SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
FOR QUARTER ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
Commission file number 0-18410
NETCURRENTS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 95-4233050
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9720 WILSHIRE BLVD., SUITE 700, BEVERLY HILLS, CA 90212
(Address of Principal Executive Offices) (Zip Code)
(310) 860-0200
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark 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 for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the Issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.001 par value 32,484,365 shares as of October 31, 2000
NETCURRENTS, INC.
TABLE OF CONTENTS
PAGE NUMBER
PART I FINANCIAL INFORMATION
ITEM 1. Financial Information
Consolidated Balance Sheet as of September 30, 2000
and December 31, 1999...........................................................3
Consolidated Statements of Operations For The
Three Months Ended September 30, 2000 and 1999
and for the Nine Months Ended September 30, 2000 and 1999.......................5
Consolidated Statements of Shareholders' Equity
For the Nine Months Ended September 30, 2000....................................7
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2000
and September 30, 1999..........................................................9
Notes to Consolidated Financial Statements......................................11
ITEM 2. Management's Discussion and Analysis or Plan of Operation............11
PART II OTHER INFORMATION ...........................................................29
ITEM 1. Legal Proceedings .........................................................29
ITEM 2. Changes In Securities And Use Of Proceeds .................................29
ITEM 3. Defaults Upon Senior Securities ...........................................29
ITEM 4. Submission Of Matters To A Vote Of Security Holders .......................29
ITEM 5. Other Information .........................................................29
ITEM 6. Exhibits And Reports On Form 8-K And Form 8-K/A ...........................30
Page 2
NETCURRENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 (UNAUDITED) AND DECEMBER 31, 1999 (AUDITED)
- --------------------------------------------------------------------------------
ASSETS
September 30, December 31,
2000 1999
--------------- ----------------
(UNAUDITED)
CURRENT ASSETS
Cash and cash equivalents $ 4,886,751 $ 798,855
Accounts receivable, net of allowance for doubtful
accounts of nil and nil 433,123 555,667
Prepaid advertising expenses - 583,392
Prepaid assets 66,532 40,342
Subscription receivable - 200,000
--------------- ----------------
Total current assets 5,386,406 2,178,256
FILM COSTS 224,986 224,988
FIXED ASSETS, at cost, net 800,233 131,559
GOODWILL, less accumulated amortization of $211,782
and $144,282 774,413 841,913
INVESTMENTS 281,000 725,050
OTHER ASSETS 31,213 38,043
--------------- ----------------
TOTAL ASSETS $ 7,498,251 $ 4,139,809
=============== ================
Page 3
NETCURRENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 (UNAUDITED) AND DECEMBER 31, 1999 (AUDITED)
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, December 31,
2000 1999
--------------- ----------------
(UNAUDITED)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 767,611 $ 1,202,141
Dividends payable 130,713 108,313
Due to related parties - 44,046
Capital lease obligation - 4,320
Convertible debentures - 619,824
Deferred revenue - 63,025
--------------- ----------------
Total current liabilities 898,324 2,041,669
Total liabilities 898,324 2,041,669
--------------- ----------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, Series A, C, D, E, and F, $0.001 par value 5,400,000
shares authorized
1,100,000 and 2,625,000 shares issued and outstanding 1,100 2,625
Preferred stock, Series G, $0.001 par value
4,000 shares authorized
30 and 1,875 shares issued and outstanding 30,000 1,875,000
Common stock, $0.001 par value
50,000,000 shares authorized
32,151,004 and 23,070,869 shares issued and outstanding 32,151 23,071
Treasury stock, at cost
93,536 shares (1,010,192) (1,010,192)
Subscription receivable (4,165,539) (398,800)
Additional paid-in capital 47,412,078 30,704,372
Accumulated other comprehensive income (173,313) 225,050
Accumulated deficit (35,526,358) (29,322,986)
--------------- ----------------
Total shareholders' equity 6,599,927 2,098,140
--------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,498,251 $ 4,139,809
=============== ================
Page 4
NETCURRENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (UNAUDITED)
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
-------------------------------------- -------------------------------------
2000 1999 2000 1999
------------------ ----------------- ----------------- -----------------
(unaudited) (unaudited) (unaudited) (unaudited)
REVENUES $477,103 $120,251 $1,089,883 $2,655,904
COSTS OF SALES
Costs of projects sold - 3,009 - 839,132
Write-off projects in development - - - 301,037
------------------ ----------------- ----------------- -----------------
NET REVENUES 477,103 117,242 1,089,883 1,515,735
SELLING GENERAL AND ADMINISTRATIVE
Recovery of accounts receivable (137,658) - (137,658) -
Salaries and Benefits 1,363,431 - 2,500,633 -
Selling and Marketing Expenses 94,625 - 1,231,467 -
Professional Fees 330,879 - 854,713 -
Consulting Fees 134,764 - 569,109 -
Occupancy Costs 95,114 - 206,330 -
General and administrative expenses 490,217 893,299 1,756,720 2,253,725
------------------ ----------------- ----------------- -----------------
2,371,012 893,299 6,981,314 2,253,725
LOSS FROM OPERATIONS (1,893,909) (776,057) (5,891,431) (737,990)
------------------ ----------------- ----------------- -----------------
OTHER INCOME (EXPENSE)
Interest and dividend income 112,028 - 340,622 1,753
Interest and financing expense (1,681) - (8,742) (12,447)
Write-off of notes receivable and
other assets (31,790) - (87,195) (166,965)
Amortization of goodwill (22,500) (22,500) (67,500) (46,782)
Settlement expense (57,151) - (294,551) -
Gain on sale of investment - - 168,250 -
Other income (expense) (5,390) - 485 (11,098)
------------------ ----------------- ----------------- -----------------
Total other income (expense) (6,484) (22,500) 51,369 (235,539)
------------------ ----------------- ----------------- -----------------
Page 5
NETCURRENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (UNAUDITED)
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------------------------------- -----------------------------------
2000 1999 2000 1999
--------------------- --------------- -------------------- --------------
(unaudited) (unaudited) (unaudited) (unaudited)
LOSS BEFORE PROVISION FOR INCOME TAXES (1,900,393) (798,557) (5,840,062) (973,529)
PROVISION FOR INCOME TAXES - (14,744) (20,097) (14,744)
--------------------- --------------- -------------------- --------------
NET (LOSS) $(1,900,393) $(813,301) $(5,860,159) $(958,785)
DIVIDEND REQUIREMENT OF SERIES A PREFERRED STOCK (106,250) (106,250) (318,750) (318,750)
DIVIDEND REQUIREMENT OF SERIES E PREFERRED STOCK - - - (66,250)
DIVIDEND REQUIREMENT OF SERIES G PREFERRED STOCK (2,213) - (24,463) -
--------------------- --------------- -------------------- --------------
(LOSS) APPLICABLE TO COMMON SHAREHOLDERS (2,008,856) (919,551) (6,203,372) $(1,343,785)
UNREALIZED (LOSS) ON INVESTMENT (81,200) - (398,363) -
--------------------- --------------- -------------------- --------------
COMPREHENSIVE INCOME (LOSS) APPLICABLE TO COMMON
SHAREHOLDERS $ (2,090,056) $ (919,551) $ (6,,601,735) $(1,343,785)
===================== =============== ==================== ==============
BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE $ (.07) $ (0.67) $ (0.22) $ (0.10)
===================== =============== ==================== ==============
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING BASIC AND FULLY DILUTED 30,674,692 13,683,659 30,674,692 13,683,659
===================== =============== ==================== ==============
Page 6
NETCURRENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (UNAUDITED)
- --------------------------------------------------------------------------------
PREFERRED STOCK
