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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ ] Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934
[X] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For transition period from July 1, 1999, to December 31, 1999
Commission file number 0-18410
NETCURRENTS, INC.
(Name of Small Business Issuer In Its Charter)
DELAWARE 95-4233050
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
9720 WILSHIRE BLVD., SUITE 700
LOS ANGELES, CALIFORNIA 90212
(Address of Principal Executive Offices)(Zip Code)
(310) 860-0200
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on which Registered
------------------- -------------------
Securities registered under Section 12(g) of the Exchange Act:
SERIES A CONVERTIBLE PREFERRED STOCK
COMMON STOCK, PAR VALUE $.001
REDEEMABLE WARRANTS
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [ ]
The issuer's revenues for the six month period ending December 31, 1999
were $ 342,985.
As of April 30, 2000, the aggregate market value of the voting stock held
by non-affiliates of the issuer based upon the average of the closing bid and
asked prices of such stock as reported on the Nasdaq SmallCap Market was
$87,195,265.
As of April 30, 2000, the issuer had 31,678,214 shares of Common Stock,
$.001 par value, issued and outstanding.
Transitional Small Business Disclosure Format (check one): Yes __ No X
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<PAGE>
NETCURRENTS, INC.
INDEX TO FORM 10-KSB
PAGE
PART I
Item 1. Description of Business........................................ 4
Item 2. Description of Property........................................ 7
Item 3. Legal Proceedings.............................................. 7
Item 4. Submission of Matters to a Vote of Security Holders............ 7
PART II
Item 5. Market for Common Equity and Related Stockholder Matters....... 8
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................... 12
Item 7. Consolidated Financial Statements:............................. 24
Item 8. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 25
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act.............. 25
Item 10. Executive Compensation......................................... 27
Item 11. Security Ownership of Certain Beneficial Owners and Management. 28
Item 12. Certain Relationships and Related Transactions................. 30
Item 13. Exhibits, List and Reports on Form 8-K......................... 31
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FORWARD-LOOKING STATEMENTS
This Report contains statements which constitute forward-looking
statements. These statements appear in a number of places in this Report and
include statements regarding the intent, belief or current expectations of the
Company with respect to (i) the Company's growth and expansion opportunities,
(ii) trends affecting the Company's financial condition or results of
operations, (iii) integration of acquisitions and (iv) the impact of competition
in the internet industry. Such forward-looking statements may be identified by
the use of words such as "believe," "anticipate," "intend," and "expect."
Readers are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those in the forward-looking
statements as a result of various factors. The accompanying information
contained in this Report, including, without limitation, the information set
forth in Item 6, "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Factors That Could Impact Future Results"
identifies important factors that could cause such differences. The Company does
not ordinarily make projections of its future operating results and undertakes
no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
THE BUSINESS
We assist 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"), 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. Our Internet Strategists offer
clients comprehensive intelligence, qualitative analysis, and strategic counsel
based on this information, thus 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, forensic accounting support,
pre and post IPO support, asset tracking, crisis intervention and a variety of
customized services.
HISTORICAL INFORMATION
For approximately eight years, we operated under the name The Producers
Entertainment Group Ltd. Historically, we acquired, developed, produced and
distributed dramatic, comedy, documentary and instructional television series
and movies and theatrical motion pictures. We distributed our projects in the
United States and in international markets for exhibition on standard broadcast
television (network and syndication), basic cable and pay cable and for video
distribution. We also provided producer and executive producer services in
exchange for fees and participations in future profits from these projects.
Although we continue to engage in certain entertainment related distribution
activities, during the past eight months we have reduced our network and cable
television production activities and have redirected our core business towards
the Internet.
While operating as The Producers Entertainment Group Ltd., in July 1998, we
acquired MWI Distribution, Inc., which does business under the name MediaWorks
International. MediaWorks International continues to distribute television and
video programming in the international market.
As part of our expansion into the Internet and on-line commerce
industries, we identified and made investments in two early and expansion stage
companies. In February 1999, we purchased 150,000 shares of common stock of
flowersandgifts.com, a portal on the Internet for the sale of flowers and other
gifts, and 100,000 shares of common stock of Pacific Softworks, Inc., a licensor
of Internet-related software and related software development tools, which
completed an initial public offering in June 1998. We also have warrants to
purchase up to an additional 100,000 shares of Pacific Softworks' common stock.
On September 23, 1999, we entered into a merger agreement with Infolocity,
Inc., a privately-held Internet company located in Burlingame, California and
incorporated in January 1999. As of December 27, 1999, the effective date of the
merger, Infolocity, Inc. changed its name to NetCurrents Services Corporation
and became a wholly-owned subsidiary of NetCurrents, Inc.
The terms of the merger included a tax-free exchange of NetCurrents, Inc.
common stock for 100 percent 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 information for the
six-month period ending December
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31, 1999, has been restated to reflect the effects of the combination. In
connection with the merger, we issued 7,375,001 shares of common stock.
RECENT DEVELOPMENTS
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 in the Company. In March 2000, we received
$8,500,000 of this financing for the purchase of the initial 1.7 million shares
of common stock. The balance is due through the exercise of warrants to purchase
3,998,000 shares at exercise prices ranging from $6 to $9 per share for the
Company's common stock.
OUR STRATEGY
We supply Internet information and analysis in our specific target
markets. The underlying concept of our business plan is to offer services driven
by our proprietary technologies and whose functionality is a product of the
search for, identification, extraction, analysis and delivery of specific
information derived from the Internet in real-time. To this data stream, we add
wide ranging analytical and strategic capabilities. The results are integrated
into written reports and a secure portal where clients have access to both our
search and analysis capabilities and all of their historical reports and
strategic planning. This concept has significant value to the user in an
extensive variety of decision-making processes.
We currently focus on market segments within the business-to-business
sector that have been carefully selected in order to ensure that they have
optimum leverage and opportunity for significant market penetration. Management
is currently expanding its service offerings across these and new market
segments. Our goals will be achieved through the effective utilization of
current and future technologies created, purchased or licensed by our research
and development team, combined with our base of professional Internet
Strategists. We are also evaluating strategic alliances, as well as, horizontal
and vertical acquisitions that have synergistic benefits to the strategic plan.
CURRENT SERVICES
In developing its current service offerings, we recognize the need for
rapidly sourcing and analyzing critical Internet information, assessing the
impact of this information and quickly developing constructive action plans that
allow companies to be proactive in their strategic planning and to access the
results obtained. Management believes the information available on the Internet
from thousands of locations can be of invaluable strategic importance, a
necessity in the corporate quest to maximize corporate performance, assess
competitive environments, evaluate market positioning, minimize the adverse
consequences resulting from fraud or misinformation and enhance investor and
public relations. With these key issues in mind, we developed the InvestorFacts,
AgencyFacts, CyberFacts, CyberPerceptions, Competitive Intelligence, Strategic
Information Dissemination and Emergency Task Force service models. New services
are under development.
InvestorFacts is our basic monitoring and notification service that
includes monthly reporting. AgencyFacts is a streamlined information tool, which
includes graphic presentations, designed to assist public and investor relations
firms in providing sophisticated information and perception tools to their
clients. CyberFacts is a mid-range service that provides monitoring, analysis,
response to incorrect postings, message removal, more frequent reporting and
strategic support to clients. CyberPerceptions provides extensive, in-depth
monitoring, analysis and competitive intelligence to clients. Our Competitive
Intelligence service is a monitoring, reporting and strategic planning vehicle
designed to assist clients in targeting valuable competitive data specific to
their industry and competitors. The Strategic Information Dissemination service
assists clients in the creation of innovative strategies coupled with focused
dissemination programs. Emergency Task Force ("ETF") services are comprised of a
select team of top personnel who are able to assist clients in specialized
situations such as mergers, acquisitions, pre-IPO
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strategy or corporate crises. In some situations, these services are customized
for a specific situation. As well, we provide strategic dissemination services
designed to assist companies in the implementation of Internet strategies or
responding to postings.
INTERNET STRATEGISTS
Our specially trained team of Internet Strategists ensures that the
maximum benefit is derived from the information gathered by our search engine.
Internet Strategist candidates initially are interviewed to ensure that they
have the necessary sophistication and educational background in finance. They
then receive in-depth training in the highly specialized client service programs
we provide. This training program ensures that the client service programs are
uniformly executed and the highest service and support levels are delivered to
each client. As well, there is a client support team designated for each client.
RESEARCH AND DEVELOPMENT
We have an expanding technology team whose goals are to continue to
enhance our real-time, patent pending search technology. Headed by Carlos
Gonzales, our Chief Technology Officer, the technology department has recently
integrated an Oracle database into our technology, thereby further enhancing our
reporting capabilities. We are currently expanding our technology feature sets
and tools in order to provide an even broader range of services to new clients
and other market segments. In the last three months, we have added two new
programmers to the technology department and plan to continue to expand our
capabilities over the balance of the year.
SALES AND MARKETING
Our sales strategy includes the use of both a direct sales force and
channel sales. The direct sales force currently utilizes a team of experienced
sales personnel in offices located in San Francisco, Los Angeles and Toronto. We
intend to open offices in other major cities across North America.
We currently are involved in the development of a variety of forms of
channel sales. These sales take place through channel partners such as public
relations and investor relations firms who provide NetCurrents with the ability
to address hundreds or thousands of potential clients through each relationship.
Our marketing strategy is designed around the continued development of
brand name recognition and our reputation for the its real-time, innovative, and
customized Internet information management and strategic services. We utilize
many forms of marketing including: advertising, public and media relations,
investor relations, seminars, conferences and Internet marketing in its ongoing
marketing programs.
STRATEGIC ALLIANCES
We are involved in discussions with a number of potential strategic
alliance partners who bring to NetCurrents a variety of value added
relationships including: extensive distribution channels, vast sales forces,
international offices, proprietary software potentially capable of integration
with our existing products, multi-national corporate customer bases and added
financial resources.
COMPETITION
We believe our existing combination of patent pending, real-time search
capabilities, search universe, proprietary database of historical data,
profiling capabilities, coupled with its analysis and strategic counsel set it
apart from its 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 and limited ability to disseminate
information to the online discussion communities; few possess the ability to
respond to inaccurate and fraudulent postings or have a special team created to
handle emergencies, crises, merger/acquisition support or other critical
situations.
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Certain competitors offer webclipping services. These companies include:
PR Newswire, Webclipping.com, Cyberalert.com, and Middleberg. The larger PR
firms are taking steps to offer web clipping services, since they realize the PR
arena is moving onto the Internet. Many are hiring personnel to scan the Web in
an attempt to gather information, others are developing technology, and yet
others are partnering with companies that have technology. Their services differ
from our s in that they use generic technology to search the Internet for key
words or phrases and then simply "clip" the articles and forward the data to
their clients without any form of analysis or interpretation. These types of web
clipping services primarily search electronic magazines, publications, and other
static sites, but fail to hit message boards or other web sites with relevant
information, thereby limiting their search universe. We believe the web clipping
service that forms part of our service package captures information from a
broader universe, and includes analysis and integration of this information into
the client's overall strategy. Our superior technology and broader service range
allows us to sell a superior service into this market segment.
EMPLOYEES
As of April 30, 2000, we had 38 employees. We believe we have a good
relationship with our employees.
ITEM 2. 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 31, 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 NC Services subsidiary's offices are
located at 1350 Old Bayshore Highway, Suite 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 31, 2005. The
current annual rent expense is $104,544. We believe that our current facilities
are sufficient for our current needs and our needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of our business, we are subject to various claims and
legal actions. We believe that we will not be materially adversely affected by
the ultimate outcome of any of these matters either individually or in the
aggregate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On December 16, 1999, we held a Special Meeting of Stockholders.
(b) The following directors were elected at the meeting on December 16,
1999: James J. Cerna, Jr. and Victor A. Holtorf. There were 12,551,496
votes cast in favor of each director, 0 votes cast against each
director, and 120,770 abstentions.
(c) The stockholders of the Company voted to approve the issuance of
shares (the "Share Issuance") of the Company's common stock, par value
$.001 per share, pursuant to the merger of Infolocity, Inc.
("Infolocity"), a California Corporation, with and into the Company.
There were 7,108,899 votes cast in favor of the issuance, 75,648 votes
cast against the issuance, and 62,418 abstentions.
(d) Stockholders voted to approve an amendment (the "Name Change
Amendment") to the Company's Restated Certificate of Incorporation to
change the name of the Company from IAT Resources Corporation to
NetCurrents, Inc. There were 12,561,143 votes in favor of the Name
Change Amendment, 40,569 votes cast against the Name Change Amendment,
and 70,554 abstentions.
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(e) Stockholders voted to approve an amendment to the Company's 1998 Stock
Incentive Plan to increase the number of shares available for issuance
under the 1998 Stock Incentive Plan. There were 6,628,586 votes in
favor of the amendment, 406,553 votes cast against the amendment, and
211,826 abstentions.
(f) Stockholders voted to approve the issuance of shares of Common Stock
upon conversion and/or exercise of Debentures and Warrants. There were
6,933,184 votes cast in favor of the issuance, 141,065 votes cast
against the issuance, and 172,716 abstentions.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
COMMON STOCK
Our Common Stock is currently traded on the Nasdaq Small Cap 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,
retroactively adjusted for the May 1996 one-for-four and the May 1998
one-for-three reverse stock splits. The quotations are inter-dealer prices
without adjustment for retail mark-ups, mark-downs or commissions, and do not
necessarily represent actual transactions.
<TABLE>
<CAPTION>
COMMON STOCK
HIGH LOW
BID BID
PERIOD
<S> <C> <C>
March 31, 1998.......................... $ 2.75 $1.50
June 30, 1998........................... 2.38 1.44
September 30, 1998...................... 2.00 0.75
December 31, 1998....................... 0.88 0.19
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
</TABLE>
On April 25, 2000, the prices of the Common Stock as reported by Nasdaq
were $3.63 bid and $4.44 asked. On such date there were approximately 256
holders of record of the 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.
DIVIDENDS
As of April 25, 2000, we have outstanding 1,000,000 shares of Series A
Preferred Stock which are entitled to annual dividends aggregating $425,000. We
have outstanding 800,000 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.
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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 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.
RECENT SALES OF UNREGISTERED SECURITIES
From July 1, 1999, through April 30, 2000, 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, as amended, 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, as amended.
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 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 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 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 ($2.0625) 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. *** 2.0625[VALUE OF SERVICES]
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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.
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.
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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 27, 2000, we issued an aggregate of 500,000 shares of our
common stock to Salvatore Grosso and Lawrence Jacobson pursuant to
their options granted on January 14, 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 20 consecutive
trading days after a registration statement covering the underlying
Common Stock has been declared effective.
o On March 3, 2000, we 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 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.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
The following discussion and analysis should be read in conjunction with
our Financial Statements and notes included elsewhere in this Form 10-KSB.
The Notes to the Financial Statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" 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. Other risk factors include 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 the 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 are currently derived from NetCurrents Services Corporation
and MediaWorks. The limited amount of revenues recognized during this period are
not necessarily indicative of revenues to be recognized in future periods.
REVENUE RECOGNITION
Revenues derived from NC Services are recognized on an accrual basis as
earned.
Revenues 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 completed projects
where distribution rights are owned by us are recognized when the project
becomes commercially available for broadcasting or exhibition in certain media
and geographical territories by the licensee. Revenues from the sale of projects
completed under straight producer arrangements are recognized during the
production phase. Additional licensing fees, distribution fees or profit
participations are recognized as earned in accordance with the terms of the
related agreements.
