<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------
FORM 8-KA
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): September 10, 1998
ENHANCED SERVICES COMPANY, INC.
(Exact Name of Registrant as Specified in Charter)
Colorado 0-24256 76-0462973
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
3415 South Sepulveda Boulevard, Suite 500 Los Angeles, California 90034
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (310) 397-3003
1
<PAGE> 2
Item 1. CHANGES IN CONTROL OF REGISTRANT.
Not applicable.
Item 2. ACQUISITION OR DISPOSITION OF ASSETS.
As described in the Report on Form 8-K filed on September 28, 1998,
pursuant to the terms of a Securities Acquisition and Reorganization Agreement
("Reorganization Agreement") dated as of September 9, 1998, in transactions
implemented between September 10, 1998 and September 16, 1998, Enhanced Services
Company, Inc. ("Enhanced" or the "Company") and Zulu-tek, Inc. ("Zulu-tek") have
undertaken a series of transactions (the "Reorganization") in which Enhanced
acquired all of the assets and liabilities of Zulu-tek, including but not
limited to all of Zulu-tek's physical, tangible and intangible assets, and all
of the issued and outstanding capital stock of Echomedia Technologies, Inc, and
Mediabank, Inc. which in turn holds approximately 75% of the issued and
outstanding shares1 of Zulu Media, Inc. (formerly Softbank Interactive
Marketing, Inc.). The Reorganization was approved by the Board of Directors of
Enhanced and by the Board of Directors and by written consent of a majority of
the stockholders of Zulu-tek.
As described in the previous Report on Form 8-K, in exchange therefor,
Enhanced (i) issued to Zulu-tek 520,000 shares of 1998(B) Preferred Stock , (ii)
agreed to issue up to 10,209 shares of 1998(C) Preferred Stock to replace the
Series C Preferred Stock held by Softbank Holdings, Inc., OzEmail Limited and
certain other former shareholders of Zulu Media, Inc. (formerly Softbank
Interactive Marketing, Inc.), and (iii) agreed to provide up to $374,800 for
Zulu-tek to fund the repurchase of some or all of Zulu-tek's outstanding
Series(A) Preferred Stock.
Also, as previously described, the 1998(B) Preferred Stock is
convertible into 5.2 million shares of the Company's Common Stock, but only
after such conversion is approved the stockholders of the Company, at an Annual
Meeting. If the transaction is approved, Zulu-tek will be liquidated and the 5.2
million shares of the Company's Common Stock will be distributed to the Zulu-tek
shareholders on the basis of one share of the Company's Common Stock for every
ten shares of Zulu-tek common stock held by the shareholders.
Zulu-tek (OTC-ZULU), formerly OTC-NETZ and formerly known as Netmaster
Group, Inc., has continued to trade as an independent entity and will continue
to trade as an independent entity until after approval by the Shareholders of
the Company.
2
<PAGE> 3
Reference is made to the Company's Report on Form 8-K filed on
September 28, 1998 for further details of the transaction. This Report on Form
8-KA is filed to provide the financial information required by Item 7 of Form
8-K (see below).
Item 3. BANKRUPTCY OR RECEIVERSHIP.
Not applicable.
Item 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT.
Not applicable.
Item 5. OTHER EVENTS.
Not applicable.
Item 6. RESIGNATIONS OF REGISTRANT'S DIRECTORS.
Not applicable.
Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) and (b) The financial statements and pro forma financial
information required to give effect to the transactions described
in Item 2 above are annexed as Appendix 1.
(c) Exhibits
1. Audited Financial Statements of ZuluMedia, Inc. for the
fiscal year ended December 31, 1997.
Item 8. CHANGE IN FISCAL YEAR.
Not applicable.
Item 9. SALES OF EQUITY SECURITIES PURSUANT TO REGULATION S.
Not applicable.
3
<PAGE> 4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Enhanced Services Company, Inc.
