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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
January 14, 2000
------------------------------------------------
Date of Report (Date of earliest event reported)
Commission file number: 0-27556
NETWORK EVENT THEATER, INC.
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(Name of Small Business Issuer in Its Charter)
Delaware 13-3864111
- ------------------------------ ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation of Organization)
529 Fifth Avenue, New York, New York 10017
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip code)
212-622-7300
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(Issuer's Telephone Number, Including Area Code)
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Item 2. Acquisition or Disposition of Assets
On January 14, 2000, Network Event Theater, Inc. (the "Registrant" or
the "Company) pursuant to a Merger Agreement dated December 14,
1999 with Sixdegrees Acquisition Corp., a wholly-owned subsidiary of the
Registrant (the "Subsidiary"), and sixdegrees, inc. ("sixdegrees"), acquired
sixdegrees through the merger (the "Merger") of the Subsidiary into sixdegrees.
Upon the Merger, the Registrant issued to the stockholders of sixdegrees
2,742,512 shares of the Registrant's common stock and 1,000,000 shares of the
Registrant's Convertible Preferred Stock (convertible into an equal number of
shares of Registrant's common stock) and issued its options and warrants in
exchange for outstanding options or warrants to purchase common stock of
sixdegrees. The aggregate purchase price is approximately $123,500,000.
Sixdegrees is engaged in the business of developing a network
database service, accessible from its website, that enables members of
sixdegrees' service to establish connections with other members through their
respective familial, professional and personal relationships.
Item 7. Financial Statements. Proforma Financial Information and Exhibits.
(a)-(b) Financial statements, Proforma Financial Information.
(1) Audited financial statements of sixdegrees inc. for the years
ended December 31, 1997 and 1998 and unaudited financial
statements for the nine months ended September 30, 1998 and
1999.
(2) Pro Forma financial statements.
(c) Merger Agreement dated December 14, 1999 among Registrant,
Sixdegrees Acquisition Corp. and sixdegrees, inc.
(d) Exhibits
Exhibit Index
Exhibit
Number Description of Exhibit
- ------- ----------------------
10.33 Merger Agreement
10.35 1999 Stock Option Plan
10.36 1999 Special Stock Option Plan
10.37 1999 Special Incentive Stock Plan
10.39 Certificate of Designation
sixdegrees, inc.
FINANCIAL STATEMENTS
As of December 31, 1997 and 1998
and for each of the two
years ended December 31, 1998
sixdegrees, inc.
Index to Financial Statements
Page(s)
-------
Report of Independent Accountants 1
Balance Sheets at December 31, 1997 and 1998 2
Statements of Operations for the years ended December 31, 1997 and 1998 3
Statements of Cash Flows for the years ended December 31, 1997 and 1998 4
Statements of Stockholders' Equity for the years ended December 31,
1997 and 1998 5
Notes to Financial Statements 6-15
[GRAPHIC OMITTED]
Report of Independent Accountants
To the Board of Directors of
sixdegrees, inc.:
In our opinion, the accompanying balance sheets and the related statements of
operations, stockholders' equity, and cash flows present fairly, in all material
respects, the financial position of sixdegrees, inc. (the "Company") at December
31, 1998 and 1997, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
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 suffered losses from operations that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ PricewaterhouseCoopers LLP
March 9, 1999
sixdegrees, inc.
Balance Sheets
As of December 31, 1997 and 1998
December 31,
------------------------------
1997 1998
---- ----
ASSETS:
Current assets:
Cash and cash equivalents $ 339,734 $ 8,533,524
Accounts receivable 202 86,970
Interest receivable -- 37,378
Prepaid expenses and other current assets 17,127 8,727
----------- -----------
Total current assets 357,063 8,666,599
Fixed assets, net 107,871 683,634
Other assets 15,637 63,068
----------- -----------
Total assets $ 480,571 $ 9,413,301
=========== ===========
LIABILITIES and STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable and accrued expenses $ 100,071 $ 434,418
----------- -----------
Total liabilities $ 100,071 $ 434,418
Commitments and contingencies (Note 4)
Stockholders'equity:
Convertible preferred stock, par value $.001 per share;
15,000,000 shares authorized; 8,000 shares Class A issued
and outstanding; 4,744 shares and 10,478 shares Class B
issued and outstanding at December 31, 1998 and 1997,
respectively; 13,418,831 shares Class C issued and
outstanding at December 31, 1998 $ -- $ 13,419
Common stock, par value $.001 per share; 64,000,000 shares
authorized, 10,200,000 shares issued and outstanding 102 102
Additional paid-in capital 2,126,778 12,964,899
Stock subscription receivable (102,828) --
Deferred compensation (3,282) (62,016)
Accumulated deficit (1,640,270) (3,937,521)
----------- -----------
Total stockholders'equity 380,500 8,978,883
Total liabilities and stockholders' equity $ 480,571 $ 9,413,301
=========== ===========
The accompanying notes are an integral part of these financial statements.
2
sixdegrees, inc.
Statements of Operations
For the years ended December 31, 1997 and 1998
Year ended December 31,
--------------------------
1997 1998
---- ----
Revenue $ 202 $ 172,343
Operating expenses:
Product development (187,919) (666,141)
Sales and marketing (42,774) (119,050)
General and administrative (1,143,047) (1,718,880)
Depreciation and amortization (34,038) (102,925)
----------- -----------
Total operating expenses (1,407,778) (2,606,996)
----------- -----------
Interest and other income 18,578 137,402
----------- -----------
Net loss $(1,388,998) $(2,297,251)
=========== ===========
The accompanying notes are an integral part of these financial statements.
3
sixdegrees, inc.
