U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the period ended September 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______ to _______.
Commission File Number: 000-27031
Fullnet Communications, Inc.
(Exact name of registrant as specified in its charter)
Oklahoma 73-1473361
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
200 N. Harvey, Suite 1704,Oklahoma City, Oklahoma 73102
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (405) 232-0958
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes No X
---- ----
The number of shares outstanding of the Issuer's Common Stock, $.00001 par
value, as of November 12, 1999 was 2,088,928.
Transitional Small Business Disclosure Format (check one): Yes No X
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FORM 10-QSB
TABLE OF CONTENTS
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1999 (unaudited)
and December 31, 1998 ......................................................... 3
Consolidated Statements of Operations - Three months and
nine months ended September 30, 1999 and 1998 (unaudited) ..................... 4
Consolidated Statements of Cash Flows - Nine months ended
September 30, 1999 and 1998 (unaudited) ....................................... 5
Notes to Consolidated Financial Statements (unaudited)......................... 7
Item 2. Management's Discussion and Analysis or Plan of Operation....................... 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ............................................... 14
Signatures .............................................................................. 15
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Fullnet Communications, Inc. and Subsidiaries
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CONSOLIDATED BALANCE SHEETS
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ASSETS SEPTEMBER 30, DECEMBER 31,
1999 1998
(Unaudited)
CURRENT ASSETS:
Cash $ 192,573 $ 198
Accounts receivable, net 91,548 49,809
Prepaid expenses and other current assets 2,340 337
--------- ---------
Total current assets 286,461 50,344
PROPERTY AND EQUIPMENT, net 129,962 176,999
GOODWILL, net 286,737 302,667
INTANGIBLE ASSETS, net 63,273 64,726
DEFERRED TAXES 17,500 17,500
OTHER ASSETS 6,257 --
--------- ---------
TOTAL $ 790,190 $ 612,236
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Trade accounts payable $ 88,064 $ 73,578
Deferred revenues 78,459 97,379
Accrued payroll and related expenses 8,460 5,430
Other accrued expenses 322 3,366
Current portion of notes payable 57,532 127,829
Current portion of capital lease obligations 211 9,039
Cash overdraft -- 8,061
Due to related parties -- 43,891
--------- ---------
Total current liabilities 233,048 368,573
NOTES PAYABLE 603,080 697,926
CAPITAL LEASE OBLIGATIONS -- 1,153
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT:
Common stock, $.00001 par value; 10,000,000 shares
authorized; 2,088,928 and 1,380,000 shares issued and
outstanding, respectively 21 14
Common stock subscribed 186,767 --
Additional paid-in capital 537,547 486
Accumulated deficit (770,273) (455,916)
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Total shareholders' deficit (45,938) (455,416)
--------- ---------
TOTAL $ 790,190 $ 612,236
========= =========
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See accompanying notes to financial statements.
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Fullnet Communications, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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Three Months Ended Nine Months Ended
------------------------------ ------------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
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REVENUES:
Access service revenues $ 119,206 $ 111,904 $ 408,647 $ 372,022
Network solutions and other revenues 123,140 107,448 468,758 489,835
---------- ----------- ---------- ---------
Total revenues 242,346 219,352 877,405 861,857
OPERATING COSTS AND EXPENSES:
Cost of access service revenues 46,796 43,626 161,045 169,104
Cost of network solutions and other revenues 42,745 29,077 155,241 155,889
Selling, general and administrative expenses 213,127 147,604 691,919 457,180
Depreciation and amortization 29,749 36,191 78,799 103,156
---------- ----------- ---------- ---------
Total operating costs and expenses 332,417 256,498 1,087,004 885,329
---------- ----------- ---------- ---------
LOSS FROM OPERATIONS (90,071) (37,146) (209,599) (23,472)
INTEREST EXPENSE 16,557 16,529 61,402 56,907
OTHER EXPENSE 8,618 1,850 43,356 4,054
---------- ---------- ---------- ---------
NET LOSS $(115,246) $ (55,525) $(314,357) $(84,433)
========== ========== ========== =========
Net loss per common share:
Basic $ (.05) $ (.04) $ (.17) $ (.06)
Diluted $ (.05) $ (.04) $ (.17) $ (.06)
Weighted average number of common shares
outstanding:
Basic 2,275,862 1,380,000 1,888,514 1,380,000
Diluted 2,275,862 1,380,000 1,888,514 1,380,000
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See accompanying notes to financial statements.
