SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
January 8, 1998
ASSOCIATED TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-55254 87-0485306
(State or other (Commission (I.R.S. Employer
jurisdiction) File Number) Identification No.)
3 Riverside Drive, Andover, MA 01810
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (978) 688-8800
Associated Technologies, Inc.
1204 Third Avenue, Suite 172
New York, New York 10021
(Former name and former address, if changed since last report)
The undersigned registrant hereby amends its Current
Report on Form 8-K dated January 16, 1998
and filed on such date to amend Item 7.
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired.
Report of Independent Accountants
Balance Sheets as of December 31, 1997 (unaudited), March 31,
1997 and 1996.
Statements of Operations for nine-months ended December 31, 1997
and 1996 (unaudited) and the years ended March 31, 1997, 1996
and 1995.
Statements of Cash Flows for nine-months ended December 31, 1997
and 1996 (unaudited) and the years ended March 31, 1997, 1996 and
1995.
Statements of Stockholders' Deficit for the nine months ended
December 31, 1997 (unaudited) and the years ended March 31,
1997, 1996, and 1995.
Notes to the financial statements for the nine months ended
December 31, 1997.
(b) Pro Forma Financial Information
Introduction to Pro Forma financial information.
Unaudited Pro Forma combined condensed Balance Sheet at December
31, 1997.
Unaudited Pro Forma combined condensed Statement of Operations
for the year December 31, 1997.
Notes to unaudited Pro Forma combined condensed Balance Sheet
and Statement of Operations.
(c) Financial Statements of Acquiring Business
Independent auditor's report.
Consolidated Balance Sheets as of December 31, 1997 and 1996.
Consolidated Statements of Operations for the years ended
December 31, 1997 and 1996.
Consolidated Statements of Stockholders' Deficit from the period
of inception to December 31, 1997.
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1996.
Notes to and forming part of the accounts for the year ended
December 31, 1997.
Report of Independent Accountants
To the Board of Directors and Stockholders of
Virtual Music Entertainment, Inc.:
We have audited the accompanying balance sheets of Virtual Music
Entertainment, Inc. as of March 31, 1997 and 1996, and the related
statements of operations, stockholders' deficit and cash flows for each of
the three years in the period ended March 31, 1997. 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 financial position of Virtual Music
Entertainment, Inc. as of March 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period
ended March 31, 1997 in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A to the
financial statements, the Company has suffered recurring losses from
operations and has a net working capital deficiency that raises substantial
doubt about its ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note A. The financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
/s/ Coopers & Lybrand L.L.P.
Boston, Massachusetts
August 20, 1997, except for the information
presented in Note N, as to which the date is
December 16, 1997
VIRTUAL MUSIC ENTERTAINMENT, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31,
December 31, --------------------------
1997 1997 1996
-----------------------------------------
(unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash $ 4,738 $ 953,658 $ 52,462
Accounts receivable, net of allowances of
$5,700, $0 and $22,002, respectively 27,114 22,179 36,078
Inventory 116,619 245,196 40,829
Other prepaid expenses 14,588 - 92,416
Other current assets 28,590 28,590 33,589
-----------------------------------------
Total current assets 191,649 1,249,623 255,374
Furniture, equipment and leasehold improvements, net 307,205 303,824 180,579
Intangible assets, net of accumulated amortization of
$148,637, $40,867 and $18,386, respectively - 107,770 65,117
Capitalized software costs 465,000 369,955 184,481
Prepaid royalties 40,000 175,537 25,000
Deferred merger costs 225,352 - -
-----------------------------------------
Total assets $ 1,229,206 $ 2,206,709 $ 710,551
=========================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 800,637 $ 575,634 $ 354,863
Royalties payable 92,535 44 314,682
Repurchased distribution rights payable 820,000 860,000 -
Distributor advances 1,667,200 1,212,200 452,776
Accrued expenses 524,355 388,057 253,336
Notes payable 1,577,000 700,000 -
Capital lease obligations 7,500 8,609 10,494
-----------------------------------------
Total current liabilities 5,489,227 3,744,544 1,386,151
Capital lease obligations, net of current portion 699 6,056 8,830
-----------------------------------------
Total liabilities 5,489,926 3,750,600 1,394,981
-----------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTE F)
STOCKHOLDERS' DEFICIT:
Convertible preferred stock, Series D, $0.01 par value;
3,450,000 shares authorized; 3,434,050 shares issued
and outstanding (liquidation preference, $2,609,878) 34,341 34,341 34,341
Convertible preferred stock, Series E, $0.01 par value;
6,000,000 shares authorized; 1,528,583, 1,528,583 and 0
shares issued and outstanding at December 31, 1997 and
March 31, 1997 and 1996, respectively (liquidation
preference, $3,011,309 at March 31, 1997) 15,286 15,286 -
Common stock, $0.01 par value; 16,550,000 shares
authorized; 2,534,481, 2,534,481 and 2,532,231 shares
issued and outstanding at December 31, 1997 and
March 31, 1997 and 1996, respectively 25,345 25,345 25,322
Additional paid-in capital 12,932,208 12,932,208 10,238,987
Accumulated deficit (17,267,900) (14,551,071) (10,983,080)
-----------------------------------------
Total stockholders' deficit (4,260,720) (1,543,891) (684,430)
-----------------------------------------
Total liabilities and stockholders' deficit $ 1,229,206 $ 2,206,709 $ 710,551
=========================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
VIRTUAL MUSIC ENTERTAINMENT, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended Years Ended
December 31, March 31,
-------------------------- -----------------------------------------
1997 1996 1997 1996 1995
-------------------------- -----------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
NET SALES $ 528,397 $ 200,764 $ 1,913,497 $ 1,643,478 $ 295,584
COSTS AND EXPENSES:
Cost of sales 1,231,667 36,348 1,799,490 1,846,624 2,611,862
Sales and marketing 403,520 481,377 1,614,348 578,692 2,798,341
General and administrative 986,929 774,219 1,118,415 1,215,090 727,070
Research and development 505,490 431,398 827,740 599,711 2,609,563
-------------------------- -----------------------------------------
3,127,606 1,723,342 5,359,993 4,240,117 8,746,836
-------------------------- -----------------------------------------
LOSS FROM OPERATIONS (2,599,209) (1,522,578) (3,446,496) (2,596,639) (8,451,252)
INTEREST INCOME (EXPENSE), NET (81,828) (92,379) (99,618) (46,750) 8,270
-------------------------- -----------------------------------------
LOSS FROM OPERATIONS
BEFORE INCOME TAXES (2,681,037) (1,614,957) (3,546,114) (2,643,389) (8,442,982)
PROVISION FOR INCOME TAXES 35,792 1,256 21,877 2,538 456
-------------------------- -----------------------------------------
LOSS BEFORE EXTRAORDINARY ITEM (2,716,829) (1,616,213) (3,567,991) (2,645,927) (8,443,438)
EXTRAORDINARY ITEM, GAIN
ON FORGIVENESS OF DEBT - - - 655,481 74,517
-------------------------- -----------------------------------------
NET LOSS $(2,716,829) $(1,616,213) $(3,567,991) $(1,990,446) $(8,368,921)
========================== =========================================
BASIC NET LOSS PER SHARE $ (1.07) $ (.64) $ (1.41) $ (1.86) $ (35.82)
========================== =========================================
DILUTED NET LOSS PER SHARE $ (1.07) $ (.64) $ (1.41) $ (1.86) $ (35.82)
========================== =========================================
BASIC SHARES OUTSTANDING 2,534,481 2,534,031 2,534,135 1,068,689 233,648
========================== =========================================
DILUTED SHARES OUTSTANDING 2,534,481 2,534,031 2,534,135 1,068,689 233,648
========================== =========================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
VIRTUAL MUSIC ENTERTAINMENT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended Years Ended
December 31, March 31,
-------------------------- -----------------------------------------
1997 1996 1997 1996 1995
-------------------------- -----------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from operations before
extraordinary item $(2,716,829) $(1,616,213) $(3,567,991) $(2,645,927) $(8,443,438)
Adjustment to reconcile net loss to
net cash used in operating activities-
Depreciation and amortization 180,363 57,076 82,617 43,193 25,695
Interest on promissory notes, converted
to Series C and D - - - 57,200 -
Interest on promissory notes converted
to Series E - - 58,200 - -
Consulting expenses paid by issuance
of preferred stock - - - 33,334 -
Bad debt expense 5,676 - (5,871) 10,548 25,000
Issuance of common stock to vendors net
of issuance costs of $513 - - - 74,794 -
Extraordinary item, gain on forgiveness
of debt - - - 655,481 74,517
Changes in operating assets and liabilities-
Accounts receivable (10,610) (32,614) 19,771 (9,481) (62,144)
Inventory 128,577 26,012 (204,367) 544,428 (585,257)
Other current assets and prepaid expenses (14,588) (170,698) 97,415 (102,537) (15,781)
Prepaid royalties 135,537 - (150,537) 115,567 -
Deferred merger costs (225,352) - - - -
Deferred charges - - - - (140,567)
Accounts payable and accrued expenses 321,302 (455,732) 355,491 (1,285,167) 1,893,366
Repurchased distribution rights payable - - 860,000 - -
Royalties payable 92,491 28,130 (314,638) 218,597 96,085
Distributor advances 455,000 2,136,250 759,424 452,776 -
Other liabilities (1,109) - - (20,912) 20,912
-------------------------- -----------------------------------------
Net cash used in operating activities (1,649,542) (27,789) (2,010,486) (1,858,106) (7,111,612)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture, equipment and
leasehold improvements (75,976) (102,157) (183,381) (103,211) (68,193)
Payments for purchase of intangible assets - - (65,134) (42,202) (21,643)
Increase in capitalized software (95,045) (1,593,583) (185,474) (184,481) -
-------------------------- -----------------------------------------
Net cash used in investing activities (171,021) (1,695,740) (433,989) (329,894) (89,836)
-------------------------- -----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 877,000 1,874,644 1,798,615 478,818 521,182
Principal payments under capital lease
obligations (5,357) (1,525) (4,659) (8,684) (12,796)
Proceeds from issuance of preferred stock, net
of issuance of costs of $306,633 and $13,938,
for the years ended March 31, 1997 and 1996,
respectively - - 1,550,860 1,484,826 6,853,885
Proceeds from exercise of common stock options - 855 855 12,311 13,170
-------------------------- -----------------------------------------
Net cash provided by financing activities 871,643 1,873,974 3,345,671 1,967,271 7,375,441
-------------------------- -----------------------------------------
NET INCREASE (DECREASE) IN CASH (948,920) 150,445 901,196 (220,729) 173,993
CASH, BEGINNING OF YEAR 953,658 52,462 52,462 273,191 99,198
-------------------------- -----------------------------------------
CASH, END OF YEAR $ 4,738 $ 202,907 $ 953,658 $ 52,462 $ 273,191
========================== =========================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid $ 7,351 $ 25,269 $ 80,694 $ 57,441 $ 1,028
Income taxes paid - - 21,877 2,538 456
SUPPLEMENTAL DISCLOSURE OF NON-CASH
FINANCING ACTIVITIES:
Conversion of promissory notes, including
accrued interest to convertible preferred
stock, Series D - - - 1,047,777 -
Conversion of preferred stock, Series C to
Series B at 2 for 1 - - - 7,646 -
Conversion of preferred stock, Series A and B
to common stock at 1.1 and 1.2, respectively,
of common shares for each Series A and
Series B shares - - - 17,280 -
Conversion of promissory notes, including
accrued interest to convertible preferred
stock, Series E - - 1,156,815 - -
Capital lease obligations incurred when
Company entered into lease agreements for
new equipment - 9,825 9,825 18,020 -
</TABLE>
The accompanying notes are an integral part of these financial statements.
