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, 2000
[ ] 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 X No
--- ---
The number of shares outstanding of the Issuer's Common Stock, $.00001 par
value, as of November 10, 2000 was 3,522,775.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
<PAGE>
FORM 10-QSB
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 2000 (unaudited)
and December 31, 1999........................................ 3
Consolidated Statements of Operations - Three months and
nine months ended September 30, 2000 and 1999 (unaudited).... 4
Consolidated Statement of Stockholders' Equity (Deficit) -
Nine months ended September 30, 2000 (unaudited)............. 5
Consolidated Statements of Cash Flows - Nine months ended
September 30, 2000 and 1999 (unaudited)...................... 6
Notes to Consolidated Financial Statements (unaudited) ...... 8
Item 2. Management's Discussion and Analysis or Plan of Operation.... 12
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.......... 21
Item 6. Exhibits and Reports on Form 8-K............................. 21
Signatures............................................................ 22
- 2 -
<PAGE>
<TABLE>
<CAPTION>
FullNet Communications, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
ASSETS SEPTEMBER 30, DECEMBER 31,
2000 1999
----------- -----------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 111 $ 12,671
Accounts receivable, net 182,013 70,306
Inventory 4,734 --
Prepaid and other current assets 16,324 15,491
----------- -----------
Total current assets 203,182 98,468
PROPERTY AND EQUIPMENT, net 1,084,583 117,262
COST IN EXCESS OF NET ASSETS OF BUSINESSES
ACQUIRED, net 2,268,684 295,084
OTHER ASSETS
Deferred income taxes 17,500 17,500
Deferred offering costs 33,204 30,899
Other 6,257 5,000
----------- -----------
56,961 53,399
----------- -----------
TOTAL $ 3,613,410 $ 564,213
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable - trade $ 886,965 $ 100,684
Accrued liabilities 100,014 42,424
Notes payable, current portion 1,317,560 58,949
Capital lease obligations 8,918 --
Deferred revenue 182,567 74,720
----------- -----------
Total current liabilities 2,496,024 276,777
NOTES PAYABLE, less current portion 582,432 586,922
CAPITAL LEASE OBLIGATIONS, less current portion 10,736 --
DEPOSITS 44,500 --
STOCKHOLDERS' EQUITY (DEFICIT)
Commonstock - $.00001 par value and 10,000,000 shares
Authorized; 3,522,775 and 2,088,928 shares issued and
outstanding, respectively 35 21
Common stock issuable, 130,000 and 318,709 shares in 2000 and 1999,
respectively 237,799 318,709
Additional paid-in capital 3,634,700 429,295
Accumulated deficit (3,392,816) (1,047,511)
----------- -----------
Total stockholders' equity (deficit) 479,718 (299,486)
----------- -----------
TOTAL $ 3,613,410 $ 564,213
=========== ===========
</TABLE>
See accompanying notes to financial statements.
-3-
<PAGE>
<TABLE>
<CAPTION>
FullNet Communications, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
Three Months Ended Nine months Ended
---------------------------- ----------------------------
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
----------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Access service revenues $ 266,566 $ 119,206 $ 743,913 $ 408,647
Network solutions and other revenues 145,609 123,140 532,664 468,758
----------- ----------- ----------- -----------
Total revenues 412,175 242,346 1,276,577 877,405
OPERATING COSTS AND EXPENSES:
Cost of access service revenues 143,426 46,796 364,832 161,045
Cost of network solutions and other revenues 46,822 42,745 197,485 155,241
Selling, general and administrative expenses 562,450 213,127 1,735,551 691,919
Depreciation and amortization 222,387 29,749 556,132 78,799
----------- ----------- ----------- -----------
Total operating costs and expenses 975,085 332,417 2,854,000 1,087,004
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (562,910) (90,071) (1,577,423) (209,599)
INTEREST EXPENSE (367,311) (16,557) (711,012) (61,402)
OTHER EXPENSE (38,657) (8,618) (56,870) (43,356)
----------- ----------- ----------- -----------
NET LOSS $ (968,878) $ (115,246) $(2,345,305) $ (314,357)
=========== =========== =========== ===========
Net loss per common share:
Basic $ (.28) $ (.05) $ (.76) $ (.17)
Diluted $ (.28) $ (.05) $ (.76) $ (.17)
Weighted average number of common shares outstanding:
Basic 3,515,484 2,275,862 3,098,116 1,888,514
Diluted 3,515,484 2,275,862 3,098,116 1,888,514
</TABLE>
See accompanying notes to financial statements.