Registrant
Date: November 13, 1998 By: /s/ Robert C. Smith
-----------------------------
Robert C. Smith, Treasurer
(Chief Financial Officer and
Authorized Signatory)
4
<PAGE> 5
APPENDIX A-1
UNAUDITED PRO FORMA BALANCE SHEET
August 31, 1998
<TABLE>
<CAPTION>
Enhanced ZULU GROUP.COM
Zulu tek, Inc. Services
Company, Inc. Acquisition/ Equity Adjustments CONSOLIDATED
------------------------------ ------------------------------- --------------
<S> <C> <C> <C> <C> <C>
Assets
Current Assets
Cash $ 21,770 $ 63,059 $ 84,829
Accounts receivable, net 251,726 585,178 836,904
Inventory 254,826 254,826
Intercompany receivable 302,853 2,333,249 1 (2,636,102) 0
Other current assets 35,282 177,391 212,673
------------ ------------ ------------
Total current assets 611,630 3,413,703 $ 1,389,231
Property and equipment, net of
accumulated depreciation 1,540,248 108,661 1,648,909
Investment in Zulu tek, Inc. 4,045,000 2 (4,045,000) 0
Goodwill - Echo/Zulu Media 14,122,418 3 2,991,429 2 2,757,968 17,113,847
Intangible Technology 4 (2,757,968)
Other assets 150,755 19,708 170,463
------------ ------------ ------------
Total assets $ 16,425,051 $ 7,587,072 $ 20,322,450
============ ============ ============
Liabilities and Stockholders' Equity
Current Liabilities
Accounts Payable $ 7,385,107 $ 1,127,895 (356,139) $ 8,156,863
Notes payable 908,500 908,500
Repurchase of Preferred Stock 7 374,800 374,800
Due to Related parties 2,279,963 1 (2,279,963) (0)
Other current liabilities 106,945 106,945
Deferred Revenue 550,199 550,199
============ ============ ============
Total current liabilities 10,215,269 2,143,340 $ 10,097,306
Notes payable 2,463,610 2,266,249 4,729,859
Minority Interest 3 801,338 801,338
Series C Redeemable Preferred 10,209,000 9 (10,209,000) 0
============ ============ ============
Total liabilities $ 22,887,879 $ 4,409,589 $ 15,628,504
Stockholders' Equity
Common stock 10 (27,348)
52,000 3,208 2 (12,000) 3 (3,208) 12,652
Convertible Debentures 1998 5
Preferred Stock (ESC) 3,000,008 3 (3,000,000) 8
Series A/B Preferred (Zulu) 3,374,800 8 (3,000,000) 7 (374,800) 0
Series C Preferred 1998 9 10,209,000 10,209,000
Series D Preferred 10,000 2 (10,000) 0
5,170,806 3 (4,370,814)10 27,348
Additional paid in capital 3 4,567,567 2 (1,265,032) 4,371,907
4 (2,757,968)
3,000,000
Retained Earnings (9,899,628) (4,996,539) 3 4,996,539 (9,899,628)
------------ ------------ ------------
Total stockholder's equity $ 6,462,827 $ 3,177,483 $ 4,693,940
============ ============ ============
Total Liabilities & Stockholders' Equity $ 16,425,052 $ 7,587,072 $ 20,322,444
============ ============ ============
</TABLE>
<PAGE> 6
APPENDIX A-2
Zulu Group.com
Unaudited Pro Forma Statement of Operations
For the 8 Months ended
August 31, 1998
<TABLE>
<CAPTION>
DISCONTINUED CONTINUING
ESVS ZULU-MEDIA ADJUSTMENTS CONSOLIDATED OPERATIONS OPERATIONS
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Gross sales volume $ 2,675,226 $ 17,519,059 $ 20,194,285 $ 305,921 $ 19,888,364
============ ============ ============ ============ ============
Net sales 2,675,226 1,719,553 4,394,779 305,921 4,088,858
Cost of sales 1,113,331 530,069 1,643,400 103,387 1,540,013
------------ ------------ ------------ ------------ ------------
Gross profit 1,561,895 1,189,484 2,751,379 202,534 2,548,845
Operating expenses 3,311,293 4,823,298 8,134,591 622,362 7,512,229
Goodwill amortization 710,304 (2) 2,187,901 2,187,901 2,187,901
(1) (710,304)
Net operating loss $ (2,459,702) $ (3,633,814) $ (7,571,113) $ (419,828) $ (7,151,285)
------------ ------------ ------------ ------------ ------------
Other Income(Expense) (729,414) $ (729,414) (292,004) (437,410)
------------ ------------ ------------ ------------ ------------
Net loss $ (3,189,116) $ (3,633,814) $ (8,300,527) $ (711,832) $ (7,588,695)
============ ------------ ============ ============ ============
(3)
</TABLE>
Note (1) Amortization of goodwill of the discontinued operation of NB
Engineering has been eliminated in both the 1997 and 1998 pro forma statement of
operations.
