<PAGE> 1
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------------
FORM 10-QSB
-----------------------------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED COMMISSION FILE NUMBER:
SEPTEMBER 30, 1999 333-49279
NEXT GENERATION NETWORK, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 41-1670450
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
11010 PRAIRIE LAKES DRIVE, SUITE 300
MINNEAPOLIS, MINNESOTA 55344
(Address of principal executive offices)
(612) 944-7944
(Issuer's telephone number)
---------------------------
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
------ ------
Number of shares of Common Stock outstanding as of November 12,1999:
2,662,680
Transitional Small Business Disclosure Format (Check one):
Yes No X
------ ------
- -------------------------------------------------------------------------------
<PAGE> 2
NEXT GENERATION NETWORK, INC.
FORM 10-QSB
TABLE OF CONTENTS
Part I. Financial Information Page
Item 1. Financial Statements.
Balance Sheets as of December 31, 1998 and September 30, 1999.......... 3
Statements of Operations for the Three and Nine Months Ended
September 30, 1998 and 1999............................................ 4
Statements of Stockholders' Equity for the Nine Months Ended
September 30, 1999..................................................... 5
Statements of Cash Flows for the Nine Months Ended September 30, 1998
and 1999............................................................... 6
Notes to Financial Statements.......................................... 7-8
Item 2. Management's Discussion and Analysis or Plan of Operations..... 9-14
Part II. Other Information.
Item 1. Legal Proceedings ............................................. 15
Item 2. Changes in Securities and Use of Proceeds ..................... 15
Item 5. Other Information.............................................. 15
Item 6. Exhibits and Reports on Form 8-K .............................. 16
2
<PAGE> 3
Part I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEXT GENERATION NETWORK, INC.
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 7,367,473 $ 24,710,213
Accounts receivable, net 1,400,974 468,725
Other current assets 88,386 91,159
------------ ------------
Total current assets 8,856,833 25,270,097
------------ ------------
Property and Equipment, net 12,009,378 10,517,706
Deferred Financing Costs 2,135,701 2,519,597
Other Assets 242,476 145,971
------------ ------------
$ 23,244,388 $ 38,453,371
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Current maturities of long-term debt $ 24,020 $ 21,439
Accounts payable 1,197,059 1,211,742
Accrued expenses (Note 3) 3,828,604 4,516,000
------------ ------------
Total current liabilities 5,049,683 5,749,181
------------ ------------
Non-current accrued site lease expense -- 207,712
------------ ------------
Long-term Debt (Note 2) 49,140,742 42,115,147
------------ ------------
Mandatory Redeemable Preferred Stock
14.8% Series B, nonvoting; authorized 91,100 shares;
issued and outstanding 91,059 shares; stated at
liquidation value plus accrued dividends 10,867,829 9,748,507
14.8% Series C, nonvoting; authorized 90,000 shares;
issued and outstanding 75,540 shares; stated at
liquidation value plus accrued dividends 7,831,378 7,024,323
------------ ------------
18,699,207 16,772,830
------------ ------------
Stockholders Deficit
8.25% Series A cumulative preferred stock,
nonvoting; authorized 20,000 shares; issued and
outstanding 6,000 shares, stated at liquidation
value, excluding cumulative unpaid dividends 3,000,000 3,000,000
Common stock, $0.01 par value; authorized 10,000,000
shares; issued and outstanding 2,662,680 shares (Note 4) 26,627 26,627
Additional paid-in capital 7,272,009 9,242,405
Accumulated deficit (59,943,880) (38,660,531)
------------ ------------
(49,645,244) (26,391,499)
------------ ------------
$ 23,244,388 $ 38,453,371
============ ============
</TABLE>
See notes to condensed financial statements.
