As filed with the Securities and Exchange Commission on April 14, 2003
Registration No. ________
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[x] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2002.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
------------------------------------------------
Commission File Number 0-29195
NEW MILLENNIUM MEDIA INTERNATIONAL, INC.
(Name of Small Business Issuer in Its Charter)
Colorado (7310) 84-1463284
--------------------------------------------------------------------------------
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or Classification Code Number) Identification No.)
organization)
200 9th Avenue North, Suite 210
Safety Harbor, Florida 34695
(727) 797-6664
--------------
(Address and Telephone Number of Principal Executive Offices
and Principal Place of Business)
NEW MILLENNIUM MEDIA INTERNATIONAL, INC.
John D. Thatch, President
New Millennium Media International, Inc.
200 9th Avenue North, Suite 210
Safety Harbor, Florida 34695
(Name, Address and Telephone Number of Agent for Service)
1
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock
The issuer (1) filed all reports required to be filed by Section 13 or 15(d) of
the Exchange Act during the past 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year ended December 31, 2002
were $615,475.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which common equity was
sold, or the average bid and asked price of such common equity, as of December
31, 2002 was $2,257,599 (calculated by excluding restricted shares, which
includes shares owned beneficially by affiliates, directors and officers). See
Item 11. The total number of shares of issuer's common equity outstanding as of
December 31, 2002 was 10,254,508 shares.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. As of December 31, 2002, the
registrant had 10,254,508 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into the following parts
of this Form 10-KSB: certain information required in Part I of this Form 10-KSB
is incorporated from the issuer's Registration Statement for Small Business
Issuers filed September 13, 2000, as amended by Post Effective Amendment that
was filed March 20, 2002, 2nd amended Form 10-KSB that was filed April 15, 2003
and Form 8-K that was filed November 14, 2003.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BRIEF HISTORY
New Millennium Media International, Inc. is a Colorado corporation organized on
April 21, 1998. NMMI's principal place of business is located at 200 9th Avenue
North, Suite 210, Safety Harbor, Florida 34695. NMMI is the successor by merger
to Progressive Mailer Corp. (hereafter "PMC"), a corporation organized in
Florida on February 5, l997. In March 1997 and April 1998, PMC conducted
offerings of its common stock pursuant to the exemption from registration
afforded by Rule 504 of Regulation D under the Securities Act of l933, as
amended. On November 3, l997, PMC received clearance from the NASD to have its
common stock listed on the OTC Bulletin Board.
2
Effective April 8, 1998, pursuant to an Asset Purchase Agreement, PROGRESSIVE
MAILER CORPORATION, a publicly traded Florida corporation, in consideration for
six million four hundred thousand (6,400,000) shares of Progressive Mailer
Corporation common stock, purchased certain designated assets of LUFAM
TECHNOLOGIES, INC., a privately held California corporation. These acquired
assets of Lufam Technologies were valued at the net fair market value that is
not a business combination under SFAS 141 as no exchange of control occurred. On
November 3, 1997 PMC received clearance from the NASD to have its common stock
listed on the OTC Electronic Bulletin Board pursuant to PMC's application
submitted to the NASD pursuant to NASD Rule 6740 and Rule 15c2-11 under the
securities Exchange Act of 1934.
Effective April 27, 1998, pursuant to a merger agreement, PROGRESSIVE MAILER
CORPORATION, a publicly trading Florida corporation, merged with NEW MILLENNIUM
MEDIA INTERNATIONAL, INC., a privately held Colorado corporation (NMMI). This
merger qualified as a statutory merger and provided for all of the issued and
outstanding shares of stock in Progressive Mailer Corporation to be converted on
a one for one ratio for common stock of NMMI. It was further provided that NMMI
would be the surviving entity. As a part of this merger the domicile of
Progressive Mailer Corporation was authorized to be changed from Florida to
Colorado.
Effective August 31, 1999 UNERGI, INC., a privately held Nevada corporation,
merged into NEW MILLENNIUM MEDIA, Inc., a wholly owned subsidiary of NMMI, which
merger qualified as a tax free reorganization under section 368(a) of the
Internal Revenue Code of 1986 as amended. The merger required that New
Millennium, Inc. be the surviving entity and all of the issued and outstanding
shares of stock in Unergi, Inc. be prorata converted to 16,566,667 shares of
common stock of NMMI.
Effective March 9, 2000 SCOVEL CORPORATION, a Delaware corporation, merged into
NMMI in a transaction intended to qualify as a reorganization within the meaning
of Section 368(a) of the Internal Revenue Code of 1986 as amended. Prior to the
merger Scovel Corporation had filed with the Securities and Exchange Commission
a registration statement in form 10-SB which became effective pursuant to the
Securities Exchange Act of 1934 on February 9, 2000 and was at the time of
merger a reporting company pursuant to Section (g) hereunder. At the time of the
merger, Scovel Corporation had timely filed and was current on all reports
required to be filed by it pursuant to Section 13 of the Securities Exchange Act
of 1934. NMMI was the surviving entity resulting from the merger. All of the
issued and outstanding shares of Scovel Corporation were converted into 500,000
shares of restricted common shares of NMMI. The transaction was treated as a
recapitalization of NMMI.
NMMI is a fully reporting company which common stock is traded on the OTC
Bulletin Board operated by NASDAQ under the symbol NMMG.
BUSINESS OVERVIEW
For years the billboard industry has seen several consolidations with large
corporate owners acquiring smaller (fewer than 50 billboards) independent
operators. The purpose of these consolidations is to provide a platform for the
corporate owners to attract large regional and national advertisers. Billboard
advertising has evolved from painted signs without lights, to lighted signs, to
vinyl covered signs, to prism boards (three sided boards which rotate three
ads), to LED (light emitting diode) signs. Presently the plasma signs are used
indoors and generally do not have a screen size larger than 48 inches.
Advertisers soon learned that rotating signs attract the attention of viewers
more effectively than static signs. The most prominent LED display sign is in
Times Square in New York City. Despite the effectiveness of
3
LED outdoor advertising, the billboard industry is moving slowly to the LED
display sign because most large companies have a substantial investment in
static signs. The cost to change a traditional static board to an LED display is
approximately $1,000,000 to $2,000,000 depending on the size of the LED sign.
This, of course, includes the electronics necessary to operate the sign from
remote locations. In many instances, because of the additional weight of the LED
sign, it is necessary to erect an entire new foundation along with accompanying
supports. Another reason is that LED signs may only be installed in certain
traffic areas because many cities and states have regulations that prohibit LED
and prism signs on the basis that the signs may be distracting to passing
drivers and may lead to an increase in the number of traffic accidents. NMMI has
targeted markets where this may not be an issue.
There are two reasons for the changes in outdoor advertising. First,
technological improvements have made the prism and LED boards affordable.
Second, moving ads have a much greater impact on viewers than static ads. In a
digital society there must be an effective way for advertisers to display their
product in its true form. The competition in indoor advertising is limited. Most
indoor companies sell single poster board advertisements of different sizes and
place them in theaters, malls, airports and other similar venue locations.
NMMI provides several types of visual advertising: The Illumisign-Eyecatcher
front-lit movable display boards, the "EyeCatcher Powered by Insight" back-lit
scrolling movable display boards, plasma screens and LED display boards. In many
instances we retain ownership of all types of the machines and sell the
advertising space on a monthly basis.
IllumiSign-EyeCatcher Front-Lit
-------------------------------
NMMI markets, sells and places the IllumiSign-EyeCatcher front-lit movable
display boards in the United States at certain host venue locations on a revenue
share basis. This board is steel encased, front lighted, and displays poster
type ads. These mechanical devises come in various sizes ranging from 11 inches
by 17 inches to 4 feet by 6 feet. Each machine is capable of rotating up to 24
posters at preprogrammed intervals ranging from 3 seconds to one hour.
EyeCatcher Powered by Insight
-----------------------------
Additionally, NMMI has the exclusive distribution U.S. rights to an indoor
backlit advertising board designed and manufactured by AMS Controls, Inc. called
the "EyeCatcher Powered by Insight". There are a few minor exceptions to this
exclusivity that relate to accounts with which the manufacturer had an existing
business relationship at the time of contracting with NMMI. We are marketing
this new product as "EyeCatcher Powered by Insight". This is a patented product,
which ranges in poster size from 18" X 24" to 40" X 60". These signs can display
from 10 to 20 scrolling advertising images. Each rotation can be set to run from
three seconds to one hour. Because the poster material in both of these machines
is critical to the functionality as well as the longevity of the poster, it is
necessary for the advertisers to rely on our graphic arts department to develop
and supply the necessary posters. These motion displays are then placed in
various sites in stores, shopping malls, movie theaters and anywhere else where
indoor poster type advertising is feasible. NMMI is the owner of the
registration of the trademark, "IllumiSign-EyeCatcher" for electric sign
products in the United States Department of Commerce, Patent and Trademark
Office.
Light Emitting Diode (LED)
--------------------------
The LED display boards are generally placed out doors either freestanding or
affixed onto the sides of buildings or located in athletic stadiums. The LED
boards range in size from 8 feet by 10 feet to 20 feet by 30 feet and even
larger in customized designs. They are capable of displaying a near infinite
number of stationary or full motion images. Because the images need
4
to be programmed into the LED boards, it is necessary that our graphic arts
department be involved in both the design and set up of the intended displays.
NMMI has a strategic relationship with E-Vision LED, Inc., a U.S. based company
whose affiliates manufacture these high quality LED units (See heading Risk
Factors, subheading Strategic Relationships). E-Vision will sell the LED boards
to NMMI for a less than retail price and will share in the revenues that the LED
boards produce. This allows NMMI to procure the highest quality LED display
boards at a greatly reduced cost. Because these LED boards can run any
commercial format on any sized board, we feel that NMMI has a strong competitive
advantage over other similar display boards for which the visual display must be
reformatted. Formatting often takes weeks. E-Vision LED displays will run
consistent color quality and clarity. These LED boards have the potential to
display countless images in full color both static and full motion. Color
quality and clarity are very important to national advertisers who want
consistency of colors on all boards. E-Vision will assist NMMI with training and
support from the first board and with ongoing assistance in all aspects of
programming, technical and software support. Because of this strategic
relationship, E-Vision and its affiliates will supply NMMI, free of charge,
software upgrades as they become available.
In relation to these various types of display media, NMMI is capable of
providing advertisers with visual communications and media services in both
indoor and outdoor environments. We offer a comprehensive range of visual
movable board solutions designed to improve clients' advertising needs and
processes including professional services such as strategic site location,
consulting and analysis as well as poster design and development. This enables
us to locate boards and sell advertising on a national level that will benefit
NMMI in placing boards throughout the United States.
OnScreen
--------
On July 23, 2001, NMMI signed an exclusive licensing agreement with the inventor
of a new technology that allows the manufacture of large-scale LED (light
emitting diode) video displays with dramatic improvements in cost and
performance (hereafter referred to as "OnScreen"). Under this agreement, NMMI
will continue to participate in the research and development of this new
technology and will have the exclusive worldwide marketing rights to sell or
license the technology. A working prototype model for this technology has been
completed and successful and the development team has decided to pursue
fabrication of a larger, true-to-scale, prototype of the OnScreen display
technology. In further support of ongoing research and development of this
innovative technology, NMMI formed an OnScreen Scientific Advisory Board
consisting of six nationally recognized scientific technologic individuals in
the field of science and technology headed by David Pelka, all of whom have
earned at least one Doctor of Philosophy degree in a scientific discipline
relating to LED.
One of the main constraints in large-scale outdoor LED screens has been the
excess heat generated by using enough power to drive the LED screens to make
them visible in direct sunlight. Although boards exist today that provide full
motion video in an outdoor environment, the spacing of LED's is fairly wide to
reduce the heat buildup. This wide spacing results in lower resolution-
especially when the display is viewed from close up. The "OnScreen" designs are
expected to dramatically reduce the heat impact and as a result enable much
closer spacing of LED's. In addition to reducing the heat factor, these displays
will be lightweight and pliable compared to rigid LED displays being
manufactured using current technology. The outcome is a vastly improved
resolution with the brightness necessary for high visibility outdoors.
5
This new technology is expected to create a broad range of products with better
resolution and brighter pictures that are visible in direct sunlight. In
addition, the new LED technology produces an advantage that is not available in
today's marketplace: a more lightweight, pliable display that can fit any
application.