Note (2) Goodwill created by the combined entities, if approved by the
shareholders, has been presented in both the 1997 and 1998 pro forma statement
of operations.
The estimated life of 5 years was used in the calculation.
Note (3) NB Engineering, Inc., a subsidiary of Enhanced Services Company was
discontinued on May 31, 1998 and its operations have been eliminated in both the
1997 and 1998 proforma statement of operations.
<PAGE> 7
APPENDIX A-3
Zulu Group.com
Unaudited Pro Forma Statement of Operations
For the 12 Months ended
December 31, 1997
<TABLE>
<CAPTION>
DISCONTINUED CONTINUING
ESVS ZULU-MEDIA ADJUSTMENTS CONSOLIDATED OPERATIONS OPERATIONS
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Gross sales volume $ 5,689,074 $ 38,218,566 $ 43,907,640 $ 1,240,761 $ 42,666,879
============ ============ ============ ============ ============
Net sales 5,689,074 6,370,634 12,059,708 1,240,761 10,818,947
Cost of sales 2,529,222 6,250,711 8,779,933 167,096 8,612,837
------------ ------------ ------------ ------------ ------------
Gross profit 3,159,852 119,923 3,279,775 1,073,665 2,206,110
Operating expenses 4,627,984 18,031,286 22,659,270 1,776,042 20,883,228
Goodwill amortization 157,848 9,516,096 (2) 3,281,851 3,281,851 3,281,851
(1) (9,673,944)
------------ ------------ ------------ ------------ ------------
Net operating loss $ (1,625,980) $(27,427,459) $(22,661,346) $ (702,377) $(21,958,969)
------------ ------------ ------------ ------------ ------------
Other Income(Expense) 629,315 629,315 629,315
------------ ------------ ------------ ------------ ------------
Net loss $ (996,665) $(27,427,459) $(22,032,031) $ (702,377) $(21,329,654)
============ ============ ============ ============ ============
(3)
</TABLE>
(See notes on Appendix A-2)
<PAGE> 1
EXHIBIT 1
ZULU MEDIA, INC.
(A Delaware Corporation)
FINANCIAL STATEMENTS
December 31, 1997
and
December 31, 1996
<PAGE> 2
ZULU MEDIA, INC.
(A Delaware Corporation)
TABLE OF CONTENTS
For the Years Ended December 31, 1997 and December 31, 1996
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors Report 1
Balance Sheet 2-3
Statement of Income and Accumulated Deficit 4
Statement of Stockholders' Equity 5
Statement of Cash Flows 6-7
Notes to Financial Statements 8-14
</TABLE>
<PAGE> 3
[BRAD B. HAYNES LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
To The Board of Directors and Stockholders of ZULU MEDIA, INC.
We have audited the balance sheet of ZULU MEDIA, INC. as of December 31, 1997
and the related statement of income and accumulated deficit, shareholders'
equity, and cash flows for the year then ended. 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 audit. We did not audit
the Company's financial statements from June 19, 1996 (inception) to December
31,1996. Those statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
is based solely on the report of the other auditors.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit and the report of the other auditors provides a
reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of ZULU MEDIA, INC. as of December 31, 1997, and the
results of its operations, shareholders' equity and its cash flows for the year
then ended in conformity with generally accepted accounting principles.
/S/ BRAD B. HAYNES
- -------------------------
Brad B. Haynes
July 20, 1998
1
<PAGE> 4
ZULU MEDIA, INC.