Amortization of film costs is charged to operations on a
project-by-project basis. Under the individual film forecast method of Statement
of Financial Accounting Standards No. 53, the cost charged per period is
determined by multiplying the remaining unamortized costs of the project by a
fraction, whose numerator is the income generated by the project during the
period and whose denominator is management's estimate of the total gross revenue
to be derived by the project over its useful life from all sources. The effect
on the amortization of completed projects resulting from revision of
management's estimates of total gross revenue on certain projects are reflected
in the year in which such revisions are made.
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.
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On September 23, 1999, NetCurrents, Inc. entered into a merger agreement
with Infolocity, Inc., a privately-held Internet company located in Burlingame,
California and incorporated in January 1999. As of December 27, 1999, the
effective date of the merger, Infolocity, Inc. changed its name to NetCurrents
Services Corporation ("NC Services") and became a wholly-owned subsidiary of
NetCurrents, 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 information for the six-month period
ending December 31, 1999 has been restated to reflect the effects of the
combination. In connection with the merger, the Company issued 7,375,001 shares
of common stock.
RESULTS OF OPERATIONS
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 six months ending December 31, 1999
decreased $70,080 or 17% compared to the six-month period ending December 31
1998. Revenues for the six months ended December 31, 1999 consisted of sales of
$155,466 generated by our NC Services subsidiary and $187,519 generated by our
MediaWorks subsidiary. Revenues for the six-month period ending December 31,
1998 primarily consisted of fees from the production and distribution of one
made-for-television movie for a broadcast network and four additional
made-for-television movies which were exhibited on The Family Channel and
Showtime Network, and are currently being distributed internationally.
Cost of sales for the six months ending December 31, 1999 was $96,997 as
compared to $90,171 for the six-month period ending December 31, 1998. These
costs relate to MediaWorks revenues and with the difference being due to
increased distribution costs for the six months ending December 31, 1999.
General and administrative expenses increased to $2,895,211, in six months
ending December 31, 1999 from $2,621,725 in the six-month period ending December
31, 1998 or an increase of $273,486. However, when reviewed in detail, the
Company's ongoing general and administrative expense actually decreased for the
six month period ended December 31, 1999, as approximately $510,000 of the
expenses were 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 six months ending December 31, 1999 was
$10,325, and primarily consisted of short-term investment interest income.
Interest and financing expense in the six months ending December 31, 1999
was $37,189 as compared to $0 in the six-month period ending December 31, 1998.
The interest and financing expense for the six months ended December 31, 1999
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
$115,000 in Fiscal 1999 and $276,000 in Fiscal 1998. The covenant not to compete
was fully amortized in June 30, 1999 and thus there is no related cost for the
six months ended December 31, 1999.
The comprehensive net loss applicable to common shareholders was
$5,670,345 for the six months ended December 31, 1999 as compared to a net loss
of $2,719,417 for the six-month period ending December 31, 1998. Of this amount
for the six month period ending December 31, 1999, $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 six-month period
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ending December 31, 1998, 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.
YEAR ENDED JUNE 30, 1999 ("FISCAL 1999") COMPARED WITH THE YEAR ENDED JUNE 30,
1998 ("FISCAL 1998")
Revenues for the year ended June 30, 1999 were $2,936,718 as compared to
$22,369,511 for the year ended June 30, 1998, a decrease of 87%. Revenues for
the year ended June 30, 1999 primarily consisted of sales made by our MediaWorks
subsidiary and licensing of programs made by us. Revenues for the year ended
June 30, 1998 primarily consisted of fees from the production and distribution
of one made-for-television movie for a broadcast network and four additional
made-for-television movies that were exhibited on The Family Channel and
Showtime Network, and are currently being distributed internationally. This
significant decrease from Fiscal 1998 was the result of a reduction in our
television development and production activities.
Amortization of film costs for the year ended June 30, 1999 was $0, while
the amortization of film costs for the year ended June 30, 1998 was $9,384,311,
and was computed using the Individual Film Forecast Method. Amortization as a
percentage of total revenues decreased from 42.0% for Fiscal 1998 to 0% for
Fiscal 1999. In 1998, we had a mix of projects, some of which had no expectation
of additional revenues and were amortized at 100% of cost and some of which
projects we retained distribution rights for future sale and were amortized
according to the Individual Film Forecast Method. Write-offs of projects in
development were $301,037 for the year ended June 30, 1999 and $199,450 for the
year ended June 30, 1998.
Cost of sales for the year ended June 30, 1999 was $926,295 as compared to
$9,773,397 for the year ended June 30, 1998. Cost of sales as a percentage of
total revenues decreased from 43.7% for Fiscal 1998 to 31.5% for Fiscal 1999.
The difference results from the mix of product produced by us in Fiscal 1999 as
compared to Fiscal 1998.
General and administrative expenses increased to $3,953,012 in Fiscal 1999
from $3,592,772 in Fiscal 1998 or an increase of $360,240. This increase was
primarily attributable to the acquisition of MWI Distribution, Inc .
Interest income during the year ended June 30, 1999 was $1,140, and
primarily consisted of amortization of the imputed interest discount on notes
received from the sale of common stock by us to related parties and interest
related to a trade note receivable. On June 30, 1997 we and Mountaingate
Productions LLC ("Mountaingate") mutually agreed to terminate the purchase
agreement and promissory note. This termination resulted in our writing off the
non-recourse portion of the accrued interest on the note totaling $133,142.
Interest and financing expense in Fiscal 1999 was $12,447 as compared to
$4,225 in Fiscal 1998. The interest and financing expense in Fiscal 1999
primarily consisted of deferred financing charges which were expensed upon the
termination of certain promissory notes.
During the year ended June 30, 1999, we wrote off $166,965 as compared to
$196,105 during the year ended June 30, 1998, of notes receivable and other
assets relating to the sale by us of 175,000 shares of Common Stock to certain
related parties.
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 and $276,000 in Fiscal 1998. The covenant not to compete
is now fully amortized.
The net loss applicable to common shareholders was $3,156,302 for Fiscal
1999 as compared to a net loss of $1,836,916 for Fiscal 1998. Of this amount for
Fiscal 1999, $416,037 represents non-recurring expenses and $491,250 represents
the dividend paid in Common Stock to the holders of the Series A Preferred Stock
and Series E Preferred Stock. Of the amount for Fiscal 1998, $889,089
represented non-recurring expenses and $425,000 represented the dividend paid in
Common Stock to the holders of the Series A Preferred Stock.
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YEAR ENDED JUNE 30, 1998 ("FISCAL 1998") COMPARED WITH THE YEAR ENDED JUNE 30,
1997 ("FISCAL 1997")
Revenues for the year ended June 30, 1998 were $22,369,511 as compared to
$5,521,441 for the year ended June 30, 1997, an increase of 305%. Revenues for
the year ended June 30, 1998 primarily consisted of fees from the production and
distribution of one made-for-television movie for a broadcast network and four
additional made-for-television movies which were exhibited on The Family Channel
and Showtime Networks, and are currently being distributed internationally.
Revenues for the year ended June 30, 1997 primarily consisted of the continuing
international distribution of completed projects and from personal management
fees, which business was discontinued in June 1998. This significant increase
from Fiscal 1997 was the result of a greater level of production and
distribution.
Amortization of film costs for the year ended June 30, 1998 was
$9,384,311, while the amortization of film costs for the year ended June 30,
1997 was $503,552, and was computed using the Individual Film Forecast Method.
Amortization as a percentage of total revenues increased from 9.1% for Fiscal
1997 to 42.0% for Fiscal 1998. The difference reflects the mix of projects for
which we had no expectation of additional revenues that are amortized at 100% of
cost and projects for which we had retained distribution rights for future sale
that are amortized according to the Individual Film Forecast Method. Write-offs
of projects in development were $199,450 for the year ended June 30, 1998 and
$212,920 for the year ended June 30, 1997.
Cost of sales for the year ended June 30, 1998 was $9,773,397 as compared
to $3,769,025 for the year ended June 30, 1997. Cost of sales as a percentage of
total revenues decreased from 68.2% for Fiscal 1997 to 43.7% for Fiscal 1998.
The difference results from the mix of product produced by us in Fiscal 1998 as
compared to Fiscal 1997.
General and administrative expenses decreased to $3,592,772 in Fiscal
1998 from $4,980,816 in Fiscal 1997 or a decrease of $1,388,044. This decrease
was primarily attributable to an increase in production activity which absorbed
more of the producer fees.
Interest income during the year ended June 30, 1998 was $61,817. During
the year ended June 30, 1997, interest income was $227,188 and primarily
consisted of amortization of the imputed interest discount on notes received
from the sale of common stock by us to related parties, interest related to a
trade note receivable and dividends earned on a portion of the cash proceeds
from our September 1996 public offering. On June 30, 1997 the Company and the
related parties mutually agreed to terminate the purchase agreement and
promissory note. This termination resulted in our writing off the non-recourse
portion of the accrued interest on the note totaling $133,142.
Interest and financing expense in Fiscal 1998 was $4,225 as compared to
$156,975 in Fiscal 1997. The interest and financing expense in Fiscal 1997
primarily consisted of deferred financing charges which were expensed upon
repayment of the $500,000 aggregate principal amount of 10% promissory notes.
During the year ended June 30, 1998, we wrote off $196,105 as compared to
$387,295 during the year ended June 30, 1997, of notes receivable and other
assets relating to the sale by us of 175,000 shares of Common Stock to certain
related parties.
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
$276,000 in Fiscal 1998.
The net loss applicable to common shareholders was $1,836,916 for Fiscal
1998 as compared to $5,017,145 for Fiscal 1997. Of this amount for Fiscal 1998,
$889,089 represents non-recurring expenses and $491,250 represents the dividend
paid in Common Stock to the holders of the Series A Preferred Stock and Series E
Preferred Stock.
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LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, having completed the merger with Infolocity and
commencing the execution of our new business plan, we need a significant amount
of resources to execute the business plan and increase our presence in the
Internet industry. During the six month period ended March 31, 2000, as set out
below, the Company received at total of $12,500,000 to fund the execution of its
business plan.
Our cash commitments for the year ending December 31, 2000, include
payment of our current liabilities of $2,041,669 and compensation to officers
and key independent contractors of $1,500,000 and office rent of $ 289,884,
aggregating approximately $3,831,553.
Net cash used in operating activities of our company in six months ending
December 31, 1999 was $2,959,478 as compared to $527,949 in the six-month period
ended December 31, 1998. Net cash provided by investing activities during the
six months ending December 31, 1999, was $33,562 and net cash used in investing
activities during the six-month ended December 31, 1998, was $845,689. Net cash
provided by financing activities of our company during the six months ending
December 31, 1999, was $3,357,389 and net cash provided by financing activities
of our company during the six-month period ended December 31, 1998, was
$857,242.
Our total cash and cash equivalent balance as of December 31, 1999 was
$798,855 as compared to our total cash and cash equivalent balance of $367,382
as of June 30, 1999.
In July 1998, we secured access to a $5,500,000 equity-based line of
credit with an institutional investor, subject to certain minimum trading
qualifications. To date, we have sold $2,250,000 of convertible preferred stock
to the investor.
In August 1999, we entered into an agreement for a private placement of up
to $4,000,000 of 6 percent convertible debentures. During the period from August
1999 to March 31, 2000, we have closed this private placement and received the
full $4,000,000. All of the debentures have been converted to common shares as
at April 29, 2000.
On March 3, 2000, NetCurrents, Inc. entered into a securities purchase
agreement with Brown Simpson Funds to offer up to $34,000,000 worth of shares of
common stock or 5,698,000 shares at an average price of $6.50 per share. The
Company combined an immediate equity financing of $8,500,000 in common stock,
which the we received on March 3, 2000, with callable warrants for an additional
$25,500,000. Under the terms of the securities purchase agreement, NetCurrents
Inc. granted warrants to purchase 3,998,000 shares of common stock at exercise
prices ranging from $4.50 to $9 per share.
We believe that cash flow from operations, cash on hand and availability
under our current funding agreement with Brown Simpson Funds, as well as other
available financing sources, should be sufficient to fund our operations and
service its debt in the foreseeable future. However, there are a number of
factors that could change our anticipated needs, and could require that we try
to raise additional financing.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"),
"Reporting Comprehensive Income," is effective for financial statements with
fiscal years beginning after December 15, 1997. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. We do not expect adoption
of SFAS No. 130 to have a material effect, if any, on our financial position or
results of operations.
Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"),
"Disclosure about Segments of an Enterprise and Related Information," is
effective for financial statements with fiscal years beginning after December
15, 1997. This statement establishes standards for the way that public entities
report selected information about operating segments, products and services,
geographic areas and major customers in interim
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and annual financial reports. We do not expect adoption of SFAS No. 131 to have
a material effect, if any, on our financial position or results of operations.
IMPACT OF YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits instead of four to define the applicable year. Any of our computer
programs that have time-sensitive software or facilities or equipment containing
embedded micro-controllers may recognize a date using "00" as the year 1900
rather than the year 2000. This could cause a system failure or miscalculations
resulting in potential disruptions of operations, including, among other things,
a temporary inability to process transactions, send invoices or engage in
similar normal business activities. We have assessed our hardware and software
systems, which are comprised solely of an internal personal computer network and
commercially available software products. To date, we have not experienced any
significant Year 2000 problems and, therefore, the risk that any Year 2000
problems will occur in the future has been diminished significantly.
In addition, we have received information from our key vendors and
customers regarding their Year 2000 exposures which would have a material effect
on us. The financial impact on us of such third parties not achieving high
levels of year 2000 readiness cannot be estimated with any degree of accuracy.
In the area of business continuity, technological operations dependent in some
way on one or more third parties, the situation is much less in our ability to
predict or control. In some cases, third party dependence is on vendors or
technology who are themselves working towards solutions to year 2000 problems.
In other cases, third party dependence is on suppliers of products and services
that are themselves computer-intensive. Although to date we have not experienced
any material disruptions in our operations, an undiscovered failure to achieve
Year 2000 compliance by third-party systems could result in failure or
inaccessibility of our services and could adversely affect our business,
financial condition and results of operations.
FACTORS THAT COULD IMPACT FUTURE RESULTS
FACTORS AFFECTING THE COMPANY'S LIQUIDITY AND CAPITAL RESOURCES
RISKS RELATED TO OUR BUSINESS
WE ACQUIRED NC SERVICES IN DECEMBER 1999. IF WE FAIL TO GROW THE NC SERVICES
BUSINESS OR IF WE CANNOT SUCCESSFULLY INTEGRATE NC SERVICES' BUSINESS INTO OURS,
OUR BUSINESS AND FINANCIAL CONDITION COULD SUFFER.
On December 22, 1999, we completed the acquisition of NC Services
(previously known as Infolocity, Inc.), a privately held Internet company which,
through its proprietary search technology, helps publicly traded companies
minimize the impact of negative information posted on the Internet. This merger
will necessarily involve the integration of two businesses that have previously
operated independently. We merged with NC Services with the expectation that
this merger would help us execute our plan to expand our core business into the
Internet industry and provide us with further opportunities to promote
synergistic business relationships among other Internet companies. However, we
cannot be certain that our acquisition of NC Services will enable our business
to realize a higher rate of growth. In addition, there can be no assurance that
we will be able to successfully integrate the operations of NC Services into our
existing operations or that we will realize all of the benefits expected from
this integration. In order to achieve these anticipated benefits, we must
efficiently, effectively and timely integrate NC Services' operations into ours.
