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Microcap & Penny Stocks : Zulu-tek, Inc. (ZULU) -- Ignore unavailable to you. Want to Upgrade?

To: Terry T. who wrote (15932)	11/16/1998 8:37:00 PM
From: Brady B.	Respond to of 18444

To exhibit 1............... APPENDIX A-1 UNAUDITED PRO FORMA BALANCE SHEET August 31, 1998 Enhanced ZULU GROUP.COM Zulu tek, Inc. Services Company, Inc. Acquisition/ Equity Adjustments CONSOLIDATED ------------------------------ ------------------------------- -------------- Assets Current Assets Cash $ 21,770 $ 63,059 $ 84,829 Accounts receivable, net 251,726 585,178 836,904 Inventory 254,826 254,826 Intercompany receivable 302,853 2,333,249 1 (2,636,102) 0 Other current assets 35,282 177,391 212,673 ------------ ------------ ------------ Total current assets 611,630 3,413,703 $ 1,389,231 Property and equipment, net of accumulated depreciation 1,540,248 108,661 1,648,909 Investment in Zulu tek, Inc. 4,045,000 2 (4,045,000) 0 Goodwill - Echo/Zulu Media 14,122,418 3 2,991,429 2 2,757,968 17,113,847 Intangible Technology 4 (2,757,968) Other assets 150,755 19,708 170,463 ------------ ------------ ------------ Total assets $ 16,425,051 $ 7,587,072 $ 20,322,450 ============ ============ ============ Liabilities and Stockholders' Equity Current Liabilities Accounts Payable $ 7,385,107 $ 1,127,895 (356,139) $ 8,156,863 Notes payable 908,500 908,500 Repurchase of Preferred Stock 7 374,800 374,800 Due to Related parties 2,279,963 1 (2,279,963) (0) Other current liabilities 106,945 106,945 Deferred Revenue 550,199 550,199 ============ ============ ============ Total current liabilities 10,215,269 2,143,340 $ 10,097,306 Notes payable 2,463,610 2,266,249 4,729,859 Minority Interest 3 801,338 801,338 Series C Redeemable Preferred 10,209,000 9 (10,209,000) 0 ============ ============ ============ Total liabilities $ 22,887,879 $ 4,409,589 $ 15,628,504 Stockholders' Equity Common stock 10 (27,348) 52,000 3,208 2 (12,000) 3 (3,208) 12,652 Convertible Debentures 1998 5 Preferred Stock (ESC) 3,000,008 3 (3,000,000) 8 Series A/B Preferred (Zulu) 3,374,800 8 (3,000,000) 7 (374,800) 0 Series C Preferred 1998 9 10,209,000 10,209,000 Series D Preferred 10,000 2 (10,000) 0 5,170,806 3 (4,370,814)10 27,348 Additional paid in capital 3 4,567,567 2 (1,265,032) 4,371,907 4 (2,757,968) 3,000,000 Retained Earnings (9,899,628) (4,996,539) 3 4,996,539 (9,899,628) ------------ ------------ ------------ Total stockholder's equity $ 6,462,827 $ 3,177,483 $ 4,693,940 ============ ============ ============ Total Liabilities & Stockholders' Equity $ 16,425,052 $ 7,587,072 $ 20,322,444 ============ ============ ============ APPENDIX A-2 Zulu Group.com Unaudited Pro Forma Statement of Operations For the 8 Months ended August 31, 1998 DISCONTINUED CONTINUING ESVS ZULU-MEDIA ADJUSTMENTS CONSOLIDATED OPERATIONS OPERATIONS ------------ ------------ ------------ ------------ ------------ ------------ Gross sales volume $ 2,675,226 $ 17,519,059 $ 20,194,285 $ 305,921 $ 19,888,364 ============ ============ ============ ============ ============ Net sales 2,675,226 1,719,553 4,394,779 305,921 4,088,858 Cost of sales 1,113,331 530,069 1,643,400 103,387 1,540,013 ------------ ------------ ------------ ------------ ------------ Gross profit 1,561,895 1,189,484 2,751,379 202,534 2,548,845 Operating expenses 3,311,293 4,823,298 8,134,591 622,362 7,512,229 Goodwill amortization 710,304 (2) 2,187,901 2,187,901 2,187,901 (1) (710,304) Net operating loss $ (2,459,702) $ (3,633,814) $ (7,571,113) $ (419,828) $ (7,151,285) ------------ ------------ ------------ ------------ ------------ Other Income(Expense) (729,414) $ (729,414) (292,004) (437,410) ------------ ------------ ------------ ------------ ------------ Net loss $ (3,189,116) $ (3,633,814) $ (8,300,527) $ (711,832) $ (7,588,695) ============ ------------ ============ ============ ============ (3) Note (1) Amortization of goodwill of the discontinued operation of NB Engineering has been eliminated in both the 1997 and 