--------------------------------------------------------------------------------
SERIES A, C, D, E, AND F SERIES G
----------------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
----------------- ----------------- ----------------- -----------------
BALANCE, DECEMBER 31, 1999 2,625,000 $ 2,625 1,875 $ 1,875,000
ISSUANCE OF COMMON
SHARES IN PAYMENT
OF DIVIDENDS ON
SERIES A PREFERRED
STOCK
ISSUANCE OF COMMON
STOCK FOR THE
EXERCISE OF WARRANTS
ISSUANCE OF COMMON
STOCK FOR PRIVATE
PLACEMENT
ISSUANCE OF SERIES G
PREFERRED STOCK 1,090 1,090,000
ISSUANCE OF SERIES E
PREFERRED STOCK
RETIREMENT OF
COMMON STOCK
GROSSO-JACOBSON
ISSUANCE OF COMMON
STOCK FOR EXERCISE
OF OPTIONS
ISSUANCE OF COMMON
STOCK FROM THE
PREFERRED SERIES F
CONVERSION (225,000) (225)
ISSUANCE OF COMMON
STOCK FROM THE
PREFERRED SERIES G
CONVERSION (2,935) (2,935,000)
COMMON STOCK
------------------------------------ TREASURY SUBSCRIPTION
SHARES AMOUNT STOCK RECEIVABLE
------------------ -------------- -------------- ------------
BALANCE, DECEMBER 31, 1999 23,070,869 $ 23,071 $ (1,010,192) $ (398,800)
ISSUANCE OF COMMON
SHARES IN PAYMENT
OF DIVIDENDS ON
SERIES A PREFERRED
STOCK 105,013 105
Issuance of common
STOCK FOR THE
EXERCISE OF WARRANTS 151,583 152
ISSUANCE OF COMMON
STOCK FOR PRIVATE
PLACEMENT 1,700,000 1,700
ISSUANCE OF SERIES G
PREFERRED STOCK
ISSUANCE OF SERIES E
PREFERRED STOCK
RETIREMENT OF
COMMON STOCK
GROSSO-JACOBSON (328,286) (328)
ISSUANCE OF COMMON
STOCK FOR EXERCISE
OF OPTIONS 1,497,161 1,497 (1,190,385)
ISSUANCE OF COMMON
STOCK FROM THE
PREFERRED SERIES F
CONVERSION 225,000 225
ISSUANCE OF COMMON
STOCK FROM THE
PREFERRED SERIES G
CONVERSION 2,336,318 2,336
ACCUMULATED
OTHER
ADDITIONAL COMPRE-
PAID-IN HENSIVE ACCUMULATED
CAPITAL INCOME DEFICIT TOTAL
------------------ ------------- --------------- ---------------
BALANCE, DECEMBER 31, 1999 $ 30,704,372 $ 225,050 $ (29,322,986) $ 2,098,140
ISSUANCE OF COMMON
SHARES IN PAYMENT
OF DIVIDENDS ON
SERIES A PREFERRED
STOCK 318,645 318,750
ISSUANCE OF COMMON
STOCK FOR THE
EXERCISE OF WARRANTS 212,308 212,460
ISSUANCE OF COMMON
STOCK FOR PRIVATE
PLACEMENT 7,648,300 7,650,000
ISSUANCE OF SERIES G
PREFERRED STOCK 1,090,000
ISSUANCE OF SERIES E
PREFERRED STOCK
RETIREMENT OF
COMMON STOCK
GROSSO-JACOBSON 328 -
ISSUANCE OF COMMON
STOCK FOR EXERCISE
OF OPTIONS 2,094,629 905,741
ISSUANCE OF COMMON
STOCK FROM THE
PREFERRED SERIES F
CONVERSION 311,525 311,525
ISSUANCE OF COMMON
STOCK FROM THE
PREFERRED SERIES G
CONVERSION 2,932,664 -
Page 7
NETCURRENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (UNAUDITED)
- --------------------------------------------------------------------------------
PREFERRED STOCK
-----------------------------------------------------------------
SERIES A, C, D, E, AND F SERIES G
----------------------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT
----------------- -------------- ----------------- ---------
ISSUANCE OF COMMON
STOCK FOR CONVERSION
OF SERIES C PREFERRED
STOCK FOR EXERCISE
OF OPTIONS (1,300,000) $ (1,300) $
ISSUANCE OF COMMON
STOCK FOR
SETTLEMENT
ISSUANCE OF COMMON
STOCK FOR CONVERSION
DEBENTURES
DIVIDENDS PAID ON
SERIES A PREFERRED$
STOCK
DIVIDENDS PAID ON
SERIES G PREFERRED
STOCK
UNREALIZED LOSS ON
INVESTMENT
INTEREST ON SUBSCRIPTION
RECEIVABLE
NET LOSS
------------ -------------- ----------- ----------
BALANCE, SEPT 30,2000 1,100,000 $ 1,100 30 $ 30,000
============ ============== =========== ==========
COMMON STOCK
------------------------------------ TREASURY SUBSCRIPTION
SHARES AMOUNT STOCK RECEIVABLE
------------------ ----------------- ----------- -----------------
ISSUANCE OF COMMON
STOCK FOR CONVERSION
OF SERIES C PREFERRED
STOCK FOR EXERCISE
OF OPTIONS 2,800,000 $ 2,800 $ $ (2,540,958)
ISSUANCE OF COMMON
STOCK FOR
SETTLEMENT 80,000 80
ISSUANCE OF COMMON
STOCK FOR CONVERSION
DEBENTURES 513,346 513
DIVIDENDS PAID ON
SERIES A PREFERRED
STOCK
DIVIDENDS PAID ON
SERIES G PREFERRED
STOCK
UNREALIZED LOSS ON
INVESTMENT
INTEREST ON SUBSCRIPTION
RECEIVABLE (35,396)
NET LOSS
BALANCE, SEPT 30,2000 32,151,004 $ 32,151 $ (1,010,192) (4,165,539)
=================== =============== ============== ===================
ACCUMULATED
OTHER
ADDITIONAL COMPRE-
PAID-IN HENSIVE ACCUMULATED
CAPITAL INCOME DEFICIT TOTAL
-------------- ------------ ------------- -------------
ISSUANCE OF COMMON
STOCK FOR CONVERSION
OF SERIES C PREFERRED
STOCK FOR EXERCISE
OF OPTIONS $ 2,448,500 $ $ $ (90,958)
ISSUANCE OF COMMON
STOCK FOR
SETTLEMENT 96,320 96,400
ISSUANCE OF COMMON
STOCK FOR CONVERSION
DEBENTURES 644,487 645,000
DIVIDENDS PAID ON
SERIES A PREFERRED
STOCK (318,750) (318,750)
DIVIDENDS PAID ON
SERIES G PREFERRED
STOCK (24,463) (24,463)
UNREALIZED LOSS ON
INVESTMENT (398,363) (398,363)
INTEREST ON SUBSCRIPTION
RECEIVABLE (35,396)
NET LOSS (5,860,159) (5,860,159)
-------------- ----------- ------------- ---------
BALANCE, SEPT 30,2000 $ 47,387,128 $ (173,313) $(35,526,358) $ 6,599,927
============== =========== ============= ============
Page 8
NETCURRENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
For the For the
Nine Months Nine Months
Ended Ended
September 30, September 30,
2000 1999
------ ------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (5,860,159) $ (958,785)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization of fixed assets 113,452 84,316
Write-off o projects in development - 301,037
Amortization of goodwill 67,500 46,782
Amortization of acquisition costs - (5,320)
Write-off of notes receivable and other assets - 654,428
Issuance of common stock for services - 280,000
Issuance of common stock for settlement 96,400 -
Gain on sale of investments (168,250) -
(Increase) decrease in
Accounts receivable 122,672 1,498,802
Other assets and prepaid expenses (19,360) (48,938)
Prepaid advertising expenses 583,392 -
Increase (decrease) in
Accounts payable and accrued expenses (434,527) (2,741,572)
Deferred revenue (63,025) (270,669)
-------- ---------
Net cash used in operating activities (5,561,905) (1,159,919)
----------- -----------
Page 9
NETCURRENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
For the For the
Nine Months Nine Months
Ended Ended
September 30, September 30,
2000 1999
------------- -------------
(unaudited) (unaudited)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures on fixed assets $ (782,126) $(16,014)
Additions to film costs - 16,226
(Increase) decrease in receivables from related
parties - 284,821
Additions to goodwill - 809,785
Company acquisitions - 252,122
(Increase) in short-term investments - (800,000)
Increase in obligations under capital leases - 28,247
Increase in acquisition costs - 114,589
Loans to acquired company - (900,000)
Payments on receivables - related party - 2,265
Loans to related parties - (25,000)
Proceeds from sale of investments 213,809 -
-------- --
Net cash provided by (used in) investing activities (568,317) (232,959)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on notes payable - related parties (44,046) (1,210,802)
Borrowings from notes payable - related parties - 35,086
Payments on capital lease obligation (4,320) (49,821)
Payment on subscription receivable 200,000 -
Proceeds from issuance of preferred stock 311,525 2,680,975
Proceeds from issuance of common stock 8,754,933 804,070
Offering costs - (192,500)
Proceeds from convertible debentures, net of
offering costs 1,000,026 -
---------- --
Net cash provided by financing activities 10,218,118 2,067,008
----------- ----------
Net increase in cash and cash equivalents 4,087,896 674,130
---------- --------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 798,855 (442,645)
-------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,886,751 $ 231,485
============ =============
Page 10
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
NetCurrents, Inc. (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
in accordance with the instructions to Form 10-QSB. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all material adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the nine months ended September 30, 2000 are not necessarily
indicative of the results that may be expected for the year ended December 31,
2000. The information contained in this Form 10-QSB should be read in
conjunction with the audited financial statements filed as part of the Company's
Form 10-KSB for the six months ended December 31, 1999.
