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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year Ended December 31, 1999
Commission File Number: 000-24835
PTN MEDIA, INC.
(Exact name of registrant as specified in its charter)
Delaware 38-3399098
(State of Incorporation) (I.R.S. Employer I.D. Number)
455 East Eisenhower Parkway, Suite 15, Ann Arbor, Michigan 48108
(Address of principal executive offices and Zip Code)
(734-327-0579)
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act: None.
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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: [X] YES [ ] NO
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B 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]
Registrant's revenues for its most recent fiscal year (ended December 31, 1999):
$13,700
Aggregate market value of voting stock held by non-affiliates at December 31,
1999: $11,375,105
Indicate the number of shares outstanding of each of the registrant's classes of
common stock:
4,049,862 common shares were outstanding as of December 31, 1999.
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FORM 10-KSB
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PTN MEDIA, INC.
Form 10-KSB for the Fiscal Year ended December 31, 1999
Table of Contents
PART I
Page
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ITEM 1. DESCRIPTION OF BUSINESS ........................................... 3
Background on our Business .................................. 3
Background on our Industry .................................. 4
Our Web Sites ............................................... 5
Our Sources of Revenue ...................................... 7
Web Host; Operations, Security and Technology ............... 8
Competition ................................................. 9
Technology; Trademarks and Proprietary Rights ............... 10
Government Regulation ....................................... 11
Arbitration filed by Tyra Banks ............................. 11
RISK FACTORS ...................................................... 13
EMPLOYEES ......................................................... 18
FACILITIES ........................................................ 18
ITEM 2. DESCRIPTION OF PROPERTY ........................................... 18
ITEM 3. LEGAL PROCEEDINGS ................................................. 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ............... 19
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS .......... 20
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ........................................... 20
ITEM 7. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OR PLAN OF OPERATIONS ....... 21
General ..................................................... 21
Overview .................................................... 21
Cash Requirements ........................................... 23
Impact of recently issued accounting standards .............. 24
Forward looking statements .................................. 24
ITEM 8. FINANCIAL STATEMENTS .............................................. 25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ..................... 25
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS ...... 26
ITEM 11. EXECUTIVE COMPENSATION ............................................ 27
Employment and Consulting Agreements ........................ 27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT .... 28
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .................... 29
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K .................................. 30
REPORTS ON FORM 8-K ............................................... 31
SIGNATURES ................................................................. S-1
FINANCIAL STATEMENTS ....................................................... F-1
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Background on our Business
We are an interactive media content provider of branded content and
commerce opportunities for defined target audiences using a combination of new
and traditional media. Our strategy is to create content that is of great appeal
to our targeted audience and attract advertisers desiring to reach this
audience. Our initial efforts have been dedicated to content related to fashion,
style and beauty. We currently provide this content on our interactive web site
fashionwindow.com (www.fashionwindow.com). We intend to provide similar content
on claudiaschiffer.com. (www.claudiaschiffer.com), that will be hosted by the
supermodel Claudia Schiffer. We have the exclusive license to use Ms. Schiffer's
name and likeness in connection with this web site. We intend to launch this
site in the first quarter of this year.
We also intend to add celebrities to fashionwindow.com, create
additional web sites hosted by well-known models and celebrities, and provide
similar content on television, print and other forms of traditional media. We
currently market an electronic calendar featuring model Estella Warren.
Our strategy is to draw a large number of users to our web sites by
offering popular area of Web usage including current news and information on
fashion, advice on fashion and personal care, commerce opportunities, search
capabilities for additional commerce opportunities online and community
interactivity.
We further intend to draw users to our web sites by the following
means:
Offer free information and services: We provide information, services, and
commerce opportunities without cost or charges to the user and make those
services easily accessible.
Develop additional licensing of our content to third parties: We are presently
party to one license of our original content and are exploring additional
opportunities to extend our licensing to other web sites and to other media.
These relationships will enable us to develop recognition for our content cost
effectively.
Develop value added electronic commerce: We believe that Web-based electronic
commerce for fashion, apparel and beauty products will continue to grow as an
increasing number of consumers and businesses accept the Internet as a viable
method of purchasing these goods and services. We currently offer a number of
ways to purchase goods and services on our sites including placement of a number
of leading internet retailers in our "Shops at FW" area, the Personal Shopper
which allows the purchases of items found in search results, direct response via
banners, and product specific purchases through afffina Stores.
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Enhance fashionwindow.com's product offerings: We intend to enhance and expand
product offerings on fashionwindow.com with additional content areas such as
music, features, and functionality to maintain and enhance our market position.
Provide original and compelling targeted sites: Specific sites such as
claudiaschiffer.com should offer us opportunities to deliver premium advertising
opportunities to a user base with attractive demographics and to diversify our
revenue streams through rents, transactional revenue, and licensing.
Establish market awareness and brand recognition: We believe that building the
fashionwindow.com brand is a critical element of our business strategy. In this
regard, we expect to place significant emphasis on establishing a brand identity
for our sites and product offerings. We seek to reflect a network of fashion
related sites that provide a compelling balance of commerce, community, and
content. Our strategy is to build brand awareness using our content licensing,
creation of radio programming, and traditional advertising and sponsorships.
Advertise our web sites: We advertise and promote our web sites through various
forms of media. We purchase banner advertisements on search engines on the World
Wide Web and enter into advertising barter arrangements with other web sites. We
promote our web sites through advertising and promotional spots contained within
Company-sponsored radio programs and by advertising in selected publications. We
arrange for the promotion of our web sites by host models, to the extent that
they are not prohibited from participating in any such promotion as a result of
other commitments, or such promotion is limited by the terms of our license with
the model. Finally, promotional advertising in connection with products offered
by us, including calendars and electronic planners, is another means by which we
promote our web sites.
Offer interactive communication: We plan to offer an online avenue for
interactive communication covering topics such as fashion and health, with the
primary focus on our web sites' models and celebrity hosts. Our goal is to
operate the exclusive online access to select models such as Claudia Schiffer,
and to provide visitors and members with information, photos and other content
unavailable elsewhere.
Background on our Industry
By accessing the World Wide Web through the Internet, users can reach a
multitude of web sites simply by typing domain names, normally beginning with
the letters "www" and ending with the letters "com," "gov," "org" or other
suffix depending on the type of entity. Recent improvements in web browsers and
search engines, which help users navigate the information and services offered
on the World Wide Web, have made locating these web sites much simpler. We
believe that as the number of providers of infrastructure, access and browser
services increases and access to and the usefulness of the Internet improve, the
quality of the content provided by web site operators also will improve. This in
turn should attract greater levels of commerce over the Internet.
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Additionally, as a result of increased usage of the Internet, content
historically provided by means of traditional media, such as television, radio
or print, is now being offered on the Internet. Furthermore, because of the
advantages the Internet has over traditional forms of media, particularly its
interactive features, content can be provided by means unavailable through
traditional media. For example, content can be delivered to specifically
identified audiences who share strong similar interests. Advertisers seek out
only those web sites that attract audiences with the same demographic
characteristics as the desired purchasers of their goods or services.
Our Web Sites
Fashionwindow.com
We currently have one online destination that provides content over the
Internet, fashionwindow.com (www.fashionwindow.com). Although there are
currently several fashion-related web sites on the Internet, and we expect there
to be several additions in the future, we believe that the editorial content,
exclusive celebrity relationships and innovative features of fashionwindow.com,
as well as web sites we plan to develop, will distinguish us from other
providers. Fashionwindow.com offers, and our anticipated web sites are expected
to offer, a variety of articles covering fashion, beauty, style and
entertainment. Most of these articles are provided by freelance journalists who
are experienced writers in these fields.
Claudiaschiffer.com
We have the exclusive license to use well-known model Claudia
Schiffer's name and likeness in connection with a web site in production,
claudiaschiffer.com (www.claudiaschiffer.com). We intend to launch
claudiaschiffer.com in the first quarter of this year. This license agreement
with Ms. Schiffer, which we entered into in November 1998, grants us the
exclusive license for an on-line Internet service devoted to Ms. Schiffer.
Pursuant to the terms of the license agreement, we have the right to use Ms.
Schiffer's name and likeness for an Internet site including a merchandise
"boutique", monthly column and interviews or on-line chat sessions. Ms. Schiffer
also is required to make promotional appearances and voice recordings to promote
the site and provide content for it. The license agreement continues until the
year 2001. We are obligated to pay Ms. Schiffer guaranteed minimum royalties of
$300,000 for the first year, $400,000 for the second year, and $500,000 for the
third year, which would be credited against earned royalties ranging from 25% to
80% of site revenues and profits from boutique merchandise sales.
The license agreement grants to Ms. Schiffer 219,682 shares of our
Common Stock, with the right to maintain the ratio of her Common Stock ownership
to that of Peter Klamka, our President. We valued Ms. Schiffer's shares at 80%
of the market value of our stock on the date of issuance or $4.00 per share. We
agreed to indemnify Ms. Schiffer for any U.S. income tax liability resulting
from the issuance of these shares, however, we have been assured that Ms.
Schiffer is not a U.S. citizen or resident, and therefore is not likely to be
responsible for any such taxes.
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In November and December 1998, we paid Ms. Schiffer an aggregate of
$145,000 pursuant to the terms of the Schiffer License Agreement. We then paid
Ms. Schiffer an additional $155,000 in February 1999, at which time she executed
the license agreement. Additionally, in December of 1998, we agreed to issue to
Ms. Schiffer an additional 50,000 shares of our Common Stock, so that Ms.
Schiffer would be entitled to receive a total of 269,682 shares of Common Stock.
Ms. Schiffer was paid in full for 1999. Ms. Schiffer has been paid $100,000
toward the year 2000 obligation. We currently owe Ms. Schiffer $300,000.
Fragrancedirect.com.
Our wholly owned subsidiary, Fragrancedirect.com, plans to launch our
online fragrance sales effort within the next several months.
Fragrancedirect.com, with the assistance of IXL, is completing the construction
of a web site with the Internet address "www.fragrancedirect.com." On this web
site we will sell colognes, gift items, perfumes and other fragrances to
Internet users.
We anticipate that our prices for fragrances will be lower than the
manufacturers suggested retail prices, however, not necessarily less than all
retail outlets.
We intend to obtain product liability insurance in such amounts as are
appropriate to insure against any possible product liability exposure resulting
from the sale of fragrances on www.fragrancedirect.com. We are aware of at least
two similar web sites attempting to compete for the on-line fragrance business.
Additional Web Sites and Content
We are currently negotiating licenses with other popular models in
connection with our development of additional fashion-related web sites to be
hosted by these models. These web sites will offer content areas similar to
those provided on our Fashionwindow.com site, except that the content of each
web site will be specifically tailored to the look and style of its model host,
as well as the interests of the targeted audience. We also plan to provide daily
television listings and astrological forecasts on our web sites, which are
expected to be obtained on a barter basis.
We believe that user interaction will be the main draw of our web
sites. Our plan is to continuously add to and change the content on our web
sites to enhance user interest. This content may include national and regional
"behind the scenes" news from fashion shows, models, clothing designers and
other celebrities. In addition, we may enter into arrangements for live
broadcasts of fashion shows featuring models from our web sites.
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Our Sources of Revenue
Advertising
We believe that Fashionwindow.com offers a desirable vehicle for
advertisers seeking to reach fashion-oriented consumers. The subject matter of
Fashionwindow.com and our proposed future web sites attract an audience that is
well educated, sophisticated and affluent. To be successful, we must attract
advertising placements from businesses that provide the types of products and
services that appeal to the target audience of our web sites.
Banner Advertising
We derive substantially all of our revenues from the sale of
advertising banners on our initial web site. These banners appear on a user's
computer screen when accessing different areas of our web sites. The interactive
nature of the Internet also allows users to obtain extensive additional
information about an advertiser's products or services instantly, by clicking on
a hypertext link to the advertiser's web site. In some cases the advertiser's
products can be purchased in a transaction completed on the Internet. We have
entered into agreements with certain advertisers whose banner advertisements
appear on our fashionwindow.com web site, and are negotiating with additional
advertisers to place banner advertisements on our current and/or future web
sites.