1998 pro forma statement of operations. Note (2) Goodwill created by the combined entities, if approved by the shareholders, has been presented in both the 1997 and 1998 pro forma statement of operations. The estimated life of 5 years was used in the calculation. Note (3) NB Engineering, Inc., a subsidiary of Enhanced Services Company was discontinued on May 31, 1998 and its operations have been eliminated in both the 1997 and 1998 proforma statement of operations. APPENDIX A-3 Zulu Group.com Unaudited Pro Forma Statement of Operations For the 12 Months ended December 31, 1997 DISCONTINUED CONTINUING ESVS ZULU-MEDIA ADJUSTMENTS CONSOLIDATED OPERATIONS OPERATIONS ------------ ------------ ------------ ------------ ------------ ------------ Gross sales volume $ 5,689,074 $ 38,218,566 $ 43,907,640 $ 1,240,761 $ 42,666,879 ============ ============ ============ ============ ============ Net sales 5,689,074 6,370,634 12,059,708 1,240,761 10,818,947 Cost of sales 2,529,222 6,250,711 8,779,933 167,096 8,612,837 ------------ ------------ ------------ ------------ ------------ Gross profit 3,159,852 119,923 3,279,775 1,073,665 2,206,110 Operating expenses 4,627,984 18,031,286 22,659,270 1,776,042 20,883,228 Goodwill amortization 157,848 9,516,096 (2) 3,281,851 3,281,851 3,281,851 (1) (9,673,944) ------------ ------------ ------------ ------------ ------------ Net operating loss $ (1,625,980) $(27,427,459) $(22,661,346) $ (702,377) $(21,958,969) ------------ ------------ ------------ ------------ ------------ Other Income(Expense) 629,315 629,315 629,315 ------------ ------------ ------------ ------------ ------------ Net loss $ (996,665) $(27,427,459) $(22,032,031) $ (702,377) $(21,329,654) ============ ============ ============ ============ ============ (3) (See notes on Appendix A-2)

To: Terry T. who wrote (15932)	11/16/1998 8:39:00 PM
From: Brady B.	Respond to of 18444

More pages............. EXHIBIT 1 ZULU MEDIA, INC. (A Delaware Corporation) FINANCIAL STATEMENTS December 31, 1997 and December 31, 1996 ZULU MEDIA, INC. (A Delaware Corporation) TABLE OF CONTENTS For the Years Ended December 31, 1997 and December 31, 1996 Page ---- Independent Auditors Report 1 Balance Sheet 2-3 Statement of Income and Accumulated Deficit 4 Statement of Stockholders' Equity 5 Statement of Cash Flows 6-7 Notes to Financial Statements 8-14 [BRAD B. HAYNES LETTERHEAD] INDEPENDENT AUDITOR'S REPORT To The Board of Directors and Stockholders of ZULU MEDIA, INC. We have audited the balance sheet of ZULU MEDIA, INC. as of December 31, 1997 and the related statement of income and accumulated deficit, shareholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We did not audit the Company's financial statements from June 19, 1996 (inception) to December 31,1996. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included is based solely on the report of the other auditors. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit and the report of the other auditors provides a reasonable basis for our opinion. In our opinion, based on our audit and the report of the other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of ZULU MEDIA, INC. as of December 31, 1997, and the results of its operations, shareholders' equity and its cash flows for the year then ended in conformity with generally accepted accounting principles. /S/ BRAD B. HAYNES Brad B. Haynes July 20, 1998 1 ZULU MEDIA, INC. (A Delaware corporation) BALANCE SHEET AS OF ASSETS JUNE 19, 1996 YEAR ENDED (INCEPTION) TO DECEMBER 31. 