UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2000
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 000-22715
FUTUREONE, INC.
(Name of Small Business Issuer in its Charter)
Nevada 84-1383677
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4250 E. Camelback Rd., Suite K-124
Phoenix, Arizona 85018-2751
(Address of Principal Executive Offices) (Zip Code)
(602) 852-9725
Registrant's Telephone Number, Including Area Code
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practical date: As of June 30, 2000, there were 13,147,151
shares of Common Stock, $.001 par value per share, outstanding.
<PAGE>
FUTUREONE, INC.
INDEX
PAGE
----
Part I: Financial Information ............................................... 3
Item 1. Financial Statements (unaudited) .................................... 3
Condensed consolidated balance sheets -
June 30, 2000 and September 30, 1999 .................................... 3
Condensed consolidated statements of operations -
Three months ended June 30, 2000 and 1999 ............................... 4
Condensed consolidated statements of operations -
Nine months ended June 30, 2000 and 1999 ................................ 4
Condensed consolidated statements of cash flows -
Nine months ended June 30, 2000 and 1999 ................................ 5
Notes to condensed consolidated financial statements -
June 30, 2000 ........................................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................................... 12
Part II: Other Information .................................................. 17
Item 1. Legal Proceedings ................................................... 17
Item 2. Changes in Securities and Use of Proceeds ........................... 17
Item 3. Defaults Upon Senior Securities ..................................... 19
Item 4. Submission of Matters to a Vote of Security Holders ................. 19
Item 5. Other Information ................................................... 19
Item 6. Exhibits and Reports on Form 8-K. ................................... 19
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FUTUREONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, SEPTEMBER 30,
2000 1999
------------ ------------
(UNAUDITED) (NOTE 1)
ASSETS
Current assets:
Cash and cash equivalents $ 472,183 $ 155,529
Available for sale securities 97,438 --
Trade accounts receivable, net of allowance
for doubtful accounts of approximately
$114,000 and $140,000 at June 30, 2000 and
September 30, 1999, respectively 2,685,934 2,567,893
Cost and estimated earnings in excess of
billings on uncompleted contracts 670,378 717,548
Prepaid expenses and other assets 492,498 132,559
------------ ------------
Total current assets 4,418,431 3,573,529
Property and equipment, net 2,606,467 3,670,868
Notes receivable 38,866 62,906
Intangible assets, net 5,593,836 6,256,679
Other assets 8,628 --
Net long-term assets of discontinued
operations 1,802 1,157,197
------------ ------------
$ 12,668,030 $ 14,721,179
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Credit lines payable $ 480,000 $ 480,000
Notes payable to stockholders 166,450 171,450
Trade accounts payable 3,179,067 2,401,163
Accrued expenses 319,471 368,536
Taxes payable 283,262 282,462
Billings in excess of cost and estimated
earnings on uncompleted contract 178,364 66,861
Current portion of long term debt and
capital leases 1,540,831 1,429,799
Other liabilities 240,181 25,870
Net current liabilities of discontinued
operations 763,694 331,373
------------ ------------
Total current liabilities 7,151,320 5,557,514
Notes payable, less current portion 1,993,029 2,603,848
Capital lease payable, less current portion 76,826 67,786
Stockholders' equity:
Common stock, $.001 par value, 50,000,000
shares authorized and 13,147,151 and
12,891,028 shares issued at June 30, 2000
and September 30, 1999, Respectively 13,148 12,891
Preferred stock, $.001 par value, 10,000,000
shares authorized and none outstanding
Additional paid-in capital 14,211,854 14,050,433
Unearned Compensation (109,838) (481,187)
Treasury stock, 292,850 and 108,850 shares
at June 30, 2000 and September 30, 1999,
respectively (434,573) (250,573)
Other comprehensive loss (128,310) --
Accumulated deficit (10,105,426) (6,839,533)
------------ ------------
Total stockholders' equity 3,446,855 6,492,031
------------ ------------
$ 12,668,030 $ 14,721,179
============ ============
See notes to condensed consolidated financial statements.
3
<PAGE>
FUTUREONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30 NINE MONTHS ENDED JUNE 30
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Internet services business $ 195,823 $ 58,856 $ 717,920 $ 149,800
Broadband communications engineering
and construction services 3,139,694 2,341,979 10,034,454 5,207,593
------------ ------------ ------------ ------------
Total Revenues 3,335,517 2,400,835 10,752,374 5,357,393
Costs of sales:
Internet services business 113,403 56,013 513,329 164,591
Broadband communications engineering
and construction services 2,636,847 2,030,272 9,267,889 4,562,933
------------ ------------ ------------ ------------
Total costs of sales 2,750,250 2,086,285 9,781,218 4,727,524
------------ ------------ ------------ ------------
Gross profit 585,267 314,550 971,156 629,869
Operating expenses:
General and administrative 1,040,155 902,485 3,811,606 1,887,355
Depreciation and amortization 217,312 256,947 733,242 631,125
------------ ------------ ------------ ------------
Loss from operations (672,200) (844,882) (3,573,692) (1,888,611)
Other income (expense):
Interest expense (111,772) (80,177) (617,192) (141,647)
Interest income 814 -- 4,676 --
Gain (loss) on sale of stock (113,121) -- 5,100 27,897
Gain (loss) on sale of property and
equipment 129,547 -- (62,659) --
Other (71,624) 10,065 (77,636) 22,970
------------ ------------ ------------ ------------
Net loss from continuing operations (838,356) (914,994) (4,321,403) (1,979,391)
Discontinued operations:
Gain (loss) from operations 173,592 (757,829) (17,996) (1,681,409)
Gain (loss) on disposal (245,081) -- 1,073,506 --
------------ ------------ ------------ ------------
Net loss $ (909,845) $ (1,672,823) $ (3,265,893) $ (3,660,800)
============ ============ ============ ============
Basic and diluted net loss per
common share:
Loss from continuing operations $ (.06) $ (0.07) $ (0.33) $ (0.17)
Gain/(Loss) from discontinued
operations (.01) (0.06) .08 (0.14)
------------ ------------ ------------ ------------
Net loss per common share $ (.07) $ (0.13) $ (0.25) $ (0.31)
============ ============ ============ ============
Basic and diluted weighted average
shares: 12,909,294 12,347,052 12,909,264 11,792,561
============ ============ ============ ============
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
FUTUREONE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30
-----------------------------
2000 1999
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(3,265,893) $(3,660,800)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,145,733 833,921
Provision for doubtful accounts (credit) (30,000) --
Amortization of unearned compensation 155,865 --
Accretion of debt discount 245,667 --
Stock compensation 92,495 --
Realized and unrealized (gain) loss on investments (5,100) (27,897)
Loss (Gain) on disposal of discontinued operations (1,055,510) 1,681,409
Gain on Abcon sale (91,158) --
Loss on Priority Systems -- 120,175
Loss on GlobalKey goodwill writeoff -- 516,676
Loss on sale of assets 62,659 --
Changes in operating assets and liabilities:
Available for sale securities 1,699,690 167,518
Trade accounts receivable (88,041) 273,292
Costs and estimated earnings in excess of
billings on uncompleted contracts 47,170 (28,179)
Inventory
Prepaid expenses and other assets (96,610) (270,492)
Trade accounts payable 777,904 438,898
Accrued expenses (49,065) 125,426
Accrued bonus -- (500,000)
Accrual for loss contract -- (100,000)
Taxes payable 800 (41,967)
Billings in excess of cost and estimated
earnings on uncompleted contracts 111,503 93,443
Other liabilities 214,311 (99,647)
----------- -----------
Net cash used in operating activities (127,580) (478,224)
INVESTING ACTIVITIES
Purchases of property and equipment (828,894) (1,607,424)
Proceeds from sale of property and equipment 603,670 64,458
Acquisitions of businesses, net of cash received -- 25,402
Purchase of trademark (779) (1,022)
Change in other assets 15,412 80,864
----------- -----------
Net cash used in continuing operations (210,591) (1,437,722)
Net cash provided by (used in) discontinued operations
activities 902,782 (1,921,272)
----------- -----------
Net cash provided by (used in) investing activities 692,191 (3,358,994)
FINANCING ACTIVITIES
Net proceeds under credit lines -- 280,000
Principal payments under capital lease obligations (119,457) --
Proceeds from issuance of common stock -- 1,999,250
Debt issuance costs (15,000) --
Proceeds notes payable officers -- 164,000
Principle payments of notes payable (302,633) (222,460)
Proceeds from notes payable 189,133 1,322,837
----------- -----------
Net cash provided by (used in) financing activities (247,957) 3,543,627
----------- -----------
Increase (decrease) in cash and cash equivalents 316,654 (293,591)
Cash and cash equivalents at beginning of period 155,529 543,332
----------- -----------
Cash and cash equivalents at end of period $ 472,183 $ 249,741
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Assets acquired under capital lease obligation $ -- $ 23,957
=========== ===========
Exchange of available for sale securities for
common stock $ 184,000 $ --
=========== ===========
Retirement of debt with available for sale
securities $ 500,000 $ --
=========== ===========
Available for sale securities received for assets
of discontinued operations $ 2,604,000 $ --
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
FUTUREONE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine-month periods ended June
30, 2000 are not necessarily indicative of the results that may be expected for
the year ended September 30, 2000.
