U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 0-27556
NETWORK EVENT THEATER, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 13-3864111
- ------------------------------- -------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation of Organization) Identification No.)
529 Fifth Avenue, New York, New York 10017
(Address of Principal Executive Offices) (Zip Code)
(212) 622-7300
(Registrant's Telephone Number, Including Area Code)
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
--- ---
At February 8, 1999 there were 14,432,483 shares of Common Stock, $.01 par value
outstanding.
Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---
Network Event Theater, Inc.
Form 10-QSB
Index
Page
PART I--FINANCIAL INFORMATION Number
------
Item 1 Financial Statements
Consolidated balance sheets - December 31, 1998
(unaudited) and June 30, 1998............................ 1
Consolidated statements of operations - three and six
months ended December 31, 1998 and 1997 (unaudited)...... 2
Consolidated statements of cash flows - six months ended
December 31, 1998 and 1997 (unaudited)................... 3
Consolidated statement of stockholders' equity - six
months ended December 31, 1998 (unaudited)............... 4
Notes to consolidated financial statements................. 5
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 8
PART II--OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K............................ 12
Signatures......................................................... 13
Network Event Theater, Inc.
Consolidated Balance Sheets
(In thousands)
December 31, June 30,
1998 1998
------------ --------
ASSETS (Unaudited)
Current Assets:
Cash and cash equivalents $ 3,080 $ 2,271
Accounts receivable, net of allowance for doubtful accounts of $153
and $137 at December 31, 1998 and June 30, 1998, respectively 3,178 1,539
Prepaid expenses 477 348
Deposits and other current assets 263 181
-------- --------
Total current assets 6,998 4,339
Property and equipment, net of accumulated depreciation of $3,397
and $2,664 at December 31, 1998 and June 30, 1998, respectively 4,872 4,861
Deferred financing costs, net of accumulated amortization of $125
and $12 at December 31, 1998 and June 30, 1998, respectively 1,014 77
Intangible assets, net of accumulated amortization of $1,104
and $857 at December 31, 1998 and June 30, 1998, respectively 6,152 6,399
-------- --------
Total assets $ 19,036 $ 15,676
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 721 $ 914
Accrued employee compensation 625 520
Other accrued expenses 1,148 762
Deferred revenues 790 689
Current portion of long-term debt 842 789
-------- --------
Total current liabilities 4,126 3,674
Long-term debt 8,072 3,459
Commitments and contingencies -- --
Stockholders' Equity:
Preferred stock, $.01 par value, 1,000 shares authorized, no shares
issued and outstanding -- --
Common stock, $.01 par value, 32,000 shares authorized, 11,635 shares
and 11,347 shares issued and outstanding at December 31, 1998
and June 30, 1998, respectively 116 113
Additional paid-in capital 29,377 27,198
Accumulated deficit (22,655) (18,768)
-------- --------
Total stockholders' equity 6,838 8,543
-------- --------
Total liabilities and stockholders' equity $ 19,036 $ 15,676
======== ========
See notes to consolidated financial statements
Network Event Theater, Inc.
Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
Three months ended Six months ended
December 31, December 31,
--------------------- ---------------------
1998 1997 1998 1997
---- ---- ---- ----
Net Revenues $ 3,385 $ 3,002 $ 6,810 $ 5,955
Operating Expenses:
Selling, general and
administrative expenses 3,553 3,654 6,909 6,922
Corporate expenses 1,484 801 2,258 1,435
Depreciation and amortization 496 412 980 806
-------- -------- -------- --------
Total operating expenses 5,533 4,867 10,147 9,163
-------- -------- -------- --------
Loss from operations (2,148) (1,865) (3,337) (3,208)
Interest income 69 25 127 65
Interest expense (290) (171) (584) (326)
-------- -------- -------- --------
Loss before provision for income taxes (2,369) (2,011) (3,794) (3,469)
Provision for income taxes 56 59 93 105
-------- -------- -------- --------
Net loss $ (2,425) $ (2,070) $ (3,887) $ (3,574)
======== ======== ======== ========
Net loss per basic and diluted common share $ (0.21) $ (0.21) $ (0.34) $ (0.36)
======== ======== ======== ========
Weighted average basic and diluted common
shares outstanding 11,367 9,904 11,419 9,883
======== ======== ======== ========
See notes to consolidated financial statements
2
