<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER: 0-09613
NETMOVES CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 11-3025769
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
399 THORNALL STREET
EDISON, NEW JERSEY 08837
(Address of Principal Executive Officer and Zip Code)
(732) 906-2000
(Registrant's Telephone Number, Including Area Code)
Check whether the registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the preceding 12
months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes /X/ No / /
As of August 9, 1999, there were 16,461,490 shares of the registrant's common
stock outstanding.
<PAGE>
NETMOVES CORPORATION
Index to June 30, 1999 Form 10-Q
- --------------------------------------------------------------------------------
PAGE
Part I - Financial Information
Item 1. Financial Statements
Condensed Balance Sheets - June 30, 1999 and December 31, 1998..... 3
Condensed Statements of Operations -
Three and Six Months Ended June 30, 1999 and 1998.................. 4
Condensed Statements of Cash Flows - Six Months Ended
June 30, 1999 and 1998............................................. 5
Notes to Condensed Financial Statements............................ 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 14
Part II - Other Information
Item 1. Legal Proceedings.................................................. 21
Item 2. Changes in Securities.............................................. 21
Item 3. Defaults upon Senior Securities.................................... 21
Item 4. Submission of Matters to a Vote of Security Holders................ 21
Item 5. Other Information.................................................. 21
Item 6. Exhibits and Reports on Form 8-K................................... 21
Signatures......................................................... 24
<PAGE>
NETMOVES CORPORATION
CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 12,068,464 $ 5,260,450
Accounts receivable, net of allowances of $186,119
and $220,076 for June 30, 1999
and December 31, 1998, respectively 3,584,723 3,198,688
Prepaid expenses and other current assets 364,134 162,218
------------ ------------
Total current assets 16,017,321 8,621,356
Property and equipment, net 5,811,800 5,487,221
Other assets, net 2,212,236 379,148
------------ ------------
Total assets $ 24,041,357 $ 14,487,725
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,532,886 $ 1,153,688
Accrued expenses and other liabilities 2,911,115 2,654,658
Obligation under capital lease 79,379 95,804
Current portion of notes payable 1,149,311 992,960
------------ ------------
Total current liabilities 5,672,691 4,897,110
Notes payable 1,616,424 1,540,481
Obligation under capital lease 161,570
------------ ------------
Total liabilities 7,450,685 6,437,591
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock,$0.01 par value;40,000,000 shares authorized;
16,461,490 and 13,904,203 shares issued and outstanding
as of June 30, 1999 and December 31, 1998, respectively 164,615 139,042
Additional paid-in capital 61,526,646 48,171,015
Accumulated deficit (45,100,589) (40,259,923)
------------ ------------
Total stockholders' equity 16,590,672 8,050,134
------------ ------------
Total liabilities and stockholders' equity $ 24,041,357 $ 14,487,725
============ ============
</TABLE>
The accompanying notes are an integral part of the condensed
financial statements
3
<PAGE>
NETMOVES CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 5,726,954 $ 5,223,115 $ 11,229,578 $ 10,200,370
Cost of service 2,993,402 2,660,161 5,936,333 5,266,847
------------ ------------ ------------ ------------
Gross margin 2,733,552 2,562,954 5,293,245 4,933,523
Operating expenses:
Network operations and support 1,137,945 898,649 2,253,382 1,640,227
Research and development 562,629 546,572 992,279 1,126,336
Sales and marketing 1,920,444 1,533,009 3,650,420 2,953,079
General and administrative 1,254,112 822,624 2,262,832 1,602,761
Depreciation and amortization 492,484 380,818 935,437 686,290
------------ ------------ ------------ ------------
Operating loss (2,634,062) (1,618,718) (4,801,105) (3,075,170)
Interest income ( expense ), net (40,609) (52,438) (95,010) (74,900)
Other income 27,242 27,531 55,449 58,983
------------ ------------ ------------ ------------
Net loss $ (2,647,429) $ (1,643,625) $ (4,840,666) $ (3,091,087)
============ ============ ============ ============
Net loss per common and
equivalent share $ (0.17) $ (0.15) $ (0.33) $ (0.29)
============ ============ ============ ============
Shares used in computing historical
net loss per common and
equivalent share 15,197,533 10,817,867 14,568,786 10,814,654
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the condensed
financial statements
4
<PAGE>
NETMOVES CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------
1999 1998
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,840,666) $(3,091,087)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization expense 935,437 686,290
Other adjustments 458,490 66,417
Changes in assets and liabilities:
Accounts receivable (844,525) (744,811)
Accounts payable 379,198 576,767
Other, net 66,821 597,560
------------ -----------
Net cash used in operating activities (3,845,245) (1,908,864)
------------ -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment, net (952,845) (1,030,800)
Purchase of intangibles (1,937,480) (233,218)
------------ -----------
Net cash used in investing activities (2,890,325) (1,264,018)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of notes payable and capital lease
obligation (687,028) (368,355)
Borrowings under equipment lines of credit 849,407 648,337
Proceeds from issuance of common stock and exercise of stock
options and warrants, net 13,381,205 8,509
------------ -----------
Net cash provided by financing activities 13,543,584 288,491
------------ -----------
NET INCREASE (DECREASE) 6,808,014 (2,884,391)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 5,260,450 3,680,185
------------ -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,068,464 $ 795,794
============ ===========
Supplemental disclosure of non-cash investing activities:
Acquisition of network equipment under capital lease $ 215,057 0
============ ===========
</TABLE>
The accompanying notes are an integral part of the condensed
financial statements
5
<PAGE>
NETMOVES CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited condensed financial statements included herein have been
prepared by the Company in accordance with the requirements of Form 10-Q, and
consequently do not include disclosures normally made in the annual report on
Form 10-K. The December 31, 1998 results included herein have been derived from
the audited financial statements included in the Company's annual report on Form
10-K. However, the Company believes that the disclosures are adequate to make
the information presented not misleading. These condensed financial statements
should be read in conjunction with the financial statements and the notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
The unaudited condensed financial statements included herein reflect
all adjustments (which include only normal, recurring adjustments) which are, in
the opinion of management, necessary to state fairly the results for the three
and six month periods ended June 30, 1999. The results for the three and six
month periods ended June 30, 1999 are not necessarily indicative of the results
expected for the full fiscal year.
2. UNIFI ACQUISITION
In May 1999 the Company purchased the U.S. fax customer base of UNIFI
Communications for $1.5 million. The purchase price net of transaction expenses
is classified as Other Assets and is being amortized over forty-eight months.
3. LOSS PER SHARE
Net loss per common and equivalent share for the three months ended
June 30, 1999 and 1998 is based on the weighted average number of shares
outstanding during the periods presented. Stock options outstanding of
approximately 2,177,000 and 1,716,000 as of June 30, 1999 and 1998,
respectively, have been excluded from the calculation of diluted earnings per
share since their effect would be antidilutive.
4. CONTINGENCIES
The Company is involved in various disputes, claims or legal
proceedings and may be included in future actions including infringement on
intellectual property rights, related to its normal course of business. In the
opinion of management, all such matters are without merit or involve amounts, if
disposed of unfavorably, which would not have a material adverse effect on the
financial position or results of operations of the Company.
5. STOCK ISSUANCE
In May 1999 the Company completed a $14.3 million private placement of
2,499,000 new unregistered shares of its common stock to a group of investors.
In accordance with the Stock Purchase Agreement for this transaction, the
Company subsequently registered the securities for public sale.
6. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 131, "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION". Although the services provided to its customers are the
same in the U.S. and international markets, management views the two as separate
businesses and measures the results for both to the gross margin level. The
ubiquitous nature of the Company's network and its centralized operations in the
U.S. prohibit the allocation of expenses beyond that level. Accordingly, segment
Gross Margin for the three and six months ended June 30, 1999 and Assets for the
Company as of June 30, 1999 and 1998 were as follows:
6
<PAGE>
<TABLE>
<CAPTION>
GROSS MARGIN THREE MONTHS ENDED JUNE 30, 1999 THREE MONTHS ENDED JUNE 30, 1998
--------------------------------------------------- --------------------------------------------------
U.S. INTERNATIONAL TOTAL U.S. INTERNATIONAL TOTAL
---------------- ---------------- ---------------- ---------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
INTERNET FAX
Revenues $ 3,076,490 $ 1,650,906 $ 4,727,396 $ 2,176,811 $ 1,400,042 $ 3,576,853
Cost of Service 1,529,527 957,943 2,487,470 1,037,175 660,308 1,697,483
---------------- ---------------- ---------------- -------------- -------------- -------------
Gross Margin 1,546,963 692,963 2,239,926 1,139,636 739,734 1,879,370
TELEPHONY FAX
Revenues 999,558 999,558 1,646,262 1,646,262
Cost of Service 505,932 505,932 962,678 962,678
---------------- ---------------- ---------------- ---------------
Gross Margin 493,626 493,626 683,584 683,584
TOTAL
Revenues 4,076,048 1,650,906 5,726,954 3,823,073 1,400,042 5,223,115
Cost of Service 2,035,459 957,943 2,993,402 1,999,853 660,308 2,660,161
================ ================ ================ ================ ================= ===============
Gross Margin $ 2,040,589 $ 692,963 $ 2,733,552 $ 1,823,220 $ 739,734 $ 2,562,954
================ ================ ================ ================ ================= ===============
GROSS MARGIN SIX MONTHS ENDED JUNE 30, 1999 SIX MONTHS ENDED JUNE 30, 1998
--------------------------------------------------- --------------------------------------------------
U.S. INTERNATIONAL TOTAL U.S. INTERNATIONAL TOTAL
---------------- ---------------- ---------------- ---------------- ----------------- ---------------
INTERNET FAX
Revenues $ 5,654,388 $ 3,428,910 $ 9,083,298 $ 4,231,177 $ 2,514,644 $ 6,745,821
Cost of Service 2,749,024 2,095,665 4,844,689 2,082,223 1,198,864 3,281,087
---------------- ---------------- ---------------- -------------- -------------- -------------
Gross Margin 2,905,364 1,333,245 4,238,609 2,148,954 1,315,780 3,464,734
TELEPHONY FAX
Revenues 2,146,280 2,146,280 3,454,549 3,454,549
Cost of Service 1,091,644 1,091,644 1,985,760 1,985,760
---------------- ---------------- ---------------- ---------------
Gross Margin 1,054,636 1,054,636 1,468,789 1,468,789
TOTAL
Revenues 7,800,668 3,428,910 11,229,578 7,685,726 2,514,644 10,200,370
Cost of Service 3,840,668 2,095,665 5,936,333 4,067,983 1,198,864 5,266,847
================ ================ ================ ================ ================= ===============
Gross Margin $ 3,960,000 $ 1,333,245 $ 5,293,245 $ 3,617,743 $ 1,315,780 $ 4,933,523
================ ================ ================ ================ ================= ===============
ASSETS JUNE 30, 1999 JUNE 30, 1998
--------------------------------------------------- --------------------------------------------------
U.S. INTERNATIONAL TOTAL U.S. INTERNATIONAL TOTAL
---------------- ---------------- ---------------- ---------------- ----------------- ---------------
Cash and Cash Equivalents $ 12,068,464 $ 12,068,464 $ 795,794 $ 795,794
Accounts Receivable, net 2,339,878 $ 1,244,845 3,584,723 1,980,279 $ 954,151 2,934,430
Property & Equipment, net 5,083,844 727,956 5,811,800 3,583,279 980,642 4,563,921
================ ================ ---------------- ================ ================ ---------------
Sub-total $ 19,492,186 $ 1,972,801 21,464,987 $ 6,359,352 $ 1,934,793 8,294,145
================ ================ ================ ================
Other unallocated amounts 2,576,370 417,055
================ ===============
Total Assets $ 24,041,357 $ 8,711,200
================ ===============
</TABLE>
7. NAME CHANGE
In April 1999 the Company announced that it has changed its name to
NetMoves Corporation. This name change reflects the Company's focus on
Internet-based solutions and to support the Company's expansion into Internet
Document Delivery (IDD).
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS REPORT CONTAINS CERTAIN STATEMENTS OF A FORWARD-LOOKING NATURE RELATING TO
FUTURE EVENTS OF THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY. STOCKHOLDERS
ARE CAUTIONED THAT SUCH STATEMENTS ARE ONLY PREDICTIONS AND THAT ACTUAL EVENTS
OR RESULTS MAY DIFFER MATERIALLY. IN EVALUATING SUCH STATEMENTS, PROSPECTIVE
INVESTORS SHOULD SPECIFICALLY CONSIDER THE VARIOUS FACTORS IDENTIFIED IN THIS
REPORT, INCLUDING THE MATTERS SET FORTH UNDER THE CAPTION "CERTAIN FACTORS THAT
MAY AFFECT FUTURE RESULTS, FINANCIAL CONDITION AND THE MARKET PRICE OF
SECURITIES," WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
INDICATED BY SUCH FORWARD-LOOKING STATEMENTS.
OVERVIEW
NetMoves Corporation, (the "Company") designs, develops and markets a
variety of business-to-business Internet messaging solutions, including
computer-to-fax, fax-to-fax, fax-to-email, enhanced fax and broadcast fax
services. The Company has developed proprietary software which enables its
customers to specify whether a fax transmission will be delivered through
NetMoves' real-time, "virtual real-time (Internet fax)" or broadcast services.
This software, coupled with NetMoves' fax-only network of three interconnected
switching nodes in the United States and Internet-capable fax nodes located in
twenty countries as of June 30, 1999, automatically delivers each outgoing
transmission through the route that provides the lowest cost and the highest
transmission quality available on the NetMoves network. Pre-negotiated
volume-based arrangements with several telephony common carriers, the major
carrier being MCI WorldCom, and the cost savings available for transmission
through the Internet enable NetMoves to transmit its customers' documents and
images to fax machines worldwide at rates that are below the international rates
charged by long distance voice carriers. While NetMoves generates cost savings
for customers transmitting faxes to international destinations, many NetMoves
customers use the Company's services for ease of use and productivity
improvements, rather than cost savings.
The Company has deployed Internet-capable fax nodes in twenty key
international telecommunications markets to enable it to migrate a portion of
its customer traffic off of its telephony-based network and to route it over the
Internet. This global Internet backbone, which seamlessly integrates with
NetMoves' telephony-based network, enables the Company to bypass long distance
common carriers for transmissions originating and terminating in countries where
such nodes have been deployed, thereby further reducing its customers'
international transmission costs. NetMoves believes that the combination of its
telephony-based network and its growing Internet-based network will enable it to
emerge as a leading supplier of comprehensive, convenient, low-cost global
faxing services.