The combination of these businesses requires, among other things:
o integration of management staffs and necessary support staffing to
meet the combined entity's business growth opportunities;
o coordination of operations and marketing efforts; and
o location of adequate sources of additional funding.
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Full integration of these businesses requires considerable effort on the
part of our management, who will need to dedicate considerable time toward
integrating the financial and information systems, management staffs and
organizational cultures of the separate businesses. We could experience problems
associated with the integration, and the integration itself may not proceed
efficiently or be successful. Any delay in completing the integration may
negatively impact the combined entity's ability to provide ongoing quality
products and services, which in turn may negatively impact the future revenues,
net income and earnings per share of the combined entity. Additionally,
unexpected costs incurred in connection with the integration could decrease
operating margins and negatively impact net income and earnings per share of the
combined entity. In addition, there can be no assurance that the operations,
management and personnel of the businesses will be compatible or that NC
Services will not experience the loss of key personnel, notwithstanding the fact
that we have employment agreements with a number of these key employees.
Furthermore, even if we successfully integrate NC Services' operations into
ours, the combination may nevertheless adversely affect our business and results
of operations by interrupting or interfering with our pre-existing business
operations, diverting management's attention and resulting in additional
management expenses.
ALTHOUGH WE CONTINUE TO OPERATE IN THE ENTERTAINMENT BUSINESS ON A SIGNIFICANTLY
REDUCED SCALE, OUR PROSPECTS IN THE INTERNET SECTOR ARE DIFFICULT TO FORECAST
BECAUSE WE HAVE ONLY BEEN TRANSITIONING TO THE INTERNET AND ONLINE COMMERCE
INDUSTRIES SINCE FEBRUARY 1999.
We announced our intention to expand our business in the Internet and
electronic commerce industries in February 1999, and we have changed our core
television production business to Internet technology services, primarily
through our acquisition of NC Services. These industries are new, highly
speculative and involve a substantial degree of risk. Since we are in an early
stage of development in these rapidly evolving industries, our prospects are
difficult to predict and could change rapidly and without warning. You must
consider our prospects in light of the risks, expenses and difficulties
frequently encountered by companies in the early stages of developing and
expanding their business, particularly companies in the new and rapidly evolving
Internet technology and online commerce markets. These risks include, but are
not limited to, the inability to attract key personnel knowledgeable in the
Internet markets, the inability to respond promptly to changes in a rapidly
evolving and unpredictable business environment and the inability to manage
potential growth. To address these risks, we must, among other things:
o successfully implement new business and marketing strategies;
o respond to competitive developments;
o expand our funding of early and expansion-stage companies; and
o attract and retain qualified personnel.
WE MAY NOT BE SUCCESSFUL IN ENTERING INTO THE INTERNET AND ONLINE COMMERCE
FIELDS SINCE WE HISTORICALLY NEVER HAVE OPERATED IN THESE BUSINESSES. OPERATING
IN THESE BUSINESSES WILL ALSO REQUIRE SUBSTANTIAL WORKING CAPITAL.
The Internet and online commerce industries are relatively new business
ventures for us, and are businesses in which we have not historically operated.
Except for a limited number of officers, none of our current executives have
experience operating Internet-related companies. Although we believe that our
experience in the entertainment business lends itself well to these industries,
we may not be able to operate successfully in them.
In addition, our new business strategy, investment and acquisition
activities will require substantial working capital. We spent substantial funds
to acquire NC Services and will continue to spend substantial funds to market
and expand our new business and to establish an effective management team with
experience in the Internet and online commerce industries. We cannot assure you
that we will be successful in any of these areas.
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FUTURE ACQUISITIONS INVOLVE RISKS FOR US.
We intend to evaluate future acquisitions of complementary product lines
and businesses as part of our business strategy. Any future acquisitions may
result in potentially dilutive issuances of equity securities, the use of our
cash resources, the incurrence of additional debt and increased goodwill,
intangible assets and amortization expense, which could negatively impact our
profitability. In addition, acquisitions involve numerous risks, including
difficulties in the assimilation of the operations and products of the acquired
companies, the diversion of management's attention from other business concerns,
risks of entering markets in which we have no or limited direct prior
experience, and the potential loss of key employees of the acquired company.
OUR GROWTH AND OPERATING RESULTS COULD BE IMPAIRED IF WE ARE UNABLE TO MEET OUR
CURRENT LIQUIDITY AND CAPITAL RESOURCES REQUIREMENTS.
We estimate that, as of December 31, 1999, taking into account our
acquisition of NC Services, our cash commitments for the next twelve months will
be approximately $12,500,000; a significant portion of this amount is allocated
for requirements associated with the business of NC Services.
We incur expenses associated with other general and administrative costs
such as:
o staff salaries;
o employee benefits;
o employer taxes;
o premiums on insurance policies;
o marketing costs;
o office expenses;
o professional fees;
o consulting fees; and
o other expenses.
With the acquisition of NC Services, we expect our expenses to increase
significantly. 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 believe the cash generated from operations will be
sufficient to fund our business for the next 12 months, we cannot anticipate all
of our future requirements. We may need to raise additional funding for the
expansion of our business and marketing efforts, for example. However, if we
must raise additional funds by issuing equity or convertible debt securities,
the percentage ownership of our stockholders will be diluted. Any new securities
could have rights, preferences and privileges senior to those of our common
stock. Furthermore, we cannot be certain that additional financing will be
available when and to the extent required or that, if available, it will be on
acceptable terms. If adequate funds are not available on acceptable terms, we
may not be able to fund our expansion of our business into the Internet and
online commerce sectors.
WE HAVE A HISTORY OF LOSSES AND MAY NOT BE PROFITABLE IN THE FUTURE.
For the fiscal years ended June 30, 1997, 1998 and 1999, and the six months
ended December 31, 1999, we generated revenues of $5,521,441, $22,369,511,
$2,991,953 and $342,985, respectively, and incurred net losses
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of $4,592,145, $1,411,916, $2,722,239 and $4,724,582, respectively (without
giving effect to the payment in 1997, 1998 and 1999 of dividends of $425,000
annually, on the Series A Preferred Stock, payment in 1999 of dividends of
$66,250 on the Series E Preferred Stock and payment for the six months ended
December 31, 1999 of $1,313 on the Series G Preferred Stock). As of March 31,
2000, we had an accumulated deficit of ($31,578,871). If the cash we generate
from our operations cannot sufficiently fund possible future operating losses,
we may need to raise additional funds. Additional financing may not be available
in amounts or on terms acceptable to us, if at all.
OUR FUTURE OPERATING RESULTS MAY FLUCTUATE AND ARE UNPREDICTABLE. IF WE FAIL TO
MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS, THE MARKET PRICE
OF OUR 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.
BECAUSE OF THE LIMITED BARRIERS TO ENTRY IN THE INTERNET AND ONLINE COMMERCE
BUSINESSES, 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 and online commerce markets are new, rapidly evolving and
intensely competitive, and we expect that competition could further intensify in
the future. Barriers to entry are limited, and current and new competitors can
launch web sites and other similar businesses at a relatively low cost. Many of
our current and potential competitors have longer operating histories and
significantly greater financial, marketing and other resources than us.
Increased competition may result in reduced operating margins and loss of market
share.
We have not yet determined whether we will be able to compete successfully
against our current and future competitors. Further, as a strategic response to
changes in the competitive environment, we may from time to time make marketing
decisions or acquisitions that could adversely affect our business, prospects,
financial condition and results of operations.
OUR GROWTH AND OPERATING RESULTS WILL BE IMPAIRED IF THE INTERNET AND ONLINE
COMMERCE INDUSTRIES DO NOT CONTINUE TO GROW.
Our growth and operating results depend in part on widespread acceptance
and use of the Internet as a point of convergence in the telecommunications,
entertainment and technology industries, as well as on continued consumer
acceptance and use of the Internet for purposes of chat rooms and other forms of
communication. These practices are at an early stage of development, and demand
and market acceptance are uncertain.
The Internet may not become a viable medium for telecommunications,
entertainment and technology convergence or a healthy commercial marketplace due
to inadequate development of network infrastructure and enabling technologies
that address the public's concerns about:
o network performance;
o reliability;
o speed of access;
o ease of use; and
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<PAGE>
o bandwidth availability.
In addition, the Internet's overall viability could be adversely affected
by increased government regulation. Changes in or insufficient availability of
telecommunications or other services to support the Internet could also result
in slower response times and adversely affect general usage of the Internet.
Also, negative publicity and consumer concern about the security of transactions
conducted on the Internet and the privacy of users may also inhibit the growth
of commerce on the Internet.
BURDENSOME GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD IMPAIR OUR
RESULTS OF OPERATIONS.
It is possible that a number of laws and regulations may be adopted
concerning the Internet, relating to, among other things:
o user privacy;
o content;
o copyrights;
o distribution;
o telecommunications; and
o characteristics and quality of products and services.
The adoption of any additional laws or regulations may decrease the
popularity or expansion of the Internet. A decline in the growth of the Internet
could decrease demand for our services and increase our cost of doing business.
The application of laws and regulations from jurisdictions whose laws do not
currently apply to our business, or the application of existing laws and
regulations to the Internet and other online services could also harm our
business.
OUR OUTSTANDING OPTIONS AND WARRANTS MAY DILUTE OUR STOCKHOLDERS' INTERESTS AND
COULD HINDER US FROM OBTAINING ADDITIONAL FINANCING.
As of March 21, 2000, 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 terms we like, since the holders of the outstanding
options and warrants will likely exercise them at a time when we may be able to
obtain such capital on better terms than those in the options and warrants.
THE CONVERSION OF OUR CONVERTIBLE PREFERRED STOCK MAY DILUTE OUR STOCKHOLDERS'
INTERESTS AND COULD HINDER US FROM OBTAINING ADDITIONAL FINANCING.
As of March 31, 2000, we have issued and outstanding 1,000,000 shares of
our Series A Preferred Stock, 50,000 shares of our Series D Preferred Stock,
50,000 shares of our Series F Preferred Stock and 1,505 shares of our Series G
Preferred Stock. At our option, we can pay the dividends on our Series A
Preferred Stock in cash or in shares of common stock. No dividends are currently
due on the Series C Preferred Stock. We are not required to pay dividends on the
Series F Preferred Stock; however, we are required to pay dividends on our
Series G Preferred Stock.
Holders of our convertible preferred stock could convert their shares into
common stock at any time in the future. To the extent all of the shares of our
outstanding convertible preferred stock are converted into common stock, our
common stockholders' interests will be diluted. Since these shares of common
stock will be
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<PAGE>
registered for sale in the marketplace, future offers to sell such shares could
potentially depress the price of our common stock. In the future, this could
make it difficult for us or our stockholders to sell the common stock. Also, we
may have problems obtaining additional equity capital on terms we like, since we
can expect the holders of our convertible preferred stock to convert their
shares into common stock at a time when we would be able to obtain any needed
capital on more favorable terms than those of the convertible preferred stock.
STOCK PRICES OF INTERNET-RELATED COMPANIES HAVE FLUCTUATED WIDELY IN RECENT
MONTHS AND THE TRADING PRICE OF OUR COMMON STOCK AND REDEEMABLE WARRANTS IS
LIKELY TO BE VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES TO INVESTORS.
As a result of our recent expansion into Internet and online commerce, the
trading price of our common stock and redeemable warrants could become more
volatile and could fluctuate widely in response to factors including the
following, some of which are beyond our control:
o variations in our operating results;
o announcements of technological innovations or new services by us or
our competitors;
o changes in expectations of our future financial performance,
including financial estimates by securities analysts and investors;
o changes in operating and stock price performance of other
Internet-related companies similar to us;
o conditions or trends in the Internet and technology industries;
o additions or departures of key personnel;
o future sales of our common stock; and
o acceptance by the market of our acquisition of NC Services.
Domestic and international stock markets often experience significant
price and volume fluctuations. These fluctuations, as well as general economic
and political conditions unrelated to our performance, may adversely affect the
price of our common stock and redeemable warrants.
TAKEOVER EFFORTS COULD BE DETERRED AS A RESULT OF OUR RIGHT TO ISSUE PREFERRED
STOCK IN THE FUTURE AND CERTAIN PROVISIONS IN OUR CERTIFICATE OF INCORPORATION.
Our Certificate of Incorporation permits our Board of Directors to issue
up to 20,000,000 shares of "blank check" Preferred Stock. 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, 800,000 shares of Series C Preferred Stock, 275,000 shares of
Series F Preferred Stock and 2,015 shares of Series G Preferred Stock. If we
issue additional preferred stock with voting and conversion rights, the rights
of our common stockholders could be adversely affected by, among other things,
the loss of their voting control to others. Any additional issuances could also
delay, defer or prevent a change in our control, even if these actions would
benefit our stockholders.
Additionally, provisions of Delaware law and our Certificate of
Incorporation could make it more difficult for a third party to acquire us, even
if doing so would be beneficial to our stockholders.
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<PAGE>
WE HAVE NEVER PAID DIVIDENDS ON OUR COMMON STOCK. WE PAY ANNUAL CASH OR STOCK
DIVIDENDS ON SOME OF OUR PREFERRED STOCK.
We have never paid cash dividends on our common stock and we do not expect
to pay these dividends in the foreseeable future. Holders of our Series A
Preferred Stock are entitled to annual dividends of 8 1/2% (aggregating $425,000
annually, in cash or stock at our option, assuming no conversion). Holders of
our Series C Preferred Stock are entitled to dividends of 8% annually, so long
as we have net income in excess of $1,000,000 in the applicable fiscal year. We
pay these dividends quarterly, in cash or in shares of our common stock.
Beginning January 1, 2000, holders of our Series G Preferred Stock were entitled
to dividends of $60 per year per share of Series G Preferred Stock, payable
quarterly. For the foreseeable future, we anticipate that we will retain all of
our cash resources and earnings, if any, for the operation and expansion of our
business, except to the extent required to satisfy our obligations under the
terms of the Series A Preferred Stock, Series C Preferred Stock and Series G
Preferred Stock.
SALES OF ADDITIONAL SHARES OF OUR COMMON STOCK INTO THE PUBLIC MARKET MAY CAUSE
OUR STOCK PRICE TO FALL.
If we or our stockholders sell substantial amounts of our common stock
(including shares issued upon the exercise of outstanding options and warrants
or upon the conversion of shares of our convertible preferred stock) in the
public market, the market price of our common stock could fall. As of March 17,
2000, we had outstanding 28,415,102 shares of our common stock. The unregistered
common stock and the common stock held by our officers and directors are
"restricted" securities, as that term is defined by Rule 144 under the
Securities Act. In the future, these restricted securities may be sold only in
compliance with Rule 144 or if they are registered under the Securities Act or
under an exemption. Generally, under Rule 144, each person who holds restricted
securities for a period of one year may, every three months, sell in ordinary
brokerage transactions an amount of shares which does not exceed the greater of
1% of our then-outstanding shares of common stock, or the average weekly volume
of trading of our common stock as reported during the preceding four calendar
weeks. A person who has not been an affiliate of ours for at least the three
months immediately preceding the sale and who has beneficially owned shares of
common stock for at least two years can sell such shares under Rule 144 without
regard to any of the limitations described above. Sales of substantial amounts
of common stock in the public market, or the perception that such sales could
occur, may adversely affect the prevailing market price for our common stock and
could impair our ability to raise capital through a public offering of equity
securities.