Network Event Theater, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six months ended
December 31,
-------------------
1998 1997
---- ----
Cash Flows From Operating Activities
Net loss $(3,887) $(3,574)
Adjustments to reconcile net loss to
net cash used in operating activities:
Provision for bad debts 16 77
Depreciation and amortization 980 806
Amortization of deferred financing costs 113 --
Changes in assets and liabilities:
Increase in prepaid expenses (129) (16)
(Increase) in deposits and other current assets (82) (1)
Increase in accounts receivable (1,655) (1,490)
(Decrease) increase in accounts payable (193) 1,631
Increase (decrease) in accrued employee compensation 105 (169)
Increase (decrease) in other accrued expenses 386 (308)
Increase in deferred revenues 101 --
------- -------
Net cash used in operating activities (4,245) (3,044)
Cash Flows From Investing Activities
Capital expenditures (744) (890)
Notes receivable -- (1)
Payment for business acquisitions -- (10)
------- -------
Net cash used in investing activities (744) (901)
Cash Flows From Financing Activities
Sale of warrants 188 --
Net proceeds from sale of common stock 1,442 60
Proceeds from long-term debt 4,502 5,065
Repayment of long-term debt (334) (4,030)
------- -------
Net cash provided by financing activities 5,798 1,095
------- -------
Increase (decrease) in cash and cash equivalents 809 (2,850)
Cash and cash equivalents at beginning of period 2,271 4,185
------- -------
Cash and cash equivalents at end of period $ 3,080 $ 1,335
======= =======
Supplemental cash flow information;
Cash paid for interest $ 476 $ 324
======= =======
Cash paid for income taxes $ 66 $ 78
======= =======
Issuance of warrants in connection with long-term debt $ 552 $ --
======= =======
See notes to consolidated financial statements
3
Network Event Theater, Inc.
Consolidated Statement of Stockholders' Equity
For the period July 1, 1998 to December 31, 1998
(In thousands)
(Unaudited)
Common Stock Additional
---------------- paid-in Accumulated
Shares Amount Capital Deficit Total
------ ------ ---------- ----------- -----
Balances at June 30, 1998 11,347 $ 113 $ 27,198 $(18,768) $ 8,543
Issuance of warrants in connection with long-term debt -- -- 740 -- 740
Exercise of warrants and issuance of common stock 288 3 1,439 1,442
Net loss -- -- -- (3,887) (3,887)
-------- -------- -------- -------- --------
Balances at December 31, 1998 11,635 $ 116 $ 29,377 $(22,655) $ 6,838
======== ======== ======== ======== ========
See notes to consolidated financial statements
4
Network Event Theater, Inc.
Notes to Consolidated Financial Statements
December 31, 1998
(Unaudited)
1. Organization and Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Network Event Theater, Inc. ("NET"), and its wholly-owned subsidiaries American
Passage Media, Inc. ("American Passage"), Campus Voice, Inc. ("Campus Voice"),
Beyond the Wall, Inc. ("Beyond the Wall") and Pik:Nik Media, Inc. ("Pik:Nik")
(collectively, the "Company"). All significant intercompany transactions have
been eliminated.
The Company owns and operates a proprietary national network of theaters on
college campuses (the "Network"). The Network delivers entertainment and
educational events via satellite for display through high resolution video
projectors on movie theater sized screens. Additionally, the Company owns and
operates collegiate media and marketing service businesses, which complement and
enhance the reach of its Network. The Company operates in one industry segment,
which provides media and marketing services to advertisers who want to reach
young adults.
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Item 310 of Regulation
S-B. Accordingly, they do not include all the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for an interim period are not necessarily indicative of the
results that may be expected for the year ended June 30, 1999. Because the
Company earns most of its revenues during the academic year (September through
May), the Company's second and third quarters generally reflect higher levels of
revenues than are earned in the first and fourth quarters. For further
information, refer to the consolidated financial statements and footnotes
thereto included in Company's Form 10-KSB for the fiscal year ended June 30,
1998.
2. Reclassifications
Certain amounts in the NET's consolidated balance sheet of June 30, 1998 have
been reclassified to conform to the current period's presentation.
3. Pro Forma Financial Data
The effect of the On the House, Inc. acquisition in May 1998 was not material to
the reported net loss or net loss per share.