Employees
---------
NMMI has nine full time employees. None of our employees is represented by a
labor union. We consider our relations with our employees to be good. Because a
major portion of our business involves nationwide site location and procurement
as well as sales and marketing of advertising space, it is advantageous for us
to outsource this segment of our business through strategic partnering and
subcontracting distributors. We intend to utilize in-house employees and plan to
add additional staff as needed to handle all other phases of our business
including graphic arts, warehousing, distribution, purchasing, distribution,
shipping, accounting and bookkeeping.
ITEM 2. DESCRIPTION OF PROPERTY
NMMI owns no real estate. On March 29, 2001 the Company signed a lease with
Safety Harbor Centre commencing May 1, 2001 for five years with an option for
five additional years. The lease became effective August 27, 2001, the date that
the Company began occupancy of the new facility. This leased facility is
slightly larger than the prior leased premises and will support a more efficient
use of the floor space as well as additional space for expansion. Many of the
machines will continue to be shipped directly to the site location and for those
machines that require more detailed installation such as the LED boards, the
machines will be shipped directly to the installer. Machines that are in need of
repair will be repaired on-site whenever possible. Those machines that are not
repairable on-site will be repaired in-house at the Safety Harbor, Florida
facility.
ITEM 3. LEGAL PROCEEDINGS
The Company is presently negotiating the settlement of an ongoing litigation in
Great Britain with the individual patent owner who licenses to NMMI the current
manufacture and sale of the front-lit IllumiSign EyeCatcher display. This
litigation is described as Maurice Grosse and New Millennium Media
International, Inc., Claim Number HQ02X01340 in the High Court of Justice,
Queen's Bench Division. This litigation was initiated as a result of the Company
deciding to phase out distribution of the IllumiSign-EyeCatcher front-lit
displays in deference to the more modern back-lit displays.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to security holders for a vote during the course
of the fourth quarter of the last fiscal year.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
NMMI is a fully reporting company which common stock is traded on the OTC
Bulletin Board operated by NASDAQ under the symbol NMMG. The shares have
historically not been eligible for listing on any securities exchange or under
the NASDAQ system. As of December 31, 2002, we reported 10,253,508 outstanding
shares of $.001 par value common stock and no
6
outstanding shares of preferred stock. There were in excess of 1,000
shareholders and reported beneficial owners of record of the Company's common
stock, 1,000 common shares issuable, listed by the Company's transfer agent as
of December 31, 2002.
For additional information relating to Common Equity Matters please see
hereafter in this filing Notes to the Financial Statement, December 31, 2002 and
2001, Note 7, Stockholders' Equity.
We have not paid any dividends on our common stock since inception. We expect to
continue to retain all earnings generated by our operations for the development
and growth of our business and do not anticipate paying any cash dividends to
our shareholders in the foreseeable future. The payment of future dividends on
the common stock and the rate of such dividends, if any, will be determined by
our Board of Directors in light of our earnings, financial condition, capital
requirements and other factors.
The table below sets forth the high and low bid prices of our common stock for
each quarter for the four quarters of 2001 and 2002. The quotations set forth
below reflect inter-dealer prices, without retail mark-up, markdown or
commission and may not represent actual transactions.
Year High Bid Low Bid
---- -------- -------
2001
----
First Quarter .400 .380
Second Quarter 1.700 1.350
Third Quarter 1.170 1.110
Fourth Quarter .580 .470
2002
----
First Quarter 1.110 1.000
Second Quarter* .350 .330
Third Quarter .220 .220
Fourth Quarter .290 .280
*Note: On May 18,2001 the issuer shares split 5:1. The second quarter
prices reflect the post split prices.
As of December 31, 2002 there were outstanding warrants to Swartz Private
Equity, LLC for the purchase of 242,274 (post split number of shares) shares of
NMMI common stock at a price of $1.50 per share that may be reset every 6 months
thereafter. As of December 31, 2002 16,796 warrants were reset to an exercise
price of $0.28 and 25,478 warrants were reset to an exercise price of $0.51.
These warrants were issued to Swartz on March 21, 2000 (200,000 shares), April
17, 2001 (16,796 shares) and July 17, 2001 (25,478 shares) in consideration of
Swartz's commitment to enter into the Investment Agreement. The warrants expire
on May 25, 2004, April 17, 2006 and July 17, 2006, respectively. The shares of
common stock to support these warrants are included in the SB-2 registration
statement filed September 13, 2000 and as amendment filed March 18, 2002. During
2002 the Company became obligated to issue 299,284 "additional warrants" to
Swartz. Such warrants are issuable with an initial estimated exercise price of
$0.29 per share and expire December 31, 2007. For a more detailed explanation of
the Swartz Private Equity agreement please see Notes to the Financial Statement,
December 31, 2002 and 2001, Note 7, Stockholders' Equity, (C) Investment
Agreement.
7
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
Management's discussion and analysis contains various "forward looking
statements." Such statements consist of any statement other than a recitation of
historical fact and can be identified by the use of forward-looking terminology
such as "may," "expect," "anticipate," "estimate," or "continue" or use of
negative or other variations or comparable terminology.
We caution that these statements are further qualified by important factors that
could cause actual results to differ materially from those contained in the
forward-looking statements, that these forward-looking statements are
necessarily speculative, and there are certain risks and uncertainties that
could cause actual events or results to differ materially from those referred to
in such forward-looking statements.
OVERVIEW
The Company is no longer a development stage company as defined in Statement of
Financial Accounting Standards No. 7, "Accounting and Reporting by Development
Stage Enterprises." We have generated our cash needs through equity financings
and loans from officers and stockholders. As an operational company, we devote
substantially all of our efforts to securing and establishing new business. We
have engaged in limited activities in the advertising business, but no
significant revenues have been generated to date. The primary activity of the
Company currently involves several types of visual advertising: The
Illumisign-Eyecatcher front-lit movable display board, "EyeCatcher Powered by
Insight" back-lit movable display boards, plasma screens and LED display boards.
In many instances we retain ownership of all types of the machines and sell the
advertising space on a monthly basis and also derive revenue from rental of an
LED truck. We also periodically sell certain display products on a special order
basis. The Company is continuing to devote substantially all of its present
efforts to implementing its operational and marketing plans designed to
establish new business accounts for its mobile LED boards and the motion display
boards. The Company presently conducts all marketing in-house and continues to
use the EyeCatcherPlus logo, marketing material and website. Using this business
model, management feels that there will be a net effect of "cutting out the
middle man" and increasing Company revenues.
CRITICAL ACCOUNTING POLICIES
The U.S. Securities and Exchange Commission defines critical accounting policies
as "those that are both most important to the portrayal of a company's financial
condition and results, and require management's most difficult, subjective or
complex judgments, often as a result of the need to make estimates about the
effect of matters that are inherently uncertain". Preparation of our financial
statements involves the application of several such policies. These policies
include: Estimates of the allowance for doubtful accounts and other receivables,
estimates of the recoverability and the impairment of long lived assets,
estimates of the valuation of stock based compensation, revenue recognition
policies, estimates of the valuation allowance on deferred tax assets.
Estimates of the allowance for doubtful accounts and other receivables
----------------------------------------------------------------------
The company estimates its allowance for doubtful accounts and receivables by
reviewing historical collection experience and through specific identification
of doubtful receivables.
Estimates of the recoverability and the impairment of long lived assets
-----------------------------------------------------------------------
The Company reviews long-lived assets and certain identifiable assets related to
those assets for impairment whenever circumstances and situations change such
that there is an indication
8
that the carrying amounts may not be recoverable. If the non-discounted future
cash flows of the enterprise are less than their carrying amount, their carrying
amounts are reduced to fair value and an impairment loss is recognized.
Estimates of the valuation of stock based compensation
------------------------------------------------------
The Company accounts for stock options issued to employees in accordance with
the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. As
such, compensation cost is measured on the date of grant as the excess of the
current market price of the underlying stock over the exercise price. Such
compensation amounts are amortized over the respective vesting periods of the
option grant. The Company adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," which permits entities to provide pro
forma net income (loss) and pro forma earnings (loss) per share disclosures for
employee stock option grants as if the fair-valued based method defined in SFAS
No. 123 had been applied. The Company accounts for stock options and stock
issued to non-employees for goods or services in accordance with SFAS 123 and
related interpretations.
Revenue recognition policies
----------------------------
The Company sells EyeCatcher Displays on a special order basis and does not hold
inventory. Revenue and cost of revenue from EyeCatcher Display sales is
recognized when the boards are shipped to the customer. Advertising revenue is
recognized pro-rata over the term of the customer contract or arrangement and
customer prepayments received are recorded as a deferred revenue liability until
revenue recognition is proper. Graphic arts revenue is recognized at completion
of services. LED Truck rental revenue is recognized pro-rata as earned over the
rental period which generally does not exceed 14 days. Territory fees from
exclusive distributors are recorded as a deferred revenue liability and then
recognized over the term of the distributor contract. For all revenue types,
recognition criteria also includes assessing whether pervasive evidence of an
arrangement exits, the sale price is fixed or determinable, and collectability
is reasonably assured.
Estimates of the valuation allowance on deferred tax assets
-----------------------------------------------------------
Income taxes are accounted for under the asset and liability method of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). Under SFAS 109 deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under SFAS
109, the effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
LIQUIDITY AND CAPITAL RESOURCES
Generally, the Company has funded our operations and investments in equipment
through cash from operations, equity financings and borrowing from private
parties as well as related parties; however, there is no assurance that there
will be proceeds from these sources in the future. For a further explanation of
these loan transactions please see hereafter in this filing Notes to the
Financial Statement, December 31, 2002 and 2001, Note 4, Notes and Loans Payable
and Note 5, Related Party Payables.
The attached Balance Sheet shows that Stockholders' Equity has decreased from
($348,957) to ($1,858,074), a decrease of $1,509,117 from calendar year 2001 to
year 2002. This is
9
the result of a $411,293 decrease of assets and a $1,097,824 increase of
liabilities to be discussed as follows.
The Property and Equipment value decreased from $1,461,824 in 2001 to $1,065,870
in 2002. A large portion of this $395,954 decrease is the result of an
impairment loss of $250,000 relating to the second LED truck that is under
construction and $173,874 depreciation in 2002 on property and equipment owned
by the company. These amounts are discussed in Notes to the Financial Statement,
December 31, 2002 and 2001, Note 2, Property and Equipment. The Deferred Royalty
Expense in the amount of $75,000 is an OnScreen (See above Business Overview for
a discussion of the OnScreen product.) royalty expense to be paid by the third
party as a deferred expense asset to be recognized when due in 2003 and the
company recorded a Deferred Gain on Sale of Future Revenues liability of
$150,000 as of December 31, 2002 to be recognized as revenues pro-rata over the
term of the license. This expense and liability are discussed in Financial
Statement, December 31, 2002 and 2001, Note 3, License.
The Cash on hand, $16,335, fluctuates from time to time as in any business and
it use varies from paying overhead and salaries to buying operating supplies.
As noted above, the Company has thus far funded our operations and investments
in equipment through cash from operations, equity financings and borrowing from
private parties as well as related parties. The repayment and interest on these
loan transactions are detailed in Financial Statement, December 31, 2002 and
2001, Note 4, Notes and Loans Payable and Note 5, Related Party Payables. It is
noteworthy to mention that $1,021,655 of these note holders have contingently
agreed to convert to shares of Series A Convertible Preferred including $237,735
of the $303,657 obligation to the company president; please see Financial
Statement, December 31, 2002 and 2001, Note 12, Subsequent Events and Note 5,
Loans Payable to Related Parties.
Accounts Payable decreased by $70,512, from $520,377 in 2001 to $449,865 in
2002. This 14% decrease is principally the result of management's continuing
effort to reduce operating expenses while continuing to maintain a high quality
of service and product.
The $83,924 Royalties Payable liability is discussed above herein in Item 3,
Legal Proceedings as well as Financial Statement, December 31, 2002 and 2001,
Note 6, Commitments and Contingencies, (A) Legal Matters. It is the practice of
management to allocate a realistic reserve for this type of contingent
liability.
The Accrued Expense liability in the amount of $330,707 is a reserve for a
claimed obligation claimed to be owed from 1999 for which the company has no
records nor documentation to support this claim. As a consequence, management
has taken the position that the claim is not owed; however, a bookkeeping
reserve is required.
The company president and director of operations continue to accrue a portion of
their compensation until such time as the company is better able to afford
payment.
When the company sell advertising it collects advertising fees several months in
advance of commencement of actually displaying the advertisement. Because these
collected fees have not yet been earned until the advertisement is actually
displayed these fees are accounted for as Deferred Revenues. From time to time
company customers deposit money with the company for the purchase of these
products; these deposits are accounted for as Customer Deposits. These two
categories are accounted for in the amounts of $41,609 and $28,500,
respectively.