In addition, as of March 21, 2000, 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 F Preferred Stock
and Series G Preferred Stock may acquire shares of common stock at various
conversion rates.
NASDAQ COULD DELIST OUR COMMON STOCK AND/OR REDEEMABLE WARRANTS, WHICH COULD
MAKE IT MORE DIFFICULT FOR YOU TO SELL OR OBTAIN QUOTATIONS AS TO THE PRICE OF
OUR COMMON STOCK AND/OR REDEEMABLE WARRANTS.
In order to continue to be listed on Nasdaq, we must meet the following
requirements:
o net tangible assets of at least $2,000,000, or a market capitalization
of $35,000,000 or $500,000 in net income for two of the last three
years;
o a minimum bid price of $1.00;
o two market makers;
o 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.
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<PAGE>
If we cannot satisfy Nasdaq's maintenance criteria in the future, Nasdaq
could delist our common stock and/or redeemable warrants. In the event of
delisting, trading, if any, would be conducted only in the over-the-counter
market in the so-called "pink sheets" or the NASD's Electronic Bulletin Board.
As a result of any delisting, an investor would likely find it more difficult to
sell or obtain quotations as to the price of our common stock and/or redeemable
warrants.
WE HAVE OUTSTANDING WARRANTS THAT TRADE ON NASDAQ, AND THE COMMON STOCK
UNDERLYING THESE WARRANTS ARE NOT CURRENTLY FREELY TRADABLE.
We have issued and outstanding common stock purchase warrants that trade
on the Nasdaq SmallCap Market under the symbol "NTCSW." We initially registered
the shares of common stock underlying these warrants with the SEC through the
filing of a registration statement. However, until March 28, 2000 we had not
updated the registration statement with current information. As a result, upon
exercise of the warrants, the underlying shares of common stock will not be
freely tradable until the post-effective amendment to the registration statement
has been declared effective by the SEC. Until the post-effective amendment is
declared effective, the underlying shares will be restricted securities under
U.S. federal and applicable state laws, and may not be transferred, sold or
otherwise disposed of in the United States except as permitted under U.S.
federal and state securities laws, pursuant to exemption from registration. The
warrant holders should be prepared to hold the shares of common stock issuable
upon exercise of the warrants for an indefinite period of time.
IF THE SOFTWARE, HARDWARE, COMPUTER TECHNOLOGY AND OTHER SYSTEMS AND SERVICES
THAT WE USE ARE NOT YEAR 2000 COMPLIANT, OUR OPERATING RESULTS COULD BE
IMPAIRED.
Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without addressing the impact of the
recent change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond the year
2000. This could result in system failures or miscalculations causing
disruptions of operations, including, among others, a temporary inability to
process transactions, send invoices or engage in similar normal business
activities.
We have assessed our hardware and software systems and we believe that our
systems correctly define the year 2000. We have also assessed the embedded
system contained in our leased equipment, which we believe to be Year 2000
compliant.
In addition, we have received information from our key vendors and
customers with respect to their significant Year 2000 exposures that would have
a material effect on us. The financial impact on us of such third parties not
achieving high levels of Year 2000 readiness cannot be estimated with any degree
of accuracy. In the area of business continuity, technological operations
dependent in some way on one or more third parties, the situation is much less
in our ability to predict or control. In some cases, third party dependence is
on vendors who are themselves working toward solutions to Year 2000 problems. In
other cases, third party dependence is on suppliers of products and services to
ascertain the state of Year 2000 readiness of significant third parties. We are
taking steps to attempt to ensure that the third parties on which we are heavily
reliant are Year 2000 ready, but cannot predict the likelihood of such
compliance nor the direct and indirect costs of non-readiness by those third
parties or of securing such services from alternate third parties. We are not
yet aware of any Year 2000 issues relating to third parties with which we have a
material relationship. If such critical third party providers experience
difficulties resulting in disruption of service to us, a shutdown of our
operations at individual facilities could occur for the duration of the
disruption.
ITEM 7. FINANCIAL STATEMENTS
The Report of Independent Certified Public Accountants, Financial
Statements and Notes to the Financial Statements appear in a separate section of
this Form 10-KSB following Part III. The Index to Financial Statements appears
on page F-1.
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<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
The directors and executive officers of our company and their ages as of
April 30, 2000, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
----- --------
<S> <C> <C>
Irwin Meyer 64 Chief Executive Officer, Chairman
of the Board of Directors
Arthur H. Bernstein 37 Executive Vice President,
Secretary, and Director
Michael Iscove (1)(2) 49 Director
Thomas A. Daniels 46 Director
Ivan Berkowitz (1)(2) 54 Director
Victor A. Holtorf 36 Director
Stanley Graham (1)(2) 55 Director
- ------------------------
<FN>
(1) Audit Committee Member
(2) Compensation Committee Member
</FN>
</TABLE>
Directors are elected to an annual term that expires at our Company's annual
meeting of stockholders.
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.
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<PAGE>
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. Since
June 1995, 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 from April 1989 to June 1995. In 1978, Mr. Iscove
received a Chartered Accounts 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.
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.
VICTOR A. HOLTORF has been a director of our Company since December 1999.
Mr. Holtorf has served as President of Infolocity since January 1999. In 1988,
Mr. Holtorf joined Oracle Corporation, where he initially created and headed the
Oracle Real Estate Corporation, its commercial real estate development
subsidiary, and later rose to the position of Vice President and Chief Financial
Officer until his departure in 1994. From 1994 to 1997, he started and headed
several successful companies including NUVO, Inc. (a retail sporting goods
chain), MART Cattle Co. (a cattle production and trading company), and Dashabout
Shuttle (a transportation company). Mr. Holtorf obtained his Master's Degree
from M.I.T., where he studied business at the Sloan School of Management, and
construction management at the School of Civil Engineering.
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, 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 fro Samford University Graduate School and a B.S. in
chemistry from the University of Alabama.
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<PAGE>
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires our
directors and executive officers and persons who own more than ten percent of a
registered class of our equity securities, to file with the Securities and
Exchange Commission initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of our Company. Officers,
directors and greater than ten percent stockholders are required by SEC
regulations to furnish us with copies of Section 16(a) forms they file.
To our knowledge, based solely on review of the copies of such reports
furnished to us and written representations that no other reports were required
during the fiscal year ended December 31, 1999, all Section 16(a) filing
requirements applicable to our officers, directors and greater than ten percent
beneficial owners were satisfied, except Ivan Berkowitz filed a Form 3 late and
Arthur Bernstein filed a Form 4 late.
ITEM 10. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the annual and
long-term compensation for services in all capacities to us for the fiscal years
ended December 31, 1997, 1998 and 1999, of those persons who were (i) at
December 31, 1999, 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 years:
<TABLE>
<CAPTION>
Annual
Compensation Long Term
------------------ Compensation
Fiscal Number of
Year Securities All
Ended Underlying Other on
June 30 Salary Bonus Options Compensation
------- -------- ---------- -------------- ---------------
------- -------- ---------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Irwin Meyer.........................Stub 1999* $ 156,000 0 $ 9,000
Chief Executive 1999 312,000 0 3,000,000 18,000 (2)
Officer (1) 1998 312,000 0 0 18,000 (2)
1997 312,000 0 0 18,000 (2)
68,016 (3)
Arthur H. Bernstein.................Stub 1999* $ 87,500 0 300,000 $ 6,00
Executive Vice President 1999 175,000 0 600,000 12,000 (2)
and Secretary 1998 175,000 0 0 12,000 (2)
1997 160,000 0 150,000 12,000 (2)
Thomas A. Daniels...................Stub 1999* $ 93,000 0 0 0
Director and President of 1999 188,482 0 500,000 $ 11,500 (2)
of MediaWorks, a wholly owned 1998 0 0 0 0
subsidiary of the Company (4) 1997 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.
* Stub 1999 refers to the six month period July 1, 1999 through December
31, 1999.
</FN>
</TABLE>
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<PAGE>
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 as producers and/or executive producers and to perform other duties.
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 have been extended to 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.
Arthur Bernstein is employed as Executive Vice President of our Company
pursuant to an employment agreement, as amended, which has been extended to 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.
Victor A. Holtorf is employed as Executive Vice President and Chief
Operating Officer of our Company and Chief Executive Officer of NetCurrents
Services Corporation pursuant to an employment agreement, as amended, which will
terminate on December 21, 2002. Mr. Holtorf's annual compensation is $200,000.
The employment agreement is terminable by us in the event of Mr. Holtorf's death
or disability. We may also terminate the employment agreement "for cause" (as
defined in the agreement). Mr. Holtorf 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 one year of his base
salary.
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<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information as of April 30, 2000, relating
to the ownership of the Common Stock and Series C Preferred 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 and Series C Preferred 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 such 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.
<TABLE>
<CAPTION>
Number of
Shares of
Common
Stock Percent
Beneficially of
Owned Class
Name and Address (1) (1)
- ------------------------- ------------ --------
<S> <C> <C> <C>
Alison Meyer (2) 2,800,000 8.8%
Patricia Meyer (2)
Mountaingate Productions LLC(2)
Arthur H. Bernstein (3) 335,000 1.0%
Salvatore Grosso (4) 1,611,111 5.0%
Lawrence S. Jacobson (4) 1,611,111 5.0%
Irwin Meyer 0 0.0%
Ivan Berkowitz (5) 525,000 1.6%
Strategic Capital Consultants (6) 800,000 2.5%
Michael Iscove (7) 465,000 1.5%
Thomas A. Daniels (8) 701,852 2.2%
James J. Cerna, Jr. 3,107,830 9.8%
Victor A. Holtorf (9) 2,120,433 6.7%
Stanley Graham (10) 45,000 0.1%
Joseph Stephens & Company, Inc. (11) 400,266 1.3%
Directors and Executive Officers 4,192,285 12.5%
as a group (7 persons) (12)
<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 such person (and only such 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 April 30, 2000. As of
April 30, 2000, the Company had 31,678,214 shares of Common Stock.
(2) Alison Meyer and Patricia Meyer, the adult children of Irwin Meyer, our
Chief Executive Officer, beneficially own these shares of Common Stock by
virtue of being the sole members of Mountaingate.
(3) Represents shares which may be acquired upon exercise of options.
(4) Includes 500,000 shares which may be acquired upon exercise of options by
each of Mr. Grosso and Mr. Jacobson.
Page 29
<PAGE>
(5) Represents shares which may be acquired upon exercise of options.
(6) Represents shares of Common Stock which may be acquired upon conversion of
800,000 shares of Series C Convertible Preferred Shares.
(7) Represents 16,945 shares of Common Stock held through Sirius Corporate
Finance, Inc., of which Mr. Iscove is President and options to purchase
350,000 shares of Common Stock held by Mr. Iscove.
(8) Includes 400,000 shares which may be acquired upon exercise of options.
(9) Includes 200,000 shares which may be acquired upon exercise of options.
(10) Represents shares which may be acquired upon exercise of options.
(11) 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 ("Reedemable 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, 1999, 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, 1999, Mr. Sorbara beneficially
owned 424,266 shares of Common Stock within the meaning of Rule 13d-3 of
the Act.
As of December 31, 1999, 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.
(12) Includes options to purchase 1,855,000 shares of Common Stock. There are
no issued and outstanding shares of Series B Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock or Series F Preferred Stock. To
our knowledge, there are no 5% beneficial owners of Series A Preferred
Stock or of Series G Convertible Preferred Stock.
</FN>
</TABLE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During the fiscal year ended December 31, 1999, Michael Iscove provided
approximately $100,000 of consulting services to our company.
During the fiscal year ended December 31, 1999, we and Mountaingate
entered into a Securities Purchase Agreement. Mountaingate purchased for
$1,300.00, 1,300,000 shares of the Series C Convertible Preferred Stock
convertible upon payment of a fixed price of $0.50 per share.
For more information concerning transactions between us and related
parties, see Note 6 of the Notes to the Financial Statements.
Page 30
<PAGE>
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Transition Report on
Form 10-KSB for the fiscal year ended December 31, 1999.
1. Financial Statements:
Financial Statements are listed in the "Index to Financial
Statements" at page F-1.
2. Schedules:
Financial Statements schedules are listed in the "Index to Financial
Statements" at page F-1 herein.
3. Exhibits: (numbered in accordance with Item 601 of Regulation S-B)
(a) The Exhibits listed below are filed or incorporated by
reference as part of this Report.
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.
3.4 Bylaws. (1)
3.4 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)
Page 31
<PAGE>
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. (8)
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. (1)
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)
10.1 1998 Stock Incentive Plan, as amended. (5)
10.2 Executive Extension Agreement, dated October 20, 1997, between The
Producers Entertainment Group Ltd. and Irwin Meyer. (3) +
10.3 Executive Extension Agreement, dated October 20, 1997, between The
Producers Entertainment Group Ltd. and Arthur Bernstein. (3) +
10.4 Mountaingate Extension Agreement, dated October 20, 1997, between
The Producers Entertainment Group Ltd. and Mountaingate
Productions, LLC. (3)
10.5 Employment Agreement amendment as of December 31, 1999, by and
among TPEG Merger Company and Thomas Daniels. +
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)
Page 32
<PAGE>
10.9 Employment Agreement, dated December 21, 1999, and amended as of
March 1, 2000, by and among NetCurrents and Victor Holtorf. +
21.1 Subsidiaries of the Company.
23.1 Consent of Singer Lewak Greenbaum & Goldstein LLP.
27.1 Financial Data Schedule.
- ------------------------
(1) Incorporated by reference to Registrant's Report on Form 8-K dated June
18, 1996.
(2) Incorporated by reference to Registrant's Registration Statement on Form
S-3 filed September 1, 1998.
(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 our Registration Statement on Form S-3 filed
February 3, 2000.
(6) Incorporated by reference to Registrant's Report on Form 10-Q filed on May
24, 1999.
(7) Incorporated by reference to our Report on Form 10-KSB, as filed on
October 13, 1999.
(8) Incorporated by reference to our Registration Statement on Form S-3 filed
November 17, 1999.
(9) Incorporated by reference to our Definitive Proxy Statement filed on
November 17, 1999.
(10) Incorporated by reference to our Report on Form 8-K filed March 9, 2000.
(11) Incorporated by reference to our Registration Statement on Form S-3 filed
April 4, 2000.
+ Denotes employment contract.
(b) Reports on Form 8-K:
The following Current Reports on Form 8-K were filed by the
Company during the quarter ended December 31, 1999:
(i) Current Report on Form 8-K filed December 29, 1999. Item 2
was reported.
(ii) Current Report on Form 8-K filed December 30, 1999. Items 5
and 7 were reported.
Page 33
<PAGE>
SIGNATURES
IN ACCORDANCE WITH SECTION 13 OR 15(d) OF THE EXCHANGE ACT, THE REGISTRANT
HAS CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, HEREUNDER
DULY AUTHORIZED.
NETCURRENTS, INC.
