<PAGE>
- -------------------------------------------------------------------------------
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:
JUNE 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 August 11,1999: 2,662,680
Transitional Small Business Disclosure Format (Check one):
Yes No X
----- -----
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<PAGE>
NEXT GENERATION NETWORK, INC.
FORM 10-QSB
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements.
Balance Sheets as of December 31, 1998 and June 30, 1999 . . . . . . . . . . . . . . . 3
Statements of Operations for the Three and Six Months Ended June 30, 1998 and 1999. . . 4
Statements of Stockholders' Equity for the Six Months Ended June 30,1999 . . . . . . . 5
Statements of Cash Flows for the Six Months Ended June 30, 1998 and 1999 . . . . . . . 6
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-8
Item 2. Management's Discussion and Analysis or Plan of Operations . . . . . . . . . . . . 9-13
Part II. Other Information.
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
2
<PAGE>
Part I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEXT GENERATION NETWORK, INC.
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------------- --------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 12,419,799 $ 24,710,213
Accounts receivable, net 824,262 468,725
Other current assets 62,885 91,159
------------- -------------
Total current assets 13,306,946 25,270,097
------------- -------------
Property and Equipment, net 11,580,264 10,517,706
Deferred Financing Costs 2,269,417 2,519,597
Other Assets 142,671 145,971
------------- -------------
$ 27,299,298 $ 38,453,371
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Current maturities of long-term debt $ 23,126 $ 21,439
Accounts payable 891,714 1,211,742
Accrued expenses (Note 3) 4,505,582 4,516,000
------------- -------------
Total current liabilities 5,420,422 5,749,181
------------- -------------
Non-current accrued site lease expense - 207,712
------------- -------------
Long-term Debt (Note 2) 45,723,024 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 10,476,994 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 7,549,754 7,024,323
------------- -------------
18,026,748 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 7,951,511 9,242,405
Accumulated deficit (52,849,034) (38,660,531)
------------- -------------
(41,870,896) (26,391,499)
------------- -------------
$ 27,299,298 $ 38,453,371
============= =============
</TABLE>
See notes to condensed financial statements.
3
<PAGE>
NEXT GENERATION NETWORK, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Revenues:
Advertising Revenue $ 1,152,259 $ 483,291 $ 2,110,283 $ 883,368
Less agency commissions (34,817) (8,042) (59,426) (11,166)
------------- ------------- -------------- -------------
Net advertising revenue 1,117,442 475,249 2,050,857 872,202
Network equipment sales --- --- --- 26,309
Network operating revenue 210 1,290 420 1,440
------------- ------------- -------------- -------------
1,117,652 476,539 2,051,277 899,951
------------- ------------- -------------- -------------
Costs and expenses:
Cost of network equipment sales --- --- --- 9,996
Network Operating Expenses 2,116,008 1,013,334 3,969,620 1,857,412
Selling Expenses 2,202,292 1,109,510 4,430,995 2,066,430
General and administrative expenses 2,118,891 1,366,353 4,238,055 2,662,006
------------- ------------- -------------- -------------
6,437,191 3,489,197 12,638,670 6,595,844
------------- ------------- -------------- -------------
Operating loss (5,319,539) (3,012,658) (10,587,393) (5,695,893)
Non operating income (expense):
Interest expense (2,030,386) (1,814,689) (4,021,395) (2,658,463)
Interest income 175,754 488,033 428,738 750,746
Other expense (8,453) --- (8,453) ---
------------- ------------- -------------- -------------
Net loss (7,182,624) (4,339,314) (14,188,503) (7,603,610)
Preferred stock dividends 765,575 678,319 1,377,668 1,206,996
------------- ------------- -------------- -------------
Net loss applicable to common
stockholders $ (7,948,199) $ (5,017,633) $ (15,566,171) $ (8,810,606)
------------- ------------- -------------- -------------
Basic and diluted net loss per common share $ (2.99) $ (1.88) $ (5.85) $ (3.31)
------------- ------------- -------------- -------------
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>
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 --- --- --- --- (1,253,918) --- (1,253,918)
Compensation element of
stock options forfeited --- --- --- --- (36,976) --- (36,976)
Net Loss --- --- --- --- --- (14,188,503) (14,188,503)
----------- ---------- ---------- --------- ---------- ------------- -------------
Balance, June 30, 1999 6,000 $3,000,000 2,662,680 $26,627 $7,951,511 $(52,849,034) $(41,870,896)
=========== ========== ========== ========== ========== ============= =============
</TABLE>
See notes to condensed financial statements.