10
On May 19, 2000 the Company entered into an investment agreement with Swartz
Private Equity, LLC to raise up to $25 million through a series of sales of
common stock. The dollar amount of each sale is limited by the trading volume
and a minimum period of time must occur between sales. In order to sell shares
to Swartz, there must be an effective registration statement on file with the
SEC covering the resale of the shares by Swartz and we must meet certain other
conditions. The agreement is for a three-year period ending May 2003. There can
be no assurance that we will receive financing from Swartz, that we will not
require additional financing or that such additional financing will be available
on terms acceptable to us, if at all. A detailed description of the Swartz
equity line agreements can be found in the SB-2 Registration Statement filed
September 13, 2000 as amended by Post Effective Amendment that was filed March
20, 2002.
As discussed in Financial Statement, December 31, 2002 and 2001, Note 7,
Stockholders' Equity, (C) Investment Agreement, the company entered into an
investment agreement with Swartz Private Equity, LLC. A $100,000 semiannual
penalty attaches for each six months period that the company does not exercise
its put rights under the agreement. To date the company has not exercise any put
rights to Swartz as detailed in the Note 7 shown above.
Additional Paid in Capital
--------------------------
Additional Paid in Capital is recorded in 2002 as $5,101,664, an increase of
$3,443,760 over 2001. This increase is the result of the company continuing to
fund operations and investments in equipment through cash from equity financings
and borrowing from private parties as well as related parties. As itemized in
Financial Statement, December 31, 2002 and 2001, Note 4, Notes and Loans Payable
and Note 5, Related Party Payables a major portion of the paid in capital is
through the issuance of common and company preferred equity in exchange for
operating capital. Most of the debt settlement is by way of equity issuance, see
Financial Statement, December 31, 2002 and 2001, Note 7, Stockholders' Equity,
(B) Common Stock Issuances.
RESULTS OF OPERATIONS
EyeCatcher Display Sales
------------------------
The revenue for the calendar year 2001, $363,802, when compared to calendar year
2002, $615,475 shows an increase of approximately 69 percent. This increase is
due primarily to EyeCatcher display sales, $285,700. The company added an
element to its business plan by selling geographic distributorships that grant
to the distributor the exclusive right to purchase EyeCatcherPlus displays from
the company provided that the distributor maintains yearly milestones as
mutually agreed by the company and the distributor. In these arrangements, the
company sells the displays to the distributor. The $187,300 Cost of EyeCatcher
Display Sales accounts for the company's purchase of the sold displays and
sundry items such as crating and shipping.
Advertising Revenue
-------------------
The Advertising Revenue decreased slightly in 2002 ($63,629) as compared to
$69,893 in 2001. This decrease is due to the revised business model because more
advertising revenue is retained by the distributor while the company benefits
from the sale of the display.
Graphic Arts Revenue
--------------------
The Graphic Arts Revenue decreased in year 2002 compared to 2001, from $39,741
to $38,144. Graphic arts revenue is the revenue resulting from the design and
printing of the posters that are displayed in the EyeCatcherPlus displays. This
revenue is recognized at
11
completion of services. Because the printed posters have a life of no more than
12 months and the majority of advertising contracts are for 6 months, the
graphic arts revenue stream is cyclic. When the cycle begins at the end of the
year (2002) or the beginning of a year (2003)
LED Truck Rental Revenue
------------------------
The LED Truck Rental Revenue declined from $219,253 in 2001 to $190,837 in 2002.
Apparently because of the 9/11 tragedy the economy in the United States has
declined which has had an effect on the advertising industry as well as many
other industries. Currently the LED mobile advertising seems to have generated
sufficient interest for competition to have grown in the past year. Because of
this increased competition the daily rental rate has also declined as is to be
expected according to the theory of supply and demand.
Other Revenue
-------------
Other Revenue, $36,416, increased from the 2001 figure of $9,915. $25,000 of
this 2002 figure was a fee received by the company to convert the payor's right
of first refusal regarding future monetary advances for funding future OnScreen
technology funding. The payor shall receive an additional fee for future
participation in additional OnScreen funding not other wise included in the
original right of first refusal. This issue is discussed in Financial Statement,
December 31, 2002 and 2001, Note 3, License.
Territory Fees
--------------
Territory Fees are the fees paid by distributors for the contractual exclusive
right to purchase EyeCatcherPlus displays for a specific geographic area. These
fees are recorded as deferred revenue liability and then recognized over the
term of the distributor contract. The $749 for 2002 compared to $25,000 for 2001
is indicative of a distributor contracting and paying the distributor fee late
in 2002 which fee is then prorated into 2003 as well as for the balance of the
contract term. The current revised business model that includes this exclusive
distributor right to purchase displays was initiated late in 2002. Prior to 2002
the company granted distributorships, but only with the right to lease the
displays, not purchase them. This current business model gives business
protection to the distributor and permits the distributor to purchase the
EyeCatcherPlus displays which, in turn, provides additional revenue to the
company. The company also continues to provide the EyeCatcherPlus displays to
host venues on a profit sharing basis.
Bad Debt
--------
Bad Debt has decreased by $71,823 (47%) when comparing 2002 ($80,484) to 2001
($152,307). Approximately $29,000 is described as uncollectable rent from a
related party subtenant, see Financial Statement, December 31, 2002 and 2001,
Note 8, Related Party Transactions. The balance of the bad debt is primarily due
to inability to collect receivables from advertisers and former distributors
over the past two years. In an effort to minimize future uncollectables,
management currently requires advertisers to pay in advance and current
distributors are required to purchase geographic territories by paying in
advance and, in most instances, purchasing the EyeCatcherPlus displays by
payment in full prior to delivery.
Compensation
------------
This item is comprised of stock compensation to the company president resulting
in an expense of $131,431 and $275,676 in 2002 and 2001 respectively, see
Financial Statement, December 31, 2002 and 2001, Note 7, Stockholders' Equity,
(B) Common Stock Issuances. The remainder represents cash compensation to
employees. The increase to $736,855 for 2002 from $690,519 is due to
performances bonuses and cost of living salary increases.
12
Commitment Expense and Penalties
--------------------------------
This is the expense item of penalties to Swartz Private Equity, LLC. as noted
herein above, $200,000 penalty for non-placement of at least $1,000,000 put
semiannually, see Financial Statement, December 31, 2002 and 2001, Note 6,
Commitments and Contingencies, (A) Legal Matters. Additionally, the value of the
"additional warrants" to which Swartz is entitled was calculated to be $61,236
in 2002 and $12,090 in 2001 as noted in Financial Statement, December 31, 2002
and 2001, Note 7, Stockholders' Equity, (D) stock Options and Warrants.
Consulting
----------
From time to time the company contracts with private business consultants to
assist the company with such matters as investment banking, private placements,
financing, mergers, acquisitions, shareholder relations, investor information
packages, development of marketing material for the company stock, advertising
and public relations. This $1,373,198 expense increased from $239,205 and is
paid in company stock when ever practicable under the circumstances of each
particular situation. The expensing of these share issuances are noted at
Financial Statement, December 31, 2002 and 2001, Note 6, Commitments and
Contingencies, (C) Consulting Agreements; Note 7, Stockholders' Equity, (B)
Common Stock Issuances and (D) Stock Options and Warrants.
Depreciation and Amortization
-----------------------------
The depreciation schedule shown at Financial Statement, December 31, 2002 and
2001, Note 2, Property and Equipment expresses the accumulated depreciation for
the personal property of the company, 2001, $248,141 and for 2002 the
accumulated depreciation is $422,015. The depreciation for calendar year 2002 is
$173,874. The increase in depreciation is due to increased personal property
owned by the company.
General and Administrative
--------------------------
General and Administrative expenses increased by $175,136 from its 2001 amount
of $301,116. The current 2002 amount of $476,252 is principally the result of
the Company continuing to grow after becoming fully operational in year 2000.
This line item includes all operational expenses other than interest and
depreciation expenses. By the Company being fully operational this line item
includes such items as contract labor, general office supplies and printing,
management fees and expenses, telephone, cell phone, automobile and travel
expenses, Internet service, office security, utilities, transfer agent fees,
legal and accounting fees, insurances, business promotion and entertainment.
Impairment Loss
---------------
This $250,000 expense is the result of the construction of a second LED mobile
unit. The mobile unit has not yet been put into service by the company and
delivery is behind schedule. This issue is detailed at Financial Statement,
December 31, 2002 and 2001, Note 2, Property and Equipment.
Professional Fees
-----------------
This item has increased from $75,549 in 2001 to $105,852 in 2002, an increase of
$30,303. These professional fees, legal and accounting, increase as the company
grows because of increased business exposes the company to more complex issues
for both the attorneys and accountants.
Rent
----
The company leases office and warehouse space in Safety Harbor, Florida under a
5-year lease beginning May 1, 2001. For calendar year 2002 the company paid
$133,183 rent compared to
13
$135,726 for year 2001. The office rental space from which the company relocated
in May 2001 was a great deal smaller and lacked many of the amenities and
conveniences that are generally found in current office properties. The company
up-graded its offices at no additional rental fees and expenses. The current
rental schedule is outlined at Financial Statement, December 31, 2002 and 2001,
Note 6, Commitments and Contingencies, (E) Leases.
Royalties
---------
The $138,943 Royalties line item is made up of two expenses: The company
recorded $75,000 of the OnScreen royalty expense paid by a third party. This
issue is discussed in Financial Statement, December 31, 2002 and 2001, Note 3,
License. The second expense relates to the $63,943 reserve regarding a pending
lawsuit. This matter was discussed above herein in Item 3, Legal Proceedings as
well as Financial Statement, December 31, 2002 and 2001, Note 6, Commitments and
Contingencies, (A) Legal Matters. It is the practice of management to allocate a
realistic reserve for this type of contingent liability.
Loss From Operations
--------------------
Loss from Operations has increased from the 2001 amount of $1,535,155 to the
current year amount of $3,301,702, an increase of $1,766,547. As noted from the
discussion above, the most significant increases are Consulting and Commitment
Expense and Penalties. Although these items cannot be minimized, it is
noteworthy to mention that most of these expenses are the result of common stock
and warrant issuances rather than cash outlay.
Gain on Settlement and Loss on Settlement
-----------------------------------------
Financial Statement, December 31, 2002 and 2001, Note 1, Nature of Operations
and Summary of Significant Accounting Policies, (M) Recent Accounting
Pronouncements in the fourth paragraph relating to SFAS No. 143 discusses the
settlement of an obligation for its recorded amount or incurs a gain or loss
upon settlement. This accounting principle is applied in various transactions
notably discusses in Financial Statement, December 31, 2002 and 2001, Note 7,
Stockholders' Equity, (A) Preferred Stock and (B) Common Stock Issuances. These
transactions involve the settlement/payment of company debt and the payment of
current consulting fees. In general terms, when the company obligation is
settled by issuance of shares of stock, the shares of stock is valued at the
then current trading value which is compared to the debt obligation that is
settled. The resulting difference is then determined to be a gain of loss
depending on whether the resulting calculation is negative or positive.
Sublease Income
---------------
The company subleases office space to another company for a monthly rent of
$4,800 which amount accrued during 2002 to the sum of $30,991 as described in
Financial Statement, December 31, 2002 and 2001, Note 6, Commitments and
Contingencies, (E) Leases and which amount was not paid to the company and
subsequently reserved as described in Financial Statement, December 31, 2002 and
2001, Note 8, Related Party Transactions. Additionally, the company subleases to
another individual who is current in monthly rental payments for calendar year
2002. Company management determined that in order to have office space into
which the company anticipates to grow, it is desirable to have this additional
office space included in the company's current lease, but sublease the
additional space until such time as the company grows into the additional space.
14
Interest Expense
----------------
Interest Expense decreased by $22,177 from 2001 to 2002 (8%). Interest expense
relates to interest on loans and notes and the value of options issued under
default provisions of certain notes. The normal interest expense decreased
primarily as a result of the Company paying off debt obligations by issuing
shares of common and preferred stock as total or partial satisfaction of some of
the debt obligations as discussed herein above.
Basic and Fully Diluted Loss Per Common Share
---------------------------------------------
The Basic and Fully Diluted Loss Per Common Share difference from 2001 to 2002
calendar years shows a 0.12 increase in net loss per common share. The loss per
common share is a function of net income, preferred dividends and weighted
number of common shares outstanding. For a more thorough explanation of the
"earnings per share" calculations see Financial Statement, December 31, 2002 and
2001, Note 1, Nature of Operations and Summary of Significant Accounting
Policies, (K) Earnings Per Share. The basis for this increase is discussed
item-by-item immediately above. We are now fully staffed and producing income.
