<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
COMMISSION FILE NUMBER 0 - 25112
ADVANCED MEDIA, INC
(Exact name of registrant as specified in its charter)
DELAWARE 11-2899603
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
80 ORVILLE DRIVE
BOHEMIA, NEW YORK 11716
(Address of principal executive offices)
(516) 244 -1616
(Issuer's telephone number)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. YES NO X
There were 18,667,271 shares of registrant's common stock outstanding as of
March 31, 1998.
<PAGE> 2
ADVANCED MEDIA INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE
Balance Sheets 3
Statements of Operations 4
Statements of Changes in Stockholders' Equity (Deficit) 5
Statements of Cash Flows 6
Notes to Financial Statements 7-11
Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-12
PART II - OTHER INFORMATION
Item 1 - Changes in Securities 13
Item 2 - Defaults Upon Senior Securities 13
Item 3 - Submission of Matters to a Vote of Security Holders 13
Item 4 - Other Information 13
Item 5 - Exhibits and Reports on Form 8-K 13
Signatures 14
2
<PAGE> 3
ADVANCED MEDIA INC.
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MAR. 31, DEC. 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 1,040 $ 2,709
Accounts receivable, net of allowance for
doubtful accounts of $123,097 and $123,097, respectively 29,620 195,121
Inventories 101,696 53,010
Prepaid expenses and other current assets 227,638 74,535
------------ ------------
Total current assets 359,993 325,375
Fixed assets, net 256,880 290,085
Intangible assets, net 778,449 818,628
Other assets 53,882 43,882
------------ ------------
Total assets $ 1,449,204 $ 1,477,970
============ ============
LIABILITIES & STOCKHOLDERS' DEFICIENCY
Current liabilities
Accounts payable $ 733,969 $ 849,712
Accrued expenses and other liabilities 401,858 430,785
Cash overdrafts 12,858 0
Payable to related parties 93,974 27,578
Current portion of capital lease obligations 19,193 16,125
------------ ------------
Total current liabilities 1,321,852 1,464,200
------------ ------------
Loan payable - stockholder 1,161,078 1,155,537
Capital lease obligations 18,798 23,298
Advance Due Berg & Berg 250,000 --
------------ ------------
Total liabilities 2,751,728 2,643,035
------------ ------------
Stockholders' deficiency:
Preferred stock, par value $.0001 per share,
Shares authorized: 10,000,000, none outstanding -- --
Common stock, par value $.0001 per share,
Shares authorized: 100,000,000
Shares issued and outstanding:
1998 - 18,667,271
1997 - 16,836,365 1,869 1,685
Additional paid-in capital 10,060,751 9,851,669
Accumulated deficit (11,349,899) (10,994,290)
Deferred compensation (15,245) (24,129)
------------ ------------
Total stockholders' deficiency
(1,302,524) (1,165,065)
------------ ------------
Commitments and contingencies
Total liabilities and stockholders' (deficit) equity $ 1,449,204 $ 1,477,970
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
ADVANCED MEDIA INC
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1997
------------ -----------
<S> <C> <C>
Net revenues $ 417,609 $ 741,319
Cost of sales 219,401 486,828
------------ -----------
------------ -----------
Gross profit 198,207 254,491
------------ -----------
EXPENSES:
Development 32,361 14,700
Selling and marketing 56,981 150,519
General and administrative 359,098 547,293
Amortization of intangible assets 40,179 43,059
------------ -----------
Total expenses 488,619 755,571
------------ -----------
Loss from operations (290,412) (501,080)
OTHER INCOME (EXPENSE):
Other Misc. Revenues (1,000) --
Gain/Loss on sale of assets (179) --
Interest expense, net (64,018) (31,236)
------------ -----------
Net loss $ (355,609) $ (532,316)
============ ===========
Net loss per share $ (0.02) $ (0.06)
============ ===========
Weighted average number of common
shares outstanding 15,535,905 8,234,122
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
ADVANCED MEDIA INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
SHARES .0001 PAR SHARES .0001 PAR PAID-IN ACCUMULATED
.0001 PAR AMOUNT .0001 PAR AMOUNT CAPITAL DEFICIT
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 120,000 12 7,569,281 758 8,705,509 (9,345,126)
Stock Split -- -- -- -- -- --
Sales of common stock -- -- 4,264,110 426 620,872 --
Conversion of preferred to common (120,000) (12) 317,126 32 (20) --
Sales to 401K plan -- -- 2,525 -- 1,231 --
Issuance of common stock for:
Commissions due broker -- -- 45,454 5 (5) --
Services - consulting -- -- 290,000 29 85,596 --
Services - employee -- -- 7,500 1 5,999 --
Services - director -- -- 40,000 4 31,996 --
Penalty shares -- -- 253,125 25 (25) --
Officer loan principle and interest -- -- 4,073,960 407 406,989 --