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Fullnet Communications, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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September 30, September 30,
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(314,357) $ (84,433)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities
Common stock subscribed in exchange for services 186,767 --
Depreciation and amortization 78,799 103,156
Provision for non-collection of accounts receivable 2,320 250
Changes in assets and liabilities:
Accounts receivable (44,059) (59,685)
Prepaid expenses and other current assets (2,003) 16,436
Other assets (6,257) --
Trade accounts payable 14,486 (4,332)
Cash overdraft (8,061) 2,536
Deferred revenue (18,920) 8,608
Accrued payroll and related expenses 3,030 (2,454)
Other accrued expenses (3,044) (3,678)
--------- ---------
Net cash used in operating activities (111,299) (23,596)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiary -- (175,000)
Purchases of property and equipment (13,707) (30,393)
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Net cash used in investing activities (13,707) (205,393)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 487,063 --
Proceeds from issuance of bridge financing 49,999 --
Principal payments on Animus notes payable (122,405) --
Proceeds from issuance of notes payable -- 303,459
Principal payments on notes payable (43,404) (58,354)
Proceeds from issuance of note payable to related party -- 43,891
Principal payments on note payable to related party (43,891) --
Principal payments on capital lease obligations (9,981) (16,289)
--------- ---------
Net cash provided by financing activities 317,381 272,707
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NET INCREASE IN CASH 192,375 43,718
CASH, beginning of period 198 3
--------- ---------
CASH, end of period $ 192,573 $ 43,721
========= =========
(continued)
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Fullnet Communications, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Note payable issued for Animus acquisition $ -- $ 175,000
Acquisition of Animus property and equipment -- 28,251
Acquired capital lease obligations of Animus -- (28,251)
(concluded)
See accompanying notes to financial statements.
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Fullnet Communications, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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1. UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited financial statements and related notes have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been omitted pursuant to
such rules and regulations. The accompanying financial statements and
related notes should be read in conjunction with the audited consolidated
financial statements of the Company and notes thereto for the year ended
December 31, 1998.
The information furnished reflects, in the opinion of management, all
adjustments, consisting of normal recurring accruals, necessary for a
fair presentation of the results of the interim periods presented.
Operating results of the interim period are not necessarily indicative of
the amounts that will be reported for the year ending December 31, 1999.
2. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
3. SHAREHOLDERS' DEFICIT
In February 1999, the Company's Board of Directors approved an amendment
to the Company's certificate of incorporation to increase authorized
common shares from fifty thousand to ten million shares and to effect a
2,760-for-1 stock split with a reduction in par value from $1.00 to
$0.00001. These changes have been given retroactive effect in the
accompanying financial statements.
Also in February 1999, options to purchase an aggregate of 120,000 shares
of common stock were granted to Timothy J. Kilkenny, the Company's
President and Chief Executive Officer. The options, which are not
exercisable until October 2000, have an exercise price of $1.15 per share
and are exercisable in whole or in part until October 2003.
Also in February 1999, the Company entered into a financial advisory
services agreement (the "Agreement") with a financial advisory firm,
pursuant to which Company common stock and common stock options were to
be issued to such entity as partial compensation for services to be
performed by the financial advisor. The Agreement is currently the
subject of a dispute between the Company and the financial advisor. A
maximum 200,000 shares of Common Stock were to be issued pursuant to the
terms of the Agreement, as well as options to purchase a maximum 90,000
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shares of Common Stock at $1.25 per share beginning October 2000. The
Common Stock and options have not yet been issued pending resolution of
the dispute.
In April 1999, the Company completed an offering of common stock,
effected pursuant to Rule 504 of Regulation D of the Securities Act of
1933. Pursuant to the 504 Offering, 637,500 net shares of common stock
were issued.
