U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 or 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file number
December 31, 1998 139908107
- ----------------- ---------
CAPITA RESEARCH GROUP, INC.
(Exact name of Registrant as specified in its charter)
Nevada 88-0072350
- ------------------------ ------------------------
(State of incorporation) (IRS Employer ID Number)
591 Skippack Pike, Blue Bell, PA 19422 19422
- ---------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 619-7777
Securities registered pursuant to Section 12 (b) of the Exchange Act:
None
Securities registered pursuant to Section 12 (g) of the Exchange Act:
Number of Shares Outstanding
Title of Class as of March 31 1999
- ----------------------------- ----------------------------
Common Stock, $.001 par value 14,330,964
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 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 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 _X__
Issuer's revenues for its most recent fiscal year: $85,500.
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the last sale price on March 10, 1999 is approximately
$2,725,000.
<PAGE>
PART I
ITEM I - DESCRIPTION OF BUSINESS
- --------------------------------
Capita Research Group, Inc., ("Capita" or the "Company") is a Nevada
Corporation, which was created as the result of an exchange transaction between
Royal American Mining Properties, Ltd. and NextGen Systems, Inc., a Pennsylvania
Corporation ("Nextgen")(Capita's Predecessor) on January 30, 1998. The Company
has the exclusive license with the National Aeronautics and Space Administration
("NASA") for software, which measures a test respondent's EEG, or brain wave
impulse, when subjected to aural or visual stimuli. This software then converts
the raw brain wave data into an index, which indicates the respondent's level of
interest, or boredom, with the stimuli. The Company believes that it has the
only commercial software system of this nature and is using it for testing
services in the media, advertising and entertainment industries.
On January 27, 1998 the Company known as Royal American Mining
Properties, Ltd.("Royal") entered into an Exchange Agreement under the terms of
which the Royal acquired all the issued and outstanding shares of NextGen in
exchange for shares of Royal's common stock.. Royal issued (90%) 8,622,000
shares of its common stock to an Exchange Agent for the shareholders of NextGen
and in return received all the issued and outstanding shares of NextGen. Under
the terms of this Exchange Agreement, the Royal's management and majority
shareholders then effected a two for one forward split of the Royal's remaining
common stock. Accordingly, Royal's shareholders were entitled to two shares of
the Company's common stock for every one share they owned. The Company's name
also was changed to Capita Research Group, Inc.
As of December 31, 1998, 13,562,900 shares of the Company's authorized
shares of common stock were issued and outstanding.
To management's knowledge, the Company has not been subject to
bankruptcy, receivership or any similar proceedings.
Forward - Looking Statements
- ----------------------------
This report contains forward-looking statements (within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended), representing
the Company's current expectations and beliefs concerning future events. When
used in this report, the words "believes," "estimates," "plans," "expects,"
"intends," "anticipates," and similar expressions as they relate to the Company
or its management are intended to identify forward-looking statements. The
actual results of the Company could differ materially from those indicated by
the forward-looking statements because of various risks and uncertainties
related to and including, without limitation, the Company's ability to obtain
sufficient financing, market acceptance of the Company's technology, competition
from well-established and well-funded competitors, the recruitment and retention
of qualified personnel, the achievement by the Company and its suppliers and
customers of year 2000 compliance in a timely and cost efficient manner, general
economic conditions, changes in governmental rules and regulations applicable to
the Company, and other risks set forth in this report and in the Company's other
filings with the Securities and Exchange Commission. These risks and
uncertainties are beyond the ability of the Company to control, in many cases,
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and the Company cannot predict the risks and uncertainties that could cause
actual results to differ materially from those indicated by the forward-looking
statements.
Business of Issuer
- ------------------
Capita is a technology company that designs and markets systems and
services, which are used in research to measure communication effectiveness. It
does this by measuring the psycho-physiological engagement of an individual to
various forms of communication. The basic technology is licensed under an
exclusive agreement from NASA to measure electrical activity using an
electroencephalogram (EEG) in the human brain and processing the results through
the computer using an algorithm developed by NASA. The Company's mission is to
become the leading commercial provider of customized, high performance
technology systems and services, including analysis and technical support, for
the real-time, objective measurement of engagement for use in multiple markets.
The Company is in the development stage. It is in the process of
obtaining patents for its hardware and software technology. Using this
technology in communications research the Company is developing systems to
evaluate individual engagement while watching television and plans to develop
systems to test and measure individual engagement with print media advertising,
package design, and Internet web sites. The Company will market this technology
as a testing service with particular focus on the television advertising
industry. The Company will provide to its client's test results, which determine
whether the test subjects are mentally engaged by the media being viewed.
This type of testing is referred to as "copy testing" or "advertising
testing" research. In addition to general interviews about consumer preferences,
at present there are two principal methods of conducting such tests. The first
is the use of a meter, or dial, by which the test subject indicates his positive
(or negative) reaction associated with the test material. The second method of
testing is performed by companies specializing in focus group measurement,
whereby a group of demographically selected test subjects views a program and is
then asked a series of questions to determine interest or lack of interest. This
form of testing constitutes a well-established industry, although there is much
debate within the media industry about the reliability of these tests due to the
subjective nature of measuring viewer response and due to the tendency of some
test subjects to follow strong and vocal leaders.
The Company's method of using brain wave measurement technology differs
from standard industry methods in that it monitors brain activity objectively
during respondents testing and converts the measured activity into an engagement
index. Testing allows an advertiser to evaluate consumer engagement to its
commercials on a second-by-second basis.
Based on early marketing results, the Company believes that it can
stimulate significant demand for its objective and passive form of test subject
measurement. Although other means of psycho-physiological measurement have been
used to test advertising material, management believes that no method comparable
to the Company's EEG measurement exists in the marketplace.
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Marketing
- ---------
The Company is primarily marketing its testing services to 1) the
established research industry, as a complement to that industry's existing
research methods; 2) advertising agencies, as a tool to help refine creative
content and strategy; and 3) advertising clients. The Company intends to reach
prospects through initial phone or mail contact, referrals, industry
publications, all of which will be followed by person-to-person demonstration of
testing methodology and results. In addition, the Company's personnel regularly
attend industry trade shows to develop a network of prospects and generate
broader exposure.
Competition
- -----------
The Company faces well-established and well-funded competition. The
Company's principal competition consists of entities within the opinion research
industry which provide a third party testing service either to advertising
agencies or directly to the advertising client. Often, agencies own their own
dedicated research company. According to Advertising Age, in 1997, combined
revenue from research companies exceeded $4.0 billion in the US and $6.5 billion
worldwide. The top five companies in this group are:
1997 Revenue (Millions)
-----------------------
Company US Worldwide
------- -- ---------
IMS Health $378.3 $980.5
Information Resources Inc. 366.7 456.3
Nielsen Media Research 358.6 358.6
AC Nielsen Corp. 310.0 1,391.6
VNU Marketing Information Services 220.0 285.0
The Company intends to compete against these established research
entities on the basis of technology differentiation, test reliability and
pricing. As mentioned above, management believes that the Company's technology
and testing methodology are incomparable as to the nature and composition of its
test results. Management further believes that measurements of engagement or
boredom, developed with scientific objectivity, will provide a competitive
advantage in an industry long dissatisfied with subjective results. Management
believes the Company's underlying technology allows it to compete aggressively
on pricing because of the relatively low variable testing costs associated with
the need for fewer test subjects comprising a statistically valid sample.