Statements of Cash Flows
For the years ended December 31, 1997 and 1998
Year ended December 31,
------------------------------
1997 1998
---- ----
Cash flows from operating activities:
Net loss $(1,388,998) $(2,297,251)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 24,194 66,472
Non cash compensation charges 9,844 78,953
Forgiveness of cash payment on legal fees 41,131
Changes in assets and liabilities:
Accounts receivable (202) (86,768)
Interest receivable (37,378)
Prepaid expenses & other current assets 57,918 8,400
Other assets (12,096) (47,431)
Accounts payable and accrued expenses (14,908) 334,347
----------- -----------
Net cash used in operating activities (1,283,117) (1,980,656)
Cash flows from investing activities:
Purchase of plant, property and equipment (128,824) (642,235)
----------- -----------
Net cash used in investing activities (128,824) (642,235)
Cash flows from financing activities:
Proceeds from issuance of preferred stock 1,139,795 10,708,853
Proceeds from issuance of common stock
Payment of subscription receivable 102,828
Proceeds from issuance of stock warrants 5,000
Proceeds from issuance (payment) of debt (3,157)
----------- -----------
Net cash provided by financing activities 1,136,638 10,816,681
Net increase in cash (275,303) 8,193,790
Cash, beginning of year 615,037 339,734
----------- -----------
Cash, end of year $ 339,734 $ 8,533,524
=========== ===========
Non-cash transactions:
During the year ended December 31, 1997, the Company issued stock options with
strike prices below the then-fair market value resulting in a $13,126 credit to
Additional paid-in capital and a $13,126 debit to Deferred compensation, both
components of stockholders' equity. See Note 5.
During the year ended December 31, 1998, the Company issued stock options to
certain consultants and board members resulting in a $95,187 credit to
Additional paid-in capital and a $95,187 debit to Deferred compensation, both
components of stockholders' equity. See Note 5.
The accompanying notes are an integral part of these financial statements.
4
SIXDEGREES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1997 and 1998
CUMULATIVE PREFERRED STOCK
------------------------------------------
SHARES COMMON STOCK ADDITIONAL
------------------------------------------ ----------------------- PAID-IN
CLASS A CLASS B CLASS C AMOUNT SHARES AMOUNT CAPITAL
------- ------- ----------- -------- ---------- ---------- ------------
Balance at December 31, 1996
(unaudited).......................... 8,000 -- -- $ 0 10,200,000 $ 102 $ 829,898
Sales of preferred stock - Series B
Preferred.......................... 4,592 1,242,623
Forgiveness of Indebtedness in return
for Series B Preferred Stock....... 152 41,131
Issuance of non-qualified stock
options below deemed fair value for
accounting purposes................ 13,126
Amortization of deferred
compsensation......................
Net loss.............................
------- ------- ----------- -------- ---------- ---------- ------------
Balance at December 31, 1997........... 8,000 4,744 0 0 10,200,000 102 2,126,778
Payment of Subscription Receivable...
Sales of preferred stock - Series B
Preferred.......................... 5,734 1,551,974
Conversion of promissory notes for
Series C Preferred Stock........... 13,418,831 13,419 9,143,460
Issuance of non-qualified stock
options to directors and
consultants........................ 95,187
Issuance of stock warrants........... 5,000
Issuance of warrants and warrant
purchase rights to consultant...... 42,500
Amortization of deferred
compensation.......................
Net loss.............................
------- ------- ----------- -------- ---------- ---------- ------------
Balance at December 31, 1998........... 8,000 10,478 13,418,831 $ 13,419 10,200,000 $ 102 $ 12,964,899
------- ------- ----------- -------- ---------- ---------- ------------
------- ------- ----------- -------- ---------- ---------- ------------
SUBSCRIPTIONS DEFERRED ACCUMULATED
RECEIVABLE COMPENSATION DEFICIT TOTAL
------------- ------------ ------------ ------------
Balance at December 31, 1996
(unaudited).......................... $ 0 $ 0 $ (251,272) $ 578,728
Sales of preferred stock - Series B
Preferred.......................... (102,828) 1,139,795
Forgiveness of Indebtedness in return
for Series B Preferred Stock....... 41,131
Issuance of non-qualified stock
options below deemed fair value for
accounting purposes................ (13,126)
Amortization of deferred
compsensation...................... 9,844 9,844
Net loss............................. (1,388,998) (1,388,998)
------------- ------------ ------------ ------------
Balance at December 31, 1997........... (102,828) (3,282) (1,640,270) 380,500
Payment of Subscription Receivable... 102,828 102,828
Sales of preferred stock - Series B
Preferred.......................... 1,551,974
Conversion of promissory notes for
Series C Preferred Stock........... 9,156,879
Issuance of non-qualified stock
options to directors and
consultants........................ (95,187) --
Issuance of stock warrants........... 5,000
Issuance of warrants and warrant
purchase rights to consultant...... 42,500
Amortization of deferred
compensation....................... 36,453 36,453
Net loss............................. (2,297,251) (2,297,251)
------------- ------------ ------------ ------------
Balance at December 31, 1998........... $ -- $ (62,016) $(3,937,521) $ 8,978,883
------------- ------------ ------------ ------------
------------- ------------ ------------ ------------
The accompanying notes are an Integral part of these financial statements.
5
sixdegrees, inc.
Notes to Financial Statements
1. Organization and Basis of Presentation:
sixdegrees, inc. ("sixdegrees" or the "Company") was incorporated in the
State of Delaware on September 24, 1998. Prior to this date, the Company
was operating under the name of MacroView Communications Corp.
("MacroView"), which was incorporated in the State of New York on May 3,
1996. On October 20, 1998, MacroView, as the owner of all the outstanding
shares of the stock of sixdegrees, was merged into sixdegrees, with
sixdegrees as the surviving corporation.
The Company develops World Wide Web-based tools which enable individuals to
build and administer their own personal virtual communities. The
accompanying financial statements have been prepared assuming the Company
will be able to meet its obligations in the ordinary course of its
business. The Company has sustained net losses and negative cash flow from
operations and expects these conditions to continue for the foreseeable
future. Continuance of the Company is dependent upon, among other things,
its ability to establish profitable operations or raise additional
financing to fund operations. There can be no assurance that such
additional financing, if at all available, can be obtained on terms
reasonable to the Company. In the event the Company is unable to raise
additional capital, operations may need to be scaled back or discontinued.
