As filed with the Securities and Exchange Commission on April 13, 2001
Registration No. 333-_____
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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NETCURRENTS, INC.
(Name of Small Business Issuer in its Charter)
DELAWARE 7374 95-4553128
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction Industrial Identification No.)
of Incorporation Classification
or Organization) Code Number)
9720 WILSHIRE BLVD., SUITE 700
BEVERLY HILLS, CALIFORNIA 90212
(310) 860-0200
(Address of Principal Place of Business and Principal Executive Offices)
-----------
IRWIN MEYER, CHIEF EXECUTIVE OFFICER
NETCURRENTS, INC.
9720 WILSHIRE BLVD., SUITE 700
BEVERLY HILLS, CALIFORNIA 90212
(310) 860-0200
(Name, Address and Telephone number of Agent for Service)
---------------
Copies of all communications to:
Julie M. Kaufer, Esq.
Afshin Hakim, Esq.
Akin, Gump, Strauss, Hauer & Feld, LLP
2029 Century Park East, 24th Floor
Los Angeles, California 90024
Telephone: (310) 229-1000
Facsimile: (310) 229-1001
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after the effective date of this Registration Statement.
---------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
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CALCULATION OF REGISTRATION FEE
============================================================================================================
Title of Each Class Proposed Maximum Proposed Maximum
of Securities to Amount to be Offering Price Aggregate Offering Amount of
be Registered (1) Registered (1) Per Security Price (2) Registration Fee
- ------------------------------- --------------- ---------------- ------------------ ----------------
Common Stock, $0.001 par
value per share.............. $ $ $
Preferred Stock, $0.001 par
value per share.............. $ $ $
Warrants, each to purchase one
share of Common Stock........ $ $ $
--------------- ---------------- ------------------ ----------------
Total.......................... $20,000,000 (3) $20,000,000 $5,000
============================================================================================================
<FN>
(1) Also includes such indeterminate number of shares of Common Stock
and/or Preferred Stock as may be issued upon conversion or exercise of any
Preferred Stock and/or Warrants that provide for conversion or exercise into
other securities.
(2) Estimated solely for the purpose of computing the registration fee
pursuant to Rule 457(o).
(3) Not specified as to each class and/or series of securities to be
registered.
</FN>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
PRELIMINARY PROSPECTUS DATED APRIL 13, 2001
SUBJECT TO COMPLETION
NETCURRENTS, INC.
BY THIS PROSPECTUS, WE MAY OFFER UP TO $20,000,000 OF OUR
COMMON STOCK
PREFERRED STOCK
WARRANTS
We are offering shares of our common stock on a delayed under a shelf
registration under Rule 415 in accordance with the terms of this prospectus.
This offering is being made on a best-efforts basis by us, with no minimum
purchase requirement. Our common stock is quoted on the Nasdaq SmallCap Market
under the symbol "NTCS." On April 9, 2001, the closing sale price of a share of
our common stock, as reported on the Nasdaq SmallCap Market, was $0.14.
We may offer the securities directly or through underwriters, agents or
dealers. The supplement will describe the terms of that plan of distribution.
"Plan of Distribution" below also provides more information on this topic.
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK
AND SHOULDN'T BE PURCHASED BY INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR
ENTIRE INVESTMENT. SEE "RISK FACTORS" COMMENCING ON PAGE 6.
THE SECURITIES OFFERED OR SOLD UNDER THIS PROSPECTUS HAVE NOT BEEN APPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is ______________, 2001
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND THE FINANCIAL STATEMENTS AND NOTES
THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THE STATEMENTS WHICH ARE NOT
HISTORICAL FACTS CONTAINED IN THIS PROSPECTUS ARE FORWARD-LOOKING STATEMENTS
THAT INVOLVE RISKS AND UNCERTAINTIES, INCLUDING THOSE DESCRIBED UNDER "RISK
FACTORS." PROSPECTIVE PURCHASERS OF THE SECURITIES OFFERED BY THIS PROSPECTUS
SHOULD CAREFULLY CONSIDER THE "RISK FACTORS" SECTION, AS WELL AS THE OTHER
INFORMATION AND DATA INCLUDED IN THIS PROSPECTUS, BEFORE MAKING AN INVESTMENT IN
THE SECURITIES OFFERED HEREBY.
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement we filed with the
Securities and Exchange Commission utilizing a "shelf" registration process.
Under this shelf process, we may from time to time offer up to $20,000,000 in
the aggregate of (a) shares of our common stock, $0.001 par value, in one or
more series, (b) shares of preferred stock, $0.001 par value, in one or more
series, (c) warrants to purchase shares of our common or preferred stock or (d)
any combination of the foregoing, either individually or as units consisting of
one or more of the foregoing, each at prices and on terms to be determined at
the time of sale in accordance with Rule 415 of the Securities Act of 1933. The
common stock, preferred stock, and warrants collectively are referred to herein
as "securities." The securities offered pursuant to this prospectus may be
issued in one or more series of issuances and the aggregate offering price of
the securities will not exceed $20,000,000.
Each time we offer these securities, we will provide a prospectus
supplement that will contain specific information about the terms of that
offering.
THE COMPANY
We assist corporations in the achievement of their strategic business goals
through the management of Internet-based information. Using FIRST (Fast Internet
Real-Time Search Technology), our proprietary, patent pending, real-time search
technology, we monitor sources of information ranging from thousands of
e-publications, Internet sites and message boards, from an extensive universe of
targeted Internet locations which are monitored in real-time, 24 hours a day,
seven days a week. We monitor the Internet and use either artificial
intelligence or Internet Strategists to rate, evaluate or report to clients,
depending on the product purchased. The Internet Strategists offer clients
comprehensive intelligence, qualitative analysis, and strategic counsel, based
on this information, thereby providing timely, extensive Internet information
analysis and professional support.
We provide our clients with critical information and strategic counsel in a
broad range of areas which assist, among other things, in improving corporate
performance, protecting and enhancing their corporate and personal images,
measuring a wide range of perceptions, providing competitive intelligence,
countering misinformation and fraud on the Internet, providing due diligence
support, and optimizing shareholder value.
We monitor and deliver this targeted Internet information based on specific
criteria pre-determined by clients. Our broad range of services include:
real-time web clipping, real-time monitoring and notification, analysis and
reporting, competitive intelligence, dissemination of strategic information, due
diligence support, merger/acquisition support, pre and post IPO support, crisis
intervention, and a variety of customized services.
On February 28, 2001, we entered into a letter of intent to acquire
MindfulEye.com, Inc., a subscription-based Internet monitoring company that
automatically alerts investors in real time to online news, rumors, information
and changes in public sentiment about companies in which they have interests.
Currently, MindfulEye.com monitors all major financial discussions on the
Internet, and processes more than half a million individual mentions each day.
The closing of the acquisition is subject to, among other customary closing
conditions, reciprocal due diligence, applicable corporate and regulatory
approvals and the negotiation and execution of a definitive merger agreement.
Our principal executive offices are located at 9720 Wilshire Blvd., Suite
700, Beverly Hills, California 90212. Our telephone number is (310) 860-0200.
Page 3
THE OFFERING
Securities offered............ Up to $20,000,000 of common stock, preferred
stock and/or warrants.
Use of Proceeds............... The Company intends to use the net proceeds
of this offering to repay indebtedness that
may be outstanding from time to time for
marketing and advertising; and for working
capital and general corporate purposes. See
"Use of Proceeds."
Risk Factors.................. The securities offered hereby are speculative
and involve a high degree of risk and should
not be purchased by investors who cannot
afford the loss of their entire investment.
See "Risk Factors."
Nasdaq Symbol................. "NTCS"
Page 4
SUMMARY FINANCIAL INFORMATION
The summary financial information set forth below is derived from and
should be read in conjunction with the Consolidated Financial Statements and
notes thereto and with "Management's Discussion and Analysis of Results of
Operations and Financial Condition" appearing elsewhere in this Prospectus. In
February 2000, the Company changed its fiscal year end from June 30 to December
31.
FOR THE YEAR FOR THE SIX FOR THE YEAR FOR THE SIX
ENDED MONTHS ENDED ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31, JUNE 30, DECEMBER 31,
2000 1999 1999 1998
-------------- --------------- -------------- ----------------
(unaudited)
REVENUES......................... $1,665,225 $342,985 $2,991,953 $413,065
COST OF SALES.................... -- 96,997 926,295 90,171
-------------- --------------- -------------- ----------------
NET REVENUES..................... 1,665,225 245,988 2,065,658 322,894
WRITE-OFF OF
Projects in development....... 224,988 246,774 301,037 --
Notes and accounts receivable. 138,124 1,429,926 166,965 --
Investment.................... -- 300,000 -- --
GENERAL AND ADMINISTRATIVE
EXPENSES......................... 9,747,586 2,895,211 4,066,590 2,621,725
-------------- --------------- -------------- ----------------
LOSS FROM OPERATIONS............. (8,445,473) (4,625,923) (2,468,934) (2,298,831)
OTHER INCOME (EXPENSE --
Merger expenses .............. -- -- (6,696) (6,696)
Realized Gain on investment... 168,250 -- -- --
Settlements................... (191,214) -- -- --
Interest and dividend income.. 482,993 10,325 3,096 --
Interest and financing expense (8,354) (37,189) (12,447) --
Amortization of related party
covenant not to compete....... -- -- (115,000) (115,000)
Amortization of goodwill...... (90,000) (45,000) (99,282) (75,000)
Impairment of goodwill........ (251,913) -- -- --
Other expense................. (24,414) (26,795) (22,176) (11,390)
Total other income
(expense)................ 85,348 (98,659) (252,505) (208,086)
LOSS BEFORE PROVISION FOR
INCOME TAXES.................. 8,360,125 (4,724,582) (2,721,439) (2,506,917)
PROVISION FOR INCOME TAXES....... -- -- 800 --
NET LOSS...................... (8,360,125) (4,724,582) (2,722,239) (2,506,917)
DIVIDEND REQUIREMENT OF SERIES A
PREFERRED STOCK............... (425,000) (212,500) (425,000) (212,500)
DIVIDEND REQUIREMENT OF SERIES E
PREFERRED STOCK............... -- -- (66,250) --
BENEFICIAL CONVERSION ON SERIES
G PREFERRED STOCK............. (1,090,000) (957,000) -- --
DIVIDEND REQUIREMENT OF SERIES G
PREFERRED STOCK............... (22,850) (1,313) -- --
LOSS APPLICABLE TO COMMON
SHAREHOLDERS.................. (9,897,975) (5,895,395) (3,213,489) (2,719,417)
UNREALIZED GAIN ON INVESTMENT.... (635,863) 225,050 -- --
-------------- --------------- -------------- ----------------
COMPREHENSIVE LOSS APPLICABLE TO
COMMON SHAREHOLDERS........... $(10,533,838) $(5,670,345) $(3,213,489) (2,719,417)
============== =============== ============== ================
BASIC LOSS PER COMMON SHARE...... (0.33) $(0.37) $(0.33) (0.37)
============== =============== ============== ================
DILUTED LOSS PER COMMON SHARE.... (0.33) $(0.37) $(0.33) (0.37)
============== =============== ============== ================
WEIGHTED-AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
USED TO COMPUTE BASIS AND
DILUTED LOSS PER SHARE........ 31,594,660 15,227,839 9,688,012 7,274,036
============== =============== ============== ================
BALANCE SHEET DATA:
Working capital (deficit)..... $2,189,365 $136,587 $759,663 $(1,171,805)
Total assets.................. 4,969,626 4,139,809 4,454,620 5,338,453
Total liabilities............. 1,268,347 2,041,669 1,451,613 4,362,564
Stockholders' equity (deficit) 3,701,279 2,098,140 3,003,007 975,889
Page 5
RISK FACTORS
THE SECURITIES OFFERED HEREBY ARE HIGHLY SPECULATIVE AND INVOLVE A HIGH
DEGREE OF RISK AND THEREFORE SHOULD NOT BE PURCHASED BY ANYONE WHO CANNOT AFFORD
A LOSS OF HIS OR HER ENTIRE INVESTMENT. EACH PROSPECTIVE INVESTOR SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS BEFORE PURCHASING SECURITIES
OFFERED BY THIS PROSPECTUS.
IF WE ARE NOT ABLE TO OBTAIN ADDITIONAL CAPITAL, WE MAY SUBSTANTIALLY REDUCE OUR
OPERATIONS AND MAY NOT BE ABLE TO EXECUTE ON OUR BUSINESS PLAN.
We experienced significant operating losses in the fiscal year ended
December 31, 2000 and we expect that these losses will continue in the first and
second quarters of fiscal 2001. Our cash and short-term investment balances have
continued to decline since December 31, 2000 and we expect to experience further
declining balances until we either obtain additional capital or our accounts
receivable and other collections exceed our cash outflows. On February 28, 2001,
we entered into a financing agreement for a loan of $2 million, to be drawn down
by us as needed. We actively continue to pursue additional equity or debt
financings but to date have not received any other funding commitments. We
intend to improve liquidity by enhancing the efficiency of our operations, the
continued monitoring and reduction of administrative costs and through sales of
existing products including PR Manager and our Digital Trademark Product, new
products released in April 2001. Currently, our cash on hand, together with cash
generated by operations, cannot sufficiently fund future operating losses and
capital requirements. If the lender fails to fund the $2.0 million commitment or
we are unable to obtain other financing on terms acceptable to us, or at all, or
if we are not able immediately to recognize significant revenue from sales of
our new products, we may not be able to accomplish any or all of our initiatives
and could be forced to consider steps that would protect our assets against our
creditors.
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
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
Year ended December 31, 2000 $ 1,665,225 $ 8,360,125
(without giving effect to the payment in 1997, 1998, 1999 and 2000 of dividends
of $425,000 annually, and $212,500 for the six months ended December 31, 1999 on
the Series A Preferred Stock and a payment in 1999 of dividends of $66,250 on
the Series E Preferred Stock). Because a substantial portion of our expenses are
fixed, achieving profitability depends upon our ability to generate and sustain
substantially higher revenues. We cannot assure you that we will be able to do
so and consequently we may experience additional losses in fiscal 2001.
Our new business strategy, including our investment and acquisition
activities, requires substantial working capital. We spent substantial funds in
our acquisition of NetCurrents Services Corporation and since the acquisition
have spent a significant amount of money developing our technology and bringing
products to market. We expect to continue to spend significant amounts
developing new products and enhancements to existing products, in our related
marketing efforts and in expanding our existing management team with additional
experienced Internet personnel. We estimate that, as of December 31, 2000, our
cash commitments for the next twelve months will be approximately $1,346,000; a
significant portion of this amount is allocated to the business of NSC.
We incur expenses associated with general and administrative costs
including:
o staff salaries;
o employee benefits;
Page 6
o employer taxes;
o premiums on insurance policies;
o advertising and marketing costs;
o office expenses;
o professional fees;
o consulting fees; and
o other expenses.
In addition to general and administrative expenses, the required
dividends on the shares of Series A Preferred Stock are $425,000 annually. The
dividends on the Series A Preferred Stock may be paid either in shares of our
common stock or in cash.
In addition, while we attempt to accurately forecast our capital
requirements, we cannot anticipate all of our future capital needs. We need to
obtain additional funds to continue our product development efforts and
otherwise to execute our business plan. If we raise additional funds by issuing
equity or convertible debt securities, the percentage ownership of our
stockholders will be diluted. Any new securities may have rights, preferences,
and privileges senior to those of our common stock. If we do not obtain
sufficient funds to further develop and market our products, or to enhance our
management team, we may not successfully penetrate our Internet market sectors,
establish any brand recognition or successfully grow our business, all of which
may adversely affect our sales, revenues and overall financial condition.
UNANTICIPATED TECHNOLOGICAL PROBLEMS MAY AFFECT OUR ABILITY TO MEET OUR RELEASE
AND DELIVERY SCHEDULES AND ADVERSELY AFFECT OUR OVERALL FINANCIAL CONDITION.
During fiscal 2000, we launched several new products. In addition, we
plan to release additional new products and enhancements to our existing
products in fiscal 2001. All of our products undergo thorough quality assurance
testing prior to release. We have experienced delays in bringing our products to
market due to unanticipated technological issues. While we believe we have
resolved these issues, we cannot anticipate all of the technological and other
issues that may arise in connection with our future product development. We may
be unable to meet delivery commitments if technological or other development
issues arise in connection with our continued product development and
enhancement. Our reputation may suffer if we fail to meet our release and
delivery schedules or if our products upon release do not perform as expected.
We cannot assure you that we will be able to fix any new problems that arise in
a timely or cost effective manner, or at all. If unexpected problems continue to
arise, and we are unable to resolve them timely or at all, we may be unable meet
our release and delivery schedules, our reputation may suffer, it may become
more difficult forming strategic alliances with distribution and other partners,
and our results of operations and financial condition could be materially and
adversely affected.
OUR PRODUCTS MAY NOT BE COMMERCIALLY ACCEPTED WHICH WILL ADVERSELY AFFECT OUR
REVENUES AND PROFITABILITY.
Our ability to enter into the online commerce market, establish brand
recognition and compete effectively depend upon many factors, including broad
commercial acceptance of our products. The success of our products will depend
in large part on the breadth of the information these products capture and the
timeliness of delivery of that information to the client. The commercial success
of or products also depends upon the quality and acceptance of other competing
products, in-house capabilities of our clients to perform the same or similar
functions as do our products, general economic conditions and other tangible and
intangible factors, all of which can change and cannot be predicted with
certainty. We cannot assure you that our new products will achieve significant
market acceptance or will generate significant revenue. If the marketplace does
not broadly accept our products, our results of operations and financial
condition could be materially and adversely affected.
Page 7
FUTURE ACQUISITIONS INVOLVE RISKS FOR US.
We evaluate future acquisitions of complementary product lines and
businesses as part of our business strategy. On February 28, 2001, we entered
into a letter of intent to acquire MindfulEye.com, Inc., the developer of
Lexant(TM), an artificial intelligence technology that can read and understand
material as it appears on the Internet. Closing of the MindfulEye acquisition is
subject to reciprocal due diligence, applicable corporate and regulatory
approvals and the negotiation and execution of definitive documents, among other
customary closing conditions. The MindfulEye acquisition and any other
acquisitions may result in 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 integration 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.
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 COMMON STOCK AND REDEEMABLE WARRANTS 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. Consequently, we may not satisfy the expectations of analysts
or investors which may cause our stock price to decline. Investors may not be
able to resell their shares of our common stock at or above the cost of their
purchase prices.
BECAUSE OF THE LIMITED BARRIERS TO ENTRY IN THE INTERNET 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, additional barriers to our entry into the
Internet and online commerce fields and to establishing brand recognition, and
loss of market share.
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 industries, as well as on continued consumer and
corporate acceptance of the Internet as a communications medium and for 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.
Page 8
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.
OUR OUTSTANDING OPTIONS AND WARRANTS MAY DILUTE OUR STOCKHOLDERS' INTERESTS AND
COULD HINDER US FROM OBTAINING ADDITIONAL FINANCING.
As of March 1, 2001, we have granted options and warrants to purchase a
total of 11,255,747 shares of common stock that have not been exercised. 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 acceptable terms, since the holders of the
outstanding options and warrants may exercise those securities 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 March 1, 2001, we have issued and outstanding 1,000,000 shares of our
Series A Preferred Stock, 400,000 shares of our Series C Preferred Stock, 50,000
shares of our Series D Preferred Stock and 50,000 shares of our Series F
Preferred Stock. At our option, we can pay the dividends on our Series A
Preferred Stock in cash or in shares of common stock. We are required to pay
dividends on our Series C Preferred Stock if we have net income in excess of
$1,000,000 in the applicable fiscal year. We are not required to pay dividends
on the Series D and Series F Preferred Stock. We have not yet paid dividends on
the Series A Preferred Stock for the periods ended September 30, 2000, and
December 31, 2000.
Holders of shares of our convertible preferred stock may convert their
shares into shares of our common stock at any time in the future. To the extent
all of the shares of our outstanding convertible preferred stock are converted
into shares of our common stock, our common stockholders' interests will be
diluted. Since these shares of common stock will be registered for resale in the
marketplace, future offers to sell these 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 acceptable terms, since we can expect the holders
of our convertible preferred stock to convert their shares into common stock at
a time when
Page 9
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 COMMON STOCK AND REDEEMABLE WARRANTS IS
LIKELY TO BE VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES TO INVESTORS.
The trading price of our common stock and redeemable warrants is 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;
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 acquisitions.
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. 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. We have issued and outstanding 1,000,000 shares of Series A
Preferred Stock, 400,000 shares of Series C Preferred Stock, 50,000 shares of
our Series D Preferred Stock and 50,000 shares of Series F Preferred Stock. If
we issue additional shares of 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 CERTAIN SERIES 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, if any, quarterly, in cash or in shares of our common
stock. 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 and Series C Preferred Stock.
Page 10
SALES OF ADDITIONAL SHARES OF OUR COMMON STOCK INTO THE PUBLIC MARKET MAY CAUSE
OUR STOCK PRICE TO FALL.
If our stockholders or we 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 March 1,
2001, we had outstanding 31,706,729 shares of our common stock. The unregistered
shares of common stock and the shares of 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 March 1, 2001, holders of options and warrants may
acquire approximately 11,255,747 shares of common stock and holders of shares of
our Series A Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, and Series F Preferred Stock may acquire shares of common stock at
various conversion rates. This figure consists of 3,479,579 options held by our
employees at exercise prices ranging from $0.38 to $3.03. This figure also
represents 1,866,667 warrants exercisable at $5.25 (the warrant holder must
tender three warrants and $5.25 for one share of our common stock), which expire
in September 2001, and 3,498,000 warrants held by one investor exercisable at
$1, which expire in March 2005.
WE MAY BE EXPOSED TO CONTINGENT LIABILITY ARISING FROM OUR FAILURE TO MAINTAIN
AN EFFECTIVE REGISTRATION STATEMENT COVERING OUR 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. We did not update the registration statement with current information
until August 30, 2000. 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.
We do 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. 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
Page 11
cash exercise price previously paid. Rescission would result in no
proceeds to us from the warrant offering and no damages to us except for minimal
transactional costs associated with the rescission.
As of the date of this registration statement, we are not aware of any
claims for damage or rescission.
WE MAY BE DELISTED FROM THE NASDAQ SMALLCAP MARKET IF WE DO NOT MEET THE
CONTINUED LISTING REQUIREMENTS.