In addition to established competition, the Company also faces
uncertainty regarding acceptance of, and demand for, its method of advertising
testing. The Company's method represents a new development in an established
industry. Advertising researchers may be slow to accept the Company's method of
testing, or may reject it.
Management hopes to build a large base of customers for its services,
including advertising research organizations, advertising agencies, businesses
actually purchasing advertising, television production companies and television
networks.
4
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Research and Development
- ------------------------
The Company is in the development stage. All the work performed by its
non -administrative personnel is research and development. The costs of
servicing customers who contract for the Company's services are applied research
and development which are costs borne directly by the customer. Significant
research and development is included in technical costs and selling costs. It is
estimated that half of the Company's effort or the equivalent of three man-years
has been expended on research and development activities for each of the last
two years.
Production and Manufacturing
- ----------------------------
The Company requires specialized hardware for its operations. The
Company's employees and contractors manufacture such hardware.
Intellectual Property
- ---------------------
The Company is in the process of applying for a number of patents
pertaining to its technology. The Company has a number of trademarks and
servicemarks on trade names used in its operations and marketing. All such
trademarks and servicemarks are under US Trademark filings applied for. All
computer software code used by the Company is under software source code
copyrights filed with the US Trademark and Copyright office. Although the
Company believes that such patent, trademarks, servicemarks and copyrights will
be adequate to protect its business, there can be no assurance that they will do
so.
Personnel
- ---------
The Company employs 7 full time employees in its Blue Bell, PA
headquarters. It also does business with several independent contractors who
perform services on "as needed" basis.
ITEM 2 - DESCRIPTION OF PROPERTY
- --------------------------------
Listed below is the principal office of the Company. This property is
leased under a lease providing for minimum annual rental payments of $70,740,
$74,796 and $78,849 for 1999, 2000 and 2001, respectively.
Location Square Feet Lease Expiration
- -------- ----------- ----------------
Blue Bell, PA 4,200 December 2001
The Company believes its Facilities are well maintained and are of
adequate size for its present needs and planned expansion in the near future.
ITEM 3 - LEGAL PROCEEDINGS
- --------------------------
The Company knows of no litigation pending, threatened, or
contemplated, or unsatisfied judgements, or any proceedings in which it or any
of its officers or directors in their capacity as such is a party.
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ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
Not applicable
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- --------------------------------------------------------------------------------
The Company commenced trading on the OTC Electronic Bulletin Board on
August 3, 1998 under the symbol "CEEG", to date, there has been only sporadic
trading in the Company's common stock. As of December 31, 1998, the Company had
1,013 holders of record of its common stock. The Company has 5 listed
market-makers, and the trading ranges by quarter for the year were as follows:
High Low
---- ---
Third Quarter (from Aug 3, 1998)* $2.00 $1.00
Fourth Quarter* $1.00 $1.00
*Total shares traded in last two quarters totaled 5,600 shares.
PART II
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
- --------------------------------------------------------------------------------
The following selected consolidated financial data have been derived
from the audited financial statements of Capita Research Group, Inc. The
selected financial data should be read in conjunction with the consolidated
financial statements and related notes included elsewhere in this Form 10-KSB.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
1998 1997 1996
---- ---- ----
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C>
Net sales $ 85,500 $ 81,894 $ 360,654
Net loss $ (1,160,682) $ (689,280) $ (398,975)
Loss per share $ (0.10) $ (0.40) $ (0.39)
Weighted average 11,380,306 1,736,458 1,034,658
number of shares
outstanding
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA:
<S> <C> <C> <C>
Total assets $ 141,414 $ 126,840 $ 144,764
Working capital $ (270,524) $ (429,609) $ (278,243)
Long-term debt $ 23,895 -- --
(including current
portion)
Stockholders' $ (168,533) $ (319,959) $ (162,319)
deficiency
</TABLE>
RESULTS OF OPERATIONS: YEAR ENDED DECEMBER 31, 1998, COMPARED WITH YEAR ENDED
DECEMBER 31, 1997
As disclosed in the Company's Form 10-SB/A filed in July 1998, Media
Solutions International (MSII) (a predecessor of Capita) licensed the rights
from Media Solutions Inc. (also a predecessor of Capita) to continue the
development and selling of MediaLink. MediaLink is a software system used by
marketers to manage Direct Response Television, "DRTV", advertising campaigns.
During the first half of 1997, MSII was actively engaged in marketing its
product and providing technical support to its clients. As also disclosed in the
Form 10-SB/A, during 1998, having previously sold the MediaLink line of
business, and having obtained the rights to commercialize the NASA software,
Media Solutions was engaged in developing and launching a new line of business
directed towards advertising and media copy testing. In addition to validating
its testing system for commercial use, this involved substantial ongoing
technical development, creation of corporate infrastructure, and initiation of a
sale solicitation program among prospective media and advertising company
prospects. Currently, the Company is devoting substantially all its efforts in
establishing the advertising and media copy testing business and cannot predict
when these planned principal operations will commence.
For these reasons, substantially all of the material changes from
period to period in the respective Consolidated Statements of Operations for the
year ended December 31, 1998, reflect a basic change of business operations and
not a change in comparable operating results. Accordingly, in the period ended
December 31, 1997 Media Solutions and MSII generated revenue of $81,894 from
sales of its MediaLink software product. Total expenses of $751,722 (exclusive
of interest) were incurred largely in connection with system sales and support
activities. In the year ended December 31, 1998 Capita had sales of $ 85,500 of
its copy testing service. This accounts for the entire period-to-period change
in revenue. The gross margin for the year ended December 31, 1998 was a negative
($40,236). Improvements in gross margin are expected with anticipated sales
increases and further technical and operational improvements to the testing
process. Capita's expenses of $1,216,200 (exclusive of interest) reflect the
technical development of the product, development of an infrastructure, and the
start-up of testing operations. General and administrative expenses include
costs of approximately $104,490 which are attributable to legal, accounting, and
other costs related to the reverse acquisition into Royal American and the
filing of the Form 10-SB/A with the Securities and Exchange Commission.
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Liquidity and Capital Resources at December 31, 1998
- ----------------------------------------------------
With losses expected to continue in the foreseeable future, the
Company's ability to sustain operations is dependent on its ability to raise
added investment capital. During the year ended December 31, 1998, the Company
received cash proceeds of $675,075 from the sale of its common stock. In
consideration of technical and management services, the Company issued common
stock of $460,208 and issued $176,825 of common stock in exchange for
shareholder loans. At December 31, 1998 the financial condition remained
impaired with the working capital shortfall being met primarily from the
proceeds of the issuance of common stock. The above transactions net of the
operating loss had the effect of reducing the total stockholder deficiency by
$151,426 to a deficit of $168,533 at December 31, 1998.
On March 10, 1999 the Company entered into an agreement with Quaker
Capital Markets Group, Inc. ("Quaker"), to render advisory services to the
Company in its attempt to raise up to $5,000,000 in equity capital.
RESULTS OF OPERATIONS: YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED
DECEMBER 31, 1996.