1997 DECEMBER 31.1996 ----------------- ---------------- CURRENT ASSETS Cash 575,235 351,893 Accounts receivable net of allowance for doubtful accounts 1997 - 117,738 and 1996 - 307,470 3,741,024 6,672,333 Employee advances and other receivables 0 200,571 Marketable securities 820,820 0 Prepaid expenses 98,146 117,492 ---------- ---------- Total Current Assets 5,235,225 7,342,289 PROPERTY AND EQUIPMENT (NET) 1,845,066 1,315,343 OTHER ASSETS Goodwill (Net) 0 7,600,681 Deposits 111,130 68,848 ---------- Total Other Assets 111,130 7,669,529 ---------- ---------- TOTAL ASSETS 7,191,421 16,327,161 ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable 6,504,466 6,365,869 Payroll and other related liabilities 1,854,003 1,695,385 Payable to related party 2,435,000 1,265,729 Deferred revenues, current portion 311,370 317,761 ---------- ---------- Total Current Liabilities 11,104,839 9,644,744 DEFERRED REVENUES - non current portion 0 224.196 ---------- ---------- TOTAL LIABILITIES 11,104,839 9,868,940 See accompanying notes 2 ZULU MEDIA, INC. (A Delaware corporation) BALANCE SHEET CONTINUED AS OF JUNE 19, 1996 YEAR ENDED (INCEPTION) TO DECEMBER 31, 1997 DECEMBER 31, 1996 ----------------- ----------------- STOCKHOLDERS' EQUITY Preferred Stock, Series A, 1 par value authorized, issued and outstanding - 705 voting shares 0 705 Preferred Stock, Series B, 1 par value authorized, issued and outstanding - 295 non voting shares 0 295 Common Stock, 1 par value authorized, 1,000,000 shares issued and outstanding shares 862,529 - 1997 1,000 shares - 1996 862,529 1,000 Additional paid in capital 26,977,471 11,603,000 Unrealized gain on marketable securities 820,820 0 Accumulated deficit (32,574,238) (5,146,779) ----------- ----------- Total Stockholders' Equity (3,913,418) 6,458,221 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 7,191,421 16,327,161 =========== =========== See accompanying notes 3

To: Terry T. who wrote (15932)	11/16/1998 8:41:00 PM
From: Brady B.	Respond to of 18444

Maas............ ZULU MEDIA, INC. (A Delaware Corporation) STATEMENT OF INCOME AND ACCUMULATED DEFICIT FOR THE JUNE 19, 1996 YEAR ENDED (INCEPTION) TO DECEMBER 31. 1997 DECEMBER 31.1996 ----------------- ---------------- GROSS SALES VOLUME 38,218,566 20,124,024 ----------- ----------- REVENUES 6,370,634 4,140,127 COST OF SALES 6,250,711 823,937 ----------- ----------- GROSS PROFIT 119,923 3,316,190 OPERATING EXPENSES Marketing 2,851,345 1.426,894 Selling 6,871,984 4,023,342 General and administrative 8,309,957 2,612,697 Amortization and write-off of goodwill 9,516,096 400,036 ----------- ----------- Total Operating Expenses 27,547,382 8,462,969 ----------- ----------- LOSS BEFORE INCOME TAXES (27,427,459) (5,146,779) PROVISION FOR INCOME TAXES 0 0 NET LOSS (27,427,459) (5,146,779) ----------- ACCUMULATED DEFICIT DECEMBER 31, 1996 (5,146,779) (5,146,779) ----------- ACCUMULATED DEFICIT - DECEMBER 31, 1997 (32,574,238) ----------- See accompanying notes 4 ZULU MEDIA, INC. (A Delaware Corporation) STATEMENT OF STOCKHOLDERS' EQUITY FOR THE PERIOD JUNE 19, 1996 (INCEPTION) TO DECEMBER 31, 1996 AND FOR THE YEAR ENDED DECEMBER 31,1997 SERIES A SERIES B PREFERRED STOCK PREFERRED STOCK COMMON STOCK --------------- --------------- ------------ SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ---------- ---------- ---------- ---------- ---------- ---------- Issuance of stock in connection with the formation of the Company and the acquisition of IMl and Network 1.0 705 705 295 295 1,000 1,000 Additional capital contribution from parent -- -- -- -- -- -- Loss for period June 19, 1998 (inception) to December 31, 1998 -- -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- Balance December 31, 1996 705 705 295 295 1,000 1,000 Additional capital contribution from parent -- -- -- -- -- -- Unrealized gain on marketable securities -- -- -- -- -- -- Stock split (705) (705) (295) (295) 861,529 861,529 Acquisition of assets of Webwide Media PTY, LTD -- -- -- -- -- -- Loss for year ended December 31, 1997 -- -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- Balance December 31,1997 -- -- -- -- 862,529 862,529 ========== ========== ADDITIONAL UNREALIZED GAIN PAID-IN ON MARKETABLE ACCUMULATED CAPITAL SECURITIES DEFICIT TOTAL ---------- ---------- ---------- ---------- Issuance of stock in connection with the formation of the Company and the acquisition of IMl and Network 1.0 5,748,000 -- -- 5,750,000 Additional capital contribution from parent 5,855,000 -- -- 5,855,000 Loss for