Pursuant to a stock bonus granted in June 1999, Roger S. Laubhan and
Jason C. Ayers, officers of the Company, and two other employees were
granted a number of shares of common stock equal to 3%, 1%, 2% and 1%,
respectively, of the fully diluted common shares outstanding at such
date. Such shares have not yet been issued, pending resolution of certain
contingent compensation, in connection with the Agreement. However,
178,434 shares were considered issuable in June 1999, and as such,
$178,434 (estimated fair value of the stock) has been recognized as
compensation expense during the nine months ended September 30, 1999,
with a corresponding credit to common stock subscribed. Previously issued
financial statements as of and for the six months ended June 30, 1999 did
not include recognition of this transaction. Had the June 1999 financial
statements included this transaction, net loss and net loss per share for
the six months then ended would have increased by $178,434 and $.10,
respectively. Additionally, because these shares are issuable for no
additional consideration, they have been included as outstanding since
June 1999 for basic loss per share computations.
The Company entered into a financial advisory services agreement with an
investment banker for the period from September 1, 1999 through August
31, 2000. Pursuant to the advisory agreement, 100,000 shares of Company
common stock are to be issued to such entity as partial compensation for
services to be performed. Such shares have not been issued as of
September 30, 1999; however, the earned portion of such shares are
recorded in the shareholders' deficit section as common stock subscribed.
4. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per common share is computed based upon net loss
divided by the weighted average number of common shares outstanding
during each period. Diluted earnings per common share is computed based
upon net loss divided by the weighted average number of common shares
outstanding during each period adjusted for the effect of dilutive
potential common shares calculated using the treasury stock method. The
basic and diluted earnings (loss) per common share are the same since the
Company had a net loss for 1999 and 1998 and the inclusion of stock
options for 120,000 shares would be anti-dilutive.
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Item 2. Management's Discussion and Analysis or Plan of Operation
The following discussion is qualified in its entirety by the more
detailed information in the Company's Form 10-SB and the financial statements
contained therein, including the notes thereto, and the Company's other periodic
reports and all Current Reports on Form 8-K filed with the Securities and
Exchange Commission since October 12, 1999 (collectively are referred to as the
"Disclosure Documents"), the date at which the Company's registration statement
on Form 10-SB became effective. Certain forward-looking statements contained
herein and in such Disclosure Documents regarding the Company's business and
prospects are based upon numerous assumptions about future conditions which may
ultimately prove to be inaccurate and actual events and results may materially
differ from anticipated results described in such statements. The Company's
ability to achieve such results is subject to certain risks and uncertainties,
such as those inherent generally in the internet service provider and
competitive local exchange carrier industries, the impact of competition and
pricing, changing market conditions, and other risks. Any forward-looking
statements contained herein represent the Company's judgment as of the date
hereof. The Company disclaims, however, any intent or obligation to update these
forward-looking statements. As a result, the reader is cautioned not to place
undue reliance on these forward-looking statements. As used herein, the word
"Company" means Fullnet Communications, Inc. and its wholly owned subsidiaries,
Animus Communications, Inc. ("Animus") and Fulltel Communications, Inc.
("Fulltel"), unless the context indicates otherwise.
Overview
The Company, founded in 1995, is a regional provider of consumer
internet access and business services, offering innovative technological
solutions for individuals, businesses, organizations, education institutions, as
well as government agencies. The Company provides direct internet access through
a statewide network with "points of presence" in 14 communities throughout the
state of Oklahoma. Points of presence are local telephone numbers through which
the Company's subscribers can access the internet. In addition, the Company also
provides internet-related value-added products and services that are designed to
enable its business customers to outsource their internet and electronic
commerce activities. Such services include:
-- connectivity to the internet and secure private networks through the
Company's network from which its internet access customers can reach
every other internet address and the Company's network customers can
reach other destinations within their private network;
-- value-added services, which are additional services delivered over
the same circuit as the Company's connectivity services. The Company's
current value-added services are remote management of its networks and
systems integration, which includes the resale, installation and
configuration of customers' computer systems and software; and web
hosting, which is the distribution of customers' internet content from
the Company's facilities.
Fulltel, a licensed competitive local exchange carrier, ("CLEC") is
expected to commence operations in early 2000. As a result, the Company expects
to offer broadband digital subscriber line ("DSL") service, with speeds of 60 to
100 times faster than analog modems. Faster speed will allow customers to browse
through web pages like they would a book, and downloading large email attachment
files will take only a matter of seconds. The Company plans to offer DSL service
in approximately 25 selected communities throughout the state of Oklahoma, as
well as continuing to offer local dial-up internet access in each of such
communities so served.