5
Network Event Theater, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 1998
(Unaudited)
4. Long-Term Debt
A summary of long-term debt is as follows:
December 31, June 30,
1998 1998
---- ----
Note Payable to Bank (A) $2,738,000 $3,072,000
Note Payable to Finance Company (B) 1,000,000 1,000,000
Note Payable - Private Placement (C) 5,000,000 -
Other 176,000 176,000
---------- ----------
8,914,000 4,248,000
Less current portion (842,000) (789,000)
---------- ----------
$8,072,000 $3,459,000
========== ==========
(A) This loan is secured by all of the assets of Campus Voice, Beyond the Wall
and American Passage (the "Borrowers") and is guaranteed by NET. This loan
is payable in equal monthly installments, commencing in February 1998, over
a maximum of six years (as defined). Interest is payable monthly at a rate
of interest of 275 basis points above LIBOR for U.S. dollar deposits of one
month maturity.
The Borrowers are also party to an interest rate exchange agreement
originally converting $3.0 million of the aforementioned floating rate debt
to a fixed rate. The balance of the interest rate agreement at December 31,
1998 was $2,389,000. Under the interest rate exchange agreement, the
Borrowers are required to pay interest at a fixed rate of 9.11% on the
notional amount covered by the interest rate exchange agreement. In return,
the Company receives interest payments on the same notional amount at the
prevailing LIBOR rate plus 275 basis points. The interest rate exchange
agreement terminates in June 2002.
The bank has also made available to the Borrowers a revolving line of
credit with a maximum principal amount of $1.0 million. All amounts
borrowed under this facility must be repaid by July 1999. The revolving
line of credit facility bears interest at the rate of the bank's prime rate
plus 25 basis points and interest is due monthly. Borrowings under the
revolving line of credit are secured by the Borrower's eligible accounts
receivable (as defined) and are also guaranteed by NET. As of December 31,
1998 the Borrowers have not borrowed any amounts under this facility.
(B) Interest on this note is payable monthly at a rate of 12% per annum, with
the principal due in June 2000. The note is secured by all of the assets of
Pik:Nik and is guaranteed by NET.
(C) In July 1998, the Company realized net proceeds of approximately $4.7
million from the sale of $5,000,000 of 11% Subordinated Notes (the "Notes")
and 375,000
6
Network Event Theater, Inc.
Notes to Consolidated Financial Statements (Continued)
December 31, 1998
(Unaudited)
warrants (see note 5). The Notes are due in July 2003. Interest
at the rate of 11% per annum is due semi-annually.
5. Stockholders' Equity
In July 1998, in connection with the sale of the Notes (see Note 4), NET sold
375,000 warrants for approximately $188,000. Each warrant entitles the holder to
purchase one share of the Company's common stock for $4.125 and expires in July
2003.
In connection with the sale of the Notes and warrants, the Company issued
150,000 warrants to the placement agent. Each warrant entitles the holder to
purchase one share of the Company's common stock for $4.125 and expires in July
2003.
The 525,000 warrants described above were valued at $740,000 based on a
valuation from an independent third party. Such amount has been recorded as
deferred financing costs and is being amortized over the term of the related
debt.
The Company announced on December 28, 1998 that it had called for redemption as
of the close of business on January 28, 1999, all of its outstanding publicly
traded warrants at a redemption price of $0.10 per warrant. The warrants,
approximately 2.6 million, were issued in connection with the Company's initial
public offering in April 1996. The warrants permitted the holder to purchase one
share of the Company's common stock at a price of $5.00 per share. The funds to
be received by the Company, assuming the exercise of all outstanding warrants
prior to the date of redemption, will be approximately $13.0 million. As of
December 31, 1998, approximately 294,000 of the publicly traded warrants were
exercised.
7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with the consolidated financial
statements and related notes thereto. The following discussion contains certain
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from those discussed herein. Factors that
could cause or contribute to such differences include, but are not limited to,
the ability to obtain financing, integration of acquisitions, the management of
growth, changing consumer tastes and general economic conditions. The Company
undertakes no obligation to publicly release the results of any revisions to
these forward-looking statements that may be made to reflect any future events
or circumstances.
The following financial analysis compares the three months and the six months
ended December 31, 1998 (unaudited) to the three months and six months ended
December 31, 1997 (unaudited).
Results of Operations
For the three months ended December 31, 1998, net revenues were $3,385,000 as
compared to $3,002,000 for the three months ended December 31, 1997. The
increase of $383,000 is primarily due to increased sales efforts as a result of
an increase in sales staff.
For the six months ended December 31, 1998, net revenues were $6,810,000 as
compared to $5,955,000 for the six months ended December 31, 1997. The increase
of $855,000 is primarily due to increased sales efforts as a result of an
increase in sales staff.
