U.S. 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 No. 0-23780
MEDIAX CORPORATION
(Exact Name of Small Business Issuer as Specified in its Charter)
Nevada
(State or Other Jurisdiction of Incorporation or Organization)
84-1107138
(I.R.S. Employer Identification Number)
8522 National Boulevard, Suite 110, Culver City, California 90232
(Address of Principal Executive Offices, Including Zip Code)
(310) 815-8002
Issuer's Telephone Number
Securities Registered Pursuant to Section 12(b) of the Act: None.
Securities Registered Pursuant to Section 12(g) of the Act:
SHARES OF COMMON STOCK, $.0001 PAR VALUE
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not contained in this form, and no disclosure will be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
The Issuer's revenues for its most recent fiscal year were $ 55,918.
The aggregate market value of the Issuer's Common Stock, $.0001 Par Value, held
by non-affiliates of the Issuer, based on the closing sale price of the Common
Stock on March 31, 2000 as reported on the OTC Bulletin Board, was approximately
$ 18,170,343.
As of March 31, 2000 there were 6,961,781 shares of the Issuer's Common Stock,
$.0001 Par Value, outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
DESCRIPTION OF BUSINESS
Originally founded as a multi-media production studio in 1995, MediaX Inc. was
acquired by ZeitGeist Werks, Inc and went public in 1996 and subsequently
renamed MediaX Corporation. MediaX began as a real-time 3D computer game
development company, developing high marquee-value intellectual properties, such
as the exclusive license for George Orwell's "1984" for distribution through
both conventional and Internet distribution channels, as well as licensing it to
large publishers.
After the acquisition MediaX's business development strategy began to focus on
the production of new media content for Internet and Broadband channels; website
design and hosting and Internet-based commerce and on-line marketing. MediaX
believes that since any sucessful Internet presence today requires a skilled and
experienced engineering & graphic artist team and advanced technology, that
MediaX's real-time 3D engineering team and the technology developed by that
team, will prove to become a competitive advantage.
Leading edge on-line campaigns, such as the full screen real-time streaming
graphically intense event in June 1999 for Paul McCartney, could not have been
produced without this skill set.Subsequently MediaX has entered into several
contracts that require and recognize this development and technology skill set.
With the varied expertise of MediaX's Chairman, President and Executive Vice
President in the areas of artist and record company management, film production,
software development &distribution and proprietary technology development,
MediaX expects to bridge an existing gap in the entertainment and technology
markets and become a successful player in the Internet content production,
marketing and e-commerce market.
MediaX designs, owns, hosts and maintains an integrated network of distinct
types of entertainment based web sites. This network of sites positions MediaX
to generate revenue through web site design services, the sale of artist
specific merchandises, entertainment related products, club subscriptions,
endorsements by corporate sponsors, third party advertising and a variety of
products provided by affiliates. In February 1999, MediaX launched amuZnet.com,
an entertainment destination and e-commerce site now offering more than 300,000
entertainment titles on CDs, DVDs, videos and movies for sale. MediaX places its
own and/or third party marketing campaigns on amuZnet.com to generate
re-occurring traffic to the site.
With increasing numbers of visitors from MediaX's most recent site launches and
on-line campaigns with Rod Stewart, Divine, Paul McCartney, Faith Hill, AJ
MacLean and NSYNC, MediaX believes that amuZnet.com is on the path to become a
substantial entertainment destination site. MediaX's team of engineers and
graphic artists develops, designs and maintains all MediaX designed/owned sites
in this network in house and hosts all services on the MediaX server system,
including the real time streaming of video and audio.
MediaX continues to produce new content for the Internet and based on its
technological structure is in a position to re-purpose all Internet content it
has produced for interactive satellite broadcasting and other broadband systems
such as cable TV or ADSL subscriber systems, without applying significant
technological effort. This affords MediaX several outlets for the same digital
interactive content it produces.
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MediaX has signed contracts with EchoStar (Dish Network) for the launch of an
Interactive Satellite Entertainment Channel and hopes to further tap into the
rapidly emerging efforts of cable and telecom companies with its existing
technology and content. However, there can be no assurance that MediaX will
achieve its objectives or successfully implement its interactive satellite
business plan.
Historical Products and Services
MediaX has developed, produced and marketed software products for the
information, entertainment and development tool sector of the software industry
in the form of software distributed on floppy disks and CD-ROM's. Three released
CD-ROM products are "On the Road with BB King, "Queensryche's Promised Land" and
"Peter Norton - PC Guru" distributed by MCA, EMI Records and MediaX,
respectively.
MediaX was selected by Apple Computer to produce the Welcome Experience
for their limited edition Twentieth Anniversary Macintosh, which was introduced
on March 19, 1997. The multimedia presentation featured leading-edge animation,
digital video, interactive 3D graphics, original soundtrack and theater quality
audio, which highlighted the Macintosh's extreme multimedia capabilities.
In December 1997, MediaX released and distributed "Peter Norton - PC
Guru." During the fourth quarter of 1998, it was determined that this product
would not gain significant additional sales beyond 1998, therefore, MediaX has
ceased distribution of the product.
PATENTS, TRADEMARKS AND LICENSES
As a site developer, MediaX also develops its own proprietary sites,
which sometimes results in the development of innovative technology solutions
with broad applications in other growing markets, especially in the on-line
environment. MediaX owns several Internet domain names. MediaX either has filed
or is in the process of filing the appropriate applications for patents,
trademarks or licenses for its products. Based on the experience of its
engineering and graphic artist team and the successful launch and hosting of
several prominent web sites, MediaX is well positioned to gain revenues from
site development and Internet marketing services to larger corporations against
payment of a development fee and participation in e-commerce and advertising
revenues with these partners.
COMPETITION
MediaX is a minor participant among companies that engage in
multimedia and Internet content development. Many of these companies have
significantly greater capitalization and experience in this industry.
Additionally, online commerce is rapidly evolving and highly competitive and
MediaX expects competition to further intensify. Barriers to entry are minimal,
and a competitor can launch a simple site at a relatively low cost. In addition,
the general retail music industry is also intensely competitive. MediaX
currently competes with a variety of companies, including online vendors of
consumer products including CDs, DVDs, music videos and other related products
and traditional retailers of music products, including specialty music
retailers, many of which also have dedicated web sites that compete directly
with MediaX.
MediaX is aware that several of its competitors have aggressive
pricing or inventory availability policies and devote substantially more
resources to site and systems development than MediaX. Increased competition may
result in reduced operating margins.
There can be no assurance that MediaX will be able to compete
successfully against current and future competitors.
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EMPLOYEES
As of March 31, 2000, MediaX had 29 employees and subcontractors.
YEAR 2000
In 1999, MediaX completed its remediation and testing of MediaX's
systems. Because of those planning and implementation efforts, MediaX
experienced no significant disruptions in critical information technology and
non-information technology systems and those systems have successfully responded
to the Year 2000 date change. MediaX did not incur any significant expenses
during 1999 in connection with its remediation and testing of its systems.
MediaX is not aware of any material problems resulting from Year 2000 issues,
either with its products, internal systems, or the products and services of
third parties. MediaX will continue to monitor its critical computer
applications and those of its suppliers and vendors throughout the year 2000 to
ensure any latent Year 2000 matters arising are addressed promptly.
ITEM 2. DESCRIPTION OF PROPERTY
MediaX maintains its corporate office at 8522 National Boulevard, Suite
110, Culver City, California 90232 on a month-to-month basis and pays
approximately $3,200 per month for rent. MediaX entered into an agreement to
lease new corporate offices in Culver City, California through December 2004.
The agreement provides for monthly lease payments of $9,250 increasing yearly to
$10,411 in the last year. MediaX maintains its software development office at
303 Potrero St., #42-302, Santa Cruz, California 95060. MediaX pays
approximately $3,146 per month for rent pursuant to a lease, which expires in
June 2000.
ITEM 3. LEGAL PROCEEDINGS
Valley Media, Inc. ("Valley") commenced an arbitration proceeding
against MediaX Corporation ("MediaX") for breach of contract in relation to an
order fulfillment contract and related license agreement. MediaX participated in
the arbitration while reserving the right to challenge the scope of the
arbitrator's authority and the arbitration provision in the written agreement.
On March 6, 2000, the arbitrator found in favor of Valley and awarded $170,000
in damages, plus the cost of the arbitration. MediaX has recorded approximately
$183,000 in the 1999 balance sheet and statement of operations. MediaX is in the
process of challenging the arbitrator's authority and the arbitration provisions
in the written agreement and plans to request the superior court of the state of
California to vacate the arbitration awards.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1999 other than as follows:
On September 10, 1999, shareholders of MediaX holding a majority of
the voting power, acting pursuant to Nevada law and in lieu of an annual
meeting, elected Nancy Poertner, Rainer Poertner and Matthew MacLaurin to serve
as directors for the ensuing year; approved an increase in the number of
authorized $.0001 par value common shares to 25,000,000 from 7,500,000; approved
and ratified the 1998 Amendment to MediaX's 1996 Stock Option Plan that
increased the number of shares of common stock available to the Plan to 500,000
shares of $.0001 par value common stock and ratified the appointment of Davis &
Co. CPA's P.C. as MediaX's independent accountants for the year ended December
31, 1999. Notice of the proposed written consent in lieu of an annual meeting
was filed with the SEC on Schedule 14C and mailed to all shareholders of record
on September 29, 1999.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) MARKET INFORMATION. MediaX's Common Stock is traded on the
over-the-counter market. The following table sets forth the high and low bid
price for MediaX's Common Stock for the periods indicated as reported by the
OTC's Electronic Bulletin Board. These prices are believed to be inter-dealer
quotations and do not include retail mark-ups, mark-downs, or other fees or
commissions, and may not necessarily represent actual transactions.
Quarter Ended High Bid Low Bid
------------------ -------- -------
March 31, 1999 $4.62 $2.06
June 30, 1999 $6.91 $3.56
September 30, 1999 $5.25 $1.75
December 31, 1999 $3.03 $1.31
March 31, 1998 $13.31 $3.80
June 30, 1998 $5.00 $1.30
September 30, 1998 $3.50 $1.50
December 31, 1998 $3.00 $ .60
(b) HOLDERS. As of March 31, 2000, MediaX had approximately 1500
shareholders of record, which includes shareholders who hold stock in their
accounts at broker/dealers.
(c) DIVIDENDS. MediaX has never paid a cash dividend on its common
stock and does not expect to pay a cash dividend in the foreseeable future.
(d) RECENT SALES OF UNREGISTERED SECURITIES.
Year ended December 31, 1999
Stock sales
During January 1999, MediaX issued 30,000 shares of common stock in connection
with the exercise of stock warrants for $75,000. Exemption from registration
under the Securities Act of 1933, as amended ("Act"), is claimed for the sale of
all the securities set forth above in reliance upon the exemption afforded by
Section 4(2) of the Act.
During January through September1999, MediaX issued 30,000 shares of common
stock valued at $106,875 (based on the market value on the date of grant) and
830,000 shares of restricted common stock valued at $1,689,807 (based on the
market value on the date of grant) to consultants for services rendered.
Exemption from registration under the Securities Act of 1933, as amended
("Act"), is claimed for the sale of all the securities set forth above in
reliance upon the exemption afforded by Section 4(2) of the Act.
During January through April 1999, MediaX issued 20,000 shares of common stock
and 340,000 shares of restricted stock for $20,000 and $421,500, respectively
(plus 16,000 shares issued for finders fees). Exemption from registration under
the Securities Act of 1933, as amended ("Act"), is claimed for the sale of all
the securities set forth above in reliance upon the exemption afforded by
Section 4(2) of the Act.
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During March 1999, MediaX issued 200,000 shares of restricted common stock
valued at $393,125 (based on the market value on the date of grant to a third
party for prepaid advertising time. Exemption from registration under the
Securities Act of 1933, as amended ("Act"), is claimed for the sale of all the
securities set forth above in reliance upon the exemption afforded by Section
4(2) of the Act.
Convertible Securities
Included in convertible subordinated debentures payable at December 31, 1998 was
$1,454,092 of various notes payable. The notes, bearing interest at the prime
rate (prime rate at December 31, 1999 was 8.25%) plus 2% to 4%, were due on
various dates through September 1999. In 1999, MediaX offered the note holders
an inducement to convert the notes with a current balance of $1,566,192
(including accrued interest in 1999 of $112,100) into common stock at $1.69 per
share (estimated fair market value on the date of conversion was approximately
$2.71 per share) or 921,925 shares. Exemption from registration under the
Securities Act of 1933, as amended ("Act"), is claimed for the sale of all the
securities set forth above in reliance upon the exemption afforded by Section
4(2) of the Act.
In 1999, MediaX entered into a securities purchase agreement with an investor,
whereby MediaX sold to the investor a $2,200,000 principal amount convertible
note for $2,024,000 (net of finders fee of $176,000). The note bears interest at
5% and is due on August 24, 2002. The holder of the note has the option to
require interest payments in cash or stock. The note is convertible at
beneficial rates which vary based on recent stock prices and date of conversion,
as defined In addition, MediaX gave the investor a warrant to purchase 220,000
shares of its common stock at $3.40 per share expiring in August 23, 2004.
Exemption from registration under the Securities Act of 1933, as amended
("Act"), is claimed for the sale of all the securities set forth above in
reliance upon the exemption afforded by Section 4(2) of the Act.