The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
The Company has a limited operating history and its prospects are subject
to the risks, expenses and uncertainties frequently encountered by
companies in the new and rapidly evolving markets for internet products and
services. These risks include the failure to develop and extend the
Company's online service brands, the rejection of the Company's services by
Web consumers, vendors and/or advertisers, the inability of the Company to
maintain and increase the levels of traffic on its online services, as well
as other risks and uncertainties. In the event that the Company does not
successfully implement its business plan, certain assets may not be
recoverable.
2. Significant Accounting Policies and Procedures
Revenue Recognition
Advertising revenues are derived from the sale of advertising space on the
Company's various online services. Advertising revenues are recognized over
the period in which the advertisements are displayed, provided that no
significant Company obligations remain and collection of the receivable is
reasonably assured. Company obligations typically include guarantees of a
minimum number of "impressions" (times that an advertisement is viewed by
users of the Company's online services over a specified period of time). To
the extent that minimum guaranteed impressions are not met, the Company
defers recognition of the corresponding revenues until the guaranteed
impressions are achieved.
Continued 6
sixdegrees, inc.
Notes to Financial Statements, Continued
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. Although cash
balances are maintained in high quality financial institutions, the
balances at times exceed insurable amounts.
Concentration of Credit Risk
Substantially all of the Company's excess cash has been invested in highly
liquid investments. The Company generally does not require collateral on
accounts receivable. The Company's services are provided to customers in
several industries worldwide.
Accounts Receivable
Accounts receivable are stated gross, and to date, no allowance has been
necessary. The Company has assessed the need for an allowance on a
continuous basis. At December 31, 1998, two customers accounted for 99% of
the accounts receivable balance. For the year ended December 31, 1998, one
customer accounted for 74% of revenues.
Financial Instruments
The recorded amounts of financial instruments approximate their fair
values.
Fixed Assets
Depreciation of equipment, furniture and fixtures and computer software is
provided for by the straight-line method over estimated useful life ranging
from three to seven years. Amortization of leasehold improvements is
provided for over the lesser of the term of the related lease or the
estimated useful life of the improvement. The cost of additions and
betterments is capitalized, and repairs and maintenance costs are charged
to operations in the periods incurred.
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 amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these estimates.
Long-Lived Assets
The carrying value of assets is reviewed on a regular basis for the
existence of facts or circumstances, both internally and externally, that
suggest impairment. To date no such impairment has been indicated. Should
there be impairment in the future, the Company will determine the
impairment based on a comparison of recorded amounts to the expected future
cash flows from the impaired assets. The cash flow estimates will contain
management's best estimates, using appropriate and customary assumptions
and projections at the time.
Continued 7
sixdegrees, inc.
Notes to Financial Statements, Continued
Comprehensive Income
The Company adopted the provisions of SFAS No. 130, "Reporting
Comprehensive Income in 1998." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net
assets) during a period from non-owner sources. To date, the Company has
not had any transactions that are required to be reported in comprehensive
income.
Segment Information
The Company adopted the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information in 1998." This statement
establishes standards for the way companies report information about
operating segments in annual financial statements. It also establishes
standards for related disclosures about products and services, geographic
areas and major customers. The Company has determined that it does not have
any separately reportable business segments as of December 31, 1998.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1 ").
SOP 98-1 is effective for financial statements for years beginning after
December 15, 1998. SOP 98-1 provides guidance over accounting for computer
software developed or obtained for internal use including the requirement
to capitalize specified costs and amortization of such costs. The Company
does not expect the adoption of this standard to have a material effect on
the Company's financial position, result of operations or cash flows.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5, which is
effective for fiscal years beginning after December 15, 1998, provides
guidance on the financial reporting of start-up costs and organization
costs. It requires costs of start up activities and organization costs to
be expensed as incurred. As the Company has expensed these costs
historically, the adoption of this standard is not expected to have a
significant impact on the Company's results of operations, financial
position or cash flows.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities" ("SFAS 133"), which establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred
to as derivatives) and for hedging activities. SFAS No. 133 is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999. As
the Company does not currently engage or plan to engage in derivative or
hedging activities there will be no impact to the Company's results of
operations, financial position or cash flows upon the adoption of this
standard.
Continued 8
sixdegrees, inc.
Notes to Financial Statements, Continued
3. Fixed Assets
Property and equipment consist of the following:
December 31, December 31,
1997 1998
------------ ------------
Equipment $ 13,732 $ 20,678
Hardware 85,300 578,464
Computer software 33,681 170,806
Leasehold improvements -- 5,000
-------- --------
132,713 774,948
Less, accumulated depreciation and
Amortization 24,842 91,314
-------- --------
$107,871 $683,634
======== ========
Depreciation and amortization for the years ended December 31, 1997 and
1998 totaled approximately $24,000 and $66,000, respectively.
4. Commitments and Contingencies
Leases:
The Company leases office space in New York, under non-cancelable operating
leases expiring at various dates through July 2002. In addition, the
Company is a lessee, under several operating lease agreements, with third
parties for certain equipment. Future minimum lease payments under
non-cancelable operating leases as of December 31, 1998 are as follows:
Operating
Leases
------
1998 $ 109,455
1999 145,869
2000 142,894
2001 138,071
2002 48,480
---------
Total $ 584,769
=========
Rent expense was approximately $24,000, and $62,000, for the years ended
December 31, 1997 and 1998, respectively.
Continued 9
sixdegrees, inc.