8
<PAGE>
RESULTS OF OPERATIONS
The following table represents unaudited financial information expressed as a
percentage of total revenues for the periods indicated. The Company believes
that this information has been presented on a basis consistent with the
Company's audited financial statements and includes all adjustments, consisting
only of normal recurring adjustments that management considers necessary for a
fair presentation for the periods presented.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Percentage of Revenues:
Revenues 100.0 % 100.0 % 100.0 % 100.0 %
Cost of service 52.3 50.9 52.9 51.6
------- ------- ------- -------
Gross margin 47.7 49.1 47.1 48.4
------- ------- ------- -------
Operating expenses
Net operations and support 19.8 17.2 20.0 16.1
Research and development 9.9 10.5 8.9 11.0
Sales and marketing 33.5 29.3 32.5 29.0
General and administrative 21.9 15.8 20.1 15.7
Depreciation and amortization 8.6 7.3 8.3 6.7
------- ------- ------- -------
Total operating expenses 93.7 80.1 89.8 78.5
------- ------- ------- -------
Operating loss (46.0) (31.0) (42.7) (30.1)
------- ------- ------- -------
Interest income (expense), net (0.7) (1.0) (0.9) (0.8)
Other income 0.5 0.5 0.5 0.6
------- ------- ------- -------
Loss before income taxes (46.2) (31.5) (43.1) (30.3)
Provision for income taxes -- -- -- --
------- ------- ------- -------
Net loss (46.2)% (31.5)% (43.1)% (30.3)%
======= ======= ======= =======
</TABLE>
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES. Revenues, which consist primarily of customer usage charges, grew 9.7%
to $5.7 million in the three months ended June 30, 1999 from $5.2 million in the
three months ended June 30, 1998 as a result of a 37% increase in total Internet
Fax revenues which account for 81% of total Company revenues offset by a 41%
decrease in Telephony Fax revenues which only comprise 19% of total Company
revenues. All of the company's current sales and marketing programs are related
to the sale of Internet Fax services and more specifically to computer
originated Internet Fax services which amounted to $3.2 million for the three
months ended June 30, 1999, representing a 50% increase over the same service
revenues for the three months ended June 30, 1998. Internet Fax revenues for the
U.S. business segment increased $0.9 million or 41% to $3.1 million in the 1999
first quarter and the international business segment increased $0.3 million or
18% to $1.7 million in the 1999 period in comparison to the same period in 1998.
COST OF SERVICE. Cost of service consists of local access charges, leased
network backbone circuit costs and long distance domestic and international
termination charges. These are primarily variable costs based on actual fax
volume. Cost of service increased as a result of the increase in fax volume for
the period and increased as a percentage of revenues in the three months ended
June 30, 1999 to 52.3% from 50.9% in the three months ended June 30, 1998. The
increased percentage is attributable to a higher percentage in the 1999 quarter
of international customer usage revenues that are provided on a wholesale basis
and less non-usage revenues in the Internet Fax segment, while the Telephony Fax
segment costs decreased as a percentage of revenues as a result of lower
international termination charges.
NETWORK OPERATIONS AND SUPPORT. Network operations and support costs consist
primarily of the expenses of operating and expanding the network infrastructure,
monitoring network traffic and quality of service and providing customer support
in service installations, fax deliveries and message reporting and billing.
Network operations and support costs increased to $1.1 million for the three
month period ended June 30, 1999 in comparison to $0.9 million in the three
9
<PAGE>
months ended June 30, 1998 as a result of hiring additional personnel to
implement the Internet fax node deployment plan and to support the Company's
expanding customer base on a 7 days per week / 24-hour basis. As a percentage of
revenues, these expenses increased to 19.8% in the 1999 period from 17.2% of
revenues in the 1998 period.
RESEARCH AND DEVELOPMENT. Research and development expenses consist primarily of
salaries and consulting fees paid to software engineers and development
personnel largely for the continuing development efforts for enhancements to the
Company's Internet fax services. Research and development expenses were
approximately the same amount for the three months ended June 30, 1999 and 1998,
however, as a result of higher revenues in 1999 these expenses decreased to 9.9%
of revenues in the three months ended June 30, 1999 from 10.5% of revenues in
the three months ended June 30, 1998.
SALES AND MARKETING. Sales and marketing expenses consist primarily of salaries
and commissions for sales and marketing staffs, promotional material preparation
and mailing costs, and agent and dealer commissions. Sales and marketing
expenses increased to $1.9 million for the three months ended June 30, 1999 in
comparison to $1.5 million in the three months ended June 30, 1998. As a
percentage of revenues, these costs increased to 33.5% from 29.3% for the 1999
and 1998 periods, respectively. The higher costs in the second quarter of 1999
as compared to the same period in 1998 relate to additional expenses to support
the Company's previously announced strategy to accelerate growth of computer
originated Internet faxing.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist of
expenses associated with the Company's management, accounting, finance, billing
and administrative functions. General and administrative expenses amounted to
$1.3 million in the three months ended June 30, 1999 as compared to $0.8 million
in the three months ended June 30, 1998. As a percentage of revenues, these
expenses increased to 21.9% in the three months ended June 30, 1999 from 15.8%
in the three months ended June 30, 1998. The increase in general and
administrative expenses result from personnel increases and additional accounts
receivable allowances to support the increased customer base and revenues.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization amounted to $0.5
million or 8.6% of revenues in the three months ended June 30, 1999 and $0.4
million or 7.3% of revenues in the three months ended June 30, 1998. The
increase in Depreciation and amortization expense relates to an increase in the
depreciable base of Fixed Assets and to a lesser extent the initial amortization
charges of the UNIFI acquisition.
PROVISION FOR INCOME TAXES. The Company had losses for income tax purposes for
the three months ended June 30, 1999 and 1998. Accordingly, there was no
provision or credit for income taxes for those periods. Any income tax benefits
at the Company's expected effective tax rate for these losses have been offset
by a valuation allowance for deferred tax assets.
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES. Revenues, which consist primarily of customer usage charges, grew
10.0% to $11.2 million in the six months ended June 30, 1999 from $10.2 million
in the six months ended June 30, 1998 as a result of a 28% increase in total
Internet Fax revenues which account for 80% of total Company revenues offset by
a 30% decrease in Telephony Fax revenues which only comprise 20% of total
Company revenues. All of the company's current sales and marketing programs are
related to the sale of Internet Fax services and more specifically to computer
originated Internet Fax services which amounted to $6.4 million for the six
months ended June 30, 1999, representing a 62% increase over the same service
revenues for the six months ended June 30, 1998. Internet Fax revenues for the
U.S. business segment increased $1.4 million or 34% to $5.7 million in the first
two quarters of 1999 and the international business segment increased $0.9
million or 36% $3.4 million in the 1999 period in comparison to the same period
in 1998.
COST OF SERVICE. Cost of service consists of local access charges, leased
network backbone circuit costs and long distance domestic and international
termination charges. These are primarily variable costs based on actual fax
volume. Cost of service increased as a result of the increase in fax volume for
the period and increased as a percentage of revenues in the six months ended
June 30, 1999 to 52.9% from 51.6% in the six months ended June 30, 1998. The
increased percentage is attributable to a higher percentage in 1999 of
international customer usage revenues that are provided on a wholesale
10
<PAGE>
basis and less non-usage revenues in the Internet Fax segment, while the
Telephony Fax segment costs decreased as a percentage of revenues as a result of
lower international termination charges.
NETWORK OPERATIONS AND SUPPORT. Network operations and support costs consist
primarily of the expenses of operating and expanding the network infrastructure,
monitoring network traffic and quality of service and providing customer support
in service installations, fax deliveries and message reporting and billing.
Network operations and support costs increased to $2.3 million for the six month
period ended June 30, 1999 in comparison to $1.6 million in the six months ended
June 30, 1998 as a result of hiring additional personnel to implement the
Internet fax node deployment plan and to support the Company's expanding
customer base on a 7 days per week / 24-hour basis. As a percentage of revenues,
these expenses increased to 20.0% in the 1999 period from 16.1% of revenues in
the 1998 period.