For the three months ended December 31, 1998, selling, general and
administrative expenses were $3,553,000 as compared to $3,654,000 for the three
months ended December 31, 1997. The decrease of $101,000 is primarily due to the
termination of a consulting agreement on December 31, 1997 representing $206,000
of the decrease, offset by $105,000 of costs relating to increased level of
sales and administrative staff in 1998.
For the six months ended December 31, 1998, selling, general and administrative
expenses were $6,909,000 as compared to $6,922,000 for the six months ended
December 31, 1997. The decrease of $13,000 is primarily due to termination of a
consulting agreement on December 31, 1997 representing $413,000 of the decrease,
offset by $400,000 of costs relating to increased level of sales and
administrative staff in 1998.
8
For the three months ended December 31, 1998, corporate expenses were $1,484,000
as compared to $801,000 for the three months ended December 31, 1997. The
increase of $683,000 is primarily due to granting of bonuses to senior
management of $540,000. The remaining increase of $143,000 is due to increased
corporate personnel and related overhead expenses required to support the
Company's growth.
For the six months ended December 31, 1998, corporate expenses were $2,258,000
as compared to $1,435,000 for the six months ended December 31, 1997. The
increase of $823,000 is primarily due to granting of bonuses to senior
management of $540,000. The remaining increase of $283,000 is due to increased
corporate personnel and related overhead expenses required to support the
Company's growth.
For the three months ended December 31, 1998, total operating expenses were
$5,533,000 as compared to $4,867,000 for the three months ended December 31,
1997. The increase of $666,000 is primarily due to bonuses granted to senior
management, increased personnel and depreciation relating to additional
purchases of revenue generating assets during the period from October 1997
through December 1998, offset by a decrease in consulting fees.
For the six months ended December 31, 1998, total operating expenses were
$10,147,000 as compared to $9,163,000 for the six months ended December 31,
1997. The increase of $984,000 is primarily due to bonuses granted to senior
management, increased personnel and depreciation relating to additional
purchases of revenue generating assets during the period from October 1997
through December 1998, offset by a decrease in consulting fees.
For the three months ended December 31, 1998, interest expense was $290,000 as
compared to $171,000 for the three months ended December 31, 1997. The increase
of $119,000 primarily related to the issuance of $5,000,000 of subordinated
notes in July 1998.
For the six months ended December 31, 1998, interest expense was $584,000 as
compared to $326,000 for the six months ended December 31, 1997. The increase of
$258,000 primarily related to the issuance of $5,000,000 of subordinated notes
in July 1998.
For the three months ended December 31, 1998, net loss was $2,425,000 as
compared to $2,070,000 for the three months ended December 31, 1997. The
increase of $355,000 was due to increased selling, general and administrative
expenses, corporate expense and interest expense offset by increased revenues.
For the six months ended December 31, 1998, net loss was $3,887,000 as compared
to $3,574,000 for the six months ended December 31, 1997. The increase of
$313,000 was due to increased selling, general and administrative expenses,
corporate expense and interest expense offset by increased revenues.
9
Impact of Year 2000
During Fiscal Year 1998, the Company conducted an extensive review of its
computer systems and operations to identify the areas that could be affected by
the Year 2000 issue. A plan was developed which focused on the Company's
information systems and third-party relationships.
With respect to its own information systems, the Company adopted a five-phase
Year 2000 program consisting of: Phase I - identification of the Company's
systems that may be vulnerable to Year 2000 problems; Phase II - assessment of
items identified in Phase I; Phase III - remediation or replacement of
non-compliant systems and components; Phase IV - testing of systems and
components following remediation; and Phase V - developing contingency plans to
address the most reasonable likely worse case Year 2000 scenarios. The Company
has completed all phases of this program.
With respect to its third-party relationships, the Company reviewed its list of
large suppliers, vendors and service suppliers and is contacting them to assess
their state of Year 2000 readiness. This process is almost completed and the
Company has commenced contingency planning to address the most
reasonably likely worst case Year 2000 scenarios with respect to its third party
relationships, including developing alternate third party relationships, if
necessary. Potential sources of risk include the inability of printers to print
posters, catalogs and postcards for distribution by the Company and the
inability of college newspapers to accept print advertisements from the Company
on behalf of the Company's clients. In addition, there is the potential risk
that the Company will not be able to broadcast events to its network of theaters
on college campuses.
