<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 SEPTEMBER 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 Office 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 November 10, 1999, there were 16,462,820 shares of the registrant's
common stock outstanding.
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NETMOVES CORPORATION
Index to September 30, 1999 Form 10-Q
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
Part I - Financial Information
<S> <C> <C>
Item 1. Financial Statements
Condensed Balance Sheets - September 30, 1999 and December 31, 1998................ 3
Condensed Statements of Operations -Three and Nine Months Ended
September 30, 1999 and 1998........................................................ 4
Condensed Statements of Cash Flows - Nine Months Ended
September 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......................................................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................... 15
Part II - Other Information
Item 1. Legal Proceedings.................................................................. 22
Item 2. Changes in Securities.............................................................. 22
Item 3. Defaults upon Senior Securities.................................................... 22
Item 4. Submission of Matters to a Vote of Security Holders................................ 22
Item 5. Other Information.................................................................. 22
Item 6. Exhibits and Reports on Form 8-K................................................... 22
Signatures......................................................................... 25
</TABLE>
2
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NETMOVES CORPORATION
CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $8,966,171 $5,260,450
Accounts receivable, net of allowances of $238,648
and $220,076 as of September 30, 1999
and December 31, 1998, respectively 3,400,259 3,198,688
Prepaid expenses and other current assets 431,864 162,218
--------------- ---------------
Total current assets 12,798,294 8,621,356
Property and equipment, net 6,100,299 5,487,221
Other assets, net 2,189,668 379,148
--------------- ---------------
Total assets $21,088,261 $14,487,725
--------------- ---------------
--------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,975,503 $1,153,688
Accrued expenses and other liabilities 2,720,158 2,654,658
Obligation under capital lease 62,973 95,804
Current portion of notes payable 1,165,804 992,960
--------------- ---------------
Total current liabilities 5,924,438 4,897,110
Notes payable 1,428,996 1,540,481
Obligation under capital lease 145,461
--------------- ---------------
Total liabilities 7,498,895 6,437,591
--------------- ---------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock,$0.01 par value;40,000,000 shares authorized;
16,462,820 and 13,904,203 shares issued and outstanding
as of September 30, 1999 and December 31, 1998, 164,628 139,042
respectively
Additional paid-in capital 61,529,556 48,171,015
Accumulated deficit (48,104,818) (40,259,923)
--------------- ---------------
Total stockholders' equity 13,589,366 8,050,134
--------------- ---------------
--------------- ---------------
Total liabilities and stockholders' equity $21,088,261 $14,487,725
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of the condensed
financial statements
3
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NETMOVES CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues $5,905,565 $5,307,019 $17,135,143 $15,507,389
Cost of service 3,046,647 2,854,845 8,982,980 8,121,692
---------------- --------------- --------------- ---------------
Gross margin 2,858,918 2,452,174 8,152,163 7,385,697
Operating expenses:
Network operations and support 1,321,767 930,540 3,575,149 2,570,767
Research and development 534,125 456,111 1,526,404 1,582,447
Sales and marketing 2,320,617 1,755,210 5,971,037 4,708,289
General and administrative 1,128,024 766,200 3,390,856 2,368,961
Depreciation and amortization 590,405 394,379 1,525,842 1,080,669
Patent litigation settlement 1,025,000 1,025,000
---------------- --------------- --------------- ---------------
Operating loss (3,036,020) (2,875,266) (7,837,125) (5,950,436)
Interest expense, net (1,968) (3,108) (96,978) (78,008)
Other income 33,759 18,846 89,208 77,829
---------------- --------------- --------------- ---------------
Net loss ($3,004,229) ($2,859,528) ($7,844,895) ($5,950,615)
---------------- --------------- --------------- ---------------
---------------- --------------- --------------- ---------------
Net loss per common and
equivalent share ($0.18) ($0.23) ($0.52) ($0.52)