Year Ended December 31, 1998
Stock sales
During April to December 1998, MediaX sold 468,313 shares to an accredited
unrelated investor for proceeds of $500,000. In addition, the investor exercised
200,000 warrants during December of 1998, resulting in the issuance of 200,000
shares for proceeds of $20,000. Exemption from registration under the Securities
Act of 1933, as amended ("Act"), is claimed for the sale of all the securities
set forth above in reliance upon the exemption afforded by Section 4(2) of the
Act.
Another accredited unrelated investor purchased 104,000 shares during February
1998 for proceeds of $200,000. Exemption from registration under the Securities
Act of 1933, as amended ("Act"), is claimed for the sale of all the securities
set forth above in reliance upon the exemption afforded by Section 4(2) of the
Act.
During December 1998, the Company issued 190,000 shares of common stock valued
at $185,625 (based on the market value on the date of grant) to consultants for
services rendered. Exemption from registration under the Securities Act of 1933,
as amended ("Act"), is claimed for the sale of all the securities set forth
above in reliance upon the exemption afforded by Section 4(2) of the Act.
Convertible Securities
On March 1, 1998, MediaX replaced certain outstanding debentures with a new
convertible debenture for $850,000 which pays interest at the same rate as the
replaced debentures and is due on September 1, 1999. The principal sum of the
new debenture and any accrued interest may be converted into common shares at
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any time prior to the due date at $1.75 per share. Accrued interest at December
31, 1998 was $73,754. On March 1, 1999 the investor converted $350,000 of
principal into 200,000 shares of common stock. Exemption from registration under
the Securities Act of 1933, as amended ("Act"), is claimed for the sale of all
the securities set forth above in reliance upon the exemption afforded by
Section 4(2) of the Act.
Year Ended Decmeber 31, 1997
Stock sales
On April 20, 1997, MediaX engaged a consultant to provide financial public
relations services for MediaX for a term of twelve months. As part of the
compensation for such services, MediaX issued to the consultant 7500 shares of
MediaX's common stock. Exemption from registration under the Securities Act of
1933, as amended ("Act"), is claimed for the sale of all the securities set
forth above in reliance upon the exemption afforded by Section 4(2) of the Act.
On August 22, 1997, MediaX sold 20,000 shares of common stock to an accredited
investor for $148,000. Exemption from registration under the Securities Act of
1933, as amended ("Act"), is claimed for the sale of all the securities set
forth above in reliance upon the exemption afforded by Section 4(2) of the Act.
On August 29, 1997, MediaX sold 5,000 shares of common stock to an accredited
investor for $52,000. Exemption from registration under the Securities Act of
1933, as amended ("Act"), is claimed for the sale of all the securities set
forth above in reliance upon the exemption afforded by Section 4(2) of the Act.
On September 2, 1997, MediaX sold 5,000 shares of common stock to an accredited
investor for $52,000. Exemption from registration under the Securities Act of
1933, as amended ("Act"), is claimed for the sale of all the securities set
forth above in reliance upon the exemption afforded by Section 4(2) of the Act.
On September 7, 1997, MediaX sold 10,000 shares of common stock to an accredited
investor for $104,000. Exemption from registration under the Securities Act of
1933, as amended ("Act"), is claimed for the sale of all the securities set
forth above in reliance upon the exemption afforded by Section 4(2) of the Act.
On September 9, 1997, MediaX sold 10,000 shares of common stock to an accredited
investor for $104,000. Exemption from registration under the Securities Act of
1933, as amended ("Act"), is claimed for the sale of all the securities set
forth above in reliance upon the exemption afforded by Section 4(2) of the Act.
On September 10, 1997, MediaX sold 5,000 shares of common stock to an accredited
investor for $52,000. Exemption from registration under the Securities Act of
1933, as amended ("Act"), is claimed for the sale of all the securities set
forth above in reliance upon the exemption afforded by Section 4(2) of the Act.
On September 25, 1997, MediaX sold 19,231 shares of common stock to an
accredited investor for $200,000. Exemption from registration under the
Securities Act of 1933, as amended ("Act"), is claimed for the sale of all the
securities set forth above in reliance upon the exemption afforded by Section
4(2) of the Act.
On November 4, 1997, MediaX issued 40,000 shares of common stock to an unrelated
third party in exchange for $600,000 of prepaid advertising. Exemption from
registration under the Securities Act of 1933, as amended ("Act"), is claimed
for the sale of all the securities set forth above in reliance upon the
exemption afforded by Section 4(2) of the Act.
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Convertible Securities
On March 25, 1997, the Company sold to an accredited investor for $450,000, a
convertible debenture which pays interest at 2% per annum over the prime rate of
the Bank of America, calculated monthly on the principal portion of $350,000
from February 11, 1997 and on the principal portion of $100,000 from March 25,
1997. The debenture is due on February 28, 1998, but the principal sum and any
accrued interest may be converted into shares of common stock at any time before
the due date at a price of $1.00 per share. Exemption from registration under
the Securities Act of 1933, as amended ("Act"), is claimed for the sale of all
the securities set forth above in reliance upon the exemption afforded by
Section 4(2) of the Act.
On August 1, 1997, MediaX sold a convertible debenture to an accredited investor
for $320,000, which pays interest on the principal of $320,000 at 2% per annum
over the prime rate of the Bank of America, calculated monthly from August 1,
1997. The debenture is due on July 31, 1998, but the principal sum and any
accrued interest may be converted into shares of common stock at any time before
the due date at a price of $7.00 per share. Exemption from registration under
the Securities Act of 1933, as amended ("Act"), is claimed for the sale of all
the securities set forth above in reliance upon the exemption afforded by
Section 4(2) of the Act.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following information should be read in conjunction with the
audited financial statements of MediaX as of and for the years ended December
31, 1999 and 1998 and for the period from March 30, 1995 (date of inception)
through December 31, 1999 together with the notes thereto. The analysis set
forth below is provided pursuant to applicable Securities and Exchange
Commission regulations and is not intended to serve as a basis for projections
of future events.
FORWARD-LOOKING STATEMENTS
EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS DISCUSSED
IN THIS FORM 10-KSB ARE FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO CERTAIN
RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE SET FORTH IN SUCH FORWARD LOOKING STATEMENTS. SUCH FORWARD-LOOKING
STATEMENTS MAY BE IDENTIFIED BY THE USE OF CERTAIN FORWARD-LOOKING TERMINOLOGY,
SUCH AS "MAY," "WILL," "EXPECT," "ANTICIPATE," "INTEND," "ESTIMATE," "BELIEVE"
OR COMPARABLE TERMINOLOGY THAT INVOLVES RISKS OR UNCERTAINTIES. ACTUAL FUTURE
RESULTS AND TRENDS MAY DIFFER MATERIALLY FROM HISTORICAL AND ANTICIPATED
RESULTS, WHICH MAY OCCUR AS A RESULT OF A VARIETY OF FACTORS. SUCH RISKS AND
UNCERTAINTIES INCLUDE, WITHOUT LIMITATION, MEDIAX'S LIMITED OPERATING HISTORY,
THE UNPREDICTABILITY OF ITS FUTURE REVENUES, THE UNPREDICTABLE AND EVOLVING
NATURE OF ITS KEY MARKETS, THE INTENSELY COMPETITIVE ONLINE COMMERCE AND
ENTERTAINMENT ENVIRONMENTS, MEDIAX'S DEPENDENCE ON ITS STRATEGIC ALLIANCES,
DEPENDENCE ON KEY PERSONNEL, DEPENDENCE ON THIRD PARTIES FOR INTERNET
OPERATIONS, DEPENDENCE ON CONTENT ACQUISITION, CREATION AND LICENSING, THE
MANAGEMENT OF GROWTH AND MEDIAX'S NEED FOR ADDITIONAL CAPITAL EXCEPT AS REQUIRED
BY LAW. MEDIAX UNDERTAKES NO OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENT,
WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. READERS
SHOULD CAREFULLY REVIEW THE FACTORS SET FORTH IN OTHER REPORTS OR DOCUMENTS THAT
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MEDIAX FILES FROM TIME-TO-TIME WITH THE SEC AND MATTERS GENERALLY AFFECTING
ONLINE COMMERCE AND ONLINE SALE OF ENTERTAINMENT-RELATED PRODUCTS, INCLUDING,
BUT NOT LIMITED TO, MUSIC RETAILING.
OVERVIEW
MediaX designs and hosts entertainment web sites such as
rodstewartlive.com, NSYNC.com, Divinelive.com, EYCLive.com, Officeradio.com,
Jbirdrecords.com, BSBFunclub.com, videodrone.com and others. MediaX provides
artists with a platform to develop their presence on the Internet. Each site
provides content and products to fans including artist news, concert
information, music and video programming, ticket giveaways,fan club activities,
live chats, and live concerts that are globally broadcast on the Internet.
MediaX has established strategic relationships with companies like
Broadcast.com, AOL, Microsoft, RealNetworks, Yahoo! and others for this purpose.
In February 1999, MediaX launched amuZnet.com - an entertainment destination and
e-commerce site offering more than 300,000 entertainment titles on CDs, DVDs and
Videos by major record labels and studios and over 4,000 independent music
labels for purchase on-line. AmuZnet.com offers music news and information,
digital downloads, custom compilations of CDs, movies for sale. MediaX also
sells advertising space and sponsorships to companies interested in promoting
their own goods and services within each entertainment web sites and amuZnet.com
customer base and visitors.
GOING CONCERN
MediaX has incurred significant net losses since its inception. As of
December 31, 1999, MediaX has a deficit accumulated during the development stage
of $13,333,066. As it seeks to expand aggressively, MediaX believes that its
operating expenses will continue at a certain level as a result of the financial
commitments related to the development of new web sites, marketing channels,
advertising, future marketing agreements and campaigns, acquisition of
entertainment content and improvements to its existing Internet sites and other
capital expenditures. The ability of MediaX to generate and enhance
profitability depends upon its ability to substantially increase its net sales.
To the extent that significantly higher net sales do not result from MediaX's
selling and marketing efforts, MediaX will be materially adversely affected.
MediaX may need to utilize its common stock to fund its operations through
fiscal 2000. As such, there can be no assurance that MediaX will realize such
anticipated sales or secure additional alternative financing. Because of the
above factors, the accompanying consolidated financial statements contain an
auditor's report that is modified as to an uncertainty regarding MediaX's
ability to continue as a going concern.
RESULTS OF OPERATIONS
In view of the rapidly evolving nature of MediaX's business and its
limited operating history, period-to-period comparisons of its revenues and
operating results, including operating expenses as a percentage of total net
revenues, are not necessarily meaningful and should not be relied upon as
indications of future performance and therefore, comparative discussions have
not been included. Although MediaX has experienced sequential quarterly growth
in revenues, it does not believe that its historical growth rates are
necessarily sustainable or indicative of future growth.
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Year ended December 31, 1999 Compared to the Year Ended December 31,
1998 (as restated)
Sales are composed of website design fees , membership dues, advertising,
sponsorships, sale of artist specific merchandises, pre-recorded music and other
entertainment-related products, net of returns and include outbound shipping and
handling charges. To further promote the websites, MediaX occasionally offers
free shipping and/or increases the discounts it offers to its customers which
partially offset the positive effect of website design fees , membership dues,
advertising and sponsorship revenue, which has a higher margin than product
sales.
Cost of sales consists primarily of cost of merchandise sold to customers,
including product fulfillment and outbound shipping and handling charges. MediaX
over time intends to expand its operations by promoting new or complementary
products or sales formats and by expanding the breadth and depth of its product
or service offerings and may otherwise alter its pricing structure and policies.
Included in cost of sales is payroll and related expenses for website
development of $296,417 and $68,108 for the years ended 1999 and 1998,
respectively. Additionally, included in the prior year cost of sales is cost of
merchandise of its discontinued CD-rom products of $65,696.
Operating expenses consist primarily of payroll and related expenses for website
development, marketing; Internet content acquisition and operations of
underlying technology infrastructure; and general and administrative payroll and
other corporate expenses.
Total other income (expense) consists of interest income cash equivalents and
notes receivable, and interest expense including non-cash charge interest
expense associated with convertible debts and short-term borrowings.
Net Loss. MediaX's net loss was $7,244,707 for the year ended December 31, 1999,
compared to $3,352,541 for the comparable period last year.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, MediaX had positive working capital of
$1,087,082, as compared to negative working capital of $1,773,728 at December
31, 1998. The increase in working capital is attributed to the conversion of
debentures and exercise of options and warrants , an increase to prepaid
advertising and net proceeds received from convertible debt issued in August
1999 and sales of stock to investors throughout the year partially offset by
payments of general operating expenses.
Net cash used in operating activities of $2,457,961 for the
year ended December 31, 1999 was primarily attributed to a net loss of
$7,244,707, offset by $349,804 non-cash charge for depreciation and
amortization, bad debt and development costs written off; a $4,060,217 non-cash
charge for stock-based compensation for consulting services and common stock
issued to employees and non-employees, beneficial conversion of debentures and
amortization of debt issuance costs; and $150,953 for accrued interest on
convertible debt and change in other operating assets and liabilities of
$225,772. Net cash used in operating activities of $1,811,470 for the year ended
December 31, 1998 was primarily attributable to a net loss of $3,352,541, of
which $358,003 for depreciation and amortization and development costs written
off; $590,475 was a non-cash charge for stock-based compensation for consulting
services and common stock issued to employees and non-employees and change in
other operating assets and liabilities of $592,593.
Net cash used in investing activities was $60,023 for the year
ended December 31, 1999, consisted of purchases of fixed assets. Net cash used
in investing activities was $218,486 for the year ended December 31, 1998
consisted of acquisition of license agreement and trademark, deferred software
development costs and purchases of fixed assets.