(A Delaware corporation)
BALANCE SHEET
AS OF
ASSETS
<TABLE>
<CAPTION>
JUNE 19, 1996
YEAR ENDED (INCEPTION) TO
DECEMBER 31. 1997 DECEMBER 31.1996
----------------- ----------------
<S> <C> <C>
CURRENT ASSETS
Cash 575,235 351,893
Accounts receivable net of allowance for doubtful
accounts 1997 - 117,738 and 1996 - 307,470 3,741,024 6,672,333
Employee advances and other receivables 0 200,571
Marketable securities 820,820 0
Prepaid expenses 98,146 117,492
---------- ----------
Total Current Assets 5,235,225 7,342,289
PROPERTY AND EQUIPMENT (NET) 1,845,066 1,315,343
OTHER ASSETS
Goodwill (Net) 0 7,600,681
Deposits 111,130 68,848
----------
Total Other Assets 111,130 7,669,529
---------- ----------
TOTAL ASSETS 7,191,421 16,327,161
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable 6,504,466 6,365,869
Payroll and other related liabilities 1,854,003 1,695,385
Payable to related party 2,435,000 1,265,729
Deferred revenues, current portion 311,370 317,761
---------- ----------
Total Current Liabilities 11,104,839 9,644,744
DEFERRED REVENUES - non current portion 0 224.196
---------- ----------
TOTAL LIABILITIES 11,104,839 9,868,940
</TABLE>
See accompanying notes
2
<PAGE> 5
ZULU MEDIA, INC.
(A Delaware corporation)
BALANCE SHEET CONTINUED
AS OF
<TABLE>
<CAPTION>
JUNE 19, 1996
YEAR ENDED (INCEPTION) TO
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
STOCKHOLDERS' EQUITY
Preferred Stock, Series A, 1 par value
authorized, issued and outstanding -
705 voting shares 0 705
Preferred Stock, Series B, 1 par value
authorized, issued and outstanding -
295 non voting shares 0 295
Common Stock, 1 par value
authorized, 1,000,000 shares issued
and outstanding shares 862,529 - 1997
1,000 shares - 1996 862,529 1,000
Additional paid in capital 26,977,471 11,603,000
Unrealized gain on marketable securities 820,820 0
Accumulated deficit (32,574,238) (5,146,779)
----------- -----------
Total Stockholders' Equity (3,913,418) 6,458,221
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY 7,191,421 16,327,161
=========== ===========
</TABLE>
See accompanying notes
3
<PAGE> 6
ZULU MEDIA, INC.
(A Delaware Corporation)
STATEMENT OF INCOME AND ACCUMULATED DEFICIT
FOR THE
<TABLE>
<CAPTION>
JUNE 19, 1996
YEAR ENDED (INCEPTION) TO
DECEMBER 31. 1997 DECEMBER 31.1996
----------------- ----------------
<S> <C> <C>
GROSS SALES VOLUME 38,218,566 20,124,024
----------- -----------
REVENUES 6,370,634 4,140,127
COST OF SALES 6,250,711 823,937
----------- -----------
GROSS PROFIT 119,923 3,316,190
OPERATING EXPENSES
Marketing 2,851,345 1.426,894
Selling 6,871,984 4,023,342
General and administrative 8,309,957 2,612,697
Amortization and write-off of goodwill 9,516,096 400,036
----------- -----------
Total Operating Expenses 27,547,382 8,462,969
----------- -----------
LOSS BEFORE INCOME TAXES (27,427,459) (5,146,779)
PROVISION FOR INCOME TAXES 0 0
NET LOSS (27,427,459) (5,146,779)
-----------
ACCUMULATED DEFICIT DECEMBER 31, 1996 (5,146,779) (5,146,779)
-----------
ACCUMULATED DEFICIT - DECEMBER 31, 1997 (32,574,238)
-----------
</TABLE>
See accompanying notes
4
<PAGE> 7
ZULU MEDIA, INC.