Notes to Financial Statements, Continued
5. Capital Stock
At December 31, 1998, the authorized capital stock of the Company consists
of 64,000,000 shares of Common Stock and 15,000,000 shares of Convertible
Preferred Stock. The authorized capital stock and the related par values
were adjusted as part of the Company's incorporation in the State of
Delaware on October 20, 1998 (see Note 1). During 1996, the Company's Board
approved a seventeen-for-one Common Stock split. Shareholders of record in
December 1996 received sixteen additional shares for each share held.
Further, during January 1997, the Company's Board of Directors approved a
six-hundred-for-one Common Stock split. Shareholders of record in April
1997 received 599 additional shares for each share held. All references to
the number of shares of common stock have been retroactively restated in
the financial statements to reflect the effect of these two stock splits.
Common Stock
In 1996, the Company issued 10,200,000 shares of Common Stock to the
Company's founders.
Convertible Preferred Stock
In December 1996, the Company issued 8,000 shares of Series A Convertible
Preferred Stock ("Series A") through a private placement, in consideration
of net proceeds to the Company of $820,000, inclusive of the conversion of
promissory notes in the aggregate amount of $75,000. The Series A shares
are convertible into common stock at the ratio of 1 to 600.
Between August 1997 and June 1998, the Company issued approximately 10,478
shares of Series B Convertible Preferred Stock ("Series B") through two
private placements, in consideration of net proceeds to the Company of
approximately $2,835,728, inclusive of conversion of an outstanding debt in
the amount of approximately $41,131. As part of this transaction, the
Company also issued Class A Warrants and Class B Warrants, as described in
footnote 6. The Series B shares are convertible into common stock at the
ratio of 1 to 600.
In October 1997, the Company issued 152 shares of Series B Convertible
Preferred Stock in return for the forgiveness of legal fees of $41,131.
On October 20, 1998, the Company issued 13,418,831 shares of Series C
Convertible Preferred Stock ("Series C") through a private placement, in
consideration of net proceeds to the Company of $9,156,879, inclusive of
conversion of five promissory notes in the aggregate amount of $10,000,000.
The Series C shares are convertible into common stock at the ratio of 1 to
1.
Continued 10
sixdegrees, inc.
Notes to Financial Statements, Continued
6. Incentive Plans
Employee Stock Option Plan
During June 1997, the Company's Board of Directors adopted the 1997
Incentive Stock Plan (the "1997 Plan"), which was subsequently approved by
the Company's shareholders, under which incentive stock options or
non-qualified stock options to purchase common stock may be granted to
eligible employees, directors and consultants. The 1997 Plan was amended by
the Company's Board of Directors during February 1998, which was
subsequently approved by the Company's shareholders. The Company has
reserved 2,500,000 shares of Common Stock for issuance under the 1997 Plan.
Executive Stock Option Agreements
On October 19, 1998, the Company granted two employees non-qualified stock
options to purchase 350,000 shares of common stock, which have been
reserved. The option price per share of $.75 was above the fair market
value per share on the date of grant. Options expire ten years after the
date of grant.
Consultant Stock Option Agreement
In January 1998, the Company granted to RHL Ventures LLC, a consultant to
the Company, non-qualified options to purchase 160,000 shares of common
stock, which have been reserved. The option price per share of $.45 was
above the fair market value per share on the date of grant. Options expire
ten years after the date of grant.
The Company valued these options using the "Black-Scholes Option Pricing
Model" at $51,920 amortized over 2 years. The assumptions used for the
options were zero dividend yield, 90% volatility, a weighted average
risk-free interest rate of 4.64% and expected lives of 5 years.
Continued 11
sixdegrees, inc.
Notes to Financial Statements, Continued
Information regarding the 1997 Plan, the Executive Stock Option Agreements,
the Consultant Stock Option Agreement, as of December 31, 1997 and 1998,
and changes during the years ended December 31, 1997 and 1998, is
summarized below:
Weighted
Option Average
Shares Exercise Price
------ --------------
options outstanding - December 31, 1996 (unaudited)
Opening balance -- --
Granted 525,000 $.145
Granted 30,000 $.17
Granted 604,000 $.45
Exercised -- --
Forfeited (55,000) $.305
------- -----------
Options outstanding - December 31, 1997 1,104,000 $.297
Granted 1,160,000 $.45
Granted 62,500 $.55
Granted 818,000 $.75 - $.80
Granted 50,000 $.90
Exercised -- --
Forfeited (460,509) $.59
-------- -----------
Options outstanding - December 31, 1998 2,734,000 $.493
Options exercisable at December 31, 1997 375,000
Options exercisable at December 31, 1998 805,834
Weighted average fair value of options granted during 1997 $.305
Weighted average fair value of options granted during 1998 $.59
The following table summarizes information about stock options outstanding
at December 31, 1998:
Options Outstanding
-------------------
Weighted Weighted
Average Average
Range of Shares Remaining Exercise
Exercise Prices Outstanding Contractual Life Price
--------------- ----------- ---------------- -----
$.145 to $.17 525,000 8.5 years $.145
$.45 to $.55 1,378,500 8.6 years $.452
$.75 to $.90 830,500 9.0 years $.834
Options generally vest over a period of three years.
Continued 12
sixdegrees, inc.
Notes to Financial Statements, Continued
Restricted Stock Awards
The 1997 plan also provides for the issuance of restricted stock awards
under which shares of common stock may be issued to eligible employees. No
such awards have been made.
Stock-Based Compensation
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock-Issued to Employees" and related interpretations in accounting
for its stock option issuances. The Company has adopted the disclosure-only
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Had
compensation cost for the Company's stock option issuances been determined
based on the fair value at the grant date for awards in 1997 and 1998
consistent with the provisions of SFAS No. 123, the Company's net loss
would have been adjusted to the pro forma amounts indicated below.