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Net cash provided by financing activities was $3,258,316 for
the year ended December 31, 1999, and consisted primarily of net proceeds from
sale of stock to investors, subscription advances, exercise of options and
warrants and issuance of convertible debentures. Net cash provided by financing
was $1,657,258 for the year ended December 31, 1998, and consisted primarily of
net proceeds from sale of stock to investors, subscription advances, exercise of
options and warrants and issuance of convertible debentures partially offset by
payments made on capital lease and retirement of notes payable.
MediaX's success and ongoing financial viability is contingent
upon the success and expansion of its network of sites, the increasing number of
visitors to this network, the revenues generated through its design services,
e-commerce model, advertising and sponsorships, the alliance with Echostar
interactive satellite distribution and the generation of related cash flows.
MediaX evaluates its liquidity and capital needs on a
continuous basis and based on MediaX's requirements and capital market
conditions may, from time to time, raise working capital through additional debt
or equity financing. There is no assurance that such financing will be available
in the future to meet additional capital needs of MediaX, or as to the terms or
conditions of any such financing that is available. Should there be any
significant delays in the release of new products, or lack of acceptance in the
marketplace for such products if released, or MediaX's working capital needs
otherwise exceed its resources, the adverse consequences would be severe. The
generation of MediaX's current growth and the expansion of MediaX's current
business involve significant financial risk and require significant capital
investment.
Because MediaX is in the development stage, thus incurred
cumulative losses from inception through December 31, 1999 of $13,333,066 and
lack of profitable operational history in internet services, MediaX's auditors,
in their report on the financial statements of MediaX as of December 31, 1999,
expressed doubt about MediaX's ability to continue as a going concern, which
contemplates, among other things, the realization of assets and satisfaction of
liabilities in the normal course of business. MediaX intends to obtain
additional debt and equity financing for marketing, development and the funding
of operations as well as the generating of income from product sales and
services. Management believes these funding sources will be sufficient to fund
its capital expenditures, working capital requirements and other cash
requirements through December 31, 2000. There is no assurance MediaX will be
able to obtain sufficient additional funds when needed, or that, such funds, if
available, will be obtainable on terms satisfactory to MediaX.
ITEM 7. FINANCIAL STATEMENTS
Please see pages F-1 through F-27.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On January 11, 2000, MediaX filed on Form 8-K, reporting a change of MediaX's
accountants. Davis & CO., CPA's P.C was previously the principal accountants for
MediaX. On January 4, 2000, Davis & CO., CPA's P.C was disengaged by MediaX as
principal accountants and Corbin & Wertz was engaged as principal accountants to
audit the accounts of MediaX for the year ending December 31, 1999. The decision
to change accountants was approved by MediaX's Board of Directors.
11
<PAGE>
During the fiscal years ended December 31, 1998 and 1997 and through
the date of this report, there were no disagreements with Davis & CO., CPA's P.C
on any matter of accounting principles or practices, financial statement
disclosure or audit scope or procedure which disagreement, if not resolved to
the satisfaction of Davis & CO., CPA's P.C , would have caused them to make
reference to the matter of such disagreement in connection with the Form 8-K,
dated January 11, 2000. The accountant's report for the fiscal years ended
December 31, 1998 and 1997 was modified as to uncertainty that MediaX will
continue as a going concern. MediaX has suffered recurring losses from
operations, and has net working capital and stockholders' equity deficiencies.
These matters raise substantial doubt about MediaX's ability to continue as a
going concern.
MediaX had requested that Davis & CO., CPA's P.C furnish it with a
letter addressed to the Securities and Exchange Commission stating whether it
agrees with the above statements. A copy of that letter is filed as Exhibit 1 to
the Form 8-K, dated January 11, 2000, incorporated herein by reference.
12
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The directors and executive officers of MediaX, their ages,
positions held in MediaX, and duration as such, are as follows:
NAME AGE POSITION HELD AND TENURE
Nancy Poertner 44 President, Secretary and
Director since February 23,
1996
Rainer Poertner 52 Director since February 23,
1996
Matthew MacLaurin 33 Director, Executive V.P.
since June 27, 1996
Jacqueline Cabellon 38 Controller since November
16, 1998
BUSINESS EXPERIENCE
The following is a brief account of the education and business
experience during at least the past five years of MediaX's directors, executive
officers, and key employees, indicating the principal occupation and employment
during that period, and the name and principal business of the organization in
which such occupation and employment were carried out.
NANCY POERTNER, PRESIDENT, SECRETARY AND DIRECTOR. Ms.
Poertner has been involved in the entertainment industry since 1979. From 1981
to December 1995, she was Vice President for a major artist management company
based in Los Angeles, where she was responsible for all aspects of artist
management domestic and international touring, marketing, promotion and album
recordings. In addition, from 1991 to December 1995, she led the international
department of a major record label distributed through MCA, resulting in sales
generating five international gold records, five top fifteen singles and two
number one positions. Several of the entertainers she has worked with include
Matthew Broderick, Rod Stewart, Toni Braxton, Suzanne Hoffs (Bangles) and
recording artist Morrissey. As a result of her years in the business, Ms.
Poertner has extensive personal relationships throughout the domestic and
international film and recording industries. Ms. Poertner was educated overseas,
graduated with a Bachelor of Arts in Education and taught in Afghanistan and
Turkey through the Peace Corps.
RAINER POERTNER, DIRECTOR. Mr. Poertner has served as a
Director of MediaX since February 23, 1996. Mr. Poertner has a twelve-year track
record of bringing new and innovative computer hardware and software technology
to the international market place. He has served as President and a Director of
Syncronys Softcorp since May 8, 1995, and as Chief Executive Officer since July
1, 1995. He left the company to fully concentrate on MediaX in July 1998. He
co-founded Seamless Software Corporation ("Seamless") and served as Director and
as President of Seamless from its inception in May 1993 until its merger with
Syncronys Softcorp on May 8, 1995. After having held several positions in the
European and U.S. entertainment industries, he founded Hybrid Arts, Inc., in
1986 by arranging $3 million of venture financing for ADAP - the first
Direct-to-Disk Digital Recording System. After arranging Hybrid Art's sale in
1991, Mr. Poertner became a consultant for Hydra Systems, Inc., which developed
and marketed ANDOR - a fully functional Macintosh CPU on a PC peripheral card.
Hydra Systems subsequently sold the technology and the inherent rights to a
company in Seoul, South Korea in 1992. Mr. Poertner received degrees in
economics from the University of Frankfurt in 1975 and the Klinger Business
School in 1973.
13
<PAGE>
Rainer Poertner and Nancy Poertner are husband and wife.
MATTHEW MACLAURIN, EXECUTIVE VICE PRESIDENT. Mr. MacLaurin's
experience stretches back to the early days of personal computers when, 17 years
ago, he developed games for the Commodore Pet 2001. Later, Mr. MacLaurin joined
Sapiens Software to create tools for artificial intelligence engineering on the
IBM PC XT platform. He was the key engineer for the development and
implementation of Common Lisp, a computer language for the 640K DOS platform. At
Apple Computer he secured funding for, designed and led the development of the
patented GATE system, a leading-edge artificial intelligence testing system. In
Apples Advanced Product Group, he led the development of a revolutionary
pen-based computer called Bauhaus, which incorporated handwriting recognition
and an advanced artificial intelligence memory system. In 1994, Mr. MacLaurin
joined forces with Gaben Chancellor to found the original MediaX, Inc.
JACQUELINE CABELLON, CPA. Ms. Cabellon has been controller of
MediaX since November 16, 1998. Prior to that, Ms. Cabellon practiced as a
certified public accountant assisting companies with consulting and accounting
projects since January, 1993. Prior to that time, she was an accountant with
local accounting firms since December, 1986.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
No persons who were either a Director, Officer or beneficial
owner of more than 10% of MediaX's Common Stock, failed to file on a timely
basis reports required by Section 16(a) of the Exchange Act during the most
recent fiscal year.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth information regarding the
executive compensation for MediaX's President and Executive V.P. for the years
ended December 31, 1999, 1998 and 1997 from MediaX and its subsidiaries. No
other executive officer received compensation in excess of $100,000 during these
periods. Directors serve with out compensation.
<TABLE>
<CAPTION>
Summary Compensation Table
Name and Principal Position Fiscal Salary Other Annual Options
Year ($) Compensation ($) Granted
- ---------------------------------------- ------------------- ------------------ ------------------------- -----------------------
<S> <C> <C> <C> <C>
Nancy Poertner 1999 185,000 10,157 (1) 0
President, 1998 185,000 3,500 N/A
Secretary, Director 1997 158,458 6,720 N/A
- ---------------------------------------- ------------------- ------------------ ------------------------- -----------------------
Matthew MacLaurin 1999 143,333 51,370 (2) 500,000
Executive 1998 125,000 N/A 50,000
VP, Director 1997 114,000 N/A N/A
- ---------------------------------------- ------------------- ------------------ ------------------------- -----------------------
Rainer Poertner 1999 N/A 120,000 (3) 500,000
Chairman Of the Board of 1998 N/A 50,000 50,000
Directors 1997 N/A N/A N/A
- ---------------------------------------- ------------------- ------------------ ------------------------- -----------------------
</TABLE>
14
<PAGE>
(1) Represents automobile allowance and a 1999 bonus of $1,657.
(2) Represents a 1999 bonus of $1,370 and a signing bonus of $50,000.
(3) Represents consulting payments made under a consulting agreement.
Effective January, 2000, the Chairman accepted a management position
with MediaX.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to grants of
options ("Options") to purchase Common Stock under the Stock Option Plan to the
Named Executive Officers during the fiscal year ended December 31, 1999.
<TABLE>
<CAPTION>
Potential Realizable
Number of % of Total Value at Assumed
Securities Options Annual Rate of Stock
Underlying Granted to Exercise Appreciation for
Options Employees Price Expiration Option Term(2)
Name Granted(#) in Fiscal Year ($/sh)(1) Date 5% 10%
---- ---------- -------------- --------- ---------- --------------- --------
<S> <C> <C> <C> <C> <C> <C>
Matthew MacLaurin 500,000 46.01 1.12 12/31/08 588,000 616,000
Rainer Poertner 500,000 46.01 1.12 12/31/08 588,000 616,000
</TABLE>
(1) The exercise price was market value of the Common Stock on the date of
grant.
(2) These amounts represent certain assumed rates of appreciation only.
Actual gains, if any, on option exercises are dependent upon other
factors, including the future performance of the Common Stock and
overall stock market conditions.
OPTION EXERCISES AND FISCAL YEAR END VALUE
The following table sets forth with respect to the Named Executive
Officers information with respect to options exercised, unexercised options and
year-end option values with respect to options to purchase shares of Common
Stock.
<TABLE>
<CAPTION>
Aggregated Option Exercises During Fiscal 1999 and Fiscal Year-End Option Values
Number of Securities
Underlying Value of Unexercised
Shares Value Unexercised Options at In the Money Options
Acquired on Realized December 31, 1999 at December 31, 1999 (1)
----------------------------- ---------------------------
Name Exercise(#) ($) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ -------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Matthew MacLaurin -- -- 16,666 533,334 9,707 240,000
Rainer Poertner -- -- 16,666 533,334 9,707 240,000
</TABLE>
15
<PAGE>
(1) Represents the difference between the last reported sale price of the
Common Stock on December 31, 1999 and the exercise price of the option
multiplied by the applicable number of shares.
EMPLOYMENT AGREEMENTS
MediaX entered into an employment agreement with its President. The agreement
which expires in December 2001, provides for an annual base salary of $185,000
and increases to $215,000. The aggregate minimum annual commitment for future
payments at December 31, 1999 was approximately $400,000. Amounts paid pursuant
to this agreement totaled $185,000 for the years ended December 31, 1999 and
1998, respectively.
MediaX entered into an employment agreement with its executive vice president.
The agreement, which expires in June 2001, provides for an annual base salary of
$185,000 and increases to $215,000. The aggregate minimum annual commitment for
future payments at December 31, 1999 was approximately $307,500. Amounts paid
pursuant to this agreement totaled $143,000 and $125,000 for the years ended
December 31, 1999 and 1998, respectively.
Both of these agreements also provide for a bonus at the end of each fiscal
quarter as determined by MediaX's Board of Directors. No bonuses have been
declared or paid since inception. Both the President and Executive
Vice-President may voluntarily terminate their employment at any time.
Consulting Fees to Officer/Director
Beginning August 1, 1998, MediaX's chairman provides services to MediaX pursuant
to a month to month consulting agreement requiring $10,000 for each month
worked. During 1999 and 1998, MediaX expensed $120,000 and $50,000,
respectively, related to this agreement. As of December 31, 1999, $40,000 is
accrued and included in accounts payable. In January 2000, the Chairman accepted
a full-time management position with MediaX.
STOCK OPTION PLAN
During April 1996, the Board of Directors adopted a Stock
Option Plan (the "Plan"), and on July 3, 1996, the Corporation's shareholders
approved the Plan. The Plan authorized the issuance of options to purchase up to
100,000 shares of MediaX's Common Stock. During December 1998, MediaX amended
the Plan to increase the available amount of shares to purchase under the plan
to 500,000 shares of MediaX's common stock. All options granted must have an
exercise price no less than the stock's fair market value on the date of grant.
The Plan allows the Board to grant stock options from time to
time to employees, officers, directors and consultants of MediaX. The Board has
the power to determine at the time that the option is granted whether the option
will be an Incentive Stock Option (an option which qualifies under Section 422
of the Internal Revenue Code of 1986) or an option which is not an Incentive
Stock Option. Vesting provisions are determined by the Board at the time options
are granted. The option price for any option will be no less than the fair
market value of the Common Stock on the date the option is granted.