(2) GOODWILL
Goodwill was recorded in connection with the acquisition of MWI
Distribution, Inc. in July 1998 and is being amortized over a period of five
years.
(3) DIVIDENDS ON PREFERRED STOCK
During the three months ended September 30, 2000, the Company issued shares
of its Common Stock at a market value to pay a required $106,250 quarterly
dividend on the Series A Preferred Stock and the required $22,250 quarterly
dividend on the Series G Preferred Stock.
(4) LOSS PER SHARE
Loss per share for the three and six months ended September 30, 2000, has
been computed after deducting the dividend requirements of the Series A and
Series G Preferred Stock. It is based on the weighted average number of common
and common equivalent shares reported outstanding during the entire period ended
on September 30, 2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD LOOKING STATEMENTS.
This report contains statements that constitute "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934 and
Section 27A of the Securities Act of 1933 with respect to the Company and its
operations that are subject to certain risks and factors which could cause the
Company's future actual results of operations and future financial condition to
differ materially from those described herein. The words "expect," "estimate,"
"anticipate," "predict, "believe" "project" and similar expressions and
variations thereof are intended to identify forward-looking statements. These
statements appear in a number of places in this filing and include statements
regarding the intent, belief or current expectations of the Company with respect
to, among other things: integration of NetCurrents Services Corporation ("NC
Services") into NetCurrents, Inc., execution of business plans, completion of
strategic alliances, the ability to work effectively with our alliance partners:
Burrelle's Information Services, Inc., Thomson Financial Carson, Kroll Risk
Consulting Services, Bowdens Media
Page 11
Monitoring Limited, Webmind, Datalink.net, and demand for NetDetect,
AgencyFacts, CyberTalk, CyberWatch, CyberPerceptions and the other premium
products and services, the ability to continue to develop new products and
services, the ability to attract sufficient skilled personnel to meet its
targets in the business plans, expected capital expenditures, anticipated
business and economic conditions and trends affecting our financial condition
and our business and strategies. Readers are cautioned not to put undue reliance
on such forward-looking statements. With respect to the NC Services business,
such forward-looking statements involve risks and uncertainties, including the
intensity of competition from other technology companies, the ability of NC
Services to meet its staffing requirements, the ability of NC Services to
execute its business plans and the status of our future liquidity. Readers are
further cautioned that any such forward-looking statements are not guarantees of
future performance and involve risks and uncertainties, and that actual results
may differ materially from those projected in this filing, including, without
limitation, those risks and uncertainties discussed under the headings "Factors
That Could Impact Future Results" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Company's Transition
Report on Form 10-KSB for the six months ended December 31, 1999 as well as the
information set forth below. We do not ordinarily make projections of our future
operating results and we undertake no obligation to publicly update or revise
any forward looking statements, whether as a result of new information, future
events or otherwise.
OVERVIEW
Prior to 1999, our principal business was to acquire, develop, produce and
distribute dramatic, comedy, documentary and instructional television series and
movies and theatrical motion pictures. We distributed our projects in the United
States and in international markets for exhibition on standard broadcast
television (network and syndication), basic cable and pay cable and for video
distribution. We also provided producer and executive producer services in
exchange for fees and participations in future profits from these projects.
In February 1999, we announced our intention to change our business focus
to the Internet and electronic commerce industries. During the next several
months, we significantly contracted our operations as we attempted to identify a
target to expand into these new business lines. In furtherance of our new
business focus, in September 1999, we entered into an agreement to acquire
Infolocity, Inc., a privately-held company in Burlingame, California engaged in
the business of helping public companies minimize the impact of negative
information on the Internet through its proprietary technology. In December
1999, we completed the acquisition for 7,375,001 shares of our common stock and
renamed the company "Net Currents Services Corporation" ("NC Services"). We
accounted for the acquisition as a pooling of interests.
Following the acquisition of NC Services, we commenced the ongoing
development and execution of a business plan for that subsidiary. One of the
first steps was to begin building the management team, the technology group, an
international sales force and a product development team. As of October 31,
2000, we have augmented the senior management team for NC Services by hiring a
Vice-President Sales, a Chief Financial Officer, a Director of Channel Sales and
a Director of Direct Sales. In addition, we expanded the international sales
force from 3 to 12 and our technology group from 2 to 6. We also hired a
Vice-President of Product Strategy, a Director of Product Development and
increased our product development team by an additional 3 people.
Page 12
As of November 2000, we will have completed the installation of Oracle
Financials, Order Entry and Sales Force automation that will allow us to
generate extensive management, sales and financial reports thereby further
enhancing our financial management capabilities. With the anticipated volume of
customers as we launch our strategic alliances, these Linux based Oracle
applications will interface with the Oracle 8i database and provide us with the
necessary financial and customer relationship management information to more
effectively manage our expanded business.
As part of our marketing and sales strategy, we have continued to search
out alliances with nationally and internationally recognized "channel partners."
We believe that these alliances will expedite an increase in our brand-name
recognition, generate sales through the utilization of our partners' sales
force, and stimulate product development efforts through joint development and
marketing of products designed for the needs of our partners' customers. We
established a set of criteria for the selection of these channel partners,
including: each partner should be a leader in its market, have established a
national or international brand in their market segment, have a broad sales
force in major cities across the United States and in some cases major
international cities and must support its sales force with strategically
structured marketing programs. To date, we have entered into four sales based
strategic alliances.
We have also determined that our product development strategy will include
strategic alliances where such alliances will add incremental value to our
product offerings and enhance our time to market. To date, we have entered into
three strategic technology alliances.
On September 30,1999, we filed an application for a patent on our FIRST
technology. We recently applied for an acceleration of the patent process and
were granted the acceleration on November 6, 2000.
Product Launches
In August 2000, we released a new product designed for the public and
investor relations markets called AgencyFacts. AgencyFacts provides real-time
online analysis of message board activity to help agency clients develop better
business strategies, stronger competitive positioning and greater understanding
of consumer perceptions about their clients' companies, products and services.