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The Company intends to design and roll out new strategies in the retail
internet service provider ("ISP") market beginning in the fourth quarter 1999.
The Company will be implementing an aggressive merger and acquisition strategy.
The Company intends to acquire ISP's in the Oklahoma market with less than 5,000
subscribers. By acquiring small ISP's in this often overlooked market segment,
the Company will be taking advantage of the infrastructure put in place since
1995.
Additionally, the Company is unveiling an independent agent program
("Agent Program") to grow access service revenues. The Agent Program will
designate a Company agent in a local market and pay a commission equal to a
percentage of the monthly recurring revenues for each DSL or dial-up account
sold under the Fullnet brand name.
Fulltel operations are expected to start by the first or second quarter
of 2000. Fulltel will be providing switched access services that enable the
Company to reach rural Oklahoma markets with a significantly decreased cost
structure compared to the structure under which the Company is currently
operating.
The Company currently is working on laying its own fiber connections to
the existing regional bell operating company ("RBOC") tandem in Oklahoma City,
which will allow the Company to cross-connect to any local or long distance
provider in the state and eliminate monthly local loop charges. Additionally,
the RBOC will be required to pay the Company fees for all traffic over the fiber
connections that terminates at the Company.
During the first quarter 2000, concurrently with bringing online the
Fulltel telephone switch in Oklahoma City, the Company intends to initiate DSL
service in six Oklahoma markets, with planned expansion to 25 markets by the end
of the fourth quarter 2000. A private placement is currently being considered as
the funding vehicle to provide the capital necessary to enable the Company to
implement its business model of providing DSL service and capital for future
mergers and acquisitions. In September 1999, the Company retained an investment
banker for investment banking and consulting purposes, including assisting the
Company in any such private placement.
The mission of the Company is to make a niche in the marketplace by
being a total solutions provider from internet connectivity, web page
development, web page hosting, broadband DSL service, and e-commerce to local
Intranets. The Company believes that its planned entry into the broadband market
through DSL and the acquisition and integration of a network solutions provider
will increase shareholder value.
In April 1999, the Company terminated its election under Subchapter S
of the Internal Revenue Code of 1986, pursuant to which its shareholders were
taxed on a proportionate share of the Company's taxable income. The termination
had no effect on the Company's financial statements.
Although the Company's common stock is not currently quoted on any
quotation medium, the Company is an "eligible issuer" for its stock to be quoted
on the OTC Bulletin Board (as such term is defined by the NASD), and it is
working with its investment banker to identify potential market makers to make
application to the OTC Bulltetin Board to make quotations in the stock.
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Results of Operations
The following table sets forth certain statement of operations data as
a percentage of revenues for the three months and nine months ended September
30, 1999 and 1998:
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
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Revenues:
Access service revenues 49.2% 51.0% 46.6% 43.2%
Network solutions and other revenues 50.8 49.0 53.4 56.8
---------- ---------- ---------- ---------
Total revenues 100.0 100.0 100.0 100.0
Operating costs and expenses:
Cost of access service revenues 19.3 19.9 18.4 19.6
Cost of network solutions and other revenues 17.6 15.9 17.7 18.1
Selling, general and administrative expenses 87.9 64.6 78.9 53.0
Depreciation and amortization 12.3 16.5 9.0 12.0
---------- ---------- ---------- ---------
Total operating costs and expenses 137.1 116.9 124.0 102.7
Loss from operations (37.2) (16.9) (24.0) (2.7)
Interest expense 6.8 7.5 7.0 6.6
Other expense 3.6 0.8 4.9 .5
---------- ---------- ---------- ---------
Net loss (47.6)% (25.3)% (35.9)% (9.8)%
========== ========== ========== ==========
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Management recognizes that sales in both access service revenues and
network solutions and other revenues were essentially flat for the nine months
ended September 30, 1999 when compared to the prior period.
The Company's future position in the marketplace depends on its ability
to fund and bring online the Fulltel telephone switch. By bringing the switch
online, the Company will be able to offer broadband DSL service in rural markets
as well as other value-added services to become a total solutions provider and
establish brand name recognition while increasing market share.