-4-
<PAGE>
<TABLE>
<CAPTION>
FullNet Communications, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity (Deficit)
Nine months Ended September 30, 2000
(Unaudited)
Common Stock Common Additional
------------ Stock Paid-in Accumulated
Shares Amount issuable capital Deficit Total
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 2000 2,088,928 $ 21 $ 318,709 $ 429,295 $(1,047,511) $ (299,486)
Issuance of common stock in conjunction with
acquisitions 618,442 6 -- 1,829,776 -- 1,829,782
Common stock issued, net of offering expenses 45,200 -- -- -- 122,809 122,809
Exercise of stock options issued relating to
services performed for offering 34,830 -- -- 34,830 -- 34,830
Warrant exercise relating to bridge financing 350,000 4 300 3,496 -- 3,800
Common stock issued for employee bonuses 181,055 2 (181,055) 181,053 -- --
Common stock issued in exchange for services 204,320 2 99,845 204,318 -- 304,165
Warrants to purchase common stock issued
relating to bridge financing -- -- -- 747,822 -- 747,822
Compensation from issuance of stock options -- -- -- 23,437 -- 23,437
Warrants issued for services -- -- -- 57,864 -- 57,864
Net loss -- -- -- -- (2,345,305) (2,345,305)
----------- ----------- ----------- ----------- ----------- -----------
Balance at September 30, 2000 3,522,775 $ 35 $ 237,799 $ 3,634,700 $(3,392,816) $ 479,718
=========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
-5-
<PAGE>
<TABLE>
<CAPTION>
FullNet Communications, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Nine months Ended
----------------------------
September 30, September 30,
2000 1999
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,345,305) $ (314,357)
Adjustments to reconcile net loss to net cash used in operating activities
Noncash compensation expense 23,437 --
Depreciation and amortization 556,132 78,799
Stock issued or issuable for services 304,167 186,767
Warrants issued for services 57,864 --
Amortization of discount relating to bridge financing 510,291 --
Provision for non-collection of accounts receivable 17,850 2,320
Net (increase) decrease in
Accounts Receivable (93,003) (44,059)
Inventory 27,052 --
Prepaid expenses and other current assets 21,215 (2,003)
Other assets (1,257) (6,257)
Net increase (decrease) in
Accounts payable - trade 138,842 14,486
Accrued and other liabilities 18,776 (14)
Deferred revenue 26,194 (18,920)
Deposits 44,500 --
----------- -----------
Net cash used in operating activities (693,245) (103,238)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (362,871) (13,707)
Proceeds from sale of property, net of closing costs 110,122 --
Acquisitions of businesses, net of cash acquired (127,057) --
----------- -----------
Net cash used in investing activities (379,806) (13,707)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred offering costs (2,305) --
Cash overdraft 31,280 (8,061)
Principal payments on borrowings under notes payable (169,024) (43,404)
Principal payments on note payable to related party -- (43,891)
Principal payments on borrowings related to purchase of subsidiary -- (122,405)
Proceeds from issuance of bridge financing and warrants, net of offering costs 1,038,500 49,999
Proceeds from exercise of stock options 34,830 --
Proceeds from exercise of warrants 3,800 --
Principal payments on capital lease obligations (4,893) (9,981)
Proceeds from issuance of notes payable 5,494 --
Proceeds from borrowings under convertible notes payable -- --
Issuance of common stock, net of offering costs 122,809 487,063
----------- -----------
Net cash provided by financing activities 1,060,491 309,320
----------- -----------
NET INCREASE (DECREASE) IN CASH (12,560) 192,375
Cash at beginning of year 12,671 198
----------- -----------
Cash at end of period $ 111 $ 192,573
=========== ===========
(continued)
</TABLE>
See accompanying notes to financial statements.