In 1996, Media Solutions continued to develop and market a line of
corporate software known as "MediaLink" for the management of television direct
response advertising ("DRTV") campaigns. During the year, the Media Solutions'
ongoing product development was funded through system sales totaling
approximately $360,000 and additional investments. In many cases, to obtain new
clients, Media Solutions offered pricing at below the fully allocated cost of
delivering and supporting each new system. Moreover, the Media Solutions
software, once installed at each client site, generally required
greater-than-anticipated technical support resources to maintain stability and
functionality. As a result of these facts and the inadequacy of investment
capital, the company experienced a chronic shortage in working capital, and
results from operations were consistently unprofitable.
In October of 1996, Media Solutions entered into a $100,000 bridge loan
agreement with one of its shareholders. Under the terms of the agreement, the
company utilized borrowed funds to satisfy near-term working capital
obligations. Management believed that repayment would come both from anticipated
system sales and from proceeds of an offering of equity securities to outside
investors.
During 1997, MSII, which had licensed the right to use and market
MediaLink, continued to experience strong demand for the product. However, in
addition to the factors mentioned above, operations were unprofitable because
of: 1) the heavy investment required to deploy a client/server application into
the media marketplace; 2) the lack of the required infrastructure to support the
product; 3) the lack of sufficient marketing resources; and 4) the inability to
obtain venture capital commitments necessary to finance the company's expansion.
Another major factor contributing to the lack of profits was the market's
inadequate perception of product value in relation to the cost of developing and
supporting a highly complex software application.
In May of 1997, MSII had exhausted its sources of investment capital.
At that date, the Company had raised approximately $540,000 in equity investment
and $330,000 in stockholder debt. Year to date, sales totaled approximately
$80,000 resulting in losses of approximately $690,000. Under these
8
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circumstances, Media Solutions initiated discussions with interested parties
about acquiring MediaLink. In July of 1997, Media Solutions sold the MediaLink
asset to MSII and MSII signed a letter of intent to sell MediaLink to Columbine
JDS Systems, Inc., a leading media software company and a subsidiary of Big
Flower, Inc., a NYSE listed company. The purchase agreement was effective as of
August 1, 1997. MSII's receipt of proceeds from the sale, totaling $350,000, is
contingent upon certain profitability tests at Columbine. MSII has merged into
Capita, so any proceeds received will be received by Capita.
In July 1997, under new management, Media Solutions reorganized
existing investment and focused on the development and launch of a business
centered around a NASA licensing agreement for the CREW software. For the
remainder of the year, Media Solutions, operating under the name Capita Systems,
Inc., significantly modified and improved the NASA software and instrumentation
hardware and engaged in extensive benchmark testing and preliminary marketing,
performing its first revenue test in October. The cost of these activities was
borne by incremental equity investment obtained over the course of the year. In
the foreseeable future, it is expected that cash generated from operations will
be inadequate to support full marketing roll out and ongoing product development
and that the Company will thus be forced to rely on additional equity financing.
Management believes that it can identify sources and obtain adequate amounts of
such financing.
Y2K Compliance Disclosure
- -------------------------
Capita has determined that year 2000 issues will not materially affect
it. Capita has reached this determination based on the following facts:
1 Capita began business during 1994. All computer hardware and software
has been purchased since that time and as a condition of purchase it
was required to be year 2000 compliant.
2 Capita's internally developed software was developed considering year
2000 issues and is compliant with the computer applications required
for the year 2000.
3 Capita is a technology company whose principal technology service is
for brain wave testing. This technology is not date dependent.
4 Capita's bank and payroll service bureau were both questioned on their
ability to deal with year 2000 issues and have responded that they have
addressed them and are confident that they will have no year 2000
issues that will affect Capita as their client.
ITEM 7 - FINANCIAL STATEMENTS
- -----------------------------
The Company's financial statements for the years ended December 31,
1998, 1997 and 1996 are attached to this report commencing with page F-1.
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- --------------------------------------------------------------------------------
Not applicable.
9
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PART III
--------
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, Promoters and Control Persons,
Compliance with Section 16 ( a ) of the Exchange Act
- --------------------------------------------------------------------------------
The Executive Officers and Directors of the Company are as follows:
Name Age Position(s) Held with Company
- ---- --- -----------------------------
David B. Hunter 44 Chairman of the Board of Directors and
Chief Executive Officer
R. Donald Peterson 60 Vice President Finance and Director
Anthony J. Baratta 35 Treasurer
Tomas J. Stenstrom 27 Vice President and Chief Technology
Officer
Millard Tydings 40 Secretary and Director
Ralph Anglin 73 Director
William T. Hummel 62 Director
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ITEM 9 - DIRECTORS AND EXECUTIVE OFFICERS (Continued)
- -----------------------------------------------------
Brief biographies of the Executive Officers and Directors of the
Company are set forth below. All Directors hold office until the next Annual
Stockholders' Meeting or until death, resignation, retirement, removal,
disqualification or until their successors have been elected and qualified.
Vacancies in the existing Board may be filled by majority vote of the remaining
Directors. Officers of the Company serve at the will of the Board of Directors.
There are no written employment contracts outstanding.
David B. Hunter, age 44, has been Chairman of the Board and Chief Executive
Officer, since January 1998. He has been with the Company since 1995 as General
Manager and Director. Mr. Hunter has been responsible for designing, deploying,
financing and marketing the Engagement(SM) Testing System since its inception,
and originated, negotiated and closed the licensing agreement with NASA. From
1989 to 1995 Mr. Hunter was an independent money manager. From 1980 to 1989 he
was a Vice President with Tucker Anthony, WH Newbolds and Piper Jaffray. Prior
to that, Mr. Hunter was an actuarial consultant with a major pension actuarial
firm. Mr. Hunter graduated Temple University with a B.S. degree in Accounting in
1980.
R. Donald Peterson, age 60, is Vice President Finance and Director. Mr. Peterson
is a Certified Public Accountant, has been with the Company since May 1998. From
1994 to 1998 he owned and operated an independent financial consulting firm
providing corporate financial management services. From 1976 to 1994 he was
employed by UGI Corporation and its subsidiaries in various financial management
capacities. From 1989 to 1994 he was Vice President of Finance for the Amerigas
Propane subsidiary. Mr. Peterson received a B.S. in business administration from
Lehigh University.
Anthony J. Baratta, age 35, has been Treasurer since November 1998 and with the
Company since November 1997. From 1990 to 1997 he was employed by Pennsylvania
Hospital as a cash manager. From 1985 to 1990 he was associated with Merrill
Lynch, Delaware Group of Investments in the area of operations. Mr. Baratta
received a B.S. in business administration with a concentration in finance and
accounting from Temple University in 1988.
Tomas J. Stenstrom, age 27, Vice President and Chief Technology Officer, has
been associated with the Company since August 1997. From 1992 to 1998 he owned
and operated a computer consulting firm providing hardware support, applications
training, and software programming and development. From 1997 to 1998 he was
employed by Prescient Systems as an Oracle Database Administrator and a Graphic
User Interface (GUI) developer. From 1994 to 1997 he worked for IntelliPro as an
Applications Engineer developing educational multimedia software for both the
desktop PC and the Internet. He received a B.S. in Mechanical - Aerospace
Engineering from Rutgers University in 1994.
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ITEM 9 - DIRECTORS AND EXECUTIVE OFFICERS (Continued)
- -----------------------------------------------------
Millard E. Tydings II, age 40, has been a Director of the Company since
September 1996. Currently an independent financial consultant and mergers and
acquisitions specialist. Mr. Tydings was formerly a marketing representative
with the United States Chamber of Commerce from 1992-1994. He received a B.A.
from Johns Hopkins University in 1992.
