set forth in the Series B and Series C Certificates of Designation.
OTHER COMMON AND PREFERRED STOCK TRANSACTIONS: During 1996, bridge loans
of $100,000 and accrued interest thereon of $11,563 were exchanged for 1,562
shares of common stock at a price of $71.43 per share. These bridge loans
were part of a 1995 financing transaction. The number of shares of common
stock into which the bridge loans were converted was based on the Company's
estimate of the per share value of the common stock based on redemption
prices or significant private stock sales near the conversion date.
NOTE 6. STOCK OPTIONS AND WARRANTS
The Company has a 1993 Stock Option Plan effective January 1, 1994, a
1994 Stock Option Plan effective December 15, 1994 and a 1998 Nonqualified
Stock Option Plan effective November 20, 1998 (the Plans). The Plans permit
the granting of incentive stock options and nonqualified options. A total of
4,000, 8,000, and 82,000 shares of the Company's common stock have been
reserved for issuance pursuant to options granted under the 1993, 1994, and
1998 Plans, respectively.
40
<PAGE>
Grants under the Plans are accounted for following APB Opinion No. 25
and related interpretations. Compensation cost charged to operations for
stock option grants was $70,430 for the year ended December 31, 1996. During
1998 and 1997, certain compensatory options were forfeited, resulting in the
reversal of $70,430 and $21,129, respectively, of compensation expense. Had
compensation cost for the options been determined using the fair value method
required by FASB Statement No. 123, the Company's basic and diluted net loss
applicable to common stockholders and net loss per common share on a pro
forma basis would have been as follows:
<TABLE>
<CAPTION>
Years Ended December 31
-------------------------------------------------------
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
Net loss applicable to common stockholders:
As reported.................................. $(22,178,567) $(8,019,320) $(2,596,306)
Pro forma.................................... (22,268,781) (8,088,203) (2,620,902)
Basic and diluted net loss per common
Share:
As reported.................................. (83.29) (30.12) (10.16)
Pro forma.................................... (83.63) (30.38) (10.26)
</TABLE>
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants: risk-free interest rate of 6.16%
and 5.98% in 1997 and 1996, respectively; expected lives of 5 years; and
expected volatility of 10%.
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Grant Weighted -
Date Fair Average
Value Shares Exercise Price
----- ------ --------------
<S> <C> <C> <C>
Outstanding at December 31, 1995 --- 3,406 1.00
Granted 71.43 1,000 1.00
Granted 71.43 500 90.56
Granted 77.00 1,000 77.00
------
Outstanding at December 31, 1996 --- 5,906 21.45
Granted 77.00 1,000 77.00
Canceled --- (300) 1.00
Outstanding at December 31, 1997 --- 6,606 30.79
Cancelled --- (1,500) 30.85
------
Outstanding at December 31, 1998 5,106 30.77
------
------
</TABLE>
There were 3,506 options exercisable at December 31, 1998 at a
weighted-average exercise price of $9.67.
The following table summarizes additional information about stock options
outstanding as of December 31, 1998:
41
<PAGE>
<TABLE>
<CAPTION>
Weighted Average
Remaining Number of Options
Range of exercise Number of Options Contractual Lives (In Exercisable at
prices Outstanding Years) December 31, 1998
------ ----------- ----- -----------------
<S> <C> <C> <C>
$1.00 3,106 5.0 3,106
$77.00 2,000 5.0 400
----- -----
5,106 3,506
----- -----
</TABLE>
WARRANTS: In connection with 12.5% unsecured bridge loan financing of
$775,000 in 1995, the Company issued warrants to purchase 3,100 shares of common
stock at a price of $71.43 per share, exercisable any time prior to May 1, 2000.
Since the exercise price approximated the estimated fair value of the common
stock and since the scheduled interest over the term of the bridge loans was not
significantly different than interest computed using the Company's incremental
borrowing rate, no separate value was ascribed to the warrants as it was
determined to be immaterial.
In connection with the Company's issuance of Senior Secured PIK Notes the
Company issued warrants to purchase 125,240 shares of its common stock at a
price of $.01 per share, exercisable at any time prior to February 1, 2008 (See
Note 2). Due to antidilution provisions, these warrants allowed the holders to
acquire 131,822 shares of common stock as of December 31, 1998.
NOTE 7. TERRITORIAL AGREEMENTS AND REPURCHASE OF NETWORK EQUIPMENT
During 1996, the Company entered into territorial agreements with two
separate unrelated owner-operators. Each agreement granted exclusive territorial
rights to NGN within certain designated markets for a period of ten years. In
the aggregate, the Company received initial payments of approximately $2,688,000
for the purchase of hardware, software, and exclusive territorial rights
(approximately $366,000, applied to territorial rights), all of which was fully
paid. The agreements also provided for royalties on all advertising revenue and
reimbursement of certain network operating expenses. The original equipment
sales and territorial rights agreement did not provide for any continuing
involvement or obligations by the Company other than the aforementioned payments
to the Company for royalties and costs relative to operating the network. One of
the agreements also provided the grantee with the option to purchase the
exclusive rights to certain additional designated NGN Network territories.
In January 1997, the Company entered into an agreement with one of its NGN
owner-operators whereby the Company repurchased equipment originally sold by the
Company in 1996 in exchange for a $700,000 note payable. In addition, the
owner-operator forfeited its territorial rights. This equipment repurchase was
not a condition of or done in connection with the terms of the original
territorial agreement and equipment sales contract. The note is
noninterest-bearing and is payable annually at an amount equal to 40% of
operating cash flows generated by the former owner-operator's territory with the
unpaid balance of the note due December 31, 2001. The note is secured by the
equipment being repurchased. The Company recorded the note and the repurchased
equipment at $348,023, the present value of the note using a discount rate of
15% and no assumed payments until maturity. No periodic payments were assumed
since the former owner-operator's territory was not generating positive
operating cash flow at the time of the equipment repurchase and there is no
assurance that such positive cash flow will be achieved and in what amount.
42
<PAGE>
In April 1997, the other owner-operator gave notice of forfeiture of its
territorial rights and its option to purchase the exclusive rights to certain
additional designated NGN territories, effective as of August 18, 1997. The
Company subsequently entered into an agreement with the owner-operator whereby,
in August 1997, the Company repurchased equipment originally sold in 1996 in
exchange for $25,000 cash and a $1,500,000 note payable. This equipment
repurchase was not a condition of or done in connection with the terms of the
original territorial agreement and equipment sales contract. The note is
noninterest-bearing and is payable in full on August 18, 2003. The note is
secured by the equipment being repurchased. The Company has also agreed to pay
the former owner-operator 10 percent of the net revenues generated by the
forfeited Florida territory for the term of the note. The Company recorded the
repurchased equipment at $25,000 plus $648,491, the present value of the note
using a discount rate of 15%.
In the aforementioned purchase transactions the entire recorded present
value repurchase price approximated less than fifty percent of the original
aggregate installed cost of the NGN Displays (monitor equipment). The Company
believes this equipment has a five year useful life and at time of repurchase
had been used an average approximately six months to one year. The Company
allocated all of the repurchase price to the NGN Displays in place since it
believed their fair value was significantly greater than the present value of
the total repurchase price. No value was allocated to the territorial rights
since they were forfeited, not repurchased and since the estimated fair value of
the tangible assets repurchased more than exceeded their repurchase cost as
noted above. The repurchased NGN Displays are being depreciated over their
approximate remaining useful lives.
NOTE 8: INCOME TAXES
Deferred income tax assets (liabilities) consisted of the following:
<TABLE>
<CAPTION>
December 31
--------------------------------------------------
1998 1997
------------------------- ------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $14,523,000 $6,711,000
Tax credit carryforwards 166,000 147,000
Nondeductable compensation 541,000 541,000
Allowance for uncollectible accounts and other 64,000 34,000
------------------------- ------------------------
15,294,000 7,433,000
Deferred tax liabilities:
Depreciation and amortization (118,000) (78,000)
-
------------------------- ------------------------
Net deferred tax 15,176,000 7,355,000
Less valuation allowance (15,176,000) (7,355,000)
------------------------- ------------------------
$ --- $ ---
------------------------- ------------------------
------------------------- ------------------------
</TABLE>
The Company had valuation allowances of $15,176,000 and $7,355,000 against
its deferred tax assets to reduce those assets to amounts that management
believes are appropriate at December 31, 1998 and 1997, respectively.