Dated: May 16, 2000 By /S/ IRWIN MEYER
--------------------------------------
Irwin Meyer
Chief Executive Officer
IN ACCORDANCE WITH EXCHANGE ACT, THIS REPORT HAS BEEN SIGNED BY THE
FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE
DATES INDICATED:
<TABLE>
<CAPTION>
Name Position Date
- ------------------------------- ----------------------------- ----------------
<S> <C> <C>
/S/ IRWIN MEYER Chief Executive Officer, May 16, 2000
- ------------------------------- Chairman of the Board of
Irwin Meyer Directors
/S/ ARTHUR BERNSTEIN Executive Vice President, May 16, 2000
- ------------------------------- Secretary and Director
Arthur H. Bernstein
/S/ MICHAEL ISCOVE Director May 16, 2000
- -------------------------------
Michael Iscove
/S/ THOMAS A. DANIELS Director and Chief May 16, 2000
- ------------------------------- Executive Officer of
Thomas A. Daniels MediaWorks
/S/ IVAN BERKOWITZ Director May 16, 2000
- -------------------------------
Ivan Berkowitz
Director May 16, 2000
- -------------------------------
Victor A. Holtorf
Director May 16, 2000
- -------------------------------
Stanley Graham
</TABLE>
Page 34
<PAGE>
NETCURRENTS, INC.
(FORMERLY IAT RESOURCES CORPORATION)
AND SUBSIDIARIES
CONTENTS
DECEMBER 31, 1999
- ---------------------------------------------------------------------------
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2
FINANCIAL STATEMENTS
Consolidated Balance Sheets F3 - 4
Consolidated Statements of Operations F5 - 6
Consolidated Statements of Shareholders' Equity F7 - 10
Consolidated Statements of Cash Flows F11 - 14
Notes to Consolidated Financial Statements F15 - 36
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
NetCurrents, Inc.
(formerly IAT Resources Corporation)
We have audited the accompanying consolidated balance sheets of NetCurrents,
Inc. (formerly IAT Resources Corporation) and subsidiaries as of December 31,
1999 and June 30, 1999, and the related consolidated statements of operations,
shareholders' equity, and cash flows for the six months ended December 31, 1999
and 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.
(formerly IAT Resources Corporation) and subsidiaries as of December 31, 1999
and June 30, 1999, and the results of their consolidated operations and their
consolidated cash flows for the six months ended December 31, 1999 and year
ended June 30, 1999 in conformity with generally accepted accounting principles.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
April 5, 2000
F-2
<PAGE>
NETCURRENTS, INC.
(FORMERLY IAT RESOURCES CORPORATION)
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND JUNE 30, 1999
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
December 31, June 30,
1999 1999
----------- ----------
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 798,855 $ 367,382
Accounts receivable, net of allowance for doubtful
accounts of $0 and $562,830 555,667 1,681,719
Receivable from related parties - 102,156
Prepaid advertising expenses 583,392 -
Prepaid assets 40,342 22,807
Subscription receivable 200,000 -
----------- ----------
Total current assets 2,178,256 2,174,064
FILM COSTS 224,988 471,762
FIXED ASSETS, at cost, net 131,559 111,846
GOODWILL, less accumulated amortization of $144,282
and $99,282 841,913 886,913
INVESTMENTS 725,050 800,000
OTHER ASSETS 38,043 10,035
----------- ----------
TOTAL ASSETS $ 4,139,809 $4,454,620
=========== ==========
</TABLE>
F-3
<PAGE>
NETCURRENTS, INC.
(FORMERLY IAT RESOURCES CORPORATION)
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND JUNE 30, 1999
- -------------------------------------------------------------------------------
<TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>
December 31, June 30,
1999 1999
----------- ----------
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable and accrued expenses $ 1,202,141 $1,033,347
Dividends payable 108,313 278,750
Due to related parties 44,046 69,046
Capital lease obligation 4,320 33,258
Convertible debentures 619,824 -
Deferred revenue 63,025 -
----------- ----------
Total current liabilities 2,041,669 1,414,401
NOTES PAYABLE - RELATED PARTIES - 37,212
----------- ----------
Total liabilities 2,041,669 1,451,613
----------- ----------
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
2,625,000 and 4,550,000 shares issued and
outstanding 2,625 4,550
Preferred stock, Series G, $1,000 par value
4,000 shares authorized
1,875 and 0 shares issued and outstanding 1,875,000 -
Common stock, $0.001 par value
50,000,000 shares authorized
23,070,869 and 19,350,765 shares issued and
outstanding 23,071 19,351
Treasury stock, at cost
93,536 shares (1,010,192) (1,010,192)
Subscription receivable (398,800) -
Additional paid-in capital 30,704,372 27,483,139
Accumulated other comprehensive income 225,050 -
Accumulated deficit (29,322,986) (23,493,841)
----------- -----------
Total shareholders' equity 2,098,140 3,003,007
----------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,139,809 $4,454,620
=========== ==========
</TABLE>
F-4
<PAGE>
NETCURRENTS, INC.
(FORMERLY IAT RESOURCES CORPORATION)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
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)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the For the
Six Months For the Six Months
Ended Year Ended Ended
December 31, June 30, December 31,
1999 1999 1998
------------ ---------- -----------
(unaudited)
<S> <C> <C> <C>
REVENUES $ 342,985 $2,991,953 $ 413,065
COST OF SALES 96,997 926,295 90,171
---------- ---------- ----------
NET REVENUES 245,988 2,065,658 322,894
WRITE-OFF OF
Projects in development 246,774 301,037 -
Notes and accounts receivable 1,429,926 166,965 -
Investment 300,000 - -
GENERAL AND ADMINISTRATIVE EXPENSES 2,895,211 4,066,590 2,621,725
---------- ---------- ----------
LOSS FROM OPERATIONS (4,625,923) (2,468,934) (2,298,831)
---------- ---------- ----------
OTHER INCOME (EXPENSE)
Merger expenses - (6,696) (6,696)
Interest and dividend income 10,325 3,096 -
Interest and financing expense (37,189) (12,447) -
Amortization of related party
covenant not to compete - (115,000) (115,000)
Amortization of goodwill (45,000) (99,282) (75,000)
Other expense (26,795) (22,176) (11,390)
---------- ---------- ----------
Total other income (expense) (98,659) (252,505) (208,086)
---------- ---------- ----------
LOSS BEFORE PROVISION FOR
INCOME TAXES (4,724,582) (2,721,439) (2,506,917)
PROVISION FOR INCOME TAXES - 800 -
---------- ---------- ----------
</TABLE>
F-5
<PAGE>
NETCURRENTS, INC.
(FORMERLY IAT RESOURCES CORPORATION)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999,
FOR THE YEAR ENDED JUNE 30, 1999, AND
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the For the
Six Months For the Six Months
Ended Year Ended Ended
December 31, June 30, December 31,
1999 1999 1998
------------ ---------- -------------
(unaudited)
<S> <C> <C> <C>
Net loss $(4,724,582) $ (2,722,239) $ (2,506,917)
Dividend requirement of Series A preferred stock (212,500) (425,000) (212,500)
Dividend requirement of Series E preferred stock - (66,250) -
Beneficial conversion on Series G preferred stock (957,000) - -
Dividend requirement of Series G preferred stock (1,313) - -
----------- ------------ -------------
Loss applicable to common shareholders (5,895,395) (3,213,489) (2,719,417)
Unrealized gain on investment 225,050 - -
----------- ------------ -------------
Comprehensive loss applicable to common
shareholders $(5,670,345) $ (3,213,489) $ (2,719,417)
=========== ============ ============
Basic loss per common share $ (0.37) $ (0.33) $ (0.37)
=========== ============ ============
Diluted loss per common share $ (0.37) $ (0.33) $ (0.37)
=========== ============ ============
Weighted-average number of common shares
outstanding
Basic 15,227,839 9,688,012 7,274,036
=========== ============ ===========
Fully diluted 15,593,277 9,688,012 7,274,036
=========== ============ ===========
</TABLE>
F-6
<PAGE>
NETCURRENTS, INC.
(formerly IAT RESOURCES CORPORATION)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Six Months Ended December 31, 1999 and
for the Year Ended June 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Preferred Stock
Additional
Series A, C, D, E, and F Series G Common Stock
---------------------------- ----------------------------- -----------------------------
Shares Amount Shares Amount Shares Amount
------------ ------------- ------------- ------------- ------------- -------------
Balance, June 30,
<S> <C> <C> <C> <C> <C>
1998 1,000,000 $ 1,000 - $ - 6,672,943 $ 6,673
Issuance of common
shares for acquisition
of NetCurrents
Services Corp. 7,375,001 7,375
Issuance of common
shares in payment
of dividends on
Series A preferred
stock 343,932 344
Issuance of common
stock in connection
with the acquisition
of MWI
Distributions, Inc. 1,203,704 1,204
Issuance of common
stock for the
exercise of options 600,000 600
Issuance of common
stock for the
exercise of options-
Strategic 500,000 500
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
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other
Additional Compre-
Treasury Subscription Paid-in hensive Accumulated
Stock Receivable Capital Income Deficit Total
------------- ------------ ----------------- ----------- ------------- ------------
Balance, June 30,
<S> <C> <C> <C> <C> <C> <C>
1998 $ (1,010,192) $ - $ 23,411,349 $ - $(20,280,352) $ 2,128,478
Issuance of common
shares for acquisition
of NetCurrents
Services Corp. 411,705 419,080
Issuance of common
shares in payment
of dividends on
Series A preferred
stock 318,406 318,750
Issuance of common
stock in connection
with the acquisition
of MWI
Distributions, Inc. 525,416 526,620
Issuance of common
stock for the
exercise of options 427,400 428,000
Issuance of common
stock for the
exercise of options-
Strategic 249,500 250,000
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
</TABLE>
F-7
<PAGE>
NETCURRENTS, INC.
(formerly IAT RESOURCES CORPORATION)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Six Months Ended December 31, 1999 and
for the Year Ended June 30, 1999
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Preferred Stock
Additional
Series A, C, D, E, and F Series G Common Stock
---------------------------- ----------------------------- -----------------------------
Shares Amount Shares Amount Shares Amount
------------ ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common
stock from the
preferred Series D
conversion -
Augustine Fund $ $ 2,005,185 $ 2,005
stock for
consulting
services 650,000 650
Film transfer for stock
not yet issued at
June 30, 1999 -
Grosso-Jacobson
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
Issuance of common
stock to former
employee 512,500 513
Retirement of
common stock
Augustine fund (409,836) (410)
Former employee
settlement (601,852) (602)
Grosso-Jacobson (666,666) (666)
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other
Additional Compre-
Treasury Subscription Paid-in hensive Accumulated
Stock Receivable Capital Income Deficit Total
------------- ------------ ----------------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common
stock from the
preferred Series D
conversion -
Augustine Fund $ $ $ 1,245,800 $ $ $ 1,247,805
Issuance of common
Issuance of common
stock for
consulting
services
Film transfer for stock 279,350 280,000
not yet issued at
June 30, 1999 -
Grosso-Jacobson (694,981) (694,981)
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 (1,010,192) - 27,483,139 - (23,493,841) 3,003,007
Issuance of common
stock to former
employee (513) -
Retirement of
common stock
Augustine fund 410 -
Former employee
settlement 602 -
Grosso-Jacobson 666 -
</TABLE>
F-8
<PAGE>
NETCURRENTS, INC.
(FORMERLY IAT RESOURCES CORPORATION)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 AND
FOR THE YEAR ENDED JUNE 30, 1999
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Preferred Stock
Additional
Series A, C, D, E, and F Series G Common Stock
---------------------------- ----------------------------- -------------------------
Shares Amount Shares Amount Shares Amount
------------ ------------- ------------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
ISSUANCE OF COMMON
STOCK IN PAYMENT OF
DIVIDENDS ON SERIES
A PREFERRED STOCK $ $ 151,387 $ 151
ISSUANCE OF COMMON
STOCK FOR EXERCISE
OF OPTIONS 370,000 370
ISSUANCE OF COMMON
STOCK FROM THE
PREFERRED SERIES E
CONVERSION (225,000) (225) 2,155,416 2,155
ISSUANCE OF COMMON
STOCK FOR CONVERSION
OF SERIES C PREFERRED
STOCK FOR EXERCISE
OF OPTIONS (1,700,000) (1,700) 1,700,000 1,700
REVERSAL OF DIVIDEND
SERIES E PREFERRED
STOCK
ISSUANCE OF COMMON
STOCK FOR FINANCING
SERVICES RENDERED 70,000 70
ISSUANCE OF SERIES G
PREFERRED STOCK 1,875 1,875,000
ISSUANCE OF COMMON
STOCK FOR CONVERSION
DEBENTURES 310,446 310
ISSUANCE OF COMMON
STOCK FOR CONSULTING
SERVICES RENDERED 128,709 129
DIVIDENDS PAID ON
SERIES A PREFERRED
STOCK
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other
Additional Compre-
Treasury Subscription Paid-in hensive Accumulated
Stock Receivable Capital Income Deficit Total
------------- ------------ ----------------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
ISSUANCE OF COMMON
STOCK IN PAYMENT OF
DIVIDENDS ON SERIES
A PREFERRED STOCK $ $ $ 318,599 $ $ $ 318,750
ISSUANCE OF COMMON
STOCK FOR EXERCISE
OF OPTIONS 313,130 313,500
ISSUANCE OF COMMON
STOCK FROM THE
PREFERRED SERIES E
CONVERSION (1,930) -
ISSUANCE OF COMMON
STOCK FOR CONVERSION
OF SERIES C PREFERRED
STOCK FOR EXERCISE
OF OPTIONS (398,800) 848,800 450,000
REVERSAL OF DIVIDEND
SERIES E PREFERRED
STOCK 66,250 66,250
ISSUANCE OF COMMON
STOCK FOR FINANCING
SERVICES RENDERED 133,630 133,700
ISSUANCE OF SERIES G
PREFERRED STOCK 1,875,000
ISSUANCE OF COMMON
STOCK FOR CONVERSION
DEBENTURES 389,690 390,000
ISSUANCE OF COMMON
STOCK FOR CONSULTING
SERVICES RENDERED 261,149 261,278
DIVIDENDS PAID ON
SERIES A PREFERRED
STOCK (212,500) (212,500)
</TABLE>
F-9
<PAGE>
NETCURRENTS, INC.
(FORMERLY IAT RESOURCES CORPORATION)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 AND
FOR THE YEAR ENDED JUNE 30, 1999
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Preferred Stock
Additional
Series A, C, D, E, and F Series G Common Stock
---------------------------- ----------------------------- -------------------------
Shares Amount Shares Amount Shares Amount
------------ ------------- ------------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
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
=========== ============= ============= ============ ========== =========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other
Additional Compre-
Treasury Subscription Paid-in hensive Accumulated
Stock Receivable Capital Income Deficit Total
------------- ------------ ----------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
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 $(1,010,192) $ (398,800) $ 30,704,372 $ 225,050 $(29,322,986) $2,098,140
</TABLE>
F-10
<PAGE>
NETCURRENTS, INC.
(FORMERLY IAT RESOURCES CORPORATION)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
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)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the For the
Six Months For the Six Months
Ended Year Ended Ended
December 31, June 30, December 31,
1999 1999 1998
------------------ ------------------ ---------------
(unaudited)
Cash flows from operating activities
<S> <C> <C> <C>
Net loss $ (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 48,881 103,981 28,579
Write-off of film projects in development 246,774 301,037 -
Amortization of related party covenant not to
compete - 115,000 115,000
Amortization of goodwill 45,000 99,282 75,000
Write-off of notes receivable and other assets 1,429,926 654,428 -
Write off of investment 300,000 - -
Issuance of common stock for services rendered 395,513 285,840 129,500
(Increase) decrease in
Accounts receivable (303,874) (475,649) (1,644,222)
Other assets and prepaid expenses (45,543) (86,644) (33,041)
Prepaid advertising expenses (583,392) - -
Increase (decrease) in
Accounts payable and accrued expenses 168,794 544,062 3,176,609
Deferred revenue 63,025 (139,126) 131,543
------------------ ------------------ --------------
Net cash used in operating activities (2,959,478) (1,320,028) (527,949)
------------------ ------------------ --------------
</TABLE>
F-11
<PAGE>
NETCURRENTS, INC.