AgencyFacts includes components ranging from statistical analysis to online
sentiment analysis, comprehensive Web clipping services for each client,
analysis and summary of most talked about topics or issues, analysis and summary
of most active poster information, summary of message sentiment over time with
message drill down and last ten message drill down capability, all delivered on
a secured webportal. Additional features include alert mechanisms that provide
e-mail and wireless notification when any of three client predefined criteria
are met. The criteria include poster ID, a sentiment threshold or a volume
alert. AgencyFacts utilizes Webmind's artificial intelligence capabilities.
In September 2000, NC Services announced the launch of its new Internet
news clipping service, WebClipper 2.0, providing an effective, time-efficient
and economical tool to help keep track of what is being said about companies on
the Internet daily. Until the launch of this product, most Internet clipping
services provided dated material that is "dumped" on the end user in
time-consuming voluminous reports containing targeted, non-targeted and/or
duplicative information. WebClipper 2.0 provides numerous features to its users
including coverage of more than 2,500
Page 13
online publications, selected web site pages, COMTEX news feed integration to
capture press releases in real time upon distribution, elimination of duplicate
articles, advanced archive search capability, daily client reporting and an
e-mail alert capability, all in an easy-to-use interface.
Prior to the end of the year, we plan to release a new product designed
specifically for the public relations agency market called PR Manager. PR
Manager is a product designed to enhance the client management capabilities of
public relations firms. PR Manager allows account managers of public relations
firms to review NC Services generated data for multiple clients at one time. PR
Manager also incorporates WebClipper 2.0 and allows the public relations firm to
update each client's FIRST and Webclipper search terms.
Before the end of the year, we also intend to launch a wireless application
that will be integrated into our premium service offerings. The yet unnamed
product is an upgraded feature to our baseline product allowing end users to
receive their detailed statistics to the Palm VII. In addition, end users may
receive alerts based on pre-determined criteria delivered to other wireless
devices such as pagers, cell phones PDA's and other similar electronic devices
The service will be made available at no additional charge to our premium
clients.
Sales Based Strategic Alliances
In May 2000, we announced a strategic alliance with Burrelle's Information
Services, Inc. ("Burrelle's") of Livingston, New Jersey, one of the world's
leading providers of media monitoring services. We will provide Burrelle's with
a customized co-branded AgencyFacts service, called CyberTalk, that will appear
on Burrelle's NewsAlert client web portals along with the "Powered by
NetCurrents" logo. Burrelle's has agreed that its national sales organization
will market this customized product to thousands of clients as part of the
Burrelle's NewsAlert service. Burrelle's will also market our premium products.
We completed the customized Burrelle's product by July 31, 2000, however, the
anticipated preliminary launch date has been extended into early December
because Burrelle's has elected to wait for the completion of the next release of
the artificial intelligence component of AgencyFacts scheduled for November 30,
2000. The Burrelle's alliance is a revenue share agreement under which
Burrelle's and NetCurrents will apportion the revenue generated by Burrelle's
based upon a predetermined formula.
In June 2000, we entered into a strategic alliance with Thomson Financial
Investor Relations ("TFIR"), one of the world's leading providers of investor
relations solutions and strategic advisory services. Under the terms of the
alliance, we, and TFIR, were to co-develop and market new Internet monitoring
services for the investor relations market. We customized our AgencyFacts
product for the specific needs of TFIR clients with NetDetect, the customized
co-branded product, to be offered as an integral part of TFIR's IR Universe
platform. We planned to launch this product to TFIR's more than 3,500 clients in
August 2000 with the roll out planned to take place over a four to five month
period. In September 2000, TFIR acquired the Carson Group and placed the senior
management of the Carson Group in charge of the new Thomson Financial Carson
("TFC") organization. As a result, the TFC rollout was delayed until October 10
and began with an initial 185 clients, with the balance of the first 500 to be
online November 30. The delay was a result of TFC's acquisition of the Carson
Group and the change in senior management resulting from this acquisition. The
Carson Group management team, who are now managing TFC, asked the management of
Netcurrents to evaluate a different approach to the sale of NetDetect to its
client base. Where the previous Thomson Financial agreement called for a mass
rollout of NetDetect to
Page 14
500 clients a month, we now believe that a more carefully orchestrated approach
will ultimately be more effective. We believe that initially selling to 500
clients and adding additional groups of 500 only as we achieve certain sales
targets will achieve better results for both NC Services and TFC.
Under the revised plan with TFC, we are controlling the entire rollout to
all TFC accounts so that our sales force will service their clients exclusively
for our entire product line that not only includes NetDetect but will also
include our premium services such as CyberPerceptions. TFC will receive a
portion of the revenue from NetDetect and a referral fee for all accounts with
respect to which we are able to sell our premium services.
On October 18, 2000, we entered into a strategic alliance with
Toronto-based Bowdens Media Monitoring Limited, the largest media monitoring
firm in Canada. Bowdens will sell CyberWatch, a new co-branded version of
AgencyFacts, to their client base of thousands of public and private companies
throughout Canada. Bowdens has hired a manager to oversee the sales and
marketing of CyberWatch. NC Services has trained Bowdens' sales personnel and
Bowdens has commenced selling efforts of CyberWatch through a national sales and
marketing program.
On October 23, 2000, we signed a definitive agreement establishing a
three-year exclusive global strategic alliance with Kroll Risk Consulting
Services, Inc. ("KRCS"). KRCS is a leading worldwide investigations and
intelligence firm, providing a full range of risk mitigation and asset
protection services to over 25,000 clients. KRCS has a global network of 60
offices in 19 countries. Under the terms of this alliance, we expect to share
Kroll offices throughout the world and provide enhanced Internet intelligence
services to corporations, individuals and governments using our proprietary
technology. We also plan to jointly develop an exclusive Internet based product
line designed specifically for the security market using the NetCurrents/Kroll
brand name and integrating our FIRST technology. Supported by a co-funded
marketing campaign, we expect to utilize a joint sales force of approximately
165 case managers and salespeople to sell products to the worldwide security and
intelligence market. We commenced our joint sales effort in October 2000 and
KRCS has begun to provide cases to NC Services under the terms of the agreement,
although KRCS has been using NC Services on some of their cases since January
2000. In connection with this alliance, we granted to KRCS warrants to
purchase 1,750,000 shares of our Common Stock at an exercise price of $2.50 to
$3.00 per share, of which warrants to purchase 350,000 shares will be
immediately vested and the balance will vest on KRCS meeting certain performance
criteria based on introductions to potential clients.
We hope that these four strategic sales alliances will create leveraged
sales channels for NC Services in the investor relations, media monitoring and
security market segments. As well, we anticipate we will derive benefits from
the marketing campaigns and web site traffic of Burrelle's, Bowdens, Kroll and
TFC. We also expect these alliances to provide us with the opportunity to
generate new clients through a combined sales force of over 200 sales personnel.
Computer Associates approached us to use our proprietary, real time
technology to assist it with certain high level government cases involving the
tracking down of hackers and certain individuals who intentionally spread
viruses throughout the Internet. We agreed to work with them and continue to
provide the data required for this program. While we did explore the potential
for a commercial alliance with Computer Associates, we were unable to reach an
agreement. As a result, we have shifted our focus to other prospective alliance
partners with comparable strategic value.
Page 15
Strategic Technology Alliances
In April 2000, we entered into a co-location agreement with AboveNet
Communications in San Jose, California under which we have co-located our
servers with AboveNet. We did this to acquire enhanced security and to gain
access to the largest aggregated bandwidth in the world (up to multi-terabit per
second capacity) which can scale as required. This also reduces the amount of
funds we would be required to invest in equipment.
In June 2000, we announced a strategic alliance with Intelligenesis
Corporation (now known as Webmind Corporation). Webmind, which has over 100
employees dedicated to the field of artificial intelligence, has developed and
markets sophisticated artificial intelligence technology that balances real
semantic understanding with computational efficiency. We utilize this advanced
technology in the delivery of our AgencyFacts-derived products. Webmind's
technology allows us to enhance our AgencyFacts products and deliver expanded
monitoring and analysis capacity without substantially increasing Internet
Strategist staffing.