The balance sheet at September 30, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-KSB for the fiscal year ended September 30, 1999, as filed
with the Securities and Exchange Commission on January 13, 2000.
2. DISCONTINUED OPERATIONS
Communications Equipment Sales Business
On May 23, 2000 the Company announced that it had eliminated its communications
equipment sales business segment. The Company will no longer be a stocking
distributor of communication products. Accordingly, the communications equipment
sales business was accounted for as a discontinued operation in the accompanying
consolidated financial statements for all periods presented. The Company
realized a loss on the discontinuance of approximately $245,000.
Networld.com Inc. - Internet access business
On November 19, 1999, the Company sold its Internet access business, including
all of its personal and business Internet access customers in Phoenix,
Flagstaff, Tucson, Lake Havasu City, Prescott, Florence, Wickenburg and Payson,
Arizona and all of the equipment related to providing Internet access to the
Company's current Internet subscribers to RMI.NET, Inc. ("RMI.NET") for RMI.NET
common stock valued at approximately $2.75 million on the closing date of the
transaction. Under terms of the asset purchase agreement (the "Agreement"), 50
percent of the stock was immediately available for sale, 20 percent will be
available for sale six months after the transaction, 20 percent will be
available for sale one year after the transaction and 10 percent will be held in
escrow for 18 months after the transaction to cover any adverse claim that may
be made against the acquired assets. The Company sold approximately 50 percent
of the RMI.NET common stock for approximately $1.5 million. Additionally,
63,052, shares of RMI.NET common stock have been exchanged for full satisfaction
of a $500,000 convertible note and 43,004 shares have been exchanged for 184,000
shares of the Company's Common Stock under the severance agreement described in
Note 9 regarding Kendall Q. Northern.
Accordingly, the Internet access business was accounted for as a discontinued
operation in the accompanying consolidated financial statements. The Company
realized a gain on the sale of approximately $1.2 million.
Under terms of the Agreement, the Company agreed to fully satisfy outstanding
amounts due on certain equipment leases and other liabilities related to the
acquired assets by January 18, 2000. To date, the Company has not fully
satisfied the outstanding amounts due on these equipment leases and currently
payments are significantly past due. One of the third party lessors has made a
written demand for payment to bring the leases current.
Pursuant to the terms of the Agreement, RMI.NET is under no obligation to
deliver 10 percent of the total shares which are to be held in escrow for 18
months following the transaction if the Company does not satisfy such
outstanding liabilities in a timely manner. In addition, if RMI.NET must assume
such equipment leases and other liabilities related to the acquired assets, then
the Company is obligated to return an additional number of shares of RMI.NET
common stock so that the total of such shares and the final disbursement shares
and escrow shares withheld by RMI.NET as set forth above equals two times the
total amount due on such liabilities. The Company has paid approximately
6
<PAGE>
$136,000 to partially satisfy the equipment leases and other liabilities and is
currently negotiating for the settlement of approximately $392,000 of such
liabilities.
One or more of the equipment lease agreements were also personally guaranteed by
its current President and CEO Earl Cook and former President and CEO Kendall
Northern. In June, 2000, management of the Company initially became aware that
claims may be made against the personal guarantees of Mr. Cook and Mr. Northern.
Should any one or more of these third parties bring any claim against either one
or both Mr. Cook or Mr. Northern as a result of their respective guarantees, the
Company may have indemnification and/or hold harmless obligations relative to
any such claim or liability and an obligation to advance expenses, including
attorneys fees, to each individual in accordance with the terms of Nevada law,
the Company's By-Laws, the employment agreement with Mr. Cook and/or the
severance agreement with Mr. Northern. The Company is currently negotiating a
modification of the payment terms with these third parties and to the Company's
knowledge, no claim has been brought against the Company or either guarantor
relating to any of the equipment lease agreements.
Networld.com Inc. - PrimeServ Virtual Telephone Service
On August 10, 1999, the Company adopted a plan to sell and signed a letter of
intent to sell the assets and customer list of its PrimeServ operating division.
On December 6, 1999, the Company closed the sale for consideration of $17,800
cash and a $30,000 note receivable which resulted in a net loss of $66,615 which
was included as a loss on disposal under discontinued operations for the year
ended September 30, 1999.
The following represents the combined results of operations of the Company's
discontinued operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30 NINE MONTHS ENDED JUNE 30
-------------------------- ---------------------------
2000 1999 2000 1999
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 132,580 $ 817,031 $ 1,295,971 $ 3,061,105
Cost of sales (112,795) (806,634) (1,228,937) (2,899,458)
General and administrative expense (11,151) (310,693) (163,567) (1,020,984)
Depreciation and amortization
expense (10,815) (113,521) (91,618) (346,367)
Interest expense -- (3,353) (5,618) (14,992)
Other 175,773 (340,659) 175,773 (460,713)
--------- --------- ----------- -----------
Net gain (loss) $ 173,592 $(757,829) $ (17,996) $(1,681,409)
========= ========= =========== ===========
</TABLE>
Costs and expenses, including interest, have been allocated to discontinued
operations for all applicable periods based on management's estimates of those
costs directly related to the discontinued operations.
3. AVAILABLE FOR SALE SECURITIES
Available for sale securities consist of RMI.Net, Inc. common shares and are
carried at fair value with the unrealized gains and losses reported in
shareholders' equity. Realized gains and losses are included in other income.
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings on uncompleted contracts consist of the following
at:
JUNE 30, SEPTEMBER 30,
2000 1999
----------- -----------
Costs incurred on
uncompleted contracts $ 4,883,156 $ 2,337,185
Estimated earnings 726,207 1,107,910
----------- -----------
5,609,363 3,445,095
Less billings to date (5,117,349) (2,794,408)
----------- -----------
$ 492,014 $ 650,687
=========== ===========
Included in the accompanying balance sheet under the following captions:
JUNE 30, SEPTEMBER 30,
2000 1999
--------- ---------
Costs and estimated earnings in
excess of Billings on uncompleted
contracts $ 670,378 $ 717,548
Billings in excess of costs and
estimated Earnings on uncompleted
contracts (178,364) (66,861)
--------- ---------
$ 492,014 $ 650,687
========= =========
7
<PAGE>
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at:
JUNE 30, SEPTEMBER 30,
2000 1999
----------- -----------
Furniture and fixtures $ 135,685 $ 147,612
Computers and other equipment 175,345 157,008
Construction equipment 1,890,448 2,708,636
Software 168,185 167,022
Vehicles 1,014,393 1,046,432
Leasehold improvements 62,514 59,092
----------- -----------
3,446,570 4,285,802
Less accumulated depreciation and
amortization (840,103) (614,934)
----------- -----------
$ 2,606,467 $ 3,670,868
=========== ===========
6. INTANGIBLE ASSETS
Intangible assets consist of the following at:
JUNE 30, SEPTEMBER 30,
2000 1999
----------- -----------
Goodwill $ 6,512,384 $ 6,613,524
Trademarks 2,436 1,023
Debt issuance costs 213,165 158,333
CLEC certification 279,030 279,030
----------- -----------
7,007,015 7,051,910
Less amortization (1,413,179) (795,231)
----------- -----------
$ 5,593,836 $ 6,256,679
=========== ===========
7. NOTES PAYABLE AND LONG TERM DEBT
In October 1999, the Company issued detachable warrants to purchase 250,000
shares of its Common Stock at $1.00 per share and a promissory note in
consideration for $250,000. The note bears interest at 15% annually and matured
February 8, 2000. The offering of such warrants, promissory note and underlying
shares of Common Stock was made pursuant to an exemption from registration under
Section 4(2) of the Securities Act as private transactions not involving a
public distribution. The warrants have a determined value of $47,500 which has
been recorded as a discount to the debt issued and will be accreted to interest
expense over the term of the note. In February 2000, the Company amended the
note to (i) provide for an extension of the note to August 8, 2000 and (ii)
include a conversion feature to Common Stock at an exercise price of $1.00 per
share. The Company did not pay this promissory note by the stated maturity date
nor has it received from the holder any notice of conversion to Common Stock.