December 31, December 31,
1997 1998
------------ ------------
Net loss - as reported $ (1,388,998) $ (2,254,751)
Net loss - pro forma $ (1,417,899) $ (2,322,300)
The fair value of each option grant is estimated on the date of the grant
using the "Black-Scholes option-pricing model" with the following weighted
average assumptions used for grants for the years ended December 31, 1997
and 1998; zero dividend yield; no volatility; a weighted average risk-free
interest rate of 5.74% and 4.64%, respectively; and expected lives of 5
years.
During the year ended December 3l, 1997, the Company issued stock options
with strike prices below the then-fair market value and, as a result,
recorded deferred compensation of $13,126. During the year ended December
31, 1998, the Company issued stock options to certain consultants and board
members and, as a result, recorded deferred compensation of $95,187.
Deferred compensation is amortized over the vesting period of the options.
As of December 31, 1998, compensation cost of approximately $46,000 has
been recognized.
Stock Warrants
Between August 1997 and February 1998, the Company issued (i) Class A
Warrants to purchase approximately 662,154 shares of Common Stock at $.67
per share, and (ii) Class B Warrants to purchase approximately 1,986,463
shares of Common Stock, at $1.1O per share, through a private placement;
both classes of warrants contain repricing provisions in the event the
Company is to sell securities for less than the exercise price of those
warrants. (Due to subsequent issuance of stock and other securities, the
exercise price of those warrants was adjusted to $.663 and $.965,
respectively.) The warrants are immediately exercisable and will expire on
June 30, 2005.
In January 1998, Jonathan Cohen purchased from the Company for aggregate
consideration of $5,000 (i) warrants to purchase 50,000 shares of Common
Stock, at $.45 per share, and (ii) the right to purchase warrants to
purchase an additional 150,000 shares of Common Stock, at $.10 per warrant.
The warrants are immediately exercisable and will expire on January 31,
Continued 13
sixdegrees, inc.
Notes to Financial Statements, Continued
2006. The right to purchase the warrants to purchase additional 150,000
shares of common stock is immediately exercisable and will expire on
January 31, 2000. The company valued the warrants and the right to purchase
additional warrants using the "Black-Scholes Option Pricing Model" at
$42,500, which was expensed immediately. The assumption used for the option
model were zero dividend yield, 90% volatility, a weighted average
risk-free interest rate of 4.64% and expected lives of 5 years.
In March 1998, the Company issued warrants to purchase 103,692 shares of
Common Stock, at $.67 per share, to National Securities Corporation (or
certain employees or consultants associated with National Securities
Corporation), in connection with the equity financing activities between
August 1997 and February 1998, which warrants contain repricing provisions
in the event the Company is to sell securities for less than the exercise
price of those warrants. (Due to subsequent issuance of stock and other
securities, the exercise price of those warrants was adjusted to $.663.)
The warrants are immediately exercisable and will expire on June 30, 2005.
On October 20, 1998, the Company issued warrants to purchase 670,942 shares
of Common Stock, at $.89427 per share, to ABN AMRO Incorporated, in
connection with the equity financing activities that took place on the same
day. The warrants are immediately exercisable and will expire on December
31, 2003.
7. Income Taxes
The components of the net deferred tax asset as of December 31, 1997 and
1998 consists of the following:
1997 1998
---- ----
Operating loss carryforward $ 684,838 $1,825,015
Depreciation of fixed assets and R&E expense 18,293 31,132
--------- ----------
Net deferred tax asset 703,131 1,856,147
Less, Valuation allowance 703,131 1,856,147
--------- ----------
Deferred tax asset $ 0 $ 0
========= ==========
The difference between the Company's U.S. federal statutory rate of 35%, as
well as its state and local rate, net of a federal benefit of 12.5%, when
compared to its effective rate of 0% is principally comprised of its
valuation allowance.
As of December 31, 1998, the Company has a net operating loss carry forward
for Federal income tax purposes of approximately $3,842,138. The carry-
forward will begin to expire in 2011 if not used. The net deferred tax
asset has been fully reserved due to the uncertainty of the Company's
ability to realize this asset in the future.
Continued 14
sixdegrees, inc.
Notes to Financial Statements, Continued
8. Related Party
The father of the CEO of the Company is an attorney at one of the law
firms which represents the Company. $55,237 and $1,404 was due to the
firm at December 31, 1997 and 1998, respectively. The Company incurred
expenses with that law firm of approximately $131,000 and $60,000 for the
years ended December 31, 1997 and 1998, respectively.
9. Subsequent Event
In March 1999, the Company sold various fixed assets in the form of a sale
leaseback transaction with GATX Technology Services Corporation for
$511,630. The Company leased these assets back from GATX under a capital
lease.
15
sixdegrees, inc.
Balance Sheet
September 30, 1999
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 7,539,966
Restricted cash 1,348,806
Accounts receivable 390,670
Interest receivable 33,625
Prepaid expenses and other current assets 5,130,652
--------------
Total current assets 14,443,719
Fixed assets, net 1,887,831
--------------
Total assets $ 16,331,550
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 609,614
Accrued expenses 610,969
Current portion of capital lease obligations 160,160
--------------
Total Current liabilities 1,380,743
Capital lease obligations net of current portion 284,992
Deferred rent 175,996
--------------
Total liabilities 1,841,731
Stockholders' Deficit:
Convertible preferred stock, par value $.001 per share; 33,000,000 shares
authorized; 8,000 shares Class A issued and outstanding;
10,478 shares Class B issued and outstanding; 13,418,831 shares
Class C issued and outstanding, 9,000,000 shares Class D
issued and outstanding, and 1,815,716 shares Class E issued and outstanding 24,235
Common Stock, $.001 par value; 64,000,000 shares authorized
10,200,000 shares issued and outstanding 102
Additional paid-in capital 25,848,256
Deferred compensation (10,096)
Accumulated deficit (11,372,678)
--------------
Total stockholders' equity 14,489,819
--------------
Total liabilities and stockholders' equity $ 16,331,550
==============
sixdegrees, inc.