-6-
<PAGE>
<TABLE>
<CAPTION>
FullNet Communications, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Nine months Ended
----------------------------
September 30, September 30,
2000 1999
------------- -------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 88,827 $ 43,308
NONCASH INVESTING AND FINANCING ACTIVITIES
Conversion of debt to equity -- 50,000
Note payable issued for Animus acquisition -- 175,000
Acquisition of Animus property and equipment -- 28,251
Acquired capital lease obligations of Animus -- 28,251
Fair value of liabilities assumed in conjunction with the acquisition of Harvest
Communications 73,062 --
Fair value of common stock issued to purchase Harvest Communications 1,612,500 --
Note payable issued in conjunction with the acquisition of Harvest Communications 175,000 --
Fair value of liabilities assumed in conjunction with the acquisition of FullNet of
Bartlesville 1,754 --
Fair value of common stock issued to purchase FullNet of Bartlesville 128,232 --
Note payable issued in conjunction with FullNet of Bartlesville acquisition 50,168 --
Acquisition of net assets of FullNet of Tahlequah 6,763 --
Note payable issued in conjunction with FullNet of Tahlequah acquisition 61,845 --
Common stock issuable in conjunction with FullNet of Nowata acquisition 89,050 --
Acquisition of net assets of FullNet of Nowata 15,366 --
Note payable issued in conjunction with FullNet of Nowata acquisition 47,950 --
Assets acquired through issuance of capital lease 24,548 --
Assets financed through accounts payable 539,549 --
(concluded)
</TABLE>
See accompanying notes to financial statements.
-7-
<PAGE>
FullNet Communications, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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, 1999.
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, 2000.
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. STOCKHOLDERS' EQUITY (DEFICIT)
In February 2000, the Company raised an aggregate $135,600 in
an offering of its common stock. The offering was made pursuant to an
exemption from the registration requirements of the Securities Act of
1933, as amended, and Regulation D of such act.
In April 2000, the Company amended its contract with its
investment banker, which entitled the investment banker to an
additional 100,000 shares of common stock.
4. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per common share is computed based upon
net earnings (loss) divided by the weighted average number of common
shares outstanding during each period. Diluted earnings (loss) per
common share is computed based upon net earnings (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 2000
and 1999 and the inclusion of stock options and warrants would be
anti-dilutive.
-8-
<PAGE>
5. NOTES PAYABLE
In February, March, June and September 2000, the Company
obtained bridge loans totaling $505,000 through the issuance of 14%
promissory notes to 14 accredited investors. The terms of the financing
additionally provided for the issuance of five-year warrants to
purchase an aggregate of 250,000 shares of the Company's common stock
at $0.01 per share, and provided for certain registration rights. The
promissory notes require monthly interest payments, mature in six
months and are extendible for two 90-day periods upon issuance of
additional warrants for an aggregate 235,000 shares exercisable at
$0.01 per share for each extension. In August 2000, the Company
extended the terms of ten of the bridge loans for an additional 90
days, and, in connection therewith, issued warrants for an additional
137,500 shares. As of September 30, 2000, warrants to purchase an
aggregate 275,000 shares of common stock have been exercised at an
aggregate exercise price of $2,800.