The Company's income tax expense differed from the statutory federal rate
as follows:
43
<PAGE>
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------------
1998 1997 1996
-------------------- ------------------- -------------------
<S> <C> <C> <C>
Statutory rate applied to loss before income taxes $(6,685,500) $(2,172,000) $(719,000)
State income tax benefit net of federal tax effect and
other (1,136,000) (288,000) (121,000)
Change in deferred tax valuation allowance resulting from
unused NOLs 7,821,000 2,460,000 840,000
-------------------- ------------------- -------------------
$ - $ - $ -
-------------------- ------------------- -------------------
-------------------- ------------------- -------------------
</TABLE>
The Company has tax net operating loss and tax credit carryforwards which
are available to reduce income taxes payable in future years. Future utilization
of these loss and credit carryforwards is subject to certain limitations under
provisions of the Internal Revenue Code including limitations subject to Section
382, which relates to a 50 percent change in control over a three-year period,
and are further dependent upon the Company attaining profitable operations. The
Company believes that the issuance of warrants during 1998 (see Note 2) resulted
in an "ownership change" under Section 382. Accordingly, the Company's ability
to use net operating loss carryforwards generated prior to February 1998 may be
limited to approximately $1.3 million per year. These carryforwards and credits
will expire as follows:
<TABLE>
<CAPTION>
Operating Loss Carryforwards Tax Credit
Year Carryforwards
------------------------------ -----------------------
<S> <C> <C>
2005 $627,000 $ ---
2006 1,532,000 ---
2007 1,536,000 ---
2008 1,400,000 ---
2009 1,442,000 94,000
2010 2,165,000 12,000
2011 1,959,000 7,000
2012 6,364,000 19,000
2018 19,000,000 ---
------------------------------ -----------------------
$36,025,000 $142,000
----------- --------
----------- --------
</TABLE>
NOTE 9. ACCRUED EXPENSES
The components of accrued expenses are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1998 1997
------------------ -------------------
<S> <C> <C>
Site agreement fees $1,807,422 $1,272,017
Interest 2,372,050 ---
Compensation 207,952 119,468
Legal fees --- 196,217
Other 128,576 75,751
------------------ -------------------
$4,516,000 $1,663,453
------------------ -------------------
------------------ -------------------
</TABLE>
44
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereto duly
authorized.
NEXT GENERATION NETWORK, INC.
Date: March 26, 1999 By: /s/ Thomas M. Pugliese
-------------------------
Thomas M. Pugliese
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Name Capacity(ies) Date
---- ------------- ----
<S> <C> <C>
/s/ Gerard P. Joyce
- ----------------------- President, Chairman and Director March 26, 1999
Gerard P. Joyce
/s/ Thomas M. Pugliese
- ----------------------- Chief Executive Officer, Secretary March 26, 1999
Thomas M. Pugliese and Director(Principal Executive
Officer)
/s/ Michael J. Kolthoff
- ----------------------- Treasurer and Assistant Secretary March 26, 1999
Michael J. Kolthoff (Principal Financial and Accounting
Officer)
/s/ Thomas J. Davis
- ----------------------- Director March 26, 1999
Thomas J. Davis
/s/ Timothy P. Hartman
- ----------------------- Director March 26, 1999
Timothy P. Hartman
/s/ Michael J. Marocco
- ----------------------- Director March 26, 1999
Michael J. Marocco
/s/ Susan Molinari
- ----------------------- Director March 26, 1999
Susan Molinari
45
<PAGE>
<CAPTION>
/s/ Malcolm Lassman
- ----------------------- Director March 26, 1999
Malcolm Lassman
/s/ David Voelker
- ----------------------- Director March 26, 1999
David Voelker
/s/ Alejandro Zubillaga
- ----------------------- Director March 26, 1999
Alejandro Zubillaga
</TABLE>
46
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF DESIGNATION
FOR SERIES B SENIOR CUMULATIVE
COMPOUNDING CONVERTIBLE REDEEMABLE PREFERRED STOCK
OF
NEXT GENERATION NETWORK, INC.
PURSUANT TO SECTION 242 OF THE
DELAWARE GENERAL CORPORATION LAW
------------------------
NEXT GENERATION NETWORK, INC. (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, by unanimous
written consent, duly adopted resolutions setting forth a proposed amendment to
the Certificate of Designation for the Series B Senior Cumulative Compounding
Convertible Preferred Stock, par value $1.00 per share of the Corporation, of
the Corporation, declaring such amendment to be advisable and authorizing the
solicitation of written consents of the stockholders of the Corporation with
respect thereto. The resolution setting forth the proposed amendment is as
follows:
RESOLVED, that the Certificate of Designation for the Corporation's
Series B Senior Cumulative Compounding Convertible Redeemable Preferred Stock,
par value $1.00 per share, be amended as follows:
1. The definition of "Employee Option" in Section 2 is amended to
read in its entirety as follows:
"Employee Option" means any option to purchase Common Stock for cash
which is granted by or with the approval of the Board of Directors or
the Compensation Committee (to the extent such committee is authorized
by the Board of Directors to grant such options) to any director,
officer, employee or consultant of the Corporation or any subsidiary
of the Corporation pursuant to either (i) the Corporation's 1993 Stock
Option Plan or the Corporation's 1994 Stock Option Plan as in effect
on the Closing Date, (ii) any other option plan adopted by the
Corporation after the Closing Date with the prior approval of the
Majority Senior Holders, in each case as the same may be amended from
time to time with the prior approval of the Majority Senior Holders,
or (iii) any stock option plan in the
<PAGE>
form approved by the Board of Directors for the issuance of Common
Stock which shall not exceed 82,000 shares of Common Stock (as
adjusted for stock splits, combinations, recapitalization,
reorganizations and similar transactions) provided that the options
granted pursuant to such plans shall not be issued with an exercise
price per share of Common Stock less than the lesser of (a) $77 (as
adjusted for stock splits, combinations, recapitalizations,
reorganizations and other similar transactions) or (b) the
Conversion Price at the time of issuance, without the consent of
the Series B Director.
2. Section 8(d) is amended to delete the words "(i) for the
Valuation Committee, (i) as provided in Section 7(f), or (i) otherwise. . ."
3. Section 8(f) is amended in its entirety to read as follows:
"(f) AUDIT AND COMPENSATION COMMITTEES. Unless the Majority Senior
Holders otherwise agree, so long as the holders of the Series B
Preferred Stock shall have the right to elect a Series B Director, the
Board of Directors shall have an audit committee and a compensation
committee (the "Compensation Committee"), each of which shall have
three members one of whom shall be the Series B Director or, during
any period when there is no Series B Director, the Series C Director,
and at least one other of whom shall be an independent director (as
defined below in this Section). The audit committee will have the
authority and responsibility for making recommendations to the Board
of Directors for the selection, engagement or discharge of independent
auditors, reviewing with the independent auditors the plan and results
of the auditing engagement, reviewing the Corporation's system of
internal accounting controls, directing investigations in matters
within the scope of its functions and performing any and all other
such functions customarily performed by audit committees of public
companies. The Compensation Committee will have the authority and
responsibility for making recommendations to the Board of Directors
for establishing and administering the stock, incentive and other
employee benefit plans of the Corporation, establishing and changing
the compensation of executive officers, approving or amending existing
and proposed employment agreements between the Corporation and its
executive officers and performing any and all other such functions
customarily performed by compensation committees of public companies.
Without limiting the generality of the foregoing, the Compensation
Committee shall make recommendations regarding the persons to whom
awards or benefits may be made, the terms and conditions (which need
not be identical) of each award made or benefit conferred (including
the timing and type of award or benefit, the exercise or purchase
price for any award of stock or stock options, and terms related to
vesting, exercisability, forfeiture and termination), and interpreting
the provisions of each such plan. Neither the Audit Committee nor the
Compensation Committee shall have the authority to exercise any powers
of the Board of Directors except to the extent authorized by the Board
of Directors pursuant to a
2
<PAGE>
resoluton adopted with the concurrence of the Series B Director,
or, if there is no Series B Director, the Series C Director, or, if
there is no Series C Director, the Majority Senior Holders. For
purposes hereof, an "independent director" is an individual who
(unless otherwise approved by the Series B Director or, if there is
no Series B Director, by the Series C Director or, if there is no
Series C Director, by the Majority Senior Holders) (i) has either a
significant financial investment in the Corporation or a
significant strategic position or expertise relative to the
business of the Corporation and (ii) is not (A) an officer or
employee of the Corporation or any of its Subsidiaries, (B) a
director, employee, partner, manager or other member of management
of any of Affiliate of the Corporation (except a director of a
Subsidiary of the Corporation), (C) a relative of any Person
described in subclause (ii)(A) or (ii)(B) or (D) a trustee of any
trust or estate in which any Person described in subclause (ii)(A),
(ii)(B) or (ii)(C) is a beneficiary has a substantial beneficial
interest."