Statements of Operations
For the Nine Months Ended September 30,
(Unaudited)
1999 1998
---- ----
Revenue $ 750,691 $ 61,526
----------- -----------
Operating expenses:
Product development 2,582,881 488,140
Sales and marketing 278,096 28,886
General and administrative 5,241,640 243,501
Depreciation and amortization 407,132 40,094
----------- -----------
Total expenses 8,509,749 800,621
Loss from operations (7,759,058) (739,095)
Interest income 323,901 31,109
----------- -----------
Net loss (7,435,157) (707,986)
=========== ===========
sixdegrees, inc
Statements of Cash Flows
For the Nine Months Ended September 30,
(Unaudited)
1999 1998
---- ----
Cash flows from operating activities
Net loss $ (7,435,157) $ (707,986)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation & amortization 407,132 40,094
Non-cash compensation 51,920 19,470
Deferred rent 175,996 --
Change in assets and liabilities (Increase) decrease in:
Accounts receivable (303,700) (46,009)
Prepaid expenses and other current assets (121,925) (18,019)
Interest receivable 3,753 (3,299)
Other assets 63,068 (46,453)
Accounts payable,accrued expenses and other liabilities 786,165 90,667
------------ ------------
Net cash used in operating activities (6,372,748) (671,535)
Cash flows from investing activities
Purchase of property and equipment (1,564,261) (102,799)
------------ ------------
Net cash used in investing activities (1,564,261) (102,799)
Cash flows from financing activities
Repayments under capital lease (113,546) --
Proceeds from Sale/Leaseback Arrangement 511,630 --
Payment of subscription receivable -- 102,828
Proceeds from issuance of stock warrants -- 5,000
Proceeds from issuance of debt -- 1,000,000
Proceeds from issuance of preferred stock 7,894,173 751,353
------------ ------------
Net cash provided by financing activities 8,292,257 1,859,181
Net (decrease) increase in cash 355,248 1,084,847
Cash - at beginning of period 8,533,524 339,734
------------ ------------
Cash - at end of period $ 8,888,772 $ 1,424,581
============ ============
Supplemental disclosure of non-cash investing and financing activities:
In connection with the issuance of preferred stock during 1999 the Company
issued approximately 3.6 million shares of preferred stock in exchange for $5
million in future advertising credits.
During 1999 the Company entered into a capital lease for computer equipment
totalling approximately $511,000.
sixdegrees, inc.
Notes to Unaudited Interim Financial Statement
September 30, 1999
1. Organization and Basis of Presentation:
sixdegrees, inc. ("sixdegrees" or the "Company") was incorporated in the State
of Delaware on September 24, 1998. Prior to this date, the Company was operating
under the name of MacroView Communications Corp. ("MacroView"), which was
incorporated in the State of New York on May 3, 1996. On October 20, 1998,
MacroView, as the owner of all the outstanding shares of the stock of
sixdegrees, was merged into sixdegrees, with sixdegrees as the surviving
corporation.
The Company develops World Wide Web-based tools which enable individuals to
build and administer their own personal virtual communities. The accompanying
financial statements have been prepared assuming the Company will be able to
meet its obligations in the ordinary course of its business. The Company has
sustained net losses and negative cash flow from operations and expects these
conditions to continue for the foreseeable future. Continuance of the Company is
dependent upon, among other things, its ability to establish profitable
operations or raise additional financing to fund operations. There can be no
assurance that such additional financing, if at all available, can be obtained
on terms reasonable to the Company. In the event the Company is unable to raise
additional capital, operations may need to be scaled back or discontinued. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
The Company has a limited operating history and its prospects are subject to the
risks, expenses and uncertainties frequently encountered by companies in the new
and rapidly evolving markets for internet products and services. These risks
include the failure to develop and extend the Company's online service brands,
the rejection of the Company's services by Web consumers, vendors and/or
advertisers, the inability of the Company to maintain and increase the levels of
traffic on its online services, as well as other risks and uncertainties. In the
event that the Company does not successfully implement its business plan,
certain assets may not be recoverable.
2. Preferred Stock
In June 1999, the Company issued 9,000,000 shares of Series D Convertible
Preferred Stock ("Series D") and 1,815, 716 shares of Series E Convertible
Preferred Stock ("Series E") in a private placement transaction. In
consideration for these shares, the Company received net proceeds of $13.0
million of which approximately $7.9 million, net of issuance costs, was received
in cash and $5.0 million was received in future advertising credits. The value
of the advertising credits received was based upon the fair value of the
preferred stock exchanged. The value of the advertising to be received in
exchange for the advertising credits will be equal to the fair value at which
the advertising would be sold to an independent third party. The Series D and E
shares are convertible into common stock at the ratio of one to one.
3. Commitments and Contingencies
Office Lease:
In February 1999 the Company entered into a seven-year lease for office space
located in New York City for its corporate office.
Equipment Leases:
In 1999 The Company entered into certain capital and operating leases for
office and computer equipment.
As of September 30, 1999, restricted cash totalling $1,300,000 represents
the collateral required by the Lessor of the office and equipment leases.
4. Subsequent event
On January 14, 2000 the Company was acquired by Youthstream Media Netorks, also
known as Network Event Theater, Inc. In a stock for stock transaction
Youthstream issued approximately 3.7 million shares of common and convertible
preferred stock, of which approximately 80 percent will be restricted from
transfer for one year. The aggregate purchase price is approximately $123.5
million.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
On January 14, 2000, Network Event Theater, Inc. (the "Registrant" or the
"Company) pursuant to a Merger Agreement dated December 14, 1999 with
Sixdegrees Acquisition Corp., a wholly-owned subsidiary of the Registrant
(the "Subsidiary"), and sixdegrees, inc. ("sixdegrees"), acquired
sixdegrees through the merger (the "Merger") of the Subsidiary into
sixdegrees. Upon the Merger, the Registrant issued to the stockholders of
sixdegrees 2,742,512 shares of the Registrant's common stock and 1,000,000
shares of the Registrant's Convertible Preferred Stock (convertible into an
equal number of shares of Registrant's common stock) and issued its options
and warrants in exchange for outstanding options or warrants to purchase
common stock of sixdegrees. The aggregate purchase price is approximately
$123,500,000.