VIRTUAL MUSIC ENTERTAINMENT, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995 AND THE NINE-MONTH
PERIOD ENDED DECEMBER 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
Convertible Preferred Convertible Preferred Convertible Preferred Convertible Preferred
Stock Stock Stock Stock
Series A Series B Series C Series D
--------------------- --------------------- --------------------- ---------------------
Shares Amount Shares Amount Shares Amount Shares Amount
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1994 65,142 $ 651 133,672 $ 1,337 $ $
Issuance of preferred stock, net
of issuance cost of $13,938 763,532 7,635
Issuance of common stock
Net loss --------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1995 65,142 651 133,672 1,337 763,532 7,635
Issuance of preferred stock, net
of issuance cost of $43,942 2,011,536 20,115
Conversion of interest on notes
payable relating to Series C issue 1,048 11
Conversion of promissory notes
payable and accrued interest to
convertible preferred stock,
Series D at $0.76 per share 1,378,654 13,787
Issuance of preferred stock for
consulting services at $0.76
per share 43,860 439
Conversion of Series C to Series B 1,529,160 15,292 (764,580) (7,646)
Conversion of Series A and Series B
to common stock (65,142) (651) (1,662,832) (16,629)
Issuance of common stock to vendors,
net of issuance cost of $513
Exercise of stock options
Net loss
--------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1996 3,434,050 34,341
Issuance of preferred stock, net
of issuance cost of $306,633
Conversion of promissory notes
payable and accrued interest to
convertible preferred stock
Series E at $1.97 per share
Exercise of stock options
Net loss
--------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1997 3,434,050 34,341
Net loss (UNAUDITED)
--------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997
(UNAUDITED) $ $ $ 3,434,050 $34,341
===========================================================================================
</TABLE>
<TABLE>
<CAPTION>
Convertible Preferred
Stock
Series E Common Stock Additional Total
---------------------- -------------------- Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Deficit
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 1994 $ 204,000 $ 2,040 $ 751,145 $ (623,713) $ 131,460
Issuance of preferred stock, net
of issuance cost of $13,938 6,846,250 6,853,885
Issuance of common stock 50,156 501 26,626 27,127
Net loss (8,368,921) (8,368,921)
-----------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1995 254,156 2,541 7,624,021 (8,992,634) (1,356,449)
Issuance of preferred stock, net
of issuance cost of $43,942 1,464,711 1,484,826
Conversion of interest on notes
payable relating to Series C issue 9,412 9,423
Conversion of promissory notes
payable and accrued interest to
convertible preferred stock,
Series D at $0.76 per share 1,033,990 1,047,777
Issuance of preferred stock for
consulting services at $0.76
per share 32,895 33,334
Conversion of Series C to Series B (7,646)
Conversion of Series A and Series B
to common stock 2,067,052 20,671 (3,391)
Issuance of common stock to vendors,
net of issuance cost of $513 198,175 1,982 72,812 74,794
Exercise of stock options 12,848 128 12,183 12,311
Net loss (1,990,446) (1,990,446)
-----------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1996 2,532,231 25,322 10,238,987 (10,983,080) (684,430)
Issuance of preferred stock, net
of issuance cost of $306,633 941,367 9,414 1,541,446 1,550,860
Conversion of promissory notes
payable and accrued interest to
convertible preferred stock
Series E at $1.97 per share 587,216 5,872 1,150,943 1,156,815
Exercise of stock options 2,250 23 832 855
Net loss (3,567,991) (3,567,991)
-----------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1997 1,528,583 15,286 2,534,481 25,345 12,932,208 (14,551,071) (1,543,891)
Net loss (UNAUDITED) (2,716,829) (2,716,829)
-----------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997
(UNAUDITED) 1,528,583 $15,286 2,534,481 $25,345 $12,932,208 $(17,267,900) $(4,260,720)
=========================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
VIRTUAL MUSIC ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF DECEMBER 31, 1997 AND FOR THE NINE MONTHS ENDED
DECEMBER 31, 1997 AND 1996 IS UNAUDITED)
(A) NATURE OF BUSINESS
Virtual Music Entertainment, Inc. (the Company) was incorporated in
Massachusetts and began operations on March 15, 1993. On February 14, 1995,
the Company was incorporated in Delaware. The Company changed its name from
Ahead, Inc. to Virtual Music Entertainment, Inc. on June 30, 1995.
The Company was formed to develop and market multimedia interactive music
video games for personal computers and home entertainment systems.
The Company's financial statements have been presented on the basis that it
is a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company
incurred operating losses since its inception and has an accumulated deficit
and working capital deficiency at March 31, 1997 of $14,551,071 and
$2,494,921, respectively. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. Management's plan to
continue operations for the next 12 months is principally based upon
increased net sales combined with reduced expenditures and obtaining
additional financing. However, there can be no assurance that the Company
will obtain necessary financing to fund operations. The financial
statements do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.
(B) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Revenue is recognized upon delivery provided no significant obligations
remain outstanding and the resulting receivable is deemed collectible by
management.
Basic and Diluted Net Loss Per Share
The Company applies SFAS No. 128, Earnings per Share, in calculating
basic and diluted net loss per share. Basic net loss per share is computed by
dividing net loss by the weighted average number of common shares
outstanding during the period. Diluted net loss per common share is the same
as basic net loss per common share as the effects of the Company's potential
common stock equivalents are antidilutive.
Inventory
Inventory, which consists mainly of goods for resale, is stated at the lower
of cost or market. The cost of inventory is determined using the first-in,
first-out method.
Furniture, Equipment and Leasehold Improvements
Furniture, equipment and leasehold improvements are recorded at historical
cost. Depreciation is calculated using the straight-line method over the
estimated useful lives of the assets, typically five to seven years.
Maintenance and repairs are charged to expense as incurred. When assets are
retired or otherwise disposed of, the assets and related accumulated
depreciation are eliminated from the accounts and any resulting gain or loss
is reflected in income.
Research and Development Costs
In accordance with Statement of Financial Accounting Standards No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed, the Company capitalizes certain software development
costs after technological feasibility of the product has been established
subject to an evaluation of their net realizable value based on existing
distributor contracts and advances received. Capitalized software
development costs are amortized based on the ratio of current gross revenues
for a product to the total current and projected gross revenues from that
product. It is reasonably possible that those estimates of anticipated
future gross revenues will be reduced significantly in the near term. As a
result, the carrying amount of the capitalized software costs may be reduced
in the near term. All other research and development costs are expensed as
incurred.
Intangible Assets
Intangible assets, consisting of organization costs and product patents, are
recorded at cost and are amortized on a straight-line basis over their
estimated useful life.
Accrued Expenses
The Company does not accrue a liability for employees' compensation for
future absences since the amount cannot be reasonably estimated.
Income Taxes
The Company utilizes the liability method of accounting for income taxes.
Under this method, deferred tax liabilities and assets are recognized for
the expected future tax consequences of temporary differences between the
carrying amounts and the tax basis of assets and liabilities. A valuation
allowance is required to offset any net deferred tax assets if, based upon
the available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized.
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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
New Accounting Pronouncements
In October 1997, the American Institute of Certified Public Accountants
(AICPA) issued the Statement of Position (SOP) 97-2, Software Revenue
Recognition, which will supersede SOP 91-1. SOP 97-2 has not changed the
basic rules of revenue recognition but does provide more guidance,
particularly with respect to multiple deliverables and "when and if
available" products. SOP 97-2 is effective for transactions entered into
for annual periods beginning after December 15, 1997. The Company will
adopt SOP 97-2 in fiscal 1999 and has not yet determined its impact.