In November 1999 we entered into an exclusive representation agreement
with Adsmart Corporation for both fashionwindow.com and claudiaschiffer.com. The
term of the agreement is one year. The advertisements are sold pursuant to the
agreement on a cost per thousand impressions basis.
Lycos Agreement
In an agreement executed on November 16, 1998, Lycos, Inc. agreed to
provide us with $600,000 worth of advertising banner impressions on the Lycos
network consisting of complete page views with a Claudia Schiffer advertising
banner and a link to www.claudiaschiffer.com. The banner advertising and link to
our web site were made available to us commencing on December 15, 1998 and were
available until December 15, 1999. Lycos has verbally informed us that they will
exercise their option to renew the agreement. We are finalizing documentation,
although there can be no assurance that Lycos will renew the agreement. These
impressions will only be used to promote www.claudiaschiffer.com, and Lycos has
also agreed to include at least $200,000 worth of these advertisements on its
web site lycos.com. Advertising content and placement on the Lycos network are
subject to approval by both parties, with banners rotated as often as the
Company desires. Lycos is currently running banner advertisements for www.
claudiaschiffer.com and will commence links to the Company's web site as soon as
the site is up. In exchange for the services to be provided by Lycos, the
Company will provide Lycos with a link to the Company's Claudia Schiffer web
site, placed at the Company's discretion. Ms. Schiffer has the right to
terminate this agreement at any time. This agreement is a barter
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arrangement for advertising, does not involve any monetary payments and can be
renewed by mutual agreement of both parties.
Syndicated Radio Shows
The Company has had preliminary discussions with a national syndicator
of radio programming, in connection with the development and airing of a daily
90-second radio show devoted to the same subject matter as the Company's web
sites. We have paid supermodel Veronica Webb $2,500 to tape pilot episodes of
our proposed radio program Fashionwindow.com Minute. The program is currently
being evaluated for distribution. We are also exploring a long form program
featuring MTV host and E Channel host Downtown Julie Brown. We paid Ms. Brown
$2,500 to tape a pilot episode of this program. The program is currently being
evaluated for distribution. Syndicated radio shows could be a source of
additional revenue through the sale of up to 30 seconds of advertising time as
well as increase traffic to our web sites allowing us to generate more banner
advertising. There can be no assurance that we will be able to enter into an
agreement with a syndicator or develop or make profitable a radio show.
Marketing and Promotion
The Company continually evaluates numerous ways to promote its brand
names such as "Fashionwindow," believing that brand recognition will assume
increasing importance as the volume of activity on the Internet increases. The
Company intends to promote its web sites, products and other services through
cobranding and online partnerships, paid advertising, content syndication,
public relations and sponsorship.
Web Host; Operations, Security and Technology
Our web sites are made available to users through our web host, Digex.
We provide pages of code, graphics and video to Digex, which uploads this
information to its dedicated servers. Digex is responsible for all traffic,
security and management of the technological aspects of our web sites. We are
responsible for updating the content on the web sites and to apprising Digex of
our changing technological needs and offering Digex the opportunity to provide
for these needs. We compensate Digex with a combination of cash and promotional
consideration. We believe we would have no difficulty replacing Digex with
another web host if our relationship with Digex were to be terminated for any
reason.
A key element of our success is to generate a high volume of use of our
sites. Accordingly, high levels of performance are critical. Any system failure
that causes interruption or an increase in response time could result in less
traffic to our web sites and, if sustained or repeated, could reduce the
attractiveness of our web sites to advertisers. Further, any substantial
increase in the number of visits to our web sites could strain the capacity of
the software or hardware deployed by us or our web hosts and would require us to
expand and adapt our network infrastructure. Our inability to add software or
hardware to accommodate substantial increases in traffic could lead to slower
response time or system failures.
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Our operations also are dependent, in part, upon the ability of our web
hosts to protect their operating systems against physical damage from fire,
floods, earthquakes, power loss, telecommunications failures, break-ins and
similar events. We do not currently have redundant, multiple site capacity in
the event of any such occurrence. Notwithstanding the implementation of security
measures by us, such as limiting physical and network access to its routers, our
infrastructure is vulnerable to computer viruses, break-ins and similar
disruptive acts by Internet users. These factors could lead to interruption,
delays or cessation in service of our web sites. Furthermore, the inappropriate
use of the Internet could jeopardize the security of confidential information
stored in the computer systems of our customers and other users of the Internet,
which could deter potential customers from accessing our web sites and give rise
to uncertain liability to users whose security and privacy has been infringed. A
security breach could result in loss of customers, damage to our reputation,
damage to our web sites, costs of repair and detection and other expenses. The
security and privacy concerns of existing and potential customers may inhibit
the growth of the Internet, in general, and our revenues in particular.
Competition
Competition among content providers on the Internet is intense and is
expected to increase significantly. The Internet is currently characterized by
minimal barriers to entry, since new web sites can be developed and launched at
relatively low cost. We face competition from a number of sources that provide
content through one or more media, such as print, broadcast, cable television
and the Internet. In order to compete successfully, we must establish and
maintain awareness, among the public, of our brand names, effectively market our
services and products, and successfully differentiate our web sites. This will
be highly dependent on our ability to provide compelling and popular content to
attract Internet users and support advertising and sales of products and
services that are intended to reach such users.
We compete with a significant number of web content providers, several
of which offer competitive services and/or products, and address certain of our
target markets, including, among others, Women's Wire, Elle Magazine, Ford
Models, Inc. and Pataxi Entertainment Network, Inc. (operator of
supermodel.com). In addition, we compete against large service providers,
including web directories, search engines, commercial online services and sites
maintained by Internet service providers, many of which offer content similar to
that provided on our web sites and attract advertisers targeting the same
audience as us. Some of these companies include Microsoft Corporation, America
Online, Inc., Netscape Communications, Yahoo! Inc. and Prodigy Services Co. Many
of these competitors have significantly greater financial, technical and
marketing resources than us, and include companies that are larger and better
capitalized than us. These competitors also may have expertise and established
brand recognition in the Internet market.
In addition, we compete for the time and attention of Internet users
with thousands of non-profit Internet sites operated by educational
institutions, governments and individuals. Existing and potential competitors
also include other forms of media, such as television, radio and print media,
many of which provide services and products that are similar to those which we
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currently provide and also intend to provide through our web sites. Although
traditional media outlets do not offer many of the interactive features
available through the Internet (such as online chat rooms, E-mail, etc.), there
are numerous publications, as well as television and radio programs, which
provide editorial content similar to that which we provide on our web site, as
well as articles and features on fashion, beauty, health and celebrities. There
can be no assurance that our competitors will not develop services and products
that are superior to ours or that achieve greater market acceptance.
We believe that the principal competitive factors in the Internet
market are brand recognition, ease of use, content depth, content quality,
content presentation, speed and quality of service execution, competitive
pricing, successful marketing and the availability of targeted content and
focused value added services and products. To be competitive, we believe that we
must distinguish our editorial content from our competitors and customize this
content to appeal to our target audiences.
Since many of our competitors have greater resources than us, these
competitors may be able to undertake more extensive marketing campaigns, adopt
more aggressive pricing policies and devote substantially more resources to
developing their content and services. In addition, as a strategic response to
changes in the competitive environment, we may make certain pricing, service or
marketing decisions or enter into acquisitions of new entities that could have a
material adverse effect on our business, results of operations and financial
condition.
Technology; Trademarks and Proprietary Rights
Our success is highly dependent on our trademarks and other
intellectual property rights. We rely upon trademark and copyright law, trade
secret protection and, where appropriate, confidentiality and /or license
agreements with our employees, independent contractors and consultants to
protect our proprietary rights. To date, none of our trademarks has been
registered, nor do we currently contemplate registering any of our trademarks.
We also rely on copyright laws to protect the original content included on our
web sites. A substantial amount of uncertainty exists concerning the application
of copyright laws to the Internet, and there can be no assurance that existing
laws will provide us with adequate protection.
Effective trademark, copyright and trade secret protection may not be
available in every country in which our services and products are distributed or
appear via the Internet. As part of our business strategy, we may license our
content, trademarks and images to third parties. Without adequate protection in
foreign markets, there can be no assurance that these licensees will not take
actions that might materially or adversely affect the value of our proprietary
rights. In addition, despite our efforts to protect our proprietary rights, the
rapid pace of technological innovation on the Internet makes it possible for
third parties to copy or otherwise obtain and use our products or technology
without authorization, or to develop similar technology independently. Policing
unauthorized use of our technology and intellectual property will be difficult.
We generally obtain confidentiality agreements from all employees and
independent contractors providing services in connection with the development
and design of our web sites.
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Government Regulation
Our business is not currently subject to direct regulation by any
government agency, other than regulations applicable to businesses generally,
and there are currently few laws or regulations directly applicable to access to
or commerce on the Internet. However, due to the increasing popularity and use
of the Internet, it is possible that a number of laws and regulations may be
adopted with respect to the Internet, covering issues such as user privacy,
pricing, characteristics and quality of products and services. The
Telecommunications Reform Act of 1996 imposes criminal penalties on anyone who
distributes obscene, indecent or patently offensive communications on the
Internet (although certain provisions of that law have recently been held to be
unconstitutional). The manner in which this law, or any similar law which may be
adopted in the future, will be interpreted and enforced and its effects on our
proposed operations cannot yet be fully determined. The adoption of any
additional laws or regulations may decrease the growth of the Internet, which
could in turn decrease the demand for our services and products and increase our
cost of doing business. Furthermore, the applicability to the Internet of
existing laws in various jurisdictions governing issues such as property
ownership, libel and personal privacy is uncertain.
Arbitration filed by Tyra Banks
We entered into a license agreement with a company controlled by
well-known model, Tyra Banks, similar to the license agreement with the company
controlled by Claudia Schiffer. In addition, we also entered into an agreement
with Ms. Banks' company in connection with the creation, marketing and sale of
calendars and electronic planners featuring photographs of Ms. Banks. On June
18, 1998, Ms. Banks declared us in breach of both of these agreements and has
refused to perform under either of them. The basis for this declaration was our
alleged failure to pay the full amount of all advances due and payable to Ms.
Banks' company pursuant to the agreements, as well as our failure to fully
reimburse Ms. Banks for certain expenses provided for under the calendar
agreement. To date, we have advanced funds to Ms. Banks' company in the
aggregate amount of $134,000. We received a letter from Ms. Banks' attorneys,
dated September 8, 1998, demanding that we pay to Ms. Banks' company an
additional $153,000 on or before September 15, 1998, cease all uses of Ms.
Banks' name, picture and likeness and return all photographs and images of Ms.
Banks. This letter further stated that in the event that we failed to comply
with their demands by that date, Ms. Banks and her company would be forced to
take all "appropriate" action to recover all amounts alleged to be owed, and to
enforce their rights against us.
On December 8, 1998, attorneys for Tyra Banks and Bankable, Inc., an
entity controlled by Ms. Banks, made a Demand for Arbitration against us under
the commercial arbitration rules of the American Arbitration Association. Ms.
Banks' attorneys alleged that we failed to make timely payments of money due
upon the execution of the web site license agreement and calendar agreement
between Ms. Banks and the Company ("Agreements"), and refused to return
photographs, pictures, prints, negatives and images of Ms. Banks. Ms. Banks is
seeking the amount of $531,333, allegedly owed to her, to prohibit the Company
from using her name, picture and likeness, and to have all images of Ms. Banks,
in any form, returned to her.
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She also is seeking the cost of attorney's fees. On January 15, 1999, we,
through our attorneys, filed an Answer and Counterclaim to Ms. Banks' Demand for
Arbitration. We raised several defenses to Ms. Banks' claims and claimed a
breach by Ms. Banks and Bankable, Inc. of the web site agreement. We are seeking
the amount of $264,000, in damages related to the Calendar and Web Site
Agreements. A preliminary administrative conference was held on January 19,
1999, and a hearing was held in October 1999 and we filed briefs on March 6,
2000 in response and are awaiting the arbitrator's decision. We intend to
vigorously defend ourself in this arbitration, and believe that we have
meritorious defenses. Nonetheless, there can be no assurance that we will be
successful in this arbitration, and an unfavorable settlement or result in this
matter could have a material adverse effect on us.
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RISK FACTORS
Investing in our common stock is very risky. You should be able to bear
a complete loss of your investment. You should carefully consider the following
risks, among others.