On December 27, 2000, we were notified by The Nasdaq Stock Market that we did
not meet the minimum bid price requirement of the continued listing requirements
of the Nasdaq Small Capital Market and that we had 90 calendar days, or until
March 27, 2001, to regain compliance. On March 28, 2001, we were notified that
we had not demonstrated compliance within the 90 day period, and that we would
be delisted from The Nasdaq SmallCap Market on April 5, 2001, unless we appealed
the determination. On April 4, 2001, we appealed the determination and requested
an oral hearing. A hearing date has been set for May 17, 2001. The hearing
request stays the delisting of our common stock pending a decision by a Nasdaq
Listing Qualifications Panel. In order to continue to be listed on Nasdaq, we
must meet the following requirements:
o minimum bid price of $1.00;
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 two market makers;
o 300 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 are delisted from The Nasdaq Small Capital Market, we anticipate that we
would apply for our common stock to trade on the Over The Counter Bulletin
Board. If we are delisted, it may be more difficult to raise additional debt or
equity financing and an investor likely would find it more difficult to sell or
obtain quotations as to the price of our common stock and/or redeemable
warrants.
THE OFFERING PRICE IS UNCERTAIN.
The offering price of the shares of common stock offered under this
registration statement will be determined in relation to the then current market
price of our shares on the Nasdaq SmallCap Market or on the market our shares of
stock then trade. Because of market fluctuations, we cannot assure you that the
shares will maintain market values commensurate with the offering price.
WE CANNOT GUARANTEE THE NUMBER AND THE TYPE OF SECURITIES THE WE WILL SELL.
The securities are offered directly by us on a delayed basis. We cannot
assure you regarding the type or combination of securities and the number of
each type of security that we may offer or sell. No broker-dealer is under
any obligation to purchase any of the securities. In addition, our officers and
directors, collectively, have limited experience in the offer and sale of
securities on our behalf.
THE USE OF PROCEEDS FROM THE OFFERING IS NOT SPECIFIC.
The proceeds of this offering have been allocated only generally. Other
than the discharge of a loan of up to $2 million, which we may draw down as
needed, proceeds from this offering have been allocated generally to working
capital. Accordingly, investors will entrust their funds with management in
whose judgment investors may depend, with only limited information about
management's specific intentions with respect to a significant amount of the
proceeds of this offering.
Page 12
USE OF PROCEEDS
The amount of cash proceeds from this offering will depend on the offering
price per share and the number of shares sold for cash. Unless otherwise
indicated in the applicable prospectus supplement, the net proceeds from the
sale of securities offered hereby will be used to repay indebtedness outstanding
from time to time and for general corporate purposes. The net proceeds of this
offering that are not spent immediately may be deposited in interest or
non-interest bearing accounts, or invested in government obligations,
certificates of deposit, commercial paper, money market mutual funds, or similar
investments. We expect from time to time to evaluate the acquisition of
products, businesses and technologies for which a portion of the net proceeds
may be used. Currently, however, we do not have any understandings, commitments
or agreements with respect to any material acquisitions for which a portion of
the net proceeds may be used.
On February 28, 2001, we entered into a financing agreement for a loan of
$2 million, to be drawn down by us as needed. The loan will be available for one
year with annualized interest at 10%. We are required to pay 50% of any proceeds
we receive from the sale of our common stock to the lender to reduce the loan
amount.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock currently is traded on the Nasdaq SmallCap Market
("Nasdaq") under the symbol "NTCS." The following table sets forth the high and
low bid prices on Nasdaq for the periods indicated, as reported by Nasdaq. The
quotations are inter-dealer prices without adjustment for retail mark-ups,
mark-downs or commissions, and do not necessarily represent actual transactions.
COMMON STOCK
---------------------
HIGH BID LOW BID
-------- --------
PERIOD
March 31, 1999......................... $4.25 $0.22
June 30, 1999.......................... 3.88 1.00
September 30, 1999..................... 2.50 0.72
December 31, 1999...................... 2.56 1.34
March 31, 2000......................... $11.94 $1.88
June 30, 2000.......................... 9.63 2.20
September 30, 2000..................... 3.50 1.38
December 31, 2000...................... 1.41 0.16
March 31, 2001......................... $0.78 $0.12
On March 30, 2001, the prices of the common stock as reported by Nasdaq
were $.19 bid and $.25 asked. On such date there were approximately 252 holders
of record of our common stock. The number of stockholders does not take into
account stockholders for whom shares are being held in the name of brokerage
firms or clearing agencies.
DIVIDEND POLICY
As of March 1, 2001, we have outstanding 1,000,000 shares of Series A
Preferred Stock that are entitled to annual dividends aggregating $425,000. We
have outstanding 400,000 shares of Series C Preferred Stock. Holders of our
Series C Preferred Stock are entitled to dividends of 8% annually, so long as we
have net profits in excess of $1,000,000 in the applicable fiscal year. No
dividends are currently due on the Series C Preferred Stock. No dividends may be
paid on the common stock unless all dividends on the Series A Preferred Stock
and Series C Preferred Stock have been paid or provision has been made for such
payment. Pursuant to the terms of our outstanding Series A Preferred Stock,
which we issued in a public offering consummated in December 1994, and pursuant
to the terms of our outstanding Series C Preferred Stock, at our option, we may
pay dividends on the preferred stock in cash or in shares of our common stock.
We have never paid a cash dividend on our common stock and presently intend
to retain any future earnings for investment and use in our business operations.
We cannot assure you that our operations will generate
Page 13
the revenues and cash flow required to declare cash dividends on our outstanding
common stock in future fiscal periods or that we will have legally available
funds to pay dividends on our common stock. Consequently, we do not expect to
pay cash dividends in the foreseeable future except to the extent required to
satisfy our obligations with respect to our outstanding Series A Preferred Stock
and Series C Preferred Stock. We have not yet paid the dividends on the Series A
and Series C Preferred Stock for the periods ended September 30, 2000 and
December 31, 2000.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS AND THE OTHER FINANCIAL DATA INCLUDED
ELSEWHERE IN THIS PROSPECTUS. THE STATEMENTS WHICH ARE NOT HISTORICAL FACTS
CONTAINED IN THIS SECTION ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES, INCLUDING THOSE DESCRIBED UNDER "RISK FACTORS." THE COMPANY'S
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS.
OVERVIEW
The following discussion and analysis should be read in conjunction with
our Financial Statements and notes included elsewhere in this Prospectus.
The Notes to the Financial Statements and "Management's Discussion and
Analysis of Operations and Financial Condition" set forth herein contain
forward-looking statements with respect to us and our operations that are
subject to certain risks and factors which could cause our future actual results
of operations and future financial condition to differ materially from that
described herein. These risk factors include, but are not limited to, our
potential inability to realize the business plan, the intensity of competition
from other companies which focus on enabling innovations for the Internet and
business-to-business e-commerce, the status of our liquidity in future fiscal
periods, factors that affect the Internet technology and online commerce
industries such as network performance, reliability, speed of access, ease of
use and bandwidth availability, and factors that generally affect Internet
commerce, such as economic, political, regulatory, technological, and public
taste environments, as well as the factors discussed below in "Factors That
Could Impact Future Results."
Our revenues currently are derived from NSC and MediaWorks. The amount of
revenue recognized during the periods discussed herein is not necessarily
indicative of revenues to be recognized in future periods.
REVENUE RECOGNITION
Revenues derived from NSC are recognized on an accrual basis as earned.
Revenues derived from MediaWorks and received from license fees for
distribution rights to projects-in-process constitute deferred income until the
project becomes available for broadcast in accordance with the terms of
its licensing agreements and are recognized as revenue at such time. Revenues
from licensing fees, distribution fees or profit participations are recognized
as earned in accordance with the terms of the related agreements.
On October 20, 1997, we acquired 100% of the capital stock of the
Grosso-Jacobson Companies for 2,222,222 shares of our common stock. The
acquisition was accounted for as a pooling of interests and, consequently, the
accompanying historical financial information for all periods presented has been
restated to reflect the effects of the combination.
On July 15, 1998, we acquired 100% of the capital stock of MWI
Distribution, Inc., (doing business as MediaWorks International). The
acquisition was accounted for using the purchase accounting method and,
consequently, our historical financial statements will not reflect the results
of operations of MediaWorks International prior to the date of acquisition.
On December 27, 1999, we acquired Infolocity, Inc. The terms of the merger
included a tax-free exchange of NetCurrents, Inc. common stock for 100% of the
issued and outstanding stock of Infolocity, Inc. The acquisition was accounted
for as a pooling of interests and, consequently, the accompanying historical
financial
Page 14
information for all periods presented has been restated to reflect the effects
of the combination. In connection with the merger, we issued 7,375,001 shares of
common stock.
RESULTS OF OPERATIONS
BECAUSE OF THE COMPLETE CHANGE IN OUR BUSINESS COMMENCING IN LATE DECEMBER 1999
WITH THE ACQUISITION OF NC SERVICES, COMPARISONS OF RESULTS FROM PERIODS IN 1999
AND PRIOR TO 2000 ARE NOT MEANINGFUL.
YEAR ENDED DECEMBER 31, 2000 ("FISCAL 2000") COMPARED WITH THE YEAR ENDED JUNE
30, 1999 ("FISCAL 1999")
Revenues for Fiscal 2000 were $1,665,225 compared to $2,991,953 for Fiscal
1999, a decrease of $1,326,728, or 44%. Revenues for Fiscal 2000 consisted
primarily of revenues from our Internet business while Fiscal 1999 revenues
consisted of fees from the production and distribution of made-for-television
movies and international distribution fees.
Write-offs of projects in development were $224,988 for Fiscal 2000 and
$301,037 for fiscal 1999.
Cost of sales for Fiscal 2000 was nil as compared to $926,295 for Fiscal
1999. Cost of sales as a percentage of total revenues decreased to zero from
31.5% for Fiscal 1999. The difference results from the transition to the
Internet business in Fiscal 2000, a business that has no cost of sales.
General and administrative expenses increased to $9,747,586 in Fiscal 2000
from $4,066,590 in Fiscal 1999, an increase of $5,680,996 or 140%. This increase
stems primarily from the infrastructure costs associated with our Internet
business including the cost of our international sales force, technology,
product development and client operations departments none of which existed in
the entertainment business in Fiscal 1999.
Interest income during Fiscal 2000 was $482,993 compared to $3,096 for
Fiscal 1999. Interest income primarily is generated from the investment of
excess cash in short term investments. During Fiscal 2000, we raised
approximately $8.5 million, with all excess cash being invested in short term
investments.
Interest and financing expense in Fiscal 2000 was $8,354 as compared to
$12,447 in Fiscal 1999. The interest and financing expense in Fiscal 1999
primarily consisted of deferred financing charges which were expensed upon
termination of certain promissory notes.
During Fiscal 2000, we wrote off $138,124 of notes and accounts receivable
as compared to $166,965 for Fiscal 1999. The decrease stems from the write-off
of receivables in Fiscal 1999 in connection with previous production deals.
On November 4, 1996, we settled our litigation with a former officer and
director in a negotiated stipulated settlement filed with the Los Angeles County
Superior Court that required us to make aggregate payments of $575,000 in
exchange for an agreement by this individual not to compete with us through
December 31, 1998. Accordingly, amortization of the covenant not to compete was
$115,000 in Fiscal 1999, the year in which the final amortization was
calculated. There was no amortization of the covenant not to compete for Fiscal
2000.
The net loss applicable to common shareholders was $9,897,975 for Fiscal
2000 as compared to $3,213,489 for Fiscal 1999.
PERIOD FROM JULY 1, 1999 THROUGH DECEMBER 31, 1999 ("1999 INTERIM PERIOD")
COMPARED WITH THE PERIOD FROM JULY 1, 1998 THROUGH DECEMBER 31, 1998 ("1998
INTERIM PERIOD")
Our aggregate revenues for the 1999 Interim Period decreased $70,080 or 17%
compared to the 1998 Interim Period. Revenues for the 1999 Interim Period
consisted of sales of $155,466 generated by our NC Services subsidiary and
$187,519 generated by our MediaWorks subsidiary. Revenues for the 1998 Interim
Period primarily consisted of fees from the production and distribution of one
made-for-television movie for a broadcast
Page 15
network and four additional made-for-television movies which were exhibited on
The Family Channel and Showtime Network, and currently are being distributed
internationally.
Cost of sales for the 1999 Interim Period was $96,997 as compared to
$90,171 for the 1998 Interim Period. These costs relate to MediaWorks revenues
and with the difference being due to increased distribution costs for the 1999
Interim Period.
General and administrative expenses increased to $2,895,211 in the 1999
Interim Period from $2,621,725 in the 1998 Interim Period or an increase of
$273,486. However, our ongoing general and administrative expense actually
decreased for the 1999 Interim Period, as approximately $510,000 of the expenses
was incurred as a result of the cost of the Infolocity, Inc. merger. The
decrease in the general and administrative expenses primarily is attributable to
the closure of our operations in New York and Toronto in January 1999 which
carried contractual obligations through approximately August 1999.
Interest income during the 1999 Interim Period was $10,325, and primarily
consisted of short-term investment interest income.
Interest and financing expense in the 1999 Interim Period was $37,189 as
compared to nil in the 1998 Interim Period. The interest and financing expense
for the 1999 Interim Period primarily consisted of interest paid to convertible
debenture holders.
On November 4, 1996, we settled our litigation with a former officer and
director in a negotiated stipulated settlement filed with the Los Angeles County
Superior Court that required us to make aggregate payments of $575,000 in
exchange for an agreement by this individual not to compete with us through
December 31, 1998. Accordingly, amortization of the covenant not to compete was
nil in the 1999 Interim Period and $115,000 in the 1998 Interim Period. The
covenant not to compete was fully amortized in June 30, 1999 and thus there is
no related cost for the 1999 Interim Period.
The comprehensive net loss applicable to common shareholders was $5,670,345
for the 1999 Interim Period as compared to a net loss of $2,719,417 for the 1998
Interim Period. Of this amount for the 1999 Interim Period, $957,000 represents
a beneficial conversion feature on Series G Preferred Stock as a dividend, an
unrealized gain on investment of $225,050, and $213,813 represents the dividend
paid in Common Stock to the holders of the Series A Preferred Stock and Series G
Preferred Stock. Of the amount for the 1998 Interim Period, there were no
non-recurring expenses and $212,500 represented the dividend paid in Common
Stock to the holders of the Series A Preferred Stock.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, having spent a year building client relationships,
alliances and NSC infrastructure, we require additional resources to roll out
our new products, complete the enhancements to our existing products, continue
development of future products and continue to execute our business plan, reach
profitability and increase our presence in the Internet industry.
Net cash provided by (used in) operating activities of our company for the
twelve month period ended December 31, 2000 was ($7,681,345), in the six month
period ended December 31, 1999 was ($2,959,478), in the twelve month period
ended June 30, 1999 was ($1,320,028), and in the six month period ended December
31, 1998 was ($527,949). Net cash provided by (used in) investing activities
during the twelve month period ended December 31, 2000 was ($734,678), in the
six month period ended December 31, 1999 was $33,562, in the twelve month period
ended June 30, 1999 was ($826,894), and in the six month period ended December
31, 1998 was ($845,689). Net cash provided by financing activities during the
twelve month period ended December 31, 2000 was $10,371,655, in the six month
period ended December 31, 1999 was $3,357,389, in the twelve month period ended
June 30, 1999 was $2,440,553, and in the six month period ending December 31,
1998 was $857,242.
Our total cash and cash equivalent balance at December 31, 2000 was
$2,754,487. Our cash and short-term investment balances have continued to
decline since December 31, 2000 and we expect to experience further declining
balances until we either obtain additional capital or our accounts receivable
and other collections exceed our cash outflows. On February 28, 2001, we entered
into a financing agreement for a loan of $2 million, to be
Page 16
drawn down by us as needed. We actively continue to pursue additional equity or
debt financings but to date have not received any other funding commitments.
Recent operating losses, our declining cash balances, our historical stock
performance, the notice of delisting of the Company's common shares from The
Nasdaq Stock Market, the delay in bringing our product to market, and a general
decrease in investor interest in our industry, may make it difficult for us to
attract equity investments or debt financing or strategic partners on terms that
are deemed to be favorable to us. We intend to improve liquidity by enhancing
the efficiency of our operations, the continued monitoring and reduction of
administrative costs and through sales of existing products including PR Manager
and our Digital Trademark Product, new products released in April 2001.
Currently, our cash on hand, together with cash generated by operations, cannot
sufficiently fund future operating losses and capital requirements. If the
lender fails to fund the $2.0 million commitment or we are unable to obtain
other financing on terms acceptable to us, or at all, or if we are not able
immediately to recognize significant revenue from sales of our new products, we
may not be able to accomplish any or all of our initiatives and could be forced
to consider steps that would protect our assets against our creditors.
On March 3, 2000, we entered into an equity securities purchase
agreement with the Brown Simpson Strategic Growth Fund Ltd. and the Brown
Simpson Strategic Growth Fund L.P. to purchase up to $34,000,000 of common stock
directly and through warrants. If Brown Simpson exercises its warrants, Brown
Simpson could own 5,698,000 shares of our common stock. In March 2000, Brown
Simpson purchased 1,700,000 shares of our common stock for $8,500,000 under the
equity securities purchase agreement. The balance is due through the exercise of
warrants to purchase 3,498,000 shares of our common stock initially at exercise
prices ranging from $6 to $9 per share. On December 27, 2000, we amended our
original agreement with Brown Simpson Strategic Growth Fund, Ltd. and Brown
Simpson Strategic Growth Fund, L.P. and repriced these warrants to an exercise
price of $1. If, at any time after the effective date of the registration
statement registering the resale of the shares of common stock underlying the
warrants, the per share market value of our common stock equals or exceeds
prices ranging from $2.125 to $3, for any period of 10 consecutive trading days,
then the warrant holder will be required to exercise the warrant.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition," to provide
guidance on the recognition, presentation, and disclosure of revenue in
financial statements. Changes in accounting to apply the guidance in SAB No. 101
may be accounted for as a change in accounting principle effective January 1,
2000. Management has not yet determined the complete impact of SAB No. 101 on
us; however, management does not expect that application of SAB No. 101 will
have a material effect on our revenue recognition and results of operations.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation," (an Interpretation of Accounting Principles Bulletin Opinion No.
25 ("APB 25")) ("FIN 44"). FIN 44 provides guidance on the application of APB
25, particularly as it relates to options. The effective date of FIN 44 is July
1, 2000, and we have adopted FIN 44 as of that date.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Instruments and Certain Hedging Activities." This statement is not applicable to
us.
In June 2000, the FASB issued SFAS No. 139, "Rescission of FASB Statement
No. 53 and Amendments to Statements No. 63, 89, and 121." This statement is not
applicable to us.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, a
replacement of FASB Statement No. 125." This statement is not applicable to us.
Page 17
DESCRIPTION OF BUSINESS
HISTORY
NetCurrents, Inc. was founded as a television production and distribution
company under the name Ventura Motion Picture Group Ltd. and, in 1989, changed
its name to The Producers Entertainment Group Ltd. In 1990, we became publicly
traded on the Nasdaq Stock Market. Over a nine-year period, we were a
significant independent producer and distributor of television series. In 1998,
we changed our name to IAT Resources Corporation.
IAT Resources made several minority investments in early stage technology
companies. In November 1999, IAT Resources entered into a revised definitive
merger agreement to merge with Infolocity and make it the Company's core
business. In December 1999, IATR merged with Infolocity and IATR's name was
changed to NetCurrents, Inc. At the time of the merger, Infolocity became known
as NetCurrents Services Corporation, or NSC, a wholly-owned subsidiary of
NetCurrents.
THE BUSINESS
NetCurrents, through NSC assists corporations and individuals in the
achievement of their strategic business goals through the management of
Internet-based information. Using FIRST (Fast Internet Real-Time Search
Technology), NSC's proprietary, patent pending, real-time search technology,
NetCurrents monitors sources of information ranging from thousands of
e-publications, Internet sites and message boards, from an extensive universe of
targeted Internet locations which are monitored in real-time, 24 hours a day,
seven days a week. NSC monitors the Internet and uses either artificial
intelligence or Internet Strategists to rate, evaluate or report to clients,
depending on the product purchased. The Internet Strategists offer clients
comprehensive intelligence, qualitative analysis, and strategic counsel, based
on this information, thereby providing timely, extensive Internet information
analysis and professional support.
NSC provides its clients with critical information and strategic counsel in
a broad range of areas which assist, among other things, in improving corporate
performance, protecting and enhancing their corporate and personal images,
measuring a wide range of perceptions, providing competitive intelligence,
countering misinformation and fraud on the Internet, providing due diligence
support, and optimizing shareholder value.
NSC monitors and delivers this targeted Internet information based on
specific criteria pre-determined by clients. NSC's broad range of services
include: real-time web clipping, real-time monitoring and notification, analysis
and reporting, competitive intelligence, dissemination of strategic information,
due diligence support, merger/acquisition support, forensic accounting support,
pre and post IPO support, asset tracking, crisis intervention, and a variety of
customized services.
POST MERGER - FIRST YEAR PLAN EXECUTION
Following the merger of NSC, we continued the development and execution of
the NSC business plan. 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 March 2001, we have augmented the senior
management team for NCS by hiring: a Chief Financial Officer, a Vice-President
of Channel Sales, a Vice President of Product Strategy, a Director of
Engineering, and a Director of Product Development. In addition, we expanded our
international sales force from 3 to 5 persons and our technology group from 2 to
11 persons and established our product development team with 6 people.
We also have completed the installation of Oracle Financials, Order Entry,
and Sales Force Automation, allowing 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 and new channel products, these Linux based Oracle
applications will be integrated to interface with the Oracle 8i database and
provide us with the necessary financial and customer relationship management
information to more effectively manage our expanding business.
Page 18
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 increase our brand-name recognition and
generate sales through the utilization of our partners' sales force. As well, we
anticipate that these relationships will stimulate product development efforts
through joint development and marketing of products designed specifically for
the needs of our partners' clients. 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 predicated on these criteria.
We also have determined that our product development strategy will include
strategic technology alliances to add incremental value to our product offerings
and enhance our time to market. To date, we have entered into three strategic
technology alliances and are evaluating a number of other such alliances as well
as potential acquisitions.
We also were granted an acceleration of a portion of our first real-time
search technology patent application on November 6, 2000.
PRODUCT LAUNCHES
During fiscal 2000, we launched several new products and continued to
enhance our existing products. 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 financially-oriented message
board activity to help investor relations agency clients develop better business
strategies, stronger competitive positioning, and greater understanding of
investor perceptions about their clients' companies, products, and services.
AgencyFacts has been utilized as the core technology in certain of our strategic
sales alliances.
In September 2000, we announced the introduction of our 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 was designed with numerous features for
its users including coverage of more than 2,500 online publications, selected
web site pages, COMTEX news feed integration to capture press releases 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. Following its release, we encountered a number of
technical problems with this product. In the last quarter, we began and we
continue to redesign this product. We have not yet scheduled a release date.