Since all options granted under the Plan must have an exercise
price no less than the fair market value on the date of grant, MediaX will not
record any expense upon the grant of options, regardless of whether or not they
16
<PAGE>
are incentive stock options. Generally, there will be no federal income tax
consequences to MediaX in connection with Incentive Stock Options granted under
the Plan. With regard to options that are not Incentive Stock Options, MediaX
will ordinarily be entitled to deductions for income tax purposes of the amount
that option holders report as ordinary income upon the exercise of such options,
in the year such income is reported.
Options granted under the Plan to employees, officers and
directors was 193,000 shares at an exercise price of $0.98 for 1998 and 93,000
shares at an exercise price of $1.68 for 1999.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 31, 2000 the stock
ownership of each person known by MediaX to be the beneficial owner of five
percent or more of MediaX's Common Stock, each Officer and Director
individually, and all Officers and Directors as a group. Each person has sole
voting and investment power over the shares except as noted.
<TABLE>
<CAPTION>
Amount and Nature
Name and Address of Beneficial Interest Percent
of Common Stock of Class
- ----------------------------------------------------------------------- ------------------------------------- ---------------------
<S> <C> <C> <C>
Nancy Poertner 1,359,375 (1)(2) 14.41
8522 National Blvd., Suite 110
Culver City, CA 90232
- ----------------------------------------------------------------------- ------------------------------------- ---------------------
Rainer Poertner 1,359,375 (1)(2) 14.41
8522 National Bvd, Suite 110
Culver City, CA 90232
- ----------------------------------------------------------------------- ------------------------------------- ---------------------
Assisi Limited Partnership 1,359,375 (1)(2) 14.41
10866 Wilshire Blvd., 15th Floor
Los Angeles, CA 90024
- ----------------------------------------------------------------------- ------------------------------------- ---------------------
Matthew MacLaurin 645,625(3) 6.84
8522 National Blvd, Suite 110
Culver City, CA 90232
- ----------------------------------------------------------------------- ------------------------------------- ---------------------
All Directors and Officers 2,005,000 (1)(2)(3) 21.25
as a group (3 persons)
- ----------------------------------------------------------------------- ------------------------------------- ---------------------
Liviakis Financial Communications, Inc. 888,800 (4) 9.42
495 Miller Ave, Third Floor
Mill Valley, CA 94941
- ----------------------------------------------------------------------- ------------------------------------- ---------------------
Apple Investors LLC 658,815 (5) 7.00
1 World Trade Center, Suite 4563
New York, NY 10048
- ----------------------------------------------------------------------- ------------------------------------- ---------------------
</TABLE>
17
<PAGE>
(1) Assisi Limited Partnership is a Nevada Limited Partnership of which
Nancy Poertner is a General Partner and owns a 100% interest. Amount of
common shares owned 809,375. Rainer Poertner may be deemed to be a
beneficial owner of the shares owned by Assisi Limited Partnership by
virtue of his spousal relationship to Nancy Poertner. Mr. Poertner
disclaims any beneficial interest in such shares.
(2) Amount beneficially owned by Mr. Poertner as reported and filed on Form
4s dated May 21, 1999 and February 2000 - Options to purchase common
shares total 550,000 were granted to Mr. Rainer Poertner with exercise
prices of $.98 and $1.12.
(3) Amount beneficially owned by Mr. MacLaurin as reported and filed on
Form 4s dated July 27, 1999 and February 2000 - Option to purchase
common shares total 550,000 were granted to Mr. MacLaurin with exercise
prices of $.98 and $1.12. Amount of common shares owned 95,625.
(4) Amount beneficially owned by Liviakis Financial Communications, Inc. as
reported and filed on Form Schedule 13G dated December 31, 1999.
(5) Amount beneficially owned by Apple Investors LLC as reported and filed
on Form Schedule 13G dated August 24, 1999.
MediaX knows of no arrangement or understanding, the operation
of which may at a subsequent date result in a change of control of MediaX.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS INVOLVING MEDIAX
On December 6, 1995, Zeitgeist, Inc. loaned Nancy Poertner,
MediaX's President, $50,000 pursuant to an unsecured note bearing interest at 4%
and with a due date of January 1, 2000. On February 25, 1996, an additional
$50,000 was loaned to Ms. Poertner on the same terms. As of the date of this
report, a new due date has yet to be determined. The total amount owed to MediaX
under these notes is $115,830 at December 31, 1999.
18
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) 3. EXHIBITS.
<TABLE>
<CAPTION>
# DESCRIPTION LOCATION
------------ ----------------------------------------------------------- -------------------------------------------------
<S> <C> <C> <C>
.1 Certificate of Incorporation Incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-18
(No. 33-28258)
.1(a) Articles of Amendment to the Articles of Incorporation Incorporated by reference to Exhibit 3.1(a) to
dated February 23, 1996, for the name change to the Company's Form 10-KSB for the year ended
Zeitgeist Werks, Inc. December 31, 1995
.1(b) Articles of Amendment to the Articles of Incorporation Incorporated by reference to Exhibit 3.1(b) to
dated August 15, 1996, for the name change to MediaX the Company's Form 10-KSB for the year ended
Corporation December 31, 1996
.1(c) Certificate of Amendment Reverse Split Incorporated by reference to Exhibit 3.1(c) to
the Company's Schedule 14C
.2 Bylaws Incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement of Form S-18
(No. 33-28258)
0.1 Disengagement Agreement dated February 20, 1997, with Incorporated by reference to Exhibit 10.1 to
Gaben Chancellor the Company's Form 10-KSB for the year ended
December 31, 1996
0.2 Employment Agreement dated January 1, 1996 with Nancy Incorporated by reference to Exhibit 10.2 to
Poertner the Company's Form 10-KSB for the year ended
December 31, 1996.
0.3 Employment Agreement dated June 26, 1996 with Matthew Incorporated by reference to Exhibit 10.3 to
MacLaurin the Company's Form 10-KSB for the year ended
December 31, 1996.
0.4 Consulting Agreement with Ted Ralston Incorporated by reference to Exhibit 10.4 to
the Company's Form 10-KSB for the year ended
December 31, 1998
0.5 Consulting Agreement with The Globus Group, Inc Incorporated by reference to Exhibit 10.5 to
the Company's Form 10-KSB for the year ended
December 31, 1998.
0.6 Consulting Agreement with Winchester Investment Incorporated by reference to Exhibit 10.6 to
Securities, Inc. the Company's Form 10-KSB for the year ended
December 31, 1998.
0.7 Consulting Agreement with Arnold Stiefel Incorporated by reference to Exhibit 10.7 to
the Company's Form 10-KSB for the year ended
December 31, 1998.
0.8 Consulting Agreement with Anne Challis Incorporated by reference to Exhibit 10.8 to
the Company's Form 10-KSB for the year ended
December 31, 1998.
0.9 Consulting Agreement with Liviakis Financial Incorporated by reference to Exhibit 10.9 to
Communications, Inc. the Company's Form 10-KSB for the year ended
December 31, 1998.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
# DESCRIPTION LOCATION
------------ ----------------------------------------------------------- -------------------------------------------------
<S> <C> <C> <C>
0.10 Consulting Agreement with Richard O. Weed Incorporated by reference to Exhibit 10.A to
the Company's registration statement on Form
S-8 (No. 33-28258)
0.11 Consulting Agreement with Steven H. Dong Incorporated by reference to Exhibit 10.B to
the Company's registration statement on Form
S-8 (No. 33-28258)
0.12 1996 Stock Option Plan and Amendment Incorporated by reference to Exhibit 10.C to
the Company's registration statement on Form
S-8 (No. 33-28258)
0.13 Consulting Agreement with CSK Securities Research Incorporated by reference to Exhibit 10.13 to
the Company's Form 10-KSB for the year ended
December 31, 1998.
0.14 Consulting Agreement with Robert J. Adsit Incorporated by reference to Exhibit 10.14 to
the Company's Form 10-KSB for the year ended
December 31, 1998.
0.15 Consulting Agreement with John H. Shaw Incorporated by reference to Exhibit 10.15 to
the Company's Form 10-KSB for the year ended
December 31, 1998.
0.16 Consulting Agreement with Retail OEM International Inc. Incorporated by reference to Exhibit 10.16 to
the Company's Form 10-KSB for the year ended
December 31, 1998.
0.17 Consulting Agreement with SME Financial Communications Incorporated by reference to Exhibit 10.17 to
the Company's Form 10-KSB for the year ended
December 31, 1998.
0.18 Consulting Agreement with Business News Network Inc. Incorporated by reference to Exhibit 10.18 to
the Company's Form 10-KSB for the year ended
December 31, 1998.
0.19 Consulting Agreement with Willow Run Incorporated by reference to Exhibit 10.19 to
the Company's Form 10-KSB for the year ended
December 31, 1998.
0.20 Consulting Agreement with Tim Werry Incorporated by reference to Exhibit 10.20 to
the Company's Form 10-KSB for the year ended
December 31, 1998.
0.21 Agreement with Business News Network Inc. Incorporated by reference to Exhibit 10.21 to
the Company's Form 10-KSB for the year ended
December 31, 1998.
0.22 Agreement with Apple Investors LLC Incorporated by reference to Exhibit 10.22 to
the Company's Registration Statement on Form
S3. (No. 33-28258)
27 Financial Data Schedule Filed herewith electronically
</TABLE>
(b) REPORTS ON FORM 8-K.
On January 11, 2000, MediaX filed on Form 8-K, dated January 11, 2000, reporting
a change of MediaX's accountants. Davis & CO., CPA's P.C was previously the
principal accountants for MediaX. On January 4, 2000, Davis & CO., CPA's P.C was
disengaged by MediaX as principal accountants and Corbin & Wertz was engaged as
principal accountants to audit the accounts of MediaX for the year ending
December 31, 1999. The decision to change accountants was approved by MediaX's
Board of Directors.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Date: April 13, 2000 MEDIAX CORPORATION
By: /s/ Nancy Poertner
----------------------------------
Nancy Poertner, President
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following person on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C> <C>
/s/ Nancy Poertner President, Secretary April 13, 2000
----------------------- and Director
Nancy Poertner
/s/ Rainer Poertner Director April 13, 2000
-----------------------
Rainer Poertner
/s/ Matthew MacLaurin Executive V.P. and April 13, 2000
----------------------- Director
Matthew MacLaurin
/s/ Jacqueline Cabellon Controller (Principal April 13, 2000
----------------------- Accounting Officer)
Jacqueline Cabellon
</TABLE>
22
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Reports........................................ F-1-F-2
Balance Sheet as of December 31, 1999.................................F-3
Statements of Operations for the years ended December 31, 1999 and
1998 and for the period from March 30, 1995 (date of inception)
through December 31, 1999 .......................................F-4
Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 1999 and 1998 and for the period from March 30, 1995
(date of inception) through December 31, 1999....................F5-F-10
Statements of Cash Flows for the years ended December 31, 1999
and 1998 and for the period from March 30, 1995 (date of inception)
through December 31, 1999 .......................................F-11-F-12
Notes to the Financial Statements ....................................F-13-F-27
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
MediaX Corporation
We have audited the accompanying balance sheet of MediaX Corporation (a
development stage company) (the "Company") as of December 31, 1999, and the
related statements of operations, stockholders' equity (deficit) 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 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 provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
1999, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the accompanying financial
statements, the Company is a development stage company which has experienced
significant losses since inception with no significant revenues. These factors
and other factors discussed in Note 1 to the financial statements raise
substantial doubt about the ability of the Company to continue as a going
concern. Management's plans in regard to these matters are described in Note 1.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
/s/ CORBIN & WERTZ
--------------------------------------
Corbin & Wertz
Irvine, California
March 17, 2000
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
MediaX Corporation
We have audited the accompanying statements of operations, stockholders' equity
(deficit) and cash flows of MediaX Corporation (a development stage company)
(the "Company") for the year ended December 31, 1998 and the period from March
30, 1995 (date of inception) to December 31, 1998 (as restated - see Note 1).
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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of the Company's operations and cash flows
for the year ended December 31, 1998 and for the period from March 30, 1995
(date of inception) to December 31, 1998 (as restated - see Note 1), in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As shown in the accompanying financial
statements, the Company is a development stage company which has experienced
significant losses since inception with no significant revenues. These factors
and other factors discussed in Note 1 to the financial statements raise
substantial doubt about the ability of the Company to continue as a going
concern. Management's plans in regard to these matters are described in Note 1.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
/s/ DAVIS & CO., CPAs, P.C.
--------------------------------------
David & Co., CPAs, P.C.