period June 19, 1998 (inception) to December 31, 1998 -- -- (5,146,779) (5,146,779) ---------- ---------- ---------- ---------- Balance December 31, 1996 11,603,000 (5,146,779) 6,458,221 Additional capital contribution from parent 14,235,000 -- -- 14,235,000 Unrealized gain on marketable securities -- 820,820 -- 820,820 Stock split (860,529) -- -- Acquisition of assets of Webwide Media PTY, LTD 2,000,000 -- -- 2,000,000 Loss for year ended December 31, 1997 -- -- (27,427,459) (27,427,459) ---------- ---------- ---------- ---------- Balance December 31,1997 26,977,471 820,820 (32,574,238) (3,913,418) ========== ========== ========== ========== See accompanying notes 5

To: Terry T. who wrote (15932)	11/16/1998 8:42:00 PM
From: Brady B.	Read Replies (1) \| Respond to of 18444

The end......... ZULU MEDIA, INC. (A Delaware Corporation) STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1997 CASH FLOWS FROM OPERATING ACTIVITIES Net loss (27,427,460) Adjustments to reconcile to net cash: Depreciation 667,353 Amortization and write-off of goodwill 9,516,096 Provision for bad debts 189,732 Decrease in accounts receivable 2,721,646 Decrease in employee advances and other receivables 200,571 Decrease in prepaid expense 19,346 Increase in deposits (42,282) Increase in accounts payable 138,597 Increase in payroll and other accrued liabilities 158,618 Increase in payable to related party 1,169,271 Decrease in deferred revenues (230,587) ----------- Total Adjustments 14,508,361 ----------- NET CASH USED IN OPERATING ACTIVITIES (12,919,099) CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of property and equipment (1,092,559) NET CASH USED IN INVESTING ACTIVITIES (1,092,559) CASH FLOWS FROM FINANCING ACTIVITIES Additional capital contribution from parent 14,235,000 NET CASH PROVIDED BY FINANCING ACTIVITIES 14,235,000 ----------- NET CASH PROVIDED BY ALL ACTIVITIES 223,342 CASH - December 31, 1996 351,893 ----------- CASH - December 31, 1997 575,235 ----------- See accompanying notes 6 ZULU MEDIA, INC. (A Delaware Corporation) STATEMENT OF CASH FLOWS FOR THE PERIOD JUNE 19, 1996 (INCEPTION) TO DECEMBER 31, 1996 CASH FLOWS FROM OPERATING ACTIVITIES NET LOSS (5,146,779) Adjustments to reconcile to net cash: Depreciation 190,400 Amortization of goodwill 400,036 Provision for bad debts 307,470 Increase in accounts receivable (4,850,603) Increase in employee advances and other receivables (108,803) Increase in prepaid expense (33,397) Increase in deposits (24,699) Increase in accounts payable 4,238,617 Increase in payroll and other accrued liabilities 825,715 Decrease in payable to related party (74,271) Decrease in deferred liabilities (380,557) ----------- Total Adjustments 489,908 ----------- NET CASH USED IN OPERATING ACTIVITIES (4,656,871) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of SOFTBANK INTERACTIVE MARKETING, INC. and Network 1.0, net of cash acquired (5,497,156) Acquisition of property and equipment (1,099,080) ------------ NET CASH USED IN INVESTING ACTIVITIES (6,596,236) CASH FLOWS FROM FINANCING ACTIVITIES Issuance of stock 5,750,000 Additional capital contribution from parent 5,855,000 ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 11,605,000 ----------- NET CASH PROVIDED BY ALL ACTIVITIES 351,893 CASH - June 19, 1996 -- CASH - December 31, 1996 351,893 ----------- See accompanying notes 7 ZULU MEDIA. INC. (A Delaware Corporation) NOTES TO FINANCIAL STATEMENTS FOR THE PERIOD JUNE 19, 1996 (INCEPTION) TO DECEMBER 31, 1996 AND FOR THE YEAR ENDED DECEMBER 31, 1997 1. ORGANIZATION AND DESCRIPTION OF BUSINESS ACTIVITIES ZULU MEDIA, INC. (the Company), a Delaware corporation, is a diversified interactive media sales, marketing and communications company. Business activities of the Company include the sale of interactive multimedia advertising and production of interactive promotions. The Company was formed on June 19, 1996 by SOFTBANK Holding Inc. (SOFTBANK) with authorized capital consisting of 1,000 shares of Preferred Stock (705 Series A voting shares and 295 Series B non-voting shares) and 1,000 shares of Common Stock. On June 19, 1996, SOFTBANK contributed 5,750,000 in cash and committed to provide as a capital contribution additional cash, as required, in exchange for 705 shares of Series A Preferred Stock and 705 shares of Common Stock of the Company. SoftBank Interactive Marketing, Inc. had a name change to Zulu Media, Inc. on March 24, 1998. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Revenue Recognition Revenues are derived from the performance of services, sale and related placement of advertisements on internet sites and production of trade shows. Revenues are recognized as services are performed, on the run-date of an advertisement or when a trade show commences. In accordance with certain agreements, billings are submitted to advertisers on behalf of client web sites. The gross sales volume are recorded as accounts receivable and an accrual is recorded for the amount due to the client web site in accordance with the terms of the agreement. A deferred liability has been established to account for timing differences between advertising billings and the period in which an advertisement runs. Such liability in the amount of approximately 141,000 has been recorded as Deferred Revenues in the balance sheet for the period ended December 31, 1996. The liability for the year ended December 31, 1997 was approximately 87,000. The remainder of the Deferred Revenue as of December 31, 1996, and December 31, 1997 is attributed to a license agreement with a related party. (See note 5. Related Party Transaction). 8 ZULU MEDIA, INC. (A Delaware Corporation) NOTES TO FINANCIAL STATEMENTS CONTINUED FOR THE PERIOD JUNE 19, 1996 (INCEPTION) TO DECEMBER 31, 1996 AND FOR THE YEAR ENDED DECEMBER 31, 1997 b. Property and Equipment Property and equipment acquired from IMI are stated at fair market value as of the acquisition date. Property and equipment acquired subsequent to June 19, 1996 are stated at cost. Depreciation is computed on the straight-line basis over the estimated useful lives of the related assets which is estimated to be three years. Leasehold improvements are amortized over the lesser of the term of the lease or the useful life of the related improvement. c. Goodwill Goodwill is amortized using the straight-line method over 10 years. The carrying value of the goodwill is periodically reviewed by the Company based on the expected future undiscounted operating cash flows of the Company. Based upon its most recent analysis, the Company believes that no future value of goodwill exists as of December 31, 1997. d. Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. e. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. f. New Accounting Standards Statement of Financial Accounting Standards No.121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of" (SFAS No.121) establishes guidelines regarding when impairment losses on long-lived assets, which include plant and equipment, and certain identifiable intangible assets, should be recognized and how impairment losses should be measured. The adoption resulted in an impairment write down of 8,412,765 of goodwill and has been recorded in the Company's current year operations. 9 ZULU MEDIA, INC. (A Delaware Corporation) NOTES TO FINANCIAL STATEMENTS CONTINUED FOR THE PERIOD JUNE 19, 1996 (INCEPTION) TO DECEMBER 31, 1996 AND FOR THE YEAR ENDED DECEMBER 31, 1997 3. ACQUISITION On June 19, 1996, the Company acquired the business and assets of Interactive Marketing Inc. (IMI) and Network 1.0 for consideration of 5,750,000 in cash, 295 shares of Series B Preferred Stock and 295 shares of Common Stock of the Company. The acquisition has been accounted for using the purchase method of accounting. The consideration paid, acquisition costs and the fair market value of the net liabilities assumed have been assigned to goodwill. The financial statements contained herein reflect the operations of the Company from June 19, 1996 through December 