Interim Financial Statements
The accompanying financial statements as of December 31, 1997 and for the
nine-month periods ended December 31, 1997 and 1996 are unaudited, but in
the opinion of management, include all adjustments consisting of normal
recurring adjustments necessary for a fair presentation of results for the
interim periods. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted, although the Company
believes that the disclosures included are adequate to make the information
presented not misleading. Results for the nine months ended December 31,
1997 are not necessarily indicative of the results that may be expected for
the year ending March 31, 1998.
Reclassification of Prior Year Balances
Certain reclassifications have been made to prior years' financial
statements to conform to the current presentation.
(C) INVENTORY
Inventory at March 31, 1997 totaling $245,196 is composed of finished goods
and work-in-process of $47,560 and $197,636, respectively. Inventory at
March 31, 1996 totaling $40,829 is composed of finished goods and work-in-
process of $16,676 and $24,153, respectively.
Cost of sales for the year ended March 31, 1996 included an inventory
writedown to the lower of cost or market of $447,768. Cost of sales for the
year ended March 31, 1995 included an inventory writedown to the lower of
cost or market of $420,764 and losses on inventory purchase commitments of
approximately $1,300,000.
(D) FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Furniture, equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
March 31,
--------------------
1997 1996
--------------------
<S> <C> <C>
Computer equipment and software $218,657 $130,418
Office equipment and furniture 22,813 17,887
Leasehold improvements 124,226 41,548
Capital lease--computer equipment 53,745 46,207
--------------------
419,441 236,060
Less--Accumulated depreciation 115,617 55,481
--------------------
$303,824 $180,579
====================
</TABLE>
Depreciation expense for the fiscal years ended March 31, 1997, 1996 and
1995 totaled $60,136, $32,535 and $19,213, respectively.
(E) NOTES PAYABLE
On September 19, 1996, the Company entered into a loan and security
agreement with related parties under which the Company may borrow up to a
total loan amount of $850,000 at an annual interest rate of 10%. As
collateral, the agreement gives the noteholders a security interest in all
tangible and intangible property the Company may now or in the future
possess. The balance outstanding at March 31, 1997 was $737,465, including
accrued interest. On August 14, 1997, the borrowing limit was increased to
$1,000,000 with a maturity date of December 31, 1997.
During the year ended March 31, 1997, the Company issued Senior Promissory
Notes with detachable warrants (the Promissory Notes) totaling $1,098,615
and bearing interest at 10% per annum. In fiscal 1997, the Company
converted the notes and accrued interest thereof, into Series E Promissory
Notes (see Note I). The Company issued each Promissory Note holder a
warrant to purchase one share of common stock for every share of Series E
preferred stock acquired upon this conversion. Certain note holders waived
their right to receive one common stock for every share of Series E
preferred stock acquired and instead received one such warrant for every
four shares of Series E preferred stock acquired (see Note K). Value
ascribed to these warrants are deemed immaterial. In connection with the
issuance of Series E preferred stock, the Company also issued to the
Promissory Note holders warrants to purchase Series E preferred stock (see
Note I).
During the years ended March 31, 1996 and 1995, the Company issued Senior
Promissory Notes with detachable warrants totaling $1,000,000 and bearing
interest at 10% per annum. Under the terms of the note agreement, the notes
are convertible immediately upon the occurrence of a subsequent financing on
or before September 1, 1995, into shares of the Company's equity securities
to be issued in such subsequent financing at a conversion price equal to the
per share price of the subsequent financing securities. In addition, the
holders are entitled to receive 500,000 detachable warrants calculated based
on a rate of one warrant for each $2 of principal invested (see also Note
K). Value ascribed to these warrants are deemed immaterial.
On January 7, 1997 and September 1, 1995, the Company converted the
Promissory Notes ($1,156,815 and $1,044,019, respectively, including accrued
interest) to Series E and D convertible preferred stock, respectively, at
conversion rates of $1.97 and $0.76 per share, respectively.
(F) LEASES AND COMMITMENTS
The Company has entered into certain capital leases for computer equipment.
Future minimum lease payments under capital leases are as follows:
<TABLE>
<S> <C>
Fiscal 1998 $10,807
Fiscal 1999 5,786
Fiscal 2000 546
-------
Total minimum lease payments 17,139
Amount representing interest 2,475
-------
Present value of minimum lease payments on
capital leases $14,664
=======
</TABLE>
The Company's lease expense under these capital leases for fiscal 1997, 1996
and 1995 was $3,660, $3,260 and $2,056, respectively.
The Company also holds real estate and equipment leases. On May 1, 1996,
the Company entered into a five-year lease for office space. The lease can
be extended up to an additional five years, and includes provisions for rent
escalation based on landlord's future electric, operating and tax costs.
The rent expense for fiscal 1997, 1996 and 1995 was $105,769, $68,392 and
$28,845, respectively. On September 29, 1996, the Company signed a three-
year operating lease agreement for a copier machine. The lease expenses
incurred in fiscal 1997 was $2,760.
At March 31, 1997, the Company has commitments under long-term operating
leases requiring approximate annual net rentals as follows:
<TABLE>
<S> <C>
1998 $149,062
1999 147,682
2000 143,543
2001 143,543
2002 11,962
--------
Total minimum rental payments $595,792
========
</TABLE>
(G) INCOME TAXES
The total provision for income for fiscal 1997 is comprised of $20,000 for
foreign withholding tax and $1,877 state minimum taxes. The provision for
income taxes for fiscal 1996 and 1995 was $2,358 and $456, respectively, due
to state minimum taxes. No provision for federal income taxes was recorded
for fiscal 1997, 1996 and 1995 due to the Company's recurring operating
losses.
The deferred tax assets are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net operating loss $4,029,000 $3,195,000
Inventory and other items 1,569,000 1,219,000
--------------------------
Total 5,598,000 4,414,000
Valuation allowance (5,598,000) (4,414,000)
--------------------------
$ - $ -
==========================
</TABLE>
Due to the uncertainty surrounding the realization of these favorable tax
attributes in future years, the net deferred tax assets have been fully
offset by a valuation allowance.
At March 31, 1997 and 1996, the Company had net operating loss (NOL)
carryforwards of approximately $10,006,000 and $7,934,000, respectively, for
federal and state tax reporting purposes. The federal NOL carryforwards
begin to expire in the year 2009. The NOL carryforwards may have an annual
limitation due to ownership changes under Internal Revenue Code, Section
382. The state NOL carryforwards will begin to expire in 1999.
(H) TROUBLED DEBT RESTRUCTURING
During the years ended March 31, 1996 and 1995, the Company restructured the
terms of various trade payable accounts. The restructuring agreements
included either a reduction of the payable or a granting of equity interest
or a combination of both. These transactions resulted in extraordinary
gains in fiscal 1996 and 1995 of $655,481 and $74,517, respectively. Under
the restructuring agreement, 198,175 common shares were issued in 1996. The
fair value per share of $.38 on the date of grant was determined by the
Board of Directors.
(I) STOCKHOLDERS' DEFICIT
Common Stock
During fiscal 1997, the Company increased the authorized number of shares of
common stock from 7,370,000 to 16,550,000. The voting, dividend and
liquidation rights of the holders of the common stock are subject to and
qualified by the rights of the holders of outstanding shares of preferred
stock. As of March 31, 1997, the Company has reserved 130,955 shares for
the exercise of stock options.
Series D and Series E Convertible Preferred Stock
Series D and Series E Convertible Preferred Stock (the Preferred Stock)
which was issued on August 31, 1995 and January 7, 1997, respectively, is
convertible at the holder's option into common stock in accordance with a
formula which would currently result in a one-for-one exchange. A mandatory
conversion is called for upon the closing of a public offering which meets
specified criteria. Except with respect to certain actions enumerated in
the Company's Certificate of Incorporation which require separate class
votes, stockholders of each series of preferred stock are entitled to one
vote for each share of common stock into which their shares can be converted
and vote together with the common stockholders. Preferred Stock, Series D
and E have a liquidation preference over common stock of $0.76 and $1.97,
respectively, per share plus any dividends unpaid.
In fiscal 1997, in connection with the issuance of Series E convertible
preferred stock, the Company issued warrants to purchase additional Series E
preferred stock (see Note K).
Stock Restriction Agreement
At March 31, 1997, the Company's outstanding shares of common and preferred
stock are subject to a stock restriction agreement. Subject to certain
exceptions, as outlined in the stockholders' agreement (the Agreement) dated
November 1, 1995, the holders of the Company's common and preferred stock
have the option to purchase additional shares in the event a stockholder
intends to sell such shares. Each holder is entitled to purchase a portion
of the stock intended for sale pro rata to the holding of common and
preferred stock, as set forth in the Agreement, at the seller's intended
sale price. If neither the Company nor the existing stockholders purchase
all of the offered shares, then the offered shares not so purchased may be
sold by the selling stockholder at any time within 120 days after the date
the offer was made under the same terms and conditions.
(J) STOCK OPTIONS
The 1993, 1994 and 1996 Incentive Stock Option Plans (the 1993 Plan, 1994
Plan and 1996 Plan) provides for the grant to officers and other employees
of the Company stock options which qualify as incentive stock options under
the applicable provision of the Internal Revenue Code. The maximum amount
of shares which may be issued under these plans are 100,000, 50,000 and
2,000,000 shares, respectively.
These Plans provide that the exercise price of all options granted shall be
at least equal to the fair market value of the Company's shares as of the
date on which the grant is made. The term of the options issued under the
Plans cannot exceed ten years. With respect to incentive stock options
granted to a participant owning more than 10% of the Company's shares, the
exercise price shall be at least 110% of the fair market value of the
Company's stock on the date of the grant.