In April 2001, 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 NSC generated data for multiple clients at one time. It searches the
Agency Facts universe, USENET and multiple industry specific universes for
company and product perceptions and provides an overall sentiment summary. It
also provides online activity volume, message board volume, top poster
identification and a historical message search capability. PR Manager also
incorporates WebClipper 2.0 and allows the public relations firm to update each
client's search criteria.
We also have launched a wireless application that is integrated into our
premium service offerings. This 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, Personal
Digital Assistance, or PDAs, and other similar electronic devices. The service
has been 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. of Livingston, New Jersey, one of the world's leading providers
of media monitoring services under which we agreed to develop
Page 19
and design a co-branded product for Burrelle's. We are finalizing this product
and anticipate the launch of Burrelle's "CyberTalk" in March 2001. CyberTalk,
based on AgencyFacts, will appear on Burrelle's NewsAlert client web portals
along with the "Powered by NetCurrents" logo. Burrelle's national sales
organization will market this customized product to its thousands of clients as
part of the Burrelle's NewsAlert service. Burrelle's also will market our
premium products. The launch date for this product was extended because
Burrelle's elected to wait for the release of PR Manager. 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, one of the world's leading providers of investor relations
solutions and strategic advisory services. Under the terms of the alliance, we
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 Thomson clients with NetDetect, the customized co-branded product, to be
offered as an integral part of Thomson's IR Universe platform. We planned to
launch this product to Thomson's more than 3,500 clients in August 2000 with the
roll out planned to take place at the rate of 500 clients per month. In
September 2000, Thomson acquired the Carson Group and placed the senior
management of the Carson Group in charge of the new Thomson Financial Carson
organization. Because of various management changes following the acquisition,
we agreed on a revised approach to the sale of NetDetect, which involves a
stepped program rather than a mass rollout of NetDetect to 500 clients per
month. In October, we received a list of 185 clients to be placed on NetDetect.
As of February 2001, we had received the balance of the first 500 clients and
are now planning the launch of NetDetect for March 2001.
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. NSC 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. Kroll is a leading worldwide investigations and intelligence
firm, providing a full range of risk mitigation and asset protection services to
over 25,000 clients. Kroll has a global network of 60 offices in 19 countries.
Under the terms of our 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. Kroll has
provided cases to NSC under the terms of the agreement, although Kroll has been
using NCS on some of their cases since January 2000. We have appointed two
senior sales personnel to manage the Kroll relationship in conjunction with
Kroll's appointed project leader and the planning and procedural integration was
completed in December 2000. Kroll and NSC completed a road show in January 2001
to 15 major Kroll offices, effectively launching our joint sales efforts.
On March 26, 2001, we announced a strategic alliance with CCN Newswire, a
leading disseminator of news releases for Canadian organizations, to market new
Internet monitoring services for the investor relations market. Under the
alliance, the companies will offer customized information services that enable
CCN Newswire's clients to monitor and analyze what is being written about them,
in real-time, on the Internet, using our patent pending, proprietary search
technology. The service, called IR-Watch, will allow subscribers to monitor and
analyze specific real-time Internet perceptions about their corporations. This
information will include: most talked about topics, online sentiments, most
active posters, real-time percentage breakdown of volume on the most active
message boards and will display the ten most recent messages within minutes of
posting.
We hope that these four strategic sales alliances will create channel sales
for NSC 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, Thompson Financial, and
Kroll. 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.
Page 20
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 one of the largest aggregated bandwidth suppliers in the world (up to
multi-terabit per second capacity) that can scale as required. This also reduced
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 semantic
understanding with computational efficiency. We utilize this advanced technology
in the delivery of our AgencyFacts and PR Manager products. Webmind's technology
allows us to enhance our AgencyFacts and PR Manager products and deliver
expanded monitoring and analysis capacity without substantially increasing
Internet Strategist staffing.
In August 2000, we 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. We are providing our
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, we are providing our 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 our 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 launched
this service in early December 2000 under the name Mobile Perceptions.
THE FUTURE
In fiscal 2000, we believe we created the critical components necessary for
long-term success and profitability: a strong management team, an international
sales organization, a product development and technology group comprised of
experienced personnel, key leveraged sales channel relationships and technology
alliances.
We also found that over the course of fiscal 2000, the focus of our clients
shifted as the stock market turned downward sharply. Where previously our
clients were keenly interested in financial message board information, the
massive downward shift in stock prices resulted in a return to business basics
where profitability and performance were the ultimate goals. While we continue
to provide financial message board information as part of our CyberPerceptions
modules and more specifically as part of our security based services with Kroll,
we also have focused on providing a broad range of business intelligence,
competitive intelligence, perception, and demographic data across a vast
universe of sites. Over the course of fiscal 2001, we plan to release a number
of new products that we expect will become critical tools for all of our target
clients. PR Manager is the first of these new products and we anticipate its
release for beta testing with our users in early March with a full launch
planned for late March 2001 or early April 2001.
In an effort to reduce costs and focus on completing our technology
upgrades and releases, achieve greater efficiencies and to position us more
effectively for meeting our 2001 targets, we reduced the size of our sales force
and targeted the remaining sales personnel on the sale of both direct and
channel sales until we have completed the CyberPerceptions upgrades planned by
June 2001. We also have made and continue to make significant additions to our
technology department and plan to significantly increase its size over the
balance of 2001. We also are evaluating a number of strategic technology
acquisitions for 2001 that we expect to further enhance our technology and
development capabilities.
On February 28, 2001, we entered into a letter of intent to acquire
MindfulEye.com, Inc., a subscription-based Internet monitoring company that
automatically alerts investors in real time to online news, rumors, information
and changes in public sentiment about companies in which they have interests.
The closing of the acquisition is subject to, among other customary closing
conditions, reciprocal due diligence, applicable corporate and regulatory
approvals, and the negotiation and execution of a definitive merger agreement.
Founded in 1999,
Page 21
Vancouver-based MindfulEye has created a new class of artificial intelligence
(AI) technology that can read and understand language in real time on the
Internet. Called LEXANT(TM), this patent-pending technology utilizes natural
language processing, neural networks and a lexicon of thousands of rules of
grammar to determine the true meaning of words in context. The filing in July
2000 with the United States Patent Office covers MindfulEye's artificial
intelligence-based technology that uses advanced ranking algorithms and natural
language processing to analyze textual content in real-time as it occurs on the
Internet. MindfulEye has applied LEXANT(TM) to develop a suite of products that
monitor, analyze and rank Internet content in real time according to sentiment,
then further gauge the "mood" score to interpret the qualitative aspects of
what's being said online. Currently, MindfulEye monitors all major financial
discussions on the Internet, and processes more than half a million individual
mentions each day.
COMPETITION
We believe our existing combination of patent pending, real-time search
technology, search universe, proprietary database of historical data, profiling
capabilities, coupled with our analysis and strategic counsel set us apart from
our competition. Most of the companies providing search services deliver delayed
and dated information and lack the flexibility and scalability of our
proprietary technology. More fundamentally, these companies offer limited
analysis of Internet communications, limited ability to disseminate information
to the online discussion communities, and few possess a special team created to
handle emergencies, crises, merger/acquisition support or other critical
situations. In addition, a combination with MindfulEye.com will add a real-time
patent pending artificial intelligence technology that monitors, analyzes, and
ranks Internet content, thereby further strengthening our proprietary
advantages.
Although management believes NSC is the leader in its field, some of our
competitors have greater financial resources than NSC and others have larger
technology development departments. In this section we briefly outline a few of
the companies providing different levels of monitoring services.
o CyVeillance provides business intelligence. This company helps major
corporations, organizations and select government agencies manage their
business strategies by providing critical market feedback and metrics from
the Internet. They also provide what they call "Image Services" which
include rumor management and libel/defamation control. While CyVeillance
has begun offering services that are similar to ours, we believe the
CyVeillance services are not as extensive as ours and it does not have a
real-time technology or analytical capabilities.
o eWatch, which was recently acquired by Business Wire, offers a limited
search of news groups and three Internet message boards for up to three
predetermined words or phrases that are supplied by the client. eWatch does
not have a product that competes with CyberPerceptions, AgencyFacts or PR
Manager. The eWatch products do not provide analysis, or the ability to
respond to rumors or potentially damaging postings. In addition, eWatch
does not maintain a proprietary database of any sort to track anonymous
users or name aliases. Finally, eWatch does not offer competitive
intelligence or strategic information dissemination.
EMPLOYEES
As of March 1, 2001, we had 62 full time employees and no part time employees.
DESCRIPTION OF PROPERTY
We lease approximately 2,700 square feet located at 9720 Wilshire
Boulevard, Los Angeles, California for our corporate offices pursuant to a lease
that expires on December 14, 2004. Our current annual rent expense is $94,368.
We currently sublease to a third party approximately 4,429 square feet located
at 767 3rd Avenue in New York City pursuant to a lease that expires on June 30,
2002. The current annual rent expense is approximately $167,928, which is fully
covered by the terms of the sublease.
Our NSC subsidiary's offices are located at 1350 Old Bayshore Highway,
Suites 30 and 50, Burlingame, California 94010. Suite 30 is approximately 3,600
square feet and the lease expires on January 31, 2002. The current annual rent
expense is $90,972. Suite 50 is approximately 2,600 square feet and the lease
expires on May
Page 22
31, 2005. The current annual rent expense is $104,544. We believe that our
current facilities are sufficient for our current needs. The Company is
currently evaluating its space requirements for the future.
Our Canadian subsidiary, NetCurrents Canada, Inc., has offices located at
69 Yonge Street, Suite 1404, Toronto, Ontario, Canada M5E 1K3. Suite 1404 is
approximately 1,800 square feet and the current annual rent is approximately
$38,000. The lease expires on June 30, 2002.
LEGAL PROCEEDINGS
On November 13, 2000, NetCurrents, Inc. and NetCurrents Services Corp.
initiated a lawsuit entitled NETCURRENTS, INC., ET AL. V. HOLTORF ET AL., Los
Angeles Superior Court, Case No. BC 240089 (the "Lawsuit"). A First Amended
Complaint was filed on December 18, 2000, alleging claims against Victor Holtorf
("Holtorf") for defamation, unfair competition and conversion. In addition, we
also filed a Demand for Arbitration against Holtorf with the American
Arbitration Association on December 18, 2000, Reference No. 72 160 01297 00 RSR
(the "Arbitration"), alleging claims for breach of contract, breach of fiduciary
duty and breach of the implied covenant of good faith and fair dealing. The
claims alleged against Holtorf in both the Lawsuit and the Arbitration arise out
of alleged wrongful conduct by Holtorf following the termination of his
employment with us in late August 2000, including the public dissemination of
defamatory and disparaging statements about us.
Holtorf has responded to the First Amended Complaint by filing a
Demurrer and a Special Motion to Strike. Both motions are currently pending
before the Los Angeles Superior Court. In addition, Holtorf has responded to the
Demand for Arbitration with a general denial and has filed counter-claims in the
Arbitration against us for the following: breach of contract, breach of covenant
of good faith and fair dealing, fraud in the inducement and negligent
misrepresentation relating to his previous Employment Agreement with the
Companies; breach of contract, breach of covenant of good faith and fair
dealing, fraud in the inducement and negligent misrepresentation relating to a
Consulting Agreement he entered into with the Companies as part of his
termination of employment in August 2000; defamation; false light; and
constructive termination of his previous employment with us. We have responded
to Holtorf's Counter-Claims in the Arbitration with a general denial. No
discovery has been conducted in the Arbitration.
A mediation session was held between Holtorf and us on February 23,
2001, but the parties were unable to resolve their claims against each other in
both the Litigation and the Arbitration at that time. We have since agreed with
Holtorf to a single arbitration proceeding and to stay the Litigation pending
the outcome of such an arbitration. A stipulation to that affect will be
submitted for the Court's approval.
Page 23
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of our company and their ages as of
March 1, 2001, are as follows:
NAME AGE POSITION
Irwin Meyer 65 Chief Executive Officer, Chairman of
the Board of Directors
Arthur H. Bernstein 38 Executive Vice President, Secretary,
and Director
Michael Iscove (1)(2) 50 Chief Financial Officer, Director
Thomas A. Daniels 46 Director
Ivan Berkowitz (1)(2) 54 Director
Stanley Graham(1)(2) 55 Director
- -----------------------------
<FN>
(1) Audit Committee Member
(2) Compensation Committee Member
</FN>
Directors are elected at each annual meeting of stockholders and hold
office until the following annual meeting and their successors are duly elected
and qualified. Executive officers of the Company serve at the discretion of the
Board of Directors and until their successors are duly elected and qualified.
IRWIN MEYER has been a director of our Company since its inception in 1989
and has served as our Chief Executive Officer since February 1995. Since October
1997, Mr. Meyer has been Chairman of the Board of Directors. At various times
prior to October 1997, Mr. Meyer has served as our Chairman of the Board (April
1996-October 1997; January 1991-June 1992); Co-Chairman of the Board (February
1990-December 1990) and President (February 1995-October 1997). From 1988 to
July 1994, Mr. Meyer was a director of Ventura Entertainment Group Ltd., our
former parent company ("Ventura"), and from May 1988 to December 1990, Mr. Meyer
was President of Ventura. Mr. Meyer was an executive producer of seven of our
made-for-television movies. In 1995, he was nominated for Producer of the Year
by the Producers Guild of America. Mr. Meyer received the Antoinette Perry
("Tony") Award, the New York Drama Critics Circle Award, the Drama Desk Award,
the Outer Critics Circle Award and the Cue Magazine Golden Apple Award for his
1977 production of the musical "Annie." Mr. Meyer is a member of the Academy of
Motion Picture Arts and Sciences and the Academy of Television Arts and
Sciences. He holds a B.S. from New York University.
ARTHUR H. BERNSTEIN has been a director of our Company since February 1995
and has served as the Executive Vice President of our Company since October 1997
as well as our Secretary since March 1995. Between June 1992 and October 1997,
Mr. Bernstein served as a Senior Vice President of our Company and was our Vice
President-Business and Legal Affairs from September 1991 to June 1992. Prior to
this, Mr. Bernstein was a Director of Legal and Business Affairs for New World
Entertainment Ltd. from July 1989 to August 1991. From 1987 to June 1989, he was
Assistant General Counsel of Four Star International, Inc. Mr. Bernstein
received a B.S. in finance and marketing from Philadelphia College of Textiles
and Sciences in 1984 and his law degree from Temple University in 1987.
MICHAEL ISCOVE has been a director of our Company since October 1997 and
our Chief Financial Officer since March 1, 2000. From June 1995 to date, Mr.
Iscove has served as the Chairman, President and Chief Executive Officer of
Sirius Corporate Finance Inc. Prior to that, Mr. Iscove was the President of
Creative Fusion Limited from April 1989 to June 1995. In 1978, Mr. Iscove
received a Chartered Accountants designation in accounting from The Canadian
Institute of Chartered Accountants. In 1972, Mr. Iscove received a B.A. degree
in English from York University, Toronto, Canada.
Page 24
THOMAS A. DANIELS has been a director of our Company since July 1998. Since
our acquisition of MediaWorks in July 1998, Mr. Daniels has served as President
of MediaWorks. Mr. Daniels co-founded MediaWorks in 1996. Prior to that time,
Mr. Daniels was, at various times, a senior production and distribution
executive with Blake Edward's Television, Paramount Pictures Television and
Columbia Pictures Television.
IVAN BERKOWITZ has been a director of our Company since February 1999.
Since 1993, Mr. Berkowitz has served as managing General Partner of Steib &
Company, a privately held New York based investment company. Between 1995 and
1997, Mr. Berkowitz served as Chief Executive Officer of PolyVision Corporation.
Between 1990 and 1994, Mr. Berkowitz served as Chairman of the Board of
Directors of Migdalei Shekel. Currently, Mr. Berkowitz serves on the Board of
Directors of the following public companies: Propierre, a real estate fund, HMG
WorldWide, a manufacturer of point of purchase displays, PolyVision Corporation,
a manufacturer of school products and displays, and Migdalei Shekel, a real
estate company based in Tel Aviv, Israel. Since 1989, Mr. Berkowitz has served
as President of Great Court Holdings Corporation, a privately held New York
based investment company. Mr. Berkowitz holds a B.A. (cum laude) from Brooklyn
College, an MBA in Finance from Baruch College, City University of New York, and
a Ph.D. in International Law from Cambridge University, England.
STANLEY GRAHAM was recently appointed a director of our Company in April
2000. Prior to being appointed an outside director, Mr. Graham worked closely
with the Company as an operations consultant and was integrally involved in the
establishment of our Burlingame office. Mr. Graham also was recently appointed
Vice President, Corporate Development at Digimarc, the worldwide leader in
digital watermark technology. Previously, he was Vice President of the New
Enterprises division of Supra Products, a subsidiary of SLC Technologies,
manufacturers of electronic security and access control products. Prior to
Supra, Mr. Graham served as President and COO of Sunflex L.P. and Managing
Director of Sunflex, Ireland, which he developed into one of the world's leading
suppliers of computer glare screens and other computer accessories with
operations in the United States, Ireland, and Germany. Before Sunflex, Mr.
Graham spent 10 years at Xidex, a manufacturer of data storage products, where
he served in numerous executive positions. As Vice President of New Enterprises
he played a significant role in increasing revenues from $50 million to over
$600 million through marketing programs, acquisitions, equity investments, joint
ventures, licenses, technology partnerships and internal start-ups. In addition
to his corporate responsibilities, Mr. Graham was President or General Manager
of several Xidex subsidiaries, Sunflex, Xidex Data Disk and Oktel. Mr. Graham
holds an MBA degree from Samford University Graduate School and a B.S. in
chemistry from the University of Alabama.
AUDIT COMMITTEE
The Board of Directors has established an Audit Committee. Responsibilities
of the Audit Committee include (i) reviewing financial statements and consulting
with the independent auditors concerning our financial statements, accounting
and financial policies and internal controls, (ii) reviewing the scope of the
independent auditors' activities and the fees of the independent auditors and
(iii) maintaining good communications among the Audit Committee, our independent
auditors and our management on accounting matters.
COMPENSATION COMMITTEE
The Board of Directors has established a Compensation Committee. The
Compensation Committee is responsible for considering and making recommendations
to the Board regarding executive compensation.
Page 25
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the annual and
long-term compensation for services in all capacities rendered to us for the
fiscal years ended June 30, 1998 and 1999, the six months ended December 31,
1999, and the fiscal year ended December 31, 2000 of those persons who were (i)
at December 31, 2000, the Chief Executive Officer and (ii) each other executive
officer of our Company whose annual compensation exceeded $100,000 (the "Named
Executive Officers") in such fiscal periods:
LONG TERM
COMPENSATION
NUMBER OF
FISCAL ANNUAL COMPENSATION SECURITIES ALL OTHER
YEAR ENDED ------------------- UNDERLYING COMPENSA-
JUNE 30 SALARY BONUS OPTIONS TION
----------- ---------- --------- ------------- ---------
Irwin Meyer................ 2000 ** $ 312,000 0 0 18,000(2)
Chief Executive Officer Stub 1999 * 156,000 0 0 9,000
(1) 1999 312,000 0 3,000,000(6) 18,000(2)
1998 312,000 0 0 18,000(2)
68,016(3)
Arthur H. Bernstein........ 2000 ** $ 175,000 0 0 12,000(2)
Executive Vice President Stub 1999 * 87,500 0 300,000 6,000
And Secretary 1999 175,000 0 600,000 12,000(2)
1998 175,000 0 0 12,000(2)
Thomas A. Daniels.......... 2000 ** $ 188,482 0 0 9,000(2)
Director and President Stub 1999 * 93,000 0 0 4,500
of MediaWorks, a wholly 1999 188,482 0 500,000 11,500(2)
Owned subsidiary of the 1998 0 0 0 0
Company (4)
Michael Iscove............. 2000 ** $ 135,000 0 230,000 0
Chief Financial Officer Stub 1999 * 0 0 50,000 0
(5) 1999 0 0 325,000 0
1998 0 0 0 0
<FN>
(1) Includes amounts paid to Mountaingate which provides us with the service of
Mr. Meyer and others.
(2) Automobile reimbursement.
(3) Forgiveness of note receivable due from Mountaingate.
(4) Mr. Daniels began employment with us on July 15, 1998.
(5) Includes amounts paid to Sirius Corporate Finance Inc. that provides us
with the services of Mr. Iscove and others.
(6) Includes 1,300,000 of Convertible Series C stock and options to purchase
1,700,000 shares of common stock.
* Stub 1999 refers to the six month period July 1, 1999 through December 31,
1999.
** As of February 2, 2000, the Company changed its fiscal year to December 31.
Accordingly, Fiscal 2000 represents the period from January 1, 2000 through
December 31, 2000.
</FN>
Page 26
OPTION GRANTS IN FISCAL 2000
The following table sets forth certain information regarding the grant of
stock options made during fiscal 2000 to the Named Executive Officers.
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN OR BASE EXPIRATION
NAME GRANTED FISCAL YEAR PRICE DATE
--------------------- ------------------ ----------------- ------------ -------------
Irwin Meyer - - - -
Arthur H. Bernstein - - - -
Thomas A. Daniels - - - -
Michael Iscove 230,000 8.9% $2.15 3/1/04
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth, for each of the Named Executive Officers,
certain information regarding the exercise of stock options during fiscal 2000,
the number of shares of common stock underlying stock options held at fiscal
year-end and the value of options held at fiscal year-end based upon the last
reported sales price of the common stock on the Nasdaq Stock Market's SmallCap
Market on December 31, 2000 ($0.31 per share).
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED DECEMBER 31, 2000 DECEMBER 31, 2000
ON VALUE -------------------------- --------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------- ----------- ---------- ----------- ------------- ----------- -------------
Irwin Meyer - - - - - -
Arthur H. Bernstein 65,000 $ 239,200 200,000 - - -
Thomas A. Daniels - - 400,000 - - -
Michael Iscove - - 535,000 70,000 - -
EMPLOYMENT AGREEMENTS
We have entered into an employment agreement with Irwin Meyer for his
services as Chief Executive Officer of our Company and a production agreement
with Mountaingate Productions LLC ("Mountaingate") for the services of Mr. Meyer
and others to perform corporate duties as specified by the Board of Directors.
Mountaingate is a California limited liability company of which Alison Meyer and
Patricia Meyer, the adult children of Mr. Meyer, are the sole members. The
production agreement with Mountaingate provides for annual compensation of
$262,000, plus a $1,500 monthly automobile reimbursement. The employment
agreement with Mr. Meyer provides for annual compensation of $50,000. Both of
these agreements expire on June 30, 2002. Both agreements are terminable by us
in the event of Mr. Meyer's death or disability. In such event, we shall pay
Mountaingate a guaranteed fee of $262,000 for one year. We may also terminate
these agreements "for cause" (as defined in the agreements). Mountaingate and
Mr. Meyer may terminate their respective agreements in the event of a material
breach thereof by us or for "good reason" (as defined in the agreements). In
such event, we shall be obligated to pay all amounts due thereunder for the
balance of their respective terms. In the event that we materially breach either
agreement after a "change in control" (as defined in the agreements),
Mountaingate and Mr. Meyer, respectively, shall be entitled to a lump sum
payment equal to three times their then current total annual compensation.