In August 2000, NC Services entered into an agreement with Datalink.net to
develop a wireless solution enabling users of NetCurrents' premium real-time
Internet monitoring and analysis services to remotely receive "alert" messages
and updates to their detailed statistics page via the Palm VII. NC Services
plans to provide its premium clients, at no charge, a Palm VII so they can
access the information being provided by this new service. By implementing
Datalink.net's Wireless Gateway technology, NC Services expects to provide its
premium clients with remote access to specific information on their secured
portals allowing for the immediate delivery of critical information through a
number of hand held devices such as pagers, cell phones and PDA's, beginning
with the Palm VII. The new service will allow NC Services' clients to receive,
in real-time, urgent "alert" messages that may require immediate action, as well
as up-to-the-minute detailed statistics graphs providing them with overall
online message board sentiment. We expect to launch this service by the end of
this year.
Management's focus in the first nine months of this year has been on: the
completion of the above- mentioned key strategic alliances as well as the sales,
technology and product modifications necessary to support our business plans.
Aside from the technological advantages achieved through Webmind, AboveNet and
Datalink.net, the sales based strategic alliances provide us with strong channel
partners in the Investor Relations , Media Monitoring and Security markets, all
of which represent large market opportunities for us. We believe that the
continuing launch of the Kroll, Bowdens, Burrelle's and TFC alliances in the
fourth quarter of 2000, the impact of joint marketing efforts and a combined
sales force of over 200 salespeople, will provide us with an opportunity to
expand our client base and improve our cash flow over the balance of fiscal 2000
and 2001.
RESULTS OF OPERATIONS
BECAUSE OF THE COMPLETE CHANGE IN THE BUSINESS OF THE COMPANY COMMENCING IN
DECEMBER 1999 WITH THE ACQUISITION OF NC SERVICES, COMPARISONS OF RESULTS FROM
PERIODS IN 1999 TO PERIODS IN 2000 ARE NOT MEANINGFUL.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1999
Page 16
Revenues for the three months ended September 30, 2000 were $477,103 and
consisted of sales of $370,998 attributable to our Internet division and
$106,105 attributable to our Entertainment division. Revenues for the three
months ended September 30, 1999 were $120,251 and were entirely attributable to
sales made by our Entertainment division.
Revenues for the Internet division increased from $233,878 for the quarter
ended June 30, 2000 to $370,998 for the quarter ended September 30, 2000, a 59%
increase from quarter to quarter. Due to circumstances associated with our
transition to an Oracle financial management system, the increase was
incorrectly reported to be 74% in a press release dated October 4, 2000.
Selling, general and administrative expenses were $2,371,012 for the three
months ended September 30, 2000 as compared to $893,299 in the three months
ended September 30, 1999. We expended $330,879 for professional fees in this
period. Of this amount, we expended approximately $141,000 for legal fees
relating to the settlement of certain litigation matters regarding MWI
Distribution, Inc. We also expended $134,764 in consulting fees. Of this amount,
$52,000 is attributable to the conversion of two employment agreements into
consulting agreements and $50,000 is a payment to a financial intermediary.
Salaries and benefits increased to $1,363,431 for the three month period
September 30, 2000. We substantially increased our staffing levels in calendar
2000 to meet our business plan levels. By September 30, 1999, we had
significantly reduced our staff and operating expenses as we reduced our
entertainment industry operations. The major components of salaries and benefits
are attributable to sales personnel of approximately $510,000 and client
operations of approximately $282,000. Sales and marketing expenses totaled
$94,265 as we continued to expand our sales force in Canada and the United
States as well as continuing our marketing campaigns. For the three months ended
September 30, 2000, general and administrative expenses were $490,217 consisting
primarily of travel and entertainment, cost associated with being a public
company, depreciation and amortization, recruiting and computer related
expenses.
The $112,028 increase in interest income during the three months ended
September 30, 2000 as compared to the three months ended September 30, 1999 was
due to the short-term investment of net proceeds from sales of securities to
Brown Simpson in March 2000 (see "Liquidity and Capital Resources")
We paid dividends on our preferred stock by issuing 51,351 shares and
45,891 shares of common stock during the three months ended September 30, 2000
and 1999, respectively.
The net comprehensive loss applicable to common shareholders was $2,090,056
and $919,551 for the three months ended September 30, 2000 and 1999,
respectively.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1999
Revenues for the nine months ended September 30, 2000 were $1,089,883 and
consisted of sales of $796,545 attributable to our Internet division and
$293,338 attributable to our Entertainment division. Revenues for the nine
months ended September 30, 1999 were $2,655,904 and consisted entirely of sales
made by our Entertainment division.
Cost of sales during the nine months ended September 30, 1999 consisted
solely of direct costs associated with the production and distribution of our
entertainment products. We did not have any cost of sales in the nine months
ended September 30, 2000 and do not anticipate cost of sales related to our
Internet division.
Page 17
During the nine months ended September 30, 1999 we wrote off $301,037 of
projects in development as a result of our determination to pursue a different
business focus.
Selling, general and administrative expenses were $6,981,314 in the nine
months ended September 30, 2000. We expended $854,713 for professional fees
during the period. Included in these amounts were $302,407 relating to the
settlement of certain litigation matters, primarily regarding MWI Distribution,
Inc. As well, we expended approximately $106,149 relating to accounting and
audit costs as a result of our change in fiscal year end from June 30 to
December 31 and the resulting requirement to file an additional report on Form
10-KSB. In addition, we incurred approximately $211,627 in professional fees
relating primarily to filings with the Securities and Exchange Commission in
connection with investments made in the Company. Management believes a
substantial portion of these costs are extraordinary, non-recurring items.
Consulting fees for the nine month period ended September 30, 2000 were
$569,109, of which $90,000 is attributable to the conversion of two employment
agreements, with an annual cost of $150,000 each, into consulting agreements.
Consulting fees also includes the payment of $280,000 to financial
intermediaries. One of the consulting agreements has a termination date of
January 31, 2001 and the other continues until December 31, 2001. Salaries and
benefits for the nine months ended September 30, 2000 increased to $2,500,633 as
we continued to expand our sales force, technology team and Internet Strategist
departments. Sales and marketing expenses continued to rise as our sales force
expanded and we augmented our marketing programs. For the nine months ended
September 30, 2000, general and administrative expenses were $1,756,720
consisting primarily of travel and entertainment, cost associated with being a
public company, depreciation and amortization, recruiting and computer related
expenses.
During the nine months ended September 30, 1999 the Company had
significantly reduced its staff and operating expenses as it transitioned out of
certain operations in the entertainment industry. The lower general and
administrative costs were primarily due to elimination of certain staff and
costs related to the entertainment business.
The $338,869 increase in interest income during the nine months ended
September 30, 2000 as compared to the nine months ended September 30, 1999 was
due to the short-term investment of net proceeds from sales of securities to
Brown Simpson in March 2000 (see "Liquidity and Capital Resources").
Settlement expense of $294,551 during the nine months ended September 30,
2000 related primarily to the settlement of certain MWI lawsuits.
We paid dividends on our preferred stock by issuing 105,013 shares and
96,637 shares of common stock during the nine months ended September 30, 2000
and 1999, respectively.
During the nine month period ended September 30, 2000, our monthly losses
peaked at $800,000 in February 2000. For the month of September 2000 our loss
was $565,000 including depreciation and amortization of $24,652.
The net comprehensive loss applicable to common shareholders was $6,601,735
and $1,343,785 for the nine months ended September 30, 2000 and 1999,
respectively.
Page 18
LIQUIDITY AND CAPITAL RESOURCES
In March 2000, we issued 1,700,000 shares of common stock and warrants to
purchase, at exercise prices ranging from $6.00 to $9.00, an additional
3,998,000 shares of common stock to Brown Simpson Strategic Growth Fund Ltd and
the Brown Simpson Strategic Growth Fund L.P.(collectively, "Brown Simpson"). The
purchase price for these securities was $8,500,000. The Company may require
Brown Simpson to exercise the warrants if the underlying shares are registered
for resale under the Securities Act of 1933 and the market price of the common
stock exceeds the exercise price by specified amounts ranging from $8.00 per
share to $14.00 per share.