Nonqualified Stock Option Agreement
On October 10, 1993, the Board of Directors approved a nonqualified stock
option agreement in connection with a royalty arrangement. The agreement
grants the option to purchase a maximum of 33,317 shares of its common stock
at the price of $0.75 per share. This nonqualified stock option agreement
expires on December 31, 1998.
Supplemental Disclosures for Stock-Based Compensation
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its Employee Stock-Based Incentive Plans. Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123), issued in 1995, defined a fair value method of
accounting for stock options and other equity instruments.
Under the fair value method, compensation cost is measured at the grant date
based on the fair value of the award and is recognized over the service
period, which is usually the vesting period. The Company elected to
continue to apply the accounting provisions of APB Opinion No. 25 for stock
options. The required disclosures under SFAS No. 123 are made below.
A summary of the Company's stock option activity for the three years ended
March 31, 1997 is as follows:
<TABLE>
<CAPTION>
Weighted Weighted
Incentive Average Nonqualified Average
Stock Exercise Stock Exercise
Options Price Options Price
--------- -------- ------------ --------
<S> <C> <C> <C> <C>
Outstanding at March 31, 1994 83,536 $.38 80,793 $ .58
Issued in 1995 54,502 .38 15,528 1.12
Exercised in 1995 - - 50,156 .54
------- -------
Outstanding at March 31, 1995 138,038 .38 46,165 .81
Issued in 1996 20,214 .38 244,786 .38
Expired in 1996 22,150 .38 - -
Exercised in 1996 - 12,848 .96
------- -------
Outstanding at March 31, 1996 136,102 .38 278,103 .42
Expired in 1997 16,000 .38 - -
Exercised in 1997 2,250 .38 - -
------- -------
Outstanding at March 31, 1997 117,852 .38 278,103 .42
======= =======
</TABLE>
Summarized information about stock options outstanding at March 31, 1997 is
as follows:
<TABLE>
<CAPTION>
Exercisable
Weighted ---------------------
Average Weighted Weighted
Range of Number of Remaining Average Average
Exercise Options Contractual Exercise Number of Exercise
Prices Outstanding Life (years) Price Options Price
-------- ----------- ------------ -------- --------- --------
<S> <C> <C> <C> <C> <C>
$.38 362,638 4 $.38 245,433 $.38
$.75 33,317 1 $.75 33,317 $.75
</TABLE>
Options for 170,570 and 90,362 shares were exercisable at March 31, 1996 and
1995, respectively. During fiscal 1997, the Company repriced its incentive
stock options by changing the exercise price to $.38 per share. The Company
had determined that the exercise price of $.38 per share was not below the
fair value of the common stock on the date when the exercise price of the
options was changed to $.38. Accordingly, no compensation expense was
recorded.
The impact on net loss would have been immaterial for fiscal 1997 and 1996,
had the compensation cost for the Company's stock option plans been
determined based on fair value at the grant date consistent with the
provisions of SFAS No. 123.
Other
Pursuant to an agreement dated May 3, 1996 between a customer and the
Company, the customer has an option to purchase the Company's common stock
having a value at the time of purchase in an amount not exceeding $500,000.
The number of shares purchased will be determined based on a formula
outlined in the agreement using the fair value of the common stock of the
Company on the date of purchase. This option is exercisable six months from
the agreement date and expires eighteen months from the date of this
agreement. The customer also has a right to apply the unrecouped portion of
its prepaid royalties, as reflected on the last accounting statement
rendered to the Company prior to such purchase, toward the purchase price of
these shares. The Company has deferred all amounts received under this
agreement.
(K) WARRANTS
On January 7, 1997, February 24, 1997 and February 26, 1997, the Company
issued 764,280 detachable warrants to the preferred stock Series E holders
at a rate of one warrant for every two shares of Series E preferred stock
held. Each warrant is exercisable into one Series E preferred share at an
exercise price of $1.97. Warrants issued on January 7, 1997 and February
24, 1997 are exercisable on or before January 6, 2002. Warrants issued on
February 26, 1997 are exercisable on or before February 25, 2002. On
January 7, 1997 and February 21, 1997, the Company also issued 81,550 and
10,550 detachable warrants, respectively, to the Series E placement agent
based on the terms outlined in the Placement Agency Agreement. These
warrants are exercisable into Series E preferred stock on a one-for-one
basis and are exercisable at a price of $1.97 a share. Warrants issued on
January 7, 1997 and February 21, 1997 to the placement agent are exercisable
on or before January 6, 2007 and February 20, 2007, respectively.
On April 30, 1997, the Company issued 764,281 additional warrants to
preferred stock Series E holders at a rate of one warrant for every two
shares of Series E preferred stock held. Each warrant is exercisable into
one Series E preferred share at an exercise price of $1.97 on or before
January 6, 2002.
In fiscal 1997, the Company issued 282,734 detachable warrants to the
holders of the Senior Promissory Notes issued in 1997. Each warrant is
exercisable into one common share at an exercise price of $1.97 prior to
January 7, 2002. In lieu of exercising the warrant, the holder may elect to
receive shares equal to the fair market value of the warrant. The fair
value of these warrants are immaterial.
In April 1995, the Company issued 500,000 detachable warrants to the holders
of the Senior Promissory Notes. Each warrant is exercisable into one common
share at an exercise price of $2 during the period from April 1995 to April
2000. In lieu of exercising the warrant, the holder may elect to receive
shares equal to the fair market value of the warrant. The fair value of
these warrants is immaterial.
As of March 31, 1997, no warrants have been exercised.
(L) REPURCHASE OF DISTRIBUTION RIGHTS
In fiscal 1997, the Company entered into an agreement with a significant
customer to reacquire for $900,000 the licensing and distribution rights to
three interactive CD-ROM titles. These titles include Quest for Fame,
Virtual Star and Rolling Stone. The Company previously developed and
delivered the licensing and distribution rights to the Quest for Fame and
the Virtual Star titles in fiscal 1996 and recognized revenue of $1,011,000
and $350,000, respectively, for each title, in fiscal 1996. The Rolling
Stone title is currently being developed and approximately $950,000 of
advance payments collected from this customer in fiscal 1997 prior to this
agreement has been recognized as revenue in fiscal 1997. In fiscal 1997,
the Company amortized under sales and marketing expense the $900,000 paid to
reacquire the licenses described above. As of March 31, 1997, $860,000 of
this amount was outstanding and payable under this agreement.
(M) SIGNIFICANT CUSTOMERS
The following represents significant customer revenue for the year ended
March 31, 1997:
<TABLE>
<S> <C>
Customer A 59%
Customer B 30
--
89%
==
</TABLE>
(N) SUBSEQUENT EVENTS AFTER MARCH 31, 1997
On September 19, 1997, the Company signed a letter confirming certain terms
describing the intention of the stockholders of the Company to exchange the
Company's shares for a certain number of shares of Associated Technologies,
Inc. (AT), a Nevada company. In connection with this deal, the Company
borrowed $500,000 from AT with an interest rate of 10% maturing on December
31, 1997.
Subsequent to March 31, 1997, the Company began negotiating to enter into a
tentative agreement with a significant customer to reacquire certain titles.
The Company is unable to quantify the outcome of this negotiation due to the
uncertain nature of this negotiation.
On December 16, 1997, the Board of Directors of the Company approved the
issuance of nonqualified stock options to one of its employees. The
agreements grant options to purchase 307,321 shares at $.38 per share,
vesting over two years, and 37,679 shares at $3.69 per share, vesting over
two years. These options expire in five years from the date of grant.
(O) SUBSEQUENT EVENTS AFTER MARCH 31, 1997 (UNAUDITED)
On January 6, 1998, the Company entered into a Merger Agreement with
AT in connection with the Securities and Exchange Agreement described below.
On December 19, 1997, the Company and its note holders entered into a
Securities Exchange Agreement with AT. In accordance with the terms of the
Securities Exchange Agreement, AT will issue 3,144,962 shares of common
stock in exchange for all of the Company's common stock, Series D and Series
E Convertible Preferred Stock and the Company's outstanding notes, including
accrued interest at December 19, 1997. In addition, the Securities Exchange
Agreement provides for the conversion of a promissory note issued by AT to
First Sydney Investments Pty Ltd, a party related to AT, into 220,000 shares
of AT's common stock. The initial exchange of securities occurred on
January 8, 1998 at which time the Company's security holders controlled
more than 50% of the issued and outstanding shares of AT. The balance of
the exchange is expected to be completed upon issuance of a private
placement memorandum or similar document. The completion date is expected
to be approximately May 30, 1998. As a result of this acquisition, the
Company's independent accountants, Coopers & Lybrand L.L.P. resigned in
January.
In anticipation of the merger, AT advanced to the Company $610,000 in the
form of promissory notes, including the note referred to in Note N. The
balance of such at December 31, 1997 was $624,347 inclusive of accrued
interest.
Associated Technologies, Inc.