Page 27
Arthur Bernstein is employed as Executive Vice President of our Company
pursuant to an employment agreement, as amended, which expires on June 30, 2002.
Mr. Bernstein's annual compensation is $175,000 plus a $1,000 monthly automobile
reimbursement. The employment agreement is terminable by us in the event of Mr.
Bernstein's death or disability. In such event, we are obligated to pay Mr.
Bernstein's compensation for one year. We may also terminate the employment
agreement "for cause" (as defined in the agreement). Mr. Bernstein may terminate
this Employment Agreement in the event of a material breach by us or for "good
reason" (as defined in the agreement). In such event, we will be obligated to
pay him all amounts due thereunder for the balance of its term and all unvested
stock options held by him shall vest. In the event of a "change in control" (as
defined in this agreement) of our Company, all stock options issued to Mr.
Bernstein shall vest and we shall, at Mr. Bernstein's option, purchase shares of
common stock owned by him at the then market price and shall acquire all of his
stock options for the difference between the exercise price of such options and
the greater of the price at which the new controlling entity acquired its
interest in our Company or the then market price of the common stock.
Thomas Daniels is employed as Chief Executive Officer of our subsidiary,
MWI Distribution, Inc. d/b/a MediaWorks International pursuant to an employment
agreement, as amended, which will terminate on June 30, 2001. Mr. Daniel's
annual compensation is $186,000. The employment agreement is terminable by us in
the event of Mr. Daniel's death or disability. We may also terminate the
employment agreement "for cause" (as defined in the agreement). Mr. Daniels may
terminate this Employment Agreement in the event of a material breach by us or
for "good reason" (as defined in the agreement). In such event, we will be
obligated to pay him all amounts due thereunder for the balance of its term.
We have entered into an employment agreement with Michael Iscove for his
services as Chief Financial Officer of our Company and a consulting agreement
with Sirius Corporate Finance Inc. ("Sirius") for the services of Mr. Iscove and
others to perform corporate duties as specified by the Board of Directors. The
consulting agreement provides for $130,000 per annum. The employment agreement
with Mr. Iscove provides for compensation of $50,000 per year for the first year
of the agreement and $70,000 per annum thereafter. These employment agreements
will terminate on February 28, 2003. Both agreements are terminable by us in the
event of Mr. Iscove's death or disability. In such event, all Accrued
Obligations (as defined in the agreement) shall be payable by the Company. We
may also terminate the employment agreement "for cause" (as defined in the
agreement). Mr. Iscove may terminate this Employment Agreement in the event of a
material breach by us or for "good reason" (as defined in the agreement). In
such event, we will be obligated to pay him all amounts due thereunder for the
balance of its term and all unvested stock options held by him shall vest. In
the event of a "change in control" (as defined in this agreement) of our
Company, all stock options issued to Mr. Iscove shall vest and we shall, at Mr.
Iscove's option, purchase shares of common stock owned by him at the then market
price and shall acquire all of his stock options for the difference between the
exercise price of such options and the greater of the price at which the new
controlling entity acquired its interest in our Company or the then market price
of the common stock.
DISCLOSURE OF COMMISSION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our Bylaws provide that we will indemnify each director, officer and
employee of the Company to the full extent permitted by law, as the same exists
or may hereafter be amended. Our Bylaws also empower us to enter into
indemnification agreements with any such persons and to purchase insurance on
behalf of any person whom we are required or permitted to indemnify. Section 145
of the Delaware General Corporation Law provides in relevant part that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of the corporation) by reason of the fact that such
person is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such action, suit or proceeding if such person acted in good
faith and in a manner such person reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe such person's conduct was
unlawful.
In addition, Section 145 provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
Page 28
corporation to procure a judgment in its favor by reason of the fact that such
person is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with the defense or settlement
of such action or suit if such person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Delaware Court
of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Delaware Court of Chancery or
such other court shall deem proper. Delaware law further provides that nothing
in the above-described provisions shall be deemed exclusive of any other rights
to indemnification or advancement of expenses to which any person may otherwise
be entitled under any bylaw, agreement, vote of stockholders or disinterested
directors or otherwise.
Our Certificate of Incorporation provides that, pursuant to Delaware law,
our directors shall not be liable for monetary damages for breach of the
director's fiduciary duty to care to us and to our stockholders. Such provision
does not eliminate duty of care to us and to our stockholders. Such provision
does not eliminate the duty of care and, in appropriate circumstances, equitable
remedies such as injunctive or other forms of non-monetary relief will remain
available under Delaware law. Each director continues to be subject to liability
for the breach of the director's duty of loyalty, for acts or omissions not in
good faith or involving intentional misconduct, for knowing violations of law,
for actions leading to improper personal benefit to the director, and for
payment of dividends or approval of stock repurchases or redemptions that are
unlawful under Delaware law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
federal environmental laws.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling us pursuant to
the foregoing provisions, we have been informed that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We have entered into an agreement with Mountaingate for the services of a
key officer and others as producer and to perform other duties. This agreement
expires in June 2002 and provides for an approximate annual payment of $262,000,
plus a $1,500 monthly automobile reimbursement.
During the year ended June 30, 1999, we issued a promissory note to
Mountaingate for the sum of $44,046, which represents amounts we owed under our
production agreement. The promissory note bears interest at the rate of 10% per
annum and was due in December 1999. During the six months ended December 31,
2000, the due date of the note was extended to February 2000 and paid in full
subsequent to the year ended December 31, 1999.
During the year ended June 30, 1999, we entered into a Securities Purchase
Agreement with Mountaingate. Mountaingate purchased 1,300,000 shares of Series C
convertible preferred stock, par value $0.001 per share, for a purchase price of
$0.001 per share.
During the year ended June 30, 1999, we had a related party receivable of
$99,891 from Irwin Meyer, our CEO, which was rescinded due to a contract
cancellation. The receivable was written off as of December 31, 1999.
During the year ended June 30, 1999, we entered into financial consulting
agreements with Strategic Capital and issued an aggregate of 650,000 shares of
common stock valued at $280,000 for consulting services. In addition, we granted
500,000 options at an exercise price of $0.50 per share, all of which have been
exercised at June 30, 1999.
Page 29
During the year ended June 30, 1999, we entered into a Securities Purchase
Agreement with Strategic Capital. Strategic Capital purchased 1,700,000 shares
of our Series C preferred stock, par value $0.001 per share, for a purchase
price of $0.001 per share. We also issued 500,000 options at an exercise price
of $0.50 per share, all of which were exercised at December 31, 1999.
During the six months ended December 31, 1999, Strategic Capital converted
1,700,000 shares of our Series C preferred stock into the same number of common
stock shares at a conversion price of $0.50 per share. In connection with the
conversion, a promissory note was issued for the principal sum of $598,800, of
which $200,000 was paid in February 2000. Interest accrues at 5% per annum and
is due and payable on or before December 31, 2002. We further issued 70,000
shares of common stock valued at $133,700 for services rendered.
We receive financial consulting services from Michael Iscove, our CFO.
During the six months ended December 31, 1999 and the year ended June 30, 1999,
we paid $35,000 and $81,000, respectively, for consulting services. In addition,
during the six months ended December 31, 1999, we issued 50,000 options at an
exercise price of $1. During the year ended June 30, 1999, we issued 300,000 and
25,000 options at an exercise price of $0.82 and $2.35, respectively. All
options are exercisable and outstanding at December 31, 2000. For the year ended
December 31, 2000, the Mr. Iscove was an employee of ours.
During the year ended June 30, 1999, we granted 50,000 options to a former
executive at an exercise price of $1.75 per share. These options are exercisable
and outstanding at December 31, 2000.
During the year ended June 30, 1999, we granted 150,000 options to another
former executive at an exercise price of $1.50 per share. These options are
exercisable and outstanding at December 31, 2000.
During the year ended June 30, 1999, we granted 25,000 and 500,000 options
to Ivan Berkowitz, one of our directors, at exercise prices of $2.35 and $1.35,
respectively. These options are exercisable and outstanding at December 31,
2000.
During the six months ended December 31, 1999, we issued 128,709 shares of
common stock valued at $261,278 for consulting services to Jeffrey Marcus, a
relative of Irwin Meyer.
Related party amounts due for the year ended June 30, 1999 aggregated to
$69,046. These amounts due were non-interest-bearing and were payable on
December 31, 2000. The loans were due to Mountaingate, of which $25,000 was paid
in July 1999, and the remaining balance of $44,046 was paid as of December 31,
2000.
On January 19, 2000, we entered into three promissory note agreements with
Victor Holtorf, one of our former officers, for a total of $1,050,000. The notes
are in connection with a Stock Purchase Agreement for the exercise of the option
to purchase 600,000 shares of our common stock at $1.75 per share. Interest
shall accrue at 5% per annum and shall be due and payable at the same time as
principal payments on or before December 31, 2001, 2002, and 2003 per promissory
note.
On March 2, 2000, we entered into a promissory agreement with Arthur
Bernstein, our Executive VP, for the principal sum of $161,500, of which $61,500
was paid in March 2000. The note is in connection with the issuance of common
stock for the exercise of the option to purchase 175,000 shares of common stock
at $0.82 per share. Interest shall accrue at 5% per annum and shall be due and
payable on or before February 28th of each year. All outstanding principal shall
be due and payable on or before February 28, 2002. As of December 31, 2000, the
balance of the Promissory Note was $104,957.
During the fiscal year ended June 30, 1999, we entered into a Securities
Purchase Agreement with Mountaingate pursuant to which Mountaingate purchased
1,300,000 shares of the Series C Convertible Preferred Stock in exchange for
$1,300,000.00. Mountaingate transferred the 1,300,000 shares of Series C
Preferred Stock to Alison Meyer and Patricia Meyer. On January 7, 2000, Alison
Meyer and Patricia Meyer each converted 650,000 shares of Series C Preferred
Stock to common stock at a price of $0.50 per share and each exercised 750,000
options at $1.20 per share and executed two Promissory Notes (which have been
subsequently amended), each in the amount of $1,225,000. As of December 31,
2000, the balance of each of the Promissory Notes are $1,286,427, including
accrued interest.
Page 30
During the year ended December 31, 2000, Arthur Bernstein executed a
Promissory Note in favor of the Company in the amount of $161,500. As of
December 31, 2000, the balance of the Promissory Note was $104,957.
During the year ended December 31, 2000, we purchased approximately
$251,965 of marketing communications services from Strategic/Ampersand Inc., a
company owned partially by Mr. Iscove's wife.
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of March 1, 2001, relating to
the ownership of our common stock by (i) each person known by us to be the
beneficial owner of more than five percent of the outstanding shares of our
common stock, (ii) each of our directors, (iii) each of the Named Executive
Officers, and (iv) all of our executive officers and directors as a group.
Except as may be indicated in the footnotes to the table and subject to
applicable community property laws, each person has the sole voting and
investment power with respect to the shares owned. The address of each person
listed is in care of us, 9720 Wilshire Boulevard, Suite 700, Los Angeles,
California 90212, unless otherwise set forth below.
Number of Shares
of common stock
Beneficially Percent of Class
Name and Address Owned (1) (1)
------------------------------------ ----------------- ----------------
Alison Meyer (2).................... 1,512,834 4.8%
Patricia Meyer (2).................. 1,513,333 4.8%
Arthur H. Bernstein (3)............. 335,000 1.1%
Salvatore Grosso (4)................ 400,000 1.3%
Lawrence S. Jacobson (4)............ 400,000 1.3%
Irwin Meyer......................... 0 0.0%
Ivan Berkowitz (5).................. 356,250 1.1%
Michael Iscove (6).................. 535,000 1.7%
Thomas A. Daniels (7)............... 1,421,852 4.5%
Victor A. Holtorf................... 2,397,433 7.6%
Stanley Graham (8).................. 45,000 0.1%
Joseph Stephens & Company, Inc.(9).. 400,266 1.3%
James J. Cerna, Jr.................. 2,730,200 8.6%
Directors and Executive Officers
as a Group (6 persons) (10)........ 2,693,102 8.5%
<FN>
(1) Under Rule 13d-3 under the Exchange Act, certain shares may be deemed to be
beneficially owned by more than one person (if, for example, persons share
the power to vote or the power to dispose of the shares). In addition,
shares are deemed to be beneficially owned by a person if the person has
the right to acquire the shares (for example, upon exercise of an option)
within 60 days of the date as of which the information is provided. In
computing the percentage ownership of any person, the amount of shares
outstanding is deemed to include the amount of shares beneficially owned by
that person (and only that person) by reason of these acquisition rights.
As a result, the percentage of outstanding shares of any person as shown in
this table does not necessarily reflect the person's actual ownership or
voting power with respect to the number of shares of common stock actually
outstanding at March 1, 2001.
(2) Alison Meyer and Patricia Meyer are the adult children of Irwin Meyer, the
Company's Chief Executive Officer. They each beneficially own the shares
stated.
(3) Represents shares that have been or may be acquired upon exercise of
options.
(4) Represents shares that may be acquired upon exercise of options by each of
Mr. Grosso and Mr. Jacobson.
Page 31
(5) Represents shares that may be acquired upon exercise of options.
(6) Represents options to purchase 535,000 shares of common stock held by Mr.
Iscove.
(7) Includes 400,000 shares which may be acquired upon exercise of options.
(8) Represents shares which may be acquired upon exercise of options.
(9) According to a Schedule 13G filed by Joseph Stevens & Company, Joseph
Sobara and Steven Markowitz on February 14, 2000, Joseph Stevens & Company,
Inc. owned as of December 31, 1999, warrants ("JSC Warrants") to purchase
200,000 units, each unit consisting of one and one-third shares of common
stock and two-thirds of a redeemable common stock purchase warrant
("Redeemable Warrants"). Each Redeemable Warrant entitles the holder to
purchase an additional share of common stock. The JSC Warrants were
exercisable commencing on September 12, 1997. Additionally, Joseph Stevens
& Company, Inc. held as of December 31, 1999, 266 shares of common stock in
its market making account.
As of December 31, 2000, Mr. Joseph Sorbara owned 24,000 Redeemable
Warrants held with his spouse as joint tenants. Each Redeemable Warrant
entitled the holder to purchase an additional share of common stock.
Additionally, Mr. Sorbara was a controlling shareholder, director and
officer of Joseph Stevens & Company, Inc. as of December 31, 1999. Based
upon the foregoing, as of December 31, 2000, Mr. Sorbara beneficially owned
424,266 shares of common stock within the meaning of Rule 13d-3 of the Act.
As of December 31, 2000, Mr. Steven Markowitz owned 10,000 Redeemable
Warrants. Each Redeemable Warrant entitled the holder to purchase an
additional share of common stock. Additionally, Mr. Markowitz was a
controlling shareholder, director and officer of Joseph Stevens & Company,
Inc. as of December 31, 1999. Based upon the foregoing, as of December 31,
1999, Mr. Markowitz beneficially owned 410,266 shares of common stock
within the meaning of Rule13d-3 of the Act.
(10) Includes options to purchase 1,936,250 shares of common stock. There are no
issued and outstanding shares of Series B Preferred Stock, Series E
Preferred Stock or Series G Preferred Stock. There are no 5% beneficial
owners of Series A Preferred Stock.
</FN>
DESCRIPTION OF SECURITIES
GENERAL
We are authorized to issue 50,000,000 shares of common stock, par value
$0.001 per share. As of March 1, 2001, there were 31,706,729 shares of our
common stock outstanding held by approximately 250 holders of record.
COMMON STOCK
The holders of our common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to the preferences that
may be applicable to any outstanding Preferred Stock, the holders of our common
stock are entitled to receive ratably dividends, if any, as may be declared from
time to time by the Board of Directors out of legally available funds. In the
event of the liquidation, dissolution or winding up of the Company, the holders
of our common stock are entitled to share ratably in all assets remaining after
payment of liabilities, subject to prior distribution rights of Preferred Stock,
if any, then outstanding. Our common stock has no preemptive or conversion
rights or other subscription rights. There are no redemptive or sinking funds
provisions applicable to our common stock. All outstanding shares of our common
stock are fully paid and nonassessable, and shares of our common stock to be
issued upon completion of this offering will be fully paid and nonassessable.
PREFERRED STOCK
Our Series A preferred stock has a par value of $0.001. There are 1,300,000
shares authorized and 1,000,000 shares issued and outstanding. The holders of
the Series A preferred stock have no voting rights. The
Page 32
preferred stock has a liquidation preference of $5 per share and pays a dividend
in cash or in common stock of 8.5% per annum. The Series A preferred stock is
convertible into common stock. The number of shares issued upon conversion is
determined by multiplying (i) the number of shares of Series A preferred stock
to be converted by (ii) the sum of $5 plus all accrued but unpaid dividends in
such shares being converted and dividing the result by $1.
Our Series C preferred stock has a par value of $0.001. There are 3,000,000
shares authorized and 400,000 shares issued and outstanding. The holders of the
Series C preferred stock have no voting rights. Each share of Series C preferred
stock is convertible at the option of its holders into one share of common stock
at a price of $0.50 per share. The preferred stock is entitled to non-cumulative
dividends of 8% per annum, but only after we have earnings in any fiscal year
greater than $1,000,000. Since the earnings requirement has not been met, no
dividends have been declared.
Our Series D preferred stock has a par value of $0.001. There are 50,000
shares authorized and 50,000 shares issued and outstanding. The holders of the
Series D preferred stock have no voting rights. The Series D preferred stock is
convertible into common stock, fixed for the redemption of such shares, and in
lieu of accumulated and unpaid dividends, that the number of shares of our
common stock which equals $10 per share of preferred stock which is to be
converted, plus accumulated and unpaid dividends thereon, divided by the lesser
of (a) 100% of the average of the closing bid prices for five trading days
preceding the date of purchase of the Series D preferred stock, (b) 80% of the
average of the closing bid prices for five trading days preceding the conversion
date, or (c) the post adjustment exercise price per share of the common stock
Our Series E preferred stock has a par value of $0.001. There are 500,000
shares authorized and no shares issued and outstanding. The holders of the
Series E preferred stock have no voting rights. The Series E preferred stock has
a liquidation preference of $10 per share and cumulative dividends at the rate
of 6% per annum, payable quarterly in arrears in cash or shares of common stock
at our option. The Series E preferred stock is convertible into common stock at
the option of the holders, fixed for the redemption of such shares into that
number of shares of common stock which equals $10 per share of the preferred
stock to be converted, plus accumulated and unpaid dividends thereon, divided by
82.5% of the average of the closing bid price per share of the common stock.
Our Series F preferred stock has a par value of $0.001. There are 550,000
shares authorized and 50,000 shares issued and outstanding. The holders of the
Series F preferred stock have no voting rights. Each share of Series F preferred
stock is convertible into one share of common stock upon payment of the
conversion price. The conversion price is an amount equal to 125% of the fair
market value of the Company's common stock on the date of issuance of the shares
of Series F preferred. In February 2000, 225,000 shares of the preferred stock
were converted into 225,000 shares of common stock for total consideration of
$311,525.
The Company's preferred stock, Series G has a par value of $1,000. There
are 4,000 shares authorized and no shares issued and outstanding. The holders of
the Series G preferred stock have no voting rights.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. That section provides, with certain exceptions, that a Delaware
corporation may not engage in any of a broad range of business combinations with
a person or affiliate, or associate of such person, who is an "interested
stockholder" for a period of three years from the date that such person became
an interested stockholder unless: (i) the transaction resulting in a person
becoming an interested stockholder, or the business combination, is approved by
the board of directors of the corporation before the person becomes an
interested stockholder; (ii) the interested stockholder acquires 85% or more of
the outstanding voting stock of the corporation in the same transaction that
makes it an interested stockholder (excluding shares owned by persons who are
both officers and directors of the corporation, and shares held by certain
employee stock ownership plans); or (iii) on or after the date the person
becomes an interested stockholder, the business combination is approved by the
corporation's board of directors and by the holders of at least 66% of the
corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. An "interested
stockholder" is defined as any person that is (a) the owner of 15% or more of
the outstanding voting stock of the corporation or (b) an affiliate or associate
of the corporation and was the owner of 15% or more of the outstanding voting
stock of the corporation at any time within the three-year
Page 33
period immediately prior to the date on which it is sought to be determined
whether such person is an interested stockholder.
TRANSFER AGENT
Our transfer agent and registrar for our common stock is Transfer Online,
Inc., 237 SW Pint Street, Suite 300, Portland, Oregon 97204.
REPORTS TO STOCKHOLDERS
We have registered our common stock under the provisions of Section 12(g)
of the Exchange Act. That registration will require us to comply with periodic
reporting, proxy solicitation and certain other requirements of the Exchange
Act. We intend to furnish our stockholders with annual reports containing
audited financial statements and such other periodic reports as we may deem to
be appropriate or as may be required by law, and to make available copies of
quarterly reports for the first three quarters of each fiscal year containing
unaudited interim financial information.
PLAN OF DISTRIBUTION
We may sell the securities through underwriters, agents or dealers or
directly to purchasers. A prospectus supplement will set forth the terms of each
specific offering, including the name or names of any underwriters or agents,
the purchase price of the securities and the proceeds to us from such sales, any
delayed delivery arrangements, any underwriting discounts and other items
constituting underwriters' compensation, any initial public offering price and
any discounts or concessions allowed or reallowed or paid to dealers. Any public
offering price and any discounts or concessions allowed or reallowed or paid to
dealers may be changed from time to time.
If underwriters are used in the sale, the securities will be acquired by
the underwriters for their own account and may be resold from time to time in
one or more transactions, including negotiated transactions, at a fixed public
offering price or at varying prices determined at the time of sale. The
securities may be offered to the public either through underwriting syndicates
represented by one or more managing underwriters or directly by one or more
firms acting as underwriters. The underwriter or underwriters with respect to a
particular underwritten offering and, if an underwriting syndicate is used, the
managing underwriter or underwriters, will be set forth on the cover of such
prospectus supplement. Unless otherwise set forth in the prospectus supplement,
the underwriters will be obligated to purchase all the securities if any are
purchased.
During and after an offering through underwriters, the underwriters may
purchase and sell the securities in the open market. These transactions may
include overallotment and stabilizing transactions and purchases to cover
syndicate short positions created in connection with the offering. The
underwriters also may impose a penalty bid, under which selling concessions
allowed to syndicate members or other broker-dealers for the securities they
sell for their account may be reclaimed by the syndicate if the syndicate
repurchases the securities in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
securities then offered, which may be higher than the price that might otherwise
prevail in the open market, and, if commenced, may be discontinued at any time.