(A Delaware Corporation)
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD JUNE 19, 1996 (INCEPTION) TO DECEMBER 31, 1996
AND FOR THE YEAR ENDED DECEMBER 31,1997
<TABLE>
<CAPTION>
SERIES A SERIES B
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
--------------- --------------- ------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Issuance of stock in
connection with the
formation of the Company
and the acquisition of
IMl and Network 1.0 705 705 295 295 1,000 1,000
Additional capital
contribution from parent -- -- -- -- -- --
Loss for period
June 19, 1998 (inception)
to December 31, 1998 -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance December 31, 1996 705 705 295 295 1,000 1,000
Additional capital
contribution from parent -- -- -- -- -- --
Unrealized gain on
marketable securities -- -- -- -- -- --
Stock split (705) (705) (295) (295) 861,529 861,529
Acquisition of assets of
Webwide Media PTY, LTD -- -- -- -- -- --
Loss for year ended
December 31, 1997 -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance December 31,1997 -- -- -- -- 862,529 862,529
========== ==========
<CAPTION>
ADDITIONAL UNREALIZED GAIN
PAID-IN ON MARKETABLE ACCUMULATED
CAPITAL SECURITIES DEFICIT TOTAL
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Issuance of stock in
connection with the
formation of the Company
and the acquisition of
IMl and Network 1.0 5,748,000 -- -- 5,750,000
Additional capital
contribution from parent 5,855,000 -- -- 5,855,000
Loss for period
June 19, 1998 (inception)
to December 31, 1998 -- -- (5,146,779) (5,146,779)
---------- ---------- ---------- ----------
Balance December 31, 1996 11,603,000 (5,146,779) 6,458,221
Additional capital
contribution from parent 14,235,000 -- -- 14,235,000
Unrealized gain on
marketable securities -- 820,820 -- 820,820
Stock split (860,529) -- --
Acquisition of assets of
Webwide Media PTY, LTD 2,000,000 -- -- 2,000,000
Loss for year ended
December 31, 1997 -- -- (27,427,459) (27,427,459)
---------- ---------- ---------- ----------
Balance December 31,1997 26,977,471 820,820 (32,574,238) (3,913,418)
========== ========== ========== ==========
</TABLE>
See accompanying notes
5
<PAGE> 8
ZULU MEDIA, INC.
(A Delaware Corporation)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss (27,427,460)
Adjustments to reconcile to net cash:
Depreciation 667,353
Amortization and write-off of goodwill 9,516,096
Provision for bad debts 189,732
Decrease in accounts receivable 2,721,646
Decrease in employee advances and other receivables 200,571
Decrease in prepaid expense 19,346
Increase in deposits (42,282)
Increase in accounts payable 138,597
Increase in payroll and other accrued liabilities 158,618
Increase in payable to related party 1,169,271
Decrease in deferred revenues (230,587)
-----------
Total Adjustments 14,508,361
-----------
NET CASH USED IN OPERATING ACTIVITIES (12,919,099)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment (1,092,559)
NET CASH USED IN INVESTING ACTIVITIES (1,092,559)
CASH FLOWS FROM FINANCING ACTIVITIES
Additional capital contribution from parent 14,235,000
NET CASH PROVIDED BY FINANCING ACTIVITIES 14,235,000
-----------
NET CASH PROVIDED BY ALL ACTIVITIES 223,342
CASH - December 31, 1996 351,893
-----------
CASH - December 31, 1997 575,235
-----------
</TABLE>
See accompanying notes
6
<PAGE> 9
ZULU MEDIA, INC.
(A Delaware Corporation)
STATEMENT OF CASH FLOWS
FOR THE PERIOD JUNE 19, 1996 (INCEPTION) TO DECEMBER 31, 1996
<TABLE>
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
NET LOSS (5,146,779)
Adjustments to reconcile to net cash:
Depreciation 190,400
Amortization of goodwill 400,036
Provision for bad debts 307,470
Increase in accounts receivable (4,850,603)
Increase in employee advances and other receivables (108,803)
Increase in prepaid expense (33,397)
Increase in deposits (24,699)
Increase in accounts payable 4,238,617
Increase in payroll and other accrued liabilities 825,715
Decrease in payable to related party (74,271)
Decrease in deferred liabilities (380,557)
-----------
Total Adjustments 489,908
-----------
NET CASH USED IN OPERATING ACTIVITIES (4,656,871)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of SOFTBANK INTERACTIVE
MARKETING, INC. and Network 1.0,
net of cash acquired (5,497,156)
Acquisition of property and equipment (1,099,080)
------------
NET CASH USED IN INVESTING ACTIVITIES (6,596,236)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of stock 5,750,000
Additional capital contribution from parent 5,855,000
------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 11,605,000
-----------
NET CASH PROVIDED BY ALL ACTIVITIES 351,893
CASH - June 19, 1996 --
CASH - December 31, 1996 351,893
-----------
</TABLE>
See accompanying notes
7
<PAGE> 10
ZULU MEDIA. INC.