Englewood, Colorado
March 26, 1999
<PAGE>
<TABLE>
<CAPTION>
MEDIAX CORPORATION
(A Development Stage Company)
BALANCE SHEET
December 31, 1999
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $ 760,307
Accounts receivable, net of reserve of $8,500 2,218
Inventories 12,855
Prepaid advertising costs 708,125
Other prepaid expenses 52,097
----------------
Total current assets 1,535,602
----------------
Property and equipment, at cost:
Computer equipment 334,640
Office equipment 36,580
Leasehold improvements 7,630
----------------
378,850
Less accumulated depreciation and amortization (276,723)
----------------
Property and equipment, net 102,127
Deposits and other assets 35,372
----------------
$ 1,673,101
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 400,556
Accrued payroll and related costs 28,048
Accrued expenses 19,916
----------------
Total current liabilities 448,520
Long-term liabilities:
Convertible notes payable 2,238,877
----------------
Total liabilities 2,687,397
----------------
Commitments and contingencies
Stockholders' deficit:
Preferred stock, $.0001 par value per share; 10,000,000 shares
authorized and no shares issued -
Common stock, $.0001 par value per share; 25,000,000 shares
authorized; 6,667,800 shares issued and outstanding 667
Additional paid-in capital 12,154,940
Subscription advances 278,993
Stockholder notes and accrued interest receivable (115,830)
Deficit accumulated during the development stage (13,333,066)
----------------
Total stockholders' deficit (1,014,296)
----------------
$ 1,673,101
----------------
</TABLE>
See independent auditors' report and accompanying notes to financial statements
F-3
<PAGE>
<TABLE>
<CAPTION>
MEDIAX CORPORATION
(A Development Stage Company)
STATEMENTS OF OPERATIONS
For The Years Ended December 31, 1999 and 1998 and
For The Period From March 30, 1995 (Date of Inception)
Through December 31, 1999
March 30, 1995
(Date of Inception)
Year Ended Year Ended Through
December 31, December 31, December 31,
1999 1998 1999
------------------ ------------------ ---------------------
(As Restated -
See Note 1)
<S> <C> <C> <C>
Sales $ 55,918 $ 162,021 $ 838,575
Cost of sales 316,497 135,988 863,387
-------------- -------------- --------------
Gross profit (loss) (260,579) 26,033 (24,812)
Operating expenses 5,016,299 3,244,333 10,446,469
-------------- -------------- --------------
Loss from operations (5,276,878) (3,218,300) (10,471,281)
-------------- -------------- --------------
Other income (expense):
Interest income 24,712 6,926 54,224
Interest expense (1,991,741) (138,274) (2,203,531)
Loss on sale of asset - (2,093) (1,093)
Other income - - 16,501
-------------- -------------- --------------
Total other income (expense) (1,967,029) (133,441) (2,133,899)
-------------- -------------- --------------
Loss before provision for income taxes (7,243,907) (3,351,741) (12,605,180)
Provision for taxes 800 800 3,200
-------------- -------------- --------------
Net loss $ (7,244,707) $ (3,352,541) $ (12,608,380)
============== ============== ==============
Basic and diluted loss per common share $ (1.37) $ (1.79)
============== ==============
Basic and diluted weighted average common
shares outstanding 5,280,837 1,873,517
============== ==============
</TABLE>
See independent auditors' report and accompanying notes to financial statements
F-4
<PAGE>
<TABLE>
<CAPTION>
MEDIAX CORPORATION
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For The Years Ended December 31, 1999 and 1998 and
For The Period From March 30, 1995 (Date of Inception)
Through December 31, 1999
Stockholder
Notes
Common Stock Additional and Accrued
------------------------------- Paid-in Subscription Interest
Shares Amount Capital Advances Receivable
------------- ------------- -------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Shares issued in March 1995 for cash of
$.00008 per share to an officer and
director 1,250,000 $ 125 $ (25) $ - $ -
Loan to stockholder in December 1995 - - - - (50,000)
Net loss for the period from March 30,
1995 (date of inception) to December 31,
1995 - - - - -
---------- -------- ------ -------- ---------
Balance at December 31, 1995 1,250,000 125 (25) - (50,000)
Adjustment for shares of ZeitGeist Werks,
Inc. outstanding immediately prior to
re-organization on February 23, 1996,
valued at net monetary asset amount 65,804 7 249,816 - -
Loan to stockholder in February 1996 - - - - (50,000)
Exchange of 15,400 shares in March 1996 for
notes and interest payable at $20 per share 15,400 2 307,998 - -
Issuance of 12,500 shares to consultant in
April 1996 in exchange for services at $10
per share 12,500 1 124,999 - -
Cancellation of 203,750 shares by majority
stockholder in June 1996 (203,750) (20) (184) - -
Issuance of 203,750 shares in June 1996 in
exchange for all of the stock of MediaX, Inc. 203,750 20 184 - -
</TABLE>
F-5
Continued
<PAGE>
<TABLE>
<CAPTION>
MEDIAX CORPORATION
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For The Years Ended December 31, 1999 and 1998 and
For The Period From March 30, 1995 (Date of Inception)
Through December 31, 1999
Deficit
Accumulated Total
During The Stockholders'
Development Equity
Stage (Deficit)
----------------- -----------------
<S> <C> <C>
Shares issued in March 1995 for cash of
$.00008 per share to an officer and
director $ - $ 100
Loan to stockholder in December 1995 - (50,000)
Net loss for the period from March 30,
1995 (date of inception) to December 31,
1995 (37,238) (37,238)
-------- -----------
Balance at December 31, 1995 (37,238) (87,138)
Adjustment for shares of ZeitGeist Werks,
Inc. outstanding immediately prior to
re-organization on February 23, 1996,
valued at net monetary asset amount (268,064) (18,241)
Loan to stockholder in February 1996 - (50,000)
Exchange of 15,400 shares in March 1996 for
notes and interest payable at $20 per share - 308,000
Issuance of 12,500 shares to consultant in
April 1996 in exchange for services at $10
per share - 125,000
Cancellation of 203,750 shares by majority
stockholder in June 1996 - (204)
Issuance of 203,750 shares in June 1996 in
exchange for all of the stock of MediaX, Inc. - 204
</TABLE>
F-5A
Continued
<PAGE>
<TABLE>
<CAPTION>
MEDIAX CORPORATION
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - CONTINUED
For The Years Ended December 31, 1999 and 1998 and
For The Period From March 30, 1995 (Date of Inception)
Through December 31, 1999
Stockholder
Notes
Common Stock Additional and Accrued
------------------------------- Paid-in Subscription Interest
Shares Amount Capital Advances Receivable
------------- ------------- -------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Sale of 2,510 shares in June and July
1996 at $20.80 per share 2,510 - 52,200 - -
Sale of 35,000 shares in November and
December 1996 at $10.00 per share 35,000 3 349,997 - -
Accrued interest on stockholder notes
receivable - - - - (3,830)
Net loss - - - - -
---------- -------- --------- -------- ---------
Balance at December 31, 1996 1,381,214 138 1,084,985 - (103,830)
Sale of 35,000 shares in January and
February 1997 at $10.00 per share
(net of issuance costs of $80,000) 35,000 4 269,996 - -
Sale of 10,000 shares and warrants in
May 1997 at $7.00 per unit 10,000 1 69,999 - -
Sale of 54,231 shares and warrants in
August and September 1997 at $10.40 per share 54,231 5 563,995 - -
Sale of 20,000 shares in August 1997 at
$7.40 per share 20,000 2 147,998 - -
Exchange of 40,000 shares in August 1997 for
note and interest payable at $7.94 per share 40,000 4 317,543 - -
</TABLE>
F-6
Continued
<PAGE>
<TABLE>
<CAPTION>
MEDIAX CORPORATION
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - CONTINUED
For The Years Ended December 31, 1999 and 1998 and
For The Period From March 30, 1995 (Date of Inception)
Through December 31, 1999
Deficit
Accumulated Total
During The Stockholders'
Development Equity
Stage (Deficit)
-- ----------------- -----------------
<S> <C> <C>
Sale of 2,510 shares in June and July
1996 at $20.80 per share - 52,200
Sale of 35,000 shares in November and
December 1996 at $10.00 per share - 350,000
Accrued interest on stockholder notes
receivable - (3,830)
Net loss (643,553) (643,553)
-------- -----------
Balance at December 31, 1996 (948,855) 32,438
Sale of 35,000 shares in January and
February 1997 at $10.00 per share
(net of issuance costs of $80,000) - 270,000
Sale of 10,000 shares and warrants in
May 1997 at $7.00 per unit - 70,000
Sale of 54,231 shares and warrants in
August and September 1997 at $10.40 per share - 564,000
Sale of 20,000 shares in August 1997 at
$7.40 per share - 148,000
Exchange of 40,000 shares in August 1997 for
note and interest payable at $7.94 per share - 317,547
</TABLE>
F-6A
Continued
<PAGE>
<TABLE>
<CAPTION>
MEDIAX CORPORATION
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - CONTINUED
For The Years Ended December 31, 1999 and 1998 and
For The Period From March 30, 1995 (Date of Inception)
Through December 31, 1999
Stockholder
Notes
Common Stock Additional and Accrued
------------------------------- Paid-in Subscription Interest
Shares Amount Capital Advances Receivable
------------- ------------- -------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Issuance of 40,000 shares in exchange for
prepaid advertising in November 1997 at
$15.00 per share 40,000 4 599,996 - -
Issuance of 7,600 shares at par value
pursuant to other agreements in 1997
for services performed 7,600 1 7 - -
Accrued interest on stockholder notes
receivable - - - - (4,000)
Net loss - - - - -
---------- -------- --------- -------- ---------
Balance at December 31, 1997 1,588,045 159 3,054,519 - (107,830)
Sale of 104,000 shares in February and
May 1998 at $1.92 per share 104,000 10 199,990 - -
Sale of 301,313 shares from April through
October 1998 at $1.39 per share 301,313 30 419,970 - -
Fractional share adjustment for 10 for 1
reverse stock split on November 17, 1998 17 - - - -
Estimated fair market value of warrants
issued in connection with the sale of stock
(as restated - see Note 1) - - 456,622 - -
</TABLE>
F-7
Continued
<PAGE>
<TABLE>
<CAPTION>
MEDIAX CORPORATION
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - CONTINUED
For The Years Ended December 31, 1999 and 1998 and
For The Period From March 30, 1995 (Date of Inception)
Through December 31, 1999
Deficit
Accumulated Total
During The Stockholders'
Development Equity
Stage (Deficit)
----------------- -----------------
<S> <C> <C>
Issuance of 40,000 shares in exchange for
prepaid advertising in November 1997 at
$15.00 per share - 600,000
Issuance of 7,600 shares at par value
pursuant to other agreements in 1997
for services performed - 8
Accrued interest on stockholder notes
receivable - (4,000)
Net loss (1,330,341) (1,330,341)
---------- -----------
Balance at December 31, 1997 (2,279,196) 667,652
Sale of 104,000 shares in February and
May 1998 at $1.92 per share - 200,000
Sale of 301,313 shares from April through
October 1998 at $1.39 per share - 420,000
Fractional share adjustment for 10 for 1
reverse stock split on November 17, 1998 - -
Estimated fair market value of warrants
issued in connection with the sale of stock
(as restated - see Note 1) (456,622) -
</TABLE>
F-7A
Continued
<PAGE>
<TABLE>
<CAPTION>
MEDIAX CORPORATION
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - CONTINUED
For The Years Ended December 31, 1999 and 1998 and
For The Period From March 30, 1995 (Date of Inception)
Through December 31, 1999
Stockholder
Notes
Common Stock Additional and Accrued
------------------------------- Paid-in Subscription Interest
Shares Amount Capital Advances Receivable
------------- ------------- -------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Warrants exercised in December 1998 at $0.10
per share 200,000 20 19,980 - -
Sale of 167,000 shares in December 1998 at
$0.48 per share 167,000 17 79,983 - -
Estimated fair market value of stock issued in
December 1998 for services rendered at $1.00 per
share (as restated - see Note 1) 90,000 9 89,991 - -
Estimated fair market value of restricted stock
issued in December 1998 for services
rendered at $0.96 per share (as restated
- - see Note 1) 100,000 10 95,615 - -
Estimated fair market value of options and
warrants granted from February through
December 1998 to consultants for services
rendered (as restated - see Note 1) - - 404,850 - -
Accrued interest on stockholder notes receivable - - - - (4,000)
Subscription advances in December 1998 - - - 320,000 -
Net loss (as restated - see Note 1) - - - - -
---------- -------- --------- -------- ---------
Balance at December 31, 1998 (as restated -
see Note 1) 2,550,375 255 4,821,520 320,000 (111,830)
Vested portion of intrinsic value of options
granted in 1998 to employees - - 1,237 - -
</TABLE>
F-8
Continued
<PAGE>
<TABLE>
<CAPTION>
MEDIAX CORPORATION
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - CONTINUED
For The Years Ended December 31, 1999 and 1998 and
For The Period From March 30, 1995 (Date of Inception)
Through December 31, 1999
Deficit
Accumulated Total
During The Stockholders'
Development Equity
Stage (Deficit)
----------------- -----------------
<S> <C> <C>
Warrants exercised in December 1998 at $0.10
per share - 20,000
Sale of 167,000 shares in December 1998 at
$0.48 per share - 80,000
Estimated fair market value of stock issued in
December 1998 for services rendered at $1.00 per
share (as restated - see Note 1) - 90,000
Estimated fair market value of restricted stock
issued in December 1998 for services
rendered at $0.96 per share (as restated
- - see Note 1) - 95,625
Estimated fair market value of options and
warrants granted from February through
December 1998 to consultants for services
rendered (as restated - see Note 1) - 404,850
Accrued interest on stockholder notes receivable - (4,000)
Subscription advances in December 1998 - 320,000
Net loss (as restated - see Note 1) (3,352,541) (3,352,541)
---------- -----------
Balance at December 31, 1998 (as restated -
see Note 1) (6,088,359) (1,058,414)
Vested portion of intrinsic value of options
granted in 1998 to employees - 1,237
</TABLE>
F-8A
<PAGE>
<TABLE>
<CAPTION>
MEDIAX CORPORATION
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - CONTINUED
For The Years Ended December 31, 1999 and 1998 and
For The Period From March 30, 1995 (Date of Inception)
Through December 31, 1999
Stockholder
Notes
Common Stock Additional and Accrued
------------------------------- Paid-in Subscription Interest
Shares Amount Capital Advances Receivable
------------- ------------- -------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Issuance of shares in January, February
and June 1999 for services rendered at
$3.56 per share average 30,000 3 106,872 - -
Warrants exercised in January through
July 1999 at $0.30 per share 1,638,667 164 496,843 (220,000) -
Sale of 340,000 restricted shares in
January, March and April 1999 for cash at
$1.24 per share (including 16,000 shares
issued for finders fees) 356,000 36 421,464 - -
Exchange of 921,925 shares in February and
December 1999 for convertible debt and
interest at $1.70 per share 921,925 92 1,566,075 - -
Sale of 20,000 shares in February 1999 at
$1.00 per share 20,000 2 19,998 - -