31, 1996. In connection with the acquisition of IMI, the Company's Board of Directors authorized the closure of two IMI divisions. The Company accrued 500,000 for liabilities relating to severance and other exit costs, with a corresponding increase in goodwill. The net purchase price has been allocated as follows: Goodwill 8,000,717 Current assets 2,324,821 Fixed assets 406,662 Other assets 44,149 Current liabilities (5,029,193) Acquisition costs (250,000) ---------- 5,497,156 Net cash acquired 252,844 5,750,000 ---------- 4. CONCENTRATION OF CREDIT RISK A concentration of credit risk may exist with respect to trade receivables. Sales to date have been primarily to customers located in the United States. The Company provides unsecured credit to its customers in the normal course of business. Credit evaluations are performed on the financial condition of customers and a reserve has been established for accounts which may not be collectible. 10 ZULU MEDIA, INC. (A Delaware Corporation) NOTES TO FINANCIAL STATEMENTS CONTINUED FOR THE PERIOD JUNE 19, 1996 (INCEPTION) TO DECEMBER 31, 1996 AND FOR THE YEAR ENDED DECEMBER 31, 1997 The Company has a customer whose revenues represent approximately 40 percent of the Company's net revenues for the period from June 19, 1996 (inception) to December 31, 1996. Effective January 1, 1997, the agreement with this customer has not been renewed. The Company does not expect this to have an adverse impact on 1997 operations. In 1997, it did not have an adverse impact as other customers replaced that one customer. 5. RELATED PARTY TRANSACTIONS The Company sells advertising on behalf of a related party. In connection with the sales representation agreement, the related party advanced the Company 1,250,000 to be offset against earned sales revenues from the sale of advertisements made on their behalf. As of December 31, 1997, the Company had earned 1,250,000 of such sales revenue, which have been fully offset against the advances in the accompanying balance sheet. The Company's group medical, dental and related benefits programs are provided by a related party. The related costs of 1,169,271 for the year ended December 31, 1997 have been charged to the Company and such amounts are expected to be repaid to the related party during 1998. The Company has entered into a license agreement with a related company. The Company has received a license fee of 450,000 as consideration for granting the related company the exclusive right to produce a certain trade show worldwide through December 31, 1998. The license fee will be amortized over the term of the agreement and has been included in Deferred Revenues in the accompanying balance sheet. 6. INCOME TAXES As of December 31, 1996, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately 5,147,000 and approximately 27,577,000 for the year ended December 31, 1997 for a total 32,724,000. No benefit has been recorded in the financial statements due to the uncertainty of future net income. The federal operating loss carryforwards begin to expire in 2011 and the state operating loss carryforwards begin to expire in 2001. Also, the losses will have a significant diminution because of a change in ownership as promulgated by Internal Revenue Code Section 382. 11 ZULU MEDIA, INC. (A Delaware Corporation) NOTES TO FINANCIAL STATEMENTS CONTINUED FOR THE PERIOD JUNE 191 1996 (INCEPTION) TO DECEMBER 31, 1996 AND FOR THE YEAR ENDED DECEMBER 31, 1997 7. MARKETABLE SECURITIES At December 31, 1997, the Company held 11,853 available for sale shares of Yahoo Stock with a closing bid price of 69.25 for a total asset value of 820,820. 8. PROPERTY AND EQUIPMENT Computer equipment 941,651 Network operating centers 1,038,389 Furniture and equipment 480,834 Leasehold improvement 114,258 --------- Total cost 2,575,132 Less accumulated depreciation 730,066 --------- PROPERTY AND EQUIPMENT NET 1,845,066 ========= Assets were pledged as security for loans made to the Company (Uniform Commercial Code Filing.) 