The unforeseen delays in bringing Fulltel online have undermined the
Company's retail access sales efforts thus far in 1999. However, access service
revenues are expected to increase significantly by rolling out DSL in 25
locations throughout Oklahoma by year end 2000. Cost of access revenue savings
will be realized through economies of scale by utilizing the Fulltel switch to
provide DSL service at a lower cost than is currently available through third
parties.
The decrease in network solutions and other revenues is attributable to
the passive nature in which the Company approaches the solutions business.
Currently, network solutions service is provided to the Company's existing
customer base without a sales force driving new revenue. The Company's new
business model calls for active and aggressive marketing through new direct
sales reps with quotas.
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Three Months Ended September 30, 1999 compared to Three Months Ended September
30, 1998
Revenues
Access service revenues increased $7,000 to $119,000 for the three
months ended September 30, 1999 from $112,000 for the three months ended
September 30, 1998. This additional revenue is due to an increase in the number
of dial-up customers of the Company's ISP resellers.
Network solutions and other revenues increased $16,000 to $123,000 for
the three months ended September 30, 1999 from $107,000 for the three months
ended September 30, 1998. This increase is due to an increase in sales of
computer equipment from $15,000 for the three months ended September 30, 1998 to
$31,000 for the three months ended September 30, 1999.
Operating costs and Expenses
Cost of access service revenues increased $3,000 from $44,000 for the
three months ended September 30, 1998 to $47,000 for the three months ended
September 30, 1999, and is consistent with the increase in dial-up customers of
the Company's ISP resellers.
Cost of network solutions and other revenues increased $14,000 from
$29,000 for the three months ended September 30, 1998 to $43,000 for the three
months ended September 30, 1999. This increase is primarily due to the increase
in cost of goods sold related to the increase in computer equipment sales
discussed above.
Selling, general and administrative expenses increased $65,000 to
$213,000 for the three months ended September 30, 1999 from $148,000 for the
three months ended September 30, 1998. This increase is comprised principally of
an increase in payroll costs of $44,000 related to the hiring of additional
personnel and $23,000 of financial advisory service fees incurred pursuant to an
agreement entered into by the Company with an investment banker on September 1,
1999.
Depreciation and amortization expense decreased $6,000 from $36,000 for
the three months ended September 30, 1998 to $30,000 for the three months ended
September 30, 1999. This decrease is attributable to the method of depreciation
whereby depreciation expense is highest in the early periods after asset
acquisition.
Other Expense
Other expense increased $7,000 from $2,000 for the three months ended
September 30, 1998 to $9,000 for the three months ended September 30, 1999. This
increase is attributable to start up costs of $8,000 incurred related to
Fulltel.
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Nine Months Ended September 30, 1999 compared to Nine Months Ended September 30,
1998.
Revenues
Access service revenues increased $37,000 from $372,000 for the nine
months ended September 30, 1998 to $409,000 for the nine months ended September
30, 1999. This increase is due to an increase in the number of dial-up customers
of the Company's ISP resellers.
Network solutions and other revenues decreased $21,000 from $490,000
for the nine months ended September 30, 1998 to $469,000 for the nine months
ended September 30, 1999. The Company historically has not actively marketed its
network solutions sales, and has typically made such sales to its existing
customer base.
Operating Costs and Expenses
Cost of access service revenues decreased $8,000 from $169,000 for the
nine months ended September 30, 1998 to $161,000 for the nine months ended
September 30, 1999, due to lower contract rates negotiated for the Company's
backbone expense.
Selling, general and administrative expenses increased $235,000 from
$457,000 for the nine months ended September 30, 1998 to $692,000 for the nine
months ended September 30, 1999. The increase is comprised of an increase in
payroll costs of $178,000 related to a June 1999 stock grant approved by the
Board of Directors and approximately $22,000 related to the hiring of additional
personnel. The increase is also comprised of $23,000 of financial advisory
service fees incurred in the third quarter pursuant to an agreement entered into
by the Company with an investment banker on September 1, 1999
Depreciation and amortization expense decreased $24,000 from $103,000
for the nine months ended September 30, 1998 to $79,000 for the nine months
ended September 30, 1999. This decrease is attributable to the method of
depreciation whereby depreciation expense is highest in the early periods after
asset acquisition.