We may sell the securities directly or through agents we designate from
time to time. Any agent involved in the offer or sale of the securities covered
by this prospectus will be named, and any commissions payable by us to an agent
will be set forth, in a prospectus supplement relating thereto. Unless otherwise
indicated in a prospectus supplement, any such agent will be acting on a best
efforts basis for the period of its appointment.
If dealers are used in any of the sales of securities covered by this
prospectus, we will sell those securities to dealers as principals. The dealers
may then resell the securities to the public at varying prices the dealers
determine at the time of resale. The names of the dealers and the terms of the
transactions will be set forth in a prospectus supplement.
We may sell the securities directly to institutional investors or others
who may be deemed to be underwriters within the meaning of the Securities Act
with respect to any sale thereof. The terms of any such sales will be described
in a prospectus supplement.
Page 34
If so indicated in a prospectus supplement, we will authorize agents,
underwriters or dealers to solicit offers from certain types of institutions to
purchase securities from us at the public offering price set forth in the
prospectus supplement pursuant to delayed delivery contracts providing for
payment and delivery on a specified date in the future. These contracts will be
subject only to those conditions set forth in the prospectus supplement, and the
prospectus supplement will set forth the commission payable for solicitation of
such contracts.
Agents, dealers and underwriters may be entitled under agreements entered
into with us to indemnification by us against certain civil liabilities,
including liabilities under the Securities Act, or to contribution with respect
to payments which such agents, dealers or underwriters may be required to make
in respect thereof. Agents, dealers and underwriters may be customers of, engage
in transactions with, or perform services on our behalf.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for us by
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
EXPERTS
The following financial statements have been audited by Singer Lewak
Greenbaum & Goldstein, LLP, independent certified public accountants, as set
forth in their reports appearing elsewhere in this Prospectus and Registration
Statement: our financial statements at December 31, 2000, for the year ended
June 30, 1999, and for the six months ended December 31, 1999. These financial
statements are included in reliance upon such reports given upon the authority
of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission (the
"Commission") in Washington, D.C., a Registration Statement under the Securities
Act for the shares offered by this Prospectus. This Prospectus, which
constitutes a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement and the exhibits thereto.
Statements contained in this Prospectus as to the contents of any contract or
any other document referred to are not necessarily complete, and with respect to
any contract or other document filed as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved, and each such statement is qualified in its entirety by
this reference. For further information about us and the shares offered by this
Prospectus, reference is hereby made to the Registration Statement and exhibits
included with the Registration Statement. A copy of the Registration Statement,
including exhibits, may be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the following regional offices of the Commission: Offices
located at 7 World Trade Center, Suite 1300, New York, New York 10048, and 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of the material
can be obtained at prescribed rates by writing to the Securities and Exchange
Commission, Public Reference Section, 450 Fifth Street, N.W., Washington, D.C.
20549. In addition, we are required to file electronic versions of these
documents with the Commission through the Commission's Electronic Data Gathering
Analysis and Retrieval (EDGAR) system. The Commission maintains an Internet web
site which contains reports, proxy and information statements and other
information regarding issuers that file electronically with the Commission,
including the Company, at http:\\www.sec.gov.
Page 35
INDEX TO FINANCIAL STATEMENTS
NETCURRENTS, INC. AND SUBSIDIARIES
CONTENTS
DECEMBER 31, 2000
- -------------------------------------------------------------------------------
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets F-3 - 4
Consolidated Statements of Operations and Comprehensive
Income (Loss) F-5 - 6
Consolidated Statements of Shareholders' Equity F-7 - 11
Consolidated Statements of Cash Flows F-12 - 15
Notes to Consolidated Financial Statements F-16 - 39
Page F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
NetCurrents, Inc. and subsidiaries
We have audited the accompanying consolidated balance sheets of NetCurrents,
Inc. and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of operations and comprehensive income (loss),
shareholders' equity, and cash flows for the year and six months then ended, and
for the year ended June 30, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of NetCurrents, Inc.
and subsidiaries as of December 31, 2000 and 1999, and the results of their
consolidated operations and their consolidated cash flows for the year and six
months then ended, and for the year ended June 30, 1999 in conformity with
generally accepted accounting principles.
/S/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
February 28, 2001
Page F-2
NETCURRENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
- ----------------------------------------------------------------------------------------------
ASSETS
2000 1999
------------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 2,754,487 $ 798,855
Accounts receivable 544,869 555,667
Prepaid advertising expenses - 583,392
Prepaid assets 158,356 40,342
Subscription receivable - 200,000
------------- -------------
Total current assets 3,457,712 2,178,256
FILM COSTS - 224,988
FIXED ASSETS, at cost, net 913,876 131,559
GOODWILL, less accumulated amortization and write-off
of $324,282 and $144,282 500,000 841,913
INVESTMENTS 43,500 725,050
OTHER ASSETS 54,538 38,043
------------- -------------
TOTAL ASSETS $ 4,969,626 $ 4,139,809
============= =============
The accompanying notes are an integral part of these financial statements
Page F-3
NETCURRENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
- ----------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
2000 1999
------------- -------------
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,030,934 $ 1,202,141
Dividends payable 237,413 108,313
Due to related parties - 44,046
Capital lease obligation - 4,320
Convertible debentures - 619,824
Deferred revenue - 63,025
------------- -------------
Total current liabilities 1,268,347 2,041,669
------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, Series A, C, D, E, and F, $0.001 par value
Series A liquidation preference $5 per share Series E
liquidation preference $10 per share
5,400,000 shares authorized
1,500,000 and 2,625,000 shares issued and outstanding 1,500 2,625
Preferred stock, Series G, $1,000 par value
4,000 shares authorized
no and 1,875 shares issued and outstanding - 1,875,000
Common stock, $0.001 par value
50,000,000 shares authorized
32,998,073 and 23,070,869 shares issued and outstanding 32,998 23,071
Treasury stock, at cost
93,536 and 93,536 shares (1,010,192) (1,010,192)
Subscription receivable (4,223,284) (398,800)
Additional paid-in capital 48,532,031 30,704,372
Accumulated other comprehensive income (loss) (410,813) 225,050
Accumulated deficit (39,220,961) (29,322,986)
------------- -------------
Total shareholders' equity 3,701,279 2,098,140
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,969,626 $ 4,139,809
============= =============
The accompanying notes are an integral part of these financial statements
Page F-4
NETCURRENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FOR THE YEAR ENDED DECEMBER 31, 2000,
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999,
FOR THE YEAR ENDED JUNE 30, 1999, AND
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
- -----------------------------------------------------------------------------------------
For the For the
For the Six Months For the Six Months
Year Ended Ended Year Ended Ended
December 31, December 31, June 30, December 31,
2000 1999 1999 1998
------------- ------------ ------------- -------------
(unaudited)
REVENUES $ 1,665,225 $ 342,985 $ 2,991,953 $ 413,065
COST OF SALES - 96,997 926,295 90,171
------------- ------------ ------------- ------------
NET REVENUES 1,665,225 245,988 2,065,658 322,894
WRITE-OFF OF
Projects in development 224,988 246,774 301,037 -
Notes and accounts receivable 138,124 1,429,926 166,965 -
Investment - 300,000 - -
GENERAL AND ADMINISTRATIVE
EXPENSES 9,747,586 2,895,211 4,066,590 2,621,725
------------- ------------ ------------- ------------
LOSS FROM OPERATIONS (8,445,473) (4,625,923) (2,468,934) (2,298,831)
------------- ------------ ------------- ------------
OTHER INCOME (EXPENSE)
Merger expenses - - (6,696) (6,696)
Realized gain on investment 168,250 - - -
Settlements (191,214) - - -
Interest and dividend income 482,993 10,325 3,096 -
Interest and financing expense (8,354) (37,189) (12,447) -
Amortization of related party
covenant not to compete - - (115,000) (115,000)
Amortization of goodwill (90,000) (45,000) (99,282) (75,000)
Impairment of goodwill (251,913) - - -
Other expense (24,414) (26,795) (22,176) (11,390)
------------- ------------ ------------- ------------
Total other income (expense) 85,348 (98,659) (252,505) (208,086)
------------- ------------ ------------- ------------
LOSS BEFORE PROVISION FOR INCOME
TAXES (8,360,125) (4,724,582) (2,721,439) (2,506,917)
PROVISION FOR INCOME TAXES - - 800 -
------------- ------------ ------------- ------------
The accompanying notes are an integral part of these financial statements
Page F-5
NETCURRENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FOR THE YEAR ENDED DECEMBER 31, 2000,
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999,
FOR THE YEAR ENDED JUNE 30, 1999, AND
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
- -----------------------------------------------------------------------------------------------
For the For the
For the Six Months For the Six Months
Year Ended Ended Year Ended Ended
December 31, December 31, June 30, December 31,
2000 1999 1999 1998
------------- ------------ ------------- -------------
(unaudited)
NET LOSS $ (8,360,125) $ (4,724,582) $ (2,722,239) $ (2,506,917)
DIVIDEND REQUIREMENT OF SERIES A
PREFERRED STOCK (425,000) (212,500) (425,000) (212,500)
DIVIDEND REQUIREMENT OF SERIES E
PREFERRED STOCK - - (66,250) -
BENEFICIAL CONVERSION ON SERIES G
PREFERRED STOCK (1,090,000) (957,000) - -
DIVIDEND REQUIREMENT OF SERIES G
PREFERRED STOCK (22,850) (1,313) - -
------------- ------------ ------------- ------------
LOSS APPLICABLE TO COMMON
SHAREHOLDERS (9,897,975) (5,895,395) (3,213,489) (2,719,417)
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gain (loss) on
investment, net (635,863) 225,050 - -
------------- ------------ ------------- ------------
COMPREHENSIVE LOSS APPLICABLE
TO COMMON SHAREHOLDERS $ (10,533,838) $ (5,670,345) $ (3,213,489) $ (2,719,417)
============= ============ ============= ============
BASIC AND DILUTED LOSS PER
COMMON SHARE $ (0.33) $ (0.37) $ (0.33)$ (0.37)
============= ============ ============= =============
WEIGHTED-AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
USED TO COMPUTE BASIS AND
DILUTED LOSS PER SHARE 31,594,660 15,227,839 9,688,012 7,274,036
============= ============ ============= =============
The accompanying notes are an integral part of these financial statements
Page F-6
NETCURRENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2000,
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999, AND
FOR THE YEAR ENDED JUNE 30, 1999
- -----------------------------------------------------------------------------------------
PREFERRED STOCK
--------------------------------------------------
SERIES A, C, D, E, AND F SERIES G COMMON STOCK
------------------------ ----------------------- ----------------------- TREASURY SUBSCRIPTION
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT STOCK RECEIVABLE
----------- ------------ ----------- ---------- ----------- ---------- ----------- ------------
BALANCE, JUNE 30, 1998 1,000,000 $ 1,000 - $ - 6,672,943 $ 6,673 $(1,010,192) $ -
ISSUANCE OF COMMON
STOCK
for acquisition of
NetCurrents
Services Corp. 7,375,001 7,375
for payment of
dividends on Series
A preferred stock 343,932 344
in connection with
the acquisition of
MWI Distributions, Inc. 1,203,704 1,204
for the exercise of
options 600,000 600
for the exercise of
options-Strategic 500,000 500
from the preferred
Series D conversion -
Augustine Fund 2,005,185 2,005
for consulting
services 650,000 650
ISSUANCE OF SERIES C
PREFERRED STOCK 3,000,000 3,000
ISSUANCE OF SERIES D
PREFERRED STOCK 50,000 50
OFFERING COSTS
ISSUANCE OF SERIES E
PREFERRED STOCK 225,000 225
OFFERING COSTS
ISSUANCE OF SERIES F
PREFERRED STOCK 275,000 275
FILM TRANSFER FOR STOCK
NOT YET ISSUED AT
JUNE 30, 1999 -
GROSSO-JACOBSON
ACCUMULATED
OTHER
ADDITIONAL COMPRE-
PAID-IN HENSIVE ACCUMULATED
CAPITAL INCOME DEFICIT TOTAL
------------ ------------ ------------- ------------
BALANCE, JUNE 30, 1998 $ 23,411,349 $ - $(20,280,352) $ 2,128,478
ISSUANCE OF COMMON
STOCK
for acquisition of
NetCurrents
Services Corp. 411,705 419,080
for payment of
dividends on Series
A preferred stock 318,406 318,750
in connection with
the acquisition of
MWI Distributions, Inc. 525,416 526,620
for the exercise of
options 427,400 428,000
for the exercise of
options-Strategic 249,500 250,000
from the preferred
Series D conversion -
Augustine Fund 1,245,800 1,247,805
for consulting
services 279,350 280,000
ISSUANCE OF SERIES C
PREFERRED STOCK 3,000
ISSUANCE OF SERIES D
PREFERRED STOCK 499,950 500,000
OFFERING COSTS (35,000) (35,000)
ISSUANCE OF SERIES E
PREFERRED STOCK 1,001,744 1,001,969
OFFERING COSTS (157,500) (157,500)
ISSUANCE OF SERIES F
PREFERRED STOCK 275
FILM TRANSFER FOR STOCK
NOT YET ISSUED AT
JUNE 30, 1999 -
GROSSO-JACOBSON (694,981) (694,981)
The accompanying notes are an integral part of these financial statements
Page F-7
NETCURRENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2000,
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999, AND
FOR THE YEAR ENDED JUNE 30, 1999
- -----------------------------------------------------------------------------------------
PREFERRED STOCK
--------------------------------------------------
SERIES A, C, D, E, AND F SERIES G COMMON STOCK
------------------------ ----------------------- ----------------------- TREASURY SUBSCRIPTION
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT STOCK RECEIVABLE
----------- ------------ ----------- ---------- ----------- ---------- ----------- ------------
DIVIDENDS PAID ON SERIES A
PREFERRED STOCK $ $ $ $ $
DIVIDENDS PAID ON SERIES E
PREFERRED STOCK
NET LOSS
----------- ------------ ----------- ---------- ----------- ---------- ----------- ------------
BALANCE, JUNE 30, 1999 4,550,000 4,550 - - 19,350,765 19,351 (1,010,192) -
ISSUANCE OF COMMON
STOCK
to former employee 512,500 513
in payment of
dividends on Series
A preferred stock 151,387 151
for exercise of options 370,000 370
from the preferred
Series E conversion (225,000) (225) 2,155,416 2,155
for conversion of
Series C preferred
stock for exercise
of options (1,700,000) (1,700) 1,700,000 1,700 (398,800)
for financing services
rendered 70,000 70
for conversion
debentures 310,446 310
for consulting services
rendered 128,709 129
RETIREMENT OF
COMMON STOCK
Augustine fund (409,836) (410)
Former employee
settlement (601,852) (602)
Grosso-Jacobson (666,666) (666)
ACCUMULATED
OTHER
ADDITIONAL COMPRE-
PAID-IN HENSIVE ACCUMULATED
CAPITAL INCOME DEFICIT TOTAL
------------ ------------ ------------- ------------
DIVIDENDS PAID ON SERIES A
PREFERRED STOCK $ $ $ (425,000) $ (425,000)
DIVIDENDS PAID ON SERIES E
PREFERRED STOCK (66,250) (66,250)
NET LOSS (2,722,239) (2,722,239)
------------ ------------ ------------- ------------
BALANCE, JUNE 30, 1999 27,483,139 - (23,493,841) 3,003,007
ISSUANCE OF COMMON
STOCK
to former employee (513) -
in payment of
dividends on Series
A preferred stock 318,599 318,750
for exercise of options 313,130 313,500
from the preferred
Series E conversion (1,930) -
for conversion of
Series C preferred
stock for exercise
of options 848,800 450,000
for financing services
rendered 133,630 133,700
for conversion
debentures 389,690 390,000
for consulting services
rendered 261,149 261,278
RETIREMENT OF
COMMON STOCK
Augustine fund 410 -
Former employee
settlement 602 -
Grosso-Jacobson 666 -
The accompanying notes are an integral part of these financial statements
Page F-8
NETCURRENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2000,
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999, AND
FOR THE YEAR ENDED JUNE 30, 1999
- -----------------------------------------------------------------------------------------
PREFERRED STOCK
--------------------------------------------------
SERIES A, C, D, E, AND F SERIES G COMMON STOCK
------------------------ ----------------------- ----------------------- TREASURY SUBSCRIPTION
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT STOCK RECEIVABLE
----------- ------------ ----------- ---------- ----------- ---------- ----------- ------------
REVERSAL OF DIVIDEND
SERIES E PREFERRED
STOCK $ $ $ $ $
ISSUANCE OF SERIES G
PREFERRED STOCK 1,875 1,875,000
DIVIDENDS PAID ON
SERIES A PREFERRED
STOCK
DIVIDENDS PAID ON
SERIES G PREFERRED
STOCK
UNREALIZED GAIN ON
INVESTMENT
BENEFICIAL CONVERSION,
SERIES G PREFERRED STOCK
NET LOSS
----------- ------------ ----------- ---------- ----------- ---------- ----------- ------------
BALANCE, DECEMBER 31, 1999 2,625,000 2,625 1,875 1,875,000 23,070,869 23,071 (1,010,192) (398,800)
ISSUANCE OF COMMON STOCK
for the exercise of
options 1,497,160 1,497 (1,205,277)
for the conversion of
warrants 151,583 152
for conversion
debentures 513,346 513
for settlement with
financing company 30,000 30
for settlement with
investing company 50,000 50
conversion of Series
C preferred stock
and exercise of
options (1,300,000) (1,300) 2,800,000 2,800 (2,572,854)
ACCUMULATED
OTHER
ADDITIONAL COMPRE-
PAID-IN HENSIVE ACCUMULATED
CAPITAL INCOME DEFICIT TOTAL
------------ ------------ ------------- ------------
REVERSAL OF DIVIDEND
SERIES E PREFERRED
STOCK $ $ $ 66,250 $ 66,250
ISSUANCE OF SERIES G
PREFERRED STOCK 1,875,000
DIVIDENDS PAID ON
SERIES A PREFERRED
STOCK (212,500) (212,500)
DIVIDENDS PAID ON
SERIES G PREFERRED
STOCK (1,313) (1,313)
UNREALIZED GAIN ON
INVESTMENT 225,050 225,050
BENEFICIAL CONVERSION,
SERIES G PREFERRED STOCK 957,000 (957,000) -
NET LOSS (4,724,582) (4,724,582)
------------ ------------ ------------- ------------
BALANCE, DECEMBER 31, 1999 30,704,372 225,050 (29,322,986) 2,098,140
ISSUANCE OF COMMON STOCK
for the exercise of
options 2,094,629 890,849
for the conversion of
warrants 212,308 212,460
for conversion
debentures 644,487 645,000
for settlement with
financing company 71,370 71,400
for settlement with
investing company 24,950 25,000
conversion of Series
C preferred stock
and exercise of
options 2,448,500 (122,854)
The accompanying notes are an integral part of these financial statements
Page F-9
NETCURRENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2000,
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999, AND
FOR THE YEAR ENDED JUNE 30, 1999
- -----------------------------------------------------------------------------------------
PREFERRED STOCK
--------------------------------------------------
SERIES A, C, D, E, AND F SERIES G COMMON STOCK
------------------------ ----------------------- ----------------------- TREASURY SUBSCRIPTION
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT STOCK RECEIVABLE
----------- ------------ ----------- ---------- ----------- ---------- ----------- ------------
in private placement $ $ 1,700,000 $ 1,700 $ $
OFFERING COSTS
ISSUANCE OF COMMON
STOCK
for conversion of
Series F preferred
stock (225,000) (225) 225,000 225
for conversion of
Series G preferred
stock (2,965) (2,965,000) 2,383,388 2,383
in payment of dividends
on Series A preferred
stock 105,013 105
RETIREMENT OF COMMON
STOCK
Grosso-Jacobson (328,286) (328)
ISSUANCE OF SERIES G
PREFERRED STOCK FOR
CONVERSION
DEBENTURES 700 700,000
ISSUANCE OF SERIES G
PREFERRED STOCK 390 390,000
DIVIDENDS PAID ON
Series A preferred
stock
Series G preferred
stock
UNREALIZED LOSS ON
INVESTMENT
RECLASSIFICATION OF
UNREALIZED LOSS
INCLUDED IN GAIN ON
SALE OF INVESTMENT
ACCUMULATED
OTHER
ADDITIONAL COMPRE-
PAID-IN HENSIVE ACCUMULATED
CAPITAL INCOME DEFICIT TOTAL
------------ ------------ ------------- ------------
in private placement $ 8,498,300 $ $ $ 8,500,000
OFFERING COSTS (850,000) (850,000)
ISSUANCE OF COMMON
STOCK
for conversion of
Series F preferred
stock 311,525 311,525
for conversion of
Series G preferred
stock 2,962,617 -
in payment of dividends
on Series A preferred
stock 318,645 318,750
RETIREMENT OF COMMON
STOCK
Grosso-Jacobson 328 -
ISSUANCE OF SERIES G
PREFERRED STOCK FOR
CONVERSION
DEBENTURES 700,000
ISSUANCE OF SERIES G
PREFERRED STOCK 390,000
DIVIDENDS PAID ON
Series A preferred
stock (425,000) (425,000)
Series G preferred
stock (22,850) (22,850)
UNREALIZED LOSS ON
INVESTMENT (804,113) (804,113)
RECLASSIFICATION OF
UNREALIZED LOSS
INCLUDED IN GAIN ON
SALE OF INVESTMENT 168,250 168,250
The accompanying notes are an integral part of these financial statements
Page F-10
NETCURRENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2000,
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999, AND
FOR THE YEAR ENDED JUNE 30, 1999
- -----------------------------------------------------------------------------------------
PREFERRED STOCK
--------------------------------------------------
SERIES A, C, D, E, AND F SERIES G COMMON STOCK
------------------------ ----------------------- ----------------------- TREASURY SUBSCRIPTION
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT STOCK RECEIVABLE
----------- ------------ ----------- ---------- ----------- ---------- ----------- ------------
INTEREST ON SUBSCRIPTION
RECEIVABLE $ $ $ $ $ (46,353)
BENEFICIAL CONVERSION,
SERIES G PREFERRED
STOCK
ISSUANCE OF SERIES C
PREFERRED STOCK 1,200,000 1,200
CONVERSION OF SERIES
C PREFERRED STOCK
INTO COMMON STOCK -
STRATEGIC (800,000) (800) 800,000 800
NET LOSS
----------- ------------ ----------- ---------- ----------- ---------- ----------- ------------
BALANCE, DECEMBER 31, 2000 1,500,000 $ 1,500 - $ - 32,998,073 $ 32,998 $(1,010,192) $(4,223,284)
=========== =========== =========== ========== =========== ========== =========== ============
ACCUMULATED
OTHER
ADDITIONAL COMPRE-
PAID-IN HENSIVE ACCUMULATED
CAPITAL INCOME DEFICIT TOTAL
------------ ------------ ------------- ------------
INTEREST ON SUBSCRIPTION
RECEIVABLE $ $ $ $ (46,353)
BENEFICIAL CONVERSION,
SERIES G PREFERRED
STOCK 1,090,000 (1,090,000) -
ISSUANCE OF SERIES C
PREFERRED STOCK 1,200
CONVERSION OF SERIES
C PREFERRED STOCK
INTO COMMON STOCK -
STRATEGIC -
NET LOSS (8,360,125) (8,360,125)
------------ ------------ ------------- ------------
BALANCE, DECEMBER 31, 2000 $ 48,532,031 $ (410,813) $(39,220,961) $ 3,701,279
============ ============ ============= ============
The accompanying notes are an integral part of these financial statements
Page F-11
NETCURRENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2000,
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999,
FOR THE YEAR ENDED JUNE 30, 1999, AND
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
- ---------------------------------------------------------------------------------------------------
For the For the
For the Six Months For the Six Months
Year Ended Ended Year Ended Ended
December 31, December 31, June 30, December 31,
2000 1999 1999 1998
------------ ------------ ------------ ------------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(8,360,125) $(4,724,582) $(2,722,239) $(2,506,917)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation and amortization of
fixed assets 166,173 48,881 103,981 28,579
Write-off of film projects in
development 224,988 246,774 301,037 -
Amortization of related party
covenant not to compete - - 115,000 115,000
Amortization of goodwill 90,000 45,000 99,282 75,000
Impairment of goodwill 251,913 - - -
Write-off of notes receivable and
other assets 138,124 1,429,926 654,428 -
Write off of investment - 300,000 - -
Issuance of common stock for
services rendered - 395,513 285,840 129,500
Issuance of common stock for
settlements 96,400 - - -
Interest on subscriptions
receivable (223,184) - - -
Gain on sale of investment (168,250) - - -
(Increase) decrease in
Accounts receivable (98,922) (303,874) (475,649) (1,644,222)
Other assets and prepaid
expenses (147,622) (45,543) (86,644) (33,041)
Prepaid advertising expenses 583,392 (583,392) - -
Increase (decrease) in
Accounts payable and accrued
expenses (171,207) 168,794 544,062 3,176,609
Deferred revenue (63,025) 63,025 (139,126) 131,543
------------ ------------ ------------ ------------
Net cash used in operating activities (7,681,345) (2,959,478) (1,320,028) (527,949)
------------ ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements
Page F-12
NETCURRENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2000,
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999,
FOR THE YEAR ENDED JUNE 30, 1999, AND
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------------------------
For the For the
For the Six Months For the Six Months
Year Ended Ended Year Ended Ended
December 31, December 31, June 30, December 31,
2000 1999 1999 1998
------------ ------------ ------------ ------------
(unaudited)
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in short-term investments $ - $ - $ (800,000) $ -
Additions to film costs - - (278,388) (294,614)
Capital expenditures on fixed assets (948,490) (68,594) (28,643) -
(Increase) decrease in receivables
from related parties - 102,156 43,015 (241,806)
Additions to goodwill - - (15,000) -
Cash from purchase of business - - 252,122 -
Increase in note receivable - - - (200,000)
Increase in acquisition costs - - - (109,269)
Net proceeds from sale of investment 383,125 - - -
Additions to investment (169,313) - - -
------------ ------------ ------------ ------------
Net cash provided by (used in)
investing activities (734,678) 33,562 (826,894) (845,689)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings from notes payable -
related parties - - - 349,260
Payments on notes payable - related
parties (44,046) (37,212) (1,210,802) -
Payments on capital lease obligation (4,320) (28,938) (37,647) (28,247)
Payments on subscription receivable 200,000 - - -
Net borrowings from related parties - (25,000) 37,212 (84,346)
Proceeds from issuance of preferred
stock 1,100,000 1,875,000 3,711,090 150
Proceeds from issuance of common
stock 9,970,021 953,715 133,200 620,425
Offering costs (850,000) - (192,500) -
Proceeds from convertible
debentures, net of offering costs - 619,824 - -
------------ ------------ ------------ ------------
Net cash provided by financing
activities 10,371,655 3,357,389 2,440,553 857,242
------------ ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements
Page F-13
NETCURRENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2000,
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999,
FOR THE YEAR ENDED JUNE 30, 1999, AND
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------------------------
For the For the
For the Six Months For the Six Months
Year Ended Ended Year Ended Ended
December 31, December 31, June 30, December 31,
2000 1999 1999 1998
------------ ------------ ------------ ------------
(unaudited)
Net increase (decrease) in cash and
cash equivalents $ 1,955,632 $ 431,473 $ 293,631 $ (516,396)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 798,855 367,382 73,751 73,751
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END
OF PERIOD $ 2,754,487 $ 798,855 $ 367,382 $ 442,645
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
INTEREST PAID $ 6,445 $ 36,120 $ 12,447 $ 6,224
============ ============ ============ ============
INCOME TAXES PAID $ - $ - $ - $ -
============ ============ ============ ============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the year ended June 30, 1999, the Company exchanged capitalized film
costs of $694,981 for 1,666,667 shares of common stock. As of December 31, 2000,
666,666 shares of common stock were retired, and the remaining shares are being
held in escrow.