RESEARCH AND DEVELOPMENT. Research and development expenses consist primarily of
salaries and consulting fees paid to software engineers and development
personnel largely for the continuing development efforts for enhancements to the
Company's Internet fax services. Research and development expenses were
approximately the same amount for the six months ended June 30, 1999 and 1998,
however, as a result of higher revenues in 1999 these expenses decreased to 8.9%
of revenues in the six months ended June 30, 1999 from 11.0% of revenues in the
six months ended June 30, 1998.
SALES AND MARKETING. Sales and marketing expenses consist primarily of salaries
and commissions for sales and marketing staffs, promotional material preparation
and mailing costs, and agent and dealer commissions. Sales and marketing
expenses increased to $3.6 million for the six months ended June 30, 1999 in
comparison to $3.0 million in the six months ended June 30, 1998. As a
percentage of revenues, these costs increased to 32.5% from 29.0% for the 1999
and 1998 periods, respectively. The higher costs in 1999 as compared to the same
period in 1998 relate to additional expenses to support the Company's previously
announced strategy to accelerate growth of computer originated Internet faxing.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist of
expenses associated with the Company's management, accounting, finance, billing
and administrative functions. General and administrative expenses amounted to
$2.3 million in the six months ended June 30, 1999 as compared to $1.6 million
in the six months ended June 30, 1998. As a percentage of revenues, these
expenses increased to 20.1% in the six months ended June 30, 1999 from 15.7% in
the six months ended June 30, 1998. The increase in general and administrative
expenses result from personnel increases and additional accounts receivable
allowances to support the increased customer base and revenues.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization amounted to $0.9
million or 8.3% of revenues in the six months ended June 30, 1999 and $0.7
million or 6.7% of revenues in the six months ended June 30, 1998. The increase
in Depreciation and amortization expense relates to an increase in the
depreciable base of Fixed Assets and to a lesser extent the initial amortization
charges of the UNIFI acquisition.
PROVISION FOR INCOME TAXES. The Company had losses for income tax purposes for
the six months ended June 30, 1999 and 1998. Accordingly, there was no provision
or credit for income taxes for those periods. Any income tax benefits at the
Company's expected effective tax rate for these losses have been offset by a
valuation allowance for deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity at June 30, 1999 included cash
and cash equivalents of $12.1 million and $0.4 million available under equipment
lines of credit. The Company believes that its current cash and cash equivalents
and available equipment financing facility will be sufficient to meet its
anticipated cash needs for working capital and capital expenditure requirements
through at least the end of 1999.
In May 1999 the Company completed a $14.3 million private placement of
2,499,000 new unregistered shares of its common stock to a group of investors.
During the six months ended June 30, 1999 the Company entered into a total of
$1.5 million of equipment lines of credit with draw-downs payable over 36 to 42
months at interest rates of 14% to 16%.
Cash used in operating activities amounted to $3.8 million in the six
months ended June 30, 1999, as compared to $1.9 million in the first six months
of 1998. Cash used for the purchase of equipment, mainly used to improve and
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expand the NetMoves network, amounted to $1.0 million in the first six months of
both 1999 and 1998. Cash used to purchase intangible assets, including the U.S.
fax customer base of UNIFI Communications in 1999, amounted to $1.9 million and
$0.2 million in the first six months of 1999 and 1998 respectively.
The Company has committed to minimum monthly usage levels with its primary
telecommunications carriers amounting to, exclusive of usage discounts, $0.5
million per month through January 2001.
To the extent that funds expected to be generated from the Company's
operations are insufficient to meet current or planned operating requirements,
we will seek to obtain additional funds through bank facilities, equity or debt
financing, collaborative or other arrangements with corporate partners and from
other sources. Additional funding may not be available when needed or on terms
acceptable to us, which could have a material adverse effect on our business,
financial condition and results of operations. If adequate funds are not
available, we may be required to delay or to eliminate certain expenditures or
to license to third parties the rights to commercialize technologies that we
would otherwise seek to develop ourselves. In addition, in the event that we
obtain any additional funding, such financings may have a dilutive effect on the
holders of our securities.
YEAR 2000 COMPLIANCE
OVERVIEW
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, in less than a year, computer systems and/or
software used by many companies may need to be upgraded to comply with such
"Year 2000" requirements or risk system failure or miscalculations causing
disruptions of normal business activities.
STATE OF READINESS. We have conducted a study of the Year 2000 readiness of
our information technology systems, including our computing and networking
systems, and our non-information technology systems. Our study consisted of:
o INVENTORY AND ASSESSMENT - conducting an inventory and review of
NetMoves software, third-party software and hardware, and
telecommunications and Internet service providers; contacting
third-party vendors and licensors of material hardware, software and
services that are both directly and indirectly related to the delivery
of the our NetMoves for internet suite of services and the NetMoves
Connector; contacting third-party vendors and licensors of material
hardware, software and services that are both directly and indirectly
related to the delivery of our NetMoves for internet suite of services
and the NetMoves Connector
o REVIEW - conducting a review of NetMoves' application and product
software code to determine Year 2000 compliance; assessment of repair
or replacement requirements
o CORRECTION AND TESTING - implementing code modifications and complete
system re-testing where necessary; modification, upgrade, repair or
replacement of all non-compliant systems
We have completed a test of our information technology systems to verify
the results of our study and have remedied certain minor discrepancies that were
discovered. We have been informed by many of our vendors of material hardware
and software components of our information technology systems that the products
that we use are currently Year 2000 compliant. The computing systems that
provide application layer services (i.e., NetMoves customer services) within the
NetMoves network are based upon some variant of the Unix operating system, which
adequately represents dates beyond the year 2000. Many of the computing systems
that support the internal operations of our business have the similar capacity
to represent dates beyond the year 2000. In addition, for all of our internal
accounting applications, we have purchased new accounting system software that
the manufacturer specifies as Year 2000 compliant. We have also required vendors
of our other material hardware and software components of our information
technology systems to provide assurances of their Year 2000 compliance. We will
also seek assurances of Year 2000 compliance from providers of our material
non-information technology systems.
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COSTS. To date, we have not incurred any material expenditures in
connection with identifying or evaluating Year 2000 compliance issues. Most of
our expenses have related to, and are expected to continue to relate to, the
operating costs associated with time spent by employees in the evaluation
process and Year 2000 compliance matters generally. Our expected cost to
purchase and implement the new accounting software mentioned above is
approximately $0.2 million.
RISKS. We are not currently aware of any Year 2000 compliance problems
relating to the NetMoves for internet suite of services, the NetMoves Connector
or our other information technology or non-information technology systems that
would have a material adverse effect on our business, financial condition and
results of operations, without taking into account our efforts to avoid or fix
such problems. There can be no assurance that our software contains all
necessary date code changes or that all problems can be identified by our study
and subsequent testing. Compliance with Year 2000 requirements may disrupt our
ability to continue developing and marketing fax transmission products and
services. The failure to adequately address Year 2000 compliance issues in our
products and services, and in our information technology and non-information
technology systems could result in claims of mismanagement, misrepresentation or
breach of contract and related litigation, which could be costly and
time-consuming to defend. In addition, there can be no assurance that
governmental agencies, utility companies, Internet access companies, third-party
service providers and others outside of our control will be Year 2000 compliant.
The failure by such entities to be Year 2000 compliant could result in a
systemic failure beyond our control, such as a prolonged Internet,
telecommunications or electrical failure, which could also prevent us from
delivering services to our customers, which could have a material adverse effect
on our business, financial condition and results of operations.