(FORMERLY IAT RESOURCES CORPORATION)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
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)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the For the
Six Months For the Six Months
Ended Year Ended Ended
December 31, June 30, December 31,
1999 1999 1998
------------------ ------------------ ------------------
(unaudited)
CASH FLOWS FROM INVESTING ACTIVITIES
<S> <C> <C> <C>
Increase in short-term investments $ - $ (800,000) $ -
Additions to film costs - (278,388) (294,614)
Capital expenditures on fixed assets (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 cash provided by (used in) investing activities 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 (37,212) (1,210,802) -
Payments on capital lease obligation (28,938) (37,647) (28,247)
Net borrowings from related parties (25,000) 37,212 (84,346)
Proceeds from issuance of preferred stock 1,875,000 3,711,090 150
Proceeds from issuance of common stock 953,715 133,200 620,425
Offering costs - (192,500) -
Proceeds from convertible debentures, net of
offering costs 619,824 - -
------------------ ------------------ ------------------
Net cash provided by financing activities 3,357,389 2,440,553 857,242
------------------ ------------------ ------------------
Net increase (decrease) in cash and cash
equivalents 431,473 293,631 (516,396)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 367,382 73,751 73,751
------------------ ------------------ ------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 798,855 $ 367,382 $ 442,645
================== ================== ==================
</TABLE>
F-12
<PAGE>
NETCURRENTS, INC.
(FORMERLY IAT RESOURCES CORPORATION)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
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)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the For the
Six Months For the Six Months
Ended Year Ended Ended
December 31, June 30, December 31,
1999 1999 1998
------------ ----------- ------------
(unaudited)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<S> <C> <C> <C>
INTEREST PAID $ 36,120 $ 12,447 $ 6,224
============ =========== ============
INCOME TAXES PAID $ - $ - $ -
============ =========== ============
</TABLE>
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, 1999,
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:
<TABLE>
<CAPTION>
<S> <C>
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)
</TABLE>
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.
F-13
<PAGE>
NETCURRENTS, INC.
(FORMERLY IAT RESOURCES CORPORATION)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
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 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.
F-14
<PAGE>
NETCURRENTS, INC.
(FORMERLY IAT RESOURCES CORPORATION)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
- --------------------------------------------------------------------------------
NOTE 1 - BUSINESS ACTIVITY
NetCurrents, Inc. ("NC") (formerly IAT Resources Corporation) 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 results of
operations of MWI are included in these financial statements from the date
of acquisition.
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.
F-15
<PAGE>
NETCURRENTS, INC.
(FORMERLY IAT RESOURCES CORPORATION)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
- -------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of NC and its
wholly-owned subsidiaries, MWI and NCS (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.
REVENUE RECOGNITION
Amounts received as Internet monitoring fees are recognized as earned in
accordance with the contract or deferred until the month of the sale.
Licensing and distribution fees are recognized as earned in accordance
with the terms of the related agreements. Revenues from the sale of
completed productions are generally recognized upon their sale.
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, 1999. 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.
F-16
<PAGE>
NETCURRENTS, INC.
(FORMERLY IAT RESOURCES CORPORATION)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
- -------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
CAPITAL LEASES
The Company leases fixed assets under non-cancelable leases that are
classified as capital leases (see Note 10). The leased fixed assets have
been capitalized, and the related obligations have been recorded at the
fair value of the assets at the inception of the leases. The leased fixed
assets are depreciated using the straight-line method over the estimated
useful lives, and interest expense is recognized over the terms of the
leases.
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.
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 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.
F-17
<PAGE>
NETCURRENTS, INC.
(FORMERLY IAT RESOURCES CORPORATION)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
- -------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 1999 and June 30, 1999, the Company had uninsured cash of
$797,246 and $257,782, respectively. With regard to receivables, the risk
is relatively limited due to most customers being either domestic or
foreign broadcasting networks or established domestic and foreign
distributors.
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, 1999 and
June 30, 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 regarding realizability.
ADVERTISING
The Company expenses advertising costs as incurred. Advertising costs for
the six months ended December 31, 1999 and the year ended June 30, 1999
were $13,653 and $10,595, respectively.
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.
F-18
<PAGE>
NETCURRENTS, INC.
(FORMERLY IAT RESOURCES CORPORATION)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
- -------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
COMPREHENSIVE INCOME
For the year ended December 31, 1999, the Company adopted 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.
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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1999, the Financial Accounting Standards Board ("FASB")
adopted SFAS No. 135, "Rescission of FASB Statement No. 75 and Technical
Corrections," which is effective for financial statements with fiscal
years beginning after February 15, 1999. This statement is not applicable
to the Company.
In June 1999, the FASB issued SFAS No. 136, "Transfer of Assets to a
Not-for-Profit Organization or Charitable Trust that Raises or Holds
Contributions for Others." This statement is not applicable to the
Company.
F-19
<PAGE>
NETCURRENTS, INC.
(FORMERLY IAT RESOURCES CORPORATION)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
- -------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (Continued) In June 1999, the
FASB issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities." The Company does not expect adoption of SFAS No. 137
to have a material impact, if any, on its financial position or results of
operations.
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, 1999, 666,666 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.
In addition, the Company issued 500,000 options to each of the two
officers at an exercise price of $0.82 per share. All options are
exercisable and outstanding at December 31, 1999.
NOTE 4 - FILM COSTS
Film costs as of December 31, 1999 consisted of projects in development of
$224,988. Write-offs of projects in development for the six months ended
December 31, 1999 and the year ended June 30, 1999 aggregated to $246,774
and $301,037, respectively. Based on management's present estimate of
future revenues at December 31, 1999, substantially all of the unamortized
costs of completed projects will be amortized by June 30, 2004.
F-20
<PAGE>
NETCURRENTS, INC.
(FORMERLY IAT RESOURCES CORPORATION)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
- -------------------------------------------------------------------------------
NOTE 5 - FIXED ASSETS
Fixed assets as of December 31, 1999 and June 30, 1999 consisted of the
following:
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
----------- ----------
<S> <C> <C>
Furniture and equipment $ 255,944 $ 179,604
Computer equipment 77,784 86,648
Equipment held under capital leases 92,594 92,594
Leasehold improvements 4,620 49,744
----------- ----------
430,942 408,590
Less accumulated deprecation and
amortization 299,383 296,744
----------- ----------
TOTAL $ 131,559 $ 111,846
=========== ==========
</TABLE>
Depreciation and amortization expense for the six months ended December
31, 1999 and the year ended June 30, 1999 were $48,881 and $103,981,
respectively.
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. Subsequent to December 31, 1999, the Company sold 43,000
shares. The Company had recorded an unrealized gain of $225,050 related to
this investment at December 31, 1999.
This investment is stated at cost or fair market value, which approximates
its fair value as of December 31, 1999, and is classified as
available-for-sale.
F-21
<PAGE>
NETCURRENTS, INC.
(FORMERLY IAT RESOURCES CORPORATION)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
- -------------------------------------------------------------------------------
NOTE 7 - 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.
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 3,000,000 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.
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.
F-22
<PAGE>
NETCURRENTS, INC.
(FORMERLY IAT RESOURCES CORPORATION)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
- -------------------------------------------------------------------------------
NOTE 7 - PREFERRED STOCK (CONTINUED)
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 225,000 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.
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 275,000 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.
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 1,875 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.
F-23
<PAGE>
NETCURRENTS, INC.
(FORMERLY IAT RESOURCES CORPORATION)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
- -------------------------------------------------------------------------------
NOTE 7 - PREFERRED STOCK (CONTINUED)
PREFERRED STOCK, SERIES G (Continued)
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 $957,000 as a dividend, offset
by additional paid-in capital.
NOTE 8 - 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 $1,350,000.
There are a total of 433,140 warrants outstanding as of December 31, 1999.
NOTE 9 - 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.
F-24
<PAGE>
NETCURRENTS, INC.
(FORMERLY IAT RESOURCES CORPORATION)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
- -------------------------------------------------------------------------------
NOTE 9 - STOCK OPTIONS AND WARRANTS (CONTINUED)
STOCK OPTIONS (Continued)
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 the six
months ended December 31, 1999 and the year ended June 30, 1999:
<TABLE>
<CAPTION>
For the
Six Months For the
Ended Year Ended
December 31, June 30,
1999 1999
----------- ----------
Net loss available for common shareholders
<S> <C> <C>
As reported $(5,670,345) $(3,213,489)
Pro forma $(7,826,478) $(4,923,289)
Basic loss per common share
As reported $ (0.37) $ (0.33)
Pro forma $ (0.51) $ (0.51)
Diluted loss per common share
As reported $ (0.37) $ (0.33)
Pro forma $ (0.51) $ (0.51)
</TABLE>
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 six months
ended December 31, 1999 and the year ended June 30, 1999: dividend yields
of 0% and 0%, respectively; expected volatility of 100% and 100%,
respectively; risk-free interest rates of 6.2% and 5.5%, respectively; and
expected lives of two years and two years, respectively.
F- 25
<PAGE>
NETCURRENTS, INC.
(FORMERLY IAT RESOURCES CORPORATION)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
- -------------------------------------------------------------------------------
NOTE 9 - 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:
<TABLE>
<CAPTION>
Weighted-
Average
Number of Exercise
Shares Price
----------- --------------
<S> <C> <C>
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
========== -------
EXERCISABLE, DECEMBER 31, 1999 2,864,000 $ 1.13
========== -------
</TABLE>
F- 26
<PAGE>
NETCURRENTS, INC.
(FORMERLY IAT RESOURCES CORPORATION)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
- -------------------------------------------------------------------------------
NOTE 9 - STOCK OPTIONS AND WARRANTS (CONTINUED)
STOCK OPTIONS (Continued)
The weighted-average remaining contractual life of the options outstanding
is 4.62 years at December 31, 1999. The exercise prices for the options
outstanding as of December 31, 1999 ranged from $0.82 to $2.48, and the
information relating to these options is as follows:
<TABLE>
<CAPTION>
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
- -------------- ------------------- -------------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 0.82 500,000 500,000 4.11 $ 0.82 $ 0.82
$ 0.83 - 2.48 3,268,625 2,364,000 4.69 $ 1.35 $ 1.20
------------------- --------------
3,768,625 2,864,000
================== ==============
</TABLE>
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
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 1,750,000 warrants outstanding as of December 31, 1999.
F- 27
<PAGE>
NETCURRENTS, INC.
(FORMERLY IAT RESOURCES CORPORATION)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
- -------------------------------------------------------------------------------
NOTE 10 - 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
December 2004. At December 31, 1999, future minimum commitments under
these obligations are as follows:
<TABLE>
<CAPTION>
Year Ending Capital Operating
December 31, Leases Leases
------------ ------- ---------
<S> <C> <C>
2000 $ 4,708 $ 185,000
2001 - 185,000
2002 - 102,000
2003 - 94,000
2004 - 90,000
--------- ----------
Total minimum lease payments 4,708 $ 656,000
==========
Less amount representing interest 388
---------
PRESENT VALUE OF NET MINIMUM LEASE
PAYMENTS $ 4,320
=========
</TABLE>
For capitalized leases, the original contract's present value, net of
amortization, is included in net fixed assets. The net book value of fixed
assets under capital leases at December 31, 1999 and June 30, 1999 was
$34,723 and $50,155, respectively. Amortization expense for leased fixed
assets was $15,432 and $30,865 for the six months ended December 31, 1999
and the year ended June 30, 1999, respectively.
Rent expense for the six months ended December 31, 1999 and the year ended
June 30, 1999 was $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.
F- 28
<PAGE>
NETCURRENTS, INC.
(FORMERLY IAT RESOURCES CORPORATION)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
- -------------------------------------------------------------------------------
NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
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, 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 $135,930,
which was recorded subsequent to the year ended December 31, 1999.
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 seeks to recover commissions owed to
MWI, and the Company is currently drafting the final terms for the
settlement.
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.
F- 29
<PAGE>
NETCURRENTS, INC.
(FORMERLY IAT RESOURCES CORPORATION)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
- -------------------------------------------------------------------------------
NOTE 11 - 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, 1999, 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.
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.
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. The Company further issued 70,000 shares of common stock valued at
$133,700 for services rendered.
F- 30
<PAGE>
NETCURRENTS, INC.
(FORMERLY IAT RESOURCES CORPORATION)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
- -------------------------------------------------------------------------------
NOTE 11 - RELATED PARTY TRANSACTIONS (CONTINUED)
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,
1999.
Payables to related parties of $25,000 at June 30, 1999 were payable on
demand and were paid in full at December 31, 1999.
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, 1999.
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, 1999.
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, 1999.
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 are non-interest-bearing and are payable on
December 31, 2000. The loans are due to two officers of the Company, of
which $25,000 was paid in July 1999, leaving a remaining balance of
$44,046 as of December 31, 1999. The balance was paid subsequent to
December 31, 1999.
F- 31
<PAGE>
NETCURRENTS, INC.
(FORMERLY IAT RESOURCES CORPORATION)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
- -------------------------------------------------------------------------------
NOTE 12 - EMPLOYMENT AGREEMENTS
The Company has entered into agreements for the services of certain of its
key executives. These agreements expire through June 30, 2002 and provide
for approximate aggregate annual payments of $411,000 and an annual auto
allowance of $21,000. 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.
NOTE 13 - INCOME TAXES
Significant components of the provision for income taxes based on income
for the six months ended December 31, 1999 and the year ended June 30,
1999 were as follows:
<TABLE>
<CAPTION>
For the
Six Months For the
Ended Year Ended
December 31, June 30,
1999 1999
----------- ----------
Current
<S> <C> <C>
Federal $ - $ -
State - 800
----------- ----------
- 800
----------- ----------
Deferred
Federal - -
State - -
----------- ----------
- -
----------- ----------
PROVISION FOR INCOME TAXES $ - $ 800
=========== ==========
</TABLE>
F- 32
<PAGE>
NETCURRENTS, INC.
(FORMERLY IAT RESOURCES CORPORATION)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
- -------------------------------------------------------------------------------
NOTE 13 - INCOME TAXES (CONTINUED)
The provision for (benefit from) federal income taxes at statutory rates
was computed as follows for the six months ended December 31, 1999 and the
year ended June 30, 1999:
<TABLE>
<CAPTION>
For the
Six Months For the
Ended Year Ended
December 31, June 30,
1999 1999
------------- -----------
<S> <C> <C>
Benefit from income taxes at statutory 34% rate $ (1,464,000) $ (906,000)
Tax effect (benefit) of
Change in valuation allowance 1,845,000 1,061,000
State income tax deduction, net of federal
benefit (381,000) (155,000)
----------- ----------
TOTAL $ - $ -
=========== ==========
</TABLE>
The Company's total deferred tax assets and deferred tax asset valuation
allowance at December 31, 1999 were as follows:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax asset
Net operating loss carryforwards $8,813,000
Valuation allowance (8,813,000)
----------
NET DEFERRED TAX ASSETS $ -
==========
</TABLE>
As of December 31, 1999, the Company had federal and state net operating
loss carryforwards of approximately $22,869,000 and $11,434,000,
respectively, which expire through 2004 and 2015, 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.