In March 2000, the Company obtained bridge loans totaling
$500,000 through the issuance of 14% promissory notes to two accredited
investors. The terms of the financing additionally provided for the
issuance of five-year warrants to purchase 100,000 shares of the
Company's common stock at $0.01 per share, and provided for certain
registration rights. The promissory notes require quarterly interest
payments, mature in six months, and initially were extendible for two
90-day periods upon issuance of additional warrants for an aggregate
10,000 shares exercisable at $0.01 per share for each extension. In
October 2000, the terms of the two bridge loans were amended to provide
that, in the event of a second 90-day extension, the Company will issue
warrants to purchase an aggregate 160,000 shares of common stock. On
March 8, 2000, the bridge loan investors exercised their warrants and
purchased 100,000 shares of common stock of the Company at an aggregate
exercise price of $1,000. In August 2000, the Company extended the
terms of the two bridge loans for an additional 90 days, and, in
connection therewith, issued warrants for an additional 10,000 shares,
of which warrants to purchase an aggregate 5,000 shares of common stock
have been exercised at an aggregate exercise price of $50 as of
September 30, 2000.
In August 2000, the Company obtained a short-term loan of
$100,000 from Timothy J. Kilkenny, Chairman of the board and CEO,
through the issuance of a 9% promissory note. The terms of the
financing additionally provided for the issuance of five-year warrants
to purchase an aggregate of 50,000 shares of the Company's common stock
at $0.01 per share, and provided for certain registration rights. The
promissory note requires monthly interest payments, matures on the
earlier of (i) the date which is within five days of receipt of funds
by the Company of any offering raising gross proceeds to the Company of
at least $1,000,000 or (ii) in three months, and is extendible for two
90-day periods upon issuance of additional warrants for an aggregate
50,000 shares exercisable at $0.01 per share for each extension.
A portion of the proceeds of the bridge loans and Mr.
Kilkenny's short-term loan have been allocated to the warrants and
accounted for as additional paid-in capital. The allocation was based
on the estimated relative fair values of the loans and the warrants and
resulted in a discount on the loans of approximately $748,000. This
discount is being amortized as interest expense over the life of the
loans using the interest method.
A building acquired in conjunction with the acquisition of
Harvest Communications, Inc. was sold in June 2000. The sale was a
cashless transaction, and the net proceeds from the sale were applied
to the SBA loan that originally provided the proceeds to purchase the
building. Net proceeds from the transaction exceeded the carrying value
of the building by approximately $5,000. This amount was recorded as a
reduction of cost in excess of net assets of businesses acquired.
-9-
<PAGE>
6. ACQUISITIONS
On January 25, 2000, the Company entered into an Asset
Purchase Agreement with FullNet of Tahlequah, Inc. ("FOT"), an Oklahoma
corporation, in which the Company purchased substantially all of FOT's
assets, including approximately 400 individual and business Internet
access accounts. The Company paid FOT an aggregate amount of $97,735,
comprised of $35,890 in cash and a note payable for $61,845. The note
is payable in eighteen monthly installments.
On February 4, 2000, the Company entered into an Asset
Purchase Agreement with David Looper, d/b/a FullNet of Bartlesville
("FOB"), an Oklahoma sole proprietorship in which the Company purchased
substantially all of FOB's assets, including approximately 400
individual and business Internet access accounts. The Company paid FOB
an aggregate amount of $178,400, payable in 42,744 shares of the
Company's common stock (valued for purposes of the acquisition at $3.00
per share) and a note payable for $50,168. The note bears an interest
rate of 8% per annum, with the principal and interest thereon payable
on the earlier to occur of (a) the closing of any private equity
placement in excess of $351,000, (b) the closing of any underwritten
offering of the Company's common stock, or (c) one year from the
closing date of the Asset Purchase Agreement.
On February 29, 2000, the Company entered into an Agreement
and Plan of Merger (the "Merger Agreement") with Harvest
Communications, Inc., ("Harvest") an Oklahoma corporation, pursuant to
which Harvest merged with and into FullNet. Harvest had approximately
2,500 individual and business dial up Internet access accounts, 15
wireless Internet access accounts and 35 Web hosting accounts. Pursuant
to the terms of the Merger Agreement, the Company paid the shareholders
of Harvest an aggregate amount of $1,912,500 payable in 537,500 shares
of the Company's common stock (valued for purposes of the merger at
$3.00 per share), a note payable for $175,000 and $125,000 in cash. The
note bears an interest rate of 8% per annum, with the principal and
interest thereon payable on the earlier to occur of (a) the closing of
any single funding (whether debt or equity) obtained by the Company
subsequent to the date of the Merger Agreement in an aggregate amount
of at least $2,000,000, (b) the closing of any underwritten offering of
the Company's common stock, or (c) March 6, 2001.