During the year ended June 30, 1999, the Company issued 1,203,704 shares of
common stock valued at $526,620 for the acquisition of a company. Cash from
investing, financing, and operating activities excludes the following:
Accounts receivable $ 1,611,037
Fixed assets, net $ 4,709
Other assets $ 10,835
Goodwill $ 961,913
Accounts payable and accrued expenses $ (153,570)
Deferred revenue $ (139,126)
Notes payable - related parties $ (1,884,172)
The accompanying notes are an integral part of these financial statements
Page F-14
NETCURRENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2000,
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999,
FOR THE YEAR ENDED JUNE 30, 1999, AND
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED)
- -------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES (CONTINUED)
During the year ended June 30, 1999, the Company issued 650,000 shares of common
stock for consulting services valued at $280,000.
During the year ended June 30, 1999, the Company issued 343,932 shares of common
stock valued at $318,750 in payment of dividends on its Series A preferred
stock.
During the six months ended December 31, 1999, the Company issued 151,387 shares
of common stock valued at $318,750 as payment of dividends on its Series A
preferred stock.
During the six months ended December 31, 1999, the Company recorded an
unrealized gain on an investment of $225,050.
During the six months ended December 31, 1999, the Company recorded $957,000 as
a dividend on Series G preferred stock, representing a beneficial conversion
feature.
During the year ended December 31, 2000, the Company issued 1,090,000 shares of
Series G preferred stock upon the conversion of debentures.
During the year ended December 31, 2000, the Company recorded $1,090,000 as a
dividend on Series G preferred stock, representing a beneficial conversion
feature.
During the year ended December 31, 2000, the Company issued 2,383,388 shares of
common stock upon the conversion of Series G preferred stock.
During the year ended December 31, 2000, the Company recorded an unrealized loss
on an investment of $635,863.
During the year ended December 31, 2000, the Company issued 105,013 shares of
common stock valued at $318,750 in payment of dividends on its Series A
preferred stock.
The accompanying notes are an integral part of these financial statements
Page F-15
NETCURRENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2000,
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999, AND
FOR THE YEAR ENDED JUNE 30, 1999
- -------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES (CONTINUED)
During the year ended December 31, 2000, the Company issued 2,800,000 shares of
common stock for a subscription receivable of $2,451,300, principal only, for
the conversion of preferred stock and the exercise of options.
During the year ended December 31, 2000, the Company issued 775,000 shares of
common stock for subscriptions receivable of $1,150,000, principal only, for the
exercise of options.
Page F-16
NETCURRENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
- -------------------------------------------------------------------------------
NOTE 1 - BUSINESS ACTIVITY
NetCurrents, Inc. ("NC") was incorporated under its former name, The
Producers Entertainment Group, Ltd. ("TPEG"), under the laws of the
State of Delaware on August 10, 1989. Effective June 4, 1999, TPEG
officially changed its name to IAT Resources Corporation ("IAT"),
reflecting a significant change of TPEG's core business from
entertainment production and distribution to Internet technology
development and integration. Effective December 27, 1999, IAT officially
changed its name to NetCurrents, Inc.
For approximately eight years, IAT acquired, developed, produced, and
distributed drama, comedy, documentary, and instructional television
series, made-for-television movies, and theatrical motion pictures.
Although IAT continues to engage in certain entertainment-related
distribution activities, during the past year, it has reduced its
network and cable television activities and has redirected its core
business toward the Internet and technology industry.
ACQUISITION
On July 15, 1998, IAT acquired 100% of the capital stock of MWI
Distributions, Inc., dba MediaWorks, International ("MWI"), a California
corporation. MWI provides international television and video
distribution, specializing in the licensing of children's and family
programming and animation. MWI engaged in worldwide sales of
direct-to-video series and specials. The transaction was accounted for
as a purchase. The excess of purchase price over the net assets acquired
was recorded as goodwill.
On March 22, 1999, IAT entered into an agreement with the shareholders
of MWI under which one of the shareholders cancelled 89,352 shares of
common stock issued to him in connection with the acquisition.
MERGER AGREEMENT
On September 23, 1999, NC entered into a merger agreement with
Infolocity, Inc., a privately-held Internet company incorporated in
January 1999, which is now called NetCurrents Services Corp. ("NCS")
effective December 27, 1999. Through its proprietary search technology,
NCS assists publicly traded companies in minimizing the impact of
negative or false information posted on the Internet. The terms of the
merger include a tax-free exchange of NC's common stock for 100% of the
issued and outstanding stock of NCS. As a result of the merger, NCS is a
wholly-owned subsidiaries of NC. In connection with the merger, the
Company issued 7,375,001 shares of common stock. The merger was
accounted for as a pooling of interests.
Page F-17
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of NC, its
wholly owned subsidiaries, MWI and NCS, and a Canadian branch
(collectively, the "Company"). All significant intercompany accounts
have been eliminated.
FISCAL YEAR
Effective February 3, 2000, the Company changed its fiscal year end from
June 30 to December 31. The consolidated financial statements include
the presentation of the transition period beginning July 1, 1999 and
ending on December 31, 1999.
INTERIM UNAUDITED FINANCIAL INFORMATION
The unaudited financial information furnished herein reflects all
adjustments, consisting only of normal recurring adjustments, which in
the opinion of management, are necessary to fairly state the Company's
financial position, the results of operations, and cash flows for the
periods presented. The information with respect to the six months ended
December 31, 1998 is unaudited.
CASH AND CASH EQUIVALENTS
For the purpose of reporting cash flows, the Company considers United
States treasury bills, money market funds, and certificates of deposit
purchased with an original maturity of three months or less to be cash
equivalents.
FILM COSTS AND AMORTIZATION
Film costs include the costs expended on projects in development. Film
costs are stated at the lower of amortized cost or estimated net
realizable value.
FIXED ASSETS
Fixed assets are stated at cost. The Company provides for depreciation
and amortization using the straight-line method over the estimated
useful lives of the assets of three to seven years.
RELATED PARTY COVENANT NOT TO COMPETE
The covenant not to compete was the result of a litigation settlement
with a former officer and has been amortized over the covenant period,
which ended December 31, 1998.
Page F-18
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK OPTIONS
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes and
encourages the use of the fair value based method of accounting for
stock-based compensation arrangements under which compensation cost is
determined using the fair value of stock-based compensation determined
as of the date of grant and is recognized over the periods in which the
related services are rendered. The statement also permits companies to
elect to continue using the current implicit value accounting method
specified in Accounting Principles Bulletin ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," to account for stock-based
compensation. The Company has elected to use the implicit value based
method and the disclosure provisions of SFAS No. 123.
SEGMENT INFORMATION
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 131, "Disclosures about Segments of an Enterprise and Related
Information," as of December 31, 2000. This statement establishes
standards for the reporting of information about operating segments in
annual and interim financial statements and requires restatement of
prior year information. Operating segments are defined as components of
an enterprise for which separate financial information is available that
is evaluated regularly by the chief operating decision markers in
deciding how to allocate resources and in assessing performance. SFAS
No. 131 also requires disclosures about products and services,
geographic areas, and major customers. The adoption of SFAS No. 131 did
not affect the results of operations or financial position, but did
affect the disclosure of segment information as presented in Note 14.
REVENUE RECOGNITION
Amounts received as Internet monitoring fees are recognized as earned in
accordance with the contract or deferred until the month of usage.
Licensing and distribution fees are recognized as earned in accordance
with the terms of the related agreements.
COMPREHENSIVE INCOME
The Company utilizes SFAS No. 130, "Reporting Comprehensive Income."
This statement establishes standards for reporting comprehensive income
and its components in a financial statement. Comprehensive income as
defined includes all changes in equity (net assets) during a period from
non-owner sources. Examples of items to be included in comprehensive
income, which are excluded from net income, include foreign currency
translation adjustments and unrealized gains and losses on
available-for-sale securities and included as a component of
shareholders' equity.
ADVERTISING
The Company expenses advertising costs as incurred. Advertising costs
for the year ended December 31, 2000, the six months ended December 31,
1999, and the year ended June 30, 1999 were $770,291, $13,653, and
$10,595, respectively.
Page F-19
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, "Accounting
for Income Taxes." SFAS No. 109 requires a liability approach for
measuring deferred tax assets and liabilities based on temporary
differences existing at each balance sheet date using enacted tax rates
in effect when those differences are expected to reverse. As of December
31, 2000 and 1999, such differences arose principally from net operating
loss carryforwards.
Deferred tax assets, consisting primarily of the tax effect of net
operating loss carryforwards, are offset with a valuation allowance
because of the uncertainty of it being realizable.
LOSS PER COMMON SHARE
Basic and diluted loss per common share have been computed after
deducting the dividend requirement of the Company's Series A, E, and G
preferred stock from net loss. Basic loss per share is based on the
weighted-average number of common shares outstanding during the year
ended December 31, 2000, the six months ended December 31, 1999, the
year ended June 30, 1999, and the six months ended December 31, 1998.
Diluted loss per share is equal to the basic loss per share because the
assumed conversion of the Series A, E, and G preferred stock and the
assumed exercise of outstanding stock purchase warrants and options have
not been included as the effect would be anti-dilutive. Treasury stock
has been excluded from the loss per common share calculation.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the
financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company measures its financial assets and liabilities in accordance
with generally accepted accounting principles. For certain of the
Company's financial instruments, including cash and cash equivalents,
accounts receivable, and accounts payable and accrued expenses, the
carrying amounts approximate fair value due to their short maturities.
The amounts shown for notes payable - related parties also approximate
fair value because current interest rates offered to the Company for
debt of similar maturities are substantially the same.
Page F-20
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSACTION
Assets and liabilities in foreign currencies are translated at the
exchange rate prevailing at the balance sheet date. Revenues and
expenses are translated at the exchange rate prevailing at the
transaction date, and the resulting gains and losses are reflected in
the statements of operations. Gains and losses arising from translation
of a subsidiary's foreign currency financial statements are shown as a
component of shareholders' equity as accumulated other comprehensive
income (loss). At December 31, 2000, such gains and losses were
immaterial.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of the assets to
future net undiscounted cash flows expected to be generated by the
assets. If the assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying amount
exceeds the fair value of the assets. For the year ended December 31,
2000, the Company incurred $251,913 for the impairment of goodwill.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
significant credit risks consist of cash and cash equivalents and
accounts receivable. The Company places its cash with high-credit,
quality financial institutions or in high-quality, short-term
investments such as insured certificates of deposit. At times, the cash
in any one bank may exceed the Federal Deposit Insurance Corporation's
insured limit of $100,000. At December 31, 2000 and 1999, the Company
had uninsured cash of $2,576,635 and $797,246, respectively. With
respect to accounts receivable, the Company routinely assesses the
financial strength of its customers and, as a consequence, believes that
the receivable credit risk exposure is limited.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition," to
provide guidance on the recognition, presentation, and disclosure of
revenue in financial statements. Changes in accounting to apply the
guidance in SAB No. 101 may be accounted for as a change in accounting
principle effective January 1, 2000. Management has not yet determined
the complete impact of SAB No. 101 on the Company; however, management
does expect that application of SAB No. 101 will have a material effect
on the Company's revenue recognition and results of operations.
Page F-21
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (Continued)
In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation," (an Interpretation of Accounting
Principles Bulletin Opinion No. 25 ("APB 25")) ("FIN 44"). FIN 44
provides guidance on the application of APB 25, particularly as it
relates to options. The effective date of FIN 44 is July 1, 2000, and
the Company has adopted FIN 44 as of that date.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Instruments and Certain Hedging Activities." This statement is not
applicable to the Company.
In June 2000, the FASB issued SFAS No. 139, "Rescission of FASB
Statement No. 53 and Amendments to Statements No. 63, 89, and 121." This
statement is not applicable to the Company.
In September 2000, the FASB issued SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, a replacement of FASB Statement No. 125." This statement is
not applicable to the Company.
NOTE 3 - ACQUISITION OF GROSSO-JACOBSON ENTERTAINMENT CORP.
On January 19, 1999, the Company entered into an agreement to terminate
all agreements and relationships between the Company and Grosso-Jacobson
Entertainment Corporation, Grosso-Jacobson Productions, Inc., and
Grosso-Jacobson Music Company, Inc. (collectively, the "G-J Companies"),
except the Merger Agreement. In exchange for the Company investing
$575,000 in a new company to be formed by the officers of the G-J
Companies and the transfer of certain unproduced projects in development
for a 15% profit participation, the officers agreed to terminate their
employment agreement and return 1,666,667 shares of the Company's common
stock. As of December 31, 2000, 994,952 shares of common stock were
retired, and the remaining shares are being held in escrow.
In accordance with paragraph 23 of Accounting Principles Bulletin
("APB") Opinion No. 29, "Accounting for Non-Monetary Transactions," this
transaction has been recorded based on the recorded amount of the
non-monetary assets distributed. Because the shares are held in escrow,
outstanding shares have been reduced and shareholders' equity has been
debited with the recorded amount of the assets distributed of $694,981.
Page F-22
NOTE 3 - ACQUISITION OF GROSSO-JACOBSON ENTERTAINMENT CORP. (CONTINUED)
In addition, the Company issued 500,000 options to each of the two
officers at an exercise price of $0.82 per share. In March 2000, 200,000
options in the aggregate were exercised by both officers for total
consideration of $164,000. The remaining 400,000 options to each officer
were exercisable and outstanding at December 31, 2000.
NOTE 4 - FILM COSTS
Film costs as of December 31, 2000 and 1999 consisted of projects in
development of $0 and $224,988, respectively. Write-offs of projects in
development for the year ended December 31, 2000, the six months ended
December 31, 1999, and the year ended June 30, 1999 aggregated to
$224,988, $246,774, and $301,037, respectively.
NOTE 5 - FIXED ASSETS
Fixed assets as of December 31 consisted of the following:
2000 1999
------------- -------------
Furniture and equipment $ 265,970 $ 255,944
Computer equipment 971,302 77,784
Equipment held under capital leases 92,594 92,594
Leasehold improvements 49,566 4,620
------------- -------------
1,379,432 430,942
Less accumulated deprecation and amortization 465,556 299,383
------------- -------------
TOTAL $ 913,876 $ 131,559
============= =============
Depreciation and amortization expense for the year ended December 31,
2000, and the six months ended December 31, 1999, and the year ended
June 30, 1999 were $166,173, $48,881, and $103,981, respectively.
Page F-23
NOTE 6 - INVESTMENTS
On February 24, 1999, the Company entered into an agreement to invest in
a publicly held company and agreed to purchase 100,000 shares of
restricted shares of the Company's common stock for $500,000. For no
additional consideration, the Company was issued 100,000 warrants at an
exercise price of $6 per share. The warrants shall only be exercisable
at any time prior to March 1, 2001. The Company has booked this
investment at fair market value, and the investment represents less than
a 5% ownership in the investee. During the year ended December 31, 2000,
the Company sold 43,000 shares and recorded a realized gain of $168,250.
The Company had recorded an unrealized loss of $661,596, net of a
reclassification, related to this investment at December 31, 2000.
This investment is stated at cost or fair market value, which
approximates its fair value as of December 31, 2000, and is classified
as available-for-sale.
NOTE 7 - CONVERTIBLE DEBENTURES
In August 1999, the Company entered into a $4,000,000 private placement
agreement of 6% convertible debentures on a best effort basis, which is
convertible into common stock. In connection with the agreement, the
Company will issue Series A and B warrants. The Series A warrants can be
converted into a maximum of 400,000 shares of common stock at an
exercise price of $1.25625 per share. The Series B warrants can be
converted into a maximum of 300,000 shares of common stock at an
exercise price of $1.361 per share. The warrants will be sold in units.
Each unit will consist of $10,000 of principal, 750 Series A warrants,
and 750 Series B warrants. The Board of Directors has authorized the
issuance and has reserved a maximum of 3,650,000 shares of common stock
for the conversion of the debentures and a maximum of 700,000 shares of
common stock upon the exercise of the warrants. To date, the Company has
received $3,970,000. There are a total of 281,557 warrants outstanding
as of December 31, 2000.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
LEASES
The Company's non-cancelable office leases provide for minimum annual
base rents and payment of certain operating expenses. The leases expire
through January 2005.
Page F-24
NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEASES (Continued)
At December 31, 2000, future minimum commitments under these obligations
are as follows:
Year Ending
DECEMBER 31,
------------
2001 $ 425,940
2002 421,440
2003 421,440
2004 421,440
2005 421,440
-------------
TOTAL $ 2,111,700
=============
Rent expense for the year ended December 31, 2000, the six months ended
December 31, 1999, and the year ended June 30, 1999 was $299,424,
$98,902, and $269,219, respectively.
The Company is a party to various agreements relating to its properties
that provide for payments to others upon the sale, production, and/or
distribution of the property. Other agreements provide for participation
by others in the net revenues and/or profits from completed projects.
In October 1999, the Company entered into an irrevocable standby letter
of credit with a financial institution for $75,000. The letter is as a
result of a default of the Company's previous office lease. The amount
of the letter of credit will be reduced by $15,000 each year until no
credit is available and will expire in November 2004.
EMPLOYMENT AGREEMENTS
The Company has entered into agreements for the services of certain of
its key executives. These agreements expire through February 28, 2003
and provide for approximate aggregate annual payments of $677,000 and an
annual auto allowance of $36,000. Certain of these agreements provide
for payments by the Company in the event of death, disability,
termination, or a change in control of the Company.