Issuance of restricted shares in March,
August and September 1999 for services
rendered at $2.04 per share average 830,000 83 1,689,724 - -
Subscription advances in March and April
1999 - - - 178,993 -
Issuance of restricted stock in March 1999
for prepaid advertising at $1.97 per share 200,000 20 393,105 - -
Estimated fair market value of options granted
in March 1999 for prepaid advertising - - 215,000 - -
</TABLE>
F-9
Continued
<PAGE>
<TABLE>
<CAPTION>
MEDIAX CORPORATION
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - CONTINUED
For The Years Ended December 31, 1999 and 1998 and
For The Period From March 30, 1995 (Date of Inception)
Through December 31, 1999
Deficit
Accumulated Total
During The Stockholders'
Development Equity
Stage (Deficit)
----------------- -----------------
<S> <C> <C>
Issuance of shares in January, February
and June 1999 for services rendered at
$3.56 per share average - 106,875
Warrants exercised in January through
July 1999 at $0.30 per share - 277,007
Sale of 340,000 restricted shares in
January, March and April 1999 for cash at
$1.24 per share (including 16,000 shares
issued for finders fees) - 421,500
Exchange of 921,925 shares in February and
December 1999 for convertible debt and
interest at $1.70 per share - 1,566,167
Sale of 20,000 shares in February 1999 at
$1.00 per share - 20,000
Issuance of restricted shares in March,
August and September 1999 for services
rendered at $2.04 per share average - 1,689,807
Subscription advances in March and April
1999 - 178,993
Issuance of restricted stock in March 1999
for prepaid advertising at $1.97 per share - 393,125
Estimated fair market value of options granted
in March 1999 for prepaid advertising - 215,000
</TABLE>
F-9A
<PAGE>
<TABLE>
<CAPTION>
MEDIAX CORPORATION
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - CONTINUED
For The Years Ended December 31, 1999 and 1998 and
For The Period From March 30, 1995 (Date of Inception)
Through December 31, 1999
Stockholder
Notes
Common Stock Additional and Accrued
------------------------------- Paid-in Subscription Interest
Shares Amount Capital Advances Receivable
------------- ------------- -------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Options exercised in April, June and
August at $2.79 per share 120,833 12 336,804 - -
Estimated fair market value of options
granted in May and June 1999 to
consultants for services rendered - - 453,600 - -
Estimated fair market value of warrants
issued in August 1999 in connection with
convertible debt - - 345,400 - -
Value of beneficial and induced conversion in
connection with convertible debt - - 1,287,298 - -
Accrued interest on stockholder notes
receivable - - - - (4,000)
Net loss - - - - -
---------- ------------ -------------- --------------- ---------------
Balance at December 31, 1999 6,667,800 $ 667 $ 12,154,940 $ 278,993 $ (115,830)
========== ============= =============== =============== ===============
</TABLE>
F-10
<PAGE>
<TABLE>
<CAPTION>
MEDIAX CORPORATION
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - CONTINUED
For The Years Ended December 31, 1999 and 1998 and
For The Period From March 30, 1995 (Date of Inception)
Through December 31, 1999
Deficit
Accumulated Total
During The Stockholders'
Development Equity
Stage (Deficit)
----------------- -----------------
<S> <C> <C>
Options exercised in April, June and
August at $2.79 per share - 336,816
Estimated fair market value of options
granted in May and June 1999 to
consultants for services rendered - 453,600
Estimated fair market value of warrants
issued in August 1999 in connection with
convertible debt - 345,400
Value of beneficial and induced conversion in
connection with convertible debt - 1,287,298
Accrued interest on stockholder notes
receivable - (4,000)
Net loss (7,244,707) (7,244,707)
------------------ ---------------
Balance at December 31, 1999 $ (13,333,066) $ (1,014,296)
================== ===============
</TABLE>
F-10A
See independent auditors' report and accompanying notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
MEDIAX CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
For The Years Ended December 31, 1999 and 1998 and
For The Period From March 30, 1995 (Date of Inception)
Through December 31, 1999
March 30, 1995
(Date of Inception
Year Ended Year Ended Through
December 31, December 31, December 31,
1999 1998 1999
------------------- ---------------- ------------------
(As Restated -
See Note 1)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (7,244,707) $ (3,352,541) $ (12,608,380)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 47,112 103,003 273,516
Allowance for doubtful accounts 8,500 - 8,500
Software development costs written off 294,192 255,000 341,667
Estimated value of shares issued for
consulting services 1,796,682 185,625 2,707,315
Estimated value of options and warrants
granted for consulting services 800,237 404,850 859,687
Estimated value of beneficial and induced
conversion of debt 1,287,298 - 1,632,698
Amortization of debt issuance costs 176,000 - 176,000
Interest accrued on convertible debt prior to
conversion 150,953 - 150,953
Interest accrued on stockholder notes
receivable (4,000) (4,000) (15,830)
Changes in operating assets and liabilities:
Accounts receivable 66,090 (66,465) (10,718)
Prepaid expense (21,772) 7,064 (52,097)
Inventories 79,908 (40,946) (12,855)
Prepaid advertising costs - 500,000 (100,000)
Deposits and other assets (23,467) (1,225) 173,494
Accounts payable and accrued expenses 129,013 222,620 430,341
Accounts payable - related parties - (24,455) -
--------------- --------------- ---------------
Net cash used in operating activities (2,457,961) (1,811,470) (6,045,709)
--------------- --------------- ---------------
Cash flows from investing activities:
Acquisition of license agreement and trademark - (81,135) (102,287)
Deferred software development costs - (105,238) (405,238)
Purchase of fixed assets (60,023) (32,113) (299,287)
Loans to stockholder - - (100,000)
Proceeds from sale of fixed assets - - 2,822
--------------- --------------- ---------------
Net cash used in investing activities (60,023) (218,486) (903,990)
--------------- --------------- ---------------
</TABLE>
F-11
Continued
<PAGE>
<TABLE>
<CAPTION>
MEDIAX CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS - CONTINUED
For The Years Ended December 31, 1999 and 1998 and
For The Period From March 30, 1995 (Date of Inception)
Through December 31, 1999
March 30, 1995
(Date of Inception
Year Ended Year Ended Through
December 31, December 31, December 31,
1999 1998 1999
------------------- ---------------- ------------------
(As Restated -
See Note 1)
<S> <C> <C> <C>
Cash flows from financing activities:
Principal payments on capital lease - (5,146) (27,567)
Subscription advances 178,993 320,000 498,993
Net proceeds from sale of stock to investors 441,500 700,000 2,616,952
Net proceeds from the exercise of options
and warrants 613,823 20,000 633,823
Retirement of notes payable - (32,276) (155,269)
Proceeds received from issuance of notes
payable and convertible debentures (net of
debt issuance costs of $176,000 in 1999) 2,024,000 654,680 4,143,074
--------------- --------------- ---------------
Net cash provided by financing activities 3,258,316 1,657,258 7,710,006
--------------- --------------- ---------------
Change in cash and cash equivalents 740,332 (372,698) 760,307
Cash and cash equivalents, beginning of period 19,975 392,673 -
--------------- --------------- ---------------
Cash and cash equivalents, end of period $ 760,307 $ 19,975 $ 760,307
=============== =============== ===============
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest $ - $ 150,151 $ 223,667
=============== =============== ===============
Income taxes $ 800 $ 800 $ 3,200
=============== =============== ===============
</TABLE>
Supplemental schedule of non-cash investing and financing activities:
See accompanying notes to the financial statements for additional information
relating to non-cash investing and financing activities during fiscal 1999
and 1998.
See independent auditors' report and accompanying notes to financial statements
F-12
<PAGE>
MEDIAX CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
For The Years Ended December 31, 1999 and 1998
For The Period From March 30, 1995 (Date of Inception)
Through December 31, 1999
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Originally founded as a multi-media production studio in 1995, MediaX Inc. was
acquired and became public in 1996 as ZeitGeist Werks, Inc. and subsequently
renamed MediaX Corporation ("MediaX" or the "Company"). MediaX began as a
real-time 3D computer game development company for distribution through both
conventional and Internet distribution channels, as well as licensing through
large publishers. After the acquisition, the Company's strategic focus is
centered on the following: new media content, web site development for Internet
and broadband channels, Internet-based commerce and on-line marketing.
MediaX designs, owns, operates, hosts and integrates a network of several
distinct types of entertainment- based Internet web sites. The company is
positioned to generate revenue through web site design services, the sale of
artist specific merchandise, entertainment-related products, club subscriptions,
endorsement opportunities for corporate sponsors, third party advertising and a
variety of products provided by affiliates. In February 1999, the Company
launched amuZnet.com, an entertainment destination and e-commerce site offering
entertainment titles on CDs, DVDs, videos and movies for sale. The Company
operates its own and/or third party marketing campaigns on amuZnet.com.
All content that is currently produced for the Internet will be re-purposed for
interactive satellite broadcasting and can also easily be transferred to other
broadband systems such as cable TV or ADSL subscriber systems without
significant technological effort. This puts the Company in the position to have
several outlets for the digital interactive content it produces. The Company has
signed contracts with EchoStar (Dish Network) for the launch of an Interactive
Satellite Channel and hopes to further tap into the rapidly emerging efforts of
cable and telecom companies with its existing technology and content expected to
be launched in late 2000. However, there can be no assurance that the Company
will achieve its objectives or successfully implement its interactive satellite
business plan.
Development Stage Company
The Company has been in the development stage since its formation due to the
change in the Company's business plan in late 1998 with no significant revenues
being generated from these proposed new activities. During the development
stage, the Company is primarily engaged in raising capital, obtaining financing,
advertising and promoting the Company and administrative functions along with
developing a unique network of celebrity web sites, central e-commerce sites,
unique entertainment and an on-line shopping experience.
F-13
<PAGE>
MEDIAX CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1999 and 1998 and
For The Period From March 30, 1995 (Date of Inception)
Through December 31, 1999
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES, continued
Restatement of 1998 Financial Statements
Based on updated information on certain transactions, the Company has restated
its 1998 audited financial statements as follows:
The estimated fair market value of 190,000 shares of restricted stock
committed to be issued in December 1998 for services rendered (see Note
4) were not recorded as the stock had not yet been issued. Based on
updated information, the estimated fair market value of the stock has
been recorded at $185,625. The estimated value of options and warrants
to purchase 191,000 shares of common stock issued to consultants (see
Notes 5 and 6) for services rendered were incorrectly recorded at $0.
Based on updated information, the estimated fair value of the options
and warrants was $415,190, of which $404,850 was recorded in 1998. In
addition, the estimated value of the detachable warrants issued to
purchase 3,676,667 shares of common stock in connection with sale of
stock (see Note 4) were incorrectly recorded at $0. Based on updated
information, the estimated fair value of the detachable warrants
(recorded as stock dividends) has been recorded at $456,622. As a
result of these restatements, the Company's loss for fiscal 1998 was
restated to $3,352,541 from the previously recorded $2,762,066 and the
loss per share was restated to $(1.79) from the previously recorded
$(1.49).
Risk and Uncertainties
The Company is a development stage company subject to the substantial business
risks and uncertainties of such an entity, including potential risk of business
failure.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern, which contemplates, among other things, the
realization of assets and satisfaction of liabilities in the normal course of
business. The Company's losses from operations through December 31, 1999 and
lack of operating history, among other matters, raise substantial doubt about
its ability to continue as a going concern. The Company hopes to obtain revenues
from product sales and the development of celebrity web sites. In the absence of
significant sales and profits, the Company intends to fund operations through
additional debt and equity financing arrangements which management believes will
be sufficient to fund its capital expenditures, working capital requirements and
other cash requirements through December 31, 2000. There is no assurance the
Company will be able to obtain sufficient additional funds when needed, or that
such funds, if available, will be obtainable on terms satisfactory to the
Company.
These circumstances 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.
F-14
<PAGE>
MEDIAX CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1999 and 1998 and
For The Period From March 30, 1995 (Date of Inception)
Through December 31, 1999
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES, continued
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 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.
Year 2000
The Year 2000 issues relates to limitations in computer systems and applications
that may prevent proper recognition of the Year 2000. The potential effect of
the Year 2000 issue on the Company and its business partners will not be fully
determinable until the Year 2000 and thereafter. If the Year 2000 modifications
are not properly completed either by the Company or entities with which the
Company conducts business, the Company's revenues and financial condition could
be adversely impacted.
Cash and Cash Equivalents
For purposes of the statement of cash flows, cash and cash equivalents consist
of demand deposits in banks with an initial maturity of 90 days or less. Cash
equivalents are carried at cost which approximates market.
Inventories
Inventories at December 31, 1999 consist primarily of artist specific
merchandise sold over the Internet. Inventories are recorded at the lower of
cost or market using the first-in, first-out method.