We are continuing to concentrate on establishing new business and increasing
sales relating to the IllumiSign-EyeCatcher, the "EyeCatcher Powered by Insight"
backlit display board and the LED display sign truck.
Trends and Events
-----------------
In May of 2001 we changed our operations model primarily in that we have
regained the marketing role in-house. Management feels that this is a positive
change in that the Company now has total control of all marketing activities.
The Company continues to allocate geographical areas to distributors who, in
turn, focus on their respective areas.
Prior to 2002 the company contracted with distributors that contracted for the
exclusive right to lease EyeCatcherPlus displays from the company; however, in
2002 the company added an element to its business plan by selling geographic
distributorships that grant to the distributor the exclusive right to purchase
EyeCatcherPlus displays from the company provided that the distributor maintains
yearly milestones as mutually agreed by the company and the distributor. In
these arrangements, the company sells the displays to the distributor and the
distributor continues to exclusively utilize the company graphic design
department for design and printing of the posters for the purchased displays.
This revised business model thus far is successful in select locations. The
company currently focuses on target area networks (TAN's) based on demographics
that respond to the EyeCatcherPlus displays. By this "specialized" concentration
of effort management feels that it is more efficient to sell the advertisement
posters and ultimately increase revenues.
The "9/11 tragedy" has had an overall effect on the American economy, including
the advertising industry, as reflected in the Net Loss increase for 2002 over
2001; however, management feels that by revising the business model as described
above, the company should be able to increase revenues without increasing
expenses. Although there is no real assurance that this revised business model
will generate the additional revenues, in the opinion of management, the
cumulative effect of these revisions will reflect a positive trend in company
revenues.
ITEM 7. FINANCIAL STATEMENTS
Financial Statements are incorporated by reference herein and attached as an
exhibit.
15
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following are officers and directors of the Company.
Name Age Position
---- --- --------
John Thatch 41 Chief Executive Officer, President and Director
Jennifer Freeman 29 Corporate Secretary
All directors hold office until the next annual meeting of shareholders of the
Company and until their successors are elected and qualified. Officers hold
office until the first meeting of directors following the annual meeting of
shareholders and until their successors are elected and qualified, subject to
earlier removal by the Board of Directors.
John "JT" Thatch, President/CEO and Director
Mr. Thatch, age 41 years, has served as President, Chief Executive Officer and
Director of New Millennium Media International since January 2000. During this
time he has overseen all functions of the company, including day-to-day
operations. Mr. Thatch has over 15 years of entrepreneurial business experience
that includes over 7 years as the principal in Bay Area Auto Sales, an
automotive dealership, that specialized in sales of reconditioned vehicles. He
was the founder and General Partner for Last Chance Finance, Ltd. that owned and
operated over 18 offices specializing in alternative vehicle financing. Over the
past 10 years Mr. Thatch has been President and majority shareholder of Superior
Management of Tampa, Inc., a privately owned company, that owns property and
commercial leases. Other than for nominal time spent on corporate and personal
real estate holdings that have no business relationship with NMMI, Mr. Thatch
dedicates his best efforts to his current position. He brings leadership,
marketing and strong management skills to the company.
Jennifer H. Freeman-Goggin has served as Corporate Secretary since August 7,
2001. During this time she has prepared, managed and maintained as permanent
records of the corporation, all official corporate minutes (shareholder and
board of directors meetings), official corporate records and contracts as well
as additional corporate secretarial duties customarily performed by corporate
secretaries and as authorized by the corporate by-laws. As temporary corporate
duties, she presently oversees all corporate office management. Ms.
Freeman-Goggin has 6 years of corporate management experience and three years of
college level business management education. Prior to being appointed corporate
secretary by the Board of Directors, Ms. Freeman-Goggin managed a finance
company that owned and operated over 18 offices specializing in alternative
vehicle financing. Ms. Freeman-Goggin devotes full time to her corporate duties
and brings a quality of innovative corporate ideas.
16
ITEM 10. EXECUTIVE COMPENSATION
The following table lists the cash remuneration paid or accrued during 2000,
2001 and 2002 to John Thatch, president and CEO. Except for John Thatch, none of
our executive officers and directors received compensation of $100,000 or more
in 2000, 2001 and 2002.
---------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
---------------------------------------------------------------------------------------------------------
Long Term Compensation
---------------------------------------------------------------------------------------------------------
Annual Compensation Awards Payouts
---------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
---------------------------------------------------------------------------------------------------------
Restricted Securities
Name and Other Annual Stock Underlying LTIP All Other
Principle Salary Bonus Compensation Award(s) Options/SARs Payouts Compensation
Position Year ($) ($) ($) ($) (#) ($) ($)
---------------------------------------------------------------------------------------------------------
John 10,000 10% of all Stock option Per month:
Thatch, 2000 140,000 expenses issued to be 500 medical
Pres./CEO common determined by 500 car
stock Board 250 celphone
---------------------------------------------------------------------------------------------------------
Director Compensation
No Director is specially compensated for the performance of duties in that
capacity or for his/her attendance at Director meetings.
Employment Agreements
NMMI has two written employment agreements, President and CEO and the Director
of Operations, see Item 12, below and Financial Statement, December 31, 2002 and
2001, Note 6, Commitments and Contingencies, Employment Agreements.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our common stock as of the date of this filing by: (i) each
shareholder known by us to be the beneficial owner of 5% or more of the
outstanding common stock, (ii) each of our directors and (iii) all directors and
executive officers as a group. Except as otherwise indicated, we believe that
the beneficial owners of the common stock listed below, based on information
furnished by such owners, have sole investment and voting power with respect to
such shares, subject to community property laws where applicable. Shares of
common stock issuable upon exercise of options and warrants that are currently
exercisable or exercisable within 60 days of filing this document have been
included in the table.
Name and Address Amount and Nature Percent of Class (1)
of Beneficial of Beneficial
Owner Ownership
------------- ---------------- --------------
John Thatch 1,333,688 13%
President/CEO
and Director
(1) Based upon December 31, 2002 shareholder list, 10,254,508 outstanding and
issuable shares of common stock.
17
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except as set forth below, none of our directors or officers, nor any proposed
nominee for election as one of our directors or officers, nor any person who
beneficially owns, directly or indirectly, shares carrying more than 10% of the
voting rights attached to our outstanding shares, nor any relative or spouse of
any of the foregoing persons has any material interest, direct or indirect, in
any transaction in any presently proposed transaction which has or will
materially affect the Company.
On November 2, 1999 NMMI signed an executive employment contract with John
Thatch employing that individual as President and Chief Executive Officer for
three years with a salary of $140,000 for the first year and $120,000 for the
second and third years. On November 18, 2002 this employment agreement was
extended for an additional three years on the same terms as the original
agreement. The original agreement included a provision that it was in the best
interest of NMMI to include in the employment package a provision giving John
Thatch the option to purchase, at a price of par value, 10% of any and all
additionally authorized and issued shares of stock at the agreement date and
discretionary cash or shares as a bonus. To date John Thatch has been granted
1,333,688 shares of restricted common stock under the agreement.
ITEM 13. EXHIBITS AND REPORTS
Indemnification of Directors and Officers
The Colorado General Corporation Act provides that each existing or former
director and officer of a corporation may be indemnified in certain instances
against certain liabilities which he or she may incur, inclusive of fees, costs
and other expenses incurred in connection with such defense, by virtue of his or
her relationship with the corporation or with another entity to the extent that
such latter relationship shall have been undertaken at the request of the
corporation; and may have advanced such expenses incurred in defending against
such liabilities upon undertaking to repay the same in the event an ultimate
determination is made denying entitlement to indemnification. The Company's
bylaws incorporate the statutory form of indemnification by specific reference.
The Company has never acquired or applied for any policy of directors' and
officers' liability insurance as a means of offsetting its obligation for
indemnity.
Reports to Shareholders
We intend to voluntarily send annual reports to our shareholders, which will
include audited financial statements. We are a reporting company, and file
reports with the Securities and Exchange Commission (SEC), including this Form
10-KSB as well as quarterly reports under Form 10-QSB. The public may read and
copy any materials filed with the SEC at the SEC's Public Reference Room at 450
Fifth Street, N.W., Washington, D.C. 20549. Information on the operation of the
Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The
company files its reports electronically and the SEC maintains an Internet site
that contains reports, proxy and information statements and other information
filed by the company with the SEC electronically. The address of that site is
http://www.sec.gov.
18
The company also maintains an Internet site, which contains information about
the company, news releases and summary financial data. The address of that site
is http://www.nmmimedia.com.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company, which are furnished herein as of
December 31, 2002, have been audited by Salberg & Company, P.A., Boca Raton,
Florida, independent auditors, as described in its reports with respect thereto.
The following list sets forth a brief description of each of the Company's
financial statements and exhibits being filed as a part of this Form 10-KSB, as
well as the page number on which each statement or exhibit commences:
Audited Fiscal Year End December 31, 2002
Index to Financial Statements F-2
Independent Auditor's Report - Salberg F-3
and Company, P.A.
Independent Auditors Report - Richard
J. Fuller, P.A.
Balance Sheet, December 31, 2002 F-4
Statement of Operations for each of
the years ended December 31, 2001
and 2002 F-5
Statement of Shareholder's (Deficit) Equity
For the years ended December 31,
2002 and 2001 F-6
Statement of Cash Flows for the years
ended December 31, 2002 and 2001 F-7
Notes to Financial Statements F-8
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,
thereunto duly authorized.
April 14, 2003 New Millennium Media International, Inc.
By: /s/____________________________
John "JT" Thatch, President/CEO
19
CERTIFICATIONS
I, John "JT" Thatch, as CEO/President/Director of New Millennium Media
International, Inc., certify that:
1. I have reviewed this annual report on Form 10-KSB of New Millennium Media
International, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 14, 2003 New Millennium Media International, Inc.
By: /s/____________________________
John "JT" Thatch CEO/President/Director
20
NEW MILLENNIUM MEDIA INTERNATIONAL, INC.
FINANCIAL STATEMENTS
as of year end December 31, 2002
INDEX
Index to Financial Statements................................................F-2
Independent Auditors' Report.................................................F-3
Balance Sheets ..............................................................F-4
Statements of Operations ....................................................F-5
Statements of Stockholders' (Deficit) Equity ................................F-6
Statements of Cash Flows.....................................................F-7
Notes to the Financial Statements............................................F-8
F-2
NEW MILLENNIUM MEDIA INTERNATIONAL, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
New Millennium Media International, Inc.
Contents
--------
Page
--------
Independent Auditors' Report 1
Balance Sheet 2
Statements of Operations 3
Statement of Changes in Stockholders' Deficiency 4
Statements of Cash Flows 5
Notes to Financial Statements 6 - 21
Independent Auditors' Report
----------------------------
To the Board of Directors of:
New Millennium Media International, Inc.
We have audited the accompanying balance sheet of New Millennium Media
International, Inc. as of December 31, 2002 and the related statements of
operations, changes in stockholders' deficiency and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The financial statements as of December 31, 2001
were audited by other auditors whose report dated March 31, 2002 (except for
Note 10 as to which the date is April 10, 2003) on those statements included an
explanatory paragraph describing conditions that raised substantial doubt about
the Company's ability to continue as a going concern.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly in all
material respects, the financial position of New Millennium Media International,
Inc. as of December 31, 2002, and the results of its operations, changes in
stockholders' deficiency and cash flows for the year then ended, in conformity
with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 11 to the
financial statements, the Company has a net loss of $3,443,760 in 2002, an
accumulated deficit of $6,915,826 at December 31, 2002; cash used in operations
in 2002 of $642,406, and a working capital deficit of $3,020,220 at December 31,
2002. Those matters raise substantial doubt about its ability to continue as a
going concern. Management's Plan in regards to these matters is also described
in Note 11. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
SALBERG & COMPANY, P.A.
Boca Raton, Florida
April 11, 2003
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
New Millennium Media International, Inc.
Safety Harbor, Florida
We have audited the statement of operations, stockholders' (deficit) equity and
cash flows for New Millennium Media International, Inc. for the year ended
December 31, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows for New
Millennium Media International, Inc for the year ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred losses for the year ended
December 31, 2001. This condition raises substantial doubt about its ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Richard J. Fuller, CPA, PA
Clearwater, Florida
March 31, 2002 (except for Note 10 as to which the date is April 10, 2003)
NEW MILLENNIUM MEDIA INTERNATIONAL, INC.