4. Section 9(p)(F) is amended in its entirety to read as follows:
(F) CERTAIN DETERMINATIONS. During each and every period that the
Board of Directors includes at least one sitting member who is a
Series B Director or, during any period that no shares of Series B
Preferred Stock shall be outstanding, the Series C Director, each
determination of the Current Market Price of any share of Common Stock
or the Fair Market Value of any other security, asset, property or
consideration which may be required to be made by the Board of
Directors pursuant to or in connection with the application of any
provision of this resolution and each determination which may be
required by SECTION 9(r)(B) or SECTION 9(w) to be made by the Board of
Directors, the Valuation Committee shall make recommendations to the
Board of Directors and such determination shall be made in good faith
by the Board of Directors. Any such determination of Fair Market
Value by the Board of Directors may be disputed in good faith by the
Majority Senior Holders and any such dispute shall be resolved by an
independent investment banking firm of recognized national standing
selected by the Majority Senior Holders and reasonably acceptable to
the Corporation (and whose fees and expenses shall be paid by the
Corporation), whose decision with respect to such dispute shall be
final and conclusive and binding on the Corporation and all Holders;
PROVIDED, HOWEVER, that the Majority Senior Holders shall not have the
right to dispute under this SECTION 9(p)(F) any such determination
that shall be made during any period referred to in the first sentence
of this SECTION 9(p)(F) by the Board of Directors by the affirmative
vote or written consent of a majority of its members, which majority
includes the Series B Director, or during any period that no shares of
Series B Preferred Stock shall be outstanding, the Series C Director.
Any determination by the Board of Directors pursuant to SECTION
9(r)(B) or SECTION 9(w) may be disputed in good faith by the Majority
Senior Holders, and any such dispute shall be resolved in accordance
with SECTION 9(y); PROVIDED, HOWEVER, that the Majority Senior Holders
shall not have the right to
3
<PAGE>
dispute under this SECTION 9(p)(F) any such determination that
shall be made during any period referred to in the first sentence
of this SECTION 9(p)(F) by the Board of Directors by the
affirmative vote or written consent of a majority of its members,
which majority includes at least one Series B Director or, during
any period that no shares of Series B Preferred Stock shall be
outstanding, the Series C Director.
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.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
signed by duly authorized officers of the Corporation this ________ day of
December, 1998.
By:
----------------------------------------
Name:
--------------------------------------
Title:
--------------------------------
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------------
4
<PAGE>
STATE OF MINNESOTA )
) ss.
County of Hennepin )
On this ___ day of December, 1998, before me, the undersigned officer,
personally appeared Thomas M. Pugliese, who acknowledged himself to be the Vice
Chairman and Chief Executive Officer of Next Generation Network, Inc., 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:
- ----------------------------
STATE OF MINNESOTA )
) ss.
County of Hennepin )
On this ___ day of December, 1998 before me, the undersigned officer,
personally appeared Michael Kolthoff, who acknowledged himself to be the
Assistant Secretary of Next Generation Network, Inc., 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:
- -----------------------
5
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF DESIGNATION
FOR SERIES C SENIOR CUMULATIVE
COMPOUNDING CONVERTIBLE REDEEMABLE PREFERRED STOCK
OF
NEXT GENERATION NETWORK, INC.
PURSUANT TO SECTION 242 OF THE
DELAWARE GENERAL CORPORATION LAW
--------------------------
NEXT GENERATION NETWORK, INC. (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, by unanimous
written consent, duly adopted resolutions setting forth a proposed amendment to
the Certificate of Designation for the Series C Senior Cumulative Compounding
Convertible Preferred Stock, par value $1.00 per share of the Corporation, of
the Corporation, declaring such amendment to be advisable and authorizing the
solicitation of written consents of the stockholders of the Corporation with
respect thereto. The resolution setting forth the proposed amendment is as
follows:
RESOLVED, that the Certificate of Designation for the Corporation's
Series C Senior Cumulative Compounding Convertible Redeemable Preferred Stock,
par value $1.00 per share, be amended as follows:
1. The definition of "Employee Option" in Section 2 is amended to
read in its entirety as follows:
"Employee Option" means any option to purchase Common Stock for cash
which is granted by or with the approval of the Board of Directors or
the Compensation Committee (to the extent such committee is authorized
by the Board of Directors to grant such options) to any director,
officer, employee or consultant of the Corporation or any subsidiary
of the Corporation pursuant to either (i) the Corporation's 1993 Stock
Option Plan or the Corporation's 1994 Stock Option Plan as in effect
on the Closing Date, (ii) any other option plan adopted by the
Corporation after the Closing Date with the prior approval of the
Majority Senior Holders, in each case as the same may be amended from
time to time with the prior approval of the Majority Senior Holders,
or (iii) any stock option plan in the
<PAGE>
form approved by the Board of Directors for the issuance of Common
Stock which shall not exceed 82,000 shares of Common Stock (as
adjusted for stock splits, combinations, recapitalization,
reorganizations and similar transactions) provided that the options
granted pursuant to such plans shall not be issued with an exercise
price per share of Common Stock less than the lesser of (a) $77 (as
adjusted for stock splits, combinations, recapitalizations,
reorganizations and other similar transactions) or (b) the
Conversion Price at the time of issuance, without the consent of
the Series B Director.
2. Section 8(d) is amended to delete the words "(i) for the
Valuation Committee, (i) as provided in Section 7(f), or (i) otherwise. . ."
3. Section 8(f) is amended in its entirety to read as follows:
"(f) AUDIT AND COMPENSATION COMMITTEES. Unless the Majority Senior
Holders otherwise agree, so long as the holders of the Series C
Preferred Stock shall have the right to elect a Series C Director, the
Board of Directors shall have an audit committee and a compensation
committee (the "Compensation Committee"), each of which shall have
three members one of whom shall be the Series B Director or, during
any period when there is no Series B Director, the Series C Director,
and at least one other of whom shall be an independent director (as
defined below in this Section). The audit committee will have the
authority and responsibility for making recommendations to the Board
of Directors for the selection, engagement or discharge of independent
auditors, reviewing with the independent auditors the plan and results
of the auditing engagement, reviewing the Corporation's system of
internal accounting controls, directing investigations in matters
within the scope of its functions and performing any and all other
such functions customarily performed by audit committees of public
companies. The Compensation Committee will have the authority and
responsibility for making recommendations to the Board of Directors
for establishing and administering the stock, incentive and other
employee benefit plans of the Corporation, establishing and changing
the compensation of executive officers, approving or amending existing
and proposed employment agreements between the Corporation and its
executive officers and performing any and all other such functions
customarily performed by compensation committees of public companies.
Without limiting the generality of the foregoing, the Compensation
Committee shall make recommendations regarding the persons to whom
awards or benefits may be made, the terms and conditions (which need
not be identical) of each award made or benefit conferred (including
the timing and type of award or benefit, the exercise or purchase
price for any award of stock or stock options, and terms related to
vesting, exercisability, forfeiture and termination), and interpreting
the provisions of each such plan. Neither the Audit Committee nor the
Compensation Committee shall have the authority to exercise any powers
of the Board of Directors except to the extent authorized by the Board
of Directors pursuant to a
2
<PAGE>
resoluton adopted with the concurrence of the Series B Director,
or, if there is no Series B Director, the Series C Director, or, if
there is no Series C Director, the Majority Senior Holders. For
purposes hereof, an "independent director" is an individual who
(unless otherwise approved by the Series B Director or, if there is
no Series B Director, by the Series C Director or, if there is no
Series C Director, by the Majority Senior Holders) (i) has either a
significant financial investment in the Corporation or a
significant strategic position or expertise relative to the
business of the Corporation and (ii) is not (A) an officer or
employee of the Corporation or any of its Subsidiaries, (B) a
director, employee, partner, manager or other member of management
of any of Affiliate of the Corporation (except a director of a
Subsidiary of the Corporation), (C) a relative of any Person
described in subclause (ii)(A) or (ii)(B) or (D) a trustee of any
trust or estate in which any Person described in subclause (ii)(A),
(ii)(B) or (ii)(C) is a beneficiary has a substantial beneficial
interest."
4. Section 9(p)(F) is amended in its entirety to read as follows:
(F) CERTAIN DETERMINATIONS. During each and every period that the
Board of Directors includes at least one sitting member who is a
Series B Director or, during any period that no shares of Series B
Preferred Stock shall be outstanding, the Series C Director, each
determination of the Current Market Price of any share of Common Stock
or the Fair Market Value of any other security, asset, property or
consideration which may be required to be made by the Board of
Directors pursuant to or in connection with the application of any
provision of this resolution and each determination which may be
required by SECTION 9(r)(B) or SECTION 9(w) to be made by the Board of
Directors, the Valuation Committee shall make recommendations to the
Board of Directors and such determination shall be made in good faith
by the Board of Directors. Any such determination of Fair Market
Value by the Board of Directors may be disputed in good faith by the
Majority Senior Holders and any such dispute shall be resolved by an
independent investment banking firm of recognized national standing
selected by the Majority Senior Holders and reasonably acceptable to
the Corporation (and whose fees and expenses shall be paid by the
Corporation), whose decision with respect to such dispute shall be
final and conclusive and binding on the Corporation and all Holders;
PROVIDED, HOWEVER, that the Majority Senior Holders shall not have the
right to dispute under this SECTION 9(p)(F) any such determination
that shall be made during any period referred to in the first sentence
of this SECTION 9(p)(F) by the Board of Directors by the affirmative
vote or written consent of a majority of its members, which majority
includes the Series B Director, or during any period that no shares of
Series B Preferred Stock shall be outstanding, the Series C Director.