3
<PAGE> 4
NEXT GENERATION NETWORK, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
-
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- ---------------------------------------
1999 1998 1999 1998
-------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenues:
Advertising Revenue $ 1,692,417 $ 807,659 $ 3,802,700 $ 1,691,027
Less agency commissions (78,097) (10,804) (137,523) (21,970)
------------- ------------- --------------- ---------------
Net advertising revenue 1,614,320 796,855 3,665,177 1,669,057
Network equipment sales 4,807 -- 4,807 26,309
Network operating revenue 210 290 630 1,730
------------- ------------- --------------- ---------------
1,619,337 797,145 3,670,614 1,697,096
------------- ------------- --------------- ---------------
Costs and expenses:
Cost of network equipment sales 1,526 -- 1,526 9,996
Network Operating Expenses 2,262,839 1,441,145 6,232,459 3,298,559
Selling Expenses 2,117,221 1,724,704 6,548,216 3,791,133
General and administrative expenses 2,339,112 1,554,773 6,577,166 4,216,778
------------- ------------- --------------- ---------------
6,720,698 4,720,622 19,359,367 11,316,466
------------- ------------- --------------- ---------------
Operating loss (5,101,361) (3,923,477) (15,688,753) (9,619,370)
Non operating income (expense):
Interest expense (2,116,212) (1,924,781) (6,137,607) (4,583,244)
Interest income 122,726 444,994 551,464 1,195,740
Other expense -- -- (8,453) --
------------- ------------- --------------- ---------------
Net loss (7,094,847) (5,403,264) (21,283,349) (13,006,874)
Preferred stock dividends 672,459 581,495 2,050,127 1,788,491
------------- ------------- --------------- ---------------
Net loss applicable to common stockholders $ (7,767,306) $ (5,984,759) $ (23,333,476) $ (14,795,365)
------------- ------------- --------------- ---------------
Basic and diluted net loss per common share $ (2.92) $ (2.25) $ (8.76) $ (5.56)
------------- ------------- --------------- ---------------
Weighted average number of common shares
outstanding 2,662,680 2,662,680 2,662,680 2,662,680
============= ============= ============== ==============
</TABLE>
See notes to condensed financial statements.
4
<PAGE> 5
NEXT GENERATION NETWORK, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
(UNAUDITED)
<TABLE>
<CAPTION>
Series A
Cumulative
Preferred Stock Common Stock Additional
--------------------- ---------------------- Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
---------- ---------- ---------- ----------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 6,000 $3,000,000 2,662,680 $26,627 $9,242,405 $(38,660,531) $(26,391,499)
Accrued dividends on
mandatory redeemable
preferred stock --- --- --- --- (1,926,377) --- (1,926,377)
Compensation element of
stock options forfeited --- --- --- --- (44,019) --- (44,019)
Net Loss --- --- --- --- --- (21,283,349) (21,283,349)
--------- ---------- --------- ---------- ---------- ------------ -------------
Balance, September 30, 1999 6,000 $3,000,000 2,662,680 $26,627 $7,272,009 $(59,943,880) $(49,645,244)
========= ========== ========= ========== ========== ============= =============
</TABLE>
See notes to condensed financial statements.
5
<PAGE> 6
NEXT GENERATION NETWORK, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1999 1998
------------ -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Loss $(21,283,349) $ (13,006,874)
Adjustments to reconcile net loss to net cash used in
operating activities:
Interest amortization and accretion on long term debt 1,574,842 1,160,510
Non cash interest on PIK Notes 4,546,928 3,389,820
Depreciation and amortization 1,925,865 849,122
Compensation element of stock options (forfeited) (44,019) (70,430)
Other 8,453 17,710
Changes in assets and liabilities:
Receivables (932,249) (92,985)
Other current assets 2,773 (30,020)
Accounts payable (14,683) 498,345
Accrued expenses 410,964 8,554
------------ -------------
Net Cash Used In Operating Activities (13,804,475) (7,276,248)
------------ -------------
INVESTING ACTIVITIES:
Purchase of equipment and furnishings (3,431,196) (6,367,998)
Proceeds from sale of fixed assets 5,207 --
Deposits and other assets (96,505) (25,094)
------------ -------------
Net Cash Used in Investing Activities (3,522,494) (6,393,092)
------------ -------------
FINANCING ACTIVITIES:
Proceeds from long-term debt -- 37,300,000
Principal payments on long-term debt and capital leases (15,771) (1,918,338)
Proceeds from issuance of warrants -- 7,700,000
Deferred financing costs -- (2,831,066)
------------ -------------
Net Cash (Used in) Provided by Financing Activities (15,771) 40,250,596
------------ -------------
Net increase (decrease) in cash and cash equivalents (17,342,740) 26,581,256
Cash and cash equivalents
Beginning 24,710,213 2,789,142
------------ -------------
Ending $ 7,367,473 $ 29,370,398
============ =============
Supplemental Cash Flow Information
Cash payments for interest $ 15,836 $ 33,914
Non cash activities:
Increase in mandatory redeemable preferred stock and
decrease in paid-in capital from accrued dividends 1,926,377 1,664,741
Accrued interest converted to long term debt 5,853,000 2,441,000
Increase in long term debt resulting from interest accretion 1,190,947 887,438
</TABLE>
See notes to condensed financial statements.