However, the Company is in the process of negotiating the terms of an extension.
Effective as of December 28, 1999, the Company issued detachable warrants to
purchase 16,667 shares of its Common Stock at $1.00 per share and a promissory
note convertible into 50,000 shares of Common Stock in consideration for
$50,000. The note bears interest at 12% and matured on June 28, 2000. The
offering of such warrants, promissory note and underlying shares of Common Stock
was made pursuant to an exemption from registration under Section 4(2) of the
Securities Act and Rule 506 of Regulation D promulgated under the Securities Act
as private transactions not involving a public distribution. The warrants have a
determined value of $3,167 which has been recorded as a discount to the debt
issued and will be accreted to interest expense over the term of the note. The
Company did not pay this promissory note by the stated maturity date nor has it
received from the holder any notice of conversion to Common Stock. However, the
Company is in the process of negotiating the terms of an extension.
Effective May 30, 2000 the Company entered into a promissory note in the
principal amount of $64,800 in conjunction with the execution of a Settlement
and Mutual Release Agreement of the same date. The note bears interest at 8%
annually and is secured by a portion of the accounts receivable and contract
rights of the Company's division, Rocket Science Creative. Installments of
interest and principal are payable at $5,000 per month commencing on July 1,
2000 until the note is fully paid. The Company has not made an installment
payment under this note. However to date, the Company has received no demand or
notice from the noteholder concerning any installment payment presently due on
the note, but is currently negotiating the terms of an extention or note
modification.
8
<PAGE>
Effective June 1, 2000, in association with the Employment Separation Agreement
(see Note 9) with Alan P. Hald, the former Chairman of the Board for the
Company, the Company entered into a convertible promissory note in the principal
amount of $70,000, with the note principal and accrued interest convertible into
shares of Common Stock. The note bears interest at 14% and matures on the
earlier of September 1, 2000, or five days after the date the Company closes one
or more public offerings, private placement of debt and/or equity, sale and/or
merger of the Company in the aggregate amount of not less than $1,500,000. The
offering of the convertible promissory note was made pursuant to an exemption
from registration under Section 4(2) of the Securities Act and Rule 506 of
Regulation D promulgated under the Securities Act as a private transaction not
involving a public distribution.
8. EMPLOYMENT AGREEMENTS
The Company and Mr. John Stephen Kelly entered into an Employment Agreement for
Mr. Kelly to serve as Vice President & General Counsel, effective as of April
24, 2000. The agreement sets forth the basic terms of employment, including
salary, management bonus and employment duties. As additional compensation, Mr.
Kelly is to receive an incentive stock option for 30,000 shares of common stock
of the Company at $1.00 per share. The options vest equally over three years.
The agreement also provides that if there is a substantial change in ownership
or management control of the Company and Mr. Kelly is thereafter terminated
without cause within 180 days of such change in ownership or management control,
Mr. Kelly shall be paid the following, in addition to his normal compensation
and the benefits due up to the actual date of termination: (i) an additional
severance amount equal to six months salary; and (ii) a management bonus related
to an equity or debt funding in a defined minimum funding amount received by the
Company within 12 months of termination; and (iii) all stock options granted to
date and in the future shall be considered immediately earned, vested and not
subject to cancellation under any termination of employment clauses in the stock
option agreements.
Mr. Ralph Zanck recently became a reporting person for purposes of Section 16 of
the Exchange Act of 1934. The Company and Mr. Zanck originally entered into an
Employment Agreement and a first amendment for Mr. Zanck to serve as Vice
President of Finance, effective as of December 6, 1999. The agreement sets forth
the basic terms of employment, including salary, management bonus and employment
duties. As additional compensation, Mr. Zanck is to receive an incentive stock
option for 30,000 shares of common stock of the Company at $1.00 per share. The
options vest equally over three years.
The agreement also provides that if there is a substantial change in ownership
or management control of the Company and Mr. Zanck is thereafter terminated
without cause within 180 days of such change in ownership or management control,
Mr. Zanck shall be paid the following, in addition to his normal compensation
and the benefits due up to the actual date of termination: (i) an additional
severance amount equal to six months salary; and (ii) a management and prorated
performance bonus related to certain funding received by the Company within
twelve 12 months of termination; and (iii) all stock options granted to date and
in the future shall be considered immediately earned, vested and not subject to
cancellation under any termination of employment clauses in the stock option
agreements.
9. SEVERANCE AGREEMENTS
Alan P. Hald, Chairman of the Board of Directors of the Company, resigned as an
employee and member of the Board of Directors of the Company. The resignation
was pursuant to the terms of an Employment Separation Agreement by and between
the Company and Mr. Hald effective as of June 1, 2000. The Separation Agreement
provides for: (a) the payment of any base salary that has accrued but has not
been paid as of the date of separation pursuant to the terms of the Employment
Agreement between the Company and Alan P. Mr. Hald dated as of January 1, 2000,
as amended (the "Employment Agreement"); (b) the lump sum payment of $70,000
representing Mr. Hald's base salary through the end of term of the Employment
Agreement to be made in accordance with the terms of a Convertible Promissory
Note (see Note 7 above); (c) accrued benefits required to be provided by the
terms of any Company sponsored benefit plans or programs; (d) warrants to
purchase 490,000 shares of common stock of the Company which equal the amount
Mr. Hald would have received through the full term of the Employment Agreement;
and (e) payment of a transaction bonus in the cash amount of 1% of the
Transaction ("Cash Amount") and an amount of warrants, equal to the Cash Amount
divided by the strike price of $1.00 per share of the warrant upon the
occurrence of certain events, including, without limitation the closing of a
public offering, private placement, sale or merger of the Company in an
aggregate amount valued at least $10,000,000 before January 1, 2001.
On November 23, 1999, the Company entered into a Severance Agreement with
Kendall Q. Northern, the Company's then president and chief executive officer.
Pursuant to the Severance Agreement, Mr. Northern's employment contract with the
Company was terminated by mutual consent and Mr. Northern resigned as an officer
9
<PAGE>
and director of the Company and all of its affiliates and agreed not to compete
with the Company for a period of one year. In consideration for executing the
Severance Agreement, the Company agreed to immediately pay a one-time sum of
$50,000 and a one-year separation payment of $100,000 to be paid in equal
monthly installments. In addition, the Company is further obligated to pay for
Mr. Northern's auto rental, auto insurance and medical insurance for one year.
The Company also allowed Mr. Northern to retain certain Company property,
already in his possession, valued at approximately $17,500 and to exchange
200,000 shares of the Company's Common Stock owned by Mr. Northern for 47,031
shares of RMI.NET, Inc. stock obtained by the Company from the sale of its
Internet access business. On March 27, 2000, the Company entered into an
agreement with Mr. Northern which amended the terms of the severance agreement
to provide for the exchange of 184,000 shares of the Company's stock for 43,004
shares of RMI.NET. Inc Common Stock. The exchange transaction was reflected in
the second quarter financial statements and was executed on or about May 5,
2000. In order to meet other financial obligations, the Company temporarily
suspended making the monthly severance payments to Mr. Northern effective June,
2000.
10. LEASES
The Company is currently negotiating with certain third parties to fully satisfy
certain outstanding equipment leases and other liabilities related to the assets
acquired from the Company by RMI.NET in an approximate amount of $392,000. The
Company may be subject to certain penalties under the terms of the agreement
between RMI.NET and the Company if it does not fully satisfy such liabilities in
a timely manner. To date, the Company has not fully satisfied the outstanding
amounts due on these equipment leases and the third parties have made a written
demand for payment.