On June 2, 2000, the Company entered into an Asset Purchase
Agreement with Lary Smith, d/b/a FullNet of Nowata ("FON"), an Oklahoma
sole proprietorship, in which the Company purchased substantially all
of FON's assets, including approximately 300 individual and business
Internet access accounts. Pursuant to the terms of the Agreement, the
Company agreed to pay FON an aggregate purchase price of $137,000,
payable in 38,198 shares of the Company's common stock (valued for
purposes of the acquisition at $2.33125 per share) and a note payable
for $47,950. The note bears an interest rate of 8% per annum with the
principal and interest thereon payable on the earlier to occur of (a)
the closing of any single funding (whether debt or equity) obtained by
the Company subsequent to the date of the Agreement in an aggregate
amount of $2,000,000, or (b) one year from the closing date of the
Agreement.
These acquisitions were accounted for as purchases. The
aggregate purchase price has been allocated to the underlying net
assets purchased or net liabilities assumed based on their estimated
fair values at the respective acquisition date. This allocation results
in cost in excess of net assets of businesses acquired of $2.4 million,
which is being amortized over the estimated periods benefited of three
to five years. Prior to the acquisitions, each of FOT, FOB, Harvest and
FON was a customer of the Company's Internet service provider access
services.
-10-
<PAGE>
The unaudited pro forma combined historical results, as if the
entities listed above (excluding FOT and FON) had been acquired at the
beginning of the nine months ended September 30, 2000 and 1999,
respectively, are included in the table below.
Nine months ended
September 30,
-------------------------
2000 1999
----------- ----------
Revenue $ 1,406,953 $1,483,340
Net loss $(2,438,343) $ (455,157)
Basic and diluted loss per share $ (0.79) $ (0.24)
The pro forma results above include amortization of cost in
excess of net assets of businesses acquired and interest expense on
debt assumed issued to finance the acquisitions. The pro forma results
are not necessarily indicative of what actually would have occurred if
the acquisitions had been completed as of the beginning of each of the
fiscal periods presented, nor are they necessarily indicative of future
consolidated results.
7. MANAGEMENT'S PLANS
On September 29, 2000, the Company began offering through a
private placement a minimum of $700,000 and a maximum of $2.0 million
in the form of three-year term 11% convertible promissory notes (the
"Notes"), which can be increased to $2.5 million at the election of the
Placement Agent (the initial closing of $700,000 occurred on November
9, 2000). Each of the Notes is convertible into common stock of the
Company at the election of the holder thereof, at a conversion rate of
$1.00 per share, subject to adjustment under certain circumstances. The
Notes are accompanied by warrants to purchase a number of shares of the
Company's common stock equal to the number obtained by dividing 25% of
the face amount of the Notes purchased by $1.00. Said warrants may be
exercised at any time after the date of grant for five years at a price
of $0.01 per share. The Company will utilize the funds from this
offering primarily for the retirement of debt, completion of its NOC
and working capital. Additionally, $1,005,000 of bridge loans were
exchanged for Notes on November 9, 2000.
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. Current cash balances will not be sufficient to fund the
Company's current business plan beyond the next three months. As a
consequence, the Company is currently seeking additional convertible
debt and/or equity financing as well as the placement of a credit
facility to fund the Company's liquidity. There can be no assurance
that the Company will be able to raise additional capital on
satisfactory terms or at all.
-11-
<PAGE>
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-KSB 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 December 31, 1999 (collectively referred to as the
"Disclosure Documents"). 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 telecommunications industry, 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, FullNet, Inc. ("FullNet"), FullSolutions, Inc. ("FullSolutions"),
FullTel, Inc. ("FullTel") and FullWeb, Inc. ("FullWeb"), a wholly owned
subsidiary of FullSolutions, unless the context indicates otherwise.