BALANCE SHEETS
December 31, 2002
-----------------
2002
------------
ASSETS
------
Current Assets
Cash $ 16,335
Accounts receivable 1,006
Prepaid expenses --
Other receivables, net 2,891
------------
Total Current Assets 20,232
------------
Property and Equipment
Property and Equipment, net 1,065,870
------------
Other Assets
Deferred royalty expense 75,000
Deposits 21,276
------------
Total Other Assets 96,276
------------
$ 1,182,378
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current Liabilities
Notes and loans payable 1,297,940
Notes payable, related party 303,657
Accounts payable $ 449,865
Royalties payable 83,924
Accrued expenses 330,707
Accrued compensation 154,250
Customer deposits 28,500
Deferred revenues 41,609
Deferred gain on sale of future revenues 150,000
Accrued commitment penalty 200,000
------------
Total Current Liabilities 3,040,452
------------
Stockholders' Deficit
Preferred stock, par value $0.001, 10,000,000 shares authorized
Convertible Series A, Preferred stock, 5,000,000 shares
authorized, 12,173 shares issuable 12
Common stock, par value $0.001; 15,000,000 shares
authorized, 10,253,508 and outstanding 10,254
Common stock issuable, at par value (1,000 shares) 1
Additional paid in capital 5,101,664
Accumulated deficit (6,915,826)
------------
(1,803,895)
Less deferred consulting expense (44,104)
Less subscriptions receivable (10,075)
------------
Total Stockholders' Deficiency (1,858,074)
------------
$ 1,182,378
============
See accompanying notes to financial statements
F-2
NEW MILLENNIUM MEDIA INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
----------------------------------------------
2002 2001
------------ ------------
Revenues
EyeCatcher Display sales $ 285,700 $ --
Advertising revenue 63,629 69,893
Graphic arts revenue 38,144 39,741
LED truck rental revenue 190,837 219,253
Territory fees 749 25,000
Other revenue 36,416 9,915
------------ ------------
Total income 615,475 363,802
------------ ------------
Cost of EyeCatcher Display Sales 187,300 --
------------ ------------
Gross profit 428,175 363,802
------------ ------------
Operating Expense
Bad debt 80,484 152,307
Compensation 736,855 690,519
Commitment expense and penalties 261,236 12,090
Consulting 1,373,198 239,205
Depreciation 173,874 152,587
General and administrative 476,252 301,116
Impairment loss 250,000 100,000
Professional fees 105,852 75,549
Rent 133,183 135,726
Royalites 138,943 39,858
------------ ------------
Total operating expense 3,729,877 1,898,957
------------ ------------
Loss from Operations (3,301,702) (1,535,155)
------------ ------------
Other income (expense)
Gain on settlement 98,299 --
Sublease income 61,800 --
Loss on settlement (37,235) --
Interest expense (264,922) (287,099)
------------ ------------
Total other income (expense), net (142,058) (287,099)
------------ ------------
Net Loss $ (3,443,760) $ (1,822,254)
============ ============
Basic and Diluted Net Loss Per Common Share $ (0.39) $ (0.27)
============ ============
Weighted average common shares outstanding 8,848,176 6,650,084
============ ============
See accompanying notes to financial statements
F-3
NEW MILLENNIUM MEDIA INTERNATIONAL, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
YEARS ENDED DECEMBER 31, 2002 AND 2001
--------------------------------------
COMMON STOCK AND
PREFERRED STOCK COMMON STOCK ISSUABLE ADDITIONAL
---------------------- ------------------------ PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
----------- --------- ----------- ----------- -----------
Balance, December 31, 2000 -- $ -- 5,824,121 $ 5,824 $ 1,783,895
Fair value of 42,274 warrants issued to investment bankers -- -- -- -- 12,090
Fair value of stock issued for services -- -- 500,926 501 420,276
Common stock issued for cash and warrants exercise -- -- 1,100,000 1,100 923,900
Exercise of common stock options for cash ($500) and other fair
value of borrowing cost -- -- 150,000 150 7,519
Fair value of stock issued in settlement of debt in accordance
with FASB 123 -- -- 35,000 35 27,965
Fair value of warrants issued for services -- -- -- -- 211,700
Fair value of options issued under promissory note
default provisions -- -- -- -- 211,483
Net loss for the year ended December 31, 2001 -- -- -- -- --
----------- --------- ----------- ----------- -----------
Balance, December 31, 2001 -- -- 7,610,047 7,610 3,598,828
Common stock issued for cash -- -- 346,667 347 139,653
Common stock issued for services of non-employees -- -- 730,292 730 275,989
Common stock issued for services of officer -- -- 505,502 506 130,925
Common stock issued as settlement -- -- 65,000 65 45,435
Common stock issued as debt settlement -- -- 570,000 570 230,630
Common stock issued as a forbearance -- -- 100,000 100 93,900
Common stock issued to purchase equipment -- -- 1,000 1 399
Common stock issuable as loan fee -- -- 1,000 1 1,249
Common stock options exercised under promissory notes -- -- 325,000 325 7,800
Amortization of deferred consulting -- -- -- -- --
Payment on subscription receivable with services rendered -- -- -- -- --
Cumulative subscriptions due on warrant exercise -- -- -- -- --
Preferred stock issuable in exchange for debt 12,173 12 -- -- 42,344
Warrants granted and price reset pursuant to investment
agreement -- -- -- -- 61,235
Warrants granted for services -- -- -- -- 388,275
Warrants granted under default provisions of promissory notes -- -- -- -- 85,002
Net loss for the year ended December 31, 2002 -- -- -- -- --
----------- --------- ----------- ----------- -----------
Balance, December 31, 2002 12,173 $ 12 10,254,508 $ 10,255 $ 5,101,664
=========== ========= =========== =========== ===========
COMMON TOTAL
ACCUMULATED DEFERRED STOCK STOCKHOLDERS'
DEFICIT CONSULTING SUBSCRIBED EQUITY
----------- --------- ----------- -----------
Balance, December 31, 2000 (1,649,812) $ -- $ -- $ 139,907
Fair value of 42,274 warrants issued to investment bankers -- -- -- 12,090
Fair value of stock issued for services -- -- -- 420,777
Common stock issued for cash and warrants exercise -- -- (333,375) 591,625
Exercise of common stock options for cash ($500) and other fair
value of borrowing cost -- -- -- 7,669
Fair value of stock issued in settlement of debt in accordance
with FASB 123 -- -- -- 28,000
Fair value of warrants issued for services -- (149,954) -- 61,746
Fair value of options issued under promissory note
default provisions -- -- -- 211,483
Net loss for the year ended December 31, 2001 (1,822,254) -- -- (1,822,254)
----------- --------- ----------- -----------
Balance, December 31, 2001 (3,472,066) (149,954) (333,375) $ (348,957)
Common stock issued for cash -- -- -- 140,000
Common stock issued for services of non-employees -- -- -- 276,719
Common stock issued for services of officer -- -- -- 131,431
Common stock issued as settlement -- -- -- 45,500
Common stock issued as debt settlement -- -- -- 231,200
Common stock issued as a forbearance -- -- -- 94,000
Common stock issued to purchase equipment -- -- -- 400
Common stock issuable as loan fee -- -- -- 1,250
Common stock options exercised under promissory notes -- -- -- 8,125
Amortization of deferred consulting -- 105,850 -- 105,850
Payment on subscription receivable with services rendered -- -- 333,375 333,375
Cumulative subscriptions due on warrant exercise -- -- (10,075) (10,075)
Preferred stock issuable in exchange for debt -- -- -- 42,356
Warrants granted and price reset pursuant to investment
agreement -- -- -- 61,235
Warrants granted for services -- -- -- 388,275
Warrants granted under default provisions of promissory notes -- -- -- 85,002
Net loss for the year ended December 31, 2002 (3,443,760) -- -- (3,443,760)
----------- --------- ----------- -----------
Balance, December 31, 2002 (6,915,826) $ (44,104) $ (10,075) $(1,858,074)
=========== ========= =========== ===========
See accompanying notes to financial statements
F-4
NEW MILLENNIUM MEDIA INTERNATIONAL, INC.
STATEMENT OF CASH FLOWS
DECEMBER 31, 2002 AND 2001
--------------------------
2002 2001
------------ ------------
Cash Flows from Operating Activities:
Net loss $ (3,443,760) $ (1,822,254)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Stock and options for services 1,091,811 728,266
Stock based settlement gain, net (61,064) --
Bad debt 80,484 --
Depreciation 173,874 152,587
Impairment loss 250,000 100,000
(Increase) decrease in:
Accounts receivable (58,095) (6,759)
Other receivables (2,891) --
Prepaid expenses 36,255 (34,876)
Deferred royalty expense (75,000) --
Deferred compensation 105,850 --
Deposits 3,682 --
Other assets -- (13,986)
Increase (decrease) in:
Loans payable - compensation 125,000 --
Notes payable - accrued interest 107,429 --
Notes payable, related party - accrued interest 22,026 --
Accounts payable 440,403 386,236
Royalties payable 69,424 --
Accrued expenses 58,370 --
Accrued compensation 154,250 --
Customer deposits 28,500 --
Deferred revenues (98,954) --
Deferred gain on sale of future revenues 150,000 --
Accrued commitment penalty 200,000 --
------------ ------------
NET CASH USED IN OPERATING ACTIVITIES (642,406) (510,786)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of machinery and equipment (27,320) (690,263)
Purchase of license -- (100,000)
------------ ------------
NET USED IN INVESTING ACTIVITIES (27,320) (790,263)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes and loans 497,197 591,719
Equity proceeds 141,625 --
Proceeds from notes payable - related parties -- 164,444
Proceeds from common stock transactions -- 591,625
Proceeds from exercise of common stock options -- 500
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES 638,822 1,348,288
------------ ------------
Increase (Decrease) in Cash and Cash Equivalents $ (30,904) $ 47,239
Cash and Cash Equivalents at Beginning of Year 47,239 --
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 16,335 $ 47,239
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Supplemental schedule of noncash investing and financing activities:
Fairvalue of shares issued (20,000 shares) for amounts previously
owed to secretary / treasurer $ -- $ 13,000
============ ============
Debt settled with capital stock $ 322,446 $ --
============ ============
Subscription receivable paid with services $ 333,375 $ --
============ ============
Common stock paid for equipment (1,000 shares) $ 400 $ --
============ ============
See accompanying notes to financial statements
F-5
NEW MILLENNIUM MEDIA INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
--------------------------
NOTE 1 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------------
(A) NATURE OF OPERATIONS
New Millennium Media International, Inc. (the Company), a Colorado
corporation organized on April 21, 1998, is a developer and marketer
of advertising space in special movable advertising display machinery
and LED display boards. The Company is a provider of visual
advertising through movable display boards and LED equipment.
(B) USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.
(C) CASH AND CASH EQUIVALENTS
For purposes of the cash flow statement, the Company considers all
highly liquid investments with maturities of three months or less at
the time of purchase to be cash equivalents.
(D) CONCENTRATION OF CREDIT RISK
The Company maintains its cash in bank deposit accounts, which, at
times, exceed federally insured limits. The Company has not
experienced any losses in such accounts through December 31, 2002.
(E) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated
depreciation and amortization. Expenditures for repairs and
maintenance are charged to expense as incurred. Depreciation is
provided using the straight-line method over the estimated useful
lives of the related assets of 5 to 7 years.
(F) LONG-LIVED ASSETS
The Company reviews long-lived assets and certain identifiable assets
related to those assets for impairment whenever circumstances and
situations change such that there is an indication that the carrying
amounts may not be recoverable. If the non-discounted future cash
flows of the enterprise are less than their carrying amount, their
carrying amounts are reduced to fair value and an impairment loss is
recognized.
(G) STOCK-BASED COMPENSATION
The Company accounts for stock options issued to employees in
accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to
F-6
NEW MILLENNIUM MEDIA INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
--------------------------
Employees," and related interpretations. As such, compensation cost is
measured on the date of grant as the excess of the current market
price of the underlying stock over the exercise price. Such
compensation amounts are amortized over the respective vesting periods
of the option grant. The Company adopted the disclosure provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation," which permits
entities to provide pro forma net income (loss) and pro forma earnings
(loss) per share disclosures for employee stock option grants as if
the fair-valued based method defined in SFAS No. 123 had been applied.