CONSULTING AGREEMENT
On January 14, 2000, the Company entered into a consulting agreement,
which was later amended on March 16, 2000. The consultant will receive
$280,000, payable in equal quarterly installments. The agreement expires
on June 30, 2001. The Company also granted 75,000 options at an exercise
price of $1.43, which vested immediately. No additional charge was
recorded in connection with the issuance of the options.
Page F-25
NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
ALLIANCE AGREEMENT
On October 23, 2000, the Company signed a definitive agreement
establishing a three-year exclusive global strategic alliance with Knoll
Risk Consulting Services, Inc. ("Knoll Risk"). Knoll Risk is a leading
worldwide investigations and intelligence firm providing a full range of
risk mitigation and asset protection services to over 25,000 clients.
Knoll Risk has a global network of 60 offices in 19 countries. Under the
terms of this alliance, the Company expects to shall Knoll Risk's
offices throughout the world and provide enhanced Internet intelligence
services to corporations, individuals, and governments using the
Company's proprietary technology. The Company also plans to jointly
develop an exclusive Internet-based product line designed specifically
for the security market using the Company/Knoll Risk's brand name and
integrating the Company's FIRST technology. In connection with this
alliance, the Company granted to Knoll Risk warrants to purchase
1,750,000 shares of common stock at an exercise price ranging from $2.50
to $3 per share, of which warrants to purchase 350,000 shares vested
immediately, and the balance will vest when Knoll Risk meets certain
performance criteria based on introductions to potential clients.
LITIGATION SETTLEMENTS
During the year ended June 30, 1999, the Company settled certain
litigation for $46,725. The Company paid the settlement in August 1999,
for which the amount has been accrued as of June 30, 1999.
On March 22, 1999, the Company filed a request for arbitration against
the former employee and Chief Executive Officer of MWI, alleging breach
of contract. On June 29, 1999, the parties entered into a settlement
agreement releasing each other from all present and future claims. The
employee has agreed to return 89,352 shares of common stock received
from the merger. In addition, the Company will pay to the employee 25%
of the Company's net recovery from the Company's disputes with an
entertainment company, after deduction for attorney's fees, contingent
fees, and costs. Deduction for contingent fees is limited to 15% of the
total recovery. The former employee was released from any obligation to
comply with the non-competition clause as included in the employment
agreement.
On April 15, 1999, a suit was filed against the Company alleging breach
of contract with a financing company. The claim indicates failure to
deliver Class B preferred stock per a Finders Fee Agreement entered into
in July 1998. On February 24, 2000, the Company entered into a
settlement agreement and has issued 30,000 shares of common stock valued
at $71,400.
Page F-26
NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
LITIGATION SETTLEMENTS (Continued)
In March 2000, the Company settled its litigation with an entertainment
company. The Company believed that the entertainment company wrongfully
terminated its contracts. The Company sought to recover commissions owed
to MWI, and the Company received $300,000 in the final settlement.
On January 19, 1999, a suit was filed by a former employee of MWI
against the Company and the prior owners of MWI alleging part ownership
of MWI prior to the merger with NC. On June 20, 2000, the Company
entered into a settlement agreement and paid $240,000. The Company also
reclaimed $37,500 from the owners.
In February 2000, a suit was filed by a former lessor as default of the
Company's previous lease. The Company entered into a settlement
agreement and paid $45,000.
In May 2000, a suit was filed against MWI for the default in payment of
services rendered to the Company. On May 12, 2000, the Company entered
into a settlement agreement and paid $40,784.
In August 2000, a suit was filed against the Company alleging breach of
contract with an investor. The claim states that the Company delayed a
transfer of common stock issuance, which was financially harmful to the
investor. In August 2000, the Company entered into a settlement
agreement and issued 50,000 shares of common stock valued at $25,000.
During the year ended December 31, 2000, the Company settled certain
litigation for $33,920.
OTHER LITIGATION
In the normal course of its business, the Company is subject to various
lawsuits and claims. The Company believes that the final outcomes of
these matters, either individually or in the aggregate, will not have a
material effect on its consolidated financial statements.
Page F-27
NOTE 9 - STOCKHOLDERS' DEFICIT
On March 3, 2000, the Company entered into an equity securities purchase
agreement with a financing company to purchase up to $34,000,000 of
common stock directly and through warrants. Upon completion of the
financing, the financing company would own 5,698,000 shares in the
Company. In March 2000, the Company received $8,500,000 of this
financing for the purchase of the initial 1,700,000 shares of common
stock. The balance is due through the exercise of 3,498,000 warrants at
exercise prices ranging from $6 to $9 per share for the Company's common
stock, which expire in February 2005. As of December 31, 2000, 1,166,000
warrants were issued and outstanding.
On March 3, 2000, the Company also granted common stock purchase
warrants for the purchase of an aggregate of 500,000 shares of common
stock, at an exercise price of $4.50 per share, to the placement agent
involved with the offer and sale of common stock and common stock
purchase warrants to the financing company. Of the warrants issued,
250,000 shares vest immediately, 83,333 shares become exercisable if the
closing bid price per share of the Company's common stock equals or
exceeds $8 for any period of 20 consecutive trading days, 83,333 shares
become exercisable if the closing bid price per share of the common
stock equals or exceeds $10 for any period of 20 consecutive trading
days, and 83,334 shares become exercisable if the closing bid price per
share of the common stock equals or exceeds $14 for any period of 20
consecutive trading days.
On December 27, 2000, the Company amended the original agreement and
repriced the warrants to an exercise price of $1. If, at any time after
the statement effective date the per shared market value equals or
exceeds the mandatory exercise prices, ranging from $2.125 to $3, for
any period of 10 consecutive trading days, then the warrant holder will
be required to exercise the warrant. The warrant will be exercised
pursuant to each mandatory exercise on no later than the third business
day following such mandatory exercise period. No additional charge was
recorded in connection with the repricing.
NOTE 10 - PREFERRED STOCK
PREFERRED STOCK, SERIES A
The Company's preferred stock, Series A has a par value of $0.001. There
are 1,300,000 shares authorized and 1,000,000 shares issued and
outstanding. The holders of the Series A preferred stock have no voting
rights. The preferred stock has a liquidation preference of $5 per share
and pays a dividend in cash or in common stock of 8.5% per annum. The
Series A preferred is convertible into common stock. The number of
shares issued upon conversion is determined by multiplying (i) the
number of shares of Series A preferred to be converted by (ii) the sum
of $5 plus all accrued but unpaid dividends in such shares being
converted and dividing the result by $1.
Page F-28
NOTE 10 - PREFERRED STOCK (CONTINUED)
PREFERRED STOCK, SERIES C
The Company's preferred stock, Series C, has a par value of $0.001.
There are 3,000,000 shares authorized and 400,000 shares issued and
outstanding. The holders of the Series C preferred stock have no voting
rights. Each share of Series C preferred is convertible at the option of
its holders into one share of common stock at a price of $0.50 per
share. The preferred stock is entitled to non-cumulative dividends of 8%
per annum, but only after the Company has earnings in any fiscal year
greater than $1,000,000. Since the earnings requirement has not been
met, no dividends have been declared.
During the year ended December 31, 2000, 2,100,000 shares of preferred
Series C were converted into 2,100,000 shares of common stock.
PREFERRED STOCK, SERIES D
The Company's preferred stock, Series D has a par value of $0.001. There
are 50,000 shares authorized and 50,000 shares issued and outstanding.
The holders of the Series D preferred stock have no voting rights. The
Series D preferred is convertible into common stock, fixed for the
redemption of such shares, and in lieu of accumulated and unpaid
dividends, that the number of shares of the Company's common stock which
equals $10 per share of preferred stock which is to be converted, plus
accumulated and unpaid dividends thereon, divided by the lesser of (a)
100% of the average of the closing bid prices for five trading days
preceding the date of purchase of the Series D preferred stock, (b) 80%
of the average of the closing bid prices for five trading days preceding
the conversion date, or (c) the post adjustment exercise price per share
of the common stock.
PREFERRED STOCK, SERIES E
The Company's preferred stock, Series E has a par value of $0.001. There
are 500,000 shares authorized and no shares issued and outstanding. The
holders of the Series E preferred stock have no voting rights. The
Series E preferred has a liquidation preference of $10 per share and
cumulative dividends at the rate of 6% per annum, payable quarterly in
arrears in cash or shares of common stock at the Company's option. The
preferred stock is convertible into common stock at the option of the
holders, fixed for the redemption of such shares into that number of
shares of common stock which equals $10 per share of the preferred stock
to be converted, plus accumulated and unpaid dividends thereon, divided
by 82.5% of the average of the closing bid price per share of the common
stock.
On September 16 and November 22, 1999, the investor converted 225,000
shares of Series E preferred stock into 2,155,416 shares of common
stock.
Page F-29
NOTE 10 - PREFERRED STOCK (CONTINUED)
PREFERRED STOCK, SERIES F
The Company's preferred stock, Series F has a par value of $0.001. There
are 550,000 shares authorized and 50,000 shares issued and outstanding.
The holders of the Series F preferred stock have no voting rights. Each
share of Series F preferred stock is convertible into one share of
common stock upon payment of the conversion price. The conversion price
is an amount equal to 125% of the fair market value of the Company's
common stock on the date of issuance of the shares of Series F
preferred. In February 2000, 225,000 shares of the preferred stock were
converted into 225,000 shares of common stock for total consideration of
$311,525.
PREFERRED STOCK, SERIES G
The Company's preferred stock, Series G has a par value of $1,000. There
are 4,000 shares authorized and no shares issued and outstanding. The
holders of the Series G preferred stock have no voting rights.
On November 14 and December 15, 1999, NC exercised its right under an
agreement and issued 1,875 shares of Series G preferred stock. Holders
of the preferred stock are entitled to dividends of $60 per year per
each share owned. The preferred stock is convertible into common stock
at the lesser of $1.26 per share or 85% of the market price of a share
of common stock on the date of conversion. Market price is defined as
the average of the two lowest closing bid prices for a share of common
stock.
During the year ended December 31, 2000, 2,965 shares of preferred
Series G were converted into 2,336,329 shares of common stock. The
preferred stock was originally issued in connection with convertible
debentures (see Note 7).
In accordance with FASB's Emerging Issues Task Force Topic No. D-60, the
Company accounts for the beneficial conversion feature of convertible
debt securities based on the difference between the conversion price and
the fair value of the common stock into which the security is
convertible, multiplied by the number of shares into which the security
is convertible. The amount attributable to the beneficial conversion
feature is recognized as dividends over the most beneficial conversion
period using the effective interest method. Any unamortized beneficial
conversion feature is recognized as retained earnings. The Company has
recognized the beneficial conversion feature by recording $1,090,000 as
a dividend, offset by additional paid-in capital.
Page F-30
NOTE 11 - STOCK OPTIONS AND WARRANTS
STOCK OPTIONS
The Company's Board of Directors adopted the 1998 Stock Incentive Plan
(the "Plan") on February 17, 1998. The Plan, which was amended in April
1999, authorizes the granting of stock options to officers, non-employee
directors, employees, and consultants to purchase an aggregate of
5,000,000 shares of common stock. Options awarded under the Plan expire
after 10 years. The Company may also grant other stock options outside
its stock option plan.
The Company has adopted only the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." It applies APB Opinion No.
25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its plans and does not recognize
compensation expense for its stock-based compensation plans other than
for restricted stock and options/warrants issued to outside third
parties.
If the Company had elected to recognize compensation expense based upon
the fair value at the grant date for awards under its plan consistent
with the methodology prescribed by SFAS No. 123, the Company's net loss
and loss per share would be increased to the pro forma amounts indicated
below for year ended December 31, 2000, the six months ended December
31, 1999, and the year ended June 30, 1999:
For the
For the Six Months For the
Year Ended Ended Year Ended
December 31, December 31, June 30,
2000 1999 1999
------------- ------------- -------------
Net loss available for common
shareholders
As reported $(10,533,838) $ (5,670,345) $ (3,213,489)
Pro forma $(12,689,971) $ (7,826,478) $ (4,923,289)
Basic loss and diluted per
common share
As reported $ (0.33) $ (0.37) $ (0.33)
Pro forma $ (0.39) $ (0.51) $ (0.51)
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense
related to grants made before 1995. The fair value of these options was
estimated at the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions for the year ended
December 31, 2000, the six months ended December 31, 1999, and the year
ended June 30, 1999: dividend yields of 0%, 0%, and 0%, respectively;
expected volatility of 100%, 100%, and 100%, respectively; risk-free
interest rates of 5.4%, 6.2%, and 5.5%, respectively; and expected lives
of two, two, and two years, respectively.
Page F-31
NOTE 11 - STOCK OPTIONS AND WARRANTS (CONTINUED)
STOCK OPTIONS (Continued)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion,
the existing models do not necessarily provide a reliable single measure
of the fair value of its employee stock options.
The following summarizes the stock option transactions under the Stock
Option Plan:
Weighted-
Average
Number of Exercise
SHARES PRICE
------------- ------------
Balance, June 30, 1998 287,028 $ 14.79
Granted 3,593,370 $ 1.19
Exercised (773,370) $ 0.71
Expired (585,416) $ 2.56
-------------
Balance, June 30, 1999 2,521,612 $ 4.57
Granted 1,768,625 $ 1.48
Exercised (320,000) $ 0.76
Expired (201,612) $ 14.79
-------------
Balance, December 31, 1999 3,768,625 $ 1.28
Granted 2,592,704 $ 2.38
Exercised (1,730,000) $ 1.32
Expired (1,151,750) $ 0.91
-------------
BALANCE, DECEMBER 31, 2000 3,479,579 $ 2.20
=============
EXERCISABLE, DECEMBER 31, 2000 2,819,864 $ 1.79
=============
The weighted-average remaining contractual life of the options
outstanding is 3.51 years at December 31, 2000. The exercise prices for
the options outstanding as of December 31, 2000 ranged from $0.38 to
$11.97.
Page F-32
NOTE 11 - STOCK OPTIONS AND WARRANTS (CONTINUED)
STOCK OPTIONS (Continued)
The information relating to these options is as follows:
Weighted- Weighted- Weighted-
Average Average Average
Remaining Exercise Exercise
Range of Stock Stock Contractual Price Price
Exercise Options Options Life of Options of Options of Options
PRICES OUTSTANDING EXERCISABLE OUTSTANDING OUTSTANDING EXERCISABLE
------------- ----------- ------------ --------------- ------------ -----------
$ 0.38 - 1.00 998,800 966,741 3.86 $ 0.86 $ 0.87
$ 1.01 - 5.00 2,200,900 1,723,539 3.86 $ 2.38 $ 2.38
$5.01 - 11.97 279,879 129,584 3.80 $ 7.25 $ 7.00
----------- ------------
3,479,579 2,819,864
=========== ============
During the year ended June 30, 1999, the Company issued options to
purchase 253,370 shares of common stock. The options were exercised
concurrently with their issuance in exchange for a subscription
receivable of $136,969. During the six months ended December 31, 1999,
the subscription receivable was forgiven due to the acquisition of
Infolocity, Inc.
WARRANTS - OTHER
In addition to the 1,533,333 redeemable warrants exercisable at $5.25
per share of common stock issued in connection with the September 1996
public offering, there are 216,667 other outstanding warrants. As part
of a June 1996 private placement of $500,000 aggregate principal amount
of 10% promissory notes ("Bridge Notes"), 166,667 "Bridge Warrants" were
issued. Upon repayment of the Bridge Notes in September 1996, the
"Bridge Warrants" were automatically exchanged for 166,667 redeemable
warrants exercisable at $5.25 per share. The Company has other existing
warrants outstanding to purchase an aggregate of 50,000 shares of common
stock at prices ranging from $21 to $24 per share. There were a total of
approximately 1,916,667 warrants outstanding as of December 31, 2000 in
relation to the public offering and private placement.
Page F-33
NOTE 12 - INCOME TAXES
The provision for (benefit from) federal income taxes at statutory rates
was computed as follows for year ended December 31, 2000, the six months
ended December 31, 1999, and the year ended June 30, 1999:
For the
For the Six Months For the
Year Ended Ended Year Ended
December 31, December 31, June 30,
2000 1999 1999
------------- ------------- -----------
Benefit from income taxes at statutory
34% rate $ (2,842,000) $ (1,464,000) $ (906,000)
Tax effect (benefit) of
Change in valuation allowance 3,318,000 1,845,000 1,061,000
State income tax deduction, net of
federal benefit (476,000) (381,000) (155,000)
TOTAL $ - $ - $ -
============ ============= ==========
The Company's total deferred tax assets and deferred tax asset valuation
allowance at December 31 were as follows:
2000 1999
-------------- -------------
Deferred tax asset
Net operating loss carryforwards $ 12,132,000 $ 8,813,000
Valuation allowance (12,132,000) (8,813,000)
------------- -------------
NET DEFERRED TAX ASSETS $ - $ -
============= =============
As of December 31, 2000, the Company had federal and state net operating
loss carryforwards of approximately $31,169,000 and $15,614,000,
respectively, which expire through 2004 and 2016, respectively.
Utilization of the net operating loss carryforwards in any one year may
be limited by, among other things, alternative minimum tax rules and
restrictions caused by changes in the Company's stock ownership
(Internal Revenue Code Section 382). The 1996 ownership changes resulted
in an annual Section 382 net operating loss limitation of approximately
$945,700.
Page F-34
NOTE 13 - RELATED PARTY TRANSACTIONS
The Company has entered into a production agreement with a Loan-Out
Company for the services of a key officer and others as producer and to
perform other duties. The Loan-Out Company is under the control of
officers/directors of the Company and their family. This agreement
expires in June 2002 and provides for an approximate annual payment of
$262,000, plus a $1,500 monthly automobile reimbursement.
During the year ended June 30, 1999, the Company issued a promissory
note to the Loan-Out Company for the sum of $44,046, which represents
amounts owed by the Company under its production agreement. The
promissory note bears interest at the rate of 10% per annum and was due
in December 1999. During the six months ended December 31, 2000, the due
date of the note was extended to February 2000 and paid in full
subsequent to the year ended December 31, 1999.
During the year ended June 30, 1999, the Company entered into a
Securities Purchase Agreement with the Loan-Out Company. The Loan-Out
Company purchased 1,300,000 shares of Series C convertible preferred
stock, par value $0.001 per share, for a purchase price of $0.001 per
share.
On January 7, 2000, the Company entered into two promissory notes with
the Loan-Out Company for the principal sum of $2,450,000. The notes are
in connection with the conversion of 1,300,000 shares of Series C
Convertible Stock, as well as the exercise of the option to purchase
1,500,000 shares of the Company's common stock. Interest shall accrue at
5% per annum and shall be due and payable on or before December 31st of
each year. All outstanding principal shall be due and payable on or
before December 31, 2001.
During the year ended June 30, 1999, the Company had a related party
receivable of $99,891 from an officer, which was rescinded due to a
contract cancellation. The receivable was written off as of December 31,
1999.
During the year ended June 30, 1999, the Company entered into financial
consulting agreements with a shareholder and issued an aggregate of
650,000 shares of common stock valued at $280,000 for consulting
services. In addition, the Company granted 500,000 options at an
exercise price of $0.50 per share, all of which have been exercised at
June 30, 1999.
During the year ended June 30, 1999, the Company entered into a
Securities Purchase Agreement with a consulting company. The consulting
company purchased 1,700,000 shares of the Company's Series C preferred
stock, par value $0.001 per share, for a purchase price of $0.001 per
share. The Company also issued 500,000 options at an exercise price of
$0.50 per share, all of which were exercised at December 31, 1999.
Page F-35
NOTE 13 - RELATED PARTY TRANSACTIONS (CONTINUED)
During the six months ended December 31, 1999, the consulting company
converted 1,700,000 shares of the Company's Series C preferred stock
into the same number of common stock shares at a conversion price of
$0.50 per share. In connection with the conversion, a promissory note
was issued for the principal sum of $598,800, of which $200,000 was paid
in February 2000. Interest accrues at 5% per annum and is due and
payable on or before December 31, 2002. The Company further issued
70,000 shares of common stock valued at $133,700 for services rendered.
The Company receives financial consulting services from a member of the
Board of Directors. During the six months ended December 31, 1999 and
the year ended June 30, 1999, the Company paid $35,000 and $81,000,
respectively, for consulting services. In addition, during the six
months ended December 31, 1999, the Company issued 50,000 options at an
exercise price of $1. During the year ended June 30, 1999, the Company
issued 300,000 and 25,000 options at an exercise price of $0.82 and
$2.35, respectively. All options are exercisable and outstanding at
December 31, 2000. For the year ended December 31, 2000, the consultant
was an employee of the Company.
During the year ended June 30, 1999, the Company granted 50,000 options
to a former executive at an exercise price of $1.75 per share. These
options are exercisable and outstanding at December 31, 2000.
During the year ended June 30, 1999, the Company granted 150,000 options
to another former executive at an exercise price of $1.50 per share.
These options are exercisable and outstanding at December 31, 2000.
During the year ended June 30, 1999, the Company granted 25,000 and
500,000 options to a director of the Company at exercise prices of $2.35
and $1.35, respectively. These options are exercisable and outstanding
at December 31, 2000.
During the six months ended December 31, 1999, the Company issued
128,709 shares of common stock valued at $261,278 for consulting
services to a relative of an officer of the Company.
Related party amounts due for the year ended June 30, 1999 aggregated to
$69,046. These amounts due were non-interest-bearing and were payable on
December 31, 2000. The loans were due to two officers of the Company, of
which $25,000 was paid in July 1999, and the remaining balance of
$44,046 was paid as of December 31, 2000.
Page F-36
NOTE 13 - RELATED PARTY TRANSACTIONS (CONTINUED)
On January 19, 2000, the Company entered into three promissory note
agreements with a former officer of the Company for a total of
$1,050,000. The notes are in connection with a Stock Purchase Agreement
for the exercise of the option to purchase 600,000 shares of the
Company's common stock at $1.75 per share. Interest shall accrue at 5%
per annum and shall be due and payable at the same time as principal
payments on or before December 31, 2001, 2002, and 2003 per promissory
note.
On March 2, 2000, the Company entered into a promissory agreement with
another officer of the Company for the principal sum of $161,500, of
which $61,500 was paid in March 2000. The note is in connection with the
issuance of common stock for the exercise of the option to purchase
175,000 shares of common stock at $0.92 per share. Interest shall accrue
at 5% per annum and shall be due and payable on or before February 28th
of each year. All outstanding principal shall be due and payable on or
before February 28, 2002.
During the year ended December 31, 2000, the Company purchased
approximately $599,000 of marketing communications services from a
company owned partially by the wife of an officer.