5
<PAGE>
NEXT GENERATION NETWORK, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------------
1999 1998
-------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Loss $ (14,188,503) $ (7,603,610)
Adjustments to reconcile net loss to net cash used in
operating activities:
Interest amortization and accretion on long term debt 1,029,058 683,854
Non cash interest on PIK Notes 2,983,050 1,948,303
Depreciation and amortization 1,206,827 495,073
Compensation element of stock options (forfeited) (36,976) ---
Other 8,453 17,710
Changes in assets and liabilities:
Receivables (355,537) 111,623
Other current assets 28,274 43,392
Accounts payable (320,028) 1,507,073
Accrued expenses (360,180) (784,206)
-------------- -------------
Net Cash Used In Operating Activities (10,005,562) (3,580,788)
-------------- -------------
INVESTING ACTIVITIES:
Purchase of equipment and furnishings (2,283,043) (4,535,936)
Proceeds from sale of fixed assets 5,207 ---
Deposits and other assets 3,299 (11,297)
-------------- -------------
Net Cash Used in Investing Activities (2,274,537) (4,547,233)
-------------- -------------
FINANCING ACTIVITIES:
Proceeds from long-term debt --- 37,300,000
Principal payments on long-term debt and capital leases (10,315) (1,903,704)
Proceeds from issuance of warrants --- 7,700,000
Deferred financing costs --- (2,593,834)
-------------- -------------
Net Cash (Used in) Provided by Financing Activities (10,315) 40,502,462
-------------- -------------
Net increase (decrease) in cash and cash equivalents (12,290,414) 32,374,441
Cash and cash equivalents
Beginning 24,710,213 2,789,142
-------------- -------------
Ending $ 12,419,799 $ 35,163,583
============== =============
Supplemental Cash Flow Information
Cash payments for interest $ 9,288 $ 26,358
Non cash activities:
Increase in mandatory redeemable preferred stock and
decrease in paid-in capital from accrued dividends 1,253,918 1,083,246
Accrued interest converted to long term debt 2,841,000 ---
Increase in long term debt resulting from interest 778,878 529,357
accretion
</TABLE>
See notes to condensed financial statements.
6
<PAGE>
Next Generation Network, Inc.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. Basis of Presentation
The condensed balance sheet as of June 30, 1999, the condensed statements
of operations for the three and six month periods ended June 30, 1999 and 1998,
the condensed statement of changes in stockholders' deficit for the six months
ended June 30, 1999, and the condensed statement of cash flows for the six month
periods ended June 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 June 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 six month periods ended June 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>
JUNE 30, DECEMBER 31,
1999 1998
----------------------------------
<S> <C> <C>
12% Senior Secured PIK Notes due February 2003 (net of $5,917,905
and $6,606,331 of unamortized discount attributed to warrants
issued in connection with PIK Notes.) $44,364,095 $40,834,669
12.1% to 18.8% capital leases, due in varying monthly installments
to August 2001, secured by equipment. 44,890 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 494,780 460,260
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 842,385 786,452
----------------------------------
45,746,150 42,136,586
Less current maturities 23,126 21,439
----------------------------------
$45,723,024 $42,115,147
==================================
</TABLE>
In February 1999 the Company issued additional Notes in payment of
$2,841,000 of accrued interest on the aforementioned PIK Notes.
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 $51,782,000 in 2003.
7
<PAGE>
Next Generation Network, Inc.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 3. Accrued Expenses
The components of accrued expenses are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------------------------------
<S> <C> <C>
Site agreement fees $1,684,399 $1,807,422
Interest 2,514,100 2,372,050
Compensation 223,903 207,952
Other 83,180 128,576
------------------------------------
$4,505,582 $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.
8
<PAGE>
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. 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
December 31, 1998 3,630
March 31, 1999 3,934
June 30, 1999 4,254
</TABLE>
RESULTS OF OPERATIONS
Net revenues were $1.1 million for the second quarter of 1999 compared
to $477,000 for the same quarter of 1998 and were $2.1 million for the six
months ended June 30, 1999 compared to $900,000 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 six months ended June 30, 1998, the
revenues included equipment
9
<PAGE>
sales and network operating revenues from site owners of $28,000. Barter
revenue was $17,000 during the second quarter of 1999 compared to $67,000 for
the same quarter on 1998 and was $36,000 for the first six months of 1999
compared to $152,000 for the same period in 1998, and is included in
advertising revenue.
Costs and expenses were $6.4 million for the second quarter of 1999
compared to $3.5 million for the same quarter of 1998 and were $12.6 million
for the first six months of 1999 compared to $6.6 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 $1.1 million, or 109%, and $2.1
million, or 114% during the three and six month periods ended June 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
during the periods which increased 95% and 88% during the three and six month
periods ended June 30, 1999 compared to the average installations during the
comparable 1998 periods. Major components of network operating expenses for
the respective periods are:
<TABLE>
<CAPTION>
3 months ended 3 months ended 6 months ended 6 months ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------------- ------------------- ------------------- --------------------
<S> <C> <C> <C> <C>
Local and long distance telephone service $565,597 $379,289 $1,075,508 $608,357
Depreciation 514,490 201,683 980,669 401,161
Maintenance 193,494 45,819 314,751 94,618
Site agreement expense related to the NGN
Displays 842,427 386,543 1,597,694 753,276
</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 June 30,
1999, in connection with the aforementioned arrangements, the Company was
committed to certain minimum site agreement fees of approximately $3.1
million annually through the year 2003, based on NGN Displays installed as of
June 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. Currently, network
operating expenses exceed advertising revenues due to the Company's limited
operating history.