Cancellation of shares due to: -- -- --
Employment termination -- -- (2,500) -- -- --
Shares repurchased (litigation settlement) -- -- (24,216) (2) (6,473) --
Amortization of deferred compensation -- -- -- -- -- --
Net Loss -- -- -- -- -- (1,649,164)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1997 -- -- 16,836,365 1,685 9,851,669 (10,994,290)
----------- ----------- ----------- ----------- ----------- -----------
Sales of common stock -- -- 644,833 64 51,543 --
Sales to 401K plan -- -- 1,254 -- 221 --
Issuance of common stock for:
Public relations -- -- 875,000 88 154,850 --
Services - consulting -- -- 2,500 --
Penalty shares -- -- 330,000 33 (33) --
Cancellation of shares -- -- (20,181) (1) 1 --
Amortization of deferred compensation -- -- -- -- -- --
Net loss -- -- -- -- -- (355,609)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT MARCH 31, 1998 -- -- 18,667,271 1,869 10,060,751 (11,349,899)
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
DEFERRED TOTAL
COMPEN- DOLLAR
SATION AMOUNTS
----------- -----------
<S> <C> <C>
BALANCE AT DECEMBER 31, 1996 (65,169) (704,016)
Stock Split -- --
Sales of common stock -- 621,298
Conversion of preferred to common -- --
Sales to 401K plan -- 1,231
Issuance of common stock for: --
Commissions due broker -- --
Services - consulting -- 85,625
Services - employee -- 6,000
Services - director (32,000) --
Penalty shares -- --
Officer loan principle and interest -- 407,396
Cancellation of shares due to: -- --
Employment termination -- --
Shares repurchased (litigation settlement) (6,475)
Amortization of deferred compensation 73,040 73,040
Net Loss (1,649,164)
----------- -----------
BALANCE AT DECEMBER 31, 1997 (24,129) (1,165,065)
----------- -----------
Sales of common stock -- 51,607
Sales to 401K plan -- 221
Issuance of common stock for: --
Public relations -- 154,938
Services - consulting -- 2,500
Penalty shares -- --
Cancellation of shares -- --
Amortization of deferred compensation 8,884 8,884
Net loss -- (355,609)
----------- -----------
BALANCE AT MARCH 31, 1998 (15,245) (1,302,524)
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
ADVANCED MEDIA INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(355,609) $(532,316)
Adjustments to reconcile net loss to net
cash provided by (used for) operating activities:
Depreciation and amortization 34,525 46,170
Amortization of intangibles 40,179 43,059
Amortization of deferred compensation 8,884 15,133
Loss on disposal of fixed assets 179 4,777
Provision for doubtful accounts -- 1,082
Issuance of common stock for services and expenses 154,938 15,375
Changes in operating assets and liabilities:
Accounts receivable, net 164,593 2,788
Inventories, net (48,686) 8,005
Prepaid expenses and other current assets (153,103) (8,483)
Accounts payable (59,145) 60,081
Accrued expenses and other liabilities (77,568) (9,262)
Payable to related parties 66,397 38,074
Deferred revenues (80,000) 17,500
--------- ---------
Net cash used for operating activities (304,416) (298,017)
--------- ---------
Cash flows from investing activities:
Purchases of fixed assets, net -- (38,889)
Proceeds from note receivable -- 500
Increase in security deposits -- 4,133
--------- ---------
Net cash used for investing activities -- (34,256)
--------- ---------
Cash flows from financing activities:
Proceeds from sale of common stock 48,638 280,356
Proceeds from loan payable - stockholder, net 5,541 (9,816)
Payments of capital lease obligations (1,432) (3,262)
Cash Overdrafts -- --
Proceeds from long term debt 250,000 --
--------- ---------
Net cash provided by financing activities 302,747 267,278
--------- ---------
Net decrease in cash and cash equivalents (1,669) (64,995)
Net cash, cash overdrafts and cash equivalents:
Beginning of period
2,709 40,863
--------- ---------
End of period $ 1,040 $ (24,132)
========= =========
Cash paid during the period for:
Interest $ 0 $ 1,805
========= =========
Taxes $ 0 $ 1,610
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 7
1 - BASIS OF PRESENTATION
The unaudited interim financial statements of Advanced Media, Inc. (the
"Company") for the three months ended March 31, 1998 and 1997 have been prepared
by management and include all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the unaudited interim periods. The
results of operations for the three months ended March 31, 1998 are not
necessarily indicative of the results to be expected for the full year. These
interim financial statements should be read in conjunction with the financial
statements and related notes contained in the Company's annual report on Form
10-KSB for the year ended December 31, 1997.