Any determination by the Board of Directors pursuant to SECTION
9(r)(B) or SECTION 9(w) may be disputed in good faith by the Majority
Senior Holders, and any such dispute shall be resolved in accordance
with SECTION 9(y); PROVIDED, HOWEVER, that the Majority Senior Holders
shall not have the right to
3
<PAGE>
dispute under this SECTION 9(p)(F) any such determination that
shall be made during any period referred to in the first sentence
of this SECTION 9(p)(F) by the Board of Directors by the
affirmative vote or written consent of a majority of its members,
which majority includes at least one Series B Director or, during
any period that no shares of Series B Preferred Stock shall be
outstanding, the Series C Director.
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.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
signed by duly authorized officers of the Corporation this day of
December, 1998.
By:
----------------------------------------
Name:
--------------------------------------
Title:
--------------------------------
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------------
4
<PAGE>
STATE OF MINNESOTA )
) ss.
County of Hennepin )
On this day of December, 1998, before me, the undersigned officer,
personally appeared Thomas M. Pugliese, who acknowledged himself to be the Vice
Chairman and Chief Executive Officer of Next Generation Network, Inc., 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:
- ----------------------------
STATE OF MINNESOTA )
) ss.
County of Hennepin )
On this day of December, 1998 before me, the undersigned officer,
personally appeared Michael Kolthoff, who acknowledged himself to be the
Assistant Secretary of Next Generation Network, Inc., 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:
- ----------------------------
5
<PAGE>
AMENDED AND RESTATED
CORPORATE BYLAWS
OF
NEXT GENERATION NETWORK, INC.
ARTICLE I
OFFICES AND SEAL
1. OFFICES. The registered office of the Corporation in the State
of Delaware shall be at such location as may be designated from time to time by
the Board of Directors. The Corporation may also maintain such other offices at
such other places, either within or without the State of Delaware, as may be
designated from time to time by the Board of Directors.
2. CORPORATE SEAL. A corporate seal shall not be requisite to the
validity of any instrument executed by or on behalf of the Corporation;
nevertheless, if in any instance a corporate seal be used, the same shall be, at
the pleasure of the officer affixing same, a circle having on the circumference
thereof the following: NEXT GENERATION NETWORK, INC.; and in the center the
following: INCORPORATED DELAWARE.
ARTICLE II
STOCKHOLDERS
1. STOCKHOLDERS' MEETINGS. All meetings of stockholders shall be
held at such place as may be fixed from time
<PAGE>
2
to time by the Board of Directors, or in the absence of direction by the
Board of Directors, by the President or Secretary of the Corporation, either
within or without the State of Delaware, as shall be stated in the notice of
the meeting. A waiver of notice signed by all stockholders entitled to vote
at a meeting may designate any place, either within or without the State, as
the place for holding such meeting.
2. NOTICE FOR MEETINGS. Written or printed notice stating the
place, day and hour of the meeting and in case of a special meeting, the purpose
or purposes for which the meeting is called, shall be delivered not less than
ten (10) days nor more than sixty (60) days before the date of the meeting,
either personally or by mail, by or at the direction of the President, or the
Secretary, or the officer or persons calling the meeting, to each stockholder of
record entitled to vote at such meeting. Business transacted at any special
meeting of stockholders shall be limited to the purposes stated in the notice.
If mailed, such notice shall be deemed to be delivered when deposited in the
United States mail, addressed to the stockholder at his address as it appears on
the stock transfer books of the Corporation, with postage thereon prepaid.
3. ANNUAL MEETINGS. Annual meetings of stockholders shall be held
at such date and time as shall be designated from time to time by the Board of
Directors and stated in the notice of
<PAGE>
3
the meeting. At the annual meeting, stockholders entitled to vote on the
election of Directors shall elect a Board of Directors and transact such
other business as may properly be brought before the meeting.
4. SPECIAL MEETING. Special meetings of the stockholders, for any
purpose or purposes, unless otherwise prescribed by statute or by the
Certificate of Incorporation, may be called by the President and shall be called
by the President or Secretary at the request in writing of stockholders owning
(i) in the case of a matter requiring the vote of all stockholders of the
Corporation, a majority in amount of the entire capital stock of the Corporation
issued, outstanding, and entitled to vote for such purposes, or (ii) in the case
of a matter as to which any one or more classes or series of capital stock are
entitled or required to vote separately as a class or series, a majority in
amount of such class or series of capital stock, issued, outstanding and
entitled to vote for such purposes; or (iii) in the case of a special meeting
for the election of a director by holders of Series B, Series C or both, as
provided under Article III, Section 2. Such request shall state the purpose or
purposes of the proposed meeting.
<PAGE>
4
5. FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OR RECORD.
A. In order that the Corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, the Board of Directors may fix, in advance, a record date,
which record date shall not precede the date upon which the resolution fixing
the record date is adopted by the Board of Directors, and which record date
shall not be more than sixty (60) days nor less than ten (10) days before the
date of such meeting.
B. If no record date is fixed by the Board of Directors, the record
date for determining stockholders entitled to notice of or to vote at a meeting
of stockholders shall be at the close of business on the day next preceding the
day on which notice is given, or, if notice is waived, at the close of business
on the day next preceding the day on which the meeting is held. A determination
of stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided,
however,that the Board of Directors may fix a new record date for the adjourned
meeting.
C. In order that the Corporation may determine the stockholders
entitled to consent to corporate action in writing without a meeting, the Board
of Directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the Board of
Directors, and which date shall not be more that ten (10) days
<PAGE>
5
after the date upon which the resolution fixing the record date is adopted by
the Board of Directors. If no record date is fixed by the Board of Directors
for determining stockholders entitled to consent to corporate action in
writing without a meeting, when no prior action by the Board of Directors is
required by these Bylaws, the Certificate of Incorporation or the laws of the
State of Delaware, the record date shall be the first date on which a signed
written consent setting forth the action taken or proposed to be taken is
delivered to the Corporation by delivery to its registered office in
Delaware, its principal place of business or an officer or agent of the
Corporation having custody of the book in which proceedings of meetings of
stockholders are recorded. Delivery made to the Corporation's registered
office shall be by hand or by certified or registered mail, return receipt
requested. If no record date has been fixed by the Board of Directors and
prior action by the Board of Directors is required by these Bylaws, the
Certificate of Incorporation or the laws of the State of Delaware, the record
date for determining stockholders entitled to consent to corporate action in
writing without a meeting shall be at the close of business on the day on
which the Board of Directors adopts the resolution taking such prior action.
D. In order that the Corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the stockholders entitled to exercise any rights in respect of
any change, conversion or exchange of stock, or for the purpose of any other
<PAGE>
6
lawful action, the Board of Directors may fix a record date, which record
date shall not precede the date upon which the resolution fixing the record
date is adopted, and which record date shall be not more than sixty (60) days
prior to such action. If no record date is fixed, the record date for
determining stockholders for any such purpose shall be at the close of
business on the day on which the Board of Directors adopts the resolution
relating thereto.
6. LIST OF STOCKHOLDERS. The officer who has charge of the stock
ledger of the Corporation shall prepare and make at least ten (10) days before
every meeting of stockholders, a complete list of the stockholders entitled to
vote at the meeting, arranged in alphabetical order, and showing the address and
the number of shares registered in the name of each stockholder. Such list
shall be open to the examination of any stockholder, for any purpose germane to
the meeting, during ordinary business hours, for a period of at least ten (10)
days prior to the meeting, either at a place within the city where the meeting
is to be held, which place shall be specified in the notice of the meeting, or,
if not so specified, at the place where the meeting is to be held. The list
shall also be produced and kept at the time and place of the meeting during the
whole time thereof, and may be inspected by any stockholder present.
7. QUORUM, ADJOURNMENT. At any meeting of
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7
stockholders, or of an class of stockholders, a majority of the holders of
the outstanding shares of the Corporation or class entitled to vote,
represented in person or by proxy, shall constitute a quorum. If less than
said number of the outstanding shares are represented at a meeting, a
majority of the shares so represented may adjourn the meeting from time to
time without further notice, other than announcement at the meeting at which
adjournment is taken, until a quorum shall be present or represented;
provided, however, that if the adjournment is for more than thirty (30) days,
or if after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given to each stockholder
of record entitled to vote at the meeting. At such adjourned meeting at
which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
notified. The stockholders present at a duly organized meeting may continue
to transact business until adjournment, notwithstanding the withdrawal of
enough stockholders to leave less than a quorum.