We have an accumulated deficit and anticipate further losses.
We have incurred significant losses since we began doing business.
There can be no assurance that our services and products will ever generate
sufficient revenues or that our operations will ever be profitable. As of
December 31, 1999, we had an accumulated deficit of $4,477,718. We expect to
incur operating losses for the foreseeable future due to the significant
expenses which we expect to incur in the continued development and marketing of
fashionwindow.com, the development and marketing of our proposed web site
claudiaschiffer.com as well as expenses related to any additional sites that we
develop. These expenses include substantial advance royalty payments that we
have agreed to make to Ms. Schiffer. Additionally, to the extent that we engage
additional models and/or celebrities for our web sites, we will most likely be
required to pay advance royalties to those persons.
We have generated extremely limited revenues to date from our
fashionwindow.com web site, and there can be no assurance that we will ever
generate revenues from this web site or from any other business we conduct.
These initial revenues have been generated primarily from advertising placed on
fashionwindow.com. We also expect to significantly increase our operating
expenses to expand our sales and marketing operations, to fund greater levels of
product development, and to develop other forms of revenue-generating business,
such as direct response sales, licensing of our proprietary materials to others,
and celebrity chat clubs.
We received an opinion from our accountants for the period ended December 31,
1999 which raised doubt about our ability to continue after such date as a going
concern.
Our consolidated financial statements for the year ended December 31,
1999, which are included in this Form 10KSB, indicate that there was substantial
doubt as of December 31, 1999 about our ability to continue as a going concern
due to our need to generate cash from operations and obtain additional
financing.
We need to raise additional funds to fund our business operations.
We need to raise additional funds because our cash flows have proven to
be insufficient to fund operations. There can be no assurance that additional
financing will be available to us on commercially reasonable terms, or at all.
We may raise funds through equity or debt financings, depending on our
opportunities. If we raise additional funds by issuing equity securities, this
will further dilute the interests of our current stockholders. If we raise
additional funds by issuing debt securities, we will be subject to the risks
associated with incurring substantial indebtedness, including the risks that
interest rates may fluctuate and cash flow may be insufficient to pay principal
and interest on any such indebtedness. We have no current arrangements with
respect to, or sources of, additional financing, and it is not anticipated that
our existing stockholders will provide any portion of our future financing
requirements.
13
<PAGE>
We depend on license agreements with models to attract users to our web sites.
We plan that a principal attraction of our web sites will be celebrity
models who host our web sites. In the event we are unable to retain the services
of a sufficient number of celebrities to host our web sites, or maintain the
services of such celebrities for an extended period of time, it is highly
unlikely that our web sites will attract the number of users required to obtain
significant advertising and merchandisers.
In addition, the success of our web sites will be highly dependent on
the continued popularity of the celebrity models who host the sites. In the
event that the popularity of any such celebrity model fades in the public eye,
including for among other reasons, disclosure of allegedly illegal or immoral
acts by such celebrity model, we will in all likelihood find it necessary to
terminate our relationship with that celebrity model. This could adversely
effect our business because a suitable replacement may not be available on a
timely basis and on mutually agreeable terms and conditions.
We may not be successful in an arbitration filed by Tyra Banks. This could have
a material adverse effect on our business.
On December 8, 1998, attorneys for Tyra Banks and Bankable, Inc., an
entity controlled by Ms. Banks, made a Demand for Arbitration against us under
the Commercial Arbitration Rules of the American Arbitration Association. There
can be no assurance that we will be successful in this arbitration and an
unfavorable settlement or result in this matter could have a material adverse
affect on us. Ms. Banks' attorneys alleged that we failed to make timely
payments due upon the execution of the Web Site License Agreement and Calendar
Agreement between Ms. Banks and us. Ms. Banks is seeking damages under the
Calendar Agreement in the amount of $161,333, damages under the Web Site
Agreement in the amount of $370,000, and legal fees. On January 15, 1999 we,
through our attorneys, filed an Answer and Counterclaim to Ms. Banks' Demand for
Arbitration. We raised several defenses to Ms. Banks' claims and claimed a
breach by Ms. Banks of the Agreements. We are seeking $264,000 in damages
related to the Calendar and Web Site Agreements. A hearing was held in October
1999 and we filed briefs on March 6, 2000 in response and are awaiting the
arbitrator's decision.
In the event that we fail to attract advertising customers, lose customers after
they have been retained, or we are forced to reduce advertising rates in order
to retain or attract advertisers, our business, results of operations and
financial condition could be materially and adversely affected.
14
<PAGE>
We derive substantially all our revenues from the sale of
advertisements on our web sites and expect this trend to continue through 2000.
Our ability to generate advertising revenues will depend upon, among other
factors, the acceptance of our web sites as attractive and sustainable media,
the development of a large audience of users of our web sites and the effective
development of media properties that provide user demographic characteristics
that will be attractive to advertisers. Existing advertising placement contracts
are for relatively short terms, generally three months or less, and are
terminable by advertisers at any time on very short notice. Consequently, our
advertising clients will be able to eliminate or move their advertising to
competing Internet sites or from the Internet to traditional media, quickly and
at low cost.
There is currently intense competition in the sale of advertising on
the Internet. This competition has resulted in a wide range of advertising rates
for a variety of advertising services, making it difficult to project future
levels of Internet advertising revenues which may be realized by us or any of
our competitors. Competition among current and future web sites, as well as
competition from traditional media for advertising placements, could result in
significant price competition and reductions in our projected advertising prices
and revenues.
In the event that we are unable to generate significant revenues from any
sources other than advertising placements, our business, results of operations
and financial condition could be materially and adversely affected.
Our ability to expand our business is also dependent upon our success
in generating significant revenues from sources other than advertising
placements on our web sites. We intend to enter into direct marketing
arrangements with a variety of businesses in connection with the sale of their
products and services on our web sites. There can be no assurance that we will
be able to enter into such arrangements or create and maintain revenue from such
arrangements.
If our web sites and the content contained thereon are not accepted, or develop
more slowly than expected, or the market becomes saturated with competitors, our
business, results of operations and financial condition will be materially and
adversely affected.
Our success is dependent upon our ability to deliver original and
compelling content in order to attract users. There can be no assurance that our
current web site and/or future web sites, to the extent developed and launched,
will contain content which will be attractive to a sufficient number of users to
generate advertising revenues or that we will be able to anticipate, monitor and
successfully respond to rapidly changing consumer tastes and preferences so as
to attract a sufficient number of new and repeat users to our sites. If we are
unable to do so, this will have a material adverse effect on our financial
condition. As is typical in a new and rapidly evolving industry, demand and
market acceptance for recently introduced products and services, such as our web
sites, are subject to a high level of uncertainty and risk. Because this market
is new and evolving, it is difficult to predict future growth. There can be no
assurance that we will be able to successfully develop a market for our web
sites or that demand will emerge or become sustainable.
15
<PAGE>
If we are unable to develop and maintain satisfactory relationships
with other web sites or if our competitors are better able to maintain such
relationships, our business, results of operations and financial condition could
be materially and adversely affected.
Our ability to advertise on other web sites and the willingness of the
owners of such sites to direct users to our web sites through hypertext links is
critical to our operations. Search engines, directories and other navigational
tools managed by Internet service providers and web browser companies also
significantly affect traffic to our web sites. We also depend on our
relationships with third party vendors of Internet development tools and
technologies in order to develop the content required to attract users to our
web sites. Developing and maintaining satisfactory relationships with such
persons could become more difficult and expensive as competition increases among
content providers.
A security breach could result in loss of customers, damage to our
reputation, damage to our web sites, costs of repair and detection and other
expenses. This could have a material adverse effect on our business, results of
operations and financial condition.
Although we have engaged a third party, Digex, Inc. to host our initial
web site, and intend to engage third parties to host all our web sites, the
Internet infrastructure is vulnerable to computer viruses, break-ins and similar
disruptive problems by our customers and other Internet users. These factors
could lead to interruption, delays or cessation in service thereby causing harm
to our business and financial condition. In addition, unauthorized use of the
Internet could also jeopardize the security of confidential information stored
in computer systems of our customers and other parties using the Internet, which
could deter potential customers from accessing our web sites and give rise to
liability to users whose security or privacy has been infringed.
If we are unable to compete successfully with potential competitors it
will have a material adverse effect on our business, results of operations and
financial condition.
The market for Internet services and products is highly competitive and
competition is expected to continue to increase significantly in the future. In
addition, we expect the market for web-based advertising to be intensely
competitive.
16
<PAGE>
There can be no assurance that we will ever be able to compete
successfully with potential competitors or that the competitive pressures faced
by us will not have a material adverse effect on our business, results of
operations and financial condition. There are no significant barriers to
developing web sites, and we expect competition to continue to grow. We compete
with a significant number of web content providers, several of which offer
competitive services and/or products, and address certain of our target markets,
including, among others, Women's Wire, Elle Magazine, Ford Models, Inc. and
Pataxi Entertainment Network, Inc. (operator of supermodel.com). Many of these
competitors have significantly greater financial, technical and marketing
resources than us, and include companies that are larger and better capitalized
than us. These competitors may also have expertise and established brand
recognition in the Internet market. There can be no assurance that our
competitors will not develop Internet services and products that are superior to
those currently offered or contemplated by us or that they will not achieve
greater market acceptance than our contemplated services and products. In
addition, we compete with these competitors, online services and other web site
operators, for the same sources of advertising and direct marketing revenue.
Our web site competes with (and any future developed web sites will
compete with) other forms of media, such as television, radio and print media,
many of which provide services and products that are similar to those which we
currently provide and also intend to provide through our web sites. Although
traditional media outlets do not offer many of the interactive features
available through the Internet (such as online chat rooms and E-mail), there are
numerous publications, as well as television and radio programs, which provide
editorial content similar to that which we provide on our web site, as well as
articles and features on fashion, beauty, health and celebrities. We also will
compete with these traditional media outlets for advertising revenue and direct
marketing revenue.
Although we believe that there exists a large share of advertising
dollars available to us and other web site operators, as well as several other
commercial opportunities for the generation of revenues through our contemplated
web sites, competition among current and future web sites, as well as
competition with other forms of media for advertising placements, could result
in significant price competition and reductions in advertising revenues.
The loss of our Chief Executive Officer's services would have a
material adverse effect on us.
Our success will be largely dependent on the efforts of Peter Klamka,
our Chairman, President and Chief Executive Officer, and his ability to forge
new relationships with celebrity models and to maintain such relationships, as
well as to oversee the development and maintenance of our web sites and other
services and products. Our success will also be highly dependent on Mr. Klamka's
ability, as well as the ability of others employed by us, to obtain advertising
placements consistent with the demographic characteristics of the users of our
web sites. The loss of his services would have a material adverse effect on our
business and prospects.
17
<PAGE>
We have not entered into an employment agreement with Mr. Klamka and
Mr. Klamka has not entered into any agreement restricting his involvement in a
business which competes with us. As a result, Mr. Klamka is an employee-at-will
and has the right to leave us at any time. Mr. Klamka has informed us that he
intends to devote a substantial portion of his working time to our business and
that he also intends to devote a portion of his time to other business interests
that do not compete with our business. In addition, Mr. Klamka is not restricted
from entering into a competing business after the term of his employment with
us; provided, however, that he would not be permitted to use proprietary
information and trade secrets belonging to us. Our success will also be
dependent upon our ability to hire and retain qualified writers, editors and
technical personnel, as well as qualified marketing, financial and other
personnel. Competition for qualified personnel is intense and there can be no
assurance that we will be able to hire or retain additional qualified personnel.
EMPLOYEES
The Company presently employs two individuals, Peter Klamka, its
Chairman, President and Chief Executive Officer and Chris Giordano, its chief
Operating Officer. None of the Company's employees are represented by a labor
union.
FACILITIES
The Company currently maintains its executive offices, consisting of
1,353 square feet of space, at 455 East Eisenhower Parkway, Suite 15, Ann Arbor,
Michigan, pursuant to a three year lease at a monthly rental of $2,227. The
telephone number is (734) 327-0579.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company does not own any real property.