(A Delaware Corporation)
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD JUNE 19, 1996 (INCEPTION) TO DECEMBER 31, 1996
AND FOR THE YEAR ENDED DECEMBER 31, 1997
1. ORGANIZATION AND DESCRIPTION OF BUSINESS ACTIVITIES
ZULU MEDIA, INC. (the Company), a Delaware corporation, is a
diversified interactive media sales, marketing and communications
company. Business activities of the Company include the sale of
interactive multimedia advertising and production of interactive
promotions.
The Company was formed on June 19, 1996 by SOFTBANK Holding Inc.
(SOFTBANK) with authorized capital consisting of 1,000 shares of
Preferred Stock (705 Series A voting shares and 295 Series B non-voting
shares) and 1,000 shares of Common Stock.
On June 19, 1996, SOFTBANK contributed 5,750,000 in cash and committed
to provide as a capital contribution additional cash, as required, in
exchange for 705 shares of Series A Preferred Stock and 705 shares of
Common Stock of the Company.
SoftBank Interactive Marketing, Inc. had a name change to Zulu Media,
Inc. on March 24, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Revenue Recognition
Revenues are derived from the performance of services, sale
and related placement of advertisements on internet sites and
production of trade shows. Revenues are recognized as services
are performed, on the run-date of an advertisement or when a
trade show commences.
In accordance with certain agreements, billings are submitted
to advertisers on behalf of client web sites. The gross sales
volume are recorded as accounts receivable and an accrual is
recorded for the amount due to the client web site in
accordance with the terms of the agreement. A deferred
liability has been established to account for timing
differences between advertising billings and the period in
which an advertisement runs. Such liability in the amount of
approximately 141,000 has been recorded as Deferred Revenues
in the balance sheet for the period ended December 31, 1996.
The liability for the year ended December 31, 1997 was
approximately 87,000. The remainder of the Deferred Revenue as
of December 31, 1996, and December 31, 1997 is attributed to a
license agreement with a related party. (See note 5. Related
Party Transaction).
8
<PAGE> 11
ZULU MEDIA, INC.
(A Delaware Corporation)
NOTES TO FINANCIAL STATEMENTS CONTINUED
FOR THE PERIOD JUNE 19, 1996 (INCEPTION) TO DECEMBER 31, 1996
AND FOR THE YEAR ENDED DECEMBER 31, 1997
b. Property and Equipment
Property and equipment acquired from IMI are stated at fair
market value as of the acquisition date. Property and
equipment acquired subsequent to June 19, 1996 are stated at
cost. Depreciation is computed on the straight-line basis over
the estimated useful lives of the related assets which is
estimated to be three years. Leasehold improvements are
amortized over the lesser of the term of the lease or the
useful life of the related improvement.
c. Goodwill
Goodwill is amortized using the straight-line method over 10
years. The carrying value of the goodwill is periodically
reviewed by the Company based on the expected future
undiscounted operating cash flows of the Company. Based upon
its most recent analysis, the Company believes that no future
value of goodwill exists as of December 31, 1997.
d. Income Taxes
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Under this method, deferred tax
assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and
laws that will be in effect when the differences are expected
to reverse.
e. Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
f. New Accounting Standards
Statement of Financial Accounting Standards No.121,
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of" (SFAS No.121) establishes
guidelines regarding when impairment losses on long-lived
assets, which include plant and equipment, and certain
identifiable intangible assets, should be recognized and how
impairment losses should be measured. The adoption resulted in
an impairment write down of 8,412,765 of goodwill and has been
recorded in the Company's current year operations.
9
<PAGE> 12
ZULU MEDIA, INC.
(A Delaware Corporation)
NOTES TO FINANCIAL STATEMENTS CONTINUED
FOR THE PERIOD JUNE 19, 1996 (INCEPTION) TO DECEMBER 31, 1996
AND FOR THE YEAR ENDED DECEMBER 31, 1997
3. ACQUISITION
On June 19, 1996, the Company acquired the business and assets of
Interactive Marketing Inc. (IMI) and Network 1.0 for consideration of
5,750,000 in cash, 295 shares of Series B Preferred Stock and 295
shares of Common Stock of the Company.