---------------- --------------- --------------- ---------------
---------------- --------------- --------------- ---------------
Shares used in computing net loss
per common and
equivalent share 16,461,924 12,483,884 15,206,767 11,377,178
---------------- --------------- --------------- ---------------
---------------- --------------- --------------- ---------------
</TABLE>
The accompanying notes are an integral part of the condensed
financial statements
4
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NETMOVES CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($7,844,895) ($5,950,615)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization expense 1,525,842 1,080,669
Patent litigation settlement 1,000,000
Other adjustments 794,650 118,282
Changes in assets and liabilities:
Accounts receivable (996,221) (956,160)
Accounts payable 821,815 401,402
Other, net (181,869) (19,056)
--------------- ---------------
Net cash used in operating activities (5,880,678) (4,325,478)
--------------- ---------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment, net (1,706,027) (1,480,570)
Purchase of intangibles (2,050,633) (284,167)
--------------- ---------------
Net cash used in investing activities (3,756,660) (1,764,737)
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of notes payable and capital lease
obligation (1,040,541) (569,053)
Borrowings under equipment lines of credit 999,485 688,697
Proceeds from issuance of common stock and exercise of stock
options and warrants, net 13,384,115 7,023,627
--------------- ---------------
Net cash provided by financing activities 13,343,059 7,143,271
--------------- ---------------
NET INCREASE 3,705,721 1,053,056
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 5,260,450 3,680,185
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $8,966,171 $4,733,241
--------------- ---------------
--------------- ---------------
Supplemental disclosure of non-cash investing activities:
Issuance of common stock pursuant to patent litigation
settlement 0 $1,000,000
--------------- ---------------
--------------- ---------------
Acquisition of network equipment under capital lease $215,057 0
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of the condensed
financial statements
5
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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 nine month periods ended September 30, 1999 and 1998. The results
for the three and nine month periods ended September 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. PATENT LITIGATION SETTLEMENT
On September 22, 1998 the Company settled all outstanding litigation
with AudioFAX IP,L.L.P. ("AudioFAX") to avoid the expense and disruption of
protracted litigation.
In 1997 the Company had filed a lawsuit against AudioFAX seeking
declaratory relief that NetMoves services did not infringe on any valid
claims in certain AudioFAX's patents relating to store-and-forward technology
or that certain claims of the AudioFAX patents are not valid. Immediately
after the filing of NetMoves' complaint, AudioFAX filed a lawsuit against
NetMoves alleging patent infringement. The terms of the settlement agreement
required the Company to issue 275,000 shares of common stock to AudioFAX and
to register such shares for resale in exchange for a fully paid-up license to
the patents in the dispute. Although under certain circumstances the Company
would have been required to issue additional shares or pay a certain amount
of cash to AudioFAX, these requirements are no longer applicable.
In the third quarter of 1998, the Company recorded a charge of
$1,025,000 representing all costs associated with the settlement. No costs
have been capitalized, as the Company could not determine the future economic
benefit, if any, to the Company of the patent licenses acquired.
4. LOSS PER SHARE
Net loss per common and equivalent share for the three months ended
September 30, 1999 and 1998 is based on the weighted average number of shares
outstanding during the periods presented. Stock options outstanding of
approximately 2,219,231 and 1,971,000 as of September 30, 1999 and 1998,
respectively, have been excluded from the calculation of diluted earnings per
share since their effect would be antidilutive.
5. 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
6
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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.
6. 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.
7. SEGMENT DISCLOSURE
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 nine months ended
September 30, 1999 and 1998 and Assets for the Company as of September 30,
1999 and 1998 were as follows:
<TABLE>
<CAPTION>
GROSS MARGIN THREE MONTHS ENDED SEPTEMBER 30, 1999 THREE MONTHS ENDED SEPTEMBER 30, 1998
--------------------------------------------------- ---------------------------------------------------
U.S. INTERNATIONAL TOTAL U.S. INTERNATIONAL TOTAL
---------------- ---------------- ---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
INTERNET FAX
Revenues $ 3,578,918 $ 1,485,709 $ 5,064,627 $ 2,294,819 $ 1,556,321 $ 3,851,140
Cost of Service 1,767,525 884,438 2,651,963 1,091,799 969,462 2,061,261
---------------- ---------------- ---------------- -------------- -------------- --------------
Gross Margin 1,811,393 601,271 2,412,664 1,203,020 586,859 1,789,879
TELEPHONY FAX
Revenues 840,938 840,938 1,455,879 1,455,879
Cost of Service 394,684 394,684 793,584 793,584
---------------- ---------------- ---------------- ----------------
Gross Margin 446,254 446,254 662,295 662,295
TOTAL
Revenues 4,419,856 1,485,709 5,905,565 3,750,698 1,556,321 5,307,019
Cost of Service 2,162,209 884,438 3,046,647 1,885,383 969,462 2,854,845
---------------- ---------------- ---------------- -------------- -------------- --------------
---------------- ---------------- ---------------- -------------- -------------- --------------
Gross Margin $ 2,257,647 $ 601,271 $ 2,858,918 $ 1,865,315 $ 586,859 $ 2,452,174
---------------- ---------------- ---------------- -------------- -------------- --------------
---------------- ---------------- ---------------- -------------- -------------- --------------
GROSS MARGIN NINE MONTHS ENDED SEPTEMBER 30, 1999 NINE MONTHS ENDED SEPTEMBER 30, 1998
--------------------------------------------------- ---------------------------------------------------
U.S. INTERNATIONAL TOTAL U.S. INTERNATIONAL TOTAL
---------------- ---------------- ---------------- ---------------- ----------------- ----------------
INTERNET FAX
Revenues $ 9,233,306 $ 4,914,619 $ 14,147,925 $ 6,525,996 $ 4,070,965 $ 10,596,961
Cost of Service 4,516,549 2,980,103 7,496,652 3,174,022 2,168,326 5,342,348
---------------- ---------------- ---------------- -------------- -------------- --------------
Gross Margin 4,716,757 1,934,516 6,651,273 3,351,974 1,902,639 5,254,613
TELEPHONY FAX
Revenues 2,987,218 2,987,218 4,910,428 4,910,428
Cost of Service 1,486,328 1,486,328 2,779,344 2,779,344
---------------- ---------------- ---------------- ----------------
Gross Margin 1,500,890 1,500,890 2,131,084 2,131,084
TOTAL
Revenues 12,220,524 4,914,619 17,135,143 11,436,424 4,070,965 15,507,389
Cost of Service 6,002,877 2,980,103 8,982,980 5,953,366 2,168,326 8,121,692
---------------- ---------------- ---------------- -------------- -------------- --------------
---------------- ---------------- ---------------- -------------- -------------- --------------
Gross Margin $ 6,217,647 $ 1,934,516 $ 8,152,163 $ 5,483,058 $ 1,902,639 $ 7,385,697
---------------- ---------------- ---------------- -------------- -------------- --------------
---------------- ---------------- ---------------- -------------- -------------- --------------
</TABLE>
7
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<TABLE>
<CAPTION>
ASSETS SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
--------------------------------------------------- ---------------------------------------------------
U.S. INTERNATIONAL TOTAL U.S. INTERNATIONAL TOTAL
---------------- ---------------- ---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Cash and Cash
Equivalents $ 8,966,171 $ 8,966,171 $ 4,733,241 $ 4,733,241
Accounts Receivable,
net 2,399,474 $ 1,000,785 3,400,259 1,924,399 $ 1,168,480 3,092,879
Property & Equipment,
net 5,436,549 663,750 6,100,299 3,716,185 926,270 4,642,455
---------------- ----------------
---------------- ---------------- ---------------- -----------------
---------------- ---------------- ---------------- -----------------
Sub-total $ 16,802,194 $ 1,664,535 18,466,729 $ 10,373,825 $ 2,094,750 12,468,575
---------------- ---------------- ---------------- -----------------
---------------- ---------------- ---------------- -----------------
Other unallocated amounts 2,621,532 511,872
---------------- ----------------
---------------- ----------------
Total Assets $ 21,088,261 $ 12,980,447
---------------- ----------------
---------------- ----------------
</TABLE>
8. 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).
8
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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 "RISK FACTORS," 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 nineteen countries as of September 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 nineteen 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.