One or more of the equipment lease agreements were also personally guaranteed by
its current President and CEO Earl Cook and former President and CEO Kendall
Northern. Should any one or more of these third parties bring any claim against
either one or both Mr. Cook or Mr. Northern as a result of their respective
guarantees, the Company may have indemnification and/or hold harmless
obligations relative to any such claim or liability and an obligation to advance
expenses, including attorneys fees, to each individual in accordance with the
terms of Nevada law, the Company's By-Laws, the employment agreement with Mr.
Cook and/or the severance agreement with Mr. Northern. The Company is currently
negotiating a modification of the payment terms with these third parties and to
the Company's knowledge, no claim has been brought against the Company or either
guarantor relating to any of the equipment lease agreements.
11. SEGMENT INFORMATION
The Company operates its business under Internet services, broadband
communications engineering and construction services, and convergence technology
and telecommunications. Management evaluates the performance of the segments
based upon revenues, gross margin, pre-tax income and long-lived assets. For the
three- and nine-months ended June 30, 2000 and 1999, this information has been
provided by segment. The Company's sales are primarily in the western United
States with no international sales.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30 NINE MONTHS ENDED JUNE 30
---------------------------- ---------------------------
2000 1999 2000 1999
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Revenues from external customers:
Internet services business $ 195,823 $ 58,856 $ 717,920 $ 149,800
Broadband communications engineering
and construction services 3,139,694 2,341,979 10,034,454 5,207,593
----------- ------------ ------------ -----------
$ 3,335,517 $ 2,400,835 $ 10,752,374 $ 5,357,393
=========== ============ ============ ===========
Gross profit (loss):
Internet services business $ 82,420 $ 2,843 $ 204,591 $ (14,791)
Broadband communications engineering
and construction services 502,847 311,707 766,565 644,660
----------- ------------ ------------ -----------
$ 585,267 $ 314,550 $ 971,156 $ 629,869
=========== ============ ============ ===========
Depreciation and amortization expense:
Internet services business $ 22,055 $ 11,786 $ 64,892 $ 11,786
Broadband communications engineering
and construction Services 159,362 167,767 499,184 480,902
Convergence technology and
telecommunications 7,957 -- 16,772 --
Unallocated corporate 27,938 77,394 152,394 138,437
----------- ------------ ------------ -----------
$ 217,312 $ 256,947 $ 733,242 $ 631,125
=========== ============ ============ ===========
Net loss from continuing operations:
Internet services business $ (51,861) $ (58,846) $ (261,326) $ (78,259)
Broadband communications engineering
and construction Services (55,199) (339,077) (1,480,537) (716,935)
Convergence technology and
telecommunications (57,323) -- (202,226) --
Unallocated corporate (673,973) (517,071) (2,377,314) (1,184,197)
----------- ------------ ------------ -----------
$ (838,356) $ (914,994) $ (4,321,403) $(1,979,391)
=========== ============ ============ ===========
</TABLE>
10
<PAGE>
12. SUBSEQUENT EVENTS
OPEC Corporation, a wholly owned subsidiary of the Company ("OPEC"), previously
entered into a Loan Agreement and Collateralized Convertible Commercial
Promissory Note (the "Note") on August 27, 1999 in the principal amount of
$1,000,000. The Note is secured in part by all of OPEC's accounts, including
accounts receivable and contract rights, both existing and future, all pursuant
to a certain Security Agreement of the same date. Donald D. Cannella, the
President of OPEC, is a guarantor under the Loan Agreement
The Note also contained a conversion privilege provision which allowed the
holders of the Note, under certain terms and conditions, to convert the
principal amount of the Note into the common stock of the Company at the
conversion ratio of $2.25 of Note principal for one share of common stock. The
Company previously signed an "Acknowledgement of Conversion Privilege" (but not
as Maker or Guarantor) under the Note.
In July, 2000, the noteholders agreed to permit periodic releasing of
approximately $360,000 of identified portions of OPEC's accounts receivable from
the Security Agreement under certain conditions. A condition for the
noteholders' consent included that Mr. Cannella and Mr. Romano, Vice President
of OPEC, voluntarily agreed to transfer up to 60,000 shares of their own common
stock in the Company to one or more of the noteholders at 10,000 shares per
month for a maximum of six months. Additionally, the Company is to deliver to
the noteholders up to a maximum of 360,000 common stock purchase warrants for
shares of common stock in the Company at a price of $1.00 per share. However,
the warrants are only deliverable to the noteholders in lots of 60,000 for each
time the noteholders consent to release collateral from the Security Agreement
and (1) OPEC approves an accounts receivable factoring arrangement in any
particular month by the factoring lender; and (2) the Company or OPEC receives
the required documentation from the noteholders satisfactory to the factoring
lender which releases the agreed identified collateral from the Security
Agreement.
In further consideration of the noteholders' consent to periodically releasing
identified portions of OPEC's accounts receivable from the Security Agreement,
the Company agreed to modify the above described conversion privilege and to
execute and sign a new "Acknowledgement of Conversion Privilege". The conversion
privilege was modified so that $444,000 of the principal amount of the Note may
be converted into the common stock of the Company at the conversion ratio of
$1.00 of Note principal for one share of common stock. All other terms of the
conversion privilege remained as stated in the original Note.
13. RELATED PARTY TRANSACTIONS
On or about May 10 , 2000 the Company became aware of two Employment Agreements
and a amendment to an existing employment contract that were entered into by the
former President, Kendall Northern, with three of the Company's employees. The
three employees are all related to Mr. Northern. Each of the agreements include
a clause stating the employee is to be paid $100,000 if terminated without
cause.
For unrelated reasons, two of the employees have been terminated and the Company
has received a formal demand for payment of $100,000 from each former employee.
The remaining employee continues to be employed by the Company. The
circumstances surrounding the execution and validity of these agreements is
currently under investigation. The Company believes there are valid defenses to
any claims which may be brought by the ex-employees and will defend its position
vigorously. Therefore, the accompanying financial statements do not include a
related liability.
14. UNUSUAL ITEMS
On April 19, 1999, the Company acquired 100 percent of the issued and
outstanding common stock of Abcon, Inc. (horizontal drilling and boring company)
in a purchase business combination for consideration of 94,118 shares of the
Company's common stock with a fair value at date of issuance of $2.302 per share
or $216,660 in the aggregate. The acquisition was accounted for as a purchase
transaction.
In February of 2000, management of the Company and its subsidiary OPEC
determined that it was no longer economically feasible to maintain a focus in
the horizontal drilling and boring business. The Company entered into a Letter
of Intent dated February 20, 2000 with Abcon Inc. ("Abcon") and a former owner
of Abcon to sell the Abcon drilling and boring business. On June 30, 2000 the
11
<PAGE>
Company completed the sale of Abcon, Inc. back to a former owner of the company
through a transfer back of all the issued and outstanding shares of capital
stock of Abcon. The purchase price for the shares included (1) the assumption of
$236,567 of specified debts and indemnification of the Company as to those
debts; (2) acknowledgement of the prior receipt by OPEC of cash payments of
$230,053 through buyer financing of equipment transferred or to be transferred
to buyer; (3) acknowledgement of the anticipated receipt by OPEC of cash
payments of $229,982 through buyer financing of equipment transferred or to be
transferred to buyer; and the delivery and execution of a promissory note and
security agreement to the Company and OPEC in the aggregate principal amount of
$263,329, which includes the $229,982 of cash payments anticipated by OPEC.
The difference between the value of the consideration received and the net
assets and liabilities of Abcon, Inc. which were sold resulted in a gain of
$91,158 which is included in the accompanying consolidated statement of
operations as gain on sale of property and equipment.