Ralph Anglin, age 73, Director, has been a Director of the Company since
November 1998. Currently Mr. Anglin is an active consultant with PRA Development
and Management Corporation. From 1980 to 1985 he was the President of Robb Cape
Inc. Mr. Anglin is a graduate of the Massachusetts Institute of Technology with
a B.S. in civil engineering in 1953.
William T. Hummel, age 62, Director, has been a Director of the Company since
November 1998. Currently he has owned and managed his own office building
development company since 1983. Prior to 1983 he was manager of office leasing
development and was a Director at the Jackson Cross Company. Mr. Hummel is a
graduate of Bucknell University with a B.A. in liberal arts in 1958.
Section 16(a) Beneficial Ownership Reporting Compliance
- -------------------------------------------------------
Based solely upon a review of Forms 3, 4 and 5 furnished to the
Company, no director, officer or beneficial owner of ten percent or more of the
Company's common stock failed to file on a timely basis any of the reports
required by Section 16(a) of the Securities Exchange Act of 1934, as amended,
during 1998.
ITEM 10 - EXECUTIVE COMPENSATION
- --------------------------------
The following sets forth the salary and bonus compensation paid during
the fiscal years ended December 31, 1998, 1997 and 1996 to the Chairman and
Chief Executive Officer of the Company. No Executive Officer of the Company
received calendar 1998 salary and bonus compensation, which exceeded $100,000.
Currently the Company's Directors do not receive any type of compensation for
attending the board meetings.
Summary Compensation
David B. Hunter 1998 $55,385 No other annual compensation
1997 $24,000 No other annual compensation
1996 $31,500 No other annual compensation
There is no Incentive Stock Option Plan at this time. No compensation to
management has been waived or accrued to date.
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ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
The following table sets forth the number and percentage of the
Company's shares of Common Stock owned of record and beneficially by each person
or entity owning more than 5% of such shares and by all executive officers and
directors, as a group at December 31, 1998.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
Name Number of Current
Shares Percentage
Owned
---------------------------------------------------------------------------------
<S> <C> <C> <C>
Ralph Anglin (2)(4) 1,893,676 13.96%
111 S. Independence Mall E. # 100
Philadelphia, PA 19106
---------------------------------------------------------------------------------
David Hunter (1) 1,494,727 11.02%
591 Skippack Pike
Blue Bell, PA 19422
---------------------------------------------------------------------------------
Michael Kline 1,295,432 9.55%
P.O. Box 314
Sharon, CT 06069
---------------------------------------------------------------------------------
Margaret Long 996,484 7.35%
591 Skippack Pike
Blue Bell, PA 19422
---------------------------------------------------------------------------------
William Winter 888,701 6.55%
110 Pacific Ave
San Francisco, CA 94111
---------------------------------------------------------------------------------
J. Townshend Benjamin 747,363 5.51%
P.O. Box 40
Oxford, MD 21554
---------------------------------------------------------------------------------
William T. Hummel (2) 188,000 1.39%
589 Skippack Pike, Suite 400
Blue Bell, PA 19422
---------------------------------------------------------------------------------
R. Donald Peterson (1) 100,000 0.74%
906 Old State Road
Berwyn, PA 19312
---------------------------------------------------------------------------------
Anthony J. Baratta (3) 99,903 0.74%
33 Country Club Road
Pine Hill, NJ 08021
---------------------------------------------------------------------------------
Tomas J. Stenstrom (3) 50,000 0.35%
275 Camp Hill Road
Fort Washington, PA 19034
---------------------------------------------------------------------------------
Millard Tydings (1) 49,824 0.37%
2705 Pocock Road
Monkton, MD 21111
---------------------------------------------------------------------------------
All Executive Officers and 3,876,130 28.58%
Directors as a Group (7 persons)
---------------------------------------------------------------------------------
</TABLE>
(1) Officer and Director.
(2) Director only.
(3) Officer only.
(4) Included in Mr. Anglin's shareholdings are 400,000 shares owned by his
profit-sharing plan and 130,000 shares owned by his personal IRA.
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ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
In October of 1996, Media Solution's a predecessor of the Company,
entered into a $100,000 bridge loan agreement with Margaret W. Long, one of its
shareholders. Under the terms of the agreement, the company utilized borrowed
funds to satisfy near term working capital obligations. Management believed that
repayment would come both from anticipated system sales and from proceeds of an
offering of equity securities to outside investors. The bridge loan has a
current outstanding principal balance of $100,000. The current rate of interest
on this loan is set at the prime rate plus two percentage points, which, at
present, is 10.5%. The bridge loan is renewable every three months, with the
current due date being May 3, 1999.
In January 1999, William Hummel, a Director, was issued 80,000 shares
of common stock at $.25 per share as prepaid rent on office space the Company
leases.
In January 1999, Ralph Anglin, a Director, was issued 84,000 shares of common
stock at $ .25 per share in return for various office furniture and fixtures at
a fair market value of $21,000.
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
3 (i) Articles of Incorporation (Incorporated by reference to Exhibit 3(i) to
the Company's Registration Statement on Form 10-SB).
3(ii) By-laws of the Company (Incorporated by reference to Exhibit 3(ii) to
the Company's Registration Statement on Form 10-SB).
10. Material Contracts:
(a) NASA License Agreement (Incorporated by
reference to Exhibit 10(c) to the Company's
Registration Statement on Form 10-SB).
(b) Exchange Agreement dated January 27, 1998
between David B. Hunter, Exchange Agent for
the stockholders of NextGen Systems, Inc.,
and Royal American Mining Properties, LTD.
(Incorporated by reference to Exhibit 10(b)
to the Company's Registration Statement on
Form 10-SB).
a. The Company did not file any reports on Form 8-K during the quarter
ended December 31, 1998.
14
<PAGE>
CAPITA RESEARCH GROUP, INC. AND SUBSIDIARY
(FORMERLY NEXTGEN SYSTEMS, INC.
AND SUBSIDIARY AND AFFILIATE)
(A DEVELOPMENT STAGE COMPANY)
YEARS ENDED
DECEMBER 31, 1998, 1997 AND 1996
<PAGE>
CAPITA RESEARCH GROUP, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
TABLE OF CONTENTS
PAGE(s)
-------
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED AND COMBINED BALANCE SHEETS F-2
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS F-3
CONSOLIDATED AND COMBINED STATEMENTS OF CHANGES IN
STOCKHOLDERS' DEFICIENCY F-4 - F-5
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS F-6
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS F-7 - F-17
<PAGE>
INDEPENDENT AUDITORS' REPORT
Directors and Shareholders
Capita Research Group, Inc.
(Formerly NextGen Systems, Inc.)