F- 33
<PAGE>
NETCURRENTS, INC.
(FORMERLY IAT RESOURCES CORPORATION)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
- -------------------------------------------------------------------------------
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.
<TABLE>
<CAPTION>
Six Months Ended December 31, 1999
------------------------------------------
Internet Distribution Total
------------- ------------- -------------
<S> <C> <C> <C>
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
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
</TABLE>
NOTE 15 - MAJOR CUSTOMERS
For the six months ended December 31, 1999, the Company had sales to one
customer representing 10% of total revenues. For the year ended June 30,
1999, the Company had sales to one customer representing 77% of total
revenues.
As of December 31, 1999, 1% of the Company's accounts receivable was from
one customer. As of June 30, 1999, 70% of the Company's accounts
receivable was from one customer.
NOTE 16 - FOURTH QUARTER ADJUSTMENTS
Certain accounts receivable balances amounting to $1,230,035 were written
off as collectability on these receivables could not be determined.
In addition, an adjustment to additional paid-in capital of $957,000 was
made to record dividends on Series G preferred stock, representing a
beneficial conversion feature.
F- 34
<PAGE>
NETCURRENTS, INC.
(FORMERLY IAT RESOURCES CORPORATION)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
- -------------------------------------------------------------------------------
NOTE 17 - YEAR 2000 ISSUE
The Company has completed a comprehensive review of its computer systems
to identify the systems that could be affected by ongoing Year 2000
problems. Upgrades to systems judged critical to business operations have
been successfully installed. To date, no significant costs have been
incurred in the Company's systems related to the Year 2000.
Based on the review of the computer systems, management believes all
action necessary to prevent significant additional problems has been
taken. While the Company has taken steps to communicate with outside
suppliers, it cannot guarantee that the suppliers have all taken the
necessary steps to prevent any service interruption that may affect the
Company.
NOTE 18 - SUBSEQUENT EVENTS
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 1,500,000 shares of Series C Convertible
Stock, as well as the exercise of the option to purchase 1,300,000 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,
2002.
On January 19, 2000, the Company entered into three promissory note
agreements with an 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. 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.
<PAGE>
NOTE 18 - SUBSEQUENT EVENTS (CONTINUED)
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 3,998,000 warrants at exercise prices ranging from
$6 to $9 per share for the Company's common stock.
Exhibit 10.5
MWI DISTRIBUTION
` 9720 WILSHIRE BOULEVARD, #700
BEVERLY HILLS, CA 90212
(310) 860-0200
As of December 31, 1999
Mr. Thomas Daniels
9720 Wilshire Blvd., #700
Beverly Hills, CA 90212
RE: AMENDMENT OF EMPLOYMENT AGREEMENT
Dear Tom:
Reference is hereby made to the certain Employment Agreement, dated July 15,
1998, as amended on January 14, 1999, and as of June 30, 1999, between Thomas
Daniels ("Daniels") and TPEG Merger Company, now known as MWI Distribution, Inc.
("MWI") (the "Agreement").
In consideration of the mutual covenants and promises contained herein, as well
as, other good and valuable consideration, the sufficiency and receipt of which
is hereby acknowledged, the parties agree to amend the Agreement as follows:
1. Past Due Compensation: Executive releases Company from and against any
obligation relating to any amounts of past due compensation which may be
due to Executive as of the date of this Amendment. The parties hereto
acknowledge that the consideration exchanged in this Amendment is adequate
for Executive to forgive the Company of any of these amounts owed to
Executive heretofore.
2. Accrued Vacation Compensation: Executive release Company from and against
any obligation relating to any amounts of past due compensation for
vacation pay accrual which may be due to Executive as of the date of this
Amendment. The parties hereto acknowledge that the consideration exchanged
in this Amendment is adequate for Executive to forgive the Company of any
of these amounts owed to Executive heretofore.
3. Automobile Reimbursement: The Automobile Reimbursement set forth in
Paragraph 4d of the Agreement, as amended in Paragraph 3 of the Amendment,
dated as of June 30, 1999 shall be eliminated, effective April 15, 2000,
calculated on a pro-rata basis.
All other terms and conditions contained in the Agreement, as amended, shall
remain in full force and effect unless and until modified in writing and signed
by the parties hereto.
<PAGE>
If the aforementioned is accepted and agreed to, please indicate such by
affixing your signature as indicated below, and together with ours shall
represent the complete Agreement.
Sincerely, ACCEPTED & AGREED
/S/ ARTHUR H. BERNSTEIN /S/ THOMAS DANIELS
- ------------------------------- --------------------------
Arthur H. Bernstein Thomas Daniels
Executive Vice President
:AHB
cc: Irwin Meyer
EXHIBIT 10.9
EMPLOYMENT AGREEMENT
THIS AGREEMENT by and among IAT Resources Corporation (the "Company"), a
Delaware corporation, Infolocity, Inc., a California corporation ("Infolocity")
and Victor A. Holtorf (the "Executive"), dated as of the 21st day of December,
1999.
WITNESSETH
WHEREAS, the Company and Infolocity have consummated a merger transaction
whereby Infolocity has become a wholly owned subsidiary of the Company; and
WHEREAS, the Company wishes to employ the Executive and Infolocity wishes
to continue to employ the Executive for the period provided for in this
Agreement, and the Executive is willing to serve in the employ of the Company
and Infolocity on the terms and subject to the conditions set forth herein;
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants herein contained, the parties agree as follows:
1. EMPLOYMENT. The Company and Infolocity hereby agree to employ the
Executive, and the Execute hereby agrees to be employed with the Company and
Infolocity, on the terms and subject to the conditions set forth herein.
2. TERM OF EMPLOYMENT. The term of the Executive's employment under this
Agreement (the "Employment Period") shall commence as of the date of this
Agreement, and shall end on December 21, 2002 (the date which is three years
from the date of this Agreement), unless extended or terminated earlier in
accordance with Section 5.
3. TITLES AND RESPONSIBILITIES.
(a) TITLES. During the Employment Period, the Executive shall serve as
the Executive Vice President and Chief Operating Officer of the Company and
President of Infolocity. Executive's service as the Company's Executive Vice
President and Chief Operating Officer shall be without any additional
compensation to the Executive apart from what the Executive will receive from
Infolocity for continuing to serve as its President. The Executive shall report
and be responsible to the Chief Executive Officer of the Company and the Board
of Directors of Infolocity.
(b) RESPONSIBILITIES. Company hereby engages Executive to provide his
exclusive services as Executive Vice President of the Company and Chief
Executive Officer of Infolocity. Pursuant to the terms and conditions hereof,
Executive hereby accepts such engagement. Executive shall render all services
usually and customarily rendered by and required of executives similarly
employed in the internet industry. Executive shall report only to the Chief
Executive Officer of the Company the Board of Directors of Infolocity.
(c) PLACE OF PERFORMANCE. During the Employment Period, the
Executive's office shall be located at Infolocity's current offices, which shall
be in the Silicon Valley area of
<PAGE>
Northern California, except for required business travel consistent with the
Executive's position. The Company shall provide the Executive with an office and
other support reasonably appropriate to his duties.
(d) BUSINESS TIME. During the Employment Period, the Executive agrees
to devote his full business time during normal business hours to the business
and affairs of the Company and to use his best efforts to perform faithfully,
diligently and competently the responsibilities assigned to him hereunder, to
the extent necessary to discharge such responsibilities, except for (i) time
spent serving on corporate, civic or charitable boards or committees only if and
to the extent not substantially interfering with the performance of such
responsibilities, (ii) periods of vacation, disability and sick leave to which
he is entitled, and (iii) reasonable activities having a charitable, educational
or other public interest purpose.
4. COMPENSATION.
(a) BASE SALARY. During the Employment Period, the Executive shall
receive a minimum annual base salary (`Base Salary") equal to $150,000, payable
in accordance with the customary payroll as in effect from time to dine for
senior executives of the Company. The Board shall review the Executive's Base
Salary for possible increases of such Base Salary in relationship to the goals
and performance of the Company and prevailing competitive conditions.
(b) BONUS. During the Employment Period, the Executive shall
participate in the Company's bonus plans to the extent that one exists or unless
otherwise granted by the Board of Directors of the Company.
(c) VACATION. During the Employment Period, the Executive shall be
entitled to four (4) weeks paid vacation per year.
(d) EXPENSES. During the Employment Period, the Executive shall be
entitled to receive prompt reimbursement for all reasonable business-related
expenses incurred by the Executive in accordance with the policies and
procedures of the Company as applicable to its senior executives.
(e) OTHER EXECUTIVE BENEFITS. Without limiting the foregoing
provisions of this Section 4, during the Employment Period the Executive shall
be entitled to participate in or be covered under ail compensation, bonus,
pension, retirement and welfare, and fringe benefit plans, programs and policies
of the Company applicable to senior executives of the Company.
(f) STOCK OPTIONS. To the extent Executive receives stock options in
the Company, the stock options will accelerate vesting in order to become fully
vested upon Executive's termination of his employment for a Change of Control,
upon termination of his employment for Good Reason, or upon termination of his
employment by the Company Without Cause (as defined below).
5. TERMINATION.
(a) DEATH OR DISABILITY. The Executive's employment pursuant to this
Agreement shall terminate automatically upon the Executive's death. The Company
may terminate the Executive's employment for Disability by giving to the
Executive notice of its intention
Page 2
<PAGE>
accordance with Section 5(e) unless Executive returns to the performance of the
essential functions of his employment within 30 days after receipt of such
notice. For purposes of this Agreement, "Disability" means any physical or
mental condition that renders the Executive unable to perform the essential
functions of his employment for 90 consecutive days or for a total of 180 days
in any period of 360 consecutive days.
(b) VOLUNTARY TERMINATION AFTER CHANGE IN CONTROL. Notwithstanding
anything in this Agreement to the contrary, the Executive may voluntarily
terminate his employment at any time, after a Change in Control, (i) for any
reason upon six months' written notice to the Company, or (ii) if termination is
for Good Reason or on account of the Executive's serious illness, upon written
notice pursuant to Section 5(e) but without any notice period. In the event of
any termination pursuant to this Section 5(b), the Executive shall have no
further obligation to the Company under this Agreement, except as provided in
Section 9.
(c) CAUSE. The Company may terminate the Executive's employment for
Cause. For purposes of this Agreement, `Cause' means:
Executive's engaging in gross misconduct materially and demonstrably injurious
to the Company; failure to perform the services required hereunder; violation of
any written resolution adopted by the Company's Board of Directors or Executive
Committee; or conviction by final judgment of a felony constituting fraud,
theft, embezzlement or homicide.
(d) GOOD REASON. The Executive may terminate his employment for Good
Reason. For purposes of this Agreement, "Good Reason" means (i) a material
reduction in the nature or scope of the Executive's position, title, status,
authority, duties, powers or functions on the date of this Agreement; (ii) the
assignment to the Executive of any material duties which are not commensurate
with or at least as prestigious as the Executive's duties and responsibilities
as contemplated by this Agreement; (iii) a material breach by the Company of any
of the provisions of this Agreement; (iv) the relocation of the Company's
principal executive offices to a location outside the Silicon Valley area of
Northern California; or (v) the failure by the Company to obtain an agreement,
reasonably satisfactory m the Executive, from any successor to assume and agree
to perform this Agreement, as contemplated by Section 12(b). After a Change in
Control, in addition to items (i) through (v), "Good Reason" shall include (vi)
a determination by the Executive, in his sole discretion, during the 30-day
period commencing 180 days following a Change in Control, that due to the Change
in Control he can no longer effectively perform his duties.
(e) NOTICE OF TERMINATION Any termination by the Company for Cause or
Disability or by the Executive for Good Reason shall be communicated by a
written notice (a "Notice of Termination") to the other party hereto given in
accordance with Section 13(d). A "Notice of Termination" shall set forth in
reasonable detail the events giving rise m such termination.
(f) DATE OF TERMINATION. For proposes of this Agreement, the term
"Date Of Termination" means (i) in the case of termination for Disability, 30
days after Notice of Termination is given (provided that the Executive shall not
have returned to the full-time performance of his duties during such 30-day
period); (ii) in the case of termination for Cause, a date specified in the
Notice of Termination (which shall not be less than 30 days nor more than 60
days from the date such Notice of Termination is given); (iii) in the case of
any other termination for which a Notice of
Page 3
<PAGE>
Termination is required, the date of receipt of such Notice of Termination or,
if later, the date specified therein, as the case may be; and (iv) in all other
cases, the actual date on which the Executive's employment terminates during the
Employment Period.
(g) GUARANTEE. The Company irrevocably guarantees the payment of one
year of Executive's Base Salary in the event of a termination of Executive's
employment with the Company pursuant to Section 5(b), 5(d) or S(e) (the
"Guaranteed Obligations"). The Company's guarantee shall cover any amendment or
modification to this Agreement, unless such amendment specifically deletes this
section. The Company hereby waives: (i) any right to require Executive to pursue
a remedy before proceeding against the Company (provided that Executive shall
first provide the Company with 30 days written notice and a reasonable
opportunity to cure); (ii) subject to the preceding clause (i), demand,
diligence, presentment and notices of protest, dishonor and nonpayment; and
(iii) rights of subrogation or reimbursement.
6. OBLIGATIONS OF THE COMPANY UPON TERMINATION.
(a) DEATH, DISABILITY, CAUSE AND VOLUNTARY TERMINATION. If at any time
before or after a Change in Control the Executive's employment is terminated by
the Company during the Employment Period by reason of the Executive's death,
Disability or for Cause, or is voluntarily terminated by the Executive (other
than for Good Reason), the Company shall have no further obligation to the
Executive or the Executive's legal representatives other than (i) those
obligations earned for Base Salary and payments under any Company bonus plan
that have accrued at the Date of Termination (the "Accrued Obligations"), (ii)
those obligations expressly provided under any of the plans referred to in
Section 4(e) (the "Benefit Rights") and (iii) upon a termination of the
Executive's employment by reason of his death, the payment provided in Section
6(a)(iii), if applicable, shall be paid to the Executive or the Executive's
estate, as the case may be, in a lump sum in cash within 15 days of the Date of
Termination.
(b) PRIOR TO CHANGE IN CONTROL TERMINATION BY THE COMPANY OTHER THAN FOR
CAUSE OR DISABILITY AND TERMINATION BY THE EXECUTIVE FOR GOOD REASON.
(i) LUMP SUM PAYMENTS. If during the Employment Period and prior to a
Change in Control, the Company terminates the Executive's employment other than
for Cause or Disability, or the Executive terminates his employment for Good
Reason, the Company shall provide the Benefit Rights and shall pay to Executive
in a lump sum in cash within 15 days of the Date of Termination the of the
following amounts: (A) file Accrued Obligation; plus (B) an amount equal to the
product of (1) one-twelfth times (2) the sum of the Executive's Base Salary plus
the Executive's average bonus for the three years ended before the Date of
Termination, times (3) the number full or partial of months remaining in the
unexpired term of the Employment Period, but in no event less than twelve months
(such period being the "Severance Period").