6
<PAGE> 7
Next Generation Network, Inc.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. Basis of Presentation
The condensed balance sheet as of September 30, 1999, the condensed
statements of operations for the three and nine month periods ended September
30, 1999 and 1998, the condensed statement of changes in stockholders' deficit
for the nine months ended September 30, 1999, and the condensed statement of
cash flows for the nine month periods ended September 30, 1999 and 1998, have
been prepared by the Company without audit. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) necessary to present
fairly the consolidated financial position, results of operations and cash flows
at and for all periods presented have been made. The operating results for the
period ended September 30, 1999, are not necessarily indicative of the operating
results to be expected for the full fiscal year.
Certain information and footnote disclosures normally included in
financial statements in accordance with generally accepted accounting principles
have been condensed or omitted.
Effective January 1, 1999 the Company adopted Statement of Position
(SOP) 98-1 Accounting for Costs of Computer Software Developed or Obtained for
Internal Use. During the three and nine month periods ended September 30, 1999
the Company did not incur any significant amount of capitalizable internal use
software costs.
Note 2. Long Term Debt
A summary of long-term debt is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
----------------- -------------
<S> <C> <C>
12% Senior Secured PIK Notes due February 2003 (net of $5,553,859
and $6,606,331 of unamortized discount attributed to warrants
issued in connection with PIK Notes.) $47,740,141 $40,834,669
12.1% to 18.8% capital leases, due in varying monthly installments
to August 2001, secured by equipment. 39,434 55,205
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 512,040 460,260
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 873,147 786,452
----------------- --------------
49,164,762 42,136,586
Less current maturities 24,020 21,439
================= ==============
$49,140,742 $42,115,147
================= ================
</TABLE>
The Company issued additional Notes in payment of accrued interest on
the aforementioned PIK Notes in February 1999 ($2,841,000) and August 1999
($3,012,000).
The long term debt excluding capital lease obligations and assuming
full accretion of the related discounts is payable as follows: $700,000 in 2001
and $54,794,000 in 2003.
7
<PAGE> 8
Next Generation Network, Inc.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 3. Accrued Expenses
The components of accrued expenses are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------------- -----------------
<S> <C> <C>
Site agreement fees $2,407,246 $1,807,422
Interest 1,065,978 2,372,050
Compensation 322,433 207,952
Other 32,947 128,576
-------------------- -----------------
$3,828,604 $4,516,000
==================== =================
</TABLE>
Note 4. Events Subsequent to December 31, 1998
The Company amended its Certificate of Incorporation to increase the
number of authorized shares of common stock of the Company to 10,000,000 shares,
and split the outstanding common stock of the Company on a ten for one basis,
effective April 26, 1999. The effect of the stock split has been retroactively
reflected in the financial statements for all periods presented.
In July 1999, the Company granted stock options to employees, including
executive officers, pursuant to its 1998 Nonqualified Stock Option Plan (the
"1998 Plan"). At September 30, 1999, options to purchase 603,000 shares of
common stock were outstanding under the 1998 Plan at an exercise price of $7.70
per share. None of these options were exercisable at September 30, 1999.