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash overdrafts - Under the Company's cash management system, checks issued but
not presented to banks frequently result in overdraft balances for accounting
purposes and are classified as "cash overdrafts" in the balance sheet.
Reclassifications - Certain amounts in the prior year financial statements have
been reclassified to conform with the current year presentation.
3 - LIQUIDITY AND BUSINESS RISKS
As of March 31, 1998, the Company had a net capital deficiency of $1,302,524, a
working capital deficit of $1,302,524 and has sustained cumulative net losses of
$11,349,899 since commencing operations in August 1993. In order to meet its
obligations as they become due and to continue its operations as a going
concern, the Company must raise additional capital. The Company continues to be
engaged in various discussions with potential investors regarding possible
equity transactions. Additional funding of $66,150 was raised during the first
quarter of 1998. Although management believes, based on the development of the
Company's business and its preliminary discussions with various potential
investors and other sources of financing, that it will be able to raise
additional capital sufficient to meet its working capital needs over the next
twelve months, no assurance can be given that it will be successful in this
respect. The Company currently has no line of credit or other access to debt
financing from any financial institution.
4 - DEBT AND EQUITY TRANSACTIONS
In March 1995, the Company entered into a loan agreement pursuant to which two
individuals (the "Lenders") loaned the Company $500,000. The loan bore interest
at a rate of ten percent per annum and was secured by certain of the Company's
assets. This loan was repaid in July 1995 utilizing the proceeds from the
promissory notes referred to below. Pursuant to the terms of the loan agreement,
the Company issued 30,000 shares of its common stock and 30,000 options to
purchase common stock to the Lenders. The options are exercisable for a five
year period at an exercise price of $4.10 per share (these options, along with
all of the Company's other option grants, were re-valued to $.80 on March 26,
1997). As a result of these issuance's, the Company recorded deferred financing
costs of $270,750 which were amortized through July 1995.
In June and July 1995, the Company issued promissory notes to Suan Investments
Corp. ("Suan") for $1,000,000. The notes bore interest at twelve percent per
annum and both principal and accrued interest were due the earlier of (a) June
30, 1996 or (b) upon the receipt by the Company of net proceeds in excess of $2
million from a financing transaction, to the extent of such excess. Subject to
the provisions of the Note Purchase Agreement, the purchasers had the option at
any time upon or after the earlier of (a) the maturity of the notes or (b) the
Company's common stock becoming authorized for trading on NASDAQ, to convert the
outstanding principal amount of the notes into shares of the Company's common
stock at a conversion price per share equal to the lesser of (i) $2.00 or (ii)
an amount equal to the ten day average bid price for the Company's common stock,
subject to certain antidilution provisions. The Company also granted to the
purchaser a security interest in all of the Company's assets. The Company issued
50,000 shares of restricted common stock, valued at $100,000, as a commission
for the aforementioned agreement. The Company recorded the commission as a
discount to the note, which was fully amortized in 1996.
7
<PAGE> 8
DEBT AND EQUITY TRANSACTIONS (CONTINUED)
In March 1996, the Company reached an agreement with Suan and an assignee
thereof to convert their $1,000,000 principal amount of notes into 600,000
shares of common stock of the Company at a conversion price of $1.667 per share.
The agreement provides the stockholders a guaranteed value of $3.30 per share,
twice the conversion price, on certain valuation dates, as defined. Pursuant to
the provisions of the note conversion agreement, and based upon the difference
between the guaranteed price of $3.30 per share and the closing price of $.28
per share at December 31, 1997, the Company would be required to issue
approximately 6,500,000 additional shares of common stock. Fulfillment of the
fair value guarantee, if by issuance of additional common stock, would result in
substantial dilution of the Company's common stock if the price of the Company's
common stock has not increased appreciably from the fair value of $.28 at
December 31, 1997. As discussed below, the Company issued warrants as an
advanced payment against this valuation guarantee. To secure the Company's value
guaranty obligation, the Company has left in place the security agreements
relating to the original Note Purchase Agreements, pursuant to which
substantially all of the Company's assets serve as collateral for these
obligations.