The Company will retain minimal horizontal drilling capabilities. Future
contracts requiring horizontal drilling will either be performed utilizing
existing capability or through subcontractors. Horizontal drilling revenue has
averaged approximately $1,300,000 per quarter during the period that the Company
owned Abcon, Inc. The sale will reduce revenue; however, the Company believes
that the impact on operating profit will be favorable.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
All statements in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this Report, other than
statements of historical facts, which address activities, events or developments
that the Company expects or anticipates will or may occur in the future,
including such things as future capital expenditures, growth, product
development, sales, business strategy and other such matters are forward-looking
statements. These forward-looking statements are based largely on the Company's
expectations and assumptions and are subject to a number of risks and
uncertainties, many of which are beyond the Company's control. Actual results
could differ materially from the forward-looking statements set forth herein as
a result of a number of factors, including, but not limited to, the Company's
limited operating history, unpredictability of operating results, intense
competition in various aspects of its business, the risks of rapid growth, the
Company's dependence on key personnel, uncertainty of product acceptance,
changes in laws and regulations, changes in economic conditions, an inability to
obtain financing and other risks described in the Company's reports on file with
the Securities and Exchange Commission. In light of these risks and
uncertainties, these cautionary statements qualify all of the forward-looking
statements made herein and there can be no assurance that the actual results or
developments anticipated by the Company will be realized. The Company undertakes
no obligation to update or revise any of the forward looking statements
contained herein.
This discussion and analysis of financial condition and results of
operations should be read in conjunction with the unaudited condensed
consolidated financial statements and the related disclosures included elsewhere
herein and Management's Discussion and Analysis of Financial Condition and
Results of Operations included as part of the Company's Annual Report on Form
10-KSB for the year ended September 30, 1999.
RESULTS OF OPERATIONS
The following table sets forth the percentage of total revenues represented
by specific expense and income items for continuing operations for the
three-month and nine-month periods ending June 30, 2000 and 1999. The prior
period revenues and related items have been adjusted for the effects of
reclassifying the revenues and associated costs of the Internet access
operations, virtual telephone services, and the communication equipment sales
business that have now been recorded as discontinued operations in 2000 and
1999. See Footnote 2 to the "Condensed Consolidated Financial Statements," which
indicates the amounts from each category that were reclassified to discontinued
operations.
12
<PAGE>
THREE MONTH PERIOD NINE MONTH PERIOD
ENDING JUNE 30 ENDING JUNE 30
---------------- ----------------
2000 1999 2000 1999
----- ----- ----- -----
REVENUES:
Internet Services Business 5.9% 2.5% 6.7% 2.8%
Broadband Communications Engineering
and Construction Services 94.1 97.5 93.3 97.2
----- ----- ----- -----
TOTAL REVENUES 100.0 100.0 100.0 100.0
----- ----- ----- -----
COSTS OF SALES:
Internet Services Business 3.4 2.3 4.8 3.1
Broadband Communications Engineering
and Construction Services 79.1 84.6 86.2 85.2
----- ----- ----- -----
TOTAL COST OF SALES 82.5 86.9 91.0 88.3
----- ----- ----- -----
GROSS PROFIT 17.5 13.1 9.0 11.7
OPERATING EXPENSES:
General and Administrative 31.2 37.6 35.4 35.2
Depreciation and Amortization 6.5 10.7 6.8 11.8
----- ----- ----- -----
TOTAL OPERATING EXPENSES 37.7 48.3 42.2 47.0
----- ----- ----- -----
LOSS FROM OPERATIONS (20.2) (35.2) (33.2) (35.3)
OTHER INCOME (LOSS), NET (5.0) (2.9) (7.0) (1.7)
----- ----- ----- -----
NET LOSS FROM CONTINUING OPERATIONS (25.2) (38.1) (40.2) (37.0)
DISCONTINUED OPERATIONS:
Loss from Operations 5.2 (31.6) (0.2) (31.4)
Gain on disposal (7.3) -- 10.0 --
----- ----- ----- -----
LOSS BEFORE INCOME TAXES (27.3) (69.7) (30.4) (68.4)
----- ----- ----- -----
NET LOSS (27.3)% (69.7)% (30.4)% (68.4)%
===== ===== ===== =====
The Company's operating loss was $838,000 and $915,000 and its net loss was
$910,000 and $1,673,000 for the three months ended June 30, 2000 and 1999,
respectively.
The Company's operating loss was $4,321,000 and $1,979,000 and its
net loss was $3,266,000 and $3,661,000 for the nine months ended
June 30, 2000 and 1999 respectively.
The following table sets forth comparative cash flows of the Company for
the periods indicated:
NINE MONTHS ENDED JUNE 30
-------------------------------
2000 1999
----------- -----------
Net Cash Used in Operating Activities $ (128,000) $ (478,000)
Net Cash Provided by (Used) in
Investing Activities 692,000 (3,359,000)
Net Cash Provided by Financing
Activities (248,000) 3,544,000
Ending Cash Balance 472,000 250,000
Working Capital (Deficit) (2,733,000) (1,984,000)
THREE MONTHS ENDED JUNE 30, 2000 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1999
REVENUES
Total revenues, excluding revenues attributable to discontinued operations,
were $3,336,000 for the three months ended June 30, 2000, an increase of 39%
from $2,401,000 for the three months ended June 30, 1999.
Internet services business revenues increased $137,000, or 232%, from
$59,000 in the three months ended June 30, 1999 to $196,000 in the three months
ended June 30, 2000. This increase is primarily attributable to additional web
service revenues resulting from the Company's acquisition of an advertising
company and an e-commerce company in March and July 1999, respectively.
The Company's broadband communications engineering and construction
services revenues increased $798,000, or 34%, from $2,342,000 in the three
months ended June 30, 1999 to $3,140,000 in the three months ended June 30,
2000. The Company believes the increase in broadband communications engineering
and construction services revenue is primarily attributable to the Company
obtaining large contracts to provide underground construction services,
establishing a new splicing division and the Company's expansion of its
underground construction services into Arizona. The Company believes that
revenues from this division are currently at the maximum level based on existing
personnel, equipment and capital resources. The Company closed its splicing
division and completed the sale of its horizontal drilling & boring division in
the third quarter. Accordingly future revenues are expected to decline, however,
the impact on operating profit is expected to be favorable.
COSTS OF REVENUES
Cost of sales in the Internet services division includes the direct cost of
labor for programmers, supplies and contract services. Cost of sales increased
$57,000, or 102%, from $56,000 in the three months ended June 30, 1999 to
$113,000 in the three months ended June 30, 2000. This increase is attributable
to acquisitions of an advertising company and e-commerce company in March and
July 1999, respectively, which resulted in increased revenues. Gross margins
increased from 5.1% in the three months ended June 30, 1999 to 42.1% for the
three months ended June 30, 2000. The increase in gross margin is due to billing
rate and business volume increases.
13
<PAGE>
Cost of sales for the Company's underground construction operations, which
includes materials, direct labor costs and depreciation, was $2,637,000 during
the three months ended June 30, 2000 compared to $2,030,000 for the three months
ended June 30, 1999. The increase is attributable to additional large contracts
to provide underground construction services and the Company's expansion of its
underground construction services into Arizona. Gross margins have improved from
13.3% for the three months ended June 30, 1999 to 16.0% for the three months
ended June 30, 2000. The higher margins are the result of the Company focusing
on smaller management and service contracts, which tend to have higher gross
margins and reducing commitment of resources to larger projects that typically
yield lower margins. See "Revenue Recognition Estimates."
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased $138,000, or 15%, from
$902,000 in the three months ended June 30, 1999 to $1,040,000 in the three
months ended June 30, 2000. Approximately $141,000 of this increase is directly
related to business growth, , $62,000 for Internet services, $29,000 for
broadband communications engineering and construction services, $49,000 for
convergence technology and telecommunications. Other corporate expenses
decreased $3,000 as a result of reductions in administrative personnel and other
operating costs.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization including amounts recorded to cost of sales
decreased from $389,000 in the three months ended June 30, 1999 to $358,000 in
the three months ended June 30, 2000. This decrease is primarily attributable to
the horizontal drilling equipment recently sold by the Company.
INTEREST EXPENSE
Interest expense increased from $80,000 in the three months ended June 30,
1999 to $112,000 in the three months ended June 30, 2000. Interest expense
increased $24,000 due to accretion of debt discount from working capital loans
obtained by the Company.