(A Development Stage Company)
Blue Bell, Pennsylvania
We have audited the accompanying consolidated balance sheet of Capita
Research Group, Inc. and Subsidiary (Formerly NextGen Systems, Inc. and
Subsidiary and Affiliate) (a development stage company) as of December 31, 1998
and the related consolidated statements of operations, changes in stockholders'
deficiency, and cash flows for the year ended December 31, 1998, and the
combined balance sheets of NextGen Systems, Inc. and Subsidiary and Media
Solutions International, Inc. (an affiliate) (development stage companies) as of
December 31, 1997, and the related combined statements of operations, changes in
stockholders' deficiency and cash flows for each of the two years in the period
ended December 31, 1997. These consolidated and combined financial statements
are the responsibility of the Companies' management. Our responsibility is to
express an opinion on these financial statements based on our audits. We did not
audit the December 31, 1996 financial statements of Media Solutions
International, Inc., whose statements reflect total assets and revenues
constituting 37 percent and 5 percent, respectively, of the related combined
totals for that year. Those statements were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to the
amounts included in Media Solutions International, Inc., is based solely on the
report of the other auditors.
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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated and combined financial statements referred to above present fairly,
in all material respects, the financial position of Capita Research Group, Inc.
and Subsidiary (a development stage company), as of December 31, 1998 and 1997
and the results of their operations, and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 9 to the
financial statements, the Company is a development stage company with no
significant operating results to date and has suffered recurring losses which
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 9. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
March 19, 1999
F-1
<PAGE>
CAPITA RESEARCH GROUP, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED AND COMBINED BALANCE SHEETS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS
1998 1997
(Consolidated) (Combined)
-------------- --------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 19,301 $ 15,190
Prepaid expenses 9,508 --
Accounts and other receivables 1,000 2,000
-------------- --------------
Total current assets 29,809 17,190
-------------- --------------
EQUIPMENT, NET 92,511 85,083
-------------- --------------
OTHER ASSETS
Due from stockholder 15,534 --
Organization costs, net -- 19,638
Deposits 3,560 4,929
-------------- --------------
Total other assets 19,094 24,567
-------------- --------------
$ 141,414 $ 126,840
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 186,052 $ 161,008
Notes payable -- 60,000
Current portion of obligations under capital leases 14,281 --
Due to stockholders 100,000 225,791
-------------- --------------
Total current liabilities 300,333 446,799
-------------- --------------
LONG-TERM OBLIGATIONS UNDER CAPITAL LEASES,
NET OF CURRENT PORTION 9,614 --
-------------- --------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY Common stock, NextGen Systems, Inc.
$1.00 par value, 3,000,000 shares authorized;
issued and outstanding 337,435 in 1997 -- 337,435
Common stock, Media Solutions International, Inc.
$.01 par value, 10,000,000 shares authorized;
issued and outstanding 1,260,100 in 1997 -- 12,601
Common stock, Capita Research Group, Inc.
$.001 par value, 100,000,000 shares authorized;
issued and outstanding, 13,562,900, December 31, 1998 13,563 --
Additional paid-in capital 2,181,114 532,533
Deficit accumulated during development stage (2,363,210) (1,202,528)
-------------- --------------
Total stockholders' deficiency (168,533) (319,959)
-------------- --------------
$ 141,414 $ 126,840
============== ==============
</TABLE>
See Notes to Consolidated and Combined Financial Statements.
F-2
<PAGE>
CAPITA RESEARCH GROUP, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997 1996
(Consolidated) (Combined) (Combined)
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES $ 85,500 $ 81,894 $ 360,654
COST OF REVENUES 125,826 96,100 253,175
------------ ------------ ------------
GROSS PROFIT (LOSS) (40,326) (14,206) 107,479
OPERATING EXPENSES
Selling 47,425 31,947 70,669
Technical 195,189 81,725 66,479
Administrative 405,129 154,365 118,738
Other general and administrative 442,631 387,585 248,855
------------ ------------ ------------
Total operating expenses 1,090,374 655,622 504,741
------------ ------------ ------------
LOSS FROM OPERATIONS (1,130,700) (669,828) (397,262)
------------ ------------ ------------
OTHER INCOME (EXPENSE)
Gain on disposition of asset -- -- 3,900
Interest expense (29,982) (19,452) (5,613)
------------ ------------ ------------
Total other income (expense) (29,982) (19,452) (1,713)
------------ ------------ ------------
LOSS BEFORE INCOME TAXES (1,160,682) (689,280) (398,975)
INCOME TAXES -- -- --
------------ ------------ ------------
NET LOSS $ (1,160,682) $ (689,280) $ (398,975)
============ ============ ============
NET LOSS PER SHARE, BASIC AND DILUTED $ (0.10) $ (0.40) $ (0.39)
============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 11,380,306 1,736,458 1,034,658
============ ============ ============
</TABLE>
See Notes to Consolidated and Combined Financial Statements.
F-3
<PAGE>
CAPITA RESEARCH GROUP, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED AND COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
MEDIA SOLUTIONS
NEXTGEN SYSTEMS, INC. INTERNATIONAL, INC.
NUMBER OF DOLLAR NUMBER OF DOLLAR
SHARES AMOUNT SHARES AMOUNT
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance,
January 1, 1996 500 $ 500 -- $ --
Issuance of stock
at inception -- -- 100,000 1,000
Issuance of stock -- -- 1,826,750 18,268
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance,
December 31, 1996 500 500 1,926,750 19,268
Issuance of stock 337,350 337,350 -- --
Issuance of stock -- -- 38,850 388
Stock redemption
and retirement -- -- (705,500) (7,055)
Stock redemption
and retirement (415) (415) -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance,
December 31, 1997 337,435 337,435 1,260,100 12,601
Exchange and reorganization:
Issuance of common stock in exchange for
debt obligations (Note 1) 218,485 218,485 10,000 100
Issuance of common stock in exchange for
shares of MSII in connection with the
merger of January 12, 1998 (Note 1) 1,099,250 1,099,250 (219,850) (2,199)
Redemption of shares in NextGen and
MSII for no consideration (Note 1) (85) (85) (1,050,250) (10,502)
Issuance of stock 72,000 72,000 -- --
Issuance of shares in Royal in exchange for
shares of NextGen in connection with the
merger of January 29, 1998 (Note 1) (1,727,085) (1,727,085) -- --
Issuance of stock -- -- -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance,
December 31, 1998 -- $ -- -- $ --
=========== =========== =========== ===========
</TABLE>
See Notes to Consolidated and Combined Financial Statements.
F-4
<PAGE>
CAPITA RESEARCH GROUP, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED AND COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(CONTINUED)
<TABLE>
<CAPTION>
DEFICIT
CAPITA RESEARCH ACCUMULATED
GROUP, INC. ADDITIONAL DURING
NUMBER OF DOLLAR PAID-IN DEVELOPMENT
SHARES AMOUNT CAPITAL STAGE PERIOD TOTAL
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance,
January 1, 1996 -- $ -- $ 199,429 $ (114,273) $ 85,656
Issuance of stock
at inception -- -- -- -- 1,000
Issuance of stock -- -- 131,732 -- 150,000
Net loss -- -- -- (398,975) (398,975)
----------- ----------- ----------- ----------- -----------
Balance,
December 31, 1996 -- -- 331,161 (513,248) (162,319)
Issuance of stock -- -- -- -- 337,350
Issuance of stock -- -- 193,902 -- 194,290
Stock redemption
and retirement -- -- 7,055 -- --
Stock redemption
and retirement -- -- 415 -- --
Net loss -- -- -- (689,280) (689,280)
----------- ----------- ----------- ----------- -----------
Balance,
December 31, 1997 -- -- 532,533 (1,202,528) (319,959)
Exchange and reorganization:
Issuance of common stock in exchange for
debt obligations (Note 1) -- -- 24,900 -- 243,485
Issuance of common stock in exchange for
shares of MSII in connection with the
merger of January 12, 1998 (Note 1) -- -- 2,199 -- 1,099,250
Redemption of shares in NextGen and
MSII for no consideration (Note 1) -- -- 10,587 -- --
Issuance of stock -- -- -- -- 72,000
Issuance of shares in Royal in exchange for
shares of NextGen in connection with the
merger of January 29, 1998 (Note 1) 9,580,000 9,580 618,155 -- (1,099,350)
Issuance of stock 3,982,900 3,983 992,740 -- 996,723
Net loss -- -- -- (1,160,682) (1,160,682)
----------- ----------- ----------- ----------- -----------
Balance,
December 31, 1998 13,562,900 $ 13,563 $ 2,181,114 $(2,363,210) $ (168,533)
=========== =========== =========== =========== ===========
</TABLE>
See Notes to Consolidated and Combined Financial Statements.