Selling expenses were $2.2 million for the second quarter of 1999
compared to $1.1 million during the comparable period of 1998 and were $4.4
million for the first six months of 1999 compared to $2.1 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 84 compared to 1998
average of 45), increased commissions due to increased sales, and the opening
of seven additional regional sales offices between June 1998 and June 1999 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 $1.4 million in the second quarter of 1999 compared to
$724,000 in the comparable period in 1998 and $3.0 million for the first six
months of 1999 compared to $1.3 million for the same period in 1998. Through
the end of 1999, the Company expects that any significant increases in
selling expenses would be due primarily to increased commissions.
10
<PAGE>
General and administrative expenses were $2.1 million during the second
quarter of 1999 compared to $1.4 million in the comparable period in 1998 and
were $4.2 million for the first six months of 1999 compared to $2.7 million
for the comparable 1998 period. Employee compensation and related costs, the
largest component of general and administrative expense, increased to
$1,136,000 and $2,325,000 in the three and six months ended June 30, 1999
compared to $703,000 and $1,437,000 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 ($145,000 and $290,000 in 1999 compared to
$55,000 and $113,000 in the comparable three and six month 1998 periods),
increases in travel costs due to the expanded business ($209,000 and $356,000
in 1999 compared to $94,000 and $154,000 in the comparable three and six
month 1998 periods), and additional legal, accounting, and other professional
fees ($169,000 and $308,000 in 1999 compared to $50,000 and $104,000 in the
comparable three and six month 1998 periods). Research and development costs
were $71,000 and $143,000 in the three and six months ended June 30,1999,
compared to $91,000 and $171,000 for the comparable periods in 1998. There
were no significant capitalizable internal use software costs in the three
and six months ended June 30, 1999.
Interest expense was $2.0 million for the second quarter of 1999
compared to $1.8 million for the same quarter in 1998 and was $4.0 million
for the first six months of 1999 compared to $2.7 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. Interest income due to
investing the unused proceeds from the Notes was $176,000 in the second
quarter of 1999 compared to $488,000 for the 1998 quarter and was $429,000
for the first six months of 1999 compared to $751,000 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 June 30, 1999 increased to $7.2
million, from $4.3 million in the comparable 1998 quarter, and to $14.2
million for the first six months of 1999 compared to $7.6 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 June 30, 1999, the Company's primary source of
liquidity has been proceeds from the sale of equity and debt securities.
As of June 30, 1999, total cash and cash equivalents was $12.4 million
compared to $24.7 million as of December 31, 1998. The decrease in cash was a
result of $10.0 million of cash used in operating activities and $2.3 million
of cash used in investing activities (primarily for capital expenditures
related to expansion of the NGN network including NGN Display purchases and
installation costs). The Company's increasing sales volume has and will
require additional cash to fund increased receivable levels. In addition,
during the six months ended June 30, 1999 the Company paid approximately $1.9
million of accrued obligations to site operators relative to site agreements.
11
<PAGE>
The increase in cash during the first six 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 $3.6 million used in operating
activities (due to the loss from operations) and $4.5 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. 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 $60.2 million.
The Company anticipates that its $12.4 million of cash, together with
operating cash flow, will be sufficient to finance the operating requirements
of the Company and anticipated capital expenditures through 1999. The Company
expects that it will need to raise additional capital. 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.
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.
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.
12
<PAGE>
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 are being either upgraded to become compliant or being 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 June 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 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 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 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 expects
the development of the contingency plans will require approximately 20 person
hours to complete, and the Company expects to have its contingency plans
substantially finalized by September 1999.
13
<PAGE>
PART II. OTHER INFORMATION
Item 5. Other Information
Effective May 28, 1999, the Company entered into a Memorandum of
Understanding with Alex Zubillaga, a director of the Company, for the
formation of an entity to develop the market for NGN in Italy, Spain, France,
and the United Kingdom. Pursuant to the terms of the Memorandum, the Company
contributed $100,000 to the entity. The Memorandum contemplates the formation
of an additional entity for the purpose of operating NGN in the subject
countries. The terms of such additional relationship are subject to the
approval of each party. There can be no assurance that the parties will reach
an agreement as to the formation of an operating entity.