The acquisition has been accounted for using the purchase method of
accounting. The consideration paid, acquisition costs and the fair
market value of the net liabilities assumed have been assigned to
goodwill. The financial statements contained herein reflect the
operations of the Company from June 19, 1996 through December 31, 1996.
In connection with the acquisition of IMI, the Company's Board of
Directors authorized the closure of two IMI divisions. The Company
accrued 500,000 for liabilities relating to severance and other exit
costs, with a corresponding increase in goodwill.
The net purchase price has been allocated as follows:
<TABLE>
<S> <C>
Goodwill 8,000,717
Current assets 2,324,821
Fixed assets 406,662
Other assets 44,149
Current liabilities (5,029,193)
Acquisition costs (250,000)
----------
5,497,156
Net cash acquired 252,844
5,750,000
----------
</TABLE>
4. CONCENTRATION OF CREDIT RISK
A concentration of credit risk may exist with respect to trade
receivables. Sales to date have been primarily to customers located in
the United States. The Company provides unsecured credit to its
customers in the normal course of business. Credit evaluations are
performed on the financial condition of customers and a reserve has
been established for accounts which may not be collectible.
10
<PAGE> 13
ZULU MEDIA, INC.
(A Delaware Corporation)
NOTES TO FINANCIAL STATEMENTS CONTINUED
FOR THE PERIOD JUNE 19, 1996 (INCEPTION) TO DECEMBER 31, 1996
AND FOR THE YEAR ENDED DECEMBER 31, 1997
The Company has a customer whose revenues represent approximately 40
percent of the Company's net revenues for the period from June 19, 1996
(inception) to December 31, 1996. Effective January 1, 1997, the
agreement with this customer has not been renewed. The Company does not
expect this to have an adverse impact on 1997 operations. In 1997, it
did not have an adverse impact as other customers replaced that one
customer.
5. RELATED PARTY TRANSACTIONS
The Company sells advertising on behalf of a related party. In
connection with the sales representation agreement, the related party
advanced the Company 1,250,000 to be offset against earned sales
revenues from the sale of advertisements made on their behalf. As of
December 31, 1997, the Company had earned 1,250,000 of such sales
revenue, which have been fully offset against the advances in the
accompanying balance sheet.
The Company's group medical, dental and related benefits programs are
provided by a related party. The related costs of 1,169,271 for the
year ended December 31, 1997 have been charged to the Company and such
amounts are expected to be repaid to the related party during 1998.
The Company has entered into a license agreement with a related
company. The Company has received a license fee of 450,000 as
consideration for granting the related company the exclusive right to
produce a certain trade show worldwide through December 31, 1998. The
license fee will be amortized over the term of the agreement and has
been included in Deferred Revenues in the accompanying balance sheet.
6. INCOME TAXES
As of December 31, 1996, the Company had net operating loss
carryforwards for federal and state income tax purposes of
approximately 5,147,000 and approximately 27,577,000 for the year ended
December 31, 1997 for a total 32,724,000. No benefit has been recorded
in the financial statements due to the uncertainty of future net
income. The federal operating loss carryforwards begin to expire in
2011 and the state operating loss carryforwards begin to expire in
2001.
Also, the losses will have a significant diminution because of a change
in ownership as promulgated by Internal Revenue Code Section 382.
11
<PAGE> 14
ZULU MEDIA, INC.
(A Delaware Corporation)
NOTES TO FINANCIAL STATEMENTS CONTINUED
FOR THE PERIOD JUNE 191 1996 (INCEPTION) TO DECEMBER 31, 1996
AND FOR THE YEAR ENDED DECEMBER 31, 1997
7. MARKETABLE SECURITIES
At December 31, 1997, the Company held 11,853 available for sale shares
of Yahoo Stock with a closing bid price of 69.25 for a total asset
value of 820,820.