Other Expense
Other expense increased $39,000 from $4,000 for the nine months ended
September 30, 1998 to $43,000 for the nine months ended September 30, 1999. This
increase is attributable to start up costs of $40,000 incurred related to
Fulltel.
Liquidity and Capital Resources
The Company used $111,000 and $24,000 of cash for operating activities
for the nine months ended September 30, 1999 and 1998, respectively, as a result
of a net loss for the periods. As of September 30, 1999, the Company had
$193,000 in cash and $233,000 in current liabilities, including $78,000 of
deferred revenues which will not require settlement in cash.
Capital expenditures relating primarily to the purchase of computer
equipment amounted to $14,000 and $30,000 for the nine months ended September
30, 1999 and 1998, respectively. In addition, the Company acquired Animus
Communications, Inc., a wholly owned subsidiary, in March 1998 for $175,000 cash
and issuance of $175,000 in notes payable.
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Net cash provided by financing activities was $317,000 and $273,000 for
the nine months ended September 30, 1999 and 1998, respectively. The cash
provided in 1999 is due primarily to the sale of equity securities pursuant to
Rule 504 of Regulation D of the Securities Act of 1933. In the second quarter of
1999, the Company received net proceeds of $487,000 from the 504 offering. Of
these proceeds, $175,000 was used to repay two debt obligations of the Company.
During the first quarter 1999, the Company also received $50,000 in proceeds
from bridge financing for working capital. Net cash provided in 1998 is
comprised of proceeds of $303,000 obtained through the issuance of bank debt and
proceeds from a $50,000 loan made by a related party.
The planned expansion of the Company's business will require
significant capital to fund capital expenditures, working capital needs, debt
service and the cash flow deficits generated by operating losses. The Company's
principal capital expenditure requirements will include the purchase and
installation of switches and transmission equipment collocated in incumbent
local exchange carrier ("ILEC") central offices and the further development of
operations support systems and other automated back office systems.
Additionally, the growth of the Company's web hosting business will require
significant capital expenditures.
The Company expects to make significant capital outlays for the
foreseeable future in order to continue activities called for in its current
business plan and to fund expected operating losses. The Company currently
estimates that cash required to fund capital expenditures for its expansion
plans will be approximately $500,000 in the fourth quarter 1999. In order for
the Company to implement its current business plan and finance its projected
capital expenditures in the fourth quarter 1999 and thereafter, the Company will
seek financing from bank debt and/or private placement equity.
Year 2000 Issue
The year 2000 issue is the result of computer programs being written
using two digits (rather than four) to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize the
date using "00" as the year 1900 rather than the year 2000. The Company
anticipates spending $500,000 on new systems by the end of 1999 from funds
provided by new sources of capital. However, specific expenditures for year 2000
costs are not being made related to the new systems. The Company has completed
its assessment on the consequences of the year 2000 on information technology
systems. As the Company has a relatively short history, virtually all systems
are newly created or are being created and, during information technology
development, year 2000 issues have been consistently addressed.
Other non-information technology systems that may be affected by the
year 2000 issue include systems provided to the Company by third parties. The
most significant third party systems are those which operate ILEC interfaces and
billing records, switching equipment and customer premises equipment. The
Company has been assured by significant third parties that year 2000 compliance
will be accomplished by the end of 1999. Presently, the Company believes that
the cost of addressing year 2000 issues is not material to its future business,
operating results or financial position. However, if such compliance is not
achieved by these third parties, it may have a material adverse effect on the
Company's business, operating results and financial condition and its ability to
achieve sufficient cash flow.
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PART II-OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Exhibit
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27.1* Financial Data Schedule
* Filed electronically herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for which this
Report is filed.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
FULLNET COMMUNICATIONS, INC.,
An Oklahoma corporation
Date: November 12, 1999 /s/ Timothy J. Kilkenny
----------------------------------------------
Timothy J. Kilkenny
Chairman of the Board of Directors;
President and Chief Executive Officer
Date: November 12, 1999 /s/ Travis Lane
----------------------------------------------
Travis Lane
Vice-President and Chief Financial Officer
(Chief Accounting Officer)
-15-
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