The results to date indicate that based on the diversity of the Company's
suppliers and the availability of other suppliers, the Company does not believe
that the Year 2000 issue will have a material adverse effect on its financial
condition or results of operations. The Company's costs incurred to date
associated with the Year 2000 issue are not material. The Company estimates that
the costs to complete its five phase program, excluding any costs that may be
incurred by the Company as a result of the failure of any third parties to
become Year 2000 compliant, will also not be material. The Company believes that
by the end of fiscal 1999 it will have developed contingency plans to address
its most reasonably likely worst case Year 2000 scenarios.
Common Places, LLC
On November 10, 1998, the Company formed a limited liability company in Delaware
called Common Places, LLC ("CPL") and on November 25, 1998 signed an operating
agreement whereby the Company became a holder of 50% of the common interests in
CPL. CPL's management, who are experienced Internet managers, held the remaining
interests. Pursuant to the terms of the operating agreement, the Company is
obligated to provide $15.0 million worth of on-campus media and marketing
services to CPL over the next four years and access to other media at favorable
rate thereafter and contributed two of its active websites to CPL. The Company
has neither contributed nor advanced funds to CPL, which intends to raise funds
from private investors through the sale of common interests to finance the
development of its CollegeBytes.com website and ancillary materials. As a result
of such sales of common interests, the Company's interest in CPL will be reduced
below 50% depending on the amount of common interests sold to investors.
Liquidity and Capital Resources
In July 1998, the Company realized net proceeds of approximately $4.7 million
from the sale of $5,000,000 of 11% Subordinated Notes and 375,000 warrants.
In December 1998, the Company realized net proceeds of approximately $1.4
million from the exercise of publicly traded warrants.
The Company used approximately $4.2 million in its operating activities in the
first six months of fiscal year 1998 as compared to $3.0 million in the first
six months of fiscal year 1997. The increase of approximately $1.2 million
represents the decrease in short-term liabilities and the increase in accounts
receivable and other assets offset by the increase in depreciation and
amortization. Cash used in investing activities in the first six months of
fiscal year 1998 of approximately $0.7 million is composed primarily of capital
expenditures. Cash provided by financing activities in the first six months of
fiscal year 1998 of approximately $5.8 million is attributable to the issuance
of long term debt and related warrants, and the proceeds from the exercise of
the publicly traded warrants.
The Company's primary capital requirements with respect to its operations have
been to fund corporate overhead and the operation of its Network of campus
theaters and postcard distribution. In the event that the Company's plans and
assumptions with respect to its Network change or prove to be inaccurate, if its
assumptions with respect to American Passage, Campus Voice, Beyond the Wall and
Pik:Nik being able to fund their operations and to make debt service payments
out of their own cash flow in the future prove to be inaccurate, or if the
working capital or capital expenditure requirements of American Passage, Campus
Voice, Beyond the Wall or Pik:Nik prove to be greater than anticipated, the
Company could be required to seek additional financing.
10
As of December 31, 1998, the Company had approximately $3.1 million in cash and
cash equivalents. The Company believes that such amounts, plus approximately
$12.1 million received from the redemption of its publicly traded warrants
during the period January 1 to February 4, 1999, will be sufficient to fund
working capital, including debt service and interest requirements for the
foreseeable future.
The Company may also seek additional debt or equity financing to fund the cost
of additional expansion of its Network and the cost of developing and acquiring
additional media and marketing services businesses or to fund its operations. To
the extent that the Company finances its requirements through the issuance of
additional equity securities, including the exercise of its publicly traded
warrants, any such issuance would result in dilution to the interests of the
Company's stockholders.
Additionally, to the extent that the Company incurs indebtedness or issues debt
securities in connection with financing activities, the Company will be subject
to all of the risks associated with incurring substantial indebtedness,
including the risk that interest rates may fluctuate and cash flow may be
insufficient to pay principal and interest on any such indebtedness. The Company
has no current arrangements with respect to, or sources of, additional
financing. There can be no assurance that any additional financing will be
available to the Company on acceptable terms, if at all.
11
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.1 Limited Liability Company Agreement of Common Places, LLC dated as
of November 25, 1998.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
None.
12
SIGNATURES
In accordance with 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.
February 16, 1999
BY: /s/ HARLAN D. PELTZ
--------------------------
HARLAN D. PELTZ
Chairman of the Board
and Chief Executive Officer
BY: /s/ BRUCE L. RESNIK
--------------------------
BRUCE L. RESNIK
Executive Vice President
Chief Financial Officer and
Chief Accounting Officer
13