Originally, Suan had agreed to convert their note into 500,000 shares of the
Company's common stock (at a conversion price of $2.00 per share). As an
inducement to convert at the March 31, 1996 date, the Company agreed to the new
conversion price of $1.667 per share and to issue an additional 10,000 shares as
a further inducement. In accordance with Statement of Financial Accounting
Standards No. 84, "Induced Conversions of Convertible Debt," the Company
recorded the additional 110,000 shares issued at their fair market value at the
date of conversion as debt conversion expense of $309,375.
In March 1997, the Board of Directors of the Company resolved to issue warrants
to purchase an aggregate 500,000 shares of common stock to Suan Investments and
its assignee, to be divided equally. The warrants become exercisable on
September 30, 1997 at an exercise price of $.65, and expire on December 31,
1998. In consideration of the issuance of warrants to purchase 250,000 shares of
common stock the aforementioned parties agreed to extend to June 30, 1997 the
interest payment due originally at the time of the conversion of the Suan
Investment note to equity. Further, upon payment of the interest, the security
interest in substantially all of the assets of the Company which collateralizes
the Company's obligations will be terminated. The value of the warrants to
purchase the balance of 250,000 shares of common stock will be applied against
the Company's obligation to provide the valuation guarantee for the 600,000
shares discussed above.
The Company made a $25,000 payment in July 1997 towards the interest due on June
30, 1997. At December 31, 1997, there remains $84,334 of interest payable to
Suan related to previously outstanding principal. The Company is presently in
default of this agreement and is discussing various options to remedy the
default. The interest payable is included in accrued expenses and other
liabilities.
During July 1995 and November 1995, the Company issued 725,000 shares of
restricted common stock in a private placement transaction (the private
placement) in exchange for $1,450,000 or $2.00 per share. Actual proceeds from
the issuance of these shares totaled $1,220,000 net of a finder's commission of
$230,000. The private placement provided that in the event the value of shares
issued to investors is not equal to at least 200% of the purchase price ten days
prior to the registration of the common stock under the Securities Act of 1933,
the Company will issue additional shares of common stock to these stockholders
so that the aggregate value of such stockholder's common stock shall equal 200%
of the purchase price paid. Pursuant to the provisions of the private placement
agreement, and based upon the difference between the private placement price of
$2.00 per share and closing price per share of $.28 per share at December 31,
1997, the Company would be required to issue an additional 9,632,000 shares of
common stock. Fulfillment of the fair value guarantee, if by issuance of
additional common stock, would result in substantial dilution of the Company's
common stock if the price of the Company's common stock has not increased
appreciably from the fair value of $.28 at December 31, 1997. The Company has
agreed to register the purchased shares of common stock within ninety (90) days
after the common stock is authorized for trading on the National Association of
Securities Dealers Automated Quotation (NASDAQ) Small Cap Market. The private
placement provided that if, on January 1, 1996, a registration statement
covering the purchased shares of common stock was not effective, which it was
not, the Company would be required to make distributions to these stockholders
of $36,250 (2.5% of the private placement proceeds) or 18,125 shares per month,
until such registration statement is declared effective. The Company has set
aside 380,625 shares of common stock to satisfy this agreement through December
8
<PAGE> 9
DEBT AND EQUITY TRANSACTIONS (CONTINUED)
31, 1997. The Company and these stockholders tentatively agreed in October 1997
to stop the issuance of these monthly penalty shares due to their antidilutive
effect on the Company. The Company and these stockholders are currently
negotiating an agreement to settle the entire obligation in exchange for Company
preferred stock. However, there can be no assurance that the Company will be
successful in these negotiations. These stockholders also have piggyback
registration rights and one demand registration right.