CONTINGENCY PLAN. As discussed above, we intend to conduct further tests of
our Year 2000 compliance to confirm the results of our study, including frequent
re-testing of the integrity of the NetMoves network, and have not yet developed
any contingency plans. The results of our tests and the responses received from
third-party vendors and service providers will be taken into account in
determining the nature and extent of any contingency plans.
FORWARD-LOOKING STATEMENTS. The foregoing Year 2000 discussion and the
information contained herein is provided as a "Year 2000 Readiness Disclosure"
as defined in the Year 2000 Information and Readiness Disclosure Act of 1998
(Public Law 105-271, 112 Stat. 2386) enacted on October 19, 1998 and contains
"forward-looking statements" within the meaning of the Private Securities
Litigation reform Act of 1995. Such statements, including without limitation,
anticipated costs and the dates by which NetMoves expects to complete certain
actions, are based on management's best current estimates, which were derived
utilizing numerous assumptions about future events, including the continued
availability of certain resources, representations received from third parties
and other factors. However, there can be no guarantee that these estimates will
be achieved, and actual results could differ materially form those anticipated.
Specific factors that might cause such material difference include, but are not
limited to, the ability to identify and remediate all relevant systems, results
of Year 2000 testing, adequate resolution of Year 2000 issues by governmental
agencies, businesses and other third parties who are outsourcing service
providers, suppliers, and vendors of NetMoves, unanticipated system costs, the
adequacy of and ability to implement contingency plans and uncertainties. The
"forward-looking statements" made in the foregoing Year 2000 discussion speak
only as of the date on which such statements are made, and NetMoves undertakes
no obligation to update any forward-looking statement to reflect events or
circumstances after the date on which such statement is made or to reflect the
occurrence of unanticipated events. Governmental agencies, businesses and other
third parties who are outsourcing service providers, suppliers, and vendors of
NetMoves, unanticipated system costs, the adequacy of and ability to implement
contingency plans and uncertainties. The "forward-looking statements" made in
the foregoing Year 2000 discussion speak only as of the date on which such
statements are made, and NetMoves undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RISK FACTORS
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF NET LOSSES AND EXPECT FUTURE LOSSES.
From our inception in 1989 through the quarter ended June 30, 1999, we have
experienced significant net losses. We incurred a net loss of $4.8 million for
the most recent six-month period and net losses of $7.5 million in the year
ended December 31, 1996, $7.1 million in the year ended December 31, 1997 and
$8.1 million in the year ended December 31, 1998. We currently anticipate that
we will have additional net losses as we attempt to expand our business and we
may not have positive operating or net income in the future. As of June 30,
1999, we had an accumulated deficit of $45.1 million.
Since inception, we have incurred substantial costs to develop and enhance
our technology and to create, introduce and enhance our service and product
offerings. We intend to continue these efforts and, in addition, to increase our
marketing spending. In early 1999, we announced a new marketing campaign that
will involve significant expenditures by us, including hiring an outside
advertising agency. In June 1999 the Company announced another sales and
marketing campaign which would also involve significant expenditures. As a
result of these expenditures, we expect to continue to experience operating
losses. There can be no assurance that these expenditures will result in any
increase in revenues.
WE HAVE MANY COMPETITORS AND WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY AGAINST
THEM.
The market for fax transmission services is intensely competitive and the
industry is characterized by low barriers to entry. We expect that competition
will intensify in the future. Our failure to compete successfully could have a
material adverse affect on our business, financial condition and results of
operations. We believe that our ability to compete successfully will depend upon
a number of factors, including market presence, the capacity, reliability and
security of our network infrastructure, the pricing policies of our competitors
and suppliers, the timing of introductions of new services and service
enhancements by us and our competitors, and industry and general economic
trends.
WE MAY NOT BE ABLE TO DELIVER OUR SERVICES IF LONG DISTANCE CARRIERS REFUSE TO
CARRY OUR TRAFFIC.
The foundation of our telephony network infrastructure consists of the
right to use the telecommunications lines of several long distance carriers,
including MCI WorldCom. As many of these companies are current or potential
competitors of ours, we cannot assure you that they will continue to handle our
traffic. If these companies discontinue or otherwise change their relationships
with us we may be unable to deliver our services which would have a material
adverse effect upon our business, financial condition and results of operations.
GOVERNMENT REGULATIONS COULD INCREASE COMPETITION FOR OUR SERVICES.
On August 7, 1997, the Federal Communications Commission issued new rules
that may significantly reduce the cost of international calls originating in the
United States. The five-year phase-in period began on January 1, 1998. To the
extent that these new regulations are implemented and result in reductions in
the cost of international calls originating in the United States, we will face
increased competition for our international fax services which may have a
material adverse effect on our business, financial condition or results of
operations.
WE MAY NEED FUNDS WHICH MAY NOT BE AVAILABLE.
Our cash requirements may vary materially from those now planned as a
result of unforeseen changes that could consume a significant portion of our
available resources before this time.
If adequate funds are not available, we may be required to delay or to
eliminate certain expenditures or to license to third parties the rights to
commercialize technologies that we would otherwise seek to develop ourselves. To
the extent that funds expected to be generated from our operations are
insufficient to meet current or planned operating requirements, we will seek to
obtain additional funds through bank facilities, equity or debt financing,
collaborative or
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other arrangements with corporate partners and from other sources. Additional
funding may not be available when needed or on terms acceptable to us, which
could have a material adverse effect on our business, financial condition and
results of operations. In addition, if we obtain any additional funding, these
financings may have a dilutive effect on the holders of our securities.
UNAUTHORIZED USE OF OUR INTELLECTUAL PROPERTY BY THIRD PARTIES MAY DAMAGE OUR
BRAND.
We regard our copyrights, service marks, trademarks, trade secrets and
other intellectual property as critical to our success. Unauthorized use of our
intellectual property by third parties may damage our brand and our reputation.
We rely on trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with our employees, customers,
partners and others to protect our intellectual property rights. We were granted
patents related to our NetMoves Connector and our "e-mail Stamps" security
technology incorporated into our fax mailer service. Despite our precautions, it
may be possible for third parties to obtain and use our intellectual property
without authorization. Furthermore, the validity, enforceability and scope of
protection of intellectual property in Internet-related industries is uncertain
and still evolving. The laws of some foreign countries are uncertain or do not
protect intellectual property rights to the same extent as the laws of the
United States.
DEFENDING AGAINST INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS COULD BE EXPENSIVE,
AND IF WE ARE NOT SUCCESSFUL, COULD DISRUPT OUR BUSINESS.
We cannot be certain that our services and the finished products that we
deliver do not or will not infringe valid patents, copyrights or other
intellectual property rights held by third parties. We may be subject to legal
proceedings and claims from time to time relating to the intellectual property
of others in the ordinary course of our business. We may incur substantial
expenses in defending against these third-party infringement claims, regardless
of their merit. Successful infringement claims against us may result in
substantial monetary liability or may materially disrupt the conduct of our
business.
WE ARE DEPENDENT ON THE RELIABILITY AND EXPANSION OF OUR NETWORK INFRASTRUCTURE.
Our future success will depend in part upon the capacity, reliability and
security of our network infrastructure and in part upon our ability to expand
the deployment of an international network of Internet-capable fax nodes. We
must continue to expand and adapt our network infrastructure as the number of
customers and the volume of traffic they wish to transmit increases. The
expansion and adaptation of our network infrastructure will require substantial
financial, operational and management resources.
There can be no assurance that we will be able to expand or adapt our
network infrastructure to meet any additional demand or to deploy additional
contemplated Internet-capable fax nodes on a timely basis, at a commercially
reasonable cost, or at all. Any failure to expand our network or
Internet-capable fax infrastructures or to adapt them to changing customer
requirements or evolving industry standards on a timely basis would have a
material adverse effect on our business, financial condition and results of
operations.