In July 1999, the Company granted stock options to an executive
officer and to consultants who are also directors to purchase a total of 30,000
shares of common stock under its 1994 Stock Option Plan at an exercise price of
$7.70 per share. None of these options were exercisable at September 30, 1999.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
The forward-looking statements in this report involve known and unknown
risks, uncertainties and other important factors that could cause the actual
results, performance or achievements of the Company, or industry results, to
differ materially from any future results, performance or achievements expressed
or implied by such forward-looking statements. Such risks, uncertainties and
other important factors include, among others: advertising rates; the ability to
secure advertising contracts; the ability to secure new sites for 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; the ability to obtain
additional financing; availability of qualified personnel; changes in, or the
failure or inability to comply with, government regulations; and other factors
referenced in this report.
OVERVIEW
The Company sells advertising space and provides programming through an
electronic out-of-home advertising network known as NGN - Next Generation
Network. The network is comprised of color video monitors ("NGN Displays")
located in high traffic public locations. From a central hub facility in
Minneapolis, Minnesota, the Company creates programming and advertising that is
transmitted to the NGN Displays by means of standard telephone lines.
The operating revenues of the Company are primarily 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 represent
national advertising, both of which primarily are sold directly by the Company's
own sales personnel.
The Company has continued in its efforts to secure site agreements for
the placement of NGN Displays, and to install additional NGN Displays. The
number of NGN installations was as follows as of the dates indicated:
<TABLE>
<S> <C>
December 31, 1997 1,769
March 31, 1998 1,775
June 30, 1998 2,428
September 30, 1998 3,386
December 31, 1998 3,630
March 31, 1999 3,934
June 30, 1999 4,254
September 30, 1999 4,575
</TABLE>
RESULTS OF OPERATIONS
Net revenues were $1.6 million for the three months ended September 30,
1999 compared to $797,000 for the same quarter of 1998 and were $3.7 million for
the nine months ended September 30,
9
<PAGE> 10
1999 compared to $1.7 million for the same period of 1998. The increase was
attributable to an increase in advertising revenue resulting from the opening of
additional local sales offices and the increase in the number of installed NGN
Displays. For the nine months ended September 30, 1999, revenues included
equipment sales and network operating revenues from site owners of $5,000
compared to $28,000 in the 1998 period. Barter revenue was $18,000 during the
third quarter of 1999 compared to $65,000 for the same quarter in 1998 and was
$53,000 for the first nine months of 1999 compared to $217,000 for the same
period in 1998, and is included in advertising revenue.
Costs and expenses were $6.7 million for the third quarter of 1999
compared to $4.7 million for the same quarter of 1998 and were $19.4 million for
the first nine months of 1999 compared to $11.3 million for the same period of
1998. The following paragraphs describe the changes in the major components of
costs and expenses.
Network operating expenses increased $0.8 million, or 57%, and $2.9
million, or 89% during the three and nine month periods ended September 30,
1999, respectively, from the comparable periods in 1998. The increases were due
primarily to the increase in the average number of installed NGN Displays, which
increased 52% and 75%, respectively, during the three and nine month periods
ended September 30, 1999 compared to the average number of installed NGN
Displays during the comparable 1998 periods. Major components of network
operating expenses for the respective periods are:
<TABLE>
<CAPTION>
3 months ended 3 months ended 9 months ended 9 months ended
September 30, 1999 September 30,1998 September 30, 1999 September 30, 1998
------------------ ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Local and long distance telephone
service $649,755 $468,92 $1,725,262 $1,077,278
Depreciation 589,149 296,420 1,569,817 697,580
Maintenance 198,341 70,766 513,092 165,386
Site agreement expense related to the
NGN Displays 827,119 605,039 2,425,814 1,358,315
</TABLE>
Site agreements generally provide the site operator with a percentage
of the advertising revenues derived by the Company 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. At September 30, 1999,
in connection with the aforementioned arrangements, the Company was committed to
certain minimum site agreement fees of approximately $3.2 million annually
through the year 2003, based on NGN Displays installed as of September 30, 1999.
On a per location basis 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. The Company incurs
operating expenses in connection with the NGN Displays prior to generating
revenues from the Displays.