F-5
<PAGE>
CAPITA RESEARCH GROUP, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
(Consolidated) (Combined) (Combined)
-------------- ---------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,160,682) $ (689,280) $ (398,975)
Adjustments to reconcile net loss to
net cash used in operating activities:
Common stock issued for salaries and services 460,208 -- --
Gain on disposition of asset -- -- (3,900)
Depreciation 41,627 28,007 20,997
Amortization 19,638 14,370 4,875
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable 1,000 26,201 47,908
Other assets 1,369 (1,126) 197
Prepaid expenses (9,508) -- --
Increase (decrease) in:
Accounts payable and accrued expenses 25,044 100,057 12,041
----------- ----------- -----------
Net cash used in operating activities (621,304) (521,771) (316,857)
----------- ----------- -----------
INVESTING ACTIVITIES
Purchase of equipment (16,255) (34,977) (40,377)
Advances to stockholder (15,534) -- --
Organization costs -- -- (38,883)
----------- ----------- -----------
Net cash used in investing activities (31,789) (34,977) (79,260)
----------- ----------- -----------
FINANCING ACTIVITIES
Proceeds from issuance of stock 675,075 531,640 151,000
Proceeds from note payable -- 60,000 --
Proceeds from (repayment of) stockholder loans (8,966) -- 237,832
Proceeds from other loans -- -- 8,300
Repayment of capital lease obligations (8,905) -- --
Repayment of loans -- (20,341) (1,000)
----------- ----------- -----------
Net cash provided by financing activities 657,204 571,299 396,132
----------- ----------- -----------
NET INCREASE IN CASH 4,111 14,551 15
CASH, BEGINNING 15,190 639 624
----------- ----------- -----------
CASH, ENDING $ 19,301 $ 15,190 $ 639
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Capital lease obligations incurred related to the
acquisition of equipment $ 32,800 $ -- $ --
=========== =========== ===========
Conversion of notes payable to
common stock $ 176,825 $ -- $ --
=========== =========== ===========
</TABLE>
See Notes to Consolidated and Combined Financial Statements.
F-6
<PAGE>
CAPITA RESEARCH GROUP, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 1. HISTORY AND NATURE OF THE BUSINESSES AND BUSINESS COMBINATIONS
Capita Research Group Inc. and Subsidiaries (the "Company" or
"Capita") (formerly NextGen Systems, Inc., and Subsidiary and
Affiliate ("NextGen")) is in the development stage of operations.
Capita's predecessor, NextGen (formerly Media Solutions, Inc.,
("Media Solutions" or "MSI")), was incorporated in Pennsylvania on
June 6, 1994, for the purpose of developing and selling MediaLink, a
client/server software system used by the direct-response
advertising industry. From January 1, 1996 through December 31,
1998, the Company, its subsidiary Capita Systems, Inc., and their
predecessors have been principally devoted to research and
development, organizational activities, and raising capital. For the
years ended December 31, 1998, 1997 and 1996, the Company had
$85,500, $81,894 and $360,654 of net revenues, respectively. The
ultimate recovery of the Company's investments and costs is
dependent on future profitable operations, which presently cannot be
determined.
In September of 1995, Media Solutions initiated discussions with
the National Aeronautics and Space Administration ("NASA") in
Langley, Virginia about licensing NASA's software technology known
as the "CREW software." This software measures a test respondent's
EEG, or brain wave impulse, when subjected to aural or visual
stimuli. The CREW software then converts the raw brain wave data
into an index, which indicates the respondent's level of interest
in, or boredom, with the stimuli. In January of 1996, Media
Solutions filed an application with NASA for a license for the
commercial application of the CREW software with the intention to
use it as a testing service in the media and advertising industries.
In June of 1996, the principal stockholders of NextGen, along
with additional investors formed Media Solutions International, Inc.
("MSII"), which was incorporated in Pennsylvania. MSII licensed the
rights from Media Solutions to continue the development and selling
of MediaLink.
F-7
<PAGE>
CAPITA RESEARCH GROUP, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 1. HISTORY AND NATURE OF THE BUSINESSES AND BUSINESS COMBINATIONS
(Continued)
In May of 1997, NASA approved Media Solutions' application for
the CREW software license and issued a license agreement in the name
of "NextGen Systems, Inc.", a fictitious name registered by Media
Solutions in the Commonwealth of Pennsylvania in September 1995.
Under its license agreement with NASA, the Company, by means of its
predecessor, NextGen, obtained an exclusive five-year license
commencing August 4, 1997. The agreement provides that prior to the
expiration of the five-year period, the Licensee (NextGen) may
request this agreement to be modified to extend the term. NASA has
agreed that such requests will not be unreasonably denied if NextGen
has met all milestones as specified in the contract. The NASA
license agreement permits the Company to offer testing services for
all direct response advertising applications, including television
and print media and the Internet, and package design. NASA has
agreed that the Company may use the CREW software for all media and
advertising applications and that such use will not be considered an
infringement of NASA's intellectual property rights in the CREW
software. The license agreement requires the Company to pay NASA a
royalty equal to 10% of revenues, payable annually, with a minimum
guaranteed annual royalty of fifteen thousand dollars ($15,000).
In June of 1997, Media Solutions formed Capita Systems, Inc., a
Delaware corporation and a wholly owned subsidiary of Media
Solutions, for the purpose of commercializing and marketing its
advertising testing service.
On July 31, 1997, NextGen and MSII agreed to sell the MediaLink
asset and related business to Columbine JDS Systems, Inc., an
unrelated party, for a future payment of $350,000 contingent upon
defined levels of profitability. The transaction was completed in
October 1997. Through December 31, 1998, the Company has not
received any payments. In connection with the agreement, and for no
consideration, NextGen's founder relinquished his officer's position
and stock ownership in NextGen and became an employee in Columbine
JDS Systems, Inc.
Since commencing operations in June 1997, Capita Systems, Inc.,
has been engaged in significant additional software research and
development. Beginning in August 1997, the Company initiated
development projects to extensively modify and enhance the original
NASA software to tailor its use to the more specific demands of
media and advertising clients. This included the integration of
video technology into the application. In addition, the Company has
continued to develop proprietary hardware, specifically the EEG
measurement headset, to facilitate high volume and convenience in
the testing process. The Company has developed a completely "dry and
noninvasive" headset and has applied for a US patent on this
hardware and related components.