OUR FAILURE TO MANAGE GROWTH COULD ADVERSELY AFFECT US.
We have rapidly and significantly expanded our operations and anticipate
that significant expansion will continue to be required to address potential
market opportunities. There can be no assurance that this expansion will be
successfully completed or that it will generate sufficient revenues to cover our
expenses. Our inability to promptly address and respond to these circumstances
could have a material adverse effect on our business, financial condition and
results of operations.
BECAUSE WE ARE DEPENDENT ON COMPUTER SYSTEMS, A SYSTEMS FAILURE COULD CAUSE A
SIGNIFICANT DISRUPTION TO OUR BUSINESS.
Our business depends upon the efficient and uninterrupted operation of our
computer and communications hardware systems and infrastructure. We currently
maintain our computer hardware and switching equipment, including our processing
equipment, at three sites. While we have taken precautions against systems
failure, interruptions could result from natural disasters as well as power
loss, telecommunications failure and similar events. Any damage or failure that
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disrupts or delays our operations could have a material adverse effect on our
business, financial condition and results of operations.
IF OUR SECURITY MEASURES ARE INADEQUATE, OUR BUSINESS WILL BE ADVERSELY
AFFECTED.
We have taken measures to protect the integrity of our infrastructure and
the privacy of confidential information. Nonetheless, our infrastructure is
potentially vulnerable to physical or electronic break-ins, viruses or similar
problems. If a person circumvents our security measures, he could jeopardize the
security of confidential information stored in and transmitted through the
computer systems of the individual, businesses and financial institutions
utilizing our services. This may result in significant liability to us and may
also deter potential customers from using our services. Any security breach that
causes interruptions or data loss in our operations or in the computer systems
of our customers could have a material adverse effect on our business, financial
condition and results of operations.
WE ARE DEPENDENT UPON OUR CURRENT SUPPLIERS, AND MAY NOT BE ABLE TO OBTAIN SOME
PRODUCTS OR SERVICES FROM OTHER SUPPLIERS.
We rely on third parties to supply key components of our network
infrastructure, including long distance telecommunications services and
telecommunications node equipment, many of which are available only from sole or
limited sources. MCI WorldCom is our primary provider of long distance
telecommunications services. We have from time-to-time experienced partial
interruptions of service from our telecommunications carriers which have
temporarily prevented customers in limited geographical areas from reaching the
NetMoves network. There can be no assurance that we will not experience partial
or complete service interruptions in the future. There can be no assurance that
MCI WorldCom and our other telecommunications providers will continue to provide
long distance services to us at attractive rates, or at all, or that we will be
able to obtain these services in the future from these or other long distance
providers on the scale and within the time frames we require. Any failure to
obtain these services on a timely basis at an affordable cost, or any
significant delays or interruptions of service from these carriers, would have a
material adverse effect on our business, financial condition and results of
operations.
All of the faxboards used in our telecommunications nodes are supplied by
Brooktrout Technology, Inc. We purchase Brooktrout faxboards on a non-exclusive
basis through purchase orders placed from time-to-time, carry a limited
inventory of faxboards and have no guaranteed supply arrangement with
Brooktrout. In addition to faxboards, many of the routers, switches and other
hardware components used in our network infrastructure are supplied by sole or
limited sources on a non-exclusive, purchase order basis. There can be no
assurance that Brooktrout or our other suppliers will not enter into exclusive
arrangements with our competitors, or cease selling these components to us at
commercially reasonable prices, or at all.
The anticipated expansion of our network infrastructure is expected to
place a significant demand on our suppliers, some of which may have limited
resources and production capacity. In addition, certain of our suppliers, in
turn, may rely on sole or limited sources of supply for components included in
their products. Should our suppliers fail to adjust to meet this increasing
demand, they may be unable to continue to supply components and products in the
quantities and quality and at the times required by us, or at all. Our inability
to obtain sufficient quantities of sole or limited source components or to
develop alternative sources if required could result in delays and increased
costs in the expansion of our network infrastructure or in our inability to
properly maintain the existing network infrastructure, which would have a
material adverse effect on our business, financial condition and results of
operations.
WE MAY EXPERIENCE DEVELOPMENT DELAYS OR HAVE SOFTWARE DEFECTS WHICH COULD
ADVERSELY AFFECT OUR BUSINESS.
Software-based services and equipment, such as our NetMoves for Internet
suite of services and the NetMoves Connector, may contain undetected errors or
failures when introduced or when new versions are released. There can be no
assurance that, despite testing by us and by current and potential customers,
errors will not be found in this software or other releases after commencement
of commercial shipments, or that we will not experience development delays,
resulting in delays in the shipment of software and a loss of or delay in market
acceptance, any of which could have a material adverse effect on our business,
financial condition and results of operations.
WE MAY NOT BE ABLE TO RETAIN THE KEY PERSONNEL WE NEED TO SUCCEED.
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Our future performance depends in significant part upon the continued
service of our key technical, sales and senior management personnel, none of
whom is bound by an employment agreement. Competition for this personnel is
intense, and there can be no assurance that we can retain our key technical,
sales and managerial employees or that we can attract, assimilate or retain
other highly qualified technical, sales and managerial personnel in the future.
WE DEPEND ON OUR INTERNATIONAL STRATEGIC ALLIANCES TO EXPAND OUR INTERNATIONAL
CUSTOMER BASE.
We have established and intend to expand an international customer base by
forming strategic sales and marketing alliances with foreign Internet service
providers, telecommunications companies and resellers. There can be no assurance
that we will be able to establish additional strategic alliances or to maintain
these strategic alliances. Our success in expanding our international customer
base depends not only on the formation of additional strategic alliances but
also on the success of these partners and their ability to market our services.
The failure to maintain these strategic alliances or the failure of these
partners to successfully develop and sustain a market for our services will have
a material adverse effect on our ability to expand our international customer
base, which could have a material adverse effect on our business, financial
condition and results of operations.
WE FACE RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS WHICH COULD MATERIALLY
AND ADVERSELY AFFECT OUR BUSINESS.
In 1998, we derived approximately $5.9 million or 27.9% of our total
revenues from customers outside of the United States and for the first six
months of 1999 we derived approximately $3.4 million, or 30.5% of our total
revenues from customers outside of the United States. We expect that these
revenues will represent an increasing percentage of our total revenues in the
future. Risks inherent in our international business activities generally
include unexpected changes in regulatory requirements, tariffs and other trade
barriers, costs of localizing products for foreign countries, lack of acceptance
of localized products in foreign markets, longer accounts receivable payment
cycles, difficulties in managing international operations, potentially adverse
tax consequences, and the burdens of complying with a wide variety of foreign
laws. There can be no assurance that these factors will not have a material
adverse effect on our future international revenues and, consequently, on our
business, financial condition and results of operations.
PROBLEMS RELATING TO THE "YEAR 2000 ISSUE" COULD ADVERSELY AFFECT OUR BUSINESS.
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, in less than a year, computer systems and/or
software used by many companies may need to be upgraded to comply with these
"Year 2000" requirements or risk system failure or miscalculations causing
disruptions of normal business activities.
We have conducted a study of the Year 2000 readiness of our information
technology systems, including our computing and networking systems, and our
non-information technology systems and believe that they are currently Year 2000
compliant. Additionally, we have been informed by many of our vendors of
material hardware and software components of our information technology systems
that the products that we use are currently Year 2000 compliant. Despite our
efforts, there can be no assurance that our software contains all necessary date
code changes or that all Year 2000 problems were identified by our study and
subsequent testing. Compliance with Year 2000 requirements may disrupt our
ability to continue developing and marketing fax transmission products and
services. The failure to adequately address Year 2000 compliance issues in our
products and services, and in our information technology and non-information
technology systems could result in claims of mismanagement, misrepresentation or
breach of contract and related litigation, which could be costly and
time-consuming to defend.