Overview
FullNet Communications Inc. (the "Company") is a regional integrated
communications provider ("ICP") offering integrated communications and network
solutions to individuals, businesses, organizations, educational institutions,
and government agencies. Through its subsidiaries, the Company provides high
quality, reliable and scaleable Internet, telephony, and network solutions
designed to meet customer needs. Services include:
o High margin carrier-neutral telecommunications grade co-location facilities
o Dial-up and direct high-speed connectivity to the Internet under the
FullNet brand name
o Web site design, hosting and server co-location for businesses
o Wireless broadband Internet, voice and data access services
o Network design, management, optimization, and ongoing support and
maintenance for businesses
o Backbone services to small Internet Service Providers ("ISPs") and
businesses
o Global domain name registration services (expected to commence in 2001)
The Company's principal executive offices are located at 200 North
Harvey Avenue, Suite 1704, Oklahoma City, Oklahoma 73102, and its telephone
number is (405) 232-0958. The Company also maintains an Internet site on the
World Wide Web ("WWW") at www.fullnet.net. Information contained on the
Company's website is not, and should not be deemed to be, a part of this Form
10-QSB.
Company History
The Company was founded in 1995 as CEN-COM of Oklahoma, Inc., an
Oklahoma corporation, to bring dial-up Internet access and education to rural
locations in Oklahoma that did not have dial-up Internet access. The Company
changed its name to FullNet Communications, Inc. in December 1995, and shifted
its focus from offering dial-up services to providing wholesale and private
label network connectivity and related services to other ISPs. During 1995 and
1996, the Company furnished wholesale and private label network connectivity
services to ISPs in Bartlesville, Cushing, Durant, Perry, Tahlequah, and Tulsa.
During 1996, the Company sold its ISP operations in Enid, Oklahoma and began ISP
operations in Ponca City, Oklahoma.
-12-
<PAGE>
In 1997 the Company continued its focus on being a backbone provider by
upgrading and acquiring more equipment. The Company also started offering its
own ISP brand access and services to its wholesale customers. As of September
30, 2000, there were two ISPs in Oklahoma that used the FullNet brand name where
the Company provides the backbone to the Internet. There are an additional two
ISPs that use a private label brand name, where the Company is their access
backbone and provides their technical support, managing and operating their
systems on an outsource basis. Additionally, the Company provides high-speed
broadband connectivity, website hosting, network management and consulting
solutions to over 50 businesses in Oklahoma.
In 1998 the Company's gross revenues exceeded $1,000,000 and the
Company made the Metro Oklahoma City Top 50 Fastest Growing Companies list. In
1998 the Company commenced the process of organizing a competitive local
exchange carrier ("CLEC") through FullTel, and acquired Animus Communications,
Inc. ("Animus"), a wholesale web-service company, thereby enabling the Company
to become a total solutions provider to individuals and companies seeking a
"one-stop shop" in Oklahoma. Animus was renamed FullWeb in January 2000.
With the incorporation of FullTel and the acquisition of FullWeb, the
Company's current business strategy is to become the dominant ICP in Oklahoma
and surrounding states, focusing on rural areas. The Company expects to grow
through the acquisition of additional customers for its carrier-neutral
co-location space, commencement of domain name registration (expected to begin
during 2001), acquisition of ISPs and network solutions providers, as well as
through a FullNet brand marketing campaign. During the first nine months of
2000, the Company has completed four separate acquisitions of ISP companies,
operating in, respectively, Tahlequah, Oklahoma, Bartlesville, Oklahoma, Enid,
Oklahoma and Nowata, Oklahoma.
During the month of February 2000, trading of the Company's common
stock began trading on the OTC Bulletin Board under the symbol FULO. While the
Company's common stock trades on the OTC Bulletin Board, it is very thinly
traded, and there can be no assurance that stockholders will be able to sell
their shares should they desire to do so. Any market for the common stock that
may develop, in all likelihood, will be a limited one, and if such a market does
develop, the price may be volatile.