In satisfaction of the $230,000 commission discussed above, the Company agreed
to issue 65,000 shares of the Company's common stock at the then current fair
market value of $2.00 per share, and to pay $100,000 in cash. Through December
31, 1995, the Company issued 15,000 shares to the finder, with the remaining
50,000 shares issued in 1996. The Company had recorded a liability of $100,000
to the finder at December 31, 1995. In August 1996, the Company issued 100,000
shares of common stock and 25,000 warrants in satisfaction of the $100,000
liability. The warrants were exercisable through December 31, 1997 at $1.00 per
share of common stock. The transaction resulted in a $36,826 loss on conversion
below applicable market prices.
In August 1996, the Company received $600,000 for 600,000 shares of its Series A
Convertible Preferred Stock ("Class A Preferred"). In the fourth quarter of
1996, 480,000 shares of Class A Preferred Stock converted to 737,248 shares of
common stock and in January 1997, the remaining 120,000 shares converted to
317,126 shares of common stock. The Class A Preferred were convertible to common
stock of the Company after a designated holding period beginning 60 days and
ending 150 days after issuance. The Class A Preferred converted at 55% of the
average closing bid price of the common stock on the five trading days
immediately prior to the conversion date. In connection with the aforementioned
funding, the broker for this transaction is entitled to a commission in the form
of warrants for the purchase of common stock equivalent to 100% of the common
stock issuable upon conversion of $150,000 of the Class A Preferred. These
warrants expired December 31, 1997.
In August 1996, the Company granted 10,000 options at $1.30 to its corporate
counsel for legal services pursuant to its 1995 Long Term Incentive Plan (these
options, along with all of the Company's option grants were revalued to $.80 on
March 26, 1997). The options expire in July 2001.
In 1996, the Company issued 186,857 shares of common stock in various private
placements for net proceeds of $218,544. In 1997, the Company issued 4,264,110
shares of common stock in various private placements for net proceeds of
$621,298.
The Company issued a total of 600,000 shares of common stock in exchange for an
aggregate $280,000 in the first quarter of 1997. As a condition of two of these
placements, the Company agreed to register 200,000 shares by April 30, 1997.
Failure to register the 200,000 shares cause the Company to pay a penalty of
5,000 shares to each of the parties, i.e., 10,000 total, on April 30, 1997 and
for each thirty-day period thereafter for which a registration statement is not
filed. Through December 31, 1997, 90,000 shares have been reserved as penalty
shares under this agreement. Such penalty shares are required to be registered
as contingency shares in the registration statement. Furthermore, as
consideration for the investors not disposing of the 200,000 shares between
April 30, 1997 and June 30, 1997, which condition has been met, the agreement
provided for additional contingency shares to be registered if the Company did
not meet a value guaranty provision ensuring that the 200,000 shares would be
equivalent in value to $175,000 after the registration became effective. In
1998, the Company reached a settlement agreement with each of these
stockholders. One stockholder was issued an additional 664,192 shares as
complete settlement of the original placement penalty and value guarantee
provisions. The second stockholder was issued an additional 400,000 shares as
settlement of the original placement penalty provision and the value guarantee
provision was revised to $.30 for the 500,000 shares issued to such stockholder.
Penalty shares for the months of January 1998 through May 1998, totaling an
additional 50,000 shares, were also issued to these stockholders.
In April 1997, the Company issued 202,690 shares of its common stock for which
the Company received approximately $86,000, net of commission of $15,000. The
Company agreed to complete a registration statement by July 15, 1997 or be
subject to a cumulative penalty of 10% of the amount of shares subscribed. The
penalty would continue for each thirty-day period for which the registration was
not effective. The shares have not been registered to date. The Company also
agreed that if the value of these shares was not $1.10 on the effective date of
the
9
<PAGE> 10
DEBT AND EQUITY TRANSACTIONS (CONTINUED)
registration statement, it would issue additional shares of equivalent value to
such subscribers. No penalty shares were issued during 1997, since the Company
was renegotiating the aforementioned penalty and value guarantee provisions, and
in June 1998, an agreement was reached. The subscribers were issued an
additional 810,760 shares as settlement of the original penalty provision and
the value guarantee provision was revised to $.30 for the 1,013,450 shares
issued to the subscribers.