The accompanying unaudited pro forma condensed consolidated financial
statements give effect to the sixdegrees acquisition and the following
transactions which have ocurred:
o The acquisition of Trent Graphics, Inc. ("Trent") on June 9, 1999,
o The acquisition of Invino Corporation ("Invino") on October 15, 1999, and
o The sale of 1,257,400 shares of the Company's common stock to certain
private investors on December 20, 1999 (the "Equity Sale"). The Company
realized net proceeds of approximately $29,517,000.
The unaudited pro forma condensed consolidated statements of operations for
the twelve months ended June 30, 1999 and the three months ended September
30, 1999 present the condensed consolidated statements of operations of the
Company as if the aforementioned acquisitions had occurred at the beginning
of the respective periods. The unaudited pro forma condensed consolidated
balance sheet at September 30, 1999 presents the balance sheet of the
Company as if the sixdegrees and Invino acquisitions and the Equity Sale
had occurred on September 30, 1999. The Company's historical balance sheet
at September 30, 1999 and statement of operations for the three months
ended September 30, 1999 includes the Trent acquisition.
The acquisitions have been accounted for using the purchase method of
accounting. The total cost of the acquisitions have been allocated to the
tangible and intangible assets acquired and liabilities assumed based on
their respective fair values. The allocation of the purchase price assumed
in the unaudited pro forma condensed consolidated financial statements is
preliminary. The Company does not expect the final allocation of the
purchase price will materially differ from the preliminary allocation.
The pro forma adjustments are based on available information and on certain
assumptions that the Company believes are reasonable under the circumstances.
The unaudited pro forma condensed consolidated financial statements should be
read in conjunction with the Company's financial statements and notes thereto,
as well as the financial statements and notes thereto of sixdegrees. The
unaudited pro forma condensed consolidated statements of operations are not
necessarily indicative of the results that would have occurred if the
acquisitions any Equity Sale had occurred on the dates indicated, nor are they
indicative of the Company's future results of operations.
Network Event Theater, Inc.
Unaudited Pro Forma Condensed Statements of Operations
Year Ended June 30, 1999
(In thousands)
Network Event Trent Invino six-
Theater, Inc. Graphics, Inc(a) Corporation. (b) degrees,inc.(c)
------------- ---------------- ---------------- ---------------
Net Revenues $ 13,266 $ 6,449 $ - 447
Operating Expenses:
Cost of goods sold - 1,804 - -
Selling, general and administrative expenses 14,005 4,186 350 3,562
Product development - - - 2,788
Corporate expenses 4,510 - - -
Depreciation and amortization 2,186 50 12 149
Impairment loss on equipment 825 - -
------------------- ------------------ ----------------- ------------------
Total operating expenses 21,526 6,040 362 6,499
------------------- ------------------ ----------------- ------------------
Income (loss) from operations (8,260) 409 (362) (6,052)
Equity loss in investment (51)
Interest Income 425 1 292
Interest Expense (1,119) (24) - -
------------------- ------------------ ----------------- ------------------
Loss before provision for income taxes (9,005) 385 (361) (5,760)
Provision for income taxes 185 34 - -
------------------- ------------------ ----------------- ------------------
Net income (loss) $ (9,190) $ 351 $ (361) (5,760)
=================== ================== ================= ==================
Net loss per basic and diluted common share $ (0.72)
===================
Weighted average basic and diluted common
shares outstanding 12,800
===================
Pro Forma Pro Forma
Adjustments Combined
----------- --------
Net Revenues $ - $ 20,162
Operating Expenses:
Cost of goods sold - 1,804
Selling, general and administrative expenses - 22,103
Product development 2,788
Corporate expenses - 4,510
Depreciation and amortization 41,332 (f) 43,729
Impairment loss on equipment 825
---------------- --------------
Total operating expenses 41,332 75,759
---------------- --------------
Loss from operations (41,332) (55,597)
Equity loss in investment (51)
Interest Income - 718
Interest Expense - (1,143)
---------------- --------------
Loss before provision for income taxes (41,332) (56,073)
Provision for income taxes - 219
---------------- --------------
Net loss $ (41,332) $(56,292)
================ ==============
Net loss per basic and diluted common share $ (3.06)
==============
Weighted average basic and diluted common
shares outstanding 5,598 (g) 18,398
================ ==============
Network Event Theater, Inc.
Unaudited Pro Forma Condensed Statement of Operations
Three Months ended September 30, 1999
(In thousands)
Network Event Invino six- Pro Forma
Theater, Inc. Corporation (b) degrees, inc. (c) Adjustments Pro Forma
------------- --------------- ----------------- ----------- ---------
Net Revenues $ 10,361 -- $ 525 $ -- $ 10,886
Operating Expenses:
Cost of goods sold 1,386 -- -- -- 1,386
Selling, general and administrative expenses 6,882 369 1,407 -- 8,658
Product development -- -- 2,101 2,101
Corporate expenses 873 -- -- -- 873
Depreciation and amortization 917 7 210 9,837(f) 10,971
-------- -------- -------- -------- --------
Total operating expenses 10,058 376 3,718 9,837 23,989
Income (loss) from operations 303 (376) (3,193) (9,837) (18,103)
Equity loss in investment (792) -- -- (792)
Interest Income 227 -- 117 -- 344
Other income 150 6 -- 156
Interest expense (249) -- -- -- (249)
-------- -------- -------- -------- --------
Loss before provision for income taxes (361) (370) (3,076) (9,837) (13,644)
Provision for income taxes 48 -- -- -- 48
-------- -------- -------- -------- --------
Net loss $ (409) (370) $ (3,076) $ (9,837) $(13,692)
======== ======== ======== ======== ========
Net loss per basic and diluted common share $ (0.03) $ (0.64)
======== ========
Weighted average basic and diluted common
shares outstanding 15,929 5,376(g) 21,305
======== ======== ========
Network Event Theater, Inc.