Unaudited Pro Forma Combined Condensed Financial Statements
The following unaudited pro forma combined condensed statements combine the
historical balance sheet and statement of operations of Virtual Music
Entertainment, Inc. (VME) and Associated Technologies, Inc. (AT). Upon
completion of the share exchange called for in the Securities Exchange
Agreement dated December 19, 1997, former note holders and preferred and
common stock holders of VME will hold 55% of the issued and outstanding
shares of AT. As a result, the merger is being accounted for, and the pro
forma combined condensed financial information is presented as, a reverse
merger with VME as the acquirer for accounting purposes. The purchase price
has been determined by taking the issued and outstanding shares of AT common
stock plus the AT common stock to be issued in exchange for certain related
party debt times the average closing price of the stock five days before and
after the initial securities exchange, plus cash to be paid to De-Minimus
VME common stockholders, plus acquisition related expenses. The unaudited
pro forma combined condensed balance sheet as of December 31, 1997 gives
effect for the merger as if the transaction occurred on that date. The
unaudited pro forma combined condensed consolidated statement of operations
the year ended December 31, 1997 gives effect for the merger as if it had
occurred at January 1, 1997. The unaudited pro forma combined condensed
statement of operations the year ended December 31, 1997 for VME reflects
historical costs recast by adding results of the nine months ended December
31, 1997 to the results of operations for the three months ended March 31,
1997.
In accordance with the terms of the Securities Exchange Agreement, AT will
issue 3,144,962 shares of common stock in exchange for all of the VME Common
Stock, Series D and Series E Convertible Preferred Stock and the VME Notes
Payable outstanding including accrued interest at December 19, 1997. In
addition, the Securities Exchange Agreement provides for the conversion of
a promissory note issued by AT to First Sydney Capital Limited, a related
party, into 220,000 shares of AT common stock. The initial exchange of
securities occurred on January 8, 1998 at which time VME security holders
controlled more than 50% of the issued and outstanding shares of AT. The
balance of the exchange is expected to be completed upon issuance of a
private placement memorandum or similar document. The completion date is
expected to be approximately May 30, 1998. It is anticipated that upon
completion of the merger, VME shareholders will continue to control more
than 50% of the outstanding shares of AT.
The unaudited pro forma combined condensed financial statements may not be
indicative of the actual results if the merger had it actually occurred on
the above dates, or of future results of operations. The pro forma combined
condensed financial statements are based on management's preliminary
estimate of the allocation of the purchase price, the final allocation of
which may differ.
The accompanying unaudited pro forma combined condensed financial statements
should be read in connection with the historical financial statements of VME
and AT.
Associated Technologies, Inc.
Unaudited Pro Forma Combined Condensed Balance Sheet
December 31, 1997
<TABLE>
<CAPTION>
Virtual Music Associated Pro Forma Combined
Entertainment, Inc. Technologies, Inc. Adjustments Company
------------------- ------------------ ----------- --------
<S> <C> <C> <C> <C>
Cash $ 4,738 $ 643,847 $ (18,000)(1) $ 630,585
Accounts Receivable 27,114 330,342 357,456
Inventory 116,619 180,867 297,486
Prepaid R&D Expense - 39,726 39,726
Other Prepaid Expenses 14,588 - 14,588
Due From VME Plus Accrued Interest 624,347 (624,347)(2) -
Other Current Assets 28,590 - 28,590
----------------------------------------------------------------------------
Total Current Assets 191,649 1,819,129 (642,347) 1,368,431
Goodwill 1,159,036 (3) 1,159,036
Property Plant & Equipment (net) 307,205 112,119 419,324
Capitalized Software (net) 465,000 - 465,000
Prepaid Royalties 40,000 40,000
Capitalized Merger Costs 225,352 - (225,352)(4) -
----------------------------------------------------------------------------
Net Property, Plant & Equipment 1,037,557 112,119 933,684 2,083,360
----------------------------------------------------------------------------
Total Assets $ 1,229,206 $ 1,931,248 $ 291,337 $ 3,451,791
============================================================================
Liabilities & Shareholders' Deficit
Accounts Payable 800,637 1,174,077 1,974,714
Royalties Payable 92,535 - 92,535
Distribution Rights Payable 820,000 - 820,000
Accrued Expenses 409,195 - 167,648 (5) 576,843
Deferred Income & Distributor
Advances 1,667,200 867,875 2,535,075
Note Payable 1,067,813 600,000 (1,067,813)(6) 600,000
Note Payable, Related Party 624,347 625,601 (1,188,847)(7) 61,101
Capital Lease Obligations 7,500 7,500
Accrued Employee Benefits 34,605 34,605
----------------------------------------------------------------------------
Total Current Liabilities 5,489,227 3,302,158 (2,089,012) 6,702,373
Capital Lease Obligation 699 - - 699
----------------------------------------------------------------------------
Total Liabilities 5,489,926 3,302,158 (2,089,012) 6,703,072
----------------------------------------------------------------------------
Convertible Preferred Series D 34,341 (34,341)(8) -
Convertible Preferred Series E 15,286 (15,286)(8) -
Common Stock 25,345 2,304 (21,980)(9) 5,669
Additional Paid in Capital 12,932,208 3,512,995 1,485,107 (10) 17,930,310
Foreign Exchange Reserve 36,119 (36,119)(11) -
Accumulated Deficit (17,267,900) (4,922,328) 1,002,968 (12) (21,187,260)
----------------------------------------------------------------------------
Total Shareholders' Deficit (4,260,720) (1,370,910) 2,380,349 (3,251,281)
----------------------------------------------------------------------------
Total Shareholders' Deficit &
Liabilities $ 1,229,206 $ 1,931,248 $ 291,337 $ 3,451,791
============================================================================
</TABLE>
Associated Technologies, Inc.
Unaudited Pro Forma Combined Condensed Statement of Operations
Twelve Months Ended December 31, 1997
<TABLE>
<CAPTION>
Virtual Music Associated Pro Forma Combined
Entertainment, Inc. Technologies, Inc. Adjustments Company
------------------- ------------------ ----------- --------
<S> <C> <C> <C> <C>
Net Sales $ 2,241,130 $ 2,394,145 $ 4,635,275
Cost of Sales 2,994,809 1,479,866 4,474,675
----------------------------------------------------------------------------
Gross Profit (753,679) 914,279 (160,600)
Operating Expenses:
Selling, General &
Administrative 2,867,617 2,390,558 5,258,175
Research & Development 901,832 916,279 1,818,111
Charge for in process R & D 3,919,360 (1)
(3,919,360)(2)
Amortization of Goodwill - 165,577 (3) 165,577
----------------------------------------------------------------------------
Total Operating Expenses 3,769,449 3,306,837 165,577 7,241,863
----------------------------------------------------------------------------
Loss from Operations (4,523,128) (2,392,558) (165,577) (7,081,263)
Interest Expense 89,065 75,927 (89,167)(4) 75,825
Provision for income taxes 56,413 - - 56,413
----------------------------------------------------------------------------
Loss before extraordinary item (4,668,606) (2,468,485) (76,410) (7,213,501)
Extraordinary item, gain on debt
extinguished 191,209 191,209
----------------------------------------------------------------------------
Net Loss $ (4,668,606) $(2,277,276) $ (76,410) $ (7,022,292)
============================================================================
Pro forma net loss per share:
Net loss per Common Share $ (1.02) $ (1.26)
====================================================
Weighted average common share
outstanding 2,226,399 3,364,962(5) 5,591,361
====================================================
</TABLE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
(1) Represents estimated cash to be paid to De-Minimus shareholders of VME
Common Stock
(2) Elimination of Associated Technologies ("AT") Note Receivable from VME
of $610,000 plus accrued interest.
(3) Goodwill calculated as follows:
<TABLE>
<S> <C>
Value of 2,303,520 AT shares @ $1.53 per share $ 3,524,386
Value of 220,000 of AT Shares converted from
convertible debt @ $1.53 per share 336,600
Cash 18,000
Estimated Merger Costs 393,000
-----------
Purchase Price 4,271,986
Net Deficit of AT Acquired 1,370,910
Estimated Purchased Research & Development (3,919,360)
Convertible Debt Exchanged (564,500)
-----------
Goodwill $ 1,159,036
===========
</TABLE>
* Purchased Research & Development calculated by determining the net
present value of five years net cash flows discounted by a risk
adjusted interest rate for certain research and development projects
in process at the date of acquisition.
(4) Elimination of VME Capitalized merger Costs.
(5) Additional expected merger costs not yet incurred.
(6) Elimination of VME Senior Notes plus accrued interest exchanged for AT
common stock.
(7) Reflects the exchange of $564,500 of Convertible Debt issued by AT to
First Sydney Capital Limited, a related party, for 220,000 shares of
AT and the elimination of $624,347 due to AT from VME.
(8) Elimination of VME Series D and E Preferred Shares exchanged for AT
common stock.
(9) Adjustments to Par value:
<TABLE>
<S> <C>
Par Value of new AT Shares $ 3,145
Shares issued to AT convertible 220
Elimination of VME Par Value (25,345)
--------
Net Adjustment to Par Value $(21,980)
========
</TABLE>
(10) Adjustments to paid in capital as follows:
<TABLE>
<S> <C>
Exchange of VME Preferred D and E $ 49,627
2,303,520 shares @ $1.53 per share 3,524,386
220,000 Shares Converted @ $1.53 per share 336,600
Par Value of shares held by AT (2,304)
Par Value of Shares Converted (220)
Par Value of Shares Issued to VME (3,145)
VME Debt exchanged for 420,982 shares of AT common stock 1,067,813
Elimination of VME Common Stock Par Value 25,345
Elimination of AT paid in capital (3,512,995)
-----------
Net Adjustment to paid in capital $ 1,485,107
===========
</TABLE>
(11) Elimination of AT foreign exchange reserve.
(12) Adjustments to accumulated deficit as follows:
<TABLE>
<S> <C>
Elimination of Accumulated deficit of AT $ 4,922,328
Estimated value of purchased Research and Development (3,919,360)
-----------
Net Adjustment to Accumulated Deficit $ 1,002,968
===========
</TABLE>
Notes to Unaudited Pro Forma Combined Condensed Statement of Operations
(1) Reflects expense associated with the in process research and
development purchased from Associated Technologies.