18
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
On December 8, 1998, attorneys for Tyra Banks and Bankable, Inc., an
entity controlled by Ms. Banks, made a Demand for Arbitration against the
Company under the Commercial Arbitration Rules of the American Arbitration
Association. Ms. Banks' attorneys alleged that the Company failed to make timely
payments of money due upon the execution the Web Site License Agreement and
Calendar Agreement between Ms. Banks and the Company ("Agreements"), and refused
to return photographs, pictures, prints, negatives and images of Ms. Banks. Ms.
Banks is seeking the amount of $153,000, plus interest, allegedly owed to her,
to have the Company not use her name, picture and likeness, and to have all
images of Ms. Banks, in any form, returned to her. She also is seeking damages
for injury to her public reputation, lost royalties and the cost of attorney's
fees. On January 15, 1999, the Company, through its attorneys, filed an Answer
and Counterclaim to Ms. Banks' Demand for Arbitration. The Company raised
several defenses to Ms. Banks' claims and claimed a breach by Ms. Banks and
Bankable, Inc. of the Web Site Agreement. The Company is seeking the amount of
$100,000, plus additional damages, relating to the advance payment made by the
Company to Bankable, Inc. A preliminary administrative conference was held on
January 19, 1999, and the Company's attorneys believe that a hearing will be
scheduled for March. Both parties have also expressed an interest in resolving
this matter through mediation. Mediation would run concurrently with the
arbitration process, prior to the arbitration hearing. The Company intends to
vigorously defend itself in this arbitration, and believes that it has
meritorious defenses. Nonetheless, there can be no assurance that the Company
will be successful in this arbitration, and an unfavorable settlement or result
in this matter could have a material adverse effect on the Company. [Update]
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted for shareholder approval during the fourth
quarter of the fiscal year covered by this Report.
19
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) Market information.
A limited public market for the Company's Common Stock exists on the
NASDAQ Bulletin Board under the symbol "PTNM."
The following table sets forth the range of high and low closing prices
for the Company's Common Stock for each quarterly period indicated, as reported
by brokers and dealers making a market in the capital stock. Such quotations
reflect inter-dealer prices without retail markup, markdown or commission, and
may not necessarily represent actual transactions.
Quarter Ended High Low
March 31, 1999* $ 7.00 $ 4.00
June 30, 1999 $ 8.25 $ 5.00
September 30, 1999 $ 8.25 $ 1.63
December 31, 1999 $ 7.38 $ 2.00
March 31, 2000 $15.06 $ 5.25
-----------------------------
* The Company's Common Stock commenced trading on March 29, 1999.
As of March 31, 2000, there were approximately 100 record holders of
the Company's Common Stock.
The Company has not paid any cash or other dividends on its Common
Stock since its inception and does not anticipate paying any such dividends in
the foreseeable future. The Company intends to retain any earnings for use in
the Company's operations and to finance the expansion of its business.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction
with the Company's Consolidated Financial Statements and the Notes thereto
included elsewhere in this document. The discussion of results, causes and
trends should not be construed to imply any conclusion that such results or
trends will necessarily continue in the future.
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OR PLAN OF OPERATIONS
General
The following discussion and analysis should be read in conjunction
with the Company's consolidated financial statements and related footnotes for
the year ended December 31, 1999 included in this Annual Report on Form 10-KSB.
The discussion of results, causes and trends should not be construed to imply
any conclusion that such results or trends will necessarily continue in the
future.
Overview
The Company, since its inception, has incurred net losses of $4,477,718 and at
December 31, 1999, its current liabilities exceeded its current assets by
$544,236. The Company may be unable to continue in existence unless it is able
to arrange additional financing to supplement its recently completed initial
public offering, bridge financing and sale of preferred stock and common stock.
The Company has not yet generated any significant revenues and is still
considered in the development stage. Through December 31, 1999, cumulative
revenues totaled $18,188, and resulted entirely from the sale of calendars (see
discussion below regarding the Claudia Schiffer Calendar Agreement). The Company
continues to incur costs associated with the development of its proposed web
sites.
Additionally, the Company has advanced $134,000 to a company controlled by
fashion model, Tyra Banks, pursuant to certain agreements between the Company
and Ms. Banks' company and has also incurred expenses of approximately $10,000,
to date, in connection with the development of the intended web site to have
been hosted by Ms. Banks and in connection with the development of calendars
featuring her. In June 1998, Ms. Banks declared the Company in breach of these
agreements based on the Company's alleged failure to pay the full amount of all
advances and reimbursable expenses allegedly owed pursuant to such agreements.
The agreement relating to the creation and sale of calendars has been
terminated. Although Ms. Banks also claims that the web site agreement has been
terminated, the Company believes that it is currently in full compliance with
this agreement, and that Ms. Banks has refused to perform thereunder.
On December 8, 1998, attorneys for Tyra Banks and Bankable, Inc., an
entity controlled by Ms. Banks, made a Demand for Arbitration against the
Company under the commercial arbitration rules of the American Arbitration
Association. Ms. Banks' attorneys alleged that the Company failed to make timely
payments of money due upon the execution of the web site license agreement and
calendar agreement between Ms. Banks and the Company ("Agreements"), and refused
to return photographs, pictures, prints, negatives and images of Ms. Banks. Ms.
Banks is seeking damages under the Calendar Agreement in the amount of $161,333,
damages under the Web Site Agreement of $370,000 and legal fees. On January 15,
1999, the Company, through its attorneys, filed an Answer and Counterclaim to
Ms. Banks' Demand for Arbitration. The Company raised several defenses to Ms.
Banks' claims and claimed a breach by Ms. Banks and Bankable, Inc. of the web
site agreement. The Company is seeking the amount of $264,000 in damages related
to the Agreements. A preliminary administrative conference was held on January
19, 1999, and a hearing was held in October 1999
21
<PAGE>
and the Company filed briefs on March 6, 2000 in response and is awaiting the
arbitrator's decision. The Company intends to vigorously defend its self in this
arbitration, and believes that its has meritorious defenses. Nonetheless, there
can be no assurance that the Company will be successful in this arbitration, and
an unfavorable settlement or result in this matter could have a material adverse
effect on the Company.
The Company entered into a Web Site License Agreement with Claudia Schiffer (the
"Schiffer License Agreement") which grants the Company the exclusive license for
an on-line Internet service devoted to Ms. Schiffer. The Company has the right
to use Ms. Schiffer's name and likeness for an Internet site including a
merchandise "boutique", monthly column and interviews or on-line chat sessions.
Ms. Schiffer also would make promotional appearances and voice recordings to
promote the site and provide content for it. The Schiffer License Agreement
would continue until the year 2001. The Company would pay Ms. Schiffer
guaranteed minimum royalties of $300,000 for the first year (which amount was
paid) of the Schiffer License Agreement, $400,000 for the second year (of which
$100,000 has been paid), and $500,000 for the third year, which would be
credited against earned royalties ranging from 25% to 80% of site revenues and
profits from boutique merchandise sales.
The Schiffer License Agreement also granted to Ms. Schiffer, 269,682 shares of
common stock (the "Shares"), with the right to maintain the ratio of her common
stock ownership to that of the Company's President. The Company agreed to
indemnify Ms. Schiffer for any U.S. income tax liability resulting from the
issuance of these shares, however, the Company has been assured that Ms.
Schiffer is not a U.S. citizen or resident, and therefore is not likely to be
responsible for any such taxes.
In June 1999, the Company entered into a License Agreement with model Estella
Warren. This license provides for an on-line Internet service and downloadable
electronic calendars featuring the name and likeness of Ms. Warren. This
agreement continues until the first anniversary of the date the service is
launched and required payment of the entire fee of $30,000 at the time of
execution. Ms. Warren also receives a royalty equal to 20% of revenues received
in connection with calendar sales.
During the second and third quarters of 1999, the Company paid the entire
$30,000 to Ms. Warren.
The Company recently created a new subsidiary, Fragrancedirect.com, Inc. and
also hopes to launch "www.fragrancedirect.com," its online fragrance sales
effort, during the first half of 2000. On this web site the Company will sell
colognes, perfumes and other fragrances direct to Internet users, much in the
same way that books are sold on web sites such as "Amazon.com." The site will be
promoted through hyper-links from the Company's affiliated web sites. The
Company also intends to create mutual linking arrangements with operators of
apparel sites and to make barter arrangements for advertising. The Company
anticipates that its prices will be lower than the manufacturer's suggested
retail prices, however, not necessarily less than all retail outlets. The web
site is currently being completed.
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<PAGE>
The Company intends to obtain product liability insurance in such amounts as it
may deem appropriate to insure against any possible product liability exposure
resulting from the sale of fragrances on the web site.
There can be no assurance that the Company will generate substantial revenues
from the web site. In addition, the Company is aware of at least two similar web
sites attempting to compete for the on-line fragrance business.
Cash Requirements
In April 1998, the Company's Chairman, President and Chief Executive Officer,
provided the Company with a revolving credit line with a maximum of $500,000
available. In September 1998, the Board of Directors of the Company authorized
an increase in this line to $610,000 and in November and December 1998, further
increases to $1,000,000, were authorized. Loans drawn under this line bear
interest at a rate of 9% per annum from the date they are made to the Company
and are payable by May 2001, provided, however, that if the Company raises gross
proceeds in an IPO of at least $1,500,000, the entire outstanding amount and
accrued interest will be repaid from the proceeds from the IPO. As of December
31, 1999, borrowings outstanding under this line aggregated $458,844. Accrued
and unpaid interest as of December 31, 1999 was $64,348. In February 2000, the
principal and accrued interest were converted into 110,000 shares of the
Company's common stock.
On September 18, 1998, the Securities and Exchange Commission declared effective
the Company's Registration Statement concerning an Initial Public Offering
("IPO") of 400,000 shares of common stock, which the Company hoped would
generate proceeds of approximately $1,600,000. This IPO expired on January 31,
1999. As of December 31, 1998, the Company had completed the sale of 66,900
shares of common stock and in February 1999, closed on the sale of an additional
62,000 shares of common stock, realizing aggregate net proceeds of $326,596. The
net proceeds from this offering, along with bridge loans received in 1997, have
been used to satisfy the Company's obligations under the License Agreements
entered into with the fashion models.
During 1999, the Company issued 190,000 shares of common stock for professional
services valued at $637,500. The Company also issued 200,000 warrants to
purchase shares of common stock for professional services valued at $200,000 and
the Company issued 25,000 options to purchase shares of common stock for legal
fees valued at $25,000.
In March 1999, the Company completed the sale of 5.5 units, each unit consisting
of a $50,000 promissory note, bearing interest at an annual rate of 10%, and
warrants to purchase 10,000 shares of common stock at $7.50 per share. During
the second quarter of 1999, the Company completed the sale of 2,400 shares of
Class A Preferred Stock in a private offering of such securities, generating net
proceeds of $216,000. The purchasers of these securities also received two-year
warrants to purchase 5,000 shares of common stock for every $25,000 of Preferred
Stock purchased at an exercise price of $7.50. The preferred shares accumulate
dividends at the rate of $10 per share per annum and are convertible to common
shares at the option of the holders.
During the fourth quarter of 1999, the Company issued 402,500 shares of its
common stock is a series of private placement offerings for aggregate proceeds
of $737,500.
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<PAGE>
In July and August of 1999, the Company's subsidiary Fragrancedirect.com, Inc.
issued 10% promissory notes aggregating $160,000. The notes are due the earlier
of one year or the completion of an initial public offering of Fragrance common
stock. In addition, Fragrance issued to the note holders an aggregate of 96,000
two-year warrants to purchase Fragrance common stock at $3.50 per share
In February 2000, the Company converted the loan payable - officer and interest
payable to officer into 110,000 shares of the Company's common stock. In
addi0ion in February 2000, the Company sold 182,000 shares of its common stock
in a private placement offering with gross proceeds aggregating $910,000
Since the Company raised less than the estimated maximum amount of net proceeds
available pursuant to the Initial Public Offering, the Company has insufficient
funds available for operations and would be required to seek additional
financing sooner than anticipated or curtail certain of its planned activities.
The Company may determine, depending on the opportunities available to it, to
seek additional equity or debt financing to fund the cost of its operations.