Property and Equipment
Property and equipment are recorded at cost and are depreciated using the
straight-line method over the estimated useful lives of the related assets,
ranging from three to seven years. Depreciation expense for the years ended
December 31, 1999 and 1998 was $47,112 and $57,059, respectively. Maintenance
and repairs are charged to expense as incurred. Significant renewals and
betterments are capitalized. At the time of retirement or other disposition of
property and equipment, the cost and accumulated depreciation are removed from
the accounts and any resulting gain or loss is reflected in operations.
F-15
<PAGE>
MEDIAX CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1999 and 1998 and
For The Period From March 30, 1995 (Date of Inception)
Through December 31, 1999
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES, continued
Deferred Software Development Costs
Certain development costs of CD-rom masters were capitalized in accordance with
SFAS No. 86 ("SFAS 86"), "Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed" and are reported at the lower of unamortized
cost or net realizable value. Amortization will be taken commencing with the
sales activity of the related product using the straight-line method and asset
lives approximating the retail sales life of the final product, generally three
to five years. During 1999 and 1998, due to the change in the Company's business
plan, the Company wrote-off previously capitalized and in process software
development costs of $294,192 and $255,000, respectively, which are recorded in
the accompanying statements of operations.
Impairment of Long-Lived Assets
Management of the Company assesses the impairment of long-lived assets by
comparing the future undiscounted net cash flows (without interest charges) from
the use and ultimate disposition of such assets with their carrying amounts. The
amount of impairment, if any, is measured based on fair value and is charged to
operations in the period in which such impairment is determined by management.
There was no impairment of long-lived assets identified for the year ended
December 31, 1999.
Income Taxes
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." Under SFAS 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. A valuation allowance is
provided for significant deferred tax assets when it is more likely than not
that such assets will not be recovered.
Stock Based Compensation
The Financial Accounting Standards Board (the "FASB") issued Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation," which defines a fair value based method of accounting for
stock-based compensation. However, SFAS 123 allows an entity to continue to
measure compensation cost related to stock and stock options issued to employees
using the intrinsic method of accounting prescribed by Accounting Principles
Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees."
Entities electing to remain with the accounting method of APB 25 must make pro
forma disclosures of net income (loss), as if the fair value method of
accounting defined in SFAS 123 had been applied. The Company has elected to
account for its stock-based compensation to employees under APB 25.
F-16
<PAGE>
MEDIAX CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1999 and 1998 and
For The Period From March 30, 1995 (Date of Inception)
Through December 31, 1999
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES, continued
Revenue Recognition
Sales of goods and services and the related cost of sales are recognized when
orders are received and goods are shipped or services are delivered. Revenues
from internet advertising and web development are recorded when earned.
Advertising
Advertising costs are expensed as incurred. Prepaid advertising costs represents
the estimated market value of stock issued (see Note 4) and options granted (see
Note 5) to a third party for advertising to be received in future periods.
Basic and Diluted Loss Per Share
The Company has adopted Statement of Financial Accounting Standards No. 128
"Earnings Per Share" ("SFAS 128"). SFAS 128 changes the methodology of
calculating earnings per share and renamed the two calculations, basic earnings
per share (formerly primary) and diluted earnings per share (formerly fully
diluted). The calculations differ by eliminating any common stock equivalents
(such as stock options, warrants, etc.) from basic earnings per share and
changes certain calculations when computing diluted earnings per share. The
adoption of SFAS 128 has not materially impacted the Company's financial
position or results of operations.
Basic and diluted loss per share were computed based on the weighted average
number of shares outstanding for the period. Basic and diluted loss per share
are the same as the effect of stock options and warrants on loss per share are
antidilutive and thus not included in the diluted loss per share calculation.
Comprehensive Income
The Company has adopted Statement of Financial Accounting Standards No. 130
("SFAS 130"), "Reporting Comprehensive Income." SFAS 130 establishes standards
for reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements. SFAS 130 had no effect on the
Company's financial statements as it had no comprehensive income components.
Segment Information
The Company has adopted Statement of Financial Accounting Standards No. 131
("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information." SFAS 131 changes the way public companies report information about
segments of their business in their annual financial statements and requires
them to report selected segment information in their quarterly reports issued to
stockholders. It also requires entity-wide disclosures about the products and
services an entity provides, the material countries in which it holds assets and
reports revenues and its major customers. As the Company is currently in the
development stage, the Company does not yet have any reportable segments.
F-17
<PAGE>
MEDIAX CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1999 and 1998 and
For The Period From March 30, 1995 (Date of Inception)
Through December 31, 1999
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES, continued
Fair Value of Financial Instruments
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 107 ("SFAS 107"), "Disclosures About Fair Value of
Financial Instruments." SFAS 107 requires disclosure of fair value information
about financial instruments when it is practicable to estimate that value. The
carrying amount of the Company's cash, receivables, trade payables, accrued
expenses and convertible notes payable approximates their estimated fair values
due to the short-term maturities of those financial instruments or because
interest rates approximate market rates.
Recent Accounting Pronouncements
The FASB issued Statement of Financial Accounting Standards No. 133 ("SFAS
133"), "Accounting for Derivative Instruments and Hedging Activities." SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities on the balance sheet at their fair value. This
statement, as amended by SFAS 137, is effective for financial statements for all
fiscal quarters of all fiscal years beginning after June 15, 2000. The Company
does not expect the adoption of this standard to have a material impact on its
results of operations, financial position or cash flows as it currently does not
engage in any derivative or hedging activities.
Reverse Stock Split
Effective November 18, 1998, the Company's Board of Directors approved a reverse
stock split of ten-to-one. All references throughout these financial statements
to number of shares, per share amounts, stock option data and market prices of
the Company's common stock have been restated to reflect the reverse stock
split.
Reclassifications
Certain reclassifications have been made to the December 31, 1998 financial
statements in order to conform to classification used in the current year.
NOTE 2 - CONVERTIBLE SUBORDINATED DEBENTURES AND NOTES PAYABLE
Included in convertible subordinated debentures payable at December 31, 1998 was
$1,454,092 of various notes payable. The notes, bearing interest at the prime
rate (prime rate at December 31, 1998 was 8.25%) plus 2% to 4%, were due on
various dates through September 1999. In 1999, the Company offered the note
holders an inducement to convert the notes with a current balance of $1,566,192
(including accrued interest in 1999 of $112,100) into common stock at $1.69 per
share (estimated fair market value on the date of conversion was approximately
$2.71 per share) or 921,925 shares. As a result of this induced conversion, the
Company recorded additional interest expense of $938,112 during the year ended
December 31, 1999.
F-18
<PAGE>
MEDIAX CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1999 and 1998 and
For The Period From March 30, 1995 (Date of Inception)
Through December 31, 1999
NOTE 2 - CONVERTIBLE SUBORDINATED DEBENTURES AND NOTES PAYABLE,
continued
In 1999, the Company entered into a securities purchase agreement with an
investor, whereby the Company sold to the investor a $2,200,000 principal amount
convertible note for $2,024,000 (net of debt issuance costs of $176,000, which
were amortized to interest expense due to the immediate convertibility of this
note). The note bears interest at 5% and is due on August 24, 2002. The holder
of the note has the option to require interest payments in cash or stock. As of
December 31, 1999, the Company has incurred interest expense related to the note
in the amount of $38,877. The note is convertible at beneficial rates which vary
based on recent stock prices and date of conversion, as defined. Due to the note
being immediately convertible at the option of the noteholder, the Company has
recorded a beneficial conversion of $349,186 that is included in interest
expense at December 31, 1999. In addition, the Company gave the investor a
warrant to purchase 220,000 shares of its common stock at $3.40 per share
expiring in August 23, 2004 which was valued at $345,400 (based on Black-Scholes
computation under SFAS 123 - see Note 6) and recorded as interest expense.
NOTE 3 - SUBSCRIPTION ADVANCES
Subscription advances represents monies received in advance from certain
investors for the future exercise of warrants or purchase of stock. The total
number of warrants to be exercised or the total number of shares to be purchased
has not yet been determined. During 1999, $220,000 of the previously received
advances were utilized to exercise certain warrants (see Note 4) and the Company
received $178,993 of new advances. At December 31, 1999, the total outstanding
balance on subscription advances was $278,993.
NOTE 4 - STOCKHOLDERS' EQUITY
Preferred Stock
The Company's Articles of Incorporation authorize up to 10,000,000 shares of
$.0001 par value preferred stock. Shares of preferred stock may be issued in one
or more classes or series at such time the Board of Directors may determine. All
shares of any one series shall be equal in rank and identical in all respects.
As of December 31, 1999, the Board of Directors has designated 6,000,000 as
Series A 10% convertible preferred stock ("Preferred A"). Each Preferred A share
has a liquidation preference of $1 per share plus accrued dividends and is
convertible at 3.5 shares of Preferred A into one common share. As of December
31, 1999, no preferred shares have been issued.
F-19
<PAGE>
MEDIAX CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1999 and 1998 and
For The Period From March 30, 1995 (Date of Inception)
Through December 31, 1999
NOTE 4 - STOCKHOLDERS' EQUITY, continued
Common Stock
During April to December 1998, the Company sold 468,313 shares to an accredited
investor for proceeds of $500,000. In addition, the Company granted to this
investor warrants to purchase up to 3,676,667 shares of common stock at varying
prices with a fair market value of $456,622 (based on Black-Scholes computation
under SFAS 123) and recorded as a common stock dividend. The warrants expire on
various dates through September 7, 2001 and the number of shares and price per
share will not be adjusted for any future stock splits or reverse stock splits.
In addition, the investor is limited to only exercise 200,000 warrants in any
sixty-day period. 200,000 of these warrants were exercised during December of
1998 for proceeds of $20,000. During 1999, 1,608,667 of these warrants were
exercised for proceeds of $422,007, of which $220,000 was received in prior year
and recorded as subscription advances (see Note 3).
Another accredited unrelated investor purchased 104,000 shares during February
1998 for proceeds of $200,000.
During December 1998, the Company issued 190,000 shares of common stock valued
at $185,625 (based on the market value on the date of grant) to consultants for
services rendered.
During January 1999, the Company issued 30,000 shares of common stock in
connection with the exercise of stock warrants for $75,000, in addition to the
warrants exercised above.
During January through September 1999, the Company issued 30,000 shares of
common stock valued at $106,875 (based on the market values on the dates of
grant) and 830,000 shares of restricted common stock valued at $1,689,807 (based
on the market values on the dates of grant) to consultants for services
rendered.
During January through April 1999, the Company issued 20,000 shares of common
stock and 340,000 shares (plus 16,000 shares issued for finders fees) of
restricted stock for $20,000 and $421,500, respectively.
During March 1999, the Company issued 200,000 shares of restricted common stock
valued at $393,125 (based on the market value on the date of grant) and options
to purchase 100,000 shares of common stock with an estimated value of $215,000
(using the Black-Scholes option pricing model pursuant to SFAS 123) to a third
party for prepaid advertising time (see Note 1).
During April through August 1999, the Company issued 120,833 shares of common
stock in connection with the exercise of stock options for $336,816.
F-20
<PAGE>
MEDIAX CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1999 and 1998 and
For The Period From March 30, 1995 (Date of Inception)
Through December 31, 1999
NOTE 5 - STOCK OPTIONS
In December 1998, the Company amended the incentive stock option plan adopted in
1996. The plan authorizes the issuance of options to purchase up to 500,000
shares of the Company's common stock. All options must have an exercise price of
no less than the stock's fair market value on the date of grant. The option plan
expires on December 10, 2008.
During fiscal 1998, pursuant to various employment agreements, the Company
issued options to purchase 185,500 shares of the Company's common stock at an
exercise price of $0.98. The options vest on various dates through December 2001
and are exercisable through December 10, 2008. A total of $3,711 of compensation
expense will be recorded over the vesting period, of which $1,237 and $0 was
recognized during 1999 and 1998, respectively.
From time to time, the Company issues stock options pursuant to various
agreements and other compensatory arrangements.
During fiscal 1998, pursuant to various consulting and outside service provider
agreements, the Company issued to consultants options to purchase 131,000 shares
of the Company's common stock at exercise prices ranging from $0.98 to $7.50 per
share. The options vest on various dates through December 2001 and are
exercisable through December 2008. Total consulting expense of $134,090 (using
the Black-Scholes option pricing model pursuant to SFAS 123 - see below) will be
recorded over the vesting period, of which none and $123,750 was recognized at
December 31, 1999 and 1998, respectively.
During fiscal 1999, the Company entered into various employment agreements
wherein the Company has agreed to supplement compensation to certain employees
in the form of stock options. Pursuant to the agreements, the Company issued
options to purchase 1,086,700 shares of common stock at exercise prices ranging
from $1.12 per share to $1.95 per share and vesting over a period ranging from
one to three years from the date of grant. A total of approximately $537 of
compensation expense will be recorded over the vesting period, of which none was
recognized during fiscal 1999.
During fiscal 1999, pursuant to various consulting and outside service provider
agreements, the Company issued to consultants options to purchase 294,400 shares
of the Company's common stock at exercise prices ranging from $1.40 to $6.50 per
share. The options vest on various dates through December 2002 and are
exercisable through December 2009. Total consulting expense of $501,000 will be
recorded over the vesting period of which $453,600 was recognized at December
31, 1999. Included in these options was 100,000 options that were issued for
prepaid advertising costs. The estimated value of these options was $215,000
(using the Black-Scholes option pricing model pursuant to SFAS 123 - see below),
which the Company has recorded as prepaid advertising on the balance sheet at
December 31, 1999.