(2) Elimination of non-recurring expense associated with the in process
research and development purchased from Associated Technologies.
(3) One year's amortization of acquisition related goodwill. Amortization
period is seven years.
(4) Elimination of interest on AT convertible debt $14,500
and VME Senior Debt exchanged for AT shares 74,667
-------
Total Interest Adjustments $89,167
=======
(5) Reflects 3,144,962 shares issued to VME Security holders and 220,000
issued to AT convertible debt holders.
ASSOCIATED TECHNOLOGIES INC.
AND SUBSIDIARIES
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Associated Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Associated
Technologies, Inc. as of December 31, 1997 and 1996 and the related
consolidated statements of operations, changes in stockholders' equity
(deficit), and consolidated cash flows for the years ended December 31, 1997
and 1996. These consolidated 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 general accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Associated Technologies as of December 31, 1997 and 1996, and
the consolidated results of its operations, changes in stockholders' equity
(deficit) and its consolidated cash flows for the years ended December 31,
1997 and 1996 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company and its subsidiaries will continue as a going
concern. As shown in the consolidated financial statements, the Company and
its subsidiaries have a consolidated working capital deficiency of
$2,107,376 at December 31, 1997 and a consolidated accumulated deficit of
$4,922,328. The Company and its subsidiaries have suffered losses from
operations and have a substantial need for working capital.
This raises substantial doubt about the Company's and its subsidiaries
ability to continue as a going concern. Management's plans in regard to
these matters are described in Note 1 to the consolidated financial
statements. The accompanying financial statements do not include any
adjustments that may result from the outcome of this uncertainty.
Stanton Partners
Public Accountants
/s/ Stanton Partners
Perth, Western Australia
April 9, 1998
ASSOCIATED TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS 12/31/97 12/31/96
-------- --------
CURRENT ASSETS
<S> <C> <C>
Cash $ 643,847 $ 18,054
Accounts receivable 330,342 181,341
Inventories (Note 3) 180,867 187,062
Prepaid expenses 39,726 759,051
--------------------------
TOTAL CURRENT ASSETS 1,194,782 1,145,508
--------------------------
NON CURRENT ASSETS
Note Receivable plus accrued interest
(Note 12) 624,347 0
--------------------------
PROPERTY, PLANT, AND EQUIPMENT
Equipment (Note 4) 370,817 425,003
Accumulated depreciation and amortization (258,698) (309,661)
--------------------------
NET PROPERTY, PLANT, AND EQUIPMENT 112,119 115,342
--------------------------
TOTAL ASSETS $1,931,248 $1,260,850
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT)
CURRENT LIABILITIES
Creditors and accrued expenses $1,174,077 $ 479,543
Deferred Income (Note 5) 867,875 0
Notes payable (Note 6) 1,225,601 66,562
Provisions 34,605 27,216
--------------------------
TOTAL CURRENT LIABILITIES 3,302,158 573,321
--------------------------
LONG-TERM LIABILITIES (Note 6) 0 500,321
--------------------------
TOTAL LIABILITIES 3,302,158 1,073,642
--------------------------
SHAREHOLDERS' EQUITY/(DEFICIT)
Common stock par value $.001:
25,000,000 shares authorized; 2,303,520
shares issued(2,148,000 at 12/31/96) 2,304 2,148
Additional paid-in capital 3,512,995 2,830,112
(Deficit) accumulated (4,922,328) (2,645,052)
Foreign currency translation reserve 36,119 0
--------------------------
TOTAL SHAREHOLDERS' EQUITY/(DEFICIT) (1,370,910) 187,208
--------------------------
$1,931,248 $1,260,850
==========================
</TABLE>
ASSOCIATED TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended
--------------------------
12/31/97 12/31/96
-------- --------
<S> <C> <C>
Operating revenue $ 2,394,145 $ 459,883
Cost of sales (1,479,866) (358,118)
----------------------------
GROSS PROFIT 914,279 101,765
Operating Expenses (3,306,837) (2,749,306)
----------------------------
Loss from Operations (2,392,558) (2,647,541)
Interest Expense, Net (75,927) (84,547)
LOSS FROM OPERATIONS BEFORE
EXTRAORDINARY ITEM (2,468,485) (2,732,088)
Extraordinary item (Note 9) 191,209 88,036
----------------------------
NET LOSS $(2,277,276) $(2,644,052)
============================
NET LOSS PER COMMON SHARE
Net basic and diluted loss before
extraordinary item per weighted average
common share outstanding $ (1.11) $ (1.94)
============================
Net loss per weighted average common
share outstanding - basic and diluted $ (1.02) $ (1.88)
============================
Weighted average number of common shares
outstanding 2,226,399 1,409,414
============================
</TABLE>
ASSOCIATED TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY/(DEFICIT)
PERIOD FROM AUGUST 9, 1990 (DATE OF INCEPTION) TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
Common Stock Foreign Total
-------------------- Additional Currency Shareholder
Number of .001 Par Paid Translation (Deficit) Equity
Shares Value In Capital Reserve Accumulated (Deficit)
--------- -------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at 8/9/90 (Date of inception)
Issuance of common stock (restricted)
at $.001 per share at 8/9/90 1,000,000 1,000 0 0 0 1,000
Net loss for period 0 0 0 0 (1,000) (1,000)
-----------------------------------------------------------------------------
Balances at 12/31/90 1,000,000 1,000 0 0 0 0
Net income for year 0 0 0 0 0 0
-----------------------------------------------------------------------------
Balances at 12/31/91 1,000,000 1,000 0 0 0 0
Net income for year 0 0 0 0 0 0
-----------------------------------------------------------------------------
Balances at 12/31/92 1,000,000 1,000 0 0 0 0
Net income for year 0 0 0 0 0 0
-----------------------------------------------------------------------------
Balances at 12/31/93 1,000,000 1,000 0 0 0 0
Net income for year 0 0 0 0 0 0
-----------------------------------------------------------------------------
Balances at 12/31/94 1,000,000 1,000 0 0 0 0
Net income for year 0 0 0 0 0 0
-----------------------------------------------------------------------------
Balances at 12/31/95 1,000,000 1,000 0 0 0 0
Issuance of common stock (restricted)
at $5.00 per share for cash at 1/10/96 20,000 20 99,980 0 0 100,000
Issuance of common stock ( 80,000 Regulation
S and 100,000 restricted) at $0.001
per share to acquire subsidiary
and associated inter-company debt at 6/28/96 180,000 180 0 0 0 180
Issuance of common stock (restricted)
at $2.00 per share for expenses at 6/28/96 230,000 230 459,770 0 0 460,000
Issuance of common stock (restricted)
at $2.00 per share to retire debt
at 9/30/96 270,000 270 539,730 0 0 540,000
Issuance of common stock (Regulation S)
at $4.50 per share to retire debt
at 9/30/96 218,000 218 980,782 0 0 981,000
Issuance of common stock (restricted)
at $5.00 per share for prepaid
expenses at 9/30/96 150,000 150 749,850 0 0 750,000
Issuance of common stock (restricted)
at $0.001 per share at 9/30/96 80,000 80 0 0 0 80
Net loss for year 0 0 0 0 (2,644,052) (2,644,052)
-----------------------------------------------------------------------------
Balances at 12/31/96 2,148,000 $2,148 $2,830,112 0 (2,645,052) $ 187,208
</TABLE>
ASSOCIATED TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY/(DEFICIT)
PERIOD FROM AUGUST 9, 1990 (DATE OF INCEPTION) TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
Common Stock Foreign Total
------------------- Additional Currency Shareholder
Number of .001 Par Paid Translation (Deficit) Equity
Shares Value In Capital Reserve Accumulated (Deficit)
--------- -------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock (Reg S) at
$2 per share to retire debt at 6/30/97 95,605 96 191,113 0 0 191,209
Issuance of common stock (Reg S) at
$2 per share to retire debt at 6/30/97 59,915 60 119,770 0 0 119,830
Options issued on March 10, 1997
in connection with a loan of $300,000 0 0 52,500 0 0 52,500
Options issued on June 3, 1997 in
connection with a loan of $300,000 0 0 67,500 0 0 67,500
Options originally issued in 1996 but
subsequently renegotiated in
December 1997 0 0 42,000 0 0 42,000
Options issued on December 22, 1997
in connection with a loan of $400,000 0 0 140,000 0 0 140,000
Options issued on December 31, 1997 in
connection with a loan of $200,000 0 0 70,000 0 0 70,000
Foreign currency translation reserve 0 0 0 36,119 0 36,119
Net loss for the year 0 0 0 0 (2,277,276) (2,277,276)
---------------------------------------------------------------------------
Balance at 12/31/97 2,303,520 $2,304 $3,512,995 $36,119 $(4,922,328) $(1,370,910)
===========================================================================
</TABLE>
ASSOCIATED TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended
----------------------------
12/31/97 12/31/96
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(2,277,276) $(2,644,052)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Gain on sale of fixed assets (15,188) (88,036)
Depreciation 59,946 32,237
Amortization of goodwill 0 845,012
Amortization of debt discount 372,000 0
Provisions 7,389 12,617
Gain on equity settlement of debt outstanding (191,209) 0
Changes in assets and liabilities:
Accounts receivable (149,001) (202,039)
Inventories 6,195 127,550
Prepaid expenses 719,325 (758,376)
Notes payable 323,104 142,547
Creditors and accrued expenses 371,430 14,702
Deferred Income 867,875 0
----------------------------
NET CASH PROVIDED BY (used in)
OPERATING ACTIVITIES 94,590 (2,517,838)
----------------------------
CASH FLOWS FROM INVESTING
ACTIVITIES
Proceeds from sale of fixed assets 26,083 713,797
Purchases of Fixed Assets (67,618) (18,752)
Cash acquired from subsidiaries 0 147,939
----------------------------
NET CASH PROVIDED BY (used in)
INVESTING ACTIVITIES (41,535) 842,984
----------------------------
CASH FLOWS FROM FINANCING
ACTIVITIES
Loan repayments - Bank $ 0 $ (657,307)
Proceeds from sale of shares 502,248 2,831,260
Loan to acquisition target (624,347) 0
Loans - related parties 627,528 500,321
Loan repayments - related parties (502,248) (1,047,928)
Other loans - repaid (681,562) 0
Other loans - received 1,215,000 66,562
----------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 536,619 1,692,908
----------------------------
Effect of exchange rates on cash and cash
equivalents 36,119 -
NET INCREASE IN CASH 625,793 18,054
CASH AT BEGINNING OF PERIOD 18,054 0
----------------------------
CASH AT END OF PERIOD $ 643,847 $ 18,054
============================
Cash Paid for Interest $ 92,716 $ 84,502
============================
</TABLE>
ASSOCIATED TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO AND FORMING PART OF THE ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1997
1. Nature of the Business
The Company was incorporated in Nevada on August 8, 1990 and was
formed for the purpose of acquiring other businesses. The Company was re-
incorporated in Delaware on October 16, 1997. The Company had no operations
until June 1996 when it acquired the outstanding shares of Ogenic
Technologies Pty Ltd, a Company in the Australian equivalent of Chapter 11
bankruptcy.