Selling expenses were $2.1 million for the third quarter of 1999
compared to $1.7 million during the comparable period of 1998 and were $6.5
million for the first nine months of 1999 compared to $3.8 million for the same
period in 1998. The increases in each period were the result of the addition of
sales office staff (average 1999 headcount of 85 compared to 1998 average of 55
in the respective nine month periods), increased commissions due to increased
sales, and the opening of seven additional regional sales offices during the
second half of 1998 to support the increase in NGN Display installations as
noted above. Employee compensation and related costs are the major component of
selling expenses and amounted to $1.5 million in the third quarter of 1999
compared to $1.3 million in the comparable period in 1998 and $4.4 million for
the first nine months of 1999 compared to $2.6
10
<PAGE> 11
million for the comparable period in 1998. For the immediate future, the Company
expects that any significant increases in selling expenses would be due
primarily to increased commissions.
General and administrative expenses were $2.3 million during the third
quarter of 1999 compared to $1.6 million in the comparable period in 1998 and
were $6.6 million for the first nine months of 1999 compared to $4.2 million for
the comparable 1998 period. Employee compensation and related costs, the largest
component of general and administrative expense, increased to $1,271,000 and
$3,596,000 in the three and nine months ended September 30, 1999 compared to
$752,000 and $2,189,000 in the comparable 1998 periods. The increases were due
to the additional administrative staff in computer operations and graphic
creation to support the sales offices and larger installed network, increased
corporate development staff to assist in securing additional venues, and
increased training costs. Other major increases were for increased rent
associated with the relocation of the Company's corporate headquarters ($146,000
and $436,000 in 1999 compared to $55,000 and $169,000 in the comparable three
and nine month 1998 periods), increases in travel costs due to the expanded
business ($198,000 and $554,000 in 1999 compared to $107,000 and $260,000 in the
comparable three and nine month 1998 periods), and increased depreciation
expense due to increased displays ($130,000 and $356,000 in 1999 compared to
$58,000 and $152,000 in the comparable three and nine month 1998 periods).
Research and development costs were $21,000 and $164,000 in the three and nine
months ended September 30,1999, compared to $164,000 and $335,000 for the
comparable periods in 1998. The decrease in research and development is because
the initial development of the network technology has been substantially
completed. There were no significant capitalizable internal use software costs
in the three and nine months ended September 30, 1999.
Interest expense was $2.1 million for the third quarter of 1999
compared to $1.9 million for the same quarter in 1998 and was $6.1 million for
the first nine months of 1999 compared to $4.6 million for the comparable period
in 1998. The increase is due to the issuance of $45.0 million of 12% Senior
Secured PIK Notes (the "Notes") in February 1998 and the issuance of additional
Notes for payment of interest on August 1, 1998 and February 1 and August 1,
1999. Interest income due to investing the unused proceeds from the Notes was
$123,000 in the third quarter of 1999 compared to $445,000 for the 1998 quarter
and was $551,000 for the first nine months of 1999 compared to $1.2 million for
the comparable period in 1998. The decrease in interest income was due primarily
to the decrease in average cash balances in the 1999 periods compared to the
comparable 1998 periods.
The net loss for the quarter ended September 30, 1999 increased to $7.1
million, from $5.4 million in the comparable 1998 quarter, and to $21.3 million
for the first nine months of 1999 compared to $13.0 million for the comparable
1998 period 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 continue to operate at a loss for the foreseeable future.
LIQUIDITY AND CAPITAL RESOURCES
From inception through September 30, 1999, the Company's primary source
of liquidity has been proceeds from the sale of equity and debt securities.
As of September 30, 1999, total cash and cash equivalents was $7.4
million compared to $24.7 million as of December 31, 1998. The decrease in cash
was a result of $13.8 million of cash used in operating activities and $3.5
million of cash used in investing activities (primarily for capital expenditures
related to expansion of the NGN network including NGN Display purchases and
11
<PAGE> 12
installation costs). The Company's increasing sales volume has and will require
additional cash to fund increased receivable levels. In addition, during the
nine months ended September 30, 1999 the Company paid approximately $2.0 million
of accrued obligations to site operators relative to site agreements.