F-21
<PAGE>
MEDIAX CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1999 and 1998 and
For The Period From March 30, 1995 (Date of Inception)
Through December 31, 1999
NOTE 5 - STOCK OPTIONS, continued
<TABLE>
<CAPTION>
Following is a status of the stock options outstanding at December 31, 1999 and
1998 and the changes during the years then ended:
1999 1998
------------------------------------- -----------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
---------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 331,635 $ 2.15 15,135 $ 14.68
Granted 1,381,100 1.75 316,500 1.55
Exercised (120,833) (2.79) - -
Expired/Forfeited (33,667) 0.98 - -
------------- ------------ ------------ -------------
Outstanding, end of year 1,558,235 $ 1.77 331,635 $ 2.15
============= ============ ============ =============
Exercisable, end of year 259,129 $ 2.80 132,923 $ 3.54
============= ============ ============ =============
Weighted average fair value of
options granted $ 1.42 $ 0.97
============ =============
</TABLE>
1,378,100 of the options outstanding at December 31, 1999 have exercise prices
between $0.98 and $1.95, with a weighted average exercise price of $1.15 and a
weighted average remaining contractual life of 8.4 years. 178,994 of these
options are exerciseable at December 31, 1999. The remaining 180,135 options
have exercise prices between $2.50 and $22.50, with a weighted average exercise
price of $6.50 and a weighted average remaining contractual life of 2.6 years.
80,135 of these options are exercisable at December 31, 1999.
The fair value of each option granted during 1999 and 1998 to consultants and
outside service providers is estimated using the Black-Scholes option-pricing
model on the date of grant using the following assumptions: (i) no dividend
yield, (ii) average volatility of 240 percent and 205 percent, respectively,
(iii) weighted-average risk-fee interest rate of approximately 6.15 percent and
5.2 percent, respectively, and (iv) expected life of 2.75 years and 2.5 years,
respectively.
Had compensation cost for the Company's 1999 and 1998 options granted to
employees been determined consistent with SFAS 123, the Company's net loss and
net loss per share for the year ended December 31, 1999 and 1998 would
approximate the pro forma amounts below:
<TABLE>
<CAPTION>
1999 1998
------------------------------------- -----------------------------------
As Reported Pro Forma As Reported Pro Forma
---------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net loss $ (7,244,707) $ (7,302,920) $ (3,352,541) $ (3,352,541)
Basic and diluted loss per share $ (1.37) $ (1.38) $ (1.79) $ (1.79)
</TABLE>
F-22
<PAGE>
MEDIAX CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1999 and 1998 and
For The Period From March 30, 1995 (Date of Inception)
Through December 31, 1999
NOTE 6 - STOCK WARRANTS
From time to time, the Company issues warrants pursuant to various consulting
agreements.
During fiscal 1998, pursuant to contract agreements with outside consultants,
the Company issued warrants to purchase 60,000 shares of the Company's common
stock at exercise prices ranging from $2.50 to $15.00. The warrants vested on
the date of grant and are exercisable through September 2001. Total expense of
$281,100 representing the fair value of these warrants was recognized during
fiscal 1998.
In connection with the sale of its common stock, the Company issued warrants to
purchase 3,676,667 shares of the Company's common stock at exercise prices
ranging from $0.10 to $0.40 (see Note 4). The warrants vest on the date of grant
and are exercisable through September 2001. Total dividends of $456,622
representing the fair market value of these warrants was recognized as of
December 31, 1998.
During fiscal 1999, the Company issued additional warrants to purchase 220,000
shares of the Company's common stock at an exercise price of $3.40 per share in
connection with the issuance of convertible debt (see Note 2). The warrants vest
on the date of grant and are exercisable through August 2004. Total additional
interest expense of $345,400 representing the fair value of these warrants was
recognized during fiscal 1999.
The following represents a summary of the warrants outstanding for the years
ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------------------------------- -----------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Warrants Price Warrants Price
---------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 3,600,898 $ 0.57 66,841 $ 14.09
Granted 220,000 3.40 3,736,667 0.33
Exercised (1,638,667) 0.30 (200,000) 0.10
Expired/Forfeited - - (2,610) 30.00
------------- -------------- ------------ --------------
Outstanding, end of year 2,182,231 $ 1.06 3,600,898 $ 0.57
============= ============== ============ ==============
Exercisable, end of year 2,182,231 $ 1.06 3,600,898 $ 0.57
============= ============== ============ ==============
Weighted average fair value of
warrants granted $ 1.57 $ 0.20
============== ==============
</TABLE>
1,868,000 of the warrants outstanding at December 31, 1999 have exercise prices
between $0.10 and $0.27, with a weighted average exercise price of $0.14 and a
weighted average remaining contractual life of 1.6 years. All of these warrants
are exercisable at December 31, 1999. The remaining 314,231 warrants have
exercise prices between $3.40 and $15.00, with a weighted average remaining
contractual life of 4.8 years. All of these warrants are exercisable at December
31, 1999.
F-23
<PAGE>
MEDIAX CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1999 and 1998 and
For The Period From March 30, 1995 (Date of Inception)
Through December 31, 1999
NOTE 6 - STOCK WARRANTS, continued
The fair value of each warrant granted during 1999 and 1998 is estimated using
the Black-Scholes option-pricing model on the date of grant using the following
assumptions: (i) no dividend yield, (ii) average volatility of 174 percent and
200 percent, respectively, (iii) weighted-average risk-free interest rate of
approximately 5.95 percent and 4.66 percent, respectively, and (iv) expected
life of 1.5 years.
NOTE 7 - RELATED PARTY TRANSACTIONS
Stockholder Notes and Accrued Interest Receivable
Stockholder notes receivable represents monies loaned to the Company's President
and stockholder. The notes, which are due on demand, are uncollateralized and
bear interest at 4% per annum. At December 31, 1999, the total outstanding
balance was $115,830, including accrued interest of $15,830, of which $4,000 was
recorded in 1999 and 1998, respectively. As the notes are due from the President
and stockholder, the Company has presented the receivables as a reduction of
stockholders' deficit at December 31, 1999.
Commitment - Employment Agreements
The Company entered into an employment agreement with its President. The
agreement which expires in December 2001, provides for an annual base salary of
$185,000 and increases to $215,000. The aggregate minimum annual commitment for
future payments at December 31, 1999 was approximately $400,000. Amounts paid
pursuant to this agreement totaled $185,000 for the years ended December 31,
1999 and 1998, respectively.
The Company entered into an employment agreement with its executive vice
president. The agreement, which expires in June 2001, provides for an annual
base salary of $185,000 and increases to $215,000. The aggregate minimum annual
commitment for future payments at December 31, 1999 was approximately $307,500.
Amounts paid pursuant to this agreement totaled $143,000 and $125,000 for the
years ended December 31, 1999 and 1998, respectively.
Both of these agreements also provide for a bonus at the end of each fiscal
quarter as determined by the Company's Board of Directors. No bonuses have been
declared or paid since inception. Both the President and Executive
Vice-President may voluntarily terminate their employment at any time.
Consulting Fees to Officer/Director
Beginning August 1, 1998, the Company's chairman provides services to the
Company pursuant to a month to month consulting agreement requiring $10,000 for
each month worked. During 1999 and 1998, the Company expensed $120,000 and
$50,000, respectively, related to this agreement. As of December 31, 1999,
$40,000 is accrued and included in accounts payable. In January 2000, the
Chairman accepted a full-time management position with the Company.
F-24
<PAGE>
NOTE 8 - INCOME TAXES
The tax effects of temporary differences that give rise to deferred taxes as of
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Deferred tax asset:
Net operating loss carryforward $ 4,185,000
Expense recognized for granting options and warrants 343,000
----------------
Total gross deferred tax asset 4,528,000
Less valuation allowance (4,528,000)
$ -
================
</TABLE>
The valuation allowance increased by approximately $2,941,800 during the year
ended December 31, 1999. No current provision for income taxes for the periods
ended December 31, 1999 and 1998 is required, except for minimum state taxes,
since the Company incurred taxable losses during such years.
The provision for income taxes for fiscal 1999 and 1998 was $800 and differs
from the amount computed by applying the U.S. federal income tax rate of 34% to
loss before income taxes as a result of the following as of December 31:
<TABLE>
<CAPTION>
1999 1998
------------------- -----------------
<S> <C> <C>
Computed tax benefit at federal statutory rate $ (2,463,000) $ (1,140,000)
State income tax benefit, net of federal effect (478,000) (221,000)
Increase in valuation allowance 2,941,800 1,361,800
--------------- ----------------
$ 800 $ 800
=============== ================
</TABLE>
As of December 31, 1999, the Company had net operating loss carryforwards of
approximately $10,760,000 and $5,960,000 for federal and state income tax
reporting purposes, which begin expiring in 2011 and 2001, respectively.
In the event the Company were to experience a greater than 50% change in
ownership as defined in Section 382 of the Internal Revenue Code, the
utilization of the Company's net operating loss carryforwards could be severely
restricted.
F-25
<PAGE>
MEDIAX CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1999 and 1998 and
For The Period From March 30, 1995 (Date of Inception)
Through December 31, 1999
NOTE 9 - EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share calculations:
<TABLE>
<CAPTION>
1999 1998
------------------- -----------------
<S> <C> <C>
Numerator for basic and diluted earnings per share:
Net loss available to common stockholders $ (7,244,707) $ (3,352,541)
=============== ================
Denominator for basic and diluted earnings per share:
Weighted average shares 5,280,837 1,873,517
=============== ================
Basic and diluted loss available to common
stockholders per common share $ (1.37) $ (1.79)
=============== ===============
</TABLE>
NOTE 10 - 401(k) RETIREMENT PLAN
On January 1, 1998, the Company adopted a Section 401(k) tax sheltered annuity
program in which each full time employee with at least three months of service
may contribute up to 15% of his/her gross salary (up to a maximum of $9,500
adjusted annually for inflation) annually on a tax-deferred basis. The Company
is not required to make any employer contributions to the plan.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases its corporate offices on a month-to-month basis for
approximately $3,200 per month. Subsequent to December 31, 1999, the Company
entered into an agreement to lease new corporate offices through December 2004.
The agreement provides for monthly lease payments of $9,250.
The Company leases space for its research and production studio from an
unrelated party under an operating lease agreement that expires June 30, 2000.
Future minimum annual commitments under lease agreements are as follows:
<TABLE>
<CAPTION>
Years Ending
December 31
---------------------------
<S> <C>
2000 $ 130,000
2001 114,000
2002 118,000
2003 121,000
2004 125,000
----------------
$ 608,000
</TABLE>
F-26
<PAGE>
MEDIAX CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
For The Years Ended December 31, 1999 and 1998 and
For The Period From March 30, 1995 (Date of Inception)
Through December 31, 1999
NOTE 11 - COMMITMENTS AND CONTINGENCIES, continued
Rent expense under operating leases was $78,088 and $70,869 for the years ended
December 31, 1999 and 1998, respectively.
Direct Fulfillment Service
In December 1998, the Company entered into a consumer direct fulfillment service
agreement with a third party. The agreement, which expires in December 2001,
provides for a minimum monthly commitment fee of $2,000, increasing to $4,000 in
August 1999, or 1.5% of sales. The aggregate minimum commitment for future
payments at December 31, 1999 was approximately $96,000. Amounts paid pursuant
to this agreement totaled $24,000 for the year ended December 31, 1999.
NOTE 12 - SUBSEQUENT EVENTS
In January 2000, the Company granted options to purchase 50,000 shares of the
Company's common stock at an exercise price of $1.68 (estimated by the Company
to be the fair market value) to consultants. The options vest immediately and
are exercisable through December 2001. Total consulting expense to be recognized
using the Black-Scholes option pricing model pursuant to SFAS 123 is
approximately $80,000.
In February 2000, the Company granted options to employees to purchase 50,000 of
the Company's common stock at an exercise price of $2.81 (estimated by the
Company to be the fair market value). The options vest over a three-year period
and are exercisable through December 2008.
In February 2000, noteholders of convertible debentures exercised their option
to convert $102,575 (including accrued interest of $2,575) of debt into 75,981
shares of the Company's common stock.
In March 2000, the Company was ordered to pay an arbitration award of $170,000
plus costs of approximately $13,000 to an order fulfillment company. The award
was a result of a breach of contract pursuant to a 1999 licensing agreement
between the Company and the order fulfillment company; therefore the Company has
recorded the related liability of approximately $183,000 at December 31, 1999 in
the related balance sheet and statement of operations. The Company is in the
process of challenging the arbitrator's authority and the arbitration provisions
in the written agreement.
In March 2000, the Company issued 218,000 shares of the Company's common stock
in connection with the exercise of warrants for $58,200, which was included in
subscription advances as of December 31, 1999.
F-27
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 760,307
<SECURITIES> 0
<RECEIVABLES> 10,718
<ALLOWANCES> 8,500
<INVENTORY> 12,855
<CURRENT-ASSETS> 1,535,602
<PP&E> 378,850
<DEPRECIATION> 276,723
<TOTAL-ASSETS> 1,673,101
<CURRENT-LIABILITIES> 448,520
<BONDS> 0
0
0
<COMMON> 667
<OTHER-SE> (1,014,296)
<TOTAL-LIABILITY-AND-EQUITY> 1,673,101
<SALES> 55,918
<TOTAL-REVENUES> 55,918
<CGS> 316,497
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,016,299
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,991,741
<INCOME-PRETAX> (7,243,907)
<INCOME-TAX> 800
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,244,707)
<EPS-BASIC> (1.37)
<EPS-DILUTED> (1.37)
<FN>
This schedule contains summary financial information extracted from the balance
sheets and statement of operations found on pages __ through __of the Company's
Form 10-KSB for the fiscal year ended December 31, 1999, and is qualified in its
entirety by reference to such financial statements.
</FN>
</TABLE>