There can be no assurance that additional financing will be available to the
Company on commercially reasonable terms, or at all. In the event that the
Company is unable to raise additional funds, the Company could be required to
either substantially reduce or terminate its operations.
Impact of recently issued accounting standards
In February 1999, the FASB issued SFAS No. 135, "Rescission of FASB Statement
No. 75 and Technical Corrections" and in June 1999 the FASB issued SFAS No. 136,
"Transfers of Assets to a Not-for-Profit Organization or Charitable Trust That
Raises or Holds Contributions for Others" and SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133." These statements are not applicable to the Company.
Forward looking statements
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Shareholders are cautioned that all
forward-looking statements involve risks and uncertainty, including without
limitation, the ability of the Company to fully establish its web sites and
satisfactorily resolves the litigation with Ms. Banks. Although the Company
believes the assumptions underlying the forward-looking statements contained
herein are reasonable, any of the assumptions could be inaccurate, and
therefore, there can be no assurance that the forward-looking statements
contained in the report will prove to be accurate.
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<PAGE>
ITEM 8. FINANCIAL STATEMENTS.
The consolidated financial statements of PTN Media, Inc. and its
subsidiary, including the notes thereto and the report of independent
accountants thereon, commence at page F-1 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
None.
25
<PAGE>
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
(a) Directors and executive officers of the Company (as of the date of
this Report):
Directors and Executive Officers
Our directors and executive officers are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Peter Klamka............................ 31 Chairman of the Board, President,
Chris Giordano.......................... 44 Chief Operating Officer
</TABLE>
The business experience, principal occupations and employment, as well
as the periods of service, of each of our directors and executive officers
during the last five years are set forth below.
Peter Klamka has been our Chairman of the Board and Chief Executive
Officer since our inception in May 1997. From 1990 to 1991, Mr. Klamka was
employed as an analyst with Credit Lyonnais. From 1991 to 1993, he was employed
by DMA Holdings, a private investment concern that invested in and acquired
automotive parts suppliers. His duties included the evaluation of acquisition
candidates. From 1993 to 1994, Mr. Klamka was the owner and sole stockholder of
General Display, a company that manufactured scoreboards and timing equipment
for sports facilities. He sold this company in 1994. In 1994, Mr. Klamka founded
Wilshire Fragrance, a company that developed and marketed men's fragrance
products. Mr. Klamka was the chief executive officer of Wilshire Fragrance from
1994 through 1996. In connection with his fragrance business, in 1996, Mr.
Klamka developed, what he believes to have been one of the first authorized
celebrity web sites, featuring Anna Nicole Smith promoting fragrances for
Wilshire Fragrance. Mr. Klamka continued working on this web site until early
1997. Mr. Klamka received his Bachelor of Arts degree from the University of
Michigan.
Chris Giordano has been our Chief Operating Officer since December
1999. Mr. Giordano has been President of Birchwood Capital Advisors Group, Inc.
since 1992 and has arranged over $200 million in financings in that period.
Prior to 1992, Mr. Giordano was employed by Pain Webber, Inc. in their asset
management group. Mr. Giordano earned a BSBA in Accounting and Finance from the
University of South Florida in 1977.
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<PAGE>
(b) Other significant employees. None.
(c) Family relationships. None.
(d) Involvement in certain legal proceedings. None.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth the annual compensation paid to
executive officers of the Company for the fiscal year ended December 31, 1998.
No executive officer received annual compensation in excess of $100,000.
<TABLE>
<CAPTION>
Name and Other Annual Restricted Stock Options/ LTIP All Other
------------ ----------------- -------- ----- ---------
Principal Position Year Salary($) Bonus($) Compensation Awards SARs Payouts Compensation
- ------------------ ---- --------- -------- ------------ ------ ---- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Peter Klamka, Chairman, 1999 $45,000 0 0 0 250,000 0 0
President and CEO(1).... 1998 $50,000 0 0 0 0 0 0
16,666 Shares of
1997 $0 0 0 Common Stock 0 0 0
</TABLE>
- -----------------------
(1) Mr. Klamka is entitled to receive an annual base salary of $100,000
from the Company. Mr. Klamka was employed by the Company, during 1997,
from its inception on May 27, 1997 to December 31, 1997. In March 1998,
the Company issued to Mr. Klamka 16,666 shares of Common Stock at a
value of $3.00 per share in respect of the payment of his annual salary
for 1997. Mr. Klamka has waived any additional salary payable to him
for services provided during the year ended December 31, 1997, and has
stated to the Company that he expects to waive any further salary
payable to him for the foreseeable future, although no assurance
thereof can be given.
Employment and Consulting Agreements
The Company has no employment or other written agreement with Peter
Klamka, its Chairman, President and Chief Executive Officer. Mr. Klamka has an
oral agreement with the Company to receive a base salary of $100,000 per year
and such other compensation as the Board of Directors shall designate. Except
for the issuance of 16,666 shares of Common Stock to Mr. Klamka as compensation
for services provided in 1997, Mr. Klamka has waived this base salary through
the date hereof, and the Company believes he will waive the base salary for the
foreseeable future, although no assurance thereof can be given.
Mr. Klamka is involved in other business ventures, including the
ownership of over 500,000 shares of American Sports History Inc. (approximately
5.5% of its outstanding capital stock), a Nasdaq Bulletin Board company, but he
intends to devote substantially all his business time and effort on behalf of
the Company for the foreseeable future. Mr. Klamka has orally committed that,
for so long as the Company shall be in existence, he shall conduct no business
relating to models or fashion personalities other than through the Company.
27
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of the date of this Report, the
number and percentage of shares of outstanding Common Stock owned by each person
owning at least 5% of the Company's Common Stock, each officer and director
owning stock, and all officers and directors as a group:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER OF SHARES
BENEFICIAL OWNER(1) BENEFICIALLY OWNED PERCENT OF CLASS
<S> <C> <C>
Peter Klamka (2) 2,113,674 52.19
Chris H. Giordano (3) 540,340 13.34
Michael Giordano (4) 300,000 7.41
All executive officers
and directors as a 2,113,674 52.19
group (one person)
</TABLE>
- -----------------------
(1) Includes the conversion of certain outstanding indebtedness of the Company,
in March 1998, into 54,166 shares of the Company's Common Stock. Excludes
the shares underlying certain warrants issued by the Company.
(2) Mr. Klamka's address is the same as that of the Company.
(3) Chris Giordano's address is 4 Dogwood Court, West Patterson, NJ 07424. Chris
Giordano is Michael Giordano's brother, but disclaims any beneficial
ownership of shares owned by Michael Giordano.
(4) Michael Giordano's address is 7591 N.W. 29th Street, Margate, Florida 33063.
Michael Giordano is Chris Giordano's brother, but disclaims any beneficial
ownership of shares owned by Chris Giordano.
28
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In June 1997, Peter Klamka purchased 2,117,008 shares of Common Stock
of the Company's predecessor for an aggregate purchase price, paid by delivery
of a promissory note, of $2,117.01. In June 1997 Chris Giordano purchased
540,340 shares of Common Stock of the Company's predecessor for an aggregate
purchase price, paid by delivery of a promissory note, of $540.34. In June 1997
Michael Giordano purchased 300,000 shares of Common Stock of the Company's
predecessor for an aggregate purchase price, paid by delivery of a promissory
note, of $300.00. All three promissory notes have been paid to the Company in
full. Messrs. Klamka, Chris Giordano and Michael Giordano are each deemed to be
founders and promoters of the Company.
Jean Renard, manager for Niki Taylor, owns 10,000 shares of Common
Stock.
In April 1998, Peter Klamka, the Company's Chairman, President and
Chief Executive Officer, provided the Company with a revolving credit line with
a maximum of $500,000 available (the "Klamka Credit Line"). In September 1998,
the Board of Directors of the Company authorized an increase in this line to
$610,000, and in November and December 1998, further increases to $1,000,000
were authorized. As of November 23, 1998 and at all times until February 5,
1999, borrowings outstanding under the Klamka Credit Line aggregated $542,500.
Monies loaned were used to make certain payments to Niki Taylor's company, to
provide a payment required under the Company's Calendar Agreement with Claudia
Schiffer, and for working capital.
Loans drawn on the Klamka Credit Line bear interest at a rate of nine
(9%) percent per annum from the date they are made to the Company and are
payable by May 2001.
Additional amounts of approximately $200,000 received by the Company in
October and November 1998, which were previously erroneously characterized as
loans made by the Company's President, were, in fact, proceeds received by the
Company from investors in prior closings of this Offering. See Prior Closings of
Offering below. This correction in the characterization of the proceeds provided
to the Company accounts for the reduction in the outstanding amount of the
Klamka Credit Line in this Supplement to the Prospectus.
29
<PAGE>
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
Exhibit
Number Description
<S> <C>
1.1* Form of Placement Agent Agreement
2.1* Plan of Merger between PTN Media, Inc. and Interactive Entertainment Studio, Inc., dated as of February 25,
1998.
3.1* Certificate of Incorporation of PTN Media, Inc. dated as of January 13, 1998.
3.2* By-Laws of PTN Media, Inc.
4.1* Specimen Common Stock Certificate
4.2* Specimen 1997 Warrant Certificate
4.3* Specimen 1998 Warrant Certificate
10.1* Web Site License Agreement between Niki, Inc. and Interactive Entertainment Studio, Inc. dated as of June 1,
1997
10.2* Website License Agreement between Ty Girl, Inc. and Interactive Entertainment Studio, Inc. dated as of January
1, 1998
10.3* License Agreement between Ty Girl, Inc. and Interactive Entertainment Studio, Inc. dated as of January 1, 1998
10.4* Lease Agreement dated as of February 27, 1998, between First Miller Limited
Partnership and PTN Media, Inc.
10.5* Website Design Services Agreement between zoecom, Inc. and Interactive
Entertainment Studio, Inc. dated as of December 20, 1996
10.6* Letter of Intent between Cdnow, Inc. and Interactive Entertainment Studio, Inc. dated as of September 8, 1997
10.7* Agreement for Fashion House Flowers & Gifts Service between PC Flowers and Gifts, Inc. and Interactive
Entertainment Studio, Inc. dated as of September 9, 1997
10.8* Standard Publicists Guild Agency - Client Agreement between The Angellotti Company and PTN Media, Inc.
dated as of April 15, 1998
10.9* PTN Media, Inc. 1998 Stock Option Plan
10.10* Form of Subscription Agreement for Shares the Company's initial public offering
10.11* Revolving Promissory Note issued by PTN Media, Inc. to Peter Klamka dated April 1, 1998, in the maximum
principal sum of $500,000
10.12* Form of Escrow Agreement between University Bank and PTN Media.
11.1** Computation of per share earnings
23.1* Consent of Lazar Levine & Felix LLP
27.1** Financial Data Schedule
</TABLE>
* Incorporated by reference from the Company's Registration Statement on Form
SB-2 (File #333-51933).
** Filed herewith.
30
<PAGE>
REPORTS ON FORM 8-K: NONE
31
<PAGE>
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the
Exchange Act, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PTN MEDIA, INC.
/s/Peter Klamka
-----------------------
Peter Klamka
Chairman, President, Secretary and Chief
Executive Officer
In accordance with the requirements of the Exchange Act, this report is
signed below by the following persons on behalf of the Registrant in the
capacities and on the dates indicated.
Name and Capacity Date
/s/ Peter Klamka April 14, 2000
- -----------------------------------------
Name: Peter Klamka
Title: Chairman, President, Secretary
and Chief Executive Officer
(Principal Executive Officer and
Principal Financial and
Accounting Officer)
S-1
<PAGE>
PTN MEDIA, INC. AND SUBSIDIARY
INDEX
Page(s)
INDEPENDENT AUDITORS' REPORT F-2
FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-3
Consolidated Statements of Operations for the Cumulative Period
During the Development Stage from May 27, 1999 (Inception) to
December 31, 1999 and for the Years Ended December 31, 1999 and 1998 F-4
Consolidated Statements of Shareholders' Deficit for the Period
From May 27, 1997 (Inception) to December 31, 1999 F-5
Consolidated Statements of Cash Flows for the Cumulative Period
During the Development Stage from May 27, 1999 (Inception) to
December 31, 1999 and for the Years Ended December 31, 1999 and 1998 F-6
Notes to Consolidated Financial Statements F-8
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
PTN Media, Inc.