The increase in cash during the first nine months of 1998 was a result
of financing activities, including $40.5 million of net cash provided by the
sale of 12% Senior Secured PIK Notes and warrants after offering expenses and
repayment of long term debt offset by $7.3 million used in operating activities
(due to the loss from operations) and $6.4 million of cash used in investing
activities (primarily for capital expenditures to expand the Company's NGN
network).
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
make cash interest payments on the Notes until the February 1, 2001 interest
payment date. Additional Notes were issued in the amount of $2,841,000 for the
interest payment due February 1, 1999 and $3,012,000 for the interest payment
due August 1, 1999. The Company expects to pay interest through August 1, 2000,
by issuing additional Notes, which would increase the original $45 million
principal amount of the Notes to approximately $60 million.
The Company anticipates that its $7.4 million of cash, together with
operating cash flow, will be sufficient to finance the operating requirements of
the Company and anticipated capital expenditures through the end of January,
2000. The Company will need to raise additional capital in order to continue
operating at current levels beyond January, 2000. The Company currently is
exploring various financing alternatives. However, there can be no assurance
that the additional funds will be available, or if available, will be available
on terms acceptable to the Company. If the Company is not able to secure
additional financing, the Company will not be able to continue to operate its
business.
The Company's agreement with 7-Eleven, Inc. (7-11) provides that the
Company will pay liquidated damages of $100,000 if certain minimum installations
are not completed by December 31, 1999. 7-11 may terminate the agreement if 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. The Company anticipates that it will not have
installed the requisite number of installations by December 31, 1999. The
Company is in active discussions with 7-11 regarding an amendment to the terms
of the current agreement, which amendment would include an extension of the time
within which to complete such installations. The Company does not anticipate
that the failure to have such installations completed by December 31, 1999 will
result in a material adverse impact on the relationship with 7-11.
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
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 has evaluated the Y2K issues and is
addressing any problems it can so that all of its systems and relationships will
be suitable for continued use into and beyond the Year 2000.
12
<PAGE> 13
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, utilizing two discovery methods: 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.
The Team has completed its Y2K investigation and assessment, and has
completed its Y2K Compliance Plan (the "Y2K Plan"). The Team found no
unresolvable business critical vulnerabilities in any of its focus areas, which
included the following: internally developed software; commercially developed
software; computer systems and peripherals; network and telecommunications
hardware; telecommunications software; and facilities. To accommodate ongoing
changes in the Company's installed software base, the Team screens all new
applications prior to installation to prevent Y2K vulnerability.
As part of the assessment phase, the Team members worked 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. Certain commercially purchased software
applications that were found to be non-compliant have been either upgraded to
become compliant or phased out. 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
As stated above, the Company's Y2K Plan is substantially complete.
Through September 30, 1999, the Company has 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 $2,000 in connection with addressing matters
identified in the Plan and becoming Year 2000 compliant. The remaining costs
will be expensed as incurred over the remainder of 1999. The Company expects to
incur less than $2,500 in monitoring compliance with the Y2K Plan. 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 Displays would continue
to run based on resident information. This type of event could affect some
13
<PAGE> 14
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 has finalized formal contingency plans 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 are 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 include identifying and securing
alternative suppliers.
14
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Although the Company may be subject to litigation, and to threats of
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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
The Company granted the following options under its 1998 Non-Qualified
Stock Option Plan (the "1998 Plan"):
Effective July 16, 1999, the Company granted options to purchase a
total of 374,000 shares of the Company's common stock at a price of $7.70 per
share, to 145 employees of the Company who are not executive officers of the
Company. Effective July 16, 1999, the Company granted options to purchase a
total of 270,000 shares of the Company's common stock, on the same terms as
described above, to executive officers of the Company. All of the options are
subject to certain vesting requirements. As a result of the termination of
certain options, options to purchase 603,000 shares of common stock under the
1998 Plan were outstanding as of September 30, 1999. None of the options were
exercisable as of September 30, 1999.