During the first quarter of 2000 we issued convertible debentures for net
proceeds of $1,090,000. In the nine months ended September 30, 2000, all of
these convertible debentures, as well as all other outstanding convertible
debentures, converted into an aggregate of 3,184,077 shares of common stock.
In July 1998, we secured access to a $5,500,000 equity-based line of credit
with an institutional investor, subject to certain minimum trading
qualifications. To date, we have raised $2,500,000 through the sale of
convertible preferred stock to the investor.
We believe that cash flows from operations, cash on hand as well as other
available financing sources, should be sufficient to fund our operations and
service our debt in the foreseeable future. However, unanticipated events,
increased growth and possible acquisitions are a number of factors that could
change our anticipated needs, and could require that we try to raise additional
financing.
IMPACT OF YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits instead of four to define the applicable year. Any of our computer
programs that have time-sensitive software or facilities or equipment containing
embedded micro-controllers may recognize a date using "00" as the year 1900
rather than the year 2000. This could cause a system failure or miscalculations
resulting in potential disruptions of operations, including, among other things,
a temporary inability to process transactions, send invoices or engage in
similar normal business activities. We did not experience any problems as a
result of the advent of the Year 2000.
FACTORS THAT COULD IMPACT FUTURE RESULTS
FACTORS AFFECTING THE COMPANY'S LIQUIDITY AND CAPITAL RESOURCES
RISKS RELATED TO OUR BUSINESS
WE ACQUIRED NC SERVICES IN DECEMBER 1999. IF WE FAIL TO GROW THE NC SERVICES
BUSINESS OUR BUSINESS AND FINANCIAL CONDITION COULD SUFFER.
We acquired NC Services in December 1999 to expand our core business into
the Internet industry and provide us with further opportunities to promote
synergistic business relationships among other Internet companies. However, we
cannot be certain that our acquisition of NC Services will enable our business
to realize a higher rate of growth.
Page 19
We announced our intention to expand our business in the Internet and
electronic commerce industries in February 1999, and we have changed our core
television production business to Internet technology services, primarily
through our acquisition of NC Services. These industries are new, highly
speculative and involve a substantial degree of risk. Since we are in an early
stage of development in these rapidly evolving industries, our prospects are
difficult to predict and could change rapidly and without warning. You must
consider our prospects in light of the risks, expenses and difficulties
frequently encountered by companies in the early stages of developing and
expanding their business, particularly companies in the new and rapidly evolving
Internet technology and online commerce markets. These risks include, but are
not limited to, the inability to attract key personnel knowledgeable in the
Internet markets, the inability to respond promptly to changes in a rapidly
evolving and unpredictable business environment and the inability to manage
potential growth. To address these risks, we must, among other things:
o successfully implement new business plans and marketing strategies;
o respond to competitive developments; and
o attract and retain qualified personnel.
WE MAY NOT BE SUCCESSFUL IN ENTERING THE INTERNET AND ONLINE COMMERCE FIELDS
SINCE WE HISTORICALLY NEVER HAVE OPERATED IN THESE BUSINESSES. OPERATING IN
THESE BUSINESSES WILL ALSO REQUIRE SUBSTANTIAL WORKING CAPITAL.
The Internet market segments are relatively new business ventures for us,
and are businesses in which we have not historically operated. In addition, our
new business strategy will require substantial working capital. We will continue
to spend substantial funds to market and expand our new business and to expand
our existing management team with additional experienced Internet personnel. We
cannot assure you that we will be successful in any of these areas.
FUTURE ACQUISITIONS INVOLVE RISKS FOR US.
We intend to evaluate future acquisitions of complementary product lines
and businesses as part of our business strategy. Any future acquisitions may
result in potentially dilutive issuances of equity securities, the use of our
cash resources, the incurrence of additional debt and increased goodwill,
intangible assets and amortization expense, which could negatively impact our
profitability. In addition, acquisitions involve numerous risks, including
difficulties in the assimilation of the operations and products of the acquired
companies, the diversion of management's attention from other business concerns,
risks of entering markets in which we have no or limited direct prior
experience, and the potential loss of key employees of the acquired company.
WE HAVE A HISTORY OF LOSSES AND MAY NOT BE PROFITABLE IN THE FUTURE.
We have a history of revenues and losses as follows:
Revenues Losses
Year ended June 30, 1997 $5,521,441 $4,592,145
Page 20
Year ended June 30, 1998 $22,369,511 $1,411,916
Year ended June 30,1999 $2,991,953 $2,722,239
Six months ended December 31,1999 $342,985 $4,724,582
Nine months ended September 30, 2000 $1,089,883 $5,860,159
(without giving effect to the payment in 1997, 1998, 1999 and 2000 of
dividends of $425,000 annually, on the Series A Preferred Stock and payment in
1999 of dividends of $66,250 on the Series E Preferred Stock and payment in the
nine months ended September 30, 2000 of dividends of $22,250 on the Series G
Preferred Stock). As of September 30, 2000, we had an accumulated deficit of
($35,526,358). If the cash we generate from our operations cannot sufficiently
fund possible future operating losses, we may need to raise additional funds.
Additional financing may not be available in amounts or on terms acceptable to
us, if at all.
OUR FUTURE OPERATING RESULTS MAY FLUCTUATE AND ARE UNPREDICTABLE. IF WE FAIL TO
MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS, THE MARKET PRICE
OF OUR SECURITIES MAY DECLINE SIGNIFICANTLY.
Our limited operating history in the Internet and online commerce
industries makes it difficult to forecast accurately our revenues, operating
expenses and operating results. As a result, we may be unable to adjust our
spending in these areas in a timely manner to compensate for any unexpected
revenue shortfall.
BECAUSE OF THE LIMITED BARRIERS TO ENTRY IN THE INTERNET INDUSTRY, COMPETITION
IN THESE MARKETS IS INTENSE. IF WE ARE UNABLE TO COMPETE SUCCESSFULLY AGAINST
CURRENT AND FUTURE COMPETITORS THAT ENTER THESE MARKETS, OUR REVENUES AND
OPERATING RESULTS COULD BE IMPAIRED.
The Internet markets are new, rapidly evolving and intensely competitive,
and we expect that competition could further intensify in the future. Barriers
to entry are limited, and current and new competitors can launch web sites and
other similar businesses at a relatively low cost. Many of our current and
potential competitors have longer operating histories and significantly greater
financial, marketing and other resources than us. Increased competition may
result in reduced operating margins and loss of market share.
We have not yet determined whether we will be able to compete successfully
against our current and future competitors. Further, as a strategic response to
changes in the competitive environment, we may from time to time make marketing
decisions or acquisitions that could adversely affect our business, prospects,
financial condition and results of operations.
OUR GROWTH AND OPERATING RESULTS WILL BE IMPAIRED IF THE INTERNET AND ONLINE
COMMERCE INDUSTRIES DO NOT CONTINUE TO GROW.
Our growth and operating results depend in part on widespread acceptance
and use of the Internet as a point of convergence in the telecommunications,
entertainment and technology
Page 21
industries, as well as on continued consumer acceptance and use of the Internet
for purposes of chat rooms and other forms of communication. These practices are
at an early stage of development, and demand and market acceptance are
uncertain.
The Internet may not become a viable medium for telecommunications,
entertainment and technology convergence or a healthy commercial marketplace due
to inadequate development of network infrastructure and enabling technologies
that address the public's concerns about:
o network performance;
o reliability;
o speed of access;
o ease of use; and
o bandwidth availability.
In addition, the Internet's overall viability could be adversely affected
by increased government regulation. Changes in or insufficient availability of
telecommunications or other services to support the Internet could also result
in slower response times and adversely affect general usage of the Internet.