(ii) WELFARE BENEFITS. Tile Company shall provide or cause to be provided
to the Executive and his family for the Severance Period continued life, medical
and dental and disability insurance benefits at least. equal to those which the
Executive was receiving or entitled to receive immediately prior to the
termination of employment described in Section 6(b)(i).
(iii) OFFICE. For the Severance Period, the Company shall provide the
Executive with an office reasonably acceptable to him.
Page 4
<PAGE>
(iv) DISCHARGE OF THE COMPANY'S OBLIGATIONS. The Company shell have no
further obligations to the Executive in respect of any termination described in
this Section 60(b)(i).
(c) FOLLOWING CHANGE IN CONTROL, TERMINATION BY THE COMPANY OTHER THAN FOR
CAUSE OR DISABILITY AND TERMINATION BY THE EXECUTIVE FOR GOOD REASON.
(i) LUMP SUM PAYMENTS. If during the Employment Period and following a
Change in Control, the Company terminates the Executive's employment other than
for Cause or Disability, or the Executive terminates his employment for Good
Reason, the Company shall provide the Benefits Rights and shall pay to the
Executive in a lump sum in cash within 15 days of the Date of Termination the
sum of the following amounts: (a) the Accrued Obligations; and (B) an amount
equal to 2.99 times the sum of the amounts described in clause (2) of Section
6(b)(i)(B).
(ii) WELFARE BENEFITS. The Company shall provide or cause to be provided to
the Executive and his family for a period of 36 months following such
termination continued life, medical and dental and disability insurance benefits
at least equal to those which the Executive was receiving or entitled to
receive. immediately prior m the termination of employment described in Section
6(c)(i).
(iii) OFFICE. For a period of 36 months following such termination, the
Company shall provide the Executive with an office reasonably acceptable to him
and other support services reasonably appropriate to an executive of a public
corporation.
(iv) DISCHARGE OF THE COMPANY'S OBLIGATIONS. The Company shall have no
further obligations to the Executive in respect of any termination described in
this Section 6(c).
(d) CHANGE IN CONTROL. A Change in Control shall be deemed to have
occurred:
(1) the shareholders of the Company shall approve (i) any merger,
consolidation or recapitalization of the Company (or, if the capital
stock of the Company is affected, any subsidiary of the Company) or
any sale, lease, or other transfer (in one transaction or a series of
transactions contemplated or arranged by any party as a single plan)
of all or substantially all of the assets of the Company (each of the
foregoing being an "Acquisition Transaction") where (x) the
shareholders of the Company immediately prior to such Acquisition
Transaction would not immediately after such Acquisition Transaction
beneficially own, directly or indirectly, shares representing in the
aggregate more than 65 % of (A) the then outstanding common stock of
the corporation surviving or resulting from such merger, consolidation
or recapitalization or acquiring such assets of the Company, as the
case may be (the "SURVIVING CORPORATION") (or of its ultimate parent
corporation, if any) or (B) the Combined Voting Power (as defined
below) of the then outstanding Securities (as defined below) of the
Surviving Corporation (or of its ultimate parent corporation, if may)
or (y) the Incumbent Directors at the time of the initial approval of
such Acquisition Transaction would not immediately after such
Acquisition Transaction constitute a majority of the Board of
Directors of the Surviving Corporation (or of its ultimate parent
Page 5
<PAGE>
corporation, if any) or (ii) any plan or proposal for the liquidation
or dissolution of the Company; or
(2) any Person (as defined below) shall become the beneficial owner (as
defined in Rule 13d-3 and 13-d-5 under the Exchange Act), directly or
indirectly securities of the Company representing in the aggregate 50%
or more of either (i) the then outstanding shares of Stock, or (ii)
the Combined Voting Power of all then outstanding Voting Securities of
the Company; providing; however that notwithstanding the foregoing, a
Change in Control of the Company shall not be deemed to have occurred
for purposes of this subsection (2) solely as the result of:
(i) an acquisition of securities by the Company which, by reducing
the number of shares of Stock or other Voting Securities
outstanding, increases (i) the proportionate number of shares of
Stock beneficially owned by any Person to 50% more of the shares
of Stock then outstanding or (ii) proportionate voting power
represented by the Voting Securities beneficially owned by any
Person to 50% or more of the Combined Voting Power of all then
outstanding Voting Securities; or
(ii) an acquisition of securities directly from the Company except
that this subsection (ii) shall not apply to:
(A) any conversion of a security that was not acquired directly
from the Company; or
(B) any acquisition of securities if the Incumbent Directors at
the time of the initial approval of such acquisition would
not immediately after (or otherwise as a result of) such
acquisition constitute a majority of the Board;
PROVIDED, HOWEVER, that if any Person referred to in subsections
(i) or (ii) of this clause (2) shall thereafter become the
beneficial owner of any additional shares of Stock or other
Voting Securities of the Company (other than pursuant to a stock
split, stock dividend or similar transaction or an acquisition
exempt under such subsection (ii), then a Change in Control shall
be deemed to have occurred for purposes of this clause (2).
For purposes of this Agreement:
(A) "PERSON" shall mean any individual, entity (including,
without limitation, any corporation, partnership, trust,
joint venture, association or governmental body and
Page 6
<PAGE>
any
successor to any such entity) or group (as defined in
Sections 13(d)(3) or 14(d)(2) of the Exchange Act and the
rules and regulations thereunder); provided, however, that
Person shall not include Executive, the Company, any of its
majority-owned subsidiaries, any executive benefit plan of
the Company or any of its majority-owned subsidiaries or any
entity organized, appointed or established by Executive, the
Company or any of its majority-owned subsidiaries for or
pursuant to the terms of any such plan, or any of their
affiliates;
(B) "VOTING SECURITIES" shall mean all securities of a
corporation having the right under ordinary circumstances to
vote in an election of the board of directors of such
corporation; and
(C) "COMBINED VOTING POWER" shall mean the aggregate votes
entitled to be cast generally in the election of directors
of a corporation by holders of then outstanding Voting
Securities of such corporation.
7. NO MITIGATION: NO OFFSET. In no event shall the Executive be obligated
to seek other employment by way of mitigation of the amounts payable to the
Executive under any of the provisions of this Agreement. Any amounts that may be
earned by the Executive other than from the Company after the Date of
Termination shall not reduce the Company's obligation to make any payments
hereunder. The amounts payable by the Company hereunder shall not be subject to
any right of set-off that the Company may assert against the Executive.
8. NONCOMPETITION.
(a) SCOPE. In the case of the Executive's termination of employment,
including due to the expiration of the Employment Period, the Executive shall
not, for one year following the Date of Termination, (a) divert to any
competitor of the Company in the business conducted by the Company (the
"Designated Industry") any active project of the Company, or (b) solicit or
encourage any officer, employee or consultant of the Company to leave their
employ for employment by or with any competitor of the Company in the Designated
Industry. If at any time the provisions of this Section 8 shall be determined to
be invalid or unenforceable, by reason of being vague or unreasonable as to
area, duration or scope of activity, this Section 8 shall be considered
divisible and shall become and be immediately amended to apply only to such
area, duration and scope of activity as shall be determined to be reasonable and
enforceable by the court or other body having jurisdiction over the matter; and
the Executive agrees that this Section 8 as so amended shall be valid and
binding as though any invalid or unenforceable provision had not been included
herein. Nothing in this Section 8 shall prevent or restrict the Executive from
engaging in any business or industry other than the Designated Industry in any
capacity.
Page 7
<PAGE>
(b) IRREPARABLE HARM. The Executive agrees that the remedy at law for
any breach of this Section 8 shall be inadequate and that the Company shall be
entitled to injunctive relief.
9. INDEMNIFICATION. The Company shall indemnify and hold harmless the
Executive, his heirs and personal representatives to the fullest extent
permitted by applicable law, as now or hereafter in effect, with respect to any
acts, omissions or events that occurred while the Executive is or was an
employee of the Company or serves or served the Company or any other corporation
or other enterprise of any kind in any capacity at the request of the Company
(an "Enterprise"). Without limiting the generality of the foregoing, the Company
shall promptly pay, or reimburse the Executive for, or advance to the Executive
amounts for the payment of (a) all of the Executive's reasonable expenses,
including attorneys' fees and court costs, actually and reasonably incurred in
connection with the defense of any action, suit or proceeding, including any
suit seeking recovery under any Company director's and officer's liability
policy, or in connection with any appeal thereof, to which the Executive may be
a party by reason of any action taken or failure to act under or in connection
with his service for the Company or an Enterprise; and (b) all amounts required
to be paid in settlement of or in satisfaction of a judgment in connection with
any such action, suit or proceeding; provided, however, that the Company shall
not be required to indemnify or hold harmless the Executive, his heirs or
personal representatives in any manner whatsoever in the event and to the extent
there is a final and nonappealable judgment by a court of competent jurisdiction
that the liability incurred by the Executive resulted from his gross negligence,
fraud or willful malfeasance.
10. ARBITRATION. If a dispute arises between the parties respecting the
terms of this Agreement or Executive's employment with the Company, including,
without limitation, any dispute with respect to the validity of this Agreement
or this arbitration clause, such dispute shall be finally resolved by binding
arbitration as follows. Any party may require that the dispute be submitted to
binding arbitration, and in such event the dispute shall be settled by
arbitration in accordance with the Commercial Arbitration Rules of the American
Arbitration Association. If a matter is submitted to arbitration, each of the
parties shall choose one arbitrator. The arbitrators selected by the two parties
shall choose a third arbitrator who shall act as chairman and shall be an
attorney and a member of the panel of the American Arbitration Association. Each
party shall agree to a speedy hearing upon the matter in dispute and the
judgment upon the award rendered by the arbitrators may be entered in any court
having jurisdiction thereof. The place of arbitration shall be Los Angeles,
California. Notwithstanding anything to the contrary contained herein, no
discovery shall be permitted in the arbitration proceeding.
11. SUCCESSORS.
(a) This Agreement is personal to the Executive and, without the prior
written consent of the Company, shall not be assignable by the Executive
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by the Executive's legal
representatives.
(b) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors. The Company shall require any successor to all
or substantially all of file business and/or assets of the Company, whether
direct or indirect, by an agreement in form and
Page 8
<PAGE>
substance reasonably satisfactory to the Executive, expressly to assume and
agree to perform this Agreement.
12. MISCELLANEOUS
(a) WITHHOLDING. Any payments provided for hereunder shall be paid net
of any applicable withholding required under federal, state or local law and any
additional withholding to which the Executive has agreed.
(b) APPLICABLE LAW. This Agreement shall be governed by and construed
in accordance with the laws of California, applied without reference to
principles of conflict of laws.
(c) AMENDMENTS. This Agreement may not be amended or modified
otherwise than by a written agreement executed by the parties hereto or their
respective successors and legal representatives.
(d) NOTICES. All notices and other communications hereunder shall be
in writing and shall be deemed to have been duly given when delivered or mailed
to the other party, by registered or certified mail, return receipt requested,
postage prepaid, addressed as follows:
If to the Executive:
Victor A. Holtorf
616 Port Drive
San Mateo, CA 94402
If to the Company:
IAT Resources Corporation
5757 Wilshire Boulevard, Penthouse I
Los Angeles, CA 90036
or to such other address as either party shall have furnished to the other in
writing in accordance herewith, except that notice of change of address shall be
effective only when actually received by the addressee.
(e) SEVERABILITY. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement.
(f) WAIVER. Waiver by any party hereto of any breach or default by any
other party of any of the terms of this Agreement shall not operate as a waiver
of any other breach or default, whether similar to or different from the breach
or default waived.
(g) ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto with respect to the matters referred to herein, and
no other agreement, verbal or otherwise, shall be binding as between the parties
unless k is in writing and signed by the party against whom enforcement is
sought. This Agreement wholly supersedes the Employment, Confidential
Information and Invention Assignment Agreement entered into between Infolocity
and Executive on or about March 12, 1999, which such agreement has been
terminated as of the date
Page 9
<PAGE>
hereof. All prior and contemporaneous agreements and understandings between the
parties with respect to the subject matter of this Agreement are superseded by
this Agreement.
(h) SURVIVAL. The respective rights and obligations of the parties
hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations.
(i) CAPTIONS AND REFERENCES. The captions of this Agreement are not
part of the provisions hereof and shall have no force or effect. References in
this Agreement to section number are references to sections of the Agreement
unless otherwise specified.
(j) CONSENT TO JURISDICTION. Each of the parties to this Agreement
hereby submits to the exclusive jurisdiction of the courts of the State of
California and the Federal courts of the United States of America located in
such state solely in respect of the interpretation and enforcement of the
provisions of this Agreement, and hereby waives, and agrees not to assert, as a
defense in any action, suit or proceeding-for the interpretation and enforcement
of this Agreement, that it is not subject thereto; that such action, suit or
proceeding, may not be brought or is not enforceable in said courts; that this
Agreement may not be enforced in or by said courts; that its property is exempt
or immune from execution; that the suit, action or proceeding is brought in an
inconvenient forum; or that the venue of the suit, action or proceeding is
improper. Each of the parties agrees that service of process in any such action,
suit or proceeding shall be deemed in every respect effective service of process
upon ii if given in the manner set forth in Section 13(d).
(k) LEGAL FEES. The Executive shall be entitled to reimbursement by
the Company for all reasonable legal fees and expenses incurred by him in
connection with the initial review of this Agreement. Such payments, which shall
be made on an ongoing basis after the Executive submits an invoice or other
reasonably appropriate documentation relating thereto to the Company.
IN WITNESS WHEREOF, the Executive has hereunto set his hand and the
Company has caused this Agreement to be executed in its name on its behalf all
as of the day and year first above written.
IAT RESOURCES CORPORATION
By: /S/ ARTHUR BERNSTEIN
-------------------------------
Its: Executive Vice President
VICTOR A. HOLTORF
By: /S/ VICTOR A. HOLTORF
-------------------------------
EXHIBIT 21.1
SUBSIDIARIES
NetCurrents Services Corporation
Netcurrents Canada, Inc.
MWI Distribution, Inc.
DSL Productions, Inc.
Grosso-Jacobson Productions, Inc.
The Grosso-Jacobson Entertainment Corporation
Grosso Jacobson Music Company, Inc.
Producers Entertainment Group, Inc.
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation of our report, dated April 5, 2000,
included in this Form 10-KSB in the previously filed Registration Statements of
NetCurrents, Inc. (f/k/a/IAT Resources Corporation) on Form S-3 (No. 33-64595,
333-86167, 333-63897, 333-62687, 333-91145, 333-96381, 333-32862 and 333-34034)
and Form S-8 (No. 333-71891 and 333-71885 and 333-68705).
/s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
- --------------------------------------------
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
May 16, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER 31,
1999 SIX MONTH FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 798,855
<SECURITIES> 0
<RECEIVABLES> 1,139,059
<ALLOWANCES> 0
<INVENTORY> 224,988
<CURRENT-ASSETS> 2,178,256
<PP&E> 131,559
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,139,809
<CURRENT-LIABILITIES> 2,041,669
<BONDS> 0
0
1,877,625
<COMMON> 23,071
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,139,809
<SALES> 342,985
<TOTAL-REVENUES> 342,985
<CGS> 96,997
<TOTAL-COSTS> 4,871,911
<OTHER-EXPENSES> (88,334)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (10,325)
<INCOME-PRETAX> (4,724,502)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,724,502)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,670,345)
<EPS-BASIC> (.37)
<EPS-DILUTED> (.37)
</TABLE>