We have audited the accompanying consolidated balance sheet of PTN Media, Inc.
and subsidiary (a development stage company) as of December 31, 1999 and 1998,
and the related statements of operations, shareholders' (deficit), and cash
flows for each of the two years in the period ended December 31, 1999 and the
period from May 27, 1997 (inception) to December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of PTN
Media, Inc. and subsidiary as of December 31, 1999 and 1998, and the
consolidated results of their operations and their consolidated cash flows for
each of the two years in the period ended December 31, 1999 and the period from
May 27, 1997 (inception), to December 31, 1999, in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1, the
Company is in the development stage, has incurred net losses since its inception
and has experienced severe liquidity problems. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ LAZAR LEVINE & FELIX LLP
----------------------------
LAZAR LEVINE & FELIX LLP
New York, New York
April 12, 2000
F-2
<PAGE>
PTN MEDIA, INC. AND SUBSIDIARY
(a Development Stage Company)
CONSOLIDATED BALANCE SHEETS
- ASSETS -
December 31, December 31,
1999 1998
------ ------
CURRENT ASSETS:
Cash $ 46,539 $ 702
Accounts receivable - 4,488
Prepaid expenses (Note 7) 715,625 -
------------ -----------
TOTAL CURRENT ASSETS 762,164 5,190
FIXED ASSETS - NET (Notes 2d and 3) 24,799 3,626
OTHER ASSETS - 690
------------ -----------
$ 786,963 $ 9,506
============ ===========
- LIABILITIES AND SHAREHOLDERS' DEFICIT -
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 191,958 $ 106,671
Interest payable to officer 64,348 27,144
License fee payable (Notes 2f and 4) 400,000 255,000
Short-term loans payable (Note 5) 191,250 56,250
Loans payable - officer (Note 6) 458,844 542,500
------------ -----------
TOTAL CURRENT LIABILITIES 1,306,400 987,565
------------ -----------
COMMITMENTS AND CONTINGENCIES
(Notes 4 and 10)
SHAREHOLDERS' DEFICIT (Notes 7 and 8):
Preferred stock, $0.01 par value;
1,000,000 shares authorized,
5,600 shares issued and
outstanding for 1999 56 --
Common stock, $0.001 par value;
10,000,000 shares authorized,
4,049,862 and 3,378,262 shares
issued and outstanding
for 1999 and 1998, respectively 4,050 3,378
Additional paid-in capital 3,954,175 1,608,910
Deficit accumulated during the
development stage (4,477,718) (2,590,347)
------------ -----------
(519,437) (978,059)
------------ ------------
$ 786,963 $ 9,506
============ ============
See accompanying notes.
F-3
<PAGE>
PTN MEDIA, INC. AND SUBSIDIARY
(a Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Cumulative
During the
Development
Stage
(May 27, 1997
to Year Ended December 31,
December ---------------------------
31,1999) 1999 1998
--------------- -------------- ----------
<S> <C> <C> <C>
REVENUE (Note 2e) $ 18,188 $ 13,700 $ 4,488
-------------- -------------- -------------
EXPENSES:
Cost of revenue 2,181,651 452,923 1,578,728
Product development 1,443,022 960,934 452,458
General, and administrative
expenses 768,382 413,718 275,277
-------------- -------------- -------------
4,393,055 1,827,575 2,306,463
-------------- -------------- -------------
LOSS FROM OPERATIONS (4,374,867) (1,813,875) (2,301,975)
-------------- -------------- ------------
OTHER (INCOME) EXPENSES:
Interest expense (102,890) (73,496) (27,144)
Interest income 39 - 39
-------------- -------------- -------------
(102,851) (73,496) (27,105)
-------------- -------------- -------------
LOSS BEFORE PROVISION FOR INCOME TAXES (4,477,718) (1,887,371) (2,329,080)
Provision for income taxes (Notes 2g and 9) - - -
-------------- -------------- -------------
NET LOSS $ (4,477,718) $ (1,887,371) $ (2,329,080)
============== =============== =============
BASIC LOSS PER COMMON SHARE (Note 2i) $ (1.39) $ (0.54) $ (0.75)
============== ============== =============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 3,243,896 3,547,270 3,097,777
============== ============== =============
</TABLE>
See accompanying notes.
F-4
<PAGE>
PTN MEDIA, INC. AND SUBSIDIARY
(a Development Stage Company)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
------------------------ ------------------ Paid-in Accumulated Total
Shares Amount Shares Amount Capital Deficit (Deficit)
------ ------ ------ ------ ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Shares issued at inception for
promissory notes - $ - 2,957,348 $2,957 $ $ - $ 2,957
Shares issued in payment of
legal fees - - 10,000 10 990 - 1,000
Net loss for the period from
inception to December 31, 1997 - - - - (261,267) (261,267)
--------- -------- --------- ----------- ------------ --------- ----------
Balance, December 31, 1997 - - 2,967,348 2,967 990 (261,267) (257,310)
Conversion of notes payable - - 54,166 54 162,446 - 162,500
Compensatory shares - - 16,666 17 49,983 - 50,000
Shares issued in payment of
legal fees - - 3,500 4 12,996 - 13,000
Shares issued in connection with
license agreement - - 269,682 269 1,078,459 - 1,078,728
Shares issued in connection with
initial public offering - - 66,900 67 238,036 - 238,103
Waiver of compensation payable - 66,000 66,000
Net loss for year - - - - - (2,329,080) (2,329,080)
--------- -------- --------- ----------- ------------ --------- ----------
Balance, December 31, 1998 - 3,378,262 3,378 1,608,910 (2,590,347) (978,059)
Shares issued in connection with
initial public offering - - 62,000 62 88,431 - 88,493
Shares issued in connection
with a private placement 2,400 24 - 215,976 - 216,000
Exercise of warrants - - 10,000 10 29,990 - 30,000
Shares issued in payment of
professional fees - - 190,000 190 637,310 - 637,500
Shares issued in payment of
production costs - - 1,000 1 5,999 - 6,000
Warrants issued in payment of
professional fees - - - - 200,000 - 200,000
Options issued in payment of
legal fees - - - - 25,000 - 25,000
Shares issued in connection
with a private placement - - 402,500 403 737,097 - 737,500
Waiver of compensation payable - - - 55,000 - 55,000
Conversion of notes payable and
accrued interest 3,200 32 6,100 6 350,462 - 350,500
Net loss for year - - - - - (1,887,371) (1,887,371)
--------- -------- --------- ----------- ------------ --------- ----------
Balance, December 31, 1999 5,600 $56 4,049,862 $4,050 $3,954,175 $(4,477,718) $ (519,437)
===== === ========= ====== ========== ============ ==========
</TABLE>
See accompanying notes.
F-5
<PAGE>
PTN MEDIA, INC. AND SUBSIDIARY
(a Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Cumulative
During the
Development
Stage
(May 27, 1997
to Year Ended December 31,
December -------------------------
31, 1999) 1999 1998
---------------- ------------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (4,477,718) $ (1,887,371) $ (2,329,080)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation of fixed assets 6,456 5,576 670
Warrants and shares issued for professional and
legal fees 876,500 862,500 13,000
Waiver of compensation payable 121,000 55,000 66,000
Shares issued for license fees and production costs 1,084,728 6,000 1,078,728
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable - 4,488 (4,488)
(Increase) in prepaid expenses (715,625) (715,625) -
Increase in accounts payable 19,675 19,675 -
Increase in accrued expenses 292,131 108,316 122,680
Increase in license fees payable 400,000 145,000 155,000
---------------- --------------- ----------------
Net cash used in operating activities (2,392,853) (1,396,441) (897,490)
----------------- ---------------- ----------------
Cash flows from investing activities:
Purchase of furniture and equipment (31,255) (26,749) (2,312)
Security deposit (paid) refunded - 690 (690)
---------------- --------------- ----------------
Net cash used in investing activities (31,255) (26,059) (3,002)
---------------- --------------- ----------------
Cash flows from financing activities:
Loans received from (paid to) officer 503,844 (38,656) 542,500
Proceeds from short-term loans 653,750 435,000 97,500
Payment from shareholders 2,957 - 2,957
Proceeds from exercise of warrants 30,000 30,000 -
Net proceeds from private placement offerings 953,500 953,500 -
Net proceeds from initial public offering 326,596 88,493 238,103
---------------- --------------- ----------------
Net cash provided by financing activities 2,470,647 1,468,337 881,060
---------------- --------------- ----------------
Increase (decrease) in cash 46,539 45,837 (19,432)
Cash, beginning of period - 702 20,134
---------------- --------------- ----------------
Cash, end of period $ 46,539 $ 46,539 $ 702
================ =============== ================
</TABLE>
See accompanying notes.
F-6
<PAGE>
PTN MEDIA, INC. AND SUBSIDIARY
(a Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
<TABLE>
<CAPTION>
Cumulative
During the
Development
Stage
(May 27, 1997
to Year Ended December 31,
December ---------------------------------
31, 1999) 1999 1998
---------------- ------------- ----------------
<S> <C> <C> <C>
(i) Supplemental disclosures of cash flow information
Interest paid $ - $ - $ -
================ =============== ================
Income taxes paid $ - $ - $ -
================ =============== ================
</TABLE>
(ii) In May 1997, the Company issued (i) 2,957,348 shares of common stock in
exchange for notes receivable of $2,957 and (ii) 10,000 shares of common
stock in lieu of payment for legal fees aggregating $1,000.
(iii) During 1998, holders of notes aggregating $162,500 converted such notes
into 54,166 shares of common stock at a value of $3.00 per share.
(iv) During 1998, the Company issued (i) 16,666 shares of common stock in lieu
of payment of $50,000 of compensation accrued as of December 31, 1997 and
(ii) 3,500 shares of common stock in payment of legal fees aggregating
$13,000.
(v) During 1999, (i) the Company converted $25,000 of debt and $5,500 of
accrued interest in exchange for 6,100 shares of common stock, (ii) the
Company issued 190,000 shares of common stock for professional services
valued at $637,500, (iii) the Company issued 200,000 warrants to purchase
shares of common stock for professional services valued at $200,000, (iv)
the Company issued 25,000 options to purchase shares of common stock for
legal fees valued at $25,000, (v) the Company issued 1,000 shares of
common stock for production costs valued at $6,000, (vi) the Company
converted $320,000 of debt in exchange for 3,200 of Series A preferred
stock.
See accompanying notes.
F-7
<PAGE>
PTN MEDIA, INC. AND SUBSIDIARY
(a Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1 - DESCRIPTION OF COMPANY AND GOING CONCERN UNCERTAINTY:
PTN Media, Inc., (the "Company"), was incorporated in Delaware
on January 13, 1998 and is the successor to Interactive
Entertainment Studio, Inc. (IES). IES was incorporated in the
State of Nevada on May 27, 1997 and was merged into the Company
in March 1998, for the sole purpose of changing the domicile of
the Company to Delaware. This merger was retroactively
reflected in the December 31, 1997 financial statements. The
Company has been in the development stage in accordance with
Statement of Financial Accounting Standards No. 7, since its
inception.
The Company is an interactive content provider focusing on
providing leading branded content for well-defined target
audiences using a combination of new and traditional media. The
Company provides this content on its interactive web sites in
the form of articles and photographs pertaining to fashion,
beauty, style and entertainment. These web sites, utilizing
celebrity models as hosts, will provide an avenue for users to
share general tips and advice relating to the subjects covered.
In July 1999, the Company formed a new wholly-owned subsidiary
FragranceDirect.com, Inc. Through this entity, the Company
plans to launch online fragrance sales to commence in 2000.
The Company, since its inception, has incurred net losses of,
$4,477,718 and at December 31, 1999 current liabilities
exceeded current assets by $544,236. In addition, the Company
is delinquent in certain payments due for license fees and
short-term financing. The Company has relied on certain bridge
financing (see Note 5) to fund its activities and in late 1998
and early 1999 completed the sale of common stock through an
initial public offering (see Note 7) to provide working capital
for its continuing development stage activities and eventual
commencement of full operations. The Company sold an aggregate
of 128,900 shares of common stock in the offering instead of
400,000 shares as originally contemplated. As such, net
proceeds from the offering aggregated $326,596 instead of
approximately $1,600,000. During the second quarter of 1999,
the Company issued $275,000 in convertible debentures that were
subsequently converted to Series A preferred stock. In addition
in the fourth quarter of 1999, the Company raised $737,500 in a
private placement of its common stock. The Company may be
unable to continue in existence unless it is able to arrange
additional financing and achieve profitable operations.