8. VOTING.
A. At every meeting of stockholders, each stockholder shall be
entitled to one vote in person or by proxy for each share of the capital stock
having voting power held by such stockholder.
B. At all meetings of stockholders, a stockholder may vote by proxy
executed in writing by the stockholder or by his
<PAGE>
8
duly authorized attorney-in-fact. Such proxy shall be filed with the
Secretary of the Corporation before or at the time of the meeting. No proxy
shall be voted or acted upon after three (3) years from its date, unless the
proxy provides for a longer period.
C. When a quorum is present at any meeting, the vote of the holders
of a majority of the voting power present, whether in person or represented by
proxy, shall decide any question brought before such meeting, unless the
question is one upon which, by express provision of the Delaware General
Corporation Law or of the Certificate of Incorporation, a different vote is
required, in which case such express provision shall govern and control the
decision of such question.
D. Upon the demand of any stockholder, the vote for directors and
upon any question before the meeting shall be by ballot.
<PAGE>
9
9. ORDER OF BUSINESS. The order of business at all meeting of the
stockholders, shall be as follows:
A. Roll call.
B. Proof of notice of meeting or waiver of notice.
C. Reading of minutes of preceding meeting.
D. Reports of officers.
E. Reports of committees.
F. Elections, if any.
G. Unfinished business.
H. New business.
<PAGE>
10
10. ACTION WITHOUT MEETING.
A. Any action required or permitted to be taken at any annual or
special meeting of stockholders may be taken without a meeting, without prior
notice, and without a vote, if a consent in writing, setting forth the action so
taken, shall be signed by the holders of outstanding stock having not less than
the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all stockholders entitled to the Corporation by
delivery to its registered office in Delaware, its principal place of business
or an officer or agent of the Corporation having custody of the book in which
proceedings of meetings of stockholders are recorded. Delivery made to the
Corporation's registered office shall be by hand or by certified or registered
mail return receipt requested.
B. Every written consent shall bear the date of signature of each
stockholder who signs the consent, and no written consent shall be effective to
take the corporate action referred to therein unless, within sixty (60) days of
the earliest dated consent delivered in the manner required by this section to
the corporation, written consents signed by a sufficient number of stockholders
to take action are delivered to the Corporation as provided in subsection 10(A)
above of this Article II.
C. Prompt notice of the taking of the corporate action without a
meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing and who, if the action had been
taken at a meeting, would
<PAGE>
11
have been entitled to notice of the meeting if the record date for such
meeting had been the date that written consents signed by a sufficient number
of holders to take the action were delivered to the corporation as provided
in subsection 10A above. In the event that the action which is consented to
is such as would have required the filing of a certificate under Title 8 of
the Delaware General Corporation Law, if such action had been voted on by
stockholders at a meeting thereof, the certificate filed thereunder shall
state, in lieu of any statement required by such section concerning any vote
of stockholders, that written consent has been given in accordance with
Section 228 of the Delaware General Corporation Law.
11. WAIVER OF NOTICE. Attendance of a stockholder at a meeting
shall constitute waiver of notice of such meeting, except when such attendance
at the meeting is for the express purpose of objecting to the transaction of any
business because the meeting is not lawfully called or convened. Any
stockholder may waive notice of any annual or special meeting of stockholders by
executing a written notice of waiver either before or after the time of the
meeting.
ARTICLE III
BOARD OF DIRECTORS
1. GENERAL POWERS. The business and affairs of the Corporation
shall be managed by its Board of Directors, which may
<PAGE>
12
exercise all such powers of the Corporation and do all such lawful acts as
are not by statute, the Certificate of Incorporation, or these Bylaws
directed or required to be exercised or done by the stockholders. The
Directors shall in all cases act as a board, and they may adopt such rules
and regulations for the conduct of their meetings and the management of the
Corporation, as they may deem proper, not inconsistent with these Bylaws, the
Certificate of Incorporation of this Corporation, and the laws of the State
of Delaware.
2. NUMBER. The number of Directors which shall constitute the whole
board shall be not fewer than one (1) and not more than ten (10). The number of
Directors shall be set by the Directors. The Directors shall be elected at the
annual meeting of the stockholders or at a special meeting for the purpose of
electing such directors, except as provided in Section 3 of this Article, and
each Director elected shall hold office until the next annual meeting and his or
her successor is elected and qualified, subject to either death, resignation or
removal. Directors need not be stockholders.
For the election of directors by the holders of the Corporation's Series B
Senior Cumulative Compounding Convertible Redeemable Preferred Stock ("Series B
Preferred Stock") or the Company's Series C Senior Cumulative Compounding
Convertible Redeemable Preferred Stock ("Series C Preferred Stock"), or both,
other than at an annual meeting of the stockholders, the Secretary
<PAGE>
13
of the Corporation shall call a special meeting upon the written request of
5% or more of the number of shares of Series B Preferred Stock or Series C
Preferred Stock, as appropriate, then outstanding for the purpose of electing
a Series B Director, Series C Director or Joint Director, as those terms are
defined in the Certificates of Designation for the Series B Preferred Stock
and Series C Preferred Stock, respectively. Notwithstanding the foregoing,
the Secretary shall not call any such meeting in the case of any request
received by the Corporation less than forty-five (45) days before the date
fixed for any annual meeting of the stockholders, and if in such case such
special meeting is not called, the holders of Series B Preferred Stock or
Series C Preferred Stock, as applicable, shall be entitled to vote as a class
at such annual meeting to elect the Series B Director, Series C Director or
Joint Director, or to fill such vacancy.
3. VACANCIES. Vacancies and newly created directorships resulting
from any increase in the authorized number of Directors may be filled by the
affirmative vote of a majority of the remaining Directors then in office,
although less than a quorum, or by a sole remaining Director, and the Directors
so chosen shall hold office until a special meeting of stockholders entitled to
elect such Directors or Director at a meeting called for such purpose, or the
next annual election and until their successors are duly elected and qualified,
unless sooner displaced. If there are no Directors in office, then an election
of Directors may be held in the manner provided by statute.
<PAGE>
14
Notwithstanding the foregoing, a vacancy for a director position
designated as a Series B Director, Series C Director or Joint Director shall
be filled by the holders of the Series B Preferred Stock or Series C
Preferred Stock, or both, respectively.
4. REGULAR MEETINGS. A regular meeting of the Directors, the first
meeting of each newly elected Board of Directors, shall be held without other
notice than this By-Law immediately after, and at the same place as, the annual
meeting of stockholders. The Directors may provide, by resolution, the time and
place for the holding of additional regular meetings without other notice than
such resolution.
5. SPECIAL MEETINGS. Subject to Article III, Section 16 of these
Bylaws, special meetings of the Board may be called by the President or the
Secretary on one (1) day's notice to each Director, either personally, by mail,
by telegram, or by telephone; special meetings shall be called by the President
or Secretary in like manner and on like notice on the written request of one (1)
Director. If mailed, such notice shall be deemed to be delivered when deposited
in the United States mail so addressed, with postage thereon prepaid. If notice
be given by telegram, such notice shall be deemed to be delivered when the
telegram is delivered to the telegraph company. The attendance of a Director at
a meeting shall constitute a waiver of notice of such meeting,
<PAGE>
15
except where a Director attends a meeting for the express purpose of
objecting to the transaction of any business because the meeting is not
lawfully called or convened. Any Director may waive notice of any annual,
regular, or special meeting of Directors by executing a written notice of
waiver either before or after the time of the meeting.
6. ELECTRONIC COMMUNICATION.
A. A conference among Directors by any means of communication
through which the Directors may simultaneously hear each other during the
conference constitutes a board meeting, if the same notice is given of the
conference as would be required by their Bylaws for a meeting, and if the number
of Directors participating in the conference would be sufficient to constitute a
quorum at a meeting. Participation in meeting by such means constitutes
presence in person at the meeting.
B. A Director may participate in a board or committee meeting not
described in subparagraph A by any means of communication through which the
Director, other Directors so participating, and all Directors physically present
at the meeting may simultaneously hear each other during the meeting.
Participation in a meeting by that means constitutes presence in person at the
meeting.
7. PLACE OF MEETING. The Board of Directors of the Corporation may
hold meetings, both regular and special, either
<PAGE>
16
within or without the State of Delaware.
8. QUORUM. A majority of the membership of the Board of Directors
or any committee thereof shall constitute a quorum and concurrence of a majority
of those present shall be sufficient to conduct the business of the Board or
committee, except as may be otherwise specifically provided by the Delaware
General Corporation Law or by the Certificate of Incorporation. If a quorum
shall not be present at any meeting of the Board of Directors or committee, the
Directors then present may adjourn the meeting to another time or place, without
notice other than announcement at the meeting, until a quorum shall be present.
The act of the majority of the Directors present at a meeting at which a quorum
is present shall be the act of the Directors or committee.
9. ACTION WITHOUT MEETING. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all members of the Board or committee, as the
case may be, consent thereto in writing, and the writing or writings are filed
with minutes of proceedings of the Board or committee.