Unaudited Proforma Consolidated Balance Sheet
(In Thousands)
September 30,1999
Newtwork
Event Invino six- Pro Forma
Theater Corporation degrees, inc. Adjustments Pro Forma
------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash Equivalents $ 28,335 107 7,540 29,517 (e) 65,499
Restricted cash - - 1,349 - 1,349
Accounts receivable, net 4,247 - 391 - 4,638
Inventory 415 - - - 115
Prepaid expenses 1,078 - 5,006 - 6,084
Deposits and other current assets 713 9 158 880
------------- -------------- --------------- ------------- ------------
Total current assets 34,788 116 14,444 29,517 78,865
-
Property and equipment, net 5,802 54 1,888 - 7,744
-
Deferred financing costs, net 679 - - 679
-
Intangible assets, net 15,925 - - 118,046 (d) 133,971
------------- -------------- --------------- ------------- ------------
Total assets $ 57,194 170 16,332 147,563 221,259
============= ============== =============== ============= =============
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities
Accounts payable $ 1,896 52 610 - 2,558
Accrued expenses 698 - 611 - 1,309
Other accrued expenses 1,542 144 - - 1,686
Deferred revenues 207 - - - 207
Current portion of long-term debt
and capital lease obligation 857 10 160 - 1,027
------------- -------------- --------------- ------------- -------------
Total current liabilites 5,200 206 1,381 - 6,787
Long-term debt and capital lease
obligations net of current portion 6,431 - 285 - 6,716
Deferred Rent - - 176 - 176
Commitments and contigencies
Invino Acquisition - - - 5,000 5,000
Stockholders Equity
Preferred stock - 700 24 (714) 10
Common stock 170 2 - 42 (d)(e) 214
Additional paid-in capital 73,760 - 25,849 131,124 (d)(e) 230,733
Deferred compensation - - (10) - (10)
Accumulated deficit (28,367) (738) (11,373) 12,111 (d)(e) (28,367)
------------- -------------- --------------- ------------- ------------
Total Stockholders equity 45,563 (36) 14,490 142,563 202,580
- - -
Total liabilities and stockholders equity 57,194 170 16,332 147,563 221,259
============= ============== =============== ============= =============
Notes to Unaudited Pro Forma Condensed Consolidated Statements of
Operations and Balance Sheet
(a) Reflects the historical statement of operations of Trent from July 1, 1998
through its acquisition date of June 9, 1999. Operations subsequent to June
9, 1999 are included in the Company's historical balances. Trent operated
on a calendar year end. Trent's historical statement of operations included
in the unaudited pro forma condensed consolidated statement of operations,
however, has been prepared on a June 30th fiscal year end basis based on
the unaudited quarterly financial statements of Trent.
(b) Reflects the historical statement of operations of Invino for the twelve
months ended June 30, 1999 and the three months ended September 30, 1999.
Invino operated on a calendar year end. The historical statement of
operations included in the unaudited pro forma condensed consolidated
statements of operations, however, have been prepared on a June 30th fiscal
year end basis based on the unaudited quarterly financial statments of
Invino.
(c) Reflects the historical statement of operations of sixdegrees for the
twelve months ended June 30, 1999 and the three months ended September 30,
1999. Sixdegrees operated on a calendar year end. The historical statement
of operations included in the unaudited pro forma condensed consolidated
statements of operations, however, have been prepared on a June 30th fiscal
year end basis based on the unaudited quarterly financial statements of
sixdegrees.
(d) To reflect the additional goodwill and issuance of the consideration
related to the Trent, Invino and sixdegrees acquisitions.
Trent Invino sixdegrees Total
------- ------- ---------- -----
Consideration:
Cash $3,500,000 $ -- $ -- $ 3,500,000
Common Stock 3,500,000(1) 9,000,000(2) 78,850,000(3) 91,350,000
Preferred Stock -- -- 28,750,000(3) 28,750,000
Stock Options -- -- 15,900,000 15,900,000
---------- --------- ----------- ----------
7,000,000 9,000,000 125,500,000 139,500,000
Estimated Fair Value
of Net Assets
Acquired/(Liabilities
Assumed) 508,000 (36,000) 14,490,000 14,962,000
---------- --------- ---------- -----------
Goodwill $6,492,000 $9,036,000 $109,010,000 $124,538,000
========== ========= ========== ===========
(1) Reflects the issuance of 242,003 shares of common stock.
(2) Reflects the issuance of 167,358 shares on the closing date valued at
$4,000,000 and an additional $5,000,000 of common stock to be issued
in the future.
(3) Reflects the issuance of 2,742,512 shares of common stock and
1,000,000 shares of convertible preferred stock.
(e) To reflect the issuance of 1,257,400 shares of the Company's common stock
to certain private investors on December 20, 1999. The Company realized net
proceeds of approximately $29,517,000.
(f) To reflect increased amortization from goodwill related to the Trent,
Invino and sixdegrees acquisitions amortized over 3 years on a
straight-line basis.
(g) To reflect adjustments to the weighted average basis of common
shares outstanding based on equity consideration described in (d) and (e)
above.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
January 11, 2000 Network Event Theater, Inc.
By:/s/ Harlan D. Peltz
--------------------------------
Harlan D. Peltz
Chairman of the Board
Exhibit Index
Exhibit
Number Description of Exhibit
- ------- ----------------------
10.33 Merger Agreement
10.35 1999 Stock Option Plan
10.36 1999 Special Stock Option Plan
10.37 1999 Special Incentive Stock Plan
10.39 Certificate of Designation