The Company accounts for stock options and stock issued to
non-employees for goods or services in accordance with SFAS 123 and
related interpretations.
(H) REVENUE RECOGNITION
The Company sells EyeCatcher Displays on a special order basis and
does not hold inventory. Revenue and cost of revenue from EyeCatcher
Display sales is recognized when the boards are shipped to the
customer.
Advertising revenue is recognized pro-rata over the term of the
customer contract or arrangement and customer prepayments received are
recorded as a deferred revenue liability until revenue recognition is
proper.
Graphic arts revenue is recognized at completion of services.
LED Truck rental revenue is recognized pro-rata as earned over the
rental period which generally does not exceed 14 days.
Territory fees from exclusive distributors are recorded as a deferred
revenue liability and then recognized over the term of the distributor
contract.
For all revenue types, recognition criteria also includes assessing
whether pervasive evidence of an arrangement exits, the sale price is
fixed or determinable, and collectability is reasonably assured.
(I) ADVERTISING
In accordance with Accounting Standards Executive Committee Statement
of Position 93-7, ("SOP 93-7") costs incurred for producing and
communicating advertising of the Company, are charged to operations as
incurred. Advertising expense for the years ended December 31, 2002
and 2001 was $59,615 and $6,308, respectively.
(J) INCOME TAXES
Income taxes are accounted for under the asset and liability method of
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("SFAS 109"). Under SFAS 109 deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
tax rates
F-7
NEW MILLENNIUM MEDIA INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
--------------------------
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under
SFAS 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date.
(K) EARNINGS PER SHARE
In accordance with, Statement of Financial Accounting Standards No.
128 "Earnings per Share", basic earnings per share is computed by
dividing the net income less preferred dividends for the period by the
weighted average number of common shares outstanding. Diluted earnings
per share is computed by dividing net income less preferred dividends
by the weighted average number of common shares outstanding including
the effect of common stock equivalents. For 2002 and 2001 diluted net
loss per share was the same as basic net loss per share since the
effect of dilutive instruments was antidilutive due to the net loss.
The following table summarizes common stock equivalents outstanding at
December 31, 2002 which may dilute future earning per share.
Convertible notes 13,150,032
Convertible preferred stock 528,692
Warrants 2,166,558
-------------
15,845,282
=============
(L) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures
about Fair Value of Financial Instruments," requires disclosures of
information about the fair value of certain financial instruments for
which it is practicable to estimate that value. For purposes of this
disclosure, the fair value of a financial instrument is the amount at
which the instrument could be exchanged in a current transaction
between willing parties, other than in a forced sale or liquidation.
The carrying amounts of the Company's short-term financial
instruments, including accounts receivable, and other current
liabilities reflected in the accompanying balance sheet approximate
fair value due to the relatively short period to maturity for these
instruments.
(M) RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has recently issued several
new accounting pronouncements which may apply to the Company.
Statement No. 141 "Business Combinations" establishes revised
standards for accounting for business combinations. Specifically, the
statement eliminates the pooling method, provides new guidance for
recognizing intangible assets arising in a business combination, and
calls for disclosure of considerably more information about a business
combination. This statement is effective for business combinations
initiated on or after July 1, 2001. The adoption of this pronouncement
on July 1, 2001 did not have a material effect on the Company's
financial position, results of operations or liquidity.
F-8
NEW MILLENNIUM MEDIA INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
--------------------------
Statement No. 142 "Goodwill and Other Intangible Assets" provides new
guidance concerning the accounting for the acquisition of intangibles,
except those acquired in a business combination, which is subject to
SFAS 141, and the manner in which intangibles and goodwill should be
accounted for subsequent to their initial recognition. Generally,
intangible assets with indefinite lives, and goodwill, are no longer
amortized; they are carried at lower of cost or market and subject to
annual impairment evaluation, or interim impairment evaluation if an
interim triggering event occurs, using a new fair market value method.
Intangible assets with finite lives are amortized over those lives,
with no stipulated maximum, and an impairment test is performed only
when a triggering event occurs. This statement is effective for all
fiscal years beginning after December 15, 2001. The adoption of SFAS
142 on January 1, 2002 did not have a material effect on the Company's
financial position, results of operations or liquidity.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." The standard requires entities to record the
fair value of a liability for an asset retirement obligation in the
period in which it is incurred. When the liability is initially
recorded, the entity capitalizes a cost by increasing the carrying
amount of the related long-lived asset. Over time, the liability is
accreted to its present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement
of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. The standard
is effective for fiscal years beginning after June 15, 2002. The
adoption of SFAS No. 143 is not expected to have a material impact on
the Company's financial position, results of operations or liquidity.
Statement No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets" supercedes Statement No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of" ("SFAS 121"). Though it retains the basic requirements of
SFAS 121 regarding when and how to measure an impairment loss, SFAS
144 provides additional implementation guidance. SFAS 144 excludes
goodwill and intangibles not being amortized among other exclusions.
SFAS 144 also supercedes the provisions of APB 30, "Reporting the
Results of Operations," pertaining to discontinued operations.
Separate reporting of a discontinued operation is still required, but
SFAS 144 expands the presentation to include a component of an entity,
rather than strictly a business segment as defined in SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information."
SFAS 144 also eliminates the current exemption to consolidation when
control over a subsidiary is likely to be temporary. This statement is
effective for all fiscal years beginning after December 15, 2001. The
adoption of SFAS 144 on January 1, 2002 did not have a material effect
on the Company's financial position, results of operations or
liquidity.
Statement No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections,"
updates, clarifies, and simplifies existing accounting pronouncements.
Statement No. 145 rescinds Statement 4, which required all gains and
losses from extinguishment of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect.
As a result, the criteria in Opinion 30 will now be used to classify
those gains and losses. Statement 64 amended Statement 4, and is no
longer necessary because Statement 4 has been rescinded. Statement 44
was issued to establish accounting requirements for the effects of
transition to the provisions of the motor Carrier Act of 1980. Because
the transaction has been completed, Statement 44 is no longer
necessary.
F-9
NEW MILLENNIUM MEDIA INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
--------------------------
Statement 145 amends Statement 13 to require that certain lease
modifications that have economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback
transactions. This amendment is consistent with FASB's goal requiring
similar accounting treatment for transaction that have similar
economic effects. This statement is effective for fiscal years
beginning after May 15, 2002. The adoption of SFAS No. 145 is not
expected to have a material impact on the Company's financial
position, results of operations or liquidity.
Statement No. 146, "Accounting for Exit or Disposal Activities" ("SFAS
146") addresses the recognition, measurement, and reporting of cost
that are associated with exit and disposal activities that are
currently accounted for pursuant to the guidelines set forth in EITF
94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to exit an Activity (including Certain Cost Incurred
in a Restructuring)," cost related to terminating a contract that is
not a capital lease and one-time benefit arrangements received by
employees who are involuntarily terminated - nullifying the guidance
under EITF 94-3. Under SFAS 146, the cost associated with an exit or
disposal activity is recognized in the periods in which it is incurred
rather than at the date the Company committed to the exit plan. This
statement is effective for exit or disposal activities initiated after
December 31, 2002 with earlier application encouraged. The adoption of
SFAS 146 is not expected to have a material impact on the Company's
financial position, results of operations or liquidity.
Statement No. 148, "Accounting for Stock-Based Compensation--
Transition and Disclosure", amends FASB Statement No. 123, "Accounting
for Stock-Based Compensation." In response to a growing number of
companies announcing plans to record expenses for the fair value of
stock options, Statement 148 provides alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition,
Statement 148 amends the disclosure requirements of Statement 123 to
require more prominent and more frequent disclosures in financial
statements about the effects of stock-based compensation. The
Statement also improves the timeliness of those disclosures by
requiring that this information be included in interim as well as
annual financial statements. In the past, companies were required to
make pro forma disclosures only in annual financial statements. The
transition guidance and annual disclosure provisions of Statement 148
are effective for fiscal years ending after December 15, 2002, with
earlier application permitted in certain circumstances. The interim
disclosure provisions are effective for financial reports containing
financial statements for interim periods beginning after December 15,
2002. The Company adopted the disclosure provisions of Statement 148
for the year ended December 31, 2002, but will continue to use the
method under APB 25 in accounting for stock options. The adoption of
the disclosure provisions of Statement 148 did not have a material
impact on the Company's financial position, results of operations or
liquidity.
(N) RECLASSIFICATIONS
Certain amounts in the 2001 financial statements have been
reclassified to conform to the 2002 presentation.
F-10
NEW MILLENNIUM MEDIA INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
--------------------------
NOTE 2 PROPERTY AND EQUIPMENT
-----------------------------
Property and equipment is summarized as follows:
2002
----------------
Boards available for lease $ 670,483
Equipment and LED truck 505,783
Graphic equipment 22,229
Furniture & fixtures 19,034
LED Truck (under construction), net of impairment 270,355
----------------
1,487,885
Less accumulated depreciation (422,015)
----------------
$ 1,065,870
================
Depreciation was $173,874 and $152,587 in 2002 and 2001, respectively.
During 2001 and 2002, the Company paid and accrued a total of $520,355 for the
development of a second LED Truck to be used to generate LED Truck rental
revenues. The development of this second truck experienced technical problems
and delays resulting in cost increases. At December 31, 2002 and as of the date
of the accompanying audit report, the development had not yet been completed and
the truck was not placed in service. Accordingly, no depreciation has been taken
on that truck. Management has evaluated the recovery of the recorded value and
determined that an impairment loss of $250,000 should be recognized at December
31, 2002.
NOTE 3 LICENSE
--------------
During 2001, the Company, under a license agreement, purchased an exclusive
license in a patent for the manufacture, sale, and marketing of direct view
video displays. At the purchase date of July 23, 2001 and as of December 31,
2002, the product was in its R&D stages, and no product was available for
marketing or sale. The license is valid for the entire patent term and was
therefore to be amortized over a patent life of 17 years, from the earlier of
the date the patent is granted, or the Company obtains a product ready for
resale. Accordingly, there was no amortization in 2001. At December 31, 2001 the
Company evaluated the recoverability of the recorded value of the license, and
since no product had been available for sale and no positive cash flows could be
accurately projected, recognized an impairment loss on the $100,000 license
asset. Under the agreement, the Company must pay royalties computed as 25% of
revenues derived from the sale of products utilizing the patented technology.
The agreement requires minimum annual royalty payments, payable quarterly, as
follows; $50,000 in year one of contract, $100,000 in year two, and $250,000 in
years three and each year thereafter after production of a prototype, which was
completed in October 2001. Accordingly, the Company recorded royalty expense of
$75,000 in 2002 and deferred another $75,000 (see below). In order the satisfy
the minimum royalty obligation, in August and December 2002, the Company sold a
total 15% of its license rights to a third party in exchange for that third
party paying the first $150,000 of royalties. The sale was treated for
accounting purposes as a sale of future revenues in accordance with EITF 88-18,
and the Company has recorded a deferred gain liability of $150,000 as of
December 31, 2002 to be recognized as revenues pro-rata over the term of the
license. In addition, the Company recorded $75,000 of the royalty expense to be
paid by the third party as a deferred expense asset to be recognized when due in
2003. The first agreement for the sale of future royalties also contained a
provision whereby the purchaser of the future royalties obtained a right of
first refusal to participate in further cash advances to the licensor. In the
second agreement, the purchaser also paid a $25,000 fee to the Company to
convert the first right of refusal to an absolute right to participate. This fee
was recorded as other income in 2002. The purchaser also agreed to loan the
Company up to
F-11
NEW MILLENNIUM MEDIA INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
--------------------------
$200,000 bearing interest at 8% only when the loan is fully funded. As of
December 31, 2002, only $120,000 had been funded (see Notes 4 and 5(B))
NOTE 4 NOTES AND LOANS PAYABLE
------------------------------
Notes and loans payable including accrued interest consist of the following:
2002
---------
$250,000 notes payable, with interest at 5% and rights to $ 270,869
purchase 50,000 common shares @ $.025 per share 30 days after
initial default and an additional 25,000 common shares each and
every month thereafter while in default. In default at December
31, 2002.
Three notes payable for a total $22,000, with interest at 8%.