10. EXECUTIVE AND OTHER COMMITTEES. Subject to
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17
Article III, Section 16(d), the Board, by resolution, may designate from
among its members an executive committee and other committees, each
consisting of three or more Directors. Each such committee shall serve at
the pleasure of the Board, and shall have such authority as is designated by
the Board.
11. REMOVAL OF DIRECTORS. Any or all of the Directors may be removed
for cause by vote of the stockholders entitled to elect such Directors or
(subject to the last sentence of this Section) by action of the Board.
Directors may be removed without cause by and only by vote of the stockholders
entitled to elect such Directors. Accordingly, any Director other than a Series
B Director, Series C Director or Joint Director may at any time be removed
without cause only by a vote of the holders of Common Stock. Any Series C
Director may at any time be removed, with or without cause, by and only by the
vote of the Series C Preferred Stockholders; any Series B Director may at any
time be removed, with or without cause, by and only by the vote of the Series B
Preferred Stockholders; any Joint Director may at any time be removed, with or
without cause, by and only by the vote of the Series B Preferred Stockholders
and Series C Stockholders, voting together.
12. RESIGNATION. A Director may resign at any time by giving written
notice to the Board, the President or the Secretary of the Corporation. Unless
otherwise specified in the notice, the
<PAGE>
18
resignation shall take effect upon receipt thereof by the Board or such
officer, and the acceptance of the resignation shall not be necessary to make
it effective.
13. COMPENSATION. No compensation shall be paid to Directors, as
such, for their services, but by resolution of the Board a fixed sum and expense
for actual attendance at each regular or special meeting of the Board may be
authorized. Nothing herein contained shall be construed to preclude any
Director from serving the Corporation in any other capacity and receiving
compensation therefor. Members of special or standing committees may be allowed
like compensation for attending committee meetings. The amount or rate of such
compensation of members of the Board of Directors or of committees shall be
established by the Board of Directors and shall be set forth in the minutes of
the Board.
14. DISALLOWED COMPENSATION. Any payment to an employee in the form
of wages, salary, bonus, travel or entertainment expense, which is disallowed in
whole or in part by the Internal Revenue Service as a deductible expense of the
Corporation, shall be repaid to the Corporation by the employee or employees
involved. The Board of Directors shall, with the approval of the employee, be
authorized to provide for deductions from future compensation paid to the
employee as a method of repayment of the disallowed expense.
<PAGE>
19
15. PRESUMPTION OF ASSENT. A Director of the Corporation who is
present at a meeting of the Directors at which action on any corporate matter is
taken shall be presumed to have assented to the action taken unless his dissent
shall be entered in the minutes of the meeting or unless he shall file his
written dissent to such action with the person acting as the secretary of the
meeting before the adjournment thereof or shall forward such dissent by
registered mail to the Secretary of the Corporation immediately after the
adjournment of the meeting. Such right to dissent shall not apply to a Director
who voted in favor of such action.
16. PROCEDURAL MATTERS CONCERNING SERIES B PREFERRED STOCK AND SERIES C
PREFERRED STOCK. So long as the holders of the Series B Preferred Stock and the
Series C Preferred Stock shall have the right to elect a Series B Director and
Series C Director:
(a) any one or more members of the Board of Directors or any
committee thereof may participate in meetings of the Board of
Directors by conference telephone;
(b) each member of the Board of Directors or any committee
thereof shall be given not less than three days' prior written notice
of each meeting of the Board
<PAGE>
20
of Directors or such committee (or two days' prior written notice in
case of meetings to consider emergency matters), specifying the time and
place of such meeting and the matters to be discussed thereat, unless
such member signs (either before or after such meeting) a written waiver
of his right to be given such notice, or attends such meeting without
protesting (prior thereto or at the commencement thereof) the failure to
be given such notice;
(c) each member of the Board of Directors or any committee
thereof shall be given not less than three days' prior written notice
of any action proposed to be taken by the Board of Directors or such
committee without a meeting (or two days' prior written notice in case
of proposed actions involving emergency matters), unless such member
signs (either before or after such action is taken) a written waiver
of his right to be given such notice, or gives his written consent to
such action without protesting the failure to be given such notice;
(d) no executive committee of the Board of Directors, and no
other committee of the Board of Directors which is authorized to
exercise any powers of the Board of Directors, shall be created except
with
<PAGE>
21
the concurrence of the Series B Director or, if there is no Series B
Director, by the Series C Director or, if there is no Series C Director,
by the Majority Senior Holders (as defined in the Series C Certificate
of Designation); and
(e) at any meeting of the Board of Directors or any committee
thereof, a quorum for the purpose of taking any action shall require
the presence in person or participation by conference telephone or
similar communications equipment of a number of directors equal to at
least a majority of the entire Board of Directors or the entire
committee.
ARTICLE IV
OFFICERS
1. NUMBER. The officers of the Corporation shall be a President, a
Secretary and a Treasurer, each of whom shall be elected by the Directors. The
Board of Directors may also choose a Chairman of the Board, a Vice-Chairman,
Chief Executive Officer, Chief Financial Officer, one or more vice-presidents,
and one or more assistant secretaries and assistant treasurers. Any number of
offices may be held by the same person, unless the Certificate of Incorporation
or these Bylaws otherwise provide.
2. ELECTION AND TERM OF OFFICE. The Board of
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22
Directors at its first meeting after each annual meeting of stockholders
shall choose a President, one or more Vice-Presidents, a Secretary, and a
Treasurer, and may choose a Chairman of the Board, each of whom shall serve
at the pleasure of the Board of Directors. The Board of Directors at any
time may appoint such other officers and agents as it shall deem necessary to
hold offices at the pleasure of the Board of Directors and to exercise such
powers and perform such duties as shall be determined from time to time by
the Board. Each officer shall hold office until his successor shall have
been duly elected and shall have qualified or until his death or until he
shall resign or shall have been removed in the manner hereinafter provided.
3. REMOVAL. Any officer or agent elected or appointed by the
Directors may be removed by the Directors whenever in their judgment, the best
interest of the Corporation would be served thereby, but such removal shall be
without prejudice to the contract rights, if any, of the person so removed.
4. VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification or otherwise, may be filled by the
Directors for the unexpired portion of the term.
5. PRESIDENT. The President shall be the principal executive
officer of the Corporation and subject to the control of
<PAGE>
23
the Directors, shall in general supervise and control all of the business and
affairs of the Corporation. The President shall preside at all meetings of
stockholders, and if a Chairman of the Board shall not have been appointed
or, having been appointed, shall not be serving or be absent, the President
shall preside at all meetings of the Board of Directors. He may sign, with
the Secretary or any other proper officer of the Corporation thereunto
authorized by the Directors, certificates for shares of the Corporation, any
deeds, mortgages, bonds, contracts, or other instruments which the Directors
have authorized to be executed, except in cases where the signing and
execution thereof shall be expressly delegated by the Directors or by these
Bylaws to some other officer or agent of the Corporation, or shall be
required by law to be otherwise signed or executed; and in general shall
perform all duties as may be prescribed by the Directors from time to time.
6. VICE-PRESIDENT. In the absence of the President or in event of
his death, inability or refusal to act, the Vice-President shall perform the
duties of the President, and when so acting, shall have all the powers of and be
subject to all the restrictions upon the President. The Vice-President shall
perform such other duties as from time to time may be assigned to him by the
President or by the Directors.
7. SECRETARY. The Secretary shall keep the minutes
<PAGE>
24
of the stockholders' and of the Directors' meeting in one or more books
provided for that purpose, see that all notices are duly given in accordance
with the provisions of these Bylaws or as required, be custodian of the
corporate records and of the seal of the Corporation and keep a register of
the post office address of each stockholder which shall be furnished to the
Secretary by such stockholder, have general charge of the stock transfer
books of the Corporation and in general perform all duties incident to the
office of Secretary and such other duties as from time to time may be
assigned to him by the President or by the Directors.
8. TREASURER. If required by the Directors, the Treasurer shall
give a bond for the faithful discharge of his duties in such sum and with such
surety or sureties as the Directors shall determine. He shall have charge and
custody of and be responsible for all funds and securities of the Corporation;
receive and give receipts for moneys due and payable to the Corporation from any
source whatsoever, and deposit all such moneys in the name of the Corporation in
such banks, trust companies or other depositories as shall be selected in
accordance with these Bylaws. He shall render financial statements to the
President, Directors, and stockholders at proper times. The Treasurer shall
have charge of the preparation and filing of such reports, financial statements,
and returns as may be required by law. he shall in general perform all of the
duties incident to the office of Treasurer and such other duties as from time to
time
<PAGE>
25
may be assigned to him by the President or by the Directors.
9. CHAIRMAN OF THE BOARD. The Chairman of the Board, if one shall
have been appointed and be serving, shall preside at all meetings of the Board
of Directors and shall perform such other duties as from time to time may be
assigned to him or her.