Also, negative publicity and consumer concern about the security of transactions
conducted on the Internet and the privacy of users may also inhibit the growth
of commerce on the Internet.
BURDENSOME GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD IMPAIR OUR
RESULTS OF OPERATIONS.
It is possible that a number of laws and regulations may be adopted
concerning the Internet, relating to, among other things:
o user privacy;
o content;
o copyrights;
o distribution;
o telecommunications; and
o characteristics and quality of products and services.
The adoption of any additional laws or regulations may decrease the
popularity or expansion of the Internet. A decline in the growth of the Internet
could decrease demand for our services and increase our cost of doing business.
The application of laws and regulations from jurisdictions whose laws do not
currently apply to our business, or the application of existing laws and
regulations to the Internet and other online services could also harm our
business.
Page 22
OUR OUTSTANDING OPTIONS AND WARRANTS MAY DILUTE OUR STOCKHOLDERS' INTERESTS AND
COULD HINDER US FROM OBTAINING ADDITIONAL FINANCING.
As of September 30, 2000, we had outstanding options and warrants to
purchase a total of 11,570,147 shares of common stock. To the extent that these
outstanding options and warrants are exercised, our stockholders' interests will
be diluted. Also, we may not be able to obtain additional equity capital on
terms we like, since the holders of the outstanding options and warrants will
likely exercise them at a time when we may be able to obtain such capital on
better terms than those in the options and warrants.
THE CONVERSION OF OUR CONVERTIBLE PREFERRED STOCK MAY DILUTE OUR STOCKHOLDERS'
INTERESTS AND COULD HINDER US FROM OBTAINING ADDITIONAL FINANCING.
As of September 30, 2000, we have issued and outstanding 1,000,000 shares
of our Series A Preferred Stock, 50,000 shares of our Series D Preferred Stock,
50,000 shares of our Series F Preferred Stock and 30 shares of our Series G
Preferred Stock. At our option, we can pay the dividends on our Series A
Preferred Stock in cash or in shares of common stock. No dividends are currently
due on the Series C Preferred Stock. We are not required to pay dividends on the
Series F Preferred Stock; however, we are required to pay dividends on our
Series G Preferred Stock.
Holders of our convertible preferred stock could convert their shares into
common stock at any time in the future. To the extent all of the shares of our
outstanding convertible preferred stock are converted into common stock, our
common stockholders' interests will be diluted. Since these shares of common
stock will be registered for sale in the marketplace, future offers to sell such
shares could potentially depress the price of our common stock. In the future,
this could make it difficult for us or our stockholders to sell the common
stock. Also, we may have problems obtaining additional equity capital on terms
we like, since we can expect the holders of our convertible preferred stock to
convert their shares into common stock at a time when we would be able to obtain
any needed capital on more favorable terms than those of the convertible
preferred stock.
STOCK PRICES OF INTERNET-RELATED COMPANIES HAVE FLUCTUATED WIDELY IN RECENT
MONTHS AND THE TRADING PRICE OF OUR SECURITIES IS LIKELY TO BE VOLATILE, WHICH
COULD RESULT IN SUBSTANTIAL LOSSES TO INVESTORS.
As a result of our recent expansion into Internet and online commerce, the
trading price of our securities could become more volatile and could fluctuate
widely in response to factors including the following, some of which are beyond
our control:
o variations in our operating results;
o announcements of technological innovations or new services by us or
our competitors;
o changes in expectations of our future financial performance, including
financial estimates by securities analysts and investors;
Page 23
o changes in operating and stock price performance of other
Internet-related companies similar to us;
o conditions or trends in the Internet and technology industries;
o additions or departures of key personnel;
o future sales of our common stock; and
o acceptance by the market of our acquisition of NC Services.
Domestic and international stock markets often experience significant price
and volume fluctuations. These fluctuations, as well as general economic and
political conditions unrelated to our performance, may adversely affect the
price of our common stock and redeemable warrants.
TAKEOVER EFFORTS COULD BE DETERRED AS A RESULT OF OUR RIGHT TO ISSUE PREFERRED
STOCK IN THE FUTURE AND CERTAIN PROVISIONS IN OUR CERTIFICATE OF INCORPORATION.
Our Certificate of Incorporation permits our Board of Directors to issue up
to 20,000,000 shares of "blank check" Preferred Stock, of which we have issued
4,304,375 shares of Preferred Stock. Our Board of Directors also has the
authority to determine the price, rights, preferences, privileges and
restrictions of those shares without any further vote or action by our
stockholders. If we issue additional preferred stock with voting and conversion
rights, the rights of our common stockholders could be adversely affected by,
among other things, the loss of their voting control to others. Any additional
issuances could also delay, defer or prevent a change in our control, even if
these actions would benefit our stockholders.
Additionally, provisions of Delaware law and our Certificate of
Incorporation could make it more difficult for a third party to acquire us, even
if doing so would be beneficial to our stockholders.
WE HAVE NEVER PAID DIVIDENDS ON OUR COMMON STOCK. WE PAY ANNUAL CASH OR STOCK
DIVIDENDS ON SOME OF OUR PREFERRED STOCK.
We have never paid cash dividends on our common stock and we do not expect
to pay these dividends in the foreseeable future. Holders of our Series A
Preferred Stock are entitled to annual dividends of 8 1/2% (aggregating $425,000
annually, in cash or stock at our option, assuming no conversion). Holders of
our Series C Preferred Stock are entitled to dividends of 8% annually, so long
as we have net income in excess of $1,000,000 in the applicable fiscal year. We
pay these dividends quarterly, in cash or in shares of our common stock.
Beginning January 1, 2000, holders of our Series G Preferred Stock were entitled
to dividends of $60 per year per share of Series G Preferred Stock, payable
quarterly. For the foreseeable future, we anticipate that we will retain all of
our cash resources and earnings, if any, for the operation and expansion of our
business, except to the extent required to satisfy our obligations under the
terms of the Series A Preferred Stock, Series C Preferred Stock and Series G
Preferred Stock.
SALES OF ADDITIONAL SHARES OF OUR COMMON STOCK INTO THE PUBLIC MARKET MAY CAUSE
OUR STOCK PRICE TO FALL.
Page 24
If we or our stockholders sell substantial amounts of our common stock
(including shares issued upon the exercise of outstanding options and warrants
or upon the conversion of shares of our convertible preferred stock) in the
public market, the market price of our common stock could fall. As of September
30, 2000, we had outstanding 32,151,004 shares of our common stock. The
unregistered common stock and the common stock held by our officers and
directors are "restricted" securities, as that term is defined by Rule 144 under
the Securities Act. In the future, these restricted securities may be sold only
in compliance with Rule 144 or if they are registered under the Securities Act
or under an exemption. Generally, under Rule 144, each person who holds
restricted securities for a period of one year may, every three months, sell in
ordinary brokerage transactions an amount of shares which does not exceed the
greater of 1% of our then-outstanding shares of common stock, or the average
weekly volume of trading of our common stock as reported during the preceding
four calendar weeks. A person who has not been an affiliate of ours for at least
the three months immediately preceding the sale and who has beneficially owned
shares of common stock for at least two years can sell such shares under Rule
144 without regard to any of the limitations described above. Sales of
substantial amounts of common stock in the public market, or the perception that
such sales could occur, may adversely affect the prevailing market price for our
common stock and could impair our ability to raise capital through a public
offering of equity securities.
In addition, as of September 30, 2000, holders of options and warrants may
acquire approximately 11,570,147 shares of common stock and holders of shares of
our Series A Preferred Stock, Series C Preferred Stock, Series F Preferred Stock
and Series G Preferred Stock may acquire shares of common stock at various
conversion rates.
NASDAQ COULD DELIST OUR COMMON STOCK, REDEEMABLE WARRANTS AND/OR SERIES A
PREFERRED STOCK, WHICH COULD MAKE IT MORE DIFFICULT FOR SHAREHOLDERS AND
POTENTIAL SHAREHOLDERS TO SELL OR OBTAIN QUOTATIONS AS TO THE PRICE OF OUR
COMMON STOCK, REDEEMABLE WARRANTS AND/OR SERIES A PREFERRED STOCK.