One half of notes plus accrued interest converted to Series A
preferred Stock as of December 31, 2002. In default at December
31, 2002. 11,000
Note payable dated July 22, 2002, with interest at 10%, original
principal of $371,250, due July 21, 2003, secured by equipment,
convertible at lender option into common stock at $0.50 per
share. 389,467
Note payable dated August 23, 2002, with interest at 8%,
original principal of $25,000, due August 22, 2003, unsecured,
convertible at lender option into common stock at $0.50 per
share. 25,252
Note payable dated August 23, 2002 with interest at 8%, original
principal of $78,432, due August 22, 2003, rights to purchase
5,000 common shares @ $.025 per share 30 days after initial
default and an additional 2,500 common shares each and every
month thereafter while in default, convertible at lender option
into common stock at $0.50 per share 80,667
Note payable dated August 23, 2002, with interest at 8%, due
August 22, 2003, unsecured, convertible at lender option into
common stock at $0.50 per share. 94,380
Loan payable for $120,000, non-interest bearing until fully
funded at $200,000, then interest at 8%, due 6 months from
receipt of full $200,000, convertible to Series A Preferred
Stock at $1.00 per share 120,000
Note payable dated October 31, 2002, non-interest bearing,
unsecured, due November 30, 2002, in default at December 31, 2002 50,000
Note payable dated April 2, 2002, interest at 10%, unsecured,
due April 14, 2002, in default at December 31, 2002 10,000
Note payable, non-interest bearing, unsecured, due on demand
with options to purchase shares if in default 25,000
F-12
NEW MILLENNIUM MEDIA INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
--------------------------
$125,000 convertible note payable, with interest at 15%, secured
by equipment, convertible into common stock at $0.25 per share,
in default at December 31, 2002 176,305
Loans payable, non-interest bearing, unsecured 39,000
Loans payable, non-interest bearing, unsecured 6,000
----------
$1,297,940
==========
NOTE 5 LOANS PAYABLE, RELATED PARTIES
-------------------------------------
Related party loans including accrued interest consist of the following:
2000
---------
Notes payable to president at 8% interest, payable from proceeds $ 303,657
of Swartz equity funding, convertible to preferred stock at
$0.10 per share, secured by certain equipment, furnishings and
accounts receivable of the Company.
---------
$ 303,657
=========
NOTE 6 COMMITMENTS AND CONTINGENCIES
------------------------------------
(A) LEGAL MATTERS
A plaintiff has alleged that he holds a convertible promissory note
for $234,869 at 8% interest accruing from the note date of August
1999. The Company believes the note is not valid and intends to defend
this claim. However, as a contingency, the Company has recorded
additional interest expense in 2002 of $53,897 in addition to accrued
interest recorded in prior fiscal years of $14,991 and has reflected
$303,757 in accrued expenses at December 31, 2002.
Under an investment agreement allowing the Company to demand ("put")
the purchase of common shares by the investor, the Company is subject
to a penalty of $100,000, less any put amount, for each six month
period after the registration statement effective date that it does
not put at least $1,000,000 and a $200,000 penalty if the put
agreement is terminated automatically or by the Company. At December
31, 2002 the Company was liable for $400,000 in penalties, of which
$200,000 have been waived by Swartz Private Equity (see Note 7(C)).
Accrued penalties were recorded as $200,000 at December 31, 2002.
The Company was party to a license agreement underlying certain
products they were selling. The licensor terminated the license
agreement in February 2002 due to non-payment of certain minimum
royalties by the Company and has initiated a lawsuit to recover those
minimum royalties plus damages totaling approximately $533,000.
Management believes it is not probable that the plaintiff will recover
the entire $533,000 and has therefore only accrued $83,924 which
represents the minimum royalties plus accrued interest due through the
license termination date.
(B) ROYALTY AGREEMENTS
The Company is party to a license agreement which is valid for the
entire patent term for the patent underlying the license. As of
December 31, 2002, a patent had not been granted.
F-13
NEW MILLENNIUM MEDIA INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
--------------------------
Accordingly, the minimum term of the minimum guaranteed royalties due
under the agreement is 17 years from the time the patent is granted.
Minimum future royalties are due as follows:
Year Ending December 31, 2001
-----------
2003 $ 137,500
2004 and each year thereafter through
expiration of patent 250,000
(C) CONSULTING AGREEMENTS
In May 2001, the Company executed two consulting agreements which
expire in May 2003. Each consultant provides financial and marketing
advisory services to the Company in exchange for a warrant to purchase
500,000 common shares at $0.75 for one consultant and a warrant to
purchase 500,000 common shares at $1.00 to the other consultant. Under
the Black-Scholes option pricing model the value of the warrants was
computed as $211,700 to be recognized over the two year term of the
agreement. Related consulting expense was $105,850 and $61,746 in 2002
and 2001, respectively. Deferred consulting expense deducted from
equity at December 31, 2002 was $44,104. The warrants were exercised
in June 2001. (See Note 7)
(D) EMPLOYMENT AGREEMENTS
In November 1999, effective the Company executed a three-year
employment agreement with its president. The agreement provides for a
base salary of $140,000 in year one and $120,000 per year in years two
and three, a non-accountable expense allowance of $10,000 per year, a
stock issuance equal to 10% of the outstanding common shares at the
agreement date, and discretionary incentive compensation payments. The
agreement was renewed in late 2002 for another three-year term with
the same provisions.
On May 22, 2002 the Company executed a three-year employment agreement
with its Director of Operations. The agreement calls for a base salary
of $75,000, a discretionary bonus, and an issuance with 2.5 months
after the close of each fiscal year of $25,000 worth of common stock
based on the value as determined on December 31 as defined in the
agreement. In addition the agreement provide for a sign-on bonus of
$125,000 in the form of a promissory note at 8%. On June 18, 2002
$100,000 of that note was converted to 200,000 shares of common stock
at a rate of $0.50 per share (see Note 7). The Company accrued the
$25,000 share value as a liability at December 31, 2002 which is
included in accrued compensation.
(E) LEASES
The Company executed a non-cancelable 5-year office lease commencing
May 1, 2001. Annual rent escalation is the greater of the CPI or 3%.
Future minimum lease payments under this lease are as follows:
F-14
NEW MILLENNIUM MEDIA INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
--------------------------
Year Ending December 31, 2001
--------------
2003 $ 135,874
2004 139,951
2005 144,149
2006 60,800
--------------
$ 480,774
==============
Rental expense was $133,183 and $135,726 in 2002 and 2001,
respectively.
The Company subleases part of its corporate office space to another
company, under common management, for $4,800 per month under a
one-year lease which expires January 31, 2003. A receivable of $30,991
due from the tenant was 100% reserved at December 31, 2002 due to the
Company's assessment that the tenant does not have the current ability
to pay.
NOTE 7 STOCKHOLDERS' EQUITY
---------------------------
(A) PREFERRED STOCK
In 2002, the Company designated 5,000,000 share of preferred stock as
new Series A Convertible Preferred Stock ("Series A"). The Series A is
convertible to common shares on a four-for-one basis, is due dividends
at $0.10 per share as authorized by the Board, has a liquidation value
of $1.00 per share and has equivalent voting rights as common shares
on a share for share basis. Although the Company granted Series A
preferred stock under certain debt conversions (see below), the
Company has not filed as an amendment to its articles of incorporation
for the designation of Series A preferred stock with the State and has
not issued such shares. Accordingly, the shares, which are issuable
under various contracts, are reflected as issuable in the accompanying
consolidated balance sheet at December 31, 2002.
On May 2, 2002 the Company granted 12,173 Series A convertible
preferred shares in exchange for $12,173 of principal and interest
payable on loans to three individuals. The preferred shares were
valued at $3.48 per share based on the quoted trading price of the
common stock on May 2, 2002 and the 4-for-1 conversion ratio for the
preferred shares which were immediately convertible. Accordingly, the
Company recorded a settlement loss of $30,183.
(B) COMMON STOCK ISSUANCES
During June 2001, the Company sold 500,000, 500,000 and 100,000 common
shares pursuant to warrant exercises for cash of $500,000 ($1.00 per
share), $375,000 ($0.75 per share), and $50,000 ($0.50 per share),
respectively. The average sale price for the month was $0.84. A
related subscription at December 31, 2001 of $333,375 was paid with
services in 2002.
During 2001, the Company issued 328,186 common shares to an officer
and 172,740 shares to others for services rendered. The shares were
valued at the contemporaneous average private sale price of $0.84 per
share resulting in a compensation expense of $275,676 and a consulting
expense of $145,101.
F-15
NEW MILLENNIUM MEDIA INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
--------------------------
During 2001, the Company issued 35,000 common shares in exchange for
debt of $28,000. The stock was valued at $0.80 per share which
approximated the contemporaneous private sale price of $0.84 per share
on the settlement date resulting in no gain or loss on the exchange.
During 2002, the Company sold common stock for cash. In May 2002 the
Company sold 80,000 restricted common shares for one investor for
$40,000 or $0.50 per share pursuant to a warrant exercise. In
September 2002 the Company sold 166,667 restricted common shares at
$0.30 per share and 100,000 restricted common shares at $0.50 per
share to one investor as one transaction for aggregate proceeds of
$100,000 or an average price of $0.375 per share. From May 2002 to
December 2002 the quoted trading price for freely traded common shares
was generally below the private sale price for restricted common
shares and therefore the Company used the lower quoted trading price
as a measure to value non-cash issuances during these dates.
During 2002, the Company issued an aggregate 325,000 common shares
pursuant to exercises of options granted under the default provisions
of certain promissory notes (see Note 4). The issuance resulted in
cash proceeds of $1,175 and subscriptions receivable of $6,950 for a
total issuance price of $8,125 or $.025 per share. Total subscriptions
receivable related to exercised options under default provisions of
promissory notes through December 31, 2002 were $10,075 at December
31, 2002.
During 2002, the Company issued 730,292 shares for services rendered
to various non-employee consultants and service providers valued at
prices ranging from $0.35 to $0.53 based on contemporaneous quoted
trading prices or cash sale prices, as applicable, for an aggregate
value of $276,719 charged to expense in 2002. The $276,219 was
allocated to a consulting expense of $299,919 and a settlement gain of
$23,200 since one of the transactions has been contractually valued
$23,200 lower than the value of the stock issued.
In December 2002, the Company issued 505,502 common shares to its
president as a bonus under his employment agreement. The shares were
valued at the $0.26 quoted trading price at the grant date a resulting
in a compensation expense charged to operations in December 2002 of
$131,431.
During 2002, the Company issued 65,000 common shares under two
settlements. In April 2002 a settlement for 40,000 common shares was
valued at the quoted trading price of $1.00 per share at the
settlement date; and in October 2002 a settlement for 25,000 common
shares valued at the quoted trading price of $0.22 per share at the
settlement date resulting in an aggregate settlement charge to
operations of $45,500.
During 2002, the Company settled various loans totaling $322,046
through the issuance of 570,000 shares of common stock. The stock was
valued at an aggregate $231,200 based on the quoted trading price
which ranged from $0.21 to $0.56 on each of the various settlement
dates resulting in a settlement gain of $98,299 and a settlement loss
of $7,052.
During 2002, the Company issued 100,000 common shares to a
vendor/creditor as a forbearance to avoid or delay potential legal
action relating to collection of the debt. The shares were valued at
the $0.94 per share quoted trading price on the forbearance date
resulting in a forbearance expense of $94,000 included in general and
administration expense.
F-16
NEW MILLENNIUM MEDIA INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
--------------------------
During 2002, the Company issued 1,000 common shares as part of the
purchase price of certain used equipment. The shares were valued at
the $0.40 quoted trading price on the purchase date resulting in an
asset of $400.
During April 2002, the Company agreed to issue 1,000 shares as a loan
fee. The shares were valued at the $1.25 quoted trading price on the
agreement date resulting in an expense of $1,250. At December 31,
2002, the shares had not been issued and are reflected as issuable in
the accompanying balance sheet.
(C) INVESTMENT AGREEMENT
A May 19, 2000 agreement ("Agreement") with Swartz Private Equity, LLC
(Swartz) provides the Company an equity line of up to $25,000,000
during the three year period following the effective date of September
28, 2000 of the registration statement covering the Swartz Agreement.
The Company may sell its common stock to Swartz under a "put right"
subject to individual put quantity limitations as defined in the
Agreement, and certain provisions subject the put rights to
termination, including periods when the Company's registration
statement is not effective. The purchase price of the common shares
shall be the lesser of (i) the market price for such put, less $0.10
or (ii) 92% of the market price, but no less than a minimum put share
price which the Company may designate. The market price is defined as
the lowest closing bid price for the period of 20 days after the put
date. The minimum put share price shall be no greater than 80% of the
closing bid price on the advance put notice date, which is from 10 to
20 days before any intended put date. The Company is also subject to a
penalty of $100,000, less any put amount, for each six month period
after the registration statement effective date that it does not put
at least $1,000,000 and a $200,000 penalty if the put agreement is
terminated automatically or by the Company. At December 31, 2002 the
Company computed $400,000 in penalties, of which $200,000 have been
waived by Swartz Private Equity resulting in an accrued penalty of
$200,000 at December 31, 2002. For all proceeds raised under this
agreement, the Company shall pay a 7% fee to a placement agent. For
accounting purposes, such fee will be charged against the gross
proceeds to additional paid-in capital.