DISCONTINUED OPERATIONS
During the period ended June 30, 2000, the Company recognized a gain of
$174,000 related to operations of its discontinued communication equipment sales
business and recorded a $245,000 loss on discontinuing this business. The gain
from operations resulted from reducing a previously recorded liability for
estimated losses on liquidating inventory, which did not occur. During the
period ended June 30, 1999, the Company recognized a loss of $758,000 from both
its discontinued communication equipment sales business and discontinued
Internet access business. These operations were identified and accounted for as
discontinued operations for the year ended September 30, 1999.
NINE MONTHS ENDED JUNE 30, 2000 COMPARED WITH NINE MONTHS ENDED JUNE 30, 1999
Total revenues, excluding revenues attributable to discontinued operations,
were $10,752,000 for the nine months ended June 30, 2000, an increase of 101%
from $5,357,000 for the nine months ended June 30, 1999.
Internet services business revenues increased $568,000, or 379%, from
$150,000 in the nine months ended June 30, 1999 to $718,000 in the nine months
ended June 30, 2000. This increase is primarily attributable to additional web
service revenues resulting from the Company's acquisition of an advertising
company and an e-commerce company in March and July 1999, respectively.
The Company's broadband communications engineering and construction
services revenues increased $4,827,000, or 93%, from $5,208,000 in the nine
months ended June 30, 1999 to $10,034,000 in the nine months ended June 30,
2000. The Company believes that the increase in broadband communications
engineering and construction services revenue is primarily attributable to the
Company obtaining additional large contracts to provide underground construction
services and the Company's expansion of its underground construction services
into Arizona. The Company believes that revenues from this division are
currently at the maximum level based on existing personnel, equipment and
capital resources. The Company closed its splicing division and sold its
horizontal drilling & boring division in the third quarter, accordingly future
revenues are expected to decline slightly in the future.
COSTS OF REVENUES
Cost of sales in the Internet services division includes the direct cost of
labor for programmers, supplies and contract services. Cost of sales increased
$349,000, or 212%, from $165,000 in the nine months ended June 30, 1999 to
14
<PAGE>
$513,000 in the nine months ended June 30, 2000. This increase is attributable
to acquisitions of an advertising company and e-commerce company in March and
July 1999, respectively, which resulted in increased revenues. Gross margins
increased from negative 9.9% in the nine months ended June 30, 1999 to 28.5% for
the nine months ended June 30, 2000. The increase in gross margin is due to
billing rate and business volume increases.
Cost of sales for the Company's underground construction operations, which
includes materials, direct labor costs and depreciation, was $9,268,000 during
the nine months ended June 30, 2000 compared to $4,563,000 for the nine months
ended June 30, 1999. The increase is attributable to additional revenues being
earned by this division. Gross margins have declined from 12.4% for the nine
months ended June 30, 1999 to 7.6% for the nine months ended June 30, 2000. The
lower margins are the result of the Company focusing its resources on larger
projects that typically yield lower margins. Additionally two large projects
exceeded cost estimates impacting gross margins for this period. In the third
quarter this division reduced focus on large construction contracts and
concentrated on smaller contracts and management and service contracts, which
tend to have higher gross margins. As a result margins improved during the most
recent quarter to 16.0%. See "Revenue Recognition Estimates."
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased $1,924,000, or 102%, from
$1,887,000 in the nine months ended June 30, 1999 to $3,811,000 in the nine
months ended June 30, 2000. Approximately $1,115,000 of this increase is
directly related to business growth, acquisitions and new business, $349,000 for
Internet services, $580,000 for broadband communications engineering and
construction services, $186,000 for convergence technology and
telecommunications. Other corporate expenses, which increased $810,000, are
generally due to increased growth, including, additional professional fees of
$210,000, increases in management personnel of $227,000, and increased
facilities expenses of $125,000. Non-recurring, executive severance expense of
$248,000 was also incurred in the nine months ended June 30, 2000.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization including amounts recorded to cost of sales
increased from $956,000 in the nine months ended June 30, 1999 to $1,268,000 in
the nine months ended June 30, 2000. This increase is attributable to previous
acquisitions made by the Company.
INTEREST EXPENSE
Interest expense increased from $142,000 in the nine months ended June 30,
1999 to $617,000 in the nine months ended June 30, 2000. Interest expense
increased $152,000 due to increased debt for equipment and working capital in
the broadband communications engineering and construction division and $244,000
associated with accretion of debt discount from working capital loans obtained
by the Company during the nine months ended June 30, 2000.
DISCONTINUED OPERATIONS
During the nine month period ended June 30, 2000, the Company recognized a
one-time gain of $1,319,000 related to disposal of its Internet access business
and a one time loss of $245,000 related to the discontinuance of its
communication equipment sales business. In addition, the Company recognized a
gain of approximately $113,000 during the nine months ended June 30, 2000, on
the sale of the RMI.NET stock received in the ISP sale. The Company also
recognized a loss of $18,000 for the nine months ended June 30, 2000 relating to
the operations of its discontinued operations compared with a loss of $1,681,000
for the nine month period ended June 30,1999. These operations were identified
and accounted for as discontinued operations for the year ended September
30,1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company had net cash used for operating activities of $128,000 for the
nine months ended June 30, 2000 compared to $478,000 net cash used for operating
activities for the nine months ended June 30, 1999. Net cash used in operating
activities was less during the nine months ended June 30, 2000 primarily due to
proceeds received from the sale of the Company's Internet access operations. The
Company's investment activities provided $692,000 and required $3,359,000,
during 2000 and 1999, respectively. The primary reason for the change in cash
used from investing activities in 2000 was a change in proceeds from the sale of
equipment of $540,000, a decrease in purchase of equipment of $778,000 and an
increase in cash provided from discontinued operations of $2,824,000. Financing
15
<PAGE>
activities used $248,000 in 2000 and provided $3,544,000 in 1999. All of the
cash proceeds from financing activities in 2000 and 1999, except for $1,999,000
in 1999 from the issuance of common stock, were attributable to net debt
proceeds.
Except for its existing contracts, the Company's NeighborComm product has
been put on hold pending additional funding and greater market acceptability.
The Company intends to immediately concentrate on expansion of its
Telecommunications business to provide more immediate revenues through the
deployment of DSL and VoDSL solutions. The Company has developed a business plan
for expanding this business segment and is currently attempting to raise
sufficient capital, through a private placement offering, to implement this plan
The Company believes that cash on hand at June 30, 2000 is not sufficient to
meet the Company's working capital demands for the next three months and
accordingly the Company plans on obtaining cash and working capital through a
private placement and the sale of assets. In the event the Company is unable to
obtain additional financing, the Company will not be able to fully undertake its
telecommunications expansion and will attempt to reduce costs and possibly
liquidate additional assets to permit existing sources of capital to finance the
operations of the Company until such time as additional sources of financing
become available.
The Company has an existing line of credit with a bank that was in place
prior to the Company's acquisition of OPEC CORP. in July 1998. The amount
available under this line of credit is $480,000, which has been fully drawn by
the Company as of June 30, 2000. This line of credit was extended until
September 15, 2000. OPEC has also entered into an agreement with a bank to
factor approximately $360,000 of invoices per month, subject to the continuing
approval of the two prior lien holders. It is anticipated that this will begin
in August 2000 and will provide additional cash flow for this subsidiary.
The Company is required to repay certain capital lease obligations prior to
their regularly scheduled maturity dates as part of its sale of the Company's
Internet access business to RMI.NET. The balances subject to such accelerated
repayment amounted to approximately $392,000 at June 30, 2000. The Company is
actively seeking additional financial resources to repay these amounts.
The Company's business plan continues to include pursuing additional debt
and equity financing with financial institutions or strategic partners. In
October 1999, the Company obtained a bridge loan in the amount of $250,000. Such
loan bears interest at a rate of 15% per annum and the principal and interest
due thereunder was payable February 8, 2000. The Company has extended the due
date of this loan to August 8, 2000 and is currently negotiating an additional
extension. The Company also obtained a bridge loan in December 1999 in the
amount of $50,000. Such loan bears interest at a rate of 12% per annum and the
principal and interest were due and payable on June 28, 2000. The note is
convertible into shares of the Company's Common Stock at $1.00 per share at the
option of the holder. As of August 15, 2000, this note has not been paid and no
formal notice of default has been made by the lender. The Company anticipates
obtaining further loans or private placement equity financing in the aggregate
amount of $1,000,000 to $2,000,000 during the fourth quarter of fiscal year
2000. There is no assurance that the Company will receive all or any additional
portion of the funding it is seeking in a timely manner or on terms that are
favorable to the Company.