The financial statements do not include any adjustments
relating to the recoverability of assets that might be
necessary in the event the Company cannot continue in
existence.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) Principles of Consolidation:
The accompanying financial statements include the accounts of
the Company and its wholly owned subsidiary,
FragranceDirect.com, Inc. All intercompany accounts and
transactions have been eliminated.
(b) Estimates:
In preparing financial statements in conformity with generally
accepted accounting principles, management makes estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements, as well as
the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
F-8
<PAGE>
PTN MEDIA, INC. AND SUBSIDIARY
(a Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
(c) Statements of Cash Flows:
For purposes of the statements of cash flows, the Company
considers all highly liquid investments purchased with a
remaining maturity of three months or less to be cash
equivalents.
(d) Fixed Assets:
Furniture and equipment are recorded at cost. Depreciation is
provided on a straight-line basis over estimated useful lives
of the assets as follows:
Computer equipment 3 years
Furniture and fixtures 5 years
Expenditures for maintenance and repairs are charged to
operations as incurred while renewals and betterments are
capitalized. Gains and losses on disposals are included in the
results of operations.
(e) Revenue Recognition:
The Company generates revenues from the sale of advertising
banners on its web sites which appear on a user's computer
screen when accessing different areas of the Company's web
sites. Advertising revenue is recognized in the period the
advertisement is displayed, provided that no significant
Company obligations remain. Company obligations typically
include guarantees of a minimum number of "impressions" or
times that an advertisement is viewed by users of the Company's
web sites. Minimal revenues were generated through December 31,
1999.
(f) Royalties/License Fees:
Royalties/license fees paid under the terms of license
agreements entered into are charged to expense in accordance
with the terms of the agreements. Any guaranteed minimum
payments will be amortized over the period of the license
agreement.
During its development stage, the Company has expensed the
guaranteed minimum royalties upon execution of the license
agreements since there is no assurance that the Company will be
able to derive any revenues during the initial term of the
agreement. See also Note 4.
(g) Income Taxes:
The Company utilizes SFAS No. 109, "Accounting for Income
Taxes," which requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of
events that have been included in the financial statements or
tax returns. Under this method, deferred income taxes are
recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and
their financial reporting amounts at each period end based on
enacted tax laws and statutory tax rates applicable to the
periods in which the differences are expected 'to affect
taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected
to be realized.
F-9
<PAGE>
PTN MEDIA, INC. AND SUBSIDIARY
(a Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
(h) Stock Based Compensation:
Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," establishes and
encourages the use of the fair value based method of accounting
for stock-based compensation arrangements under which
compensation cost is determined using the fair value of
stock-based compensation determined as of the date of grant and
is recognized over the periods in which the related services
are rendered. The statement also permits companies to elect to
continue using the current intrinsic value accounting method
specified in Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," to account for
stock-based compensation. The Company has elected to use the
intrinsic value based method for options granted to employees
and has disclosed the pro forma effect of using the fair value
based method to account for its stock-based compensation. The
Company uses the fair value method for options granted to
non-employees.
(i) Earnings (Loss) Per Share:
The Company reports earnings (loss) per share in accordance
with SFAS No. 128, "Earnings per Share." Basic earnings (loss)
per share is computed by dividing income (loss) available to
common shareholders by the weighted average number of common
shares available. Diluted earnings (loss) per share is computed
similar to basic earnings (loss) per share except that the
denominator is increased to include the number of additional
common shares that would have been outstanding if the potential
common shares had been issued and if the additional common
shares were dilutive. Diluted earnings (loss) per share has not
been presented since the effect of the assumed conversion of
options and warrants to purchase common shares would have an
anti-dilutive effect.
(j) Fair Value of Financial Instruments:
The Company measures its financial assets and liabilities in
accordance with generally accepted accounting principles. For
certain of the Company's financial instruments, including cash,
accounts payable, accrued expenses, interest payable and
license fees payable, the carrying amounts approximate fair
value due to their short maturities. The amounts shown for
short-term loans also approximate fair value because current
interest rates offered to the Company for debt of similar
maturities are substantially the same.
(k) Comprehensive Income:
For the year ended December 31, 1999, the Company adopted SFAS
No. 130, "Reporting Comprehensive Income." This statement
establishes standards for reporting other comprehensive income
and its components in a financial statement. Comprehensive
income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. Examples of items to be
included in comprehensive income, which are excluded from net
income, include foreign currency translation adjustments and
unrealized gains and losses on available-for-sale securities.
Comprehensive income is not presented in the Company's
financial statements since the Company did not have any of the
items of other comprehensive income in any period presented.
F-10
<PAGE>
PTN MEDIA, INC. AND SUBSIDIARY
(a Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
(l) Recently Issued Accounting Pronouncements:
In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities." The Company
does not expect adoption of SFAS No. 137 to have a material
impact, if any, on its financial position or results of
operations.
NOTE 3 - FIXED ASSETS:
Fixed assets consisted of the following:
1999 1998
------ ------
Computer equipment $ 27,803 $ 2,194
Furniture and fixtures 3,452 2,312
---------- --------
31,255 4,506
Less accumulated depreciation 6,456 880
---------- --------
Total 24,799 $ 3,626
========== ========
Depreciation expense for the years ended December 31, 1999 and
1998 was $5,576 and $670, respectively.
NOTE 4 - LICENSE FEES PAYABLE:
On June 1, 1997, the Company entered into a License Agreement
(the "Agreement") with Niki, Inc. ("Niki"). This agreement
provided for, among other things, the right to use Ms. Niki
Taylor's name and likeness in connection with the Company's
"Fashion House with Niki Taylor" web site. In consideration for
such rights, the Company will pay royalties of 15% of any gross
revenues received in connection with this web site (except for
sponsors introduced by Niki whereby the royalties will be
calculated at 50%) and 35% of net revenues from product sales.
This agreement expired on September 30, 1998, and was
automatically extended for an additional 12-month period at
which time it was terminated.
The Company guaranteed the payment of minimum royalties to
Niki, Inc., in the amount of $150,000. $50,000 of this amount
was paid at the time of execution of the agreement (in 1997)
and the balance of $100,000 was paid in 1998.
F-11
<PAGE>
PTN MEDIA, INC. AND SUBSIDIARY
(a Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 4 - LICENSE FEES PAYABLE (continued):
In January 1998, the Company entered into a License Agreement
(the "Agreement") with an entity controlled by model Tyra Banks
pursuant to which Ms. Banks would host the Company's next web
site under terms similar to that negotiated with Ms. Taylor.
This agreement expired on March 31, 1999, but provided for
automatic extensions for up to two additional 12-month periods,
unless terminated by either party prior to such extension. The
Company had guaranteed the payment of minimum royalties in the
amount of $100,000. $50,000 of this amount was paid at the time
of execution of this agreement and the balance upon the
consummation of the Company's proposed IPO. As of December 31,
1999, the Company had not paid the remaining balance of
$50,000.
Also in January 1998, the Company entered into a separate
agreement with this entity for the rights to utilize the name
and likeness of Ms. Banks in connection with the "Tyra Banks
Calendar." These rights were applicable to the calendar for the
16-month period ending December 31, 1999. The Company agreed to
pay this entity up to $87,000 for production expenses incurred
in connection with the creation of this calendar and guaranteed
minimum royalties in the amount of $100,000 of which only
$50,000 was paid as of December 31, 1999.
During 1998, the Company paid $34,000 toward the production
expenses of the Tyra Banks calendar. The remaining unpaid
balance of $53,000 is included in accrued expenses.
See Note 10 concerning legal proceedings associated with the
agreements entered into with Ms. Banks.
In October 1998, the Company entered into a License Agreement
(the "Agreement") with model Claudia Schiffer under terms
similar to those negotiated with Ms. Taylor and Ms. Banks. This
agreement expires on the third anniversary of the launch of
this web site, and may be extended only upon mutual agreement
of the parties. The Company guaranteed the payment of minimum
royalties in the amounts of $300,000 for the first year of the
agreement, $400,000 for the second year and $500,000 for the
third. $150,000 of the royalties for the first year was payable
at the time of execution of this agreement and the balance
before December 23, 1998. The Company paid $145,000 in 1998 and
the remaining balance of $155,000 was paid in February 1999 in
full payment of royalties for the first year. In connection
with this agreement, the Company also issued an aggregate of
269,682 shares of common stock, valued at $4.00 per share, to
Ms. Schiffer as additional compensation during 1998. As of
December 31, 1999, the Company had only paid $100,000 towards
royalties for the second year.
Also in October 1998, the Company entered into a separate
agreement with Ms. Schiffer for the rights to utilize her name
and likeness in connection with the "Claudia Schiffer
Calendar." These rights were applicable to the calendar for the
16-month period ending December 31, 1999. The Company has
guaranteed the payment of minimum royalties in the amount of
$75,000 which amount was paid as of December 31, 1998.
In June 1999, the Company entered into a License Agreement with
model Estella Warren. This agreement provides for an on-line
Internet service and downloadable electronic calendars
featuring the name and likeness of Ms. Warren. This agreement
continues until the first anniversary of the date the service
is launched and required payment of the entire fee of $30,000
at the time of execution. Ms. Warren also receives a royalty
equal to 20% of revenues received in connection with calendar
sales.
F-12
<PAGE>
PTN MEDIA, INC. AND SUBSIDIARY
(a Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 4 - LICENSE FEES PAYABLE (Continued):
A summary of the guaranteed minimum payments as of December 31,
1999, is as follows:
<TABLE>
<CAPTION>
Balance
Guaranteed Less Owed as of
Minimum Amounts December
Royalties Paid 31, 1999
--------------- -------------- ----------
<S> <C> <C> <C>
Niki Taylor Web Site $ 150,000 $ (150,000) $ -
Tyra Banks Web Site 100,000 (50,000) 50,000
Tyra Banks Calendar 100,000 (50,000) 50,000
Claudia Schiffer Web Site 700,000 (400,000) 300,000
Claudia Schiffer Calendar 75,000 (75,000) -
Estella Warren Calendar 30,000 (30,000) -
---------------- -------------- --------------
$ 1,155,000 $ (755,000) $ 400,000
================ ============= ==============
</TABLE>
NOTE 5 - SHORT-TERM LOANS PAYABLE:
In July and August 1997, the Company received $56,250 through
the issuance of 8% promissory notes and common stock purchase
warrants to acquire Company stock. The 45,000 warrants issued,
which expire in July 2001, entitle the holders to purchase
45,000 shares of common stock at an exercise price of $3.00 per
share, the deemed fair value of the warrants at the time of
issuance. The notes and accrued interest are payable one year
from the date of issuance or the closing of an equity funding
of the Company of a minimum of $500,000, whichever is sooner.
In 1999, one of the note holders converted $25,000 of principal
and $5,500 of accrued interest into 6,100 shares of the
Company's common stock. The remainder of the notes continue to
be outstanding notwithstanding the fact that payments owed by
the Company thereunder are now past due. Interest accrued as of
December 31, 1999 and 1998, aggregated $4,500 and $4,500,
respectively.
In December 1997, the Company issued unsecured 8% promissory
notes aggregating $65,000 originally due six months from date
of issuance. In 1998, the Company issued additional 8%
unsecured promissory notes aggregating $97,500. In March 1998,
these note holders agreed to convert these notes (aggregating
$162,500) into 162,500 shares of the Company's common stock. In
August 1998, the Company determined that the fair value of its
shares in March 1998 was $3.00. Accordingly, the Company
requested, and these stockholders agreed to the return of
108,334 shares of common stock in exchange for warrants to
purchase an aggregate of 108,334 shares of common stock, at a
price of $4.00 per share, the deemed fair value in August 1998.
In March 1999, the Company completed the sale of 5.5 units,
each unit consisting of a $50,000 promissory note, bearing
interest at an annual rate of 10%, and warrants to purchase
10,000 shares of common stock at $7.50 per share. During the
fourth quarter of 1999, these promissory notes were converted
to 2,750 share of Series A preferred stock. As of December 31,
1999, $20,625 of accrued interest related to these promissory
notes is unpaid.