9
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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 Nine Months Ended
September 30, September 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 51.6 53.8 52.4 52.4
---- ---- ---- ----
Gross margin 48.4 46.2 47.6 47.6
---- ---- ---- ----
Operating expenses
Network operations and support 22.4 17.5 20.9 16.6
Research and development 9.0 8.6 8.9 10.2
Sales and marketing 39.3 33.1 34.8 30.4
General and administrative 19.1 14.4 19.8 15.3
Depreciation and amortization 10.0 7.4 8.9 7.0
Patent litigation settlement 0 19.3 0 6.6
- ---- - ---
Total operating expenses 99.8 100.3 93.3 86.1
---- ----- ---- ----
Operating loss (51.4) (54.1) (45.7) (38.5)
------ ------ ------ ------
Interest expense, net 0 0 (0.6) (0.5)
Other income 0.5 0.2 0.5 0.5
--- --- ---
Loss before income taxes (50.9) (53.9) (45.8) (38.5)
Provision for income taxes ---- ---- ---- ----
Net loss (50.9) % (53.9) % (45.8) % (38.5) %
---- ---- ---- ----
---- ---- ---- ----
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
REVENUES. Revenues, which consist primarily of customer usage charges, grew
11.3% to $5.9 million in the three months ended September 30, 1999 from $5.3
million in the three months ended September 30, 1998 as a result of a 32%
increase in total Internet Fax revenues which account for 86% of total
Company revenues offset by a 42% decrease in Telephony Fax revenues which
only comprise 14% 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 $3.4 million for the three months ended September 30, 1999,
representing a 29% increase over the same service revenues for the three
months ended September 30, 1998. Internet Fax revenues for the U.S. business
segment increased $1.3 million or 56% to $3.6 million in the 1999 third
quarter. Due to lower non-recurring license fees and lower usage billing
rates, the international business segment decreased by less than $0.1 million
or 5% to $1.5 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 but decreased as a percentage of revenues in the three months
ended September 30, 1999 to 51.6% from 53.8% in the three months ended
September 30, 1998. The decreased percentage is attributable to reduced
carrier rates and operating efficiencies.
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 $1.3 million for the three month period ended September 30, 1999 in
comparison to $0.9 million in the three
10
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months ended September 30, 1998 as a result of hiring additional personnel to
support the Company's expanding customer base on a 7 days per week / 24-hour
per day basis. As a percentage of revenues, these expenses increased to 22.4%
in the 1999 period from 17.5% 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 $0.5 million for the three months ended September 30, 1999 and
1998. These expenses increased to 9.0% of revenues in the three months ended
September 30, 1999 from 8.6% of revenues in the three months ended September
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 $2.3 million for the three months ended
September 30, 1999 in comparison to $1.8 million in the three months ended
September 30, 1998. As a percentage of revenues, these costs increased to
39.3% from 33.1% for the 1999 and 1998 periods, respectively. The higher
costs in the third 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 $1.1 million in the three months ended September 30, 1999 as
compared to $0.8 million in the three months ended September 30, 1998. As a
percentage of revenues, these expenses increased to 19.1% in the three months
ended September 30, 1999 from 14.4% in the three months ended September 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 $0.6
million or 10.0% of revenues in the three months ended September 30, 1999 and
$0.4 million or 7.4% of revenues in the three months ended September 30,
1998. The increase in Depreciation and amortization expense relates to an
increase in the depreciable base of Fixed Assets and amortization charges
related to the UNIFI acquisition in 1999.
PATENT LITIGATION SETTLEMENT. During the quarter ended September 30, 1998 the
Company agreed to the settlement of all outstanding patent litigation with
AudioFAX. The charge in the 1998 quarter represents the cost of the license
fee paid by the Company for the license of certain AudioFAX patents.
PROVISION FOR INCOME TAXES. The Company had losses for income tax purposes
for the three months ended September 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.
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
REVENUES. Revenues, which consist primarily of customer usage charges, grew
10.5% to $17.1 million in the nine months ended September 30, 1999 from $15.5
million in the nine months ended September 30, 1998 as a result of a 34%
increase in total Internet Fax revenues which account for 83% of total
Company revenues offset by a 39% decrease in Telephony Fax revenues which
only comprise 17% 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 nine months ended September 30, 1999,
representing a 62% increase over the same service revenues for the nine
months ended September 30, 1998. Internet Fax revenues for the U.S. business
segment increased $2.7 million or 41% to $9.2 million in the first three
quarters of 1999 and the international business segment increased $0.8
million or 21% to $4.9 million in the 1999 period in comparison to the same
period in 1998.
11
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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 but as a percentage of revenues, remained the same for both
periods at 52.4%.
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 $3.6 million for the nine month period ended September 30, 1999 in
comparison to $2.6 million in the nine months ended September 30, 1998 as a
result of hiring additional personnel to support the Company's expanding
customer base on a 7 days per week / 24-hour per day basis. As a percentage
of revenues, these expenses increased to 20.9% in the 1999 period from 16.6%
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
decreased to $1.5 million for the nine month period ended September 30, 1999
in comparison to $1.6 million in the nine months ended September 30, 1998,
however, as a result of higher revenues in 1999 these expenses decreased to
8.9% of revenues in the nine months ended September 30, 1999 from 10.2% of
revenues in the nine months ended September 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 $6.0 million for the nine months ended
September 30, 1999 in comparison to $4.7 million in the nine months ended
September 30, 1998. As a percentage of revenues, these costs increased to
34.8% from 30.4% 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 $3.4 million in the nine months ended September 30, 1999 as
compared to $2.4 million in the nine months ended September 30, 1998. As a
percentage of revenues, these expenses increased to 19.8% in the nine months
ended September 30, 1999 from 15.3% in the nine months ended September 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 $1.5
million or 8.9% of revenues in the nine months ended September 30, 1999 and
$1.0 million or 7.0% of revenues in the nine months ended September 30, 1998.