The Company's financial statements have been presented on the basis
that it is a going concern, which contemplates the realization of assets and
the satisfaction of liabilities in the normal course of business. The
Company incurred operating losses since its inception and has an accumulated
deficit and working capital deficiency at December 31, 1997 of $4,922,328
and $2,107,376 respectively. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. Management's plan to
continue operations for the next twelve months is principally based upon
increased net sales combined with reduced expenditures and obtaining
additional financing. However, there can be no assurance that the Company
will obtain necessary financing to fund operations. The financial
statements do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.
2. Statement of Accounting Policies
The financial statements have been prepared on the basis of historical
costs. The consolidated accounts of the Company include the operating
results of subsidiaries from the date of acquisition. Inter-company
transactions and associated gains or losses, are eliminated. The Company
recognizes income and expense based on the accrual method of accounting.
The following is a summary of the significant accounting policies adopted by
the Company in the preparation of financial statements. Certain re-
classifications have been made to prior years' financial statements to
conform to the current presentation.
a) Revenue
Operating revenue represents revenue earned from the sale of the
group's and other manufactured products and project management and
engineering services, net of returns, trade allowances and duties and
taxes paid and revenue earned in regard to Research & Development
contracts.
All contracts which are on a fixed price basis are accounted for
on the basis that revenue and associated expenses, are recognized in
proportion to the progress of each contract when the following
conditions are satisfied:
- Total contract revenues to be received can be reliably estimated.
- The costs to complete the contract can be reliably estimated.
- The stage of contract completion can be reliably determined.
- The costs attributable to the contract to date can be clearly
identified and can be compared with prior estimates.
b) Inventories
With the exception of contract work in progress all inventories
are valued at the lower of the cost or net realizable value. The cost
of manufactured products includes direct materials, direct labor and
an appropriate portion of variable and fixed overhead.
c) Research & Development
The company expenses costs associated with research and
development as incurred.
d) Property, Plant and Equipment
Property, plant and equipment are recorded at cost.
Depreciation is calculated using the reducing balance method over the
estimated useful lives of the assets, typically 3 to 10 years.
The gain or loss of disposal of all fixed assets is determined
as the difference between the net book value of the asset at the time
of disposal and the proceeds of disposal.
e) Intangible Assets
Intangible assets, consisting of goodwill arising on acquisition
of subsidiaries are capitalized and amortized over a maximum period of
7 years, with the exception of the goodwill disclosed in Note 5.
f) Income Tax
The Company adopts a liability method of tax effect accounting
whereby the income tax expense shown in the Profit & Loss Account is
based on the operating profit before income tax adjusted for permanent
differences.
Timing differences (which arise due to the different accounting
periods in which items of revenue and expense are included in the
determination of operating profit before income tax and taxable
income), are either recorded as a provision for deferred income tax or
as an asset described as future income tax benefit at the rate of
income tax applicable to the period in which the benefit will be
received or the liability will become payable.
Future income tax benefits in relation to tax losses are not
recorded unless there is virtual certainly of realization of the
benefit.
g) Foreign Currency
Foreign currency transactions are translated into US currency at
the rate of exchange at the date of the transaction. At balance date
amounts payable to and by the company in foreign currencies have been
translated to US currency at rates of exchange at balance date.
Exchange differences relating to short term monetary items and long
term monetary items of an indeterminate life are brought to account in
the Profit & Loss Account when they arise. The cumulative effect of
foreign currency translations have been recorded in the Company's
equity accounts.
h) 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 disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during that reporting period. Actual results
could differ from those estimates.
3. Inventories
Inventories at December 31, 1997 totaling $180,867 is composed of
finished goods, raw materials and work in process of $15,790, $112,609 and
$52,468 respectively. Inventories at December 31, 1996 totaling $187,062 is
composed of raw materials and work in process of $115,947 and $71,115
respectively.
4. Property, Plant and Equipment
<TABLE>
<CAPTION>
December 31
-----------------------
1997 1996
---- ----
<S> <C> <C>
Plant and Equipment at cost $ 370,817 $ 425,003
Less accumulated depreciation (258,698) (309,661)
-----------------------
$ 112,119 $ 115,342
=======================
</TABLE>
5. Intangible Assets
On June 28, 1996, the Company acquired all of the outstanding common
stock of Ogenic Technologies Pty Limited in exchange for shares in the
Company. The acquisition was not treated as a business combination under
APB 16. As a result, an amortization expense was charged to operations for
the year ended December 31, 1996 of $845,012 calculated as follows:
<TABLE>
<CAPTION>
Year Ended
December 31, 1996
-----------------
<S> <C>
Par value of shares exchanged $ 180
Excess of liabilities over assets acquired 844,832
--------
Amortization charged to operations $845,012
========
</TABLE>
6. Deferred Income
Deferred income is the unearned portion of fees received on a research
contract with a total value of $1,637,500. At December 31, 1997, this
contract was 47% completed and accordingly, that proportion of the income
and expense has been recorded against current year based upon the percentage
of completion method. In 1998 it is expected that the corresponding
expenses will be in the order of $300,000 and net income will be
approximately $567,875.
7. Notes Payable & Loans
During 1997, the Company received a loan totaling $113,028 from First
Sydney Capital Limited. $1,927 of the loan was repaid during the year (see
below). The loan is repayable on demand and bears interest at 12%.
On September 18, 1997, the Company issued a promissory note payable to
First Sydney Capital Limited of $500,000 due December 31, 1997 bearing
interest of 10%. The note was modified as part of the Security Exchange
Agreement between the Company and Virtual Music Entertainment, Inc. dated
December 19, 1997 (See Note 12) where by the note is to be converted into
common stock of the Company at a rate of one share per $2.50 of principal
outstanding. Such conversion shall occur upon completion of the merger
between the Company and Virtual Music Entertainment, Inc.
During the fourth quarter of 1997, the Company issued $600,000 in
promissory notes secured by the pledge of shares in the Company's subsidiary
and a commitment to pledge shares acquired in Virtual Music Entertainment,
Inc. The note bears interest at a rate of 10% and is payable the earlier of
one year or upon the Company obtaining additional financing. In conjunction
with the note, the Company issued 412,500 options to purchase the Company's
common stock for the lower of $2.00 or the daily average closing bid price
for the company's shares for the three months ended June 30, 1998.
During 1996, the company received unsecured loans of $1,098,403 and
$922,418 from related parties, bearing 12% and 0% interest respectively.
$1,521,000 of these loans were exchanged for 488,000 shares of common stock
during 1996. The balance outstanding at December 31, 1996 was $500,321.
During 1997, the whole of this amount plus a further $1,927 was exchanged
for 155,520 shares of common stock.
During 1997, the company issued promissory notes for loans totaling
$1,215,000 including $600,000 referred to above. These loans bore interest
of between 0% and 10%. In addition, the company issued to these loan
providers, various share options which are further described in note 11.
$600,000 of these loans were repaid during the year plus interest of
$15,000.
The company also repaid the balance of a short term loan for $66,562
outstanding at December 31, 1996.
8. Leases and Commitments
The company has no capital or equipment leases.
On September 2, 1996, the company entered into a five year real
estate lease for manufacturing, storage and office space. The lease includes
provision for fixed annual rental increases and provisions for escalation in
charges for outgoings in regard to rates, taxes and other expenses.
At December 31, 1997, the company has commitments in regard to the
above real estate rental lease as follows:
<TABLE>
<S> <C>
1998 $ 68,014
1999 69,532
2000 72,039
2001 48,262
--------
$257,847
========
</TABLE>
9. Income Taxes
No provision for federal income taxes was recorded for year ended
December 31, 1997 and 1996 due to the company's recurring operating losses.
The Company files unconsolidated tax returns in the US for the parent
company.
The deferred tax assets for the parent company are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net Operating loss $ 569,216 $ 286,945
Other item 104,160 -
Valuation allowance (673,376) (286,945)
------------------------
$ 0 $ 0
========================
</TABLE>
Due to the uncertainty surrounding the realization of these favorable
tax attributes in future years, the net deferred tax assets have been fully
offset by a valuation allowance.