In June 1997, the Company entered into a Private Equity Line of Credit Agreement
("PELOC") for an aggregate purchase price of up to $1,000,000 through June 30,
1998. Under this agreement, the Company issued 699,301 shares of its common
stock for $250,000 before commissions and legal fees of $45,900 and 22,727
shares of common stock, respectively. All shares issued pursuant to the PELOC
were to be registered and declared effective by September 30, 1997. In the event
that the Company failed to obtain or maintain the effectiveness of a
registration statement on or before September 30, 1997, the Company was to pay
$5,000 in cash, and then $7,500 for each thirty-day period commencing November
1, 1997. The Company also committed to draw down a minimum total of $500,000
under this PELOC. In December 1997, the Company issued an additional 300,000
shares as a result of the Company's failure to secure an effective registration
statement, and the parties agreed to release each other from any and all further
obligations under the PELOC.
In the fourth quarter of 1997, the Company issued 528,000 shares for $52,800
(less commissions of approximately $8,000). The placement agreements provided
for a value guarantee provision of $.30 per share, based upon the fair value of
the common stock upon the effective date of a filed registration statement.
5 - RELATED PARTY TRANSACTIONS
Expenses for the three months ended March 31, 1998 and 1997 include certain
amounts payable to the Company's chief executive officer, $45,000 for the period
ended March 31, 1997 representing compensation payable, and $55,107 and $27,068,
respectively, representing interest on the loan from officer.
6 - INCOME TAXES
At March 31, 1998 the Company has net operating loss carryforwards for tax
purposes of approximately $6,800,000, which expire through 2011. Deferred tax
assets are comprised of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- -----------
<S> <C> <C>
Gross deferred tax assets $ 2,484,550 $ 2,968,000
Valuation allowance (2,484,550) (2,968,000)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
</TABLE>
The gross deferred tax assets arise primarily from net operating loss
carryforwards and differences in the valuation of receivables accruals and
deferred compensation. The Company has provided a full valuation allowance
against the gross deferred tax assets because, in management's judgment, it is
more likely than not that such benefits will not be realized.
The Company had a several changes in ownership since commencing operations in
1993, which has resulted in a restriction on the prospective annual utilization
of the loss carryforwards. Future changes in ownership may also result in
further limitations on the annual utilization of the loss carryforwards.
7 - CONTINGENCIES
Legal Proceedings
On September 29, 1995, a former employee and owner of a business acquired by the
Company, Decision Vision ("Decision"), and his wife, also a former employee of
Decision, initiated a lawsuit seeking damages of approximately
10
<PAGE> 11
7 - CONTINGENCIES (CONTINUED)
Legal Proceedings (continued)
$1,000,000 from the Company, and certain present and former officers. The
lawsuit was based on claims arising out of the employees' termination, and also
arising out of the sale of the assets of Decision to the Company. The most
significant aspect of the lawsuit, pertaining to the acquisition of the assets
of Decision by the Company, was dismissed by the court in which the action had
been filed, the Superior Court of the State of California, County of San Diego,
in a series of rulings between December 1996 and February 1997, when the court
dismissed numerous causes of action and the action against all individual
defendants and eliminated any possible punitive damages award. The court also
dismissed wrongful termination claims of both former employees. On March 25,
1997, the plaintiffs filed an appeal regarding the above claims. On August 14,
1997, a settlement was reached which required the company to make a one time
cash payment of $8,000 on or before October 1, 1997, and then make twelve
monthly payments of $5,000 commencing November 1997, for a total cash settlement
of $68,000. For each cash payment made to the plaintiff, the plaintiff is to
return to the Company, shares of the Company's common stock held by the
plaintiff. A total of 91,429 shares are to be returned to the Company in
proportion to the cash payments received by the plaintiff. The Company recorded
litigation expense of $43,000 in 1997 as a result of this settlement and will
record repurchase of common stock (at its $.27 fair value per share at the time
of settlement) as cash payments are made. Any breach of the stipulation
settlement will cause all appeals previously made to be reactivated and the
Company would receive credit for any cash payments made. The Company has made
timely payments through September 1998.
On April 21, 1998, a complaint entitled "Imperial Bank Realty Company, Inc. v.
Advanced Media, Interactive, et al." was filed by the landlord of the Company's
California office, in the Orange County, California Superior Court. The Company
had not paid all rent due under the lease agreement and the landlord sought
eviction of the Company. On July 6, 1998, a judgment against the Company was
awarded to the landlord. The judgment amounted to approximately $42,000
including attorney's fees and past rent due for the months of December 1997
through May 1998. The judgment also stipulates that the Company must pay their
July and August rents timely, and the rent for June is to be paid in two
installments, half on or before July 15, 1998 and half on or before August 17,
1998. Further, the Company will be required to vacate the premises by the end of
September 1998. The Company is currently seeking alternative office space, but
there can be no assurances that the Company will be successful.