10. VICE-CHAIRMAN OR THE BOARD. In the absence of the Chairman or in
the event of his death, inability or refusal to act, the Vice-Chairman shall
perform the duties of the Chairman, and when so acting shall have all the powers
and be subject to all the restrictions upon the Chairman. The Vice-Chairman
shall perform such other duties as from time to time may be assigned to him or
her.
11. SALARIES. The salaries of the officers shall be fixed from time
to time by the Directors and no officer shall be prevented from receiving such
salary by reason of the fact that he is also a Director of the Corporation. The
salaries of the officers or the rate by which salaries are fixed shall be set
forth in the minutes of the meetings of the Board of Directors.
<PAGE>
26
ARTICLE V
CONTRACTS, LOANS, CHECKS AND DEPOSITS
1. CONTRACTS. The Directors may authorize any officer or officers,
agent or agents, to enter into any contract or execute and deliver any
instrument in the name of and on behalf of the Corporation, and such authority
may be general or confined to specific instances.
2. LOANS. No loans shall be contracted on behalf of the Corporation
and no evidences of indebtedness shall be issued in its name unless authorized
by a resolution of the Directors. Such authority may be general or confined to
specific instances.
3. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for the
payment of money, notes or other evidences of indebtedness issued in the name of
the Corporation, shall be signed by such officer or officers, agent or agents of
the Corporation, and in such manner as shall from time to time be determined by
resolution of the Directors.
4. DEPOSITS. All funds of the Corporation not otherwise employed
shall be deposited from time to time to the credit of the Corporation in such
banks, trust companies or other depositories as the Directors may select.
<PAGE>
27
ARTICLE VI
CERTIFICATES FOR SHARES AND THEIR TRANSFER
1. CERTIFICATES FOR SHARES. Certificates representing shares of the
Corporation shall be in such form as shall be determined by the Directors. Such
certificates shall be signed by the President and by the Secretary or by such
other officers authorized by law and by the Directors. All certificates for
shares shall be consecutively numbered or otherwise identified. The name and
address of the stockholders, the number of shares and date of issue, shall be
entered on the stock transfer books of the Corporation. All certificates
surrendered to the Corporation shall be issued until the former certificate for
a like number of shares shall have been surrendered and canceled, except that in
case of a lost, destroyed or mutilated certificate a new one may be issued
therefor upon such terms and indemnity to the Corporation as the Directors may
prescribe.
3. TRANSFERS OF SHARES.
A. Upon surrender to the Corporation or the transfer agent of the
Corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignment or authority to transfer, it shall be the
duty of the Corporation to issue a new certificate to the person entitled
thereto, and cancel the old certificate; every such transfer shall be entered on
the transfer book of the Corporation which shall be kept at its
<PAGE>
28
principal office.
B. The Corporation shall be entitled to treat the holder of record
of any share as the holder in fact thereof, and, accordingly, shall not be bound
to recognize any equitable or other claim to or interest in such share on the
part of any other person whether or not it shall have express or other notice
thereof, except as expressly provided by the laws of Delaware.
<PAGE>
29
ARTICLE VII
FISCAL YEAR
The fiscal year of the Corporation shall begin on the first day of
January and end on the last day of December in each year.
ARTICLE VIII
REPEAL, ALTERATION OR AMENDMENT
The Bylaws may be repealed, altered, or amended, or substitute Bylaws
may be adopted at any time by a majority of the Board of Directors.
--------------------------
Gerard P. Joyce, President
ATTEST:
- ------------------------------
Thomas M. Pugliese, Secretary
<PAGE>
THIRD AMENDMENT TO STOCKHOLDERS' AGREEMENT
THIS THIRD AMENDMENT TO STOCKHOLDERS' AGREEMENT (this "Amendment") is
dated as of ____________ , 1998 and is made and entered into by and among the
undersigned parties.
RECITALS
The undersigned parties, constitute the "Majority Investors,"
"Majority Shareholders" and the "Company" under that certain Stockholders'
Agreement, dated as of September 25, 1996, and amended by that First Amendment
to Shareholders' Agreement dated as of August 29, 1997 and the Second Amendment
to Stockholder's Agreement dated January __, 1998 (the "Stockholders'
Agreement")
The undersigned desire to amend the Stockholders' Agreement under
Section 5.3 thereof.
AGREEMENT
Therefore, for good and valuable consideration the receipt and sufficiency
of which are hereby acknowledged, the parties hereto hereby agree as follows:
1. CERTAIN DEFINED TERMS. Unless otherwise expressly defined in this
Amendment, capitalized terms used in this Amendment have the respective meanings
assigned to them in the Stockholders' Agreement.
2. AMENDMENTS TO THE STOCKHOLDERS' AGREEMENT. Effective as of the date
hereof, the Stockholders' Agreement is hereby amended as follows:
a. The definition of Employee Option, appearing in Section 1.1 of
the Stockholders' Agreement is hereby amended in its entirety to read as
follows:
EMPLOYEE OPTION: Any option to purchase Common Stock for cash which
is granted by or with the approval of the Board of Directors or the
Compensation Committee (to the extent such committee is authorized by
the Board of Directors to grant such options) to any director,
officer, employee or consultant of the Corporation or any subsidiary
of the Corporation pursuant to either (i) the Corporation's 1993 Stock
Option Plan or the Corporation's 1994 Stock Option Plan as in effect
on the Closing Date, (ii) any other option plan adopted by the
Corporation after the Closing Date with the prior approval of the
Majority Investors, in each case as the same may be amended from time
to time with the prior approval of the Majority Investors, or (iii)
any stock option plan in the form approved by the Board of Directors
for the issuance of Common Stock which shall not exceed 82,000 shares
of Common Stock (as adjusted for stock splits, combinations,
recapitalization, reorganizations and similar transactions) provided
that the options granted pursuant to such plans shall not be issued
with an exercise
<PAGE>
price per share of Common Stock less than the lesser of (a) $77 (as
adjusted for stock splits, combinations, recapitalizations,
reorganizations and other similar transactions) or (b) the Conversion
Price at the time of issuance, without the consent of the Series B
Director.
b. Section 3.8(a)(iii) of the Stockholders' Agreement is amended by
deleting the words "Compensation Committee" therein and inserting "Board of
Directors or the Compensation Committee (to the extent such committee is
authorized by the Board of Directors to grant such options)" in their
place.
c. Section 3.8(a)(xi) of the Stockholders' Agreement is amended by
deleting the words "Compensation Committee" where such words appear and
inserting "Board of Directors" in their place.
d. Section 3.13 of the Stockholders' Agreement is amended in its
entirety to read as follows:
Section 3.13. AUDIT, COMPENSATION AND VALUATION COMMITTEES.
Unless the Majority Investors otherwise agree, the Board of Directors
shall have an audit committee (the "Audit Committee"), a compensation
committee (the "Compensation Committee") and a valuation committee
(the "Valuation Committee"), each of which shall have three members
one of whom shall be the Series B Director, and at least one other of
whom shall be a Disinterested Outside Director and, so long as the
directors of the Company include directors designated pursuant to
SECTION 3.1(a), one of the directors designated pursuant to SECTION
3.1(a). The Audit Committee will have the authority and
responsibility for making recommendations to the Board of Directors
for the selection, engagement or discharge of independent auditors,
reviewing with the independent auditors the plan and results of the
auditing engagement, reviewing the Company's systems of internal
accounting controls, directing investigations in matters within the
scope of its functions and performing any and all other such functions
customarily performed by audit committees of public companies. The
Compensation Committee will have the authority and responsibility for
making recommendations to the Board of Directors in respect of
establishing and administering the stock, incentive and other employee
benefit plans of the Company, establishing and changing the
compensation of executive officers, approving or amending existing and
proposed employment agreements between the Company and its executive
officers and performing any and all other such functions customarily
performed by compensation committees of public companies. The
Valuation Committee shall have the authority and responsibilities as
described in the Series B Certificate of Designation. None of the
Audit Committee, Compensation Committee or Valuation Committee shall
have the authority to exercise any powers of the Board of Directors
except to the extent authorized by the Board of Directors pursuant to
2
<PAGE>
a resolution adopted with the concurrence of the Series B Director,
or, if there is no Series B Director, the Series C Director, or, if
there is no Series C Director, the Majority Investors. The
requirement of the Board of Directors to designate each of the Audit
Committee, the Compensation Committee and the Valuation Committee as
set forth in this SECTION 3.13 shall terminate on the earlier of the
date on which (i) all of the shares of Senior Preferred Stock held by
the Investors are converted into Common Stock of the Company or (ii)
the Investors no longer hold any shares of Senior Preferred Stock.
3. REAFFIRMATION. The undersigned parties acknowledge that the
Stockholder's Agreement, as amended hereby, remains in full force and effect and
is hereby ratified and affirmed.