In addition, there can be no assurance that governmental agencies, utility
companies, Internet access companies, third-party service providers and others
outside of our control will be Year 2000 compliant. The failure by these
entities to be Year 2000 compliant could result in a systemic failure beyond our
control, such as a prolonged Internet, telecommunications or electrical failure,
which could also prevent us from delivering services to our customers, which
could have a material adverse effect on our business, financial condition and
results of operations.
RISKS RELATED TO OUR INDUSTRY
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OUR FUTURE GROWTH DEPENDS UPON AN INCREASE IN THE USE OF THE INTERNET AS A
MEDIUM FOR FAX TRANSMISSIONS.
We believe that our future success will depend in part upon our ability to
significantly expand our base of Internet-capable nodes and route more of our
customers' traffic through the Internet. Our success is therefore largely
dependent upon the viability of the Internet as a medium for the transmission of
documents. There can be no assurance that document transmission over the
Internet will continue to be reliable or that Internet capacity constraints will
not develop which inhibit efficient document transmission.
We access the Internet from our Internet-capable nodes by dedicated
connection to third party Internet service providers. We pay fixed monthly fees
for this Internet access, regardless of our usage or the volume of our
customers' traffic. There can be no assurance that the current pricing structure
for access to and use of the Internet will not change unfavorably. If material
capacity constraints develop on the Internet or the current Internet pricing
structure changes unfavorably, our business, financial condition and results of
operations would be materially and adversely affected. In addition, our future
success is dependent upon the increased acceptance by potential customers of the
Internet as the preferred medium for transmission of documents. There can be no
assurance that this market acceptance shall continue to increase. Lack of
increased market acceptance would materially and adversely affect our business,
financial condition and results of operations.
IF WE DO NOT KEEP PACE WITH TECHNOLOGICAL CHANGES, OUR SERVICES MAY BECOME
OBSOLETE AND OUR BUSINESS WILL SUFFER.
The telecommunications industry in general, and the fax transmission
business in particular, are characterized by rapid and continuous technological
change. Future technological advances in the telecommunications industry may
result in the availability of new services or products that could compete with
the fax transmission services we provide or reduce the cost of existing products
or services, any of which could enable our existing or potential customers to
fulfill their fax communications needs more cost efficiently. There can be no
assurance that we will be successful in developing and introducing new services
that meet changing customer needs and respond to technological changes or
evolving industry standards in a timely manner, if at all, or that services or
technologies developed by others will not render our services noncompetitive.
Our inability to respond to changing market conditions, technological
developments, evolving industry standards or changing customer requirements, or
the development of competing technology or products that render our services
noncompetitive would have a material adverse effect on our business, financial
condition and results of operations.
WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION WHICH COULD NEGATIVELY IMPACT
OUR BUSINESS.
We are subject to regulation by the FCC and other federal, state and
international communications regulatory agencies. We are licensed by the FCC as
an authorized telecommunications company and are classified as a "non-dominant
interexchange carrier." The FCC has the power to impose more stringent
regulatory requirements on us and to change our regulatory classification. There
can be no assurance that the FCC will not change our regulatory classification
or otherwise subject us to more burdensome regulatory requirements.
Our nodes and FaxLauncher service utilize encryption technology in
connection with the routing of customer documents through the Internet. The
export of this encryption technology is regulated by the United States
government. While we are currently allowed to export this encryption technology
to most countries, any change in these regulations could limit our ability to
distribute our services outside of the United States or electronically which
could have a material adverse effect on our business, financial condition and
results of operations.
WE MAY BE SUBJECT TO CLAIMS REGARDING FOREIGN LAWS AND REGULATIONS.
In connection with the deployment of Internet-capable nodes in countries
throughout the world, we are required to satisfy a variety of foreign regulatory
requirements. While we intend to comply with these requirements on a
country-by-country basis as the deployment of Internet-capable fax nodes
continues, we cannot assure you we will be able to do so. The failure to satisfy
these requirements may prevent us from installing Internet-capable fax nodes in
these countries. Should we fail to deploy a number of these nodes, our business,
operating results and financial condition could be materially and adversely
affected.
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RISKS RELATED TO OUR COMMON STOCK
FLUCTUATIONS IN OUR QUARTERLY RESULTS MAY NEGATIVELY IMPACT OUR STOCK PRICE.
We may experience significant quarter to quarter fluctuations in our
results of operations, which may result in volatility in the price of our common
stock. Quarterly results of operations may fluctuate due to a combination of
factors.
Our revenues are difficult to forecast. Shortfalls in revenues may
adversely and disproportionately affect our results of operations because a high
percentage of our operating expenses are relatively fixed, and planned
expenditures, such as the anticipated expansion of our Internet infrastructure,
are based primarily on sales forecasts. In addition, the stock market in general
has experienced extreme price and volume fluctuations which have affected the
market price of securities of many companies in the telecommunications and
technology industries and which may have been unrelated to the operating
performance of these companies. These market fluctuations may adversely affect
the market price of our common stock. Accordingly, we believe that period to
period comparisons of results of operations are not necessarily meaningful and
should not be relied upon as an indication of future results of operations.
There can be no assurance that we will be profitable in any future quarter. Due
to the foregoing factors, it is likely that in one or more future quarters our
operating results will be below the expectations of public market analysts and
investors. This would have a material adverse effect on the price of our common
stock.
FUTURE SALES OF OUR COMMON STOCK COULD CAUSE THE PRICE OF OUR SHARES TO DECLINE
AND AFFECT OUR ABILITY TO RAISE CAPITAL.
The market price of our common stock could drop as a result of sales of
substantial amounts of common stock in the public market or the perception that
these sales could occur. Registration statements are in effect covering the sale
of up to 5,208,677 shares of our common stock. A price drop may make it more
difficult for us to raise the capital necessary to fund our future operations by
selling common stock. As of August 9, 1999, without taking into account shares
of common stock issued upon exercise of stock options, warrants or other rights
to acquire common stock after this date, there were 16,461,490 shares of our
common stock outstanding.
OUR CERTIFICATE OF INCORPORATION AND BYLAWS, AND DELAWARE LAWS MAKE IT MORE
DIFFICULT FOR A THIRD PARTY TO ACQUIRE US.
Our sixth amended and restated certificate of incorporation authorizes the
board of directors to issue, without stockholder approval, up to 1,000,000
shares of preferred stock with voting, conversion and other rights and
preferences that could adversely affect the voting power or other rights of the
holders of common stock. Our certificate of incorporation also provides for
staggered terms for the members of the board of directors. In addition, we will
be subject to the provisions of Section 203 of the Delaware General Corporation
Law, which will generally prohibit us from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. The foregoing and other
provisions of our certificate of incorporation and our by-laws, as amended and
the application of Section 203 of the Delaware General Corporation Law could
have the effect of deterring certain takeovers or delaying or preventing certain
changes in our control or management, including transactions in which
stockholders might otherwise receive a premium for their shares over then
current market prices.
WE DO NOT INTEND TO PAY CASH DIVIDENDS AND, AS A RESULT, STOCKHOLDERS WILL NEED
TO SELL SHARES TO REALIZE A RETURN ON THEIR INVESTMENT.
We have never paid any cash dividends on our common stock and do not intend
to pay any cash dividends in the foreseeable future.