8. PROPERTY AND EQUIPMENT
<TABLE>
<S> <C> <C>
Computer equipment 941,651
Network operating centers 1,038,389
Furniture and equipment 480,834
Leasehold improvement 114,258
---------
Total cost 2,575,132
Less accumulated depreciation 730,066
---------
PROPERTY AND EQUIPMENT NET 1,845,066
=========
</TABLE>
Assets were pledged as security for loans made to the Company (Uniform
Commercial Code Filing.)
9. CONFORMITY
Prior auditor's statements were modified to conform to December 31,
1997 statement.
10. GROSS SALES VOLUME
Gross sales volume represents the volume of business generated to
produce the revenues. The gross sales volume of 38,218,566 produced
revenues of 6,220,857 for the year ended December 31, 1997. The gross
sales volume of 20,124,024 produced revenues of 4,140,127 for the year
ended December 31, 1996.
12
<PAGE> 15
ZULU MEDIA, INC.
(A Delaware Corporation)
NOTES TO FINANCIAL STATEMENTS continued
FOR THE PERIOD JUNE 19,1996 (INCEPTION) TO DECEMBER 31, 1996
AND FOR THE YEAR ENDED DECEMBER 31, 1997
11. GOING CONCERN
The Company has suffered recurring losses from operations, has a net
loss of 27,577,236 for the year ended December 31, 1997. Also at
December 31, 1997, the Company's working capital position was a deficit
of 6,019,391. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The accompanying
financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
The Company has been able to continue operations through the funding
from private investors, cash inflows from operations, and the extension
of terms from creditors. Continued operations depend upon the Company
continuing to obtain financing for its activities. Management's plan
for the Company includes raising additional working capital through
debt and/or equity financing until profitable operations and positive
cash flow are achieved and maintained, which management believes are in
the near future. However, no assurances can be given that the Company
will be successful in raising additional capital, there is no assurance
that the Company will achieve profitability or positive cash flow. If
the Company is unable to obtain adequate additional financing,
management will be required to curtail the operations of the Company.
12. SUBSEQUENT EVENTS
In 1998, Yahoo Stock (Marketable Securities) were sold for 749,349
resulting in a loss of approximately 71,000.
In 1998, a settlement was effected with Netscape whereby the accounts
receivable due from Netscape (697,764) would be offset by the payable
due to Netscape (1,456,564). The net effect of the settlement was the
mutual dismissal of financial obligations to each other.
Zulu Media, Inc. was sold by SoftBank Holding, Inc. (the parent
company) to MediaBank, Inc., an intermediary for Netmaster, Inc. for
nine million one hundred twenty nine thousand dollars (9,129,000) in a
common stock purchase. The purchase price was paid to SoftBank
Holdings, Inc. with 9,129 shares of Series C redeemable preferred stock
of Netmaster, Inc. The Netmaster stock shall be redeemable in three
equal installments of 3.043 shares on or before each of December 31,
1999. December 31, 2001 and December 31, 2002 (each referred to as
redemption dates) by MediaBank delivery to SoftBank of 1,000 cash for
each share of Netmaster stock or an aggregate of three million
forty-three thousand dollars (3,043,000) on or before December 31,
1999, December 31, 2001, and December 31, 2002. MediaBank hereby
irrevocably guarantees jointly and severally Netmaster's obligation to
redeem the Netmaster stock as set forth above.
13
<PAGE> 16
ZULU MEDIA, INC.
(A DELAWARE CORPORATION)
NOTES TO FINANCIAL STATEMENTS CONTINUED
FOR THE PERIOD JUNE 19, 1996 (INCEPTION) TO DECEMBER 31, 1996
AND FOR THE YEAR ENDED DECEMBER 31, 1997
13. COMMITMENTS AND CONTINGENCIES
The Company leases its operating facilities under non-cancelable
operating leases which expire at various dates through 2001. Future
minimum lease payments under such operating leases are as follows:
<TABLE>
<S> <C>
1998 449,750
1999 461,750
2000 407,400
2001 307,500
---------
1,626,400
=========
</TABLE>
Rental expense for the period from June 19, 1996 (inception) to
December 31, 1996 related to these leases were approximately 271,500
and for the year ended December 31, 1997 was approximately 566,000.
In the normal course of business the Company is involved in various
lawsuits. Management is of the opinion that any liability or loss in
excess of insurance coverage resulting from such litigation will not
have a material adverse effect on the financial statements.
14