The Company's operating subsidiary has net operating loss
carryforwards applicable to Australian income tax which have not yet been
determined or recorded.
10. Extraordinary Item, Troubled Debt Restructuring
During 1997 and 1996 the company restructured the terms of various
Notes and Accounts Payable. The terms of the restructuring called for the
issuance of 155,520 shares of common stock in 1997 and 488,000 shares of
common stock in 1996. These transactions resulted in an extraordinary gain
in 1997 of $191,209. The Company did not record a gain or loss on the
exchange of shares in 1996 as there was no reliable market value for the
shares of the date of the exchange. The extraordinary expense in 1996
is comprised of extraordinary gains on the sales off assets of $88,036.
11. Options
a) Incentive Stock Options Agreements
On May 16, 1997, the Board approved the creation of the
company's 1997 Stock Option Plan. The Stock Option Plan is for
employees and Directors of the group. The Incentive Stock Option Plan
provides for the grant to officers and employees of Company stock
options which qualify as incentive stock options under the applicable
provisions of the Internal Revenue Code. The maximum amount of shares
which may be issued under this plan is 1,000,000 shares.
The Plan provides that the exercise price of all options granted
shall be at least equal to the fair market value of the Company's
shares as of the date on which the grant is made. The term of the
options issued under the plan cannot exceed ten years. With respect
to incentive stock options granted to a participant owning more than
10% of the Company' shares, the exercise price shall be at least 110%
of the fair market value of the Company's stock on the date of the
grant.
b) Non Qualified Stock Option Agreements
The Company has charged $372,000 to operations in 1997 related
to the options granted as disclosed below.
i) On March 10, 1997, the Board of Directors approved a
non qualified stock option agreement in connection with a
promissory note. The agreement grants the option to purchase
120,000 of the Company's common stock at a price of $2.50 per
share. This non qualified option agreement expires on March 7,
2002.
ii) On June 3, 1997, the Board of Directors approved a
non qualified stock option agreement in connection with a
promissory note. The agreement grants the option to purchase
205,000 of the Company's common stock at a price of $2.00 per
share. This non qualified option agreement expires on June 3,
2002.
iii) On December 16, 1997, the Board of Directors re-
negotiated and approved a non qualified stock option agreement
in connection with services provided in obtaining certain
promissory notes. The agreement grants the option to purchase
80,000 of the Company's common stock at a price of $2.50 per
share. This non qualified option agreement expires on July 1,
2002.
iv) On December 22, 1997, the Board of Directors approved
a non qualified stock option agreement in connection with a
promissory note. The agreement grants the option to purchase
275,000 of the Company's common stock at a price which is the
lower of $2.00 or the daily average closing bid price in the
quarter to June 1998. This non qualified option agreement
expires on December 31, 2003.
v) On December 31, 1997, the Board of Directors approved
a non qualified stock option agreement in connection with a
promissory note. The agreement grants the option to purchase
137,500 of the Company's common stock at a price which is the
lower of $2.00 or the daily average closing bid price in the
quarter to June 1998. This non qualified option agreement
expires on December 31, 2003.
c) Supplemental Disclosures for Stock-Based Compensation
The Company applies APB Option No. 25 and related
Interpretations in accounting for its Employee Stock Based Incentive
Plans. Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), issued in
1995, defined a fair value method of accounting for stock options and
other equity instruments. Under the fair value method, compensation
cost is measured at the grant date based on the fair value of the
award and is recognized over the service period, which is usually the
vesting period. The Company elected to apply the accounting
provisions of APB Opinion No. 25 for stock options. The required
disclosures under SFAS No. 123 are made below:
A summary of the Company's stock option activity for the year
ended December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Weighted Weighted
Incentive Average Nonqualified Average
Stock Options Exercise Price Stock Options Exercise Price
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1996 0 $0.00 80,000 $2.00
Issued in 1997 1,000,000 $2.00 737,500 $2.12
Expired in 1997 0 $0.00 0 $0.00
Exercised in 1997 0 $0.00 0 $0.00
--------- -------
Outstanding at December 31, 1997 1,000,000 $2.00 817,500 $2.12
========= =======
</TABLE>
Summarized information about stock options outstanding at
December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Exercisable
Weighted --------------------
Average Weighted Weighted
Number of Remaining Average Average
Range of Options Contractual Exercise Number of Exercise
Exercise Prices Outstanding Life (years) Price Options Price
--------------- ----------- ------------ -------- --------- --------
<S> <C> <C> <C> <C> <C>
$2.00 1,000,000 4.3 $2.00 409,000 $2.00
$2.00 to $2.50 817,500 4.8 $2.12 817,500 $2.12
</TABLE>
The Company has computed the pro forma disclosures required by
SFAS No. 123 for all employee and director stock options and warrants
granted after January 1, 1995, using the Black-Scholes option pricing
model prescribed by SFAS 123. The weighted average assumptions used
are as follows:
<TABLE>
<CAPTION>
December 31, 1997
-----------------
<S> <C>
Risk free rate 6%
Expected dividend yield 0
Expected lives 1.6 years
Expected volatility 0%
</TABLE>
Had the options issued to employees and directors recorded, the
effect on the reported results would have been as follows:
<TABLE>
<CAPTION>
Year Ended
December 31, 1997
-----------------
<S> <C>
Net (Loss):
As reported ($2,277,276)
Pro forma ($2,346,576)
Net (loss) per share:
As reported ($1.02)
Pro forma ($1.05)
</TABLE>
The company has charged to operating expense in 1997 $372,000
related to the issuance of non-qualified stock options (Note 11 b) to
third parties as follows:
a) $330,000 where options have been issued in connection with
promissory notes, by reference to a risk adjusted interest rate of 45%
on the amount outstanding over the period of the notes.
b) $42,000 where options have been issued to third parties in
relation to the obtaining of promissory notes, by reference to an
estimated investment banking fee of 7% of the promissory note
received.
12. Related Party Transactions
a) During the year, the Company was engaged in the following
transactions with First Sydney Capital Limited or associated
entities. Mr. Gallagher and Mr. McDowall, directors and officers of
the Company, are major shareholders in First Sydney Capital Limited.
i) In June 1997, a loan of $382,418 owing by the company
to Project & General Finance Pty Ltd, a company affiliated with
First Sydney, was converted into 95,605 shares of the company's
common stock.
ii) Following the successful completion of the R&D
subcontract agreement for $1.6m in June 1997, the Company paid a
success fee to First Sydney Capital Limited of $81,220.
iii) Associated Technologies Inc. received loans from
First Sydney Investments Pty Ltd. Outstanding loan balances
including accrued interest comprise two parts:
A) Repayable on demand and bearing
interest at 12% (unsecured) $111,101
B) Repayable on December 31, 1997
and bearing interest at 10%
(unsecured). This promissory note
is convertible into shares at $2.50
per share as a result of a
Securities Exchange Agreement dated
December 19, 1997 514,500
--------
$625,601
========
iv) A loan payable to an affiliate of First Sydney was
retired in exchange for 59,915 shares of common stock with a
market value of $119,830.
v) The Company has a contract with First Sydney to
provide certain investment banking services at a rate of $75,000
per year from July 1, 1997 plus expenses of which $37,500 has
been accrued.
b) During the year, the Company retained the services of Bourne
Griffiths, Chartered Accountants, a practice in which Paul Rengel, a
Director of the Company's primary subsidiary, has an interest. Fees
for accounting and taxation services on a normal commercial basis were
$17,391 (including Directors remuneration of $13,000).
c) Included in the operating expenses for the year ended
December 31, 1997 and prepaid assets at December 31, 1996, was an
amount of $750,000 being the value of shares issued by the company to
Business and Research Management Limited (a company in which Alan
Gallagher was a Director) for certain investment banking services that
were rendered in 1997.
13. Subsequent Events
On January 6, 1998, the Company entered into a Merger Agreement with
Virtual Music Entertainment, Inc. (VME) in connection with Securities and
Exchange Agreement described below.
On December 19, 1997, the Company entered into a Securities Exchange
Agreement with VME and VME note holders. In accordance with the terms of
the Security Exchange Agreement, the Company will issue 3,144,962 shares of
common stock in exchange for all of the VME Common Stock, Series D and
Series E Convertible Preferred Stock and the VME Notes Payable outstanding,
including accrued interest at December 19, 1997. In addition, the Security
Exchange Agreement provides for the conversion of a promissory notes issued
by the Company to First Sydney Investments Pty Ltd, a related party, into
220,000 shares of the Company's common stock. The initial exchange of
securities occurred on January 8, 1998 at which time VME security holders
controlled more than 50% of the issued and outstanding shares of the
Company. The balance of the exchange is expected to be completed upon
issuance of a private placement memorandum or similar document. The
completion date is expected to be approximately May 30, 1998.
In anticipation of the merger, the Company advanced $610,000 in the
form of promissory notes of $500,000, $50,000 and $60,000 to VME. The
balance at December 31, 1997 was $624,347 inclusive of accrued interest.
On January 31, 1998, the Company acquired 100% of the share capital of
CGI Syndicated Investments Pty Ltd, a dormant company. CGI has since
entered into a joint venture agreement with Elderberry Holdings Pty Ltd,
pursuant to the proposed R&D syndication agreement with Ogenic Technologies
Pty Ltd. CGI Syndicated Investments Pty Ltd will provide 10% of the funding
for this R&D syndication with the balance being provided by Elderberry
Holdings Pty Ltd.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ASSOCIATED TECHNOLOGIES, INC.
By: /s/ Mark Kripp
_________________________________
Name: Mark Kripp
Title: Chief Financial Officer
Dated: April 21, 1998