Item 6. Exhibits and Reports on Form 8-K:
a) Exhibits
3.1(z) Certificate of Amendment, filed April 26, 1999
10.5 Memorandum of Understanding dated as of May 28, 1999 between
the Company and Alex Zubillaga
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: August 13, 1999 By: /s/ Thomas M. Pugliese
------------------------------------
Thomas M. Pugliese
Chief Executive Officer
Date: August 13, 1999 By: /s/ Michael J. Kolthoff
------------------------------------
Michael J. Kolthoff
Treasurer and Assistant Secretary
(principal financial and accounting officer)
14
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
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 duly
adopted resolutions setting forth a proposed amendment to the Certificate of
Incorporation of the Corporation, declaring such amendment to be advisable
and referring the proposed amendment to the stockholders of the Corporation
entitled to vote thereon for their consideration. The resolution setting
forth the proposed amendment is as follows:
RESOLVED, that the Corporation shall amend the first paragraph
of Article 4 of its Certificate of Incorporation in its
entirety to read as follows:
"COMMON STOCK. The Corporation shall be authorized to
issue Ten Million (10,000,000) shares of common stock, $.01
par value per share. The common stock of the Corporation
issued and outstanding as of 4:00 p.m. (ET) on April 26, 1999,
shall be split on a ten (10) for one (1) basis, so that on
such date each share of common stock issued and outstanding on
such date shall be divided and shall be equal to ten (10)
shares of common stock."
SECOND: That the appropriate stockholders of the
Corporation approved such amendment by written consent in accordance with
Section 228 of the General Corporation Law of the State of Delaware.
THIRD: That such amendment was duly adopted in
accordance with the provisions of Section 242 of the General Corporation
Law of the State of Delaware.
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this certificate to
be signed by duly authorized officers of the Corporation this 26th day of
April, 1999.
By: /s/ Thomas M. Pugliese
----------------------------
Thomas M. Pugliese,
Vice-Chairman and CEO
By: /s/ Mike Kolthoff
----------------------------
Mike Kolthoff,
Assistant Secretary
STATE OF MINNESOTA )
) ss.
County of Hennepin )
On this ___ day of April, 1999, 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:
- ----------------------------
2
<PAGE>
STATE OF MINNESOTA )
) ss.
County of Hennepin )
On this ___ day of April, 1999 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:
- ----------------------------
3
<PAGE>
MEMORANDUM OF UNDERSTANDING
This Memorandum of Understanding is between Next Generation
Network, Inc. (the "Company") and Alex Zubillaga, or his nominee entity,
("Investor Group") for purposes of setting forth the intentions of the parties
regarding joint activities in the interest of developing certain international
markets for the Company's electronic out-of-home media network known as "NGN."
1. NGN and the Investor Group agree to form an entity to be owned 50%
by the Company and 50% by the Investor Group for purposes of developing the
market for NGN in France, Italy, Spain and the United Kingdom.
2. Each party agrees to contribute to such entity the amount of One
Hundred Thousand Dollars ($100,000) for purposes of financing such development
activities.
3. The day to day activities of the development entity will be managed
by Alex Zubillaga, provided that all material matters regarding the activities
of such development entity shall require the consent of both parties.
4. It is the parties' intent that, upon mutual determination that the
results of development activities warrant the formation of an operating entity,
the parties will form an entity for the purpose of operating NGN in the stated
countries on such terms as the parties mutually determine and agree. The parties
acknowledge that nothing in this Memorandum creates any obligation on the part
of either party to form any such operating entity, or to any terms or conditions
relating thereto. The Investor Group acknowledges that it has been advised that
formation of such entity requires and is conditioned upon receipt by the Company
of all approvals and consents as may be required under any organizational
documents or other agreements whatsoever applicable to the Company and an
investment by the Company in an entity operating NGN Internationally, including
without limitation such approvals as may be required under that certain
Indenture dated as of February 1, 1998 (the "Indenture"), certain documents
related to the Indenture, and those certain certificates of designation and
agreements relating to the Series B Senior Cumulative Compounding Convertible
Redeemable Preferred Stock and Series C Senior Cumulative Compounding
Convertible Redeemable Preferred Stock. If the Company is unable, after
commercially reasonable efforts, to structure an entity to operate NGN, or to
operate NGN, in the subject countries with the involvement of the Investor
Group, the Company will have the right to purchase, and the Investor Group will
then be obligated to sell the interest of the Investor Group in the development
entity for One Hundred Thousand Dollars (100,000.00), plus interest at a per
annum rate of 15%, accruing from the date of the contribution by the Investor
Group, payable in cash.
Dated: May 28, 1999
Next Generation Network, Inc. Investor Group
By: /s/ Thomas M. Pugliese By: /s/ Alejendro Zubillaga
-------------------------------- ----------------------------
Name: Name:
Title: Title:
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