NOTE 14 - SEGMENT INFORMATION
The Company has two industry reportable segments: 1) Internet-based
analysis and 2) strategic support and distribution of television and
video programming. The accounting policies of the segments are the same
as described in Note 2. The Company evaluates segment performance based
on income from operations. All intercompany transactions between
segments have been eliminated.
YEAR ENDED DECEMBER 31, 2000
-----------------------------------------
INTERNET DISTRIBUTION TOTAL
------------- ------------- -----------
Revenues $ 1,347,303 $ 317,922 $ 1,665,225
Segment loss $ (8,033,864) $ (326,261) $(8,360,125)
Total assets $ 4,168,396 $ 801,230 $ 4,969,626
Depreciation and amortization $ 157,643 $ 8,530 $ 166,173
SIX MONTHS ENDED DECEMBER 31, 1999
-----------------------------------------
INTERNET DISTRIBUTION TOTAL
------------- ------------- -----------
Revenues $ 155,466 $ 187,519 $ 342,985
Segment loss $ (712,769) $ (4,011,813) $(4,724,582)
Total assets $ 1,434,898 $ 2,704,911 $ 4,139,809
Depreciation and amortization $ 14,080 $ 34,801 $ 48,881
Page F-37
NOTE 14 - SEGMENT INFORMATION (CONTINUED)
YEAR ENDED JUNE 30, 1999
--------------------------------------------
INTERNET DISTRIBUTION TOTAL
------------ -------------- -------------
Revenues $ 55,235 $ 2,936,718 $ 2,991,953
Segment loss $ (57,187) $ (2,665,052) $ (2,722,239)
Total assets $ 413,976 $ 4,040,644 $ 4,454,620
Depreciation and amortization $ 1,626 $ 102,355 $ 103,981
NOTE 15 - MAJOR CUSTOMERS
For the year ended December 31, 2000, the Company had sales to one
customer (the "Customer") representing 15% of total revenues. For the
six months ended December 31, 1999, the Company had sales to the
Customer representing 10% of total revenues. For the year ended June 30,
1999, the Company had sales to the Customer representing 77% of total
revenues.
As of December 31, 2000, 17% of the Company's accounts receivable was
from the Customer. As of December 31, 1999, 1% of the Company's accounts
receivable was from the Customer.
NOTE 16 - FOURTH QUARTER ADJUSTMENTS
An adjustment to additional paid-in capital of $1,090,000 was made to
record dividends on Series G preferred stock, representing a beneficial
conversion feature.
An adjustment to goodwill of $251,913 was made to record a loss on
impairment.
NOTE 17 - SUBSEQUENT EVENTS
MINDFULEYE.COM, INC.
On February 28, 2001, the Company entered into a formal letter of intent
to acquire MindfulEye.com, Inc., a subscription-based Internet
monitoring company that automatically alerts inventors in real time to
online news, rumors, information, and changes in public sentiment about
companies in which they have interest. The closing of the proposed stock
offer is subject to reciprocal due diligence, applicable corporate
approvals, and the successful negotiation and execution of a definitive
merger agreement.
Under the terms of the letter of intent, the Company has agreed to
purchase all of the outstanding stock of MindfulEye.com, Inc. for
$4,000,000. The purchase price is to be paid in shares of the Company's
stock.
Page F-38
NOTE 17 - SUBSEQUENT EVENTS (CONTINUED)
FINANCING AGREEMENT
On February 28, 2001, the Company entered into a financing agreement for
a loan of $2,000,000, which the Company can draw as needed. The loan is
for a maximum of one year with interest at 10% per annum. The financing
company will receive 5% of the amount of the loan in warrants.
The financing company further agreed to enter into an equity credit line
arrangement to register $10,000,000 of stock in a shelf registration.
Upon registration of the shares, the Company will have the ability to
draw on this line by issuing registered stock in exchange for funds.
Page F-39
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON
HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED
IN THIS PROSPECTUS IN CONNECTION WITH THE
OFFER MADE IN THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN NETCURRENTS, INC.
AUTHORIZED BY THE COMPANY OR THE UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ________ SHARES
ANY SECURITY OTHER THAN THE SECURITIES OFFERED COMMON STOCK
BY THIS PROSPECTUS, OR AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
BY ANYONE IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
TABLE OF CONTENTS
PAGE
Prospectus Summary.......................3
Risk Factors.............................6
Use of Proceeds.........................13
Dividend Policy.........................13
Business................................18 PROSPECTUS
Management's Discussion and Analysis of
Results of Operations and Financial
Condition.............................24
Management..............................24
Summary Compensation Table..............26
Principal Stockholders..................31
Certain Transactions....................32
Description of Securities...............32
Price Range of Common Stock.............34
Plan of Distribution....................34
Legal Matters...........................35
Experts.................................35
Additional Information..................35
Index to Financial Statements..........F-1
UNTIL ____________, 2001, ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT
TO THEIR UNSOLD ALLOTMENTS OF SUBSCRIPTIONS.
________, 2001
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Information on this item is set forth in the prospectus under the heading
"Disclosure of Commission on Indemnification for Securities Act Liabilities."
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table itemizes the expenses incurred by the Registrant in
connection with the issuance and distribution of the securities being
registered. All the amounts shown are estimates except the Securities and
Exchange Commission registration fee, and the Nasdaq SmallCap fee:
Registration fee - Securities and Exchange Commission........ $ 2,500
Nasdaq SmallCap fee..........................................
Accounting fees and expenses................................. 2,500
Legal fees and expenses (other than blue sky)................ 20,000
Blue sky fees and expenses, including legal fees............. 20,000
Printing; stock certificates................................. 1,000
Miscellaneous................................................ 5,000
---------
Total................................................ $ 51,000
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
During the last three years, we sold the following securities which were
not registered under the Securities Act. The Company did not employ any form of
general solicitation or general advertising in connection with the offer and
sale of the securities and warrants to purchase common stock described below. In
addition, the placement agent and the purchasers of the securities are
"accredited investors" for the purposes of Rule 501 of the Securities Act of
1933, unless otherwise specified. For these reasons, among others, the offer and
sale of the following securities were exempt from registration pursuant to Rule
506 of Regulation D of the Securities Act of 1933.
o On July 31, 1998, we sold 50,000 shares of Series D Preferred Stock for
$500,000 and issued 50,000 shares of Series F Preferred Stock to an
accredited investor. The Series D Preferred Stock converts according to a
formula based on a 20% discount to the market price of the common stock.
The Series F Preferred Stock converts on a one-for-one basis at fair market
value.
o On January 14, 1999, we sold 3,000,000 shares of Series C Preferred Stock,
all of which were sold at $.001 per share. The Series C Preferred Stock
converts into common stock on a one-for-one basis at a conversion price of
$0.50 per share.
o On August 2, 1999, we sold an aggregate of 175,000 shares of Series E
Preferred Stock for $1,750,000 and 175,000 shares of Series F Preferred
Stock to an accredited investor. The Series E Preferred Stock converts at a
17.5% discount to the market price of the common stock. The Series F
Preferred Stock converts into common stock on a one-for-one basis at fair
market value.
o On August 5, 1999, we granted an accredited investor an option to acquire
100,000 shares of our common stock at an exercise price of $1.00 per share.
o On August 27, 1999, we issued and sold to an accredited investor a
convertible debenture in the principal amount of $375,000 and granted the
accredited investor warrants to acquire an aggregate of
Page II-1
56,250 shares of common stock. All convertible debentures we issued and
sold between August and December 1999 were 6% Convertible Subordinated
Debentures convertible into shares of common stock.
o On September 2, 1999, we issued and sold to an accredited investor a
convertible debenture in the principal amount of $100,000 and granted the
accredited investor warrants to acquire an aggregate of 15,000 shares of
common stock.
o On September 3, 1999, we issued 70,000 shares of common stock to an
accredited investor as compensation for consulting services and granted the
accredited investor options to acquire an aggregate of 200,000 shares of
common stock, of which 150,000 are currently exercisable. The remaining
50,000 options vest on June 1, 2000.
o On September 7, 1999, we issued and sold to an accredited investor a
convertible debenture in the principal amount of $275,000 and granted the
investor warrants to acquire an aggregate of 41,250 shares of common stock.
o On December 22, 1999, pursuant to an amended and restated merger agreement
with NC Services, Merger Sub and James J. Cerna Jr. and Victor A. Holtorf,
NC Services became a wholly owned subsidiary of NetCurrents, and NC
Services stockholders became stockholders of our company. Each share of NC
Services' common stock, par value $.001 per share (the "NC Services Common
Stock") and each share of NC Services' Series A Preferred Stock, par value
$.001 per share (the "NC Services Preferred Stock") was converted into the
right to receive that number of shares of NetCurrents Common Stock as was
equal to approximately 7,375,000 divided by the sum of the combined total
number of shares of NC Services Common Stock and NC Services Preferred
Stock. Although some of the NC Services shareholders were unaccredited
investors, less than 35 of those shareholders were unaccredited, and the
Company provided an Information Statement to all of the NC Services
shareholders in compliance with the Securities Act.
o On September 24, 1999, we issued and sold to three accredited investors
convertible debentures in the aggregate amount of $600,000 and granted the
three accredited investors warrants to acquire an aggregate of 90,000
shares of common stock.
o On October 20, 1999, we issued and sold to nine accredited investors
convertible debentures in the aggregate amount of $470,000 and granted the
nine accredited investors warrants to acquire an aggregate of 70,500 shares
of common stock.
o On October 22, 1999, we issued and sold to three accredited investors
convertible debentures in the aggregate amount of $160,000 and granted the
three accredited investors warrants to acquire an aggregate of 24,000
shares of common stock.
o On October 27, 1999, we issued and sold to an accredited investor a
convertible debenture in the principal amount of $20,000 and granted the
accredited investor warrants to acquire an aggregate of 3,000 shares of
common stock.
o On November 2, 1999, we issued and sold to two accredited investors
convertible debentures in the aggregate amount of $350,000 and granted the
two accredited investors warrants to acquire an aggregate of 52,500 shares
of common stock.
o On December 1, 1999, we issued and sold to an accredited investor a
convertible debenture in the principal amount of $25,000 and granted the
accredited investor warrants to acquire an aggregate of 3,750 shares of
common stock.
Page II-2
o On December 8, 1999, we issued and sold to three accredited investors
convertible debentures in the aggregate amount of $225,000 and the three
accredited investors warrants to acquire an aggregate of 33,750 shares of
common stock.
o On December 14, 1999, we issued and sold to two accredited investors
convertible debentures in the aggregate amount of $300,000 and granted the
two accredited investors warrants to acquire an aggregate of 45,000 shares
of common stock.
o On December 16, 1999, we issued 400,000 shares of our common stock to
Strategic Capital Consultants as a result of their conversion of Series C
Preferred Stock purchased in January 1999.
o On March 3, 2000, we issued and issued and sold 1,700,000 shares of common
stock, at a price of $5.00 per share, to Brown Simpson Strategic Growth
Fund, Ltd. and Brown Simpson Strategic Growth Fund, L.P. In connection with
the offer and sale of the common stock, we also granted Brown Simpson
Strategic Growth Fund, Ltd. and Brown Simpson Strategic Growth Fund, L.P.
warrants to purchase an aggregate of 3,498,000 shares of common stock on
the terms described below. We granted "Series A" stock purchase warrants
for the purchase of 1,166,000 shares of common stock. The Series A warrants
are currently exercisable at a price of $6.00 per share, and provide for
mandatory exercise if the closing bid price per share of the common stock
equals or exceeds $8.00 for twenty consecutive trading days after a
registration statement covering the underlying common stock has been
declared effective. We granted "Series B" stock purchase warrants for the
purchase of 1,166,000 shares of common stock. The Series B warrants become
exercisable at a price of $7.00 per share if the closing bid price per
share of the common stock equals or exceeds $8.00 for twenty consecutive
trading days after a registration statement covering the underlying common
stock is declared effective, and provide for mandatory exercise if the
closing bid price per share of the common stock equals or exceeds $10.00
for 20 consecutive trading days after a registration statement covering the
underlying common stock has been declared effective. We granted "Series C"
stock purchase warrants for the purchase of 1,166,000 shares of common
stock. The Series C warrants become exercisable for $9.00 per share if the
closing bid price per share of the common stock equals or exceeds $10.00
for twenty consecutive trading days after a registration statement covering
the underlying common stock is declared effective, and provide for
mandatory exercise if the closing bid price per share of the common stock
equals or exceeds $14.00 for twenty consecutive trading days after a
registration statement covering the underlying common stock has been
declared effective.
o On March 3, 2000, we granted common stock purchase warrants for the
purchase of an aggregate of 500,000 shares of common stock, at an exercise
price of $4.50 per share, to the placement agent involved with the offer
and sale of common stock and common stock purchase warrants to Brown
Simpson Strategic Growth Fund, Ltd. and Brown Simpson Strategic Growth
Fund, L.P. These warrants are currently exercisable for 250,000 shares of
common stock. These warrants become exercisable with respect to an
additional 83,333 shares of common stock if the closing bid price per share
of the common stock equals or exceeds $8.00 for any period of twenty
consecutive trading days. These warrants become exercisable with respect to
an another 83,333 shares of common stock if the closing bid price per share
of the common stock equals or exceeds $10.00 for any period of twenty
consecutive trading days. These warrants become exercisable with respect to
the remaining 83,334 shares of common stock if the closing bid price per
share of the common stock equals or exceeds $14.00 for any period of twenty
consecutive trading days.
o On December 27, 2000, we amended our original agreement with Brown Simpson
Strategic Growth Fund, Ltd. and Brown Simpson Strategic Growth Fund, L.P.
and repriced the warrants to an exercise price of $1. If, at any time after
the effective date of the registration statement registering the resale of
the shares of common stock underlying the warrants the per share market
value of our common stock equals or exceeds prices ranging from $2.125 to
$3, for any period of 10 consecutive trading days, then the warrant holder
will be required to exercise the warrant. The warrant will be exercised no
later than the third business day following such mandatory exercise
requirement.
Page II-3
o On March 27, 2000, we issued an aggregate of 200,000 shares of our common
stock to Salvatore Grosso and Lawrence Jacobson pursuant to their options
granted on January 14, 1999. The remaining 300,000 options are exercisable
and outstanding.
ITEM 27. EXHIBITS.
The Exhibits listed below are filed or incorporated by reference as part of this
Prospectus:
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
2.1 Agreement and Plan of Merger, dated September 15, 1997, by and
among The Producers Entertainment Group Ltd., TPEG Acquisition I
Corp., The Grosso-Jacobson Entertainment Corporation, Salvatore
Grosso and Lawrence S. Jacobson.(3)
2.2 Agreement and Plan of Merger, dated September 15, 1997, by and
among The Producers Entertainment Group Ltd., TPEG Acquisition II
Corp., The Grosso-Jacobson Productions, Inc., Salvatore Grosso and
Lawrence S. Jacobson. (3)
2.3 Agreement and Plan of Merger, dated September 15, 1997, by and
among The Producers Entertainment Group Ltd., TPEG Acquisition III
Corp., Grosso-Jacobson Music Company, Inc., Salvatore Grosso and
Lawrence S. Jacobson. (3)
2.4 Agreement of Merger dated as of July 15, 1998, by and among The
Producers Entertainment Group Ltd., TPEG Merger Company, MWI
Distribution, Inc. and Tom Daniels and Craig Sussman.(4)
2.5 Amended and Restated Agreement and Plan of Merger, dated November
1, 1999, by and among IAT Resources Corporation, Infolocity Merger
Sub, Inc. and Infolocity, Inc., Infolocity Merger Sub, Inc.,
Victor A. Holtorf and James J. Cerna, Jr. (9)
3.1 Restated Certificate of Incorporation, dated June 24, 1993.(1)
3.2 Amendment to Certificate of Incorporation, dated April 28, 1998.(2)
3.3 Amendment to Certificate of Incorporation, dated December 22, 1999.
(11)
3.4 Bylaws.(1)
3.5 Amendment No. 1 to Bylaws.(1)
4.1 Certificate of Designations for Series A Preferred Stock dated
December 13, 1994.(1)
4.2 Certificate of Designations for Series B Preferred Stock dated
July 15, 1998.(7)
4.3 Certificate of Designations for Series C Preferred Stock dated May
20, 1999.(7)
4.4 Certificate of Designations for Series D Preferred Stock, dated
July 31, 1998.(2)
4.5 Certificate of Designations for Series E Preferred Stock, dated
July 31, 1998.(2)
4.6 Certificate of Designations for Series F Preferred Stock, dated
July 31, 1998.(2)
4.7 Certificate of Designations for Series G Preferred Stock, dated
November 15, 1999.(3)
Page II-4
4.8 Securities Purchase Agreement, dated July 31, 1998 between The
Producers Entertainment Group Ltd. and the Augustine Fund, L.P.(2)
4.9 Registration Rights Agreement, dated July 31, 1998 between The
Producers Entertainment Group Ltd. and the Augustine Fund, L.P. (2)
4.10 Escrow Agreement dated as of July 31, 1998 among the Augustine
Fund, L.P., The Producers Entertainment Group Ltd. and H. Glenn
Bagwell, Jr., as Escrow Agent.(2)
4.11 Securities Purchase Agreement, dated as of March 3, 2000, between
the Company, Brown Simpson Strategic Growth Fund, Ltd. And Brown
Simpson Strategic Growth Fund, L.P. (10)
4.12 Registration Rights Agreement, dated as of March 3, 2000, between
the Company, Brown Simpson Strategic Growth Fund, Ltd. And Brown
Simpson Strategic Growth Fund, L.P. (10)
4.13 Form of Warrant to Purchase Common Stock (Series A), dated March
3, 2000. (10)
4.14 Form of Warrant to Purchase Common Stock (Series B), dated March
3, 2000. (10)
4.15 Form of Warrant to Purchase Common Stock (Series C), dated March
3, 2000. (10)
5.1 Opinion of Akin, Gump, Strauss, Hauer & Feld L.L.P.*
10.1 1998 Stock Incentive Plan.(5)
10.2 Executive Extension Agreement, dated September 12, 1997, between
The Producers Entertainment Group Ltd. and Irwin Meyer.(3) +
10.3 Executive Extension Agreement, dated September 12, 1997, between
The Producers Entertainment Group Ltd. and Arthur Bernstein. (3) +
10.4 Mountaingate Extension Agreement, dated September 12, 1997,
between The Producers Entertainment Group Ltd. And Mountaingate
Productions, LLC. (3)
10.5 Employment Agreement dated as of July 15, 1998, by and among TPEG
Merger Company and Thomas Daniels. (4) +
10.6 Registration Rights Agreement dated as of July 15, 1998, by and
among The Producers Entertainment Group Ltd., Tom Daniels and
Craig Sussman. (4)
10.7 Securities Purchase Agreement with Strategic Capital Consultants,
dated as of January 14, 1999. (6)
10.8 Securities Purchase Agreement with Mountaingate Productions LLC,
dated as of January 14, 1999. (6)
21.1 Subsidiaries of the Company.(8)
23.1 Consent of Akin, Gump, Strauss, Hauer & Feld, LLP (included in its
opinion to be filed as Exhibit 5.1 hereto).
23.1 Consent of Singer Lewak Greenbaum & Goldstein LLP.
24.1 Power of Attorney (included in signature page).
- ---------------------------
(1) Incorporated by reference to Registrant's Report on Form 8-K dated June 18,
1996.
Page II-5
(2) Incorporated by reference to Registrant's Registration Statement on Form
S-3 filed September 1, 1998.
(3) Incorporated by reference to Registrant's Registration Statement on Form
S-3 filed November 17, 1999.
(3) Incorporated by reference to Registrant's Report on Form 8-K filed November
4, 1997 (as amended on December 29, 1997).
(4) Incorporated by reference to Registrant's Report on Form 8-K filed July 31,
1998.
(5) Incorporated by reference to Registrant's Proxy Statement filed April 1,
1998.
(6) Incorporated by reference to Registrant's Report on Form 10-QSB filed on
May 24, 1999.
(7) Incorporated by reference to Registrant's Report on Form 10-KSB, as filed
on October 13, 1999.
(8) Incorporated by reference to Registrant's Report on Form 10-KSB, as filed
on May 17, 2000.
(9) Incorporated by reference to Registrant's Definitive Proxy Statement filed
November 17, 1999.
(10) Incorporated by reference to Registrant's Report on Form 8-K filed March 9,
2000.
(11) Incorporated by reference to Registrant's Report on Form 10-KSB filed March
7, 2001.
+ Denotes employment contract.
* To be filed by amendment or by a report on Form 8-K pursuant to Section 601
of Regulation S-B.
ITEM 28. UNDERTAKINGS.
The undersigned company hereby undertakes to:
(a) (1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration states:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Acts of 1933;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in
the information in the registration statement; and
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was
registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the
form of prospects filed with the U.S. Securities and
Exchange Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in the volume and price represent no
more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee"
table in the effective statement.
(iii) Include any additional or changed material information on
plan of distribution.
(2) For determining liability under the Securities Act of 1933, treat
each post-effective amendment as a new registration statement of
the securities offered, and the offering of the securities at
that time to be the initial bona fide offering.
Page II-6
(3) File a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, offers and
controlling persons of the small business issuer pursuant to the
foregoing provisions, or otherwise, the small business issuer has been
advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act of 1933 and
is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director,
officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the small business issuer will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Securities Act 1933 and will be governed by the final
adjudication of such issue.
Page II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Los Angeles, State of California, on March 30, 2001.
NETCURRENTS, INC.
By: /S/ IRWIN MEYER
--------------------------------
Irwin Meyer
President and Chief Executive Officer
Page II-8
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Irwin Meyer and Arthur Bernstein and each
of them, his attorneys-in-fact, each with the power of substitution, for him and
in his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement,
and sign any registration statement for the same offering covered by this
Registration Statement that is to be effective upon filing pursuant to Rule
462(b) promulgated under the Securities Act of 1933, and all post-effective
amendments thereto, and to file the same, with all exhibits thereto and all
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that such attorneys-in-fact and agents or any of them, or his or their
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
SIGNATURE TITLE DATE
/S/ IRWIN MEYER
- ------------------------- President, Chief Executive March 30, 2001
Irwin Meyer Officer and Chairman of
the Board of Directors
/S/ ARTHUR H. BERNSTEIN
- ------------------------- Executive Vice President, March 30, 2001
Arthur H. Bernstein Secretary and Director
/S/ MICHAEL ISCOVE March 30, 2001
- ------------------------- Chief Financial Officer and
Michael Iscove Director
/S/ THOMAS A. DANIELS March 30, 2001
- ------------------------- Director
Thomas A. Daniels
/S/ IVAN BERKOWITZ March 30, 2001
- ------------------------- Director
Ivan Berkowitz
/S/ STANLEY GRAHAM March 30, 2001
- ------------------------- Director
Stanley Graham
Page II-9