The Company has sold the registered shares of RMI.NET, Inc. common stock
received in consideration of substantially all of the Company's assets relating
to its Internet access business. As of January 31, 2000, the Company had sold
all of the 176,000 shares of RMI.NET common stock that were immediately
transferable, which provided the Company with approximately $1,500,000, which
has been used for working capital. An additional 28,000 shares of RMI.NET stock
were sold by the Company after May 19, 2000 for $92,000 to provide additional
working capital.
The Company was unable to complete any financing during the second or third
quarters and now believes that obtaining additional capital equity or debt
financing on terms favorable to the Company, if at all, will be much more
difficult as current stock market and business conditions persist.
Although the Company has obtained additional funds from the sale of
substantially all of the assets of its internet access business and certain
bridge and working capital loans, the Company is still dependent upon additional
capital resources to enable it to carry out its business plan and obtain
profitability. This lack of profitable operations and the need for additional
capital have resulted in the report of the independent auditors for the years
ended September 30, 1999 and 1998, containing an uncertainties paragraph with
respect to the ability of FutureOne to continue as a going concern.
REVENUE RECOGNITION ESTIMATES
The Company recognizes revenues for projects in process within the
broadband communications engineering and construction division using the
percentage of completion accounting method. Under this method, revenues are
recognized based on the ratio that costs incurred to date bear to the total
estimated costs to complete the project. Estimated losses on contracts are
recognized in full when the Company determines that a loss will be incurred. The
16
<PAGE>
Company frequently reviews and revises revenue and total cost estimates as work
progresses on a contract and as contracts are modified. Accordingly, revenue
adjustments based upon the revised completion percentage are reflected in the
period that estimates are revised. Although revenue estimates are based upon
management assumptions supported by historical experience, these estimates could
vary materially from actual results. To the extent percentage of completion
adjustments reduce previously reported revenues, the Company would recognize a
charge against operating results, which could have a material adverse effect on
the Company's results of operations for the applicable period.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
All legal proceedings and actions involving the Company are of an ordinary
and routine nature incidental to the operations of the Company. Management
believes that such proceedings should not, individually or in the aggregate,
have a material adverse effect on the Company's business or financial condition
or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 12, 2000, the Company entered into a NeighborComm Service Agreement
(the "Service Agreement") along with a First Amendment to the Service Agreement
with Morley Family Investments, LLLP, ROCOLO VI, LLC, and Ridgeview
Development/Ray O'Sullivan, LLC (collectively the "Ridgeview Group"). In
conjunction therewith, the Company and the Ridgeview Group also signed Letters
of Understanding as between themselves dated April 28, 2000 and May 1, 2000
respectively. The Service Agreement, First Amendment thereto and the two Letters
of Understanding are collectively referred to as the "NeighborComm Agreements".
Pursuant to the NeighborComm Agreements, the Company contracted to provide
bundled voice, video and data communications, a community Intranet and a virtual
community portal (together branded as the "NeighborComm System" or
"NeighborComm") on an exclusive basis to a certain real estate development in
Colorado Springs, Colorado known as Ridgeview at Stetson Hills ("Ridgeview").
Ridgeview currently consists of approximately 850 acres for the planned
development of residential single family homes, 115 acres for commercial
development and 50 acres of planned multi-family housing.
The NeighborComm intranet and community portal is to be designed around the
Ridgeview development to provide a single point for residents, local businesses
and government agencies to communicate in a local environment over the Internet
and intranet. The services are intended to be phased in pursuant to targeted
dates for staged implementation.
For its part, the Ridgeview Group is responsible to install the cable
and/or conduit from the backbone to the real estate structures according to a
contract schedule set forth in the NeighborComm Agreements. Services to complete
the infrastructure installation required by the Ridgeview Group will be provided
by OPEC CORP ("OPEC"), the Company's wholly owned subsidiary at prices 10% below
those normally charged to developers for similar work. The Company is to design
and engineer the network and required infrastructure as well as supply the
required switching hardware, connection boxes and set top boxes to be sold or
leased to the residents and businesses in Ridgeview. The Company must also
supply the software and necessary technical/maintenance support for the
NeighborComm System.
Further, the Company has agreed to purchase all the required and optional
infrastructure installed and paid for by the Ridgeview Group. Payment is to be
made to the Ridgeview Group in scheduled tranches as the infrastructure is built
out through the issuance by the Company of its common stock, plus warrants to
purchase the Company's common stock equal to 15% of the number of shares issued
in each tranch. The warrants are to vest immediately upon issuance and will be
exercisable for seven years at a price equal to a defined stock valuation price
(see below). Any issuance of the Company's common stock will be made in
aggregate amounts equal to the Ridgeview Group's actual cost of the
infrastructure installed and paid for on the Ridgeview property.
The value of the common stock will be determined by the average of the
closing prices of common stock as reported in the consolidated reporting system
(for exchange traded securities and last sale reported for over-the-counter
securities) for the 21 trading days immediately preceding the established date
for issuance of an infrastructure repayment tranch (the "Stock Valuation
Price").
The NeighborComm Agreements further provide that upon the Company's receipt
and acceptance of an appropriate subscription agreement and investor
questionnaire from the Ridgeview Group, and pursuant to a schedule of
infrastructure purchases in the Service Agreement, the Company will issue shares
of its common stock to the Ridgeview Group in an initial aggregate amount equal
to $400,000. This amount represents the anticipated cost of infrastructure
17
<PAGE>
installed and to be installed and paid for by the Ridgeview Group during the
first year of the NeighborComm Agreements.
However, in the event that the infrastructure installed and paid for by the
Ridgeview Group is less than $400,000 during the first year of this Agreement,
the Ridgeview Group will, at the end of the one year period, escrow an amount
equal to the difference between $400,000 and the actual amount of the
infrastructure installed and paid for by the Ridgeview Group during the first
year of the Agreement (including the cost of any infrastructure installed and
paid for by the Ridgeview Group prior to entering into the NeighborComm
Agreements). Any amounts escrowed shall be used exclusively for payment of the
infrastructure to be installed pursuant to the schedule noted in Exhibit B to
the Service Agreement.
All the stock issued under the initial $400,000 issue, except those shares
that equal the value of the infrastructure already installed as of May 12, 2000,
will be held by the Company, with full power to cancel a pro-rata amount of such
shares if the Ridgeview Group fails to pay for the required amount of
infrastructure or to escrow sufficient funds to complete the installation of
$400,000 of infrastructure. The shares shall be delivered pro-rata to the
Ridgeview Group only upon the actual transfer of infrastructure or escrow funds
to the Company having a total value of up to $400,000.
The Company will also issue to the Ridgeview Group additional shares of its
common stock in consideration for any infrastructure installed and paid for by
the Ridgeview Group in excess of the $400,000 first year commitment.
Additionally, the NeighborComm Agreements provide the Ridgeview Group with
certain additional incentive compensation relating to the installation of a
NeighborComm System and the promotion of NeighborComm to builders and residents
in the Ridgeview development. Upon signing the NeighborComm Agreements and the
receipt of an appropriate subscription agreement and investor questionnaire, the
Company will issue an additional 100,000 shares of its common stock to the
Ridgeview Group. Any shares issued are subject to piggyback registration rights,
subject to underwriter discretion.
The Company will hold the stock issued above so that in the event the
NeighborComm Agreements are terminated by the Ridgeview Group (see below), the
shares will be returned to the Company. If the shares are not returned to the
Company, the shares may be cancelled on the records of the corporation.
The NeighborComm Agreements further provide that upon the Company
completing purchases of infrastructure during the initial twelve month period,
the Company will pay the Ridgeview Group an additional bonus in warrants (beyond
the warrants discussed earlier) to purchase Company stock. Each warrant will be
a cashless exercise warrant with a term of seven years. The shares underlying
the warrant will also contain piggyback registration rights, subject to
underwriter discretion, based upon the following:
(a) A warrant to purchase shares equal to 15% of the number of shares issued to
purchase infrastructure during the first twelve months of the NeighborComm
Agreements; and
(b) A warrant to purchase additional shares of the Company's common stock,
based on any increased value of the stock, used to make any infrastructure
purchase during the first twelve months of the Agreements, using a base
price for the shares equal to $1.65/share.