On June 20, 2000, the Company entered into a contract to provide
co-location services to KMC Telecom V, Inc. ("KMC"), a facilities-based
competitive local exchange carrier ("CLEC"). The agreement extends until January
31, 2004. Under the terms of the contract, KMC will pay the Company $44,500 per
month to provide co-location and support services for KMC's telecommunications
equipment at the Company's Network Operations Center ("NOC") in Oklahoma City,
Oklahoma. The Company is building out its NOC and expects to complete the
project during the fourth quarter of 2000. KMC moved into the Company's NOC and
began making payments pursuant to the agreement during the third quarter of
2000. The Company plans to market additional carrier neutral co-location
solutions in its NOC to other CLECs, ISPs and web-hosting companies.
The Company's co-location facility is carrier neutral, so customers may
choose among competitive offerings rather than being restricted to one carrier.
When fully completed, the NOC will be Telco-grade, so as to provide customers
the highest level of operative reliability and security. The Company offers
flexible space arrangements for customers, 24 hour onsite support and both
battery and generator backup.
Recent Developments
On September 29, 2000, the Company began offering through a private
placement a minimum of $700,000 and a maximum of $2.0 million in the form of
three-year term 11% convertible promissory notes (the "Notes"), which can be
increased to $2.5 million at the election of the Placement Agent (the initial
closing of $700,000 occurred on November 9, 2000). Each of the Notes is
convertible into common stock of the Company at the election of the holder
thereof, at a conversion rate of $1.00 per share, subject to adjustment under
certain circumstances. The Notes are accompanied by warrants to purchase a
number of shares of the Company's common stock equal to the number obtained by
dividing 25% of the face amount of the Notes purchased by $1.00. Said warrants
may be exercised at any time after the date of grant for five years at a price
of $0.01 per share. The Company will utilize the funds from this offering for
primarily for the retirement of debt, completion of its NOC, and working
capital. Additionally, $1,005,000 of bridge loans were exchanged for Notes on
November 9, 2000.
-13-
<PAGE>
<TABLE>
<CAPTION>
Results of Operations
The following table sets forth certain statement of operations data as
a percentage of revenues for the three and nine months ended September 30, 2000
and 1999:
Three Months Ended Nine months Ended
-------------------------------- ----------------------------------
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
--------------- ---------------- ----------------------------------
<S> <C> <C> <C> <C>
Revenues:
Access service revenues 64.7% 49.2% 58.3% 46.6%
Network solutions and other revenues 35.3 50.8 41.7 53.4
---------- ---------- ---------- ---------
Total revenues 100.0 100.0 100.0 100.0
Cost of access service revenues 34.8 19.3 28.6 18.4
Cost of network solutions and other revenues 11.4 17.6 15.5 17.7
Selling, general and administrative expenses 136.4 87.9 136.0 78.9
Depreciation and amortization 54.0 12.3 43.5 9.0
---------- ---------- ---------- ---------
Total operating costs and expenses 236.6 137.1 223.6 124.0
Loss from operations (136.6) (37.2) (123.6) (24.0)
Interest expense 89.1 6.8 55.7 7.0
Other expense 9.4 3.6 4.4 4.9
---------- ---------- ---------- ---------
Net loss (235.1)% (47.6)% (183.7)% (35.9)%
========== =========== ========== ==========
</TABLE>
Three Months Ended September 30, 2000 compared to Three Months Ended September
30, 1999
Revenues
Access service revenues increased $147,000 to $267,000 for the three
months ended September 30, 2000 from $119,000 for the three months ended
September 30, 1999. This additional revenue is due to the acquisition of three
ISPs in the first quarter 2000 and one ISP in June 2000.
Network solution and other revenues increased $23,000 to $146,000 for
the three months ended September 30, 2000 from $123,000 for the three months
ended September 30, 1999. The increase is attributable to the commencement of
the Company's carrier-neutral colocation revenues of $18,000 in September 2000.