9. CONFORMITY Prior auditor's statements were modified to conform to December 31, 1997 statement. 10. GROSS SALES VOLUME Gross sales volume represents the volume of business generated to produce the revenues. The gross sales volume of 38,218,566 produced revenues of 6,220,857 for the year ended December 31, 1997. The gross sales volume of 20,124,024 produced revenues of 4,140,127 for the year ended December 31, 1996. 12 ZULU MEDIA, INC. (A Delaware Corporation) NOTES TO FINANCIAL STATEMENTS continued FOR THE PERIOD JUNE 19,1996 (INCEPTION) TO DECEMBER 31, 1996 AND FOR THE YEAR ENDED DECEMBER 31, 1997 11. GOING CONCERN The Company has suffered recurring losses from operations, has a net loss of 27,577,236 for the year ended December 31, 1997. Also at December 31, 1997, the Company's working capital position was a deficit of 6,019,391. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company has been able to continue operations through the funding from private investors, cash inflows from operations, and the extension of terms from creditors. Continued operations depend upon the Company continuing to obtain financing for its activities. Management's plan for the Company includes raising additional working capital through debt and/or equity financing until profitable operations and positive cash flow are achieved and maintained, which management believes are in the near future. However, no assurances can be given that the Company will be successful in raising additional capital, there is no assurance that the Company will achieve profitability or positive cash flow. If the Company is unable to obtain adequate additional financing, management will be required to curtail the operations of the Company. 12. SUBSEQUENT EVENTS In 1998, Yahoo Stock (Marketable Securities) were sold for 749,349 resulting in a loss of approximately 71,000. In 1998, a settlement was effected with Netscape whereby the accounts receivable due from Netscape (697,764) would be offset by the payable due to Netscape (1,456,564). The net effect of the settlement was the mutual dismissal of financial obligations to each other. Zulu Media, Inc. was sold by SoftBank Holding, Inc. (the parent company) to MediaBank, Inc., an intermediary for Netmaster, Inc. for nine million one hundred twenty nine thousand dollars (9,129,000) in a common stock purchase. The purchase price was paid to SoftBank Holdings, Inc. with 9,129 shares of Series C redeemable preferred stock of Netmaster, Inc. The Netmaster stock shall be redeemable in three equal installments of 3.043 shares on or before each of December 31, 1999. December 31, 2001 and December 31, 2002 (each referred to as redemption dates) by MediaBank delivery to SoftBank of 1,000 cash for each share of Netmaster stock or an aggregate of three million forty-three thousand dollars (3,043,000) on or before December 31, 1999, December 31, 2001, and December 31, 2002. MediaBank hereby irrevocably guarantees jointly and severally Netmaster's obligation to redeem the Netmaster stock as set forth above. 13 ZULU MEDIA, INC. (A DELAWARE CORPORATION) NOTES TO FINANCIAL STATEMENTS CONTINUED FOR THE PERIOD JUNE 19, 1996 (INCEPTION) TO DECEMBER 31, 1996 AND FOR THE YEAR ENDED DECEMBER 31, 1997 13. COMMITMENTS AND CONTINGENCIES The Company leases its operating facilities under non-cancelable operating leases which expire at various dates through 2001. Future minimum lease payments under such operating leases are as follows: 1998 449,750 1999 461,750 2000 407,400 2001 307,500 --------- 1,626,400 ========= Rental expense for the period from June 19, 1996 (inception) to December 31, 1996 related to these leases were approximately 271,500 and for the year ended December 31, 1997 was approximately 566,000. In the normal course of business the Company is involved in various lawsuits. Management is of the opinion that any liability or loss in excess of insurance coverage resulting from such litigation will not have a material adverse effect on the financial statements. 14