The increase in Depreciation and amortization expense relates to an increase
in the depreciable base of Fixed Assets and amortization charges related to
the UNIFI acquisition in 1999.
PATENT LITIGATION SETTLEMENT. During the quarter ended September 30, 1998 the
Company agreed to the settlement of all outstanding patent litigation with
AudioFAX. The charge in the 1998 quarter represents the cost of the license
fee paid by the Company for the license of certain AudioFAX patents.
PROVISION FOR INCOME TAXES. The Company had losses for income tax purposes
for the nine months ended September 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 September 30, 1999
included cash and cash equivalents of $9.0 million and $0.3 million available
under equipment lines of credit. The Company believes that its current cash
and cash equivalents
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and available equipment financing facility will be sufficient to meet its
anticipated cash needs for working capital and capital expenditure
requirements through at least September 2000.
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 nine months ended September 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 $5.9 million in the nine
months ended September 30, 1999, as compared to $4.3 million in the first
nine months of 1998. Cash used for the purchase of equipment, mainly used to
improve and expand the NetMoves network, amounted to $1.7 million in the
first nine 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 $2.0 million and $0.3 million in the first nine months of 1999
and 1998 respectively. The Company has committed to minimum monthly usage
levels with its primary telecommunications carrier 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:
- 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
- REVIEW - conducting a review of NetMoves' application and product
software code to determine Year 2000 compliance; assessment of repair
or replacement requirements
- 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
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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.
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.
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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 September 30, 1999,
we have experienced significant net losses. We incurred a net loss of $7.8
million for the most recent nine-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 September 30, 1999, we had an accumulated deficit of $48.3
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 nine
months of 1999 we derived approximately $4.9 million, or 28.7% 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.
IF WE ARE UNABLE TO SUCCESSFULLY TAKE STRATEGIC ACTION, OUR STOCK PRICE COULD
DECLINE.
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In October 1999, the Company engaged Lehman Brothers to assist in
exploring strategic alternatives to enhance stockholder value. If we are
unable to successfully take strategic action, our stock price could decline.
RISKS RELATED TO OUR INDUSTRY
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-
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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.
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 November 10, 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
16,462,820 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.
20
<PAGE>
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-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.
21
<PAGE>
PART II OTHER INFORMATION
<TABLE>
<CAPTION>
<S> <C>
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).
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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.
</TABLE>
- -------------
* Confidential treatment granted.
** Filed herewith.
23
<PAGE>
(b) Reports on Form 8-K
No reports on Form 8-K
24
<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: November 12, 1999 /S/ THOMAS F. MURAWSKI
---------------------------------------
Thomas F. Murawski
Chief Executive Officer, President and
Chairman of the Board of Directors
(Principal Executive Officer)
Date: November 12, 1999 /S/ PETER S. MACALUSO
-------------------------------------
Peter S. Macaluso
Chief Financial Officer
(Principal Financial and Accounting
Officer),
Treasurer and Secretary
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the NetMoves
Corporation financial statments, and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 8,966,171
<SECURITIES> 0
<RECEIVABLES> 3,638,907
<ALLOWANCES> 238,648
<INVENTORY> 0
<CURRENT-ASSETS> 12,798,294
<PP&E> 13,072,268
<DEPRECIATION> 6,971,969
<TOTAL-ASSETS> 21,088,261
<CURRENT-LIABILITIES> 5,924,438
<BONDS> 0
0
0
<COMMON> 164,628
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 21,088,261
<SALES> 17,135,143
<TOTAL-REVENUES> 17,135,143
<CGS> 8,982,980
<TOTAL-COSTS> 15,989,288
<OTHER-EXPENSES> (89,208)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 96,978
<INCOME-PRETAX> (7,844,895)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,844,895)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,844,895)
<EPS-BASIC> (.52)
<EPS-DILUTED> (.52)
</TABLE>