In order to continue to be listed on Nasdaq, we must meet the following
requirements:
o net tangible assets of at least $2,000,000, or a market capitalization
of $35,000,000 or $500,000 in net income for two of the last three
years;
o a minimum bid price of $1.00;
o two market makers;
o stockholders;
o at least 500,000 shares in the public float or a minimum market value
for the public float of $1,000,000; and
o compliance with certain corporate governance standards.
If we cannot satisfy Nasdaq's maintenance criteria in the future, Nasdaq
could delist our common stock and/or redeemable warrants. In the event of
delisting, trading, if any, would be
Page 25
conducted only in the over-the-counter market in the so-called "pink sheets" or
the NASD's Electronic Bulletin Board. As a result of any delisting, an investor
would likely find it more difficult to sell or obtain quotations as to the price
of our common stock and/or redeemable warrants.
WE MAY BE EXPOSED TO CONTINGENT LIABILITY ARISING FROM OUR FAILURE TO MAINTAIN
AN EFFECTIVE REGISTRATION STATEMENT COVERING THE REDEEMABLE WARRANTS AND
UNDERLYING COMMON STOCK.
We initially registered the issuance of the redeemable warrants and the
offer to purchase the shares of common stock issuable upon exercise of the
redeemable warrants with the SEC though the filing of a registration statement
in 1996. Until this registration we did not update the registration statement
with current information. Until such time as this post-effective amendment is
declared effective, the redeemable warrants may not be exercised. A warrant
holder may claim that our failure to maintain an effective registration
statement covering the exercise of the redeemable warrants for the period of
time that the price of our common stock exceeded the cost associated with the
exercise of the warrants constituted a breach of their Warrant Agreement. If all
warrant holders made this assertion, which we believe has no legal basis based
on federal case law, the amount of damages they could allege may, aggregate up
to $9.5 million, which represents the difference between the highest closing
trading price of the common stock ($11.06) which occurred on March 27, 2000, and
the cash exercise price ($5.25), multiplied by the number of outstanding
warrants divided by three - as three warrants need to be tendered in addition to
the cash exercise price in order to receive one share of common stock. However,
a warrant holder who was unable to realize $5.81 by tendering three warrants and
$5.25, in cash to the Company, could have on March 27, 2000, sold those three
warrants and realized $6.27, thereby eliminating any lost opportunity, since the
warrants publicly trade on the Nasdaq Small Capital Market.
Accordingly, we also believe that this opportunity to mitigate any damages
incurred by a warrant holder resulting from an inability to exercise his or her
warrants further diminishes the likelihood of a successful claim for any damages
by a warrant holder.
The Company does not believe that the warrant holders, or any warrant
holder, would be successful in this claim in light of the fact that no warrant
holder complied with the contractual obligations to exercise their redeemable
warrants and no warrant holder ever indicated to us or our transfer agent a
desire to exercise his or her warrants.
Our failure to maintain an effective registration statement covering the
exercise of the warrants also may constitute a violation of Section 5 of the
Securities Act of 1933, as amended. A violation of Section 5 of the Securities
Act may give a warrant holder who exercised warrants the right for some period
of time up to one year, to demand rescission of that exercise in which event the
warrant holder would be required to return to us the shares of common stock
acquired upon exercise and we would return to the warrant holder the warrants
tendered and the cash exercise price previously paid. Rescission would result in
no proceeds to the Company from the warrant offering and no damages to the
Company except for minimal transactional costs associated with the rescission.
As of the date of this report, we are not aware of any claims for damage or
rescission.
Page 26
IF THE SOFTWARE, HARDWARE, COMPUTER TECHNOLOGY AND OTHER SYSTEMS AND SERVICES
THAT WE USE ARE NOT YEAR 2000 COMPLIANT, OUR OPERATING RESULTS COULD BE
IMPAIRED.
Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without addressing the impact of the
recent change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond the year
2000. This could result in system failures or miscalculations causing
disruptions of operations, including, among others, a temporary inability to
process transactions, send invoices or engage in similar normal business
activities.
We have assessed our hardware and software systems and we believe that our
systems correctly define the year 2000. We have also assessed the embedded
system contained in our leased equipment, which we believe to be Year 2000
compliant.
In addition, we have received information from our key vendors and
customers with respect to their significant Year 2000 exposures that would have
a material effect on us. The financial impact on us of such third parties not
achieving high levels of Year 2000 readiness cannot be estimated with any degree
of accuracy. In the area of business continuity, technological operations
dependent in some way on one or more third parties, the situation is much less
in our ability to predict or control. In some cases, third party dependence is
on vendors who are themselves working toward solutions to Year 2000 problems. In
other cases, third party dependence is on suppliers of products and services to
ascertain the state of Year 2000 readiness of significant third parties. We are
taking steps to attempt to ensure that the third parties on which we are heavily
reliant are Year 2000 ready, but cannot predict the likelihood of such
compliance nor the direct and indirect costs of non-readiness by those third
parties or of securing such services from alternate third parties. We are not
yet aware of any Year 2000 issues relating to third parties with which we have a
material relationship. If such critical third party providers experience
difficulties resulting in disruption of service to us, a shutdown of our
operations at individual facilities could occur for the duration of the
disruption.
Page 27
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the normal course of our business, we are subject to various claims and
legal actions. We believe that we will not be materially adversely affected by
the ultimate outcome of any of these matters either individually or in the
aggregate. At this time, the Company is not engaged in any legal proceeding with
the exception of the following:
On November 13, 2000, a suit was filed by NetCurrents, Inc. and NetCurrents
Services Corporation in the Superior Court of the State of California alleging
that certain individuals were responsible for acts of defamation, unfair
competition, breach of fiduciary duty and breach of the implied covenant of good
faith and fair dealing. The defendants in the action are Victor Holtorf, James
Maloney and Does 1 through 100 (covering anonymous ID's on the Internet). The
suit alleges that on or about September 1, 2000 when Victor Holtorf resigned as
CEO of NetCurrents Services Corporation and COO of NetCurrents, Inc, and was
installed as a Director, Chairman of the Board of NetCurrents Services
Corporation and a paid consultant, he, alone or in conjunction with the other
named and unnamed defendants, began to intentionally publish disparaging,
materially false, misleading, derogatory and malicious statements about
NetCurrents, Inc., NetCurrents Services Corporation, Irwin Meyer, CEO of
NetCurrents, Inc., and other key management of these companies. We believe that
Mr. Holtorf and others communicated these statements on the Internet and in
person to employees, shareholders and institutional investors of the companies
with the intention of causing the public to believe the officers and directors
of the companies are incompetent and are mismanaging the business of NetCurrents
Services Corporation. We believe the above named and unnamed defendants' further
intention was to frighten and intimidate shareholders into selling their shares
and causing the price of NetCurrents, Inc. shares to fall as well as attempting
to cause shareholders and employees to turn against present management so as to
create an opportunity for Victor Holtorf to gain control of management. The
companies are asking the courts for a preliminary and permanent injunction,
enjoining all of the defendants, from the publication of materially false,
misleading, malicious and defamatory statements about NetCurrents, Inc.,
NetCurrents Services Corporation and its officers and directors as well as
cancellation of Victor Holtorf's consulting contract and compensatory and
punitive damages for the actions taken.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K AND FORM 8-K/A
(a) EXHIBITS
Page 28
27.1 Financial Data Schedule
(b) Reports on Form 8-K
Page 29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
NetCurrents, Inc. (Registrant)
Dated: November 13, 2000 /S/ IRWIN MEYER
--------------------------
Irwin Meyer,
Chief Executive Officer
Dated: November 13, 2000 /S/ MICHAEL ISCOVE
--------------------------
Michael Iscove
Chief Financial Officer