FORWARD-LOOKING INFORMATION
This prospectus includes "forward-looking statements" regarding future events or
our future performance within the meaning of Section 27A of the Securities Act
and Section 21E of the Exchange Act. All statements other than statements of
historical facts included in this prospectus or incorporated by reference
regarding our financial position and business strategy may constitute
forward-looking statements. Although we believe that the expectations reflected
in these forward-
19
<PAGE>
looking statements are reasonable, we can not guarantee that these expectations
will prove to be correct. Important factors that could cause actual results to
differ materially from our expectations are listed in this prospectus, and they
include the forward-looking statements under "risk factors." All subsequent
written and oral forward-looking statements attributable to us or persons acting
on our behalf are expressly qualified in their entirety by these statements.
20
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT NO.
3.1 Registrant's Sixth Amended and Restated Certificate of Incorporation
(incorporated by reference to exhibit 3.3 to the Registrant's
Registration Statement on Form S-1, Registration No. 333-09613
("Registrant's Registration Statement")).
3.2 By-laws of the Registrant (incorporated by reference to exhibit 3.4 and
3.5 to the Registrant's Registration Statement and Exhibit 3.3 to the
Registrants. Report on Form 10-Q for the quarter ended June 30, 1997).
4.1 Specimen Common Stock Certificate (incorporated by reference to exhibit
4.1 to the Registrant's Registration Statement).
4.2 See Exhibits 3.1 and 3.2 for provisions of the Certificate of
Incorporation and Bylaws of the Registrant defining rights of holders
of Common Stock of the Registrant.
10.1 Fifth Amended and Restated Investor Rights Agreement, as amended
(incorporated by reference to exhibits 10.1 and 10.2 to the
Registrant's Registration Statement).
10.2 1990 Stock Option Plan (incorporated by reference to exhibit 10.3 to
the Registrant's Registration Statement).
10.3 1996 Stock Option/Stock Issuance Plan (incorporated by reference to
exhibit 10.4 to the Registrant's Registration Statement).
10.4 Form of Officer Severance Agreement (incorporated by reference to
exhibit 10.5 to the Registrant's Registration Statement).
10.5 Form of Director Severance Agreement (incorporated by reference to
exhibit 10.6 to the Registrant's Registration Statement).
10.6* Telecommunications Services Agreement, between LDDS WorldCom and the
Registrant, dated December 1, 1996 (incorporated by reference to
exhibit 10.8 to the Registrant's Report on Form 10-Q for the quarter
ended March 31, 1997).
10.7* Agreement between MCI Telecommunications Corporation and the
Registrant, effective March 1, 1996 (incorporated by reference to
exhibit 10.9 to the Registrant's Registration Statement).
21
<PAGE>
10.8 Lease Agreement, dated May 28, 1992, between Metro Four Associates
Limited Partnership, Thornall Associates and the Registrant (the "Metro
Four Lease"), as extended and amended prior to May 5, 1997
(incorporated by reference to exhibit 10.10 to the Registrant's
Registration Statement).
10.9 Amendment to Metro Four Lease, dated May 5, 1997.
10.10 Loan and Security Agreement, dated September 26, 1997, between the
Company and Silicon Valley Bank.
10.11 Letter Agreement, dated November 1, 1994 between Telstra Incorporated
and the Registrant (incorporated by reference to exhibit 10.12 to the
Registrant's Registration Statement).
10.12 Series B Preferred Stock Warrant between the Registrant and Comdisco,
Inc., dated May 30, 1991 (incorporated by reference to exhibit 10.14 to
the Registrant's Registration Statement).
10.13 Series B Preferred Stock Warrant between the Registrant and Comdisco,
Inc., dated September 16, 1992 (incorporated by reference to exhibit
10.15 to the Registrant's Registration Statement).
10.14 Series D Preferred Stock Warrant between the Registrant and Comdisco,
Inc., dated October 28, 1993 (incorporated by reference to exhibit
10.16 to the Registrant's Registration Statement).
10.15 Common Stock Warrant between the Registrant and LTI Ventures Leasing
Corp., dated February 15, 1993 (incorporated by reference to exhibit
10.17 to the Registrant's Registration Statement).
10.16 Common Stock Warrant between the Registrant and LTI Ventures Leasing
Corp., dated May 5, 1994 (incorporated by reference to exhibit 10.18 to
the Registrant's Registration Statement).
10.17 Common Stock Warrant between the Registrant and Silicon Valley
Bancshares, dated April 6, 1992 (incorporated by reference to exhibit
10.19 to the Registrant's Registration Statement).
10.18 Common Stock Warrant between the Registrant and Silicon Valley
Bancshares, dated July 7, 1995 (incorporated by reference to exhibit
10.20 to the Registrant's Registration Statement).
10.19 Form of Common Stock Purchase Agreement, dated November 21, 1997
(incorporated by reference to Exhibit 10.1 to the Registrant's
Registration Statement on Form S-3, Registration No. 333-43929).
10.20 Loan and Security Agreement, dated March 27, 1998, between the Company
and Silicon Valley Bank.
10.21 Form of Common Stock Purchase Agreement, dated July 22, 1998.
(incorporated by reference to Exhibit 10.1 to the Registrant's
Registration Statement on Form S-3, Registration No. 333-64515).
10.22 Rights Agreement, dated September 17, 1998 between the Registrant and
AudioFax IP LLC. (incorporated by reference to Exhibit 10.1 to the
Registrant's Registration Statement on Form S-3, Registration No.
333-67355).
10.23 Purchase Agreement, dated December 24, 1998, between the Registrant and
the Tail Wind Fund Ltd. (incorporated by reference to Exhibit 10.1 to
the Registrant's Registration Statement on Form S-3, Registration No.
333-70915).
10.24 Common Stock Warrant between the Registrant and the Tail Wind Fund
Ltd., dated December 28, 1998 (incorporated by reference to Exhibit
10.2 to the Registrant's Registration Statement on Form S-3,
Registration No. 333-70915)
10.25 Purchase Agreement, dated May 14, 1999, between the Registrant and the
investors listed on Schedule A thereto (incorporated by reference to
Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on
May 18, 1999).
27.** Financial Data Schedule.
* Confidential treatment granted.
** Filed herewith.
22
<PAGE>
(b) Reports on Form 8-K
Current Report on Form 8-K filed on May 18, 1999
Current Report on Form 8-K filed on June 3, 1999
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NETMOVES CORPORATION
--------------------
(Registrant)
Date: August 12, 1999 /s/ Thomas F. Murawski
----------------------------------------------
Thomas F. Murawski
Chief Executive Officer, President and Chairman of the
Board of Directors
(Principal Executive Officer)
Date: August 12, 1999 /s/ Peter S. Macaluso
----------------------------------------------
Peter S. Macaluso
Chief Financial Officer
(Principal Financial and Accounting Officer),
Treasurer and Secretary
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
NetMoves, Inc. 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-END> JUN-30-1999
<CASH> 12,068,464
<SECURITIES> 0
<RECEIVABLES> 3,770,842
<ALLOWANCES> 186,119
<INVENTORY> 0
<CURRENT-ASSETS> 16,017,321
<PP&E> 12,319,085
<DEPRECIATION> 6,506,152
<TOTAL-ASSETS> 24,041,357
<CURRENT-LIABILITIES> 5,672,691
<BONDS> 0
0
0
<COMMON> 164,615
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 24,041,357
<SALES> 11,229,578
<TOTAL-REVENUES> 11,229,578
<CGS> 5,936,333
<TOTAL-COSTS> 10,094,350
<OTHER-EXPENSES> (55,449)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 95,010
<INCOME-PRETAX> (4,840,666)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,840,666)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,840,666)
<EPS-BASIC> (.33)
<EPS-DILUTED> (.33)
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