In July and August of 1999, the Company's subsidiary,
Fragrancedirect.com, Inc. ("Fragrance") issued 10% promissory
notes aggregating $160,000. The notes are due the earlier of
one year or the completion of an initial public offering of
Fragrance common stock. In addition, Fragrance issued to the
note holders an aggregate of 96,000 two-year warrants to
purchase Fragrance common stock at $3.50 per share.
F-13
<PAGE>
PTN MEDIA, INC. AND SUBSIDIARY
(a Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 6 - LOANS PAYABLE - OFFICER:
In April 1998, the Company's Chairman, President and Chief
Executive Officer, provided the Company with a revolving credit
line with a maximum of $500,000 available. In September 1998,
the Board of Directors of the Company authorized an increase in
this line to $610,000 and in November and December 1998,
further increases to $1,000,000, were authorized. Loans drawn
under this line bear interest at a rate of 9% per annum from
the date they are made to the Company and are payable by May
2001, provided, however, that if the Company raises gross
proceeds in an IPO of at least $1,500,000, the entire
outstanding amount and accrued interest will be repaid from the
proceeds from the IPO. During 1999, $45,000 of the outstanding
balance was converted to 450 shares of Series A preferred
stock. As of December 31, 1999, borrowings outstanding under
this line aggregated $458,844, and interest accrued and unpaid
aggregated $64,348.
NOTE 7 - SHAREHOLDERS' EQUITY:
The Company's authorized capital consists of 1,000,000 shares
of preferred stock, $.01 par value and 10,000,000 shares of
common stock, $.001 par value.
In June 1997, the Company issued 2,957,348 shares of common
stock in exchange for one-year promissory notes aggregating
$2,957, bearing interest at an annual rate of 6%. These notes
(and accrued interest) were repaid in June 1998.
In addition, in June 1997, the Company also issued 10,000
shares of common stock in exchange for legal services rendered
aggregating $1,000.
In March 1998, the Company issued (i) 54,166 shares of common
stock in connection with the conversion of $162,500 of notes
payable into common stock (see Note 5) (ii) issued 16,666
shares of common stock in lieu of payment of $50,000 of
compensation accrued to an officer as of December 31, 1997 and
(iii) 1,000 shares of common stock in lieu of payment of legal
fees aggregating $3,000. These shares were deemed to have a
fair value of $3.00 per share at the time of issuance. In July
1998, the Company issued 2,500 shares of common stock in lieu
of payment of legal fees of $10,000.
During 1998, the Company issued an aggregate of 269,682 shares
of common stock to Ms. Schiffer (see Note 4), in connection
with the license agreement entered into. These restricted
shares have been valued at $4.00 per share, the deemed fair
value at the time of issuance.
On September 18, 1998, the Securities and Exchange Commission
declared effective the Company's registration statement
concerning an initial public offering ("IPO") of 400,000 shares
of common stock. On October 22, 1998, the Company extended the
expiration date of the initial public offering to January 31,
1999. During the three-month period ended December 31, 1998,
the Company consummated the sale of 66,900 shares of common
stock, realizing net proceeds of $238,103. In February 1999,
the Company consummated the sale of an additional 62,000 shares
of common stock for net proceeds of $88,431.
F-14
<PAGE>
PTN MEDIA, INC. AND SUBSIDIARY
(a Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 7 - SHAREHOLDERS' EQUITY (continued):
During the second quarter of 1999, the Company completed the
sale of 2,400 shares of Class A Preferred Stock in a private
offering of such securities, generating net proceeds of
$216,000. The purchasers of these securities also received
two-year warrants to purchase 5,000 shares of common stock for
every $25,000 of Preferred Stock purchased at an exercise price
of $7.50. The preferred shares accumulate dividends at the rate
of $10 per share per annum and are convertible to common shares
at the option of the holders. Undeclared, cumulative dividends
on preferred stock aggregated $30,333 at December 31, 1999.
In September 1999, an individual exercised 10,000 warrants for
aggregate proceeds to the Company of $30,000
During 1999, the Company issued (i) 190,000 shares of common
stock for professional services valued at $637,500, (ii)
warrants to purchase 200,000 shares of common stock for
professional services valued at $200,000 (iii) options to
purchase 25,000 shares of common stock for legal fees valued at
$25,000 and (iv) warrants to purchase 250,000 shares of common
stock to its President as additional compensation.
During the fourth quarter of 1999, the Company issued 402,500
shares of its common stock is a series of private placement
offerings for aggregate proceeds of $737,500.
NOTE 8 - STOCK OPTIONS:
In March 1998, the Company adopted the 1998 Stock Option Plan
(the Plan), which provides for the grant of options to purchase
up to 500,000 shares of the Company's common stock. Under this
Plan incentive stock options may be granted to employees and
non-statutory stock options may be granted to employees and
non-employees.
In March 1998, the Company granted options to purchase 106,000
shares of common stock under this Plan. These options are
exercisable at $3.00 per share and expire ten years from the
date of grant. Options to purchase 3,000 shares of common stock
are currently exercisable and the remaining options vest
equally over three years.
In October 1999, the Company granted options to purchase
250,000 shares of common stock under the Plan to its Chief
Executive Officer. These options are exercisable at $4.50 (the
market value at the date of grant) per share and expire ten
years from the date of grant. The Company also granted options
to purchase 125,000 shares of common stock under the Plan to
its Chief Operating Officer. These options are exercisable at
$3.00 (the market value at the date of grant) per share and
expire ten years from the date of grant.
In October 1999, the Company also granted options to purchase
25,000 shares of common stock as consideration for legal fees
valued at $25,000. These options are exercisable at $4.50 (the
market value at the date of grant) per share and expire ten
years from the date of grant. The options vest immediately.
The compensation cost resulting from the effect of applying
SFAS 123 to the above described option grant is not disclosed
since the amount is considered immaterial.
F-15
<PAGE>
PTN MEDIA, INC. AND SUBSIDIARY
(a Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 9 - INCOME TAXES:
No provision for Federal and state income taxes has been
recorded since the Company has incurred losses for the period
from inception through December 31, 1999. Deferred tax assets
at December 31, 1999 and 1998 consist primarily of the tax
effect of a net operating loss carry forwards which amount to
approximately $1,495,000 and $790,000, respectively. The
Company has provided a 100% valuation allowance on the deferred
tax assets at December 31, 1999 and 1998 to reduce such asset
to zero, since there is no assurance that the Company will
generate future taxable income to utilize such asset.
Management will review this valuation allowance requirement
periodically and make adjustments as warranted.
NOTE 10 - COMMITMENTS AND CONTINGENCIES:
(a) Operating Leases:
During 1997, the Company utilized office space provided by its
majority shareholder pursuant to a month-to-month lease at a
monthly rental of $400. In 1998, the Company began renting new
space under a month-to-month lease at a monthly rental of $690
which increased to $1,500 per month, effective March 1999. Rent
expense for the 1999 and 1998 periods aggregated $17,470 and
$7,700, respectively.
Effective April 1, 2000, the Company entered into a three-year
lease for office space. Annual lease commitments for the next
four years and in the aggregate are:
2000 $ 20,041
2001 27,483
2002 28,498
2003 7,188
----------
$ 83,210
(b) Consulting Agreements:
In March 1998, the Company entered into a consulting agreement
with its editorial director which expired on June 30, 1999,
subject to automatic annual renewals. The Company (i) agreed to
pay this individual a monthly fee of $4,166 and (ii) granted
options to purchase up to 50,000 shares of the Company's common
stock at an exercise price of $3.00 per share. This agreement
was terminated in 1999, and the options were cancelled.
The Company agreed to pay a monthly fee of $3,500 to a public
relations firm to assist in the launch of its web sites. This
agreement for an eight-month period effective May 1, 1998 has
expired.
F-16
<PAGE>
PTN MEDIA, INC. AND SUBSIDIARY
(a Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 10 - COMMITMENTS AND CONTINGENCIES (Continued):
(c) Employment Agreements:
The Chairman/President of the Company is entitled to receive an
annual base salary of $100,000 from the Company. At December
31, 1997, the Company accrued $50,000 in compensation payable
to this individual and payment was accomplished in 1998,
through the issuance of shares of common stock (see Note 7).
In 1999 The Company paid this individual $45,000 and issued
warrants to purchase 250,000 shares of common stock. In 1999
and 1998, this individual waived all rights to receive accrued
salaries payable to him in the amounts of $55,000 and $66,000,
respectively, and, accordingly, such amount has been presented
as a contribution to the Company's additional paid-in capital.
(d) Other Agreements:
In the normal course of operations, and in accordance with
industry customs, the Company trades its advertising services
with those of some of its suppliers. These transactions are
recorded at fair value when the services are received. No such
transactions were recorded in 1999 or 1998.
The Company has also entered into various agreements pursuant
to which it provides hyperlinks to other web sites for the
purchase of certain items. In exchange, the Company will
receive a percentage of any revenues derived from sales to
those customers using these hyperlinks.
(e) Legal Proceedings:
On December 8, 1998, attorneys for Ms. Banks (see Note 4) made
a demand for arbitration against the Company alleging that the
Company failed to make timely payments of monies due under two
executed agreements, and refused to return certain materials to
Ms. Banks. Ms. Banks is seeking damages suffered under these
two agreements in the amount of $531,333 as well as legal fees
in an unspecified amount. The agreement relating to the
creation and sale of calendars has been terminated. Although
Ms. Banks also claims that the web site agreement has been
terminated, the Company believes that it is currently in full
compliance with this agreement, and that Ms. Banks has refused
to perform thereunder. As such, the Company is seeking damages
in the amount of $205,000 under the Web Site Agreement and
$59,000 under the Calendar Agreement (total of $264,000). The
Company believes that it has meritorious defenses and pursuant
to hearings held in October 1999, filed post-hearing briefs
with the American Arbitration Association in March 2000. No
decision has been received as of yet. There can be no assurance
that the Company will be successful in this arbitration and an
unfavorable result could have a material adverse effect on the
Company.
NOTE 11 - SUBSEQUENT EVENT (Unaudited):
In February 2000, the Company converted the loan payable -
officer and interest payable to officer into 110,000 shares of
the Company's common stock.
In addition in February 2000, the Company sold 182,000 shares
of its common stock in a private placement offering with gross
proceeds aggregating $910,000.
On March 30, 2000, the Company entered into an agreement with
a company controlled by Downtown Julie Brown to give the
Company her services for weekly radio shows to air on
weekends. The Company is obligated to pay her $100,000
annually for one year plus give her 10,000 shares of common
stock.
F-17
<PAGE>
PTN MEDIA, INC.
EXHIBIT 11.1
COMPUTATION OF EARNINGS PER SHARE
For the Year Ended
December 31,
1999 1998
------ ------
BASIC:
Net loss $(1,887,371) $(2,329,080)
Less: Cumulative dividends on preferred stock (30,333) -
----------- -----------
AVAILABLE TO COMMON SHAREHOLDERS (1,917,704) (2,329,080)
----------- -----------
WEIGHTED AVERAGE - COMMON SHARES OUTSTANDING 3,547,270 3,097,777
----------- -----------
BASIC LOSS PER COMMON SHARE $ (0.54) $ (0.75)
=========== ===========
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
consolidated financial statements for the year ended December 31, 1999 and is
qualified in its entirety by reference to such statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 46,539
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 762,164
<PP&E> 31,255
<DEPRECIATION> 6,456
<TOTAL-ASSETS> 786,963
<CURRENT-LIABILITIES> 1,306,400
<BONDS> 0
0
56
<COMMON> 4,050
<OTHER-SE> (523,543)
<TOTAL-LIABILITY-AND-EQUITY> 786,963
<SALES> 13,700
<TOTAL-REVENUES> 13,700
<CGS> 452,923
<TOTAL-COSTS> 452,923
<OTHER-EXPENSES> 1,374,652
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 73,496
<INCOME-PRETAX> (1,887,371)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,887,371)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,887,371)
<EPS-BASIC> (.54)
<EPS-DILUTED> (.54)
</TABLE>