IN WITNESS WHEREOF, the undersigned have duly executed and delivered this
Third Amendment to Stockholders' Agreement as of the date first above written.
"Company"
NEXT GENERATION NETWORK, INC.
By:____________________________
Thomas M. Pugliese, Chief Executive Officer
"Majority Shareholders"
___________________________________
GERARD P. JOYCE
___________________________________
THOMAS P. PUGLIESE
3
<PAGE>
"Majority Investors"
21ST CENTURY COMMUNICATIONS
PARTNERS, L.P.
By: SANDLER INVESTMENT
PARTNERS, L.P., General Partner
By: SANDLER CAPITAL MANAGEMENT, General Partner
By: MJDM MEDIA CORP., General Partner
By: _________________________________
President
21ST CENTURY COMMUNICATIONS T-E
PARTNERS, L.P.
By: SANDLER INVESTMENT
PARTNERS, L.P., General Partner
By: SANDLER CAPITAL MANAGEMENT,
General Partner
By: MJDM MEDIA CORP., General Partner
By: _________________________________
President
4
<PAGE>
21ST CENTURY COMMUNICATIONS
FOREIGN PARTNERS, L.P.
By: SANDLER INVESTMENT
PARTNERS, L.P., General Partner
By: SANDLER CAPITAL
MANAGEMENT, General Partner
By: MJDM MEDIA CORP., a General Partner
By: __________________________________
President
5
<PAGE>
THIRD AMENDMENT TO EMPLOYMENT AGREEMENT
THIRD AMENDMENT TO EMPLOYMENT AGREEMENT (this "Amendment") dated as of
August ___, 1998, by and between Mentus Media Corp., a Delaware corporation (the
"Corporation") and Thomas M. Pugliese (the "Employee").
WHEREAS, the Corporation and the Employee are parties to the Employment
Agreement dated August 1, 1990, as previously amended pursuant to an Amendment
dated September 25, 1996, and a Second Amendment dated August 29, 1997 (the
"Employment Agreement"); and
WHEREAS, the Corporation and the Employee desire to further amend the
Employment Agreement pursuant to Section 12.3 thereof;
NOW THEREFORE, in consideration of the mutual covenants contained herein
and in the Employment Agreement, the parties hereto agree as follows:
1. Section 4.1(a) of the Employment Agreement are hereby amended to read
in its entirety as follows:
"4.1 (a) During the Term, the Corporation shall pay to Employee a salary
at an annual rate of $250,000.00 (the "Base Salary"), in equal or more frequent
installments in accordance with the Corporation's regular policy. In addition
to the Base Salary, Employee shall be entitled to receive a bonus at such time
or times and in such amounts as is determined by the Corporation's Board of
Directors."
2. Retroactive to April 1, 1998, Sections 4.1(b), (c), (d), (e), (f), (g)
and (h) shall be of no further force or effect, except that Sections 4.1 (d),
(e), (f), (g) and (h), to the extent applicable, shall continue to be in effect
as to shares of Series C Stock issued to Employee under the Employment Agreement
as in effect prior to the date hereof.
3. The Base Salary shall be payable retroactive to January 1, 1998.
4. Except as modified hereby, the Employment Agreement shall remain in
full force and effect.
5. This Third Amendment to Employment Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
shall constitute one and the same instrument.
6. Unless otherwise defined herein, all capitalized terms used in this
Third Amendment to Employment Agreement shall have the definitions as set forth
in the Employment Agreement.
<PAGE>
2
IN WITNESS WHEREOF, each party executes this Third Amendment to Employment
Agreement as of the date set forth above.
MENTUS MEDIA CORP. THOMAS M. PUGLIESE
By
--------------------------- ---------------------------
Michael Kolthoff, Assistant Secretary Thomas M. Pugliese
<PAGE>
Exhibit 10.4(b)
FIRST AMENDMENT TO MEDIA NETWORK SERVICES AGREEMENT
This First Amendment tp Media Network Services Agreement (the
"Amendment") is made and entered as of this 28th a day of April, 1998, by and
between The Southland Corporation ("Southland") and Mentus Media Corp. f/k/a The
Mentus Group, Inc. ("Mentus").
WHEREAS, Southland and Mentus entered into that certain Media Network
Services Agreement on or about April 18., 1995 (the "Media Agreement"); and
WHEREAS, Southland and Mentus desire to amend the Media Agreement for
the purposes set forth below.
NOW, THEREFORE, for and in consideration of the mutual covenants,
promises and conditions contained herein, the parties agree to amend the Media
Agreement as follows:
1. Section 9 -- TERM.
Section 9.01 is amended so that the Term of the Media Agreement shall
be extended, unless earlier terminated as provided under the Media Agreement
through January 1, 2004. The parties acknowledge with Sections 9.02, 9.03, 9,04
and 9.05 remain in full force and effect, and that the words "or enter into a
new agreement" are added to the second sentence of Section 9.02
2. Section 2 -- HARDWARE INSTALLATION.
The following shall be added after the last sentence of section 2.02 of
the Media Agreement:
"If the parties do not agree to a mutually acceptable location
for installation, Mentus shall not be obligated to install the
Hardware in such Store, In the event the Hardware is not
installed by Mentus in such Store, the minimum number of Store
Hardware installations referenced in section 2. 03 (a), (b)
and (c) herein shall be reduced by one Store for each Store in
which the Hardware is not installed."
The Hardware Installation Rollout Schedule referenced in section 2.03
of the Media Agreement ("Installation Schedule") is amended as follows:
"(a) Pursuant to the revised Installation Schedule, Mentus shall
install the Hardware in an additional 1,700 Stores (from January 1, 1998) to be
completed no later than December 31, 1998. Mentus shall complete Hardware
installation in at least 4,800 total Stores no later than December 31, 1999. The
Installation Schedule is attached herein as Exhibit C.
* Denotes this information has been filed seperately with the Securites and
Exchange Commission for Confidential Treatment.
<PAGE>
(b) If, for whatever reason the Hardware has not been installed in
an additional 1,700 Stores by December 31, 1998. Mentus shall pay Southland
liquidated damages (and not as a penalty) of $100,000 within thirty (30) days
after the end of calendar year 1998. Similarly, Mentus shall pay Southland
liquidated damages (and not as a penalty) of $100,000 within thirty (30) days
after the end of calendar year 1999, if for whatever reason, the Hardware has
not been installed in at least 4,800 total Stores by December 31, 1999.
Except as provided in (c) below, the liquidated damages shall represent
Southland's sole remedy against Mentus in the event the Installation Schedule
is not met.
(c) If, for whatever reason, the Hardware has not been installed in
a at least 4,800 total Stores by June 30, 2000, Southland may immediately
terminate the Media Agreement upon thirty (30) days written notice to Mentus."
(d) The dates set forth in subparagraph (a), (b) and (c) above shall be
extended by one (1) day for each day of any delay by Mentus in meeting the
Hardware Installation Schedule that is caused solely by the actions of
Southland, its agents or participating franchisees. Prior to the Installation
Schedule being extended, Mentus shall provide Southland with written notice of
any claimed delay caused solely by Southland."
3. Section 13 -- MENTUS EXCLUSIVITY.
Section 13.01 of the Media Agreement is amended to read as follows:
"During the Term of this Agreement, Mentus will be the exclusive
provider of video-based information, entertainment and advertising to the
Stores. Notwithstanding the above, Mentus agrees that the Mentus exclusivity
provided herein shall be waived and shall not apply to video based information,
entertainment and advertising that may be provided through the use of automatic
teller machines ("ATM's") and automated financial services centers ("FSC's")
that are or may be located in the Stores. This waiver by Mentus of exclusivity
is limited to@ (1) information, entertainment or advertising conducted on the
"transactional screens" during a customer transaction using the ATM and FSC, and
(11) in-Store ATM or FSC placement not being changed by Southland with the
exception of placement changes made in the ordinary course of Southland's
business "Transactional screens" is defined as those screens shown on the ATM
oi- FSC monitor that appear only during a customer transaction and that are
intended to be viewed only by a single person conducting a transaction on the
ATM or FSC and not by Store customers generally or by others not conducting a
transaction on the ATM or- FSC
Except as provided by this Amendment, all of the terms and conditions
in the Media Agreement shall remain in full force and effect.
The Amendment, along with the Media Agreement is the entire agreement
between the parties and supersedes all prior agreements or representations,
whether written or oral or through course of dealing between the parties
* Denotes this information has been filed seperately with the Securites and
Exchange Commission for Confidential Treatment.
2
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
day and year first set out above,
THE SOUTHLAND CORPORATION
Attest: By:
--------------------------- ----------------------------------
Assistant Secretary Its:
---------------------------------
MENTUS MEDIA CORPORATION
By:
----------------------------------
Its:
---------------------------------
* Denotes this information has been filed seperately with the Securites and
Exchange Commission for Confidential Treatment.
3
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