On May 11, 1998, a complaint entitled "Autodesk Inc. v. Advanced Media
Interactive, et al." was filed in the Marin County, California Superior Court
against the Company for breach of contract and also for nonpayment for various
products and software licenses. The complaint seeks damages of approximately
$115,000 plus interest, attorney fees and costs. Management intends to contest
this complaint vogorously and an answer was filed on August 12, 1998, which
asserts multiple defenses and the Company is also seeking to pursue a cross
complaint. The case is still in the in the preliminary pleading stages and the
Company is unable to predict the ultimate outcome of this claim. Accordingly, no
adjustments have been made in the financial statements for any potential losses.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto appearing elsewhere in this Form 10-QSB.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Although gross sales decreased $323,710 ,the gross profit percentage for the
three months ended March 31, 1998 increased to 47.5% of net revenues versus
34.3% in 1997 on comparable net revenues due to company's sales emphasis towards
more profitable interactive system solution projects and the mall strategy.
11
<PAGE> 12
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Expenses for the three months ended March 31, 1998 declined $219,116, or 31.0%.
Development expense increased $17,661, or 54.6%, as the Company continues to
expand its existing proprietary products. Selling and marketing expense
decreased $93,538, or 62.1%, of which $14,087 reflects an increase in expenses
related to demonstrations related to sales proposal efforts and $3,770 reflects
selling costs incurred in the new electronic commerce division which started up
in September 1996. General and administrative expenses declined $183,418, or
33.8%, of which $19,349 reflects costs related to the Company's new electronic
commerce division.
The increase in interest expense of $31,933 was primarily due to the increase in
the interest rate of the loan from officer.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company had a net capital deficiency of $1,302,524, a
working capital deficit of $1,302,524 and has sustained cumulative net losses of
$11,349,899 since commencing operations in August 1993. In order to meet its
obligations as they become due and to continue its operations as a going
concern, the Company must raise additional capital. The Company continues to be
engaged in various discussions with potential investors regarding possible
equity transactions. Additional funding of $66,150 was raised during the first
quarter of 1998. Although management believes, based on the development of the
Company's business and its preliminary discussions with various potential
investors and other sources of financing, that it will be able to raise
additional capital sufficient to meet its working capital needs over the next
twelve months, no assurance can be given that it will be successful in this
respect. The Company currently has no line of credit or other access to debt
financing from any financial institution.
The Company's stock price has steadily declined since January 1996, which has
made it difficult for the Company to raise additional equity capital without
significant dilution to present shareholders. The Company is further hampered by
its inability to obtain bank financing and the fact that all of its assets are
pledged as collateral to Suan Investments and its assignee, Stourbridge
Investments.
The Company is hopeful that anticipated improvements in the Company's operations
resulting from the sales and installation of interactive kiosks pursuant to the
Rollout Contract with GNC and the Company's improvements in the areas of
Electronic Commerce, including 21 SoftwareDrive and its multiple
transaction-driven vertical applications, will result in an increase in the
market price of the Company's common stock used to raise additional equity
capital, although there can be no assurance it will do so.
Forward-Looking Statements. All statements other than statements of historical
fact included in this report are forward-looking statements. When used in this
report, words such as "anticipate," "believe," "expect," "intend," and similar
expressions, as they relate to the Company's management, identify
forward-looking statements. Actual results could differ materially from those
contemplated by the forward-looking statements as a result of certain factors
including, but not limited to, financing, operational spending, revenue levels,
the effect of business and economic conditions and the impact of competitive
products and pricing. Such statements reflect the current views of the Company
with respect to future events and are subject to these and other risks,
uncertainties and assumptions relating to the operations, results of operations,
growth strategy and liquidity of the Company.
12
<PAGE> 13
PART II. OTHER INFORMATION
Item 1. Changes in Securities
Not applicable
Item 2. Defaults Upon Senior Securities
Not applicable
Item 3. Submission of Matters to a Vote of Security Holders
Not applicable
Item 4. Other Information
Not applicable
Item 5. Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K:
Current report on Form 8-K dated January 29, 1997 relating to Item 5.
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ADVANCED MEDIA, INC.
Date: 9/30/98 By /s/ Hans Kaemmlein
Hans Kaemmlein, Chairman of the Board,
President and Chief Executive and Financial Officer
14
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<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
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