F-8
<PAGE>
CAPITA RESEARCH GROUP, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 1. HISTORY AND NATURE OF THE BUSINESSES AND BUSINESS COMBINATIONS
(Continued)
As stated previously, the Company performed its first test of
the headset in October 1997, and is in various stages of negotiation
with numerous prospects, including major U.S. marketing companies
and advertising agencies.
On December 30, 1997, MSI changed its legal name to NextGen
Systems, Inc. and increased the number of authorized common shares
to 3,000,000.
The following transactions relate to the mergers, stock issuance
and redemptions occurring within the Companies during January 1998:
On January 3, 1998, $25,000 of notes payable were converted into
10,000 shares of MSII's common stock.
On January 8, 1998, 1,050,250 shares of MSII were redeemed for
no consideration.
On January 9, 1998, 85 shares of NextGen were redeemed for no
consideration.
On January 12, 1998, NextGen acquired MSII in exchange for
stock, whereby NextGen was the surviving corporation. As a result of
the merger, each share of MSII common stock was converted into five
shares of NextGen.
On January 13, 1998, $116,825 due to a stockholder was converted
into 183,385 shares of NextGen common stock.
On January 15, 1998, NextGen issued 37,000 shares of common
stock for total consideration of $37,000.
F-9
<PAGE>
CAPITA RESEARCH GROUP, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 1. HISTORY AND NATURE OF THE BUSINESSES AND BUSINESS COMBINATIONS
(Continued)
On January 27, 1998, prior to the transaction explained below,
$35,000 of notes payable were converted into 35,000 shares of
NextGen. In addition, the Board of Directors of the Company approved
a transaction with Royal American Mining Company ("Royal"), a Nevada
corporation, whose only activity had been filing fee expenses during
its fiscal year. Royal has had no significant revenues for the last
three fiscal years. On January 29, 1998, the Exchange was completed
as the Company obtained approval from 100% of its stockholders. On
January 30, 1998, the Royal stockholders approved the transaction
between NextGen and Royal, whereby the stockholders of NextGen
exchanged 100% of the outstanding common stock of NextGen for 90% of
the outstanding common stock of Royal (the "Exchange"). The Exchange
was accounted for as a reverse acquisition whereby NextGen, in
substance, acquired Royal, allocating the fair value of Royal shares
exchanged over the assets and liabilities of NextGen prior to the
merger; therefore, no goodwill was recognized. Accordingly, the
historical financial statements are those of the accounting
acquirer, NextGen and not the financial statements of the legal
acquirer, Royal. No value was ascribed to Royal's net operating loss
carryforwards as a result of potential decrease and/or limitations
in these carryforwards due to the change in control.
In connection with the Exchange, Royal changed its name to
Capita Research Group, Inc. In addition, the Board of Directors
approved a 2 for 1 stock split whereby the present stockholders of
Royal were entitled to two shares for each share owned by them in
Royal.
In July 1998, the Company filed Form 10-SB with the Securities
and Exchange Commission to register all of its 100,000,000 shares of
common stock with a par value of One Mill ($0.001) per share.
The Company currently employs seven professionals and two
contract consultants. The Company maintains offices in Blue Bell,
Pennsylvania. The Company owns or leases all of its equipment and
software, and has under development, numerous software and hardware
applications to enhance its capabilities in advertising and media
testing. The Company intends to obtain patents and software
copyrights, as products are developed to protect its intellectual
property.
F-10
<PAGE>
CAPITA RESEARCH GROUP, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Combination
For the year ended December 31, 1998, the consolidated financial
statements include the wholly owned subsidiary, Capita Systems, Inc.
For the years ended December 31, 1997 and 1996, the combined
financial statements include the accounts of two entities, which
were under common management, NextGen Systems, Inc. and Subsidiary
("formerly Media Solutions, Inc.") and Media Solutions
International, Inc. The consolidated financial statements of NextGen
included the accounts of its wholly owned subsidiary, Capita
Systems, Inc. All significant intercompany transactions have been
eliminated in all years presented.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash,
accounts receivable, accrued expenses and debt instruments. The
recorded values of cash, accounts receivable, accounts payable and
accrued expenses are considered to be representative of their fair
values. Based upon the terms of the Company's debt instruments that
are outstanding as of December 31, 1998 and 1997, the carrying
values are considered to approximate their respective fair values.
Equipment
Equipment, including assets under capital leases, are stated at
cost. Major improvements are capitalized; minor replacements,
maintenance and repairs are charged to current operations.
Depreciation is computed by applying the straight-line method over
the estimated useful lives of the related assets for financial
reporting purposes and an accelerated method for income tax
purposes.
Organization Costs
Expenses were incurred in connection with the formation of
NextGen and MSII, which were capitalized and were being amortized
over a period of five years using the straight-line method. During
the year ended December 31, 1998, the remaining costs of $19,638
were charged to operations.
F-11
<PAGE>
CAPITA RESEARCH GROUP, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Long-Lived Assets
The Company reviews for the impairment of long-lived assets and
certain identifiable intangibles whenever events or changes in
circumstances indicate that the carrying amount of an asset may not
be recoverable. An impairment loss would be recognized when
estimated future cash flows expected to result from the use of the
asset and its eventual disposition are less than its carrying
amount. The Company has not identified any such impairment losses.
Software Development Costs
Development costs incurred in the research and development of
new software products are expensed as incurred until technological
feasibility has been established. Software development expenses
incurred for product enhancements after the product has reached
technological feasibility have not been material and, accordingly,
also have been charged to operations as incurred. As of December 31,
1998 and 1997 no software development costs have been capitalized.
Advertising and Promotion Costs
Advertising and promotion costs are charged to current
operations when incurred. Advertising and promotion costs for 1998,
1997 and 1996 were $9,824, $9,916 and $26,430, respectively.
Income Taxes
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes," which requires the use of an asset
and liability approach for financial accounting and reporting for
income taxes. Under this method, deferred tax assets and liabilities
are recognized based on the expected future tax consequences of
temporary differences between the financial statement carrying
amounts and tax bases of assets and liabilities as measured by the
enacted tax rates that are expected to be in effect when taxes are
paid or recovered.
F-12
<PAGE>
CAPITA RESEARCH GROUP, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Research and Development
Expenditures for research, development and engineering of
products and manufacturing processes are expensed as incurred. Cost
reimbursements under collaborative research agreements are recorded
as offsets to research and development expenses. Research and
development costs for 1998, 1997 and 1996 were $102,534, $118,241
and $206,188, respectively.
Earnings Per Common Share
In 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings Per Share." SFAS No. 128 replaced the previously
reported primary and fully diluted earnings per share with basic and
diluted earnings per share, respectively. Earnings per share amounts
for all periods presented are based on the weighted average shares
outstanding during the respective periods.
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, liabilities, revenues and expenses, and disclosure of
contingent assets and liabilities. Actual results could differ from
those estimates.
Reclassifications
Certain items in the 1997 and 1996 financial statements were
reclassified to conform with the 1998 presentation.
NOTE 3. STOCKHOLDER LOANS
The Company was indebted to its stockholders in the amount of
$100,000 and $225,791 at December 31, 1998 and 1997, respectively.