At the Agreement date, the Company was required to and issued 200,000
"commitment warrants" exercisable at $1.50 per share, expiring March
21, 2005. Utilizing the Black Scholes formula, assuming a 5 year life,
no expected dividends, volatility of 35% and interest rate of 6%, the
Company determined that the fair value of "commitment warrants" issued
to be $57,200 and expensed that value immediately as the commitment
warrants were fully vested. For each put, the Company is required to
issue and deliver to Swartz "purchase warrants" to purchase a number
of shares of common stock equal to 10% of the common shares issued to
Swartz in each applicable put. Each "purchase warrant" will be
exercisable at a price that will initially equal 110% of the market
price for that put and thereafter the exercise price shall be reset
every six months. The warrants are immediately exercisable and have a
term expiring 5 years thereafter. In addition, at the earlier of March
15, 2001 or the date of the first put, the Company must start to issue
"additional warrants" such that the sum of the "commitment warrants"
and "additional warrants" equals at least 4% of the fully diluted
shares of common stock of the Company that are then outstanding. The
additional warrants will expire seven years from the issuance date,
have reset provisions every six months and have an initial exercise
price of equal to 110% of the market price as defined. The reset price
will be the lowest initial or reset price which effectively
F-17
NEW MILLENNIUM MEDIA INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
--------------------------
may lower the exercise price but may not increase it. The Company's
registration statement became initially effective on September 28,
2000 and the Company exercised its first put, for 100,000 shares on
July 17, 2001, the advance notice date. Thus, the triggering event for
the "additional warrants" provision was the "earlier of" date of March
15, 2001. Accordingly, during 2001 the Company issued 16,796 and
25,478 "additional warrants" expiring April 17, 2006 and July 17,
2006, respectively, to purchase 42,274 additional shares of the
Company's common stock at an initial exercise price of $1.50. The fair
value of the "additional warrants" issued was $12,090, using the same
Black-Scholes assumptions as for the commitment warrants above, which
was charged to expense in 2001. During 2002 the Company became
obligated to issue 299,284 "additional warrants." Such warrants are
issuable with an initial estimated exercise price of $0.51 per share
and expire December 31, 2007. These warrants were valued at $102,555
using a Black-Scholes pricing model with the following assumptions:
expected term of 2 years, volatility of 164%, dividends of zero, and a
discount rate of 2%. (See Note 7(D))
Due to the Company's registration statement becoming not effective as
a result of a post effective amendment, Swartz was not required to
purchase the 100,000 put shares and thus the Company has not recorded
such shares as outstanding for accounting purposes in accordance with
the accounting rules for contingent shares under the Emerging Issues
Task Force Issue Topic D-90 and SFAS 128 "Earning per Share".
(D) STOCK OPTIONS AND WARRANTS
On June 26, 2000, the Company's Board of Directors adopted the New
Millennium Media International, Inc. 2000 Stock Option Plan (the
"Plan"). The Plan provides for the issuance of incentive stock options
(ISO's) to any individual who has been employed by the Company for a
continuous period of at least six months. The Plan also provides for
the issuance of Non Statutory Options (NSO's) to any employee who has
been employed by the Company for a continuous period of at least six
months, any director, or consultant to the Company. The Company may
also issue reload options as defined in the plan. The total number of
common shares of common stock authorized and reserved for issuance
under the Plan is 3,000,000 shares. The Board shall determine the
exercise price per share in the case of an ISO at the time an option
is granted and such price shall be not less than the fair market value
or 110% of fair market value in the case of a ten percent or greater
stockholder. In the case of an NSO, the exercise price shall not be
less than the fair market value of one share of stock on the date the
option is granted. Unless otherwise determined by the Board, ISO's and
NSO's granted under the Plan have a maximum duration of 10 years. As
of December 31, 2002, no options have been granted under the Plan.
In May 2001, the Company granted 500,000 warrants at a $0.75 exercise
price and 500,000 warrants at a $1.00 exercise price for services
under two year consulting agreements. The consultants were fully
vested on the grant date thereby establishing a measurement date for
the consulting expense. The expense was determined using the
Black-Scholes option pricing model resulting in a value of $211,700.
During 2001, $61,746 of this value was expensed and $149,954 was
reflected as deferred expense deducted from equity at December 31,
2001. During 2002, $105,850 was expensed leaving a deferred balance of
$44,104 at December 31, 2002. The Black Scholes formula, assumed a
0.08 year life, volatility of 76%, no expected dividends, and a
discount rate of 3.7%. These warrants were exercised in June 2001.
F-18
NEW MILLENNIUM MEDIA INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
--------------------------
During July to December 2001, the Company granted 175,000 options to
purchase common stock at $.025 per share under the default provisions
of certain promissory notes. The options were valued using a
Black-Scholes model resulting in an interest expense of $211,483 in
2001. The Black Scholes formula, assumed a 0.08 year life, no expected
dividends, volatility of 76% and interest rate of 2.59%. These options
have been typically exercised immediately or within one month. There
were 25,000 of these options unexercised at December 31, 2001. During
2002 the Company granted 300,000 options under the default provisions
which were valued at $85,002 and charged to interest expense using the
Black-Scholes option pricing model with a 0.08 expected life,
volatility of 164%, zero expected dividends and a discount rate of 2%.
All of these options were exercised as of December 31, 2002.
In 2002 and 2001, the Company granted 299,284 and 42,274 "additional
warrants," respectively, to Swartz. The 299,284 warrants have not been
issued as of the date of the accompanying audit report. These options
to Swartz have exercise price reset provisions which require the
Company to use variable accounting for expensing these options. Under
variable accounting, the Company estimates the fair value of the
options at each balance sheet date and adjusts the aggregate expense
for all warrants granted under this provision either up or down.
During 2001 the Company charged $12,090 to commitment expense. During
2002 the Company issued the additional 299,284 warrants and priced and
valued those warrants under the Black-Scholes method based on the year
end quoted market price of the common stock. The Company also reset
the exercise price of the prior warrants as follows: 16,796 warrants
at $0.28; 25,478 at $0.51. The result under the variable accounting
method was a net charge to commitment expense of $61,236 in 2002. (See
Note 7)
During 2002 the Company granted warrants to non-employee service
providers to purchase an aggregate 2,124,284 common shares at exercise
prices ranging from $0.20 to $1.00 The warrants to non-employees were
valued at an aggregate $388,275 which was charged to consulting
expense immediately since the services were considered completed. The
warrants were valued under a Black-Scholes option pricing model using
the following assumptions: expected terms of 2 years, expected
volatility of 164%, dividends of zero, and a discount rate of 2%.
A summary of the options issued to non-employees for services as of
December 31, 2002 and 2001 and changes during the years is presented
below:
2002 2001
------------------------------------ ------------------------------------
Number of Weighted Number of Weighted
Options and Average Options and Average
Warrants Exercise Price Warrants Exercise Price
--------------- ---------------- --------------- ----------------
Stock Options
Balance at beginning of period 367,274 $ 1.28 800,000 $ 1.19
Granted 2,124,284 $ 0.45 1,167,274 $ 0.77
Exercised (325,000) $ 0.03 (1,100,000) $ 0.80
Forfeited - $ - (500,000) $ 1.00
--------------- ---------------- --------------- ----------------
Balance at end of period 2,166,558 $ 0.66 367,274 $ 1.28
=============== ================ =============== ================
Options exercisable at end of period 2,166,558 $ 0.66 367,274 $ 1.28
--------------- ---------------- --------------- ----------------
Weighted average fair value of options $ 0.26 $ 0.20
granted during the period ================ ================
F-19
NEW MILLENNIUM MEDIA INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
--------------------------
The following table summarizes information about employee and
non-employee stock options and warrants outstanding at December 31,
2002:
Options and Warrants Outstanding Options and Warrants Exercisable
-------------------------------------------------------------------------- ----------------------------------
Weighted
Number Average Weighted Weighted
Range of Outstanding at Remaining Average Number Average
Exercise December 31, Contractual Exercise Exercisable at Exercise
Price 2002 Life Price December 31, 2002 Price
-------------- ---------------- ------------- ------------ ------------------ ------------
$ 0.29 299,284 5.00 Years $ 0.29 299,284 $ 0.29
0.25 100,000 4.88 Years 0.25 100,000 0.25
0.20 100,000 4.74 Years 0.20 100,000 0.20
0.51 25,478 3.55 Years 0.51 25,478 0.51
0.28 16,796 3.30 Years 0.28 16,796 0.28
0.35 - 1.00 1,200,000 2.88 Years 0.68 1,200,000 0.68
1.50 100,000 2.58 Years 1.50 100,000 1.50
1.50 200,000 2.22 Years 1.50 200,000 1.50
0.25 100,000 2.00 Years 0.25 100,000 0.25
0.75 25,000 0.11 Years 0.75 25,000 0.75
---------------- ------------ ------------------ ------------
2,166,558 $ 0.66 2,166,558 $ 0.66
================ ============ ================== ============
NOTE 8 RELATED PARTY TRANSACTIONS
---------------------------------
The Company subleases part of its corporate office space to another company,
under common management, for $4,800 per month under a one -year lease which
expires January 31, 2003. A receivable of $30,991 due from the tenant was 100%
reserved at December 31, 2002 due to the Company's assessment that the tenant
does not have the current ability to pay.
The Company has loans payable including accrued interest to its president
totaling $303,657 at December 31,
2002. (See Note 5)
NOTE 9 INCOME TAXES
-------------------
There was no income tax expense in 2002 and 2001 due to the Company's net
losses.
The Company's tax expense differs from the "expected" tax expense for the
periods ended December 31, 2001 and 2000, (computed by applying the Federal
Corporate tax rate of 34% to loss before taxes), as follows:
2002 2001
---------------- ---------------
Computed "expected" tax benefit $ (1,170,878) (619,566)
Change in valuation allowance 799,663 619,566
Equity instruments for services 371,216 -
---------------- ---------------
$ - $ -
================ ===============
F-20
NEW MILLENNIUM MEDIA INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
--------------------------
The tax effects of temporary differences that gave rise to significant portions
of deferred tax assets and liabilities at December 31, 2001 and 2000 are as
follows:
2002 2001
---------------- ---------------
Deferred tax assets:
Net operating loss carry forwards $ 1,980,165 $ 1,180,502
Valuation allowance for deferred tax asset (1,980,165) (1,180,502)
---------------- ---------------
$ - $ -
================ ===============
After consideration of all the evidence management has determined that a full
valuation allowance is necessary to reduce the deferred tax assets to the amount
that will more likely than not be realized.
At January 1, 2002 the valuation allowance was $1,180,502. The increase during
2002 was $799,663.
At December 31, 2002, the Company has available net operating loss carry
forwards of approximately $5,824,015, which expire through 2022.
NOTE 10 CONCENTRATIONS
----------------------
During 2002, 45% of revenues were derived from two customers at 23% and 22%.
NOTE 11 GOING CONCERN
---------------------
As reflected in the accompanying financial statements, the Company has a net
loss of $3,443,760 in 2002, an accumulated deficit of $6,915,826 at December 31,
2002; cash used in operations in 2002 of $642,406, and a working capital deficit
of $3,020,220 at December 31, 2002. The ability of the Company to continue as a
going concern is dependent on the Company's ability to further implement its
business plan, raise capital, and generate revenues.
The Company is working towards re-filing its Form SB-2 with the United States
Securities and Exchange Commission in order for it to become effective. The
Swartz $25,000,000 equity line should then become available for the Company to
obtain the necessary funding to expand its operations.
NOTE 12 SUBSEQUENT EVENTS
-------------------------
In January 2003, certain creditors, officers, and employees agreed to convert
$1,021,655 of notes and accrued compensation to Series A, Convertible Preferred
Stock at $1.00 per share. The conversion is contingent on the Company raising
$1,000,000 by the sale of Series A, Convertible Preferred Stock by May 15, 2003.
If the Company does not raise such funds, the creditors may cancel the
conversion agreement at any time prior to September 25, 2003 by written notice
to the Company.
F-21