Finally, the NeighborComm Agreements are also subject to special
termination rights. The Ridgeview Group may, at its option, terminate the
Agreements if the Company has not raised $3,000,000 in equity, debt or other
financing within 90 calendar days after the effective date of the Agreements or
another words, August 10, 2000. During this time period, the Ridgeview Group is
not required to make any expenditures for infrastructure costs as otherwise
required in the NeighborComm Agreements.
Additionally, the Ridgeview Group may, at its option, terminate the
Agreements if the Company has not registered up to 100,000 shares of stock to be
held by the Ridgeview Group in an S-1 registration statement to be filed by the
Company within 120 calendar days after the effective date of the Agreements, or
another words, September 9, 2000. During this time period, the Ridgeview Group
is likewise not required to make any expenditures for infrastructure costs as
otherwise required in the NeighborComm Agreements.
Should the Ridgeview Group elect to terminate the Agreements under either
provision above, (i) the Company will cancel a pro-rata amount of the initial
shares issued to the Ridgeview Group in excess of the actual cost of
infrastructure installed and paid for by the Ridgeview Group prior to May 12,
2000; and (ii) except for the indemnification and hold harmless provisions and
the non-disclosure/confidentiality provisions set forth in the Agreements, each
of the parties will be relieved of any further liability or obligation to the
other under the Agreements.
18
<PAGE>
The Company does not anticipate that it will be able to raise the
$3,000,000 in capital or to register the shares as required by the Agreement in
the next 90 to 120 days, but to date, the Company has received no notice of
termination from the Ridgeview Group.
On June 1, 20000 the Company entered into an agreement to terminate the
existing Stock Purchase Agreement and Voting Trust Agreement with Blackwater
Capital and entered into a new Consulting Services Agreement. The termination
agreement provided that Blackwater Capital vest immediately in the approximately
1,050,000 warrants it already held to purchase shares of the Company's Common
Stock with an Exercise Price of $1.00 per share. The agreement further provided
that the Company issue to Blackwater 330,000 shares of its restricted common
stock as compensation for all past and present services, as well as services to
be performed by Blackwater under the new Consulting Services Agreement.
During the threee-month period ending June 30, 2000, the Company issued
337,500 common shares to consultants of the Company for services provided.
Issued shares were determined to have a value of $67,500. During three-month
period ending June 30, 2000, the Company cancelled 24,000 shares of non-vested
Common Stock issue to employees in previous quarters. The stock cancellations
were the result of employee terminations or resignations.
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
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
10.36 Employment Separation Agreement by and between the Company and
Alan P. Hald effective as of June 1, 2000*
10.37 14% Convertible Promissory Note payable to the order of Alan P.
Hald in the principal amount of $70,000 dated June 1, 2000
10.38 Stock Purchase Agreement by and among the Company, OPEC CORP, a
Colorado corporation, Abcon, Inc., an Arizona corporation and
Brian Smith effective as of June 30, 2000
10.39 Promissory Note and Security Agreement payable to the order of
OPEC CORP, a Colorado corporation and the Company in the
principal amount of $263,329.14 dated June 30, 2000
10.40 Termination Agreement (with Consultant Services Agreement) by and
among the Company, Blackwater Capital Partners, L.P. and
Blackwater Capital Group, L.L.C. effective as of June 1, 2000
10.41 NeighborComm Service Agreement, First Amendment to NeighborComm
Service Agreement and Letters of Understanding by and among the
Company, Morley Family Investments, LLLP, a Colorado limited
liability partnership, ROCOLO VI, LLC, a Colorado limited
liability company, Ridgeview Devp., LLC, a Colorado limited
liability company and/or Ray O'Sullivan, an individual, effective
as of May 12, 2000
10.42 Settlement and Mutual Release Agreement between the Company,
Networld.Com Inc. an Arizona corporation and Kenneth P. Eck
effective as of May 30, 2000
19
<PAGE>
10.43 8% Secured Promissory Note payable to the order of Kenneth P. Eck
in the principal amount of $64,800 dated May 30, 2000
10.44 Agreement Not to Sell effective as of March 22, 2000 and Letter
Agreement effective as of March 28, 2000 by and between the
Company and 12 Squared Partners, LLC, an Arizona Limited
Liability Company
10.45 Form of Replacement Warrant to Purchase 1,100,000 shares of
Common Stock in the name of Blackwater Capital Group, L.L.C.
10.46 Second Amendment to the Executive Employment Agreement between
the Company and Earl J. Cook, dated as of February 18, 2000
10.47 Employment Agreement between the Company and John Stephen Kelly
dated as of April 24, 2000
10.48 Employment Agreement between the Company and Ralph R. Zanck,
dated as of December 6, 1999
10.49 First Amendment to the Employment Agreement between the Company
and Ralph R. Zanck, dated as of March 27, 2000
27 Financial Data Schedule
----------
* Incorporated by reference from the Company's Form 8-K filed with the
Commission on June 21, 2000.
(b) Reports on Form 8-K
The Company filed the following report on Form 8-K during the quarter ended
June 30, 2000:
(1) Current Report on Form 8-K dated June 30, 2000 filed to report, Alan
P. Hald, Chairman of the Board of Directors of the FutureOne, Inc.
(the "Company"), resigned as an employee and member of the Board of
Directors of the Company.
20
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FUTUREONE, INC.
Date: August 11, 2000 By: /s/ Earl J. Cook
------------------------------------
Earl J. Cook Chief Executive Officer
Date: August 11, 2000 By: /s/ Ralph R. Zanck
------------------------------------
Ralph R. Zanck Vice President Finance
21
<PAGE>
Exhibit Index
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
10.36 Employment Separation Agreement by and between the Company and
Alan P. Hald effective as of June 1, 2000*
10.37 14% Convertible Promissory Note payable to the order of Alan P.
Hald in the principal amount of $70,000 dated June 1, 2000
10.38 Stock Purchase Agreement by and among the Company, OPEC CORP, a
Colorado corporation, Abcon, Inc., an Arizona corporation and
Brian Smith effective as of June 30, 2000
10.39 Promissory Note and Security Agreement payable to the order of
OPEC CORP, a Colorado corporation and the Company in the
principal amount of $263,329.14 dated June 30, 2000
10.40 Termination Agreement (with Consultant Services Agreement) by and
among the Company, Blackwater Capital Partners, L.P. and
Blackwater Capital Group, L.L.C. effective as of June 1, 2000
10.41 NeighborComm Service Agreement, First Amendment to NeighborComm
Service Agreement and Letters of Understanding by and among the
Company, Morley Family Investments, LLLP, a Colorado limited
liability partnership, ROCOLO VI, LLC, a Colorado limited
liability company, Ridgeview Devp., LLC, a Colorado limited
liability company and/or Ray O'Sullivan, an individual, effective
as of May 12, 2000
10.42 Settlement and Mutual Release Agreement between the Company,
Networld.Com Inc. an Arizona corporation and Kenneth P. Eck
effective as of May 30, 2000
10.43 8% Secured Promissory Note payable to the order of Kenneth P. Eck
in the principal amount of $64,800 dated May 30, 2000
10.44 Agreement Not to Sell effective as of March 22, 2000 and Letter
Agreement effective as of March 28, 2000 by and between the
Company and 12 Squared Partners, LLC, an Arizona Limited
Liability Company
10.45 Form of Replacement Warrant to Purchase 1,100,000 shares of
Common Stock in the name of Blackwater Capital Group, L.L.C.
10.46 Second Amendment to the Executive Employment Agreement between
the Company and Earl J. Cook, dated as of February 18, 2000
10.47 Employment Agreement between the Company and John Stephen Kelly
dated as of April 24, 2000
10.48 Employment Agreement between the Company and Ralph R. Zanck,
dated as of December 6, 1999
10.49 First Amendment to the employment Agreement between the Company
and Ralph R. Zanck, dated as of March 27, 2000
27 Financial Data Schedule
----------
* Incorporated by reference from the Company's Form 8-K filed with the
Commission on June 21, 2000.
22