The loans have an interest rate of prime plus two percent (9.75% at
December 31, 1998) and are payable on demand. Accrued interest on
stockholder loans at December 31, 1998 and 1997 was $23,612 and
$25,103, respectively.
F-13
<PAGE>
CAPITA RESEARCH GROUP, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 4. EQUIPMENT
1998 1997
---- ----
(Consolidated) (Combined)
-------------- ----------
Equipment $197,014 $149,110
Furniture and fixtures 12,034 12,034
--------- ---------
209,048 161,144
Less - accumulated depreciation (116,537) (76,061)
--------- ---------
$ 92,511 $ 85,083
========= =========
NOTE 5. CONCENTRATION OF CREDIT RISK
The Company maintains cash balances at several financial
institutions. The accounts are insured by the Federal Deposit
Insurance Corporation up to $100,000. The Company performs periodic
evaluations of the relative credit standing of the financial
institutions with which it deals. The Company has not experienced
any losses in such accounts and believes it is not exposed to any
significant credit risk on cash balances.
NOTE 6. INCOME TAXES
A reconciliation of the differences between the Company's
effective tax rates and the statutory Federal income tax rate of 34%
in 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(Consolidated) (Combined) (Combined)
-------------- ---------- ----------
<S> <C> <C> <C>
Income tax benefit at statutory rate ($394,632) ($234,355) ($135,652)
Permanent differences 1,210 4,625 715
State income tax benefit,
net of Federal effect (76,605) (44,709) (26,191)
Reduction in income tax benefit
due to valuation allowance 470,027 274,439 161,128
---------- ---------- ---------
$ -- $ -- $ --
========== ========== =========
</TABLE>
F-14
<PAGE>
CAPITA RESEARCH GROUP, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 6. INCOME TAXES (Continued)
The Company, its predecessors and its affiliates have
experienced significant losses since inception. As a result of the
business combinations during 1998, certain of the net operating loss
carryforwards generated by these losses may be lost and/or
substantially limited. Notwithstanding such effect, any deferred tax
asset recorded as a result of potential net operating loss
carryforwards available to offset future taxable income would be
offset by an equivalent valuation allowance, since Management
believes that it is more likely than not that such deferred tax
asset would not be realized.
The deferred tax assets at December 31, 1997 and 1996 of
$443,000 and $168,000, respectively, have been offset by valuation
allowances of an equal amount.
NOTE 7. COMMITMENTS
Capital Leases
During 1998, the Company leased under capital lease arrangements
expiring in February 2001, certain computer equipment with a total
cost of $32,800. The assets and liabilities under the capital lease
are recorded at the lower of the present value of the minimum lease
payments or the fair market value of the asset. The assets are
depreciated over the shorter of the related lease term or the
estimated productive lives. Amortization of $7,811 related to the
assets under capital lease is included in depreciation expense for
the year ended December 31, 1998. Interest expense related to the
capital lease was $3,651 for the year ended December 31, 1998.
Minimum future obligations under capital leases are:
YEARS ENDING
DECEMBER 31, AMOUNT
- ------------ ----------
1999 $18,470
2000 10,398
2001 192
----------
Total minimum lease payments 29,060
Less - amounts representing interest 5,165
----------
Present value of future minimum lease payments 23,895
Less - current portion 14,281
----------
Long-term portion $ 9,614
==========
F-15
<PAGE>
CAPITA RESEARCH GROUP, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 7. COMMITMENTS (Continued)
Operating Leases
Effective November 1, 1997, the Company entered into an
operating lease for its corporate office located in King of Prussia,
Pennsylvania. The lease agreement was for a term of six months,
thereafter, renewable on a monthly basis. Rent expense for 1998 and
1997 amounted to approximately $22,000 and $2,400, respectively. On
January 1, 1999, the Company moved its offices to Blue Bell,
Pennsylvania and signed a lease agreement expiring December 2001.
Minimum future rental payments under this noncancellable
operating lease through December 2001 and in the aggregate are:
YEARS ENDING
DECEMBER 31, AMOUNT
------------ ------
1999 $ 50,740
2000 74,796
2001 78,849
---------
Total minimum future rental payments $204,385
=========
NOTE 8. DEFICIT ACCUMULATED DURING DEVELOPMENT STAGE
The deficit accumulated during the development stage was
$2,363,210, which includes a loss of $114,273 from the inception of
the Company through December 31, 1995. There were no transactions,
which occurred from the inception of the Company and its
predecessors through December 31, 1995 which were qualitatively or
quantitatively material to the 1998, 1997 or 1996 consolidated and
combined financial statements.
F-16
<PAGE>
CAPITA RESEARCH GROUP, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
NOTE 9. GOING CONCERN
The Company's financial statements are prepared using generally
accepted accounting principles applicable to a going concern which
contemplates the realization of assets and liquidation of
liabilities in the normal course of business. However, the Company
does not have significant cash or other material assets nor does it
have an established source of revenues sufficient to cover its
operating costs and to allow it to continue as a going concern. It
is the intent of the Company to generate revenue through the sales
of its software and hardware products. The Company continues to
focus its energies on raising capital to begin the manufacturing and
marketing of its products. Toward these ends, the Company engaged a
public relations firm to aid in the raising of capital and to
present seminars on its technology. Management believes, with
successful completion of a financial package, that delivered sales
of the Company's products will occur. In the opinion of management,
sales of the Company's products, together with the proceeds from the
sale of its common stock, will be sufficient for it to continue as a
going concern.
NOTE 10. SUBSEQUENT EVENTS
On January 8, 1999, the Company issued 80,000 shares of common
stock in exchange for $20,000 of rent reduction during the first
quarter of 1999.
On January 8, 1999, the Company issued 84,000 shares of common
stock to a stockholder for various furniture and fixtures whose fair
market value was $21,000.
On January 8, 1999, the Company issued 68,000 shares of common
stock for investor relations services rendered in the amount of
$17,000.
In February and March 1999, the Company issued approximately
200,000 shares of common stock to two unrelated parties, for total
consideration of $50,000.
On March 10, 1999, the Company issued 50,000 shares of common
stock for legal services rendered in the amount of $12,500.
On March 10, 1999, the Company entered into an agreement with
Quaker Capital Markets Group, Inc. ("Quaker"), to render advisory
services to the Company in its attempt to raise up to $5,000,000 in
equity capital. In connection therewith, the Company agreed to pay
Quaker $10,000 in cash, $15,000 in common stock and a percentage of
equity capital raised.
F-17
<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, thereunto duly
authorized.
CAPITA RESEARCH GROUP, INC.
/s/ David B. Hunter
---------------------------
David B. Hunter
Chairman of the Board
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant in the capacities and on the dates
indicated.
Signatures Titles Date
- ---------- ------ ----
/s/ David B. Hunter April 12, 1999
- ---------------------- --------------
David B. Hunter Chairman of the Board of
Directors and Chief Executive Officer
/s/ R. Donald Peterson April 12, 1999
- ---------------------- --------------
R. Donald Peterson Vice President Finance,
Principal Financial and
Accounting Officer and Director
/s/ Milard Tydings April 12, 1999
- ---------------------- --------------
Millard Tydings Secretary and Director
/s/ Ralph Anglin April 12, 1999
- ---------------------- --------------
Ralph Anglin Director
/s/ William T. Hummel April 12, 1999
- ---------------------- --------------
William T. Hummel Director
15