The Company granted the following options under its 1994 Stock Option
Plan:
Effective July 1, 1999, the Company granted options to purchase a total
of 30,000 shares of the Company's common stock, at a price of $7.70 per share,
to an executive officer and to consultants who are also directors of the
Company. All of the options are subject to certain vesting requirements. None of
the options were exercisable as of September 30, 1999.
ITEM 5. OTHER INFORMATION.
The Company's agreement with 7-Eleven, Inc. (7-11) provides that the
Company will pay liquidated damages of $100,000 if certain minimum installations
are not completed by December 31, 1999. 7-11 may terminate the agreement if 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. The Company anticipates that it will not have
installed the requisite number of installations by December 31, 1999. The
Company is in active discussions with 7-11 regarding an amendment to the terms
of the current agreement, which amendment would include an extension of the time
within which to complete such installations. The Company does not anticipate
that the failure to have such installations completed by December 31, 1999 will
result in a material adverse impact on the relationship with 7-11.
Effective in September, 1999, the Company expanded its Board of
Directors by one director, and David Pecker joined the Board as a Director of
the Company.
15
<PAGE> 16
Item 6. EXHIBITS AND REPORTS ON FORM 8-K:
a) Exhibits
10.1(t) Fourth Amendment to Stockholders' Agreement dated as of
September 11, 1999 between the Company and 21st Century
Communications 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
27.1 Financial Data Schedule
b) Reports on Form 8-K
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on behalf by the undersigned, thereto duly
authorized.
NEXT GENERATION NETWORK, INC.
Date: November 15, 1999 By: /s/ Thomas M. Pugliese
----------------------------
Thomas M. Pugliese
Chief Executive Officer
Date: November 15, 1999 By: /s/ Michael J. Kolthoff
----------------------------
Michael J. Kolthoff
Treasurer and Assistant Secretary
(principal financial and accounting officer)
16
<PAGE> 1
EXHIBIT 10.1
FOURTH AMENDMENT TO STOCKHOLDERS' AGREEMENT
THIS FOURTH AMENDMENT TO STOCKHOLDERS' AGREEMENT (this
"Amendment") is dated as of September 11, 1999 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, the Second Amendment to
Stockholder's Agreement dated January __, 1998 and the Third Amendment to
Stockholder's Agreement (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. Section 3.1 is amended by deleting the word "nine" in the
first sentence and inserting the word "ten" in its place.
b. Section 3.1(b) is amended by deleting the word "four" and
inserting the word "five" in its place.
c. Section 3.1(c) is amended by deleting the word "six" in the
fifth sentence and inserting the words "seven" in its place.
d. Section 3.8 is amended so that no consent is required for
the Company to enter into one or more advertising contracts with
Restricted Persons in the ordinary course of the Company's business.
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.
<PAGE> 2
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: /s/ Thomas M. Pugliese
----------------------------
Thomas M. Pugliese, Chief Executive Officer
"Majority Shareholders"
/s/ Gerard P. Joyce
-----------------------------------
GERARD P. JOYCE
/s/ Thomas P. Pugliese
-----------------------------------
THOMAS P. PUGLIESE
<PAGE> 3
"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
<PAGE> 4
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
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 7,367,473
<SECURITIES> 0
<RECEIVABLES> 1,538,087
<ALLOWANCES> (137,113)
<INVENTORY> 0
<CURRENT-ASSETS> 8,856,833
<PP&E> 16,685,734
<DEPRECIATION> (4,676,356)
<TOTAL-ASSETS> 23,244,388
<CURRENT-LIABILITIES> 5,049,683
<BONDS> 49,140,742
18,699,207
3,000,000
<COMMON> 26,627
<OTHER-SE> (52,671,871)
<TOTAL-LIABILITY-AND-EQUITY> 23,244,388
<SALES> 4,807
<TOTAL-REVENUES> 3,670,614
<CGS> 1,526
<TOTAL-COSTS> 19,359,367
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 125,099
<INTEREST-EXPENSE> 6,137,607
<INCOME-PRETAX> (21,283,349)
<INCOME-TAX> 0
<INCOME-CONTINUING> (21,283,349)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,283,349)
<EPS-BASIC> (8.76)
<EPS-DILUTED> (8.76)
</TABLE>