Revenues from server co-location grew $26,000 from $21,000 for the three months
ended September 30, 1999 to $47,000 for the three months ended September 30,
2000, due primarily to the addition of one significant client during 2000.
Equipment sales decreased $21,000 from $32,000 for the three months ended
September 30, 1999 to $11,000 for the three months ended September 30, 2000. 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 increased $96,000 from $47,000 for the
three months ended September 30, 1999 to $143,000 for the three months ended
September 30, 2000. The increase in costs is attributable primarily to $80,000
of connectivity costs incurred in conjunction with the access service customers
acquired during 2000 in four Oklahoma towns: Enid, Bartlesville, Nowata and
Tahlequah.
-14-
<PAGE>
Selling, general and administrative expenses increased $349,000 to
$562,000 for the three months ended September 30, 2000 from $213,000 for the
three months ended September 30, 1999. This increase is comprised principally of
an increase in professional fees of $211,000 from $23,000 for the three months
ended September 30, 1999 to $234,000 for the three months ended September 30,
2000. Of the increase in professional fees, $126,000 is related to cash and the
fair value of common stock issued to the Company's investment banker pursuant to
the terms of financial advisory and placement agreements dated September 1999
and as amended in April 2000. Additional rent expense of $16,000 over the prior
comparative quarter related to the Company's new office space, rented in 2000,
which will house the Company's NOC. Payroll expenses increased $130,000 from
$126,000 for the three months ended September 30, 1999 to $256,000 for the three
months ended September 30, 2000.
Depreciation and amortization expense increased $192,000 from $30,000
for the three months ended September 30, 1999 to $222,000 for the three months
ended September 30, 2000. Of this increase, $137,000 is attributable to the
amortization of cost in excess of net assets of businesses acquired relating to
the four ISP acquisitions closed in 2000. An increase of $16,000 of amortization
of cost in excess of net assets of businesses acquired is attributable to the
effect of shortening the estimated period of benefit to five years for the
acquisition of FullWeb in 1998 that was originally being amortized over fifteen
years. The remaining increase is attributable to depreciation expense related to
2000 fixed asset additions.
Interest Expense
Interest expense increased $350,000 to $367,000 for the three months
ended September 30, 2000 from $17,000 for the three months ended September 30,
1999. This increase is due to $304,000 of interest expense recorded for the
three months ended September 30, 2000 associated with amortization of the loan
discount relating to bridge financing issued with warrants, and $31,000 of
interest expense on bridge financing obtained in 2000. The increase is
attributable to interest expense of $9,000 on notes issued in conjunction with
four acquisitions during 2000 and loans assumed in conjunction with the
acquisition of Harvest Communications, Inc. ("Harvest Communications"). See
"-Liquidity and Capital Resources-Acquisitions."
Other Expense
Other expense increased $30,000 to $39,000 for the three months ended
September 30, 2000 from $9,000 for the three months ended September 30, 1999.
The most significant portion of the increase was attributable to $18,000 in fees
paid to local exchange carriers for the collocation of DSL equipment with such
carriers in three cities, a necessary predicate to enable the Company to provide
DSL services during 2001.
-15-
<PAGE>
Nine months Ended September 30, 2000 compared to Nine months Ended September 30,
1999.
Revenues
Access service revenues increased $335,000 from $409,000 for the nine
months ended September 30, 1999 to $744,000 for the nine months ended September
30, 2000. This additional revenue is due to the acquisition of four ISPs during
the first nine months of 2000, which also accounts for an increase in dial-up
Internet access revenue of approximately $363,000. The Company realized a
decrease in Internet backbone service revenues of approximately $40,000 during
the nine months ended September 30, 2000 compared to the nine months ended
September 30, 1999, due to the Company's acquisition of four ISPs in 2000 that
previously had been customers of the Company's Internet backbone services.
Wireless Internet connectivity revenues, which commenced in March 2000, were
$18,000 for the seven months ended September 30, 2000.
Network solution and other revenues increased $65,000 from $469,000 for
the nine months ended September 30, 1999 to $533,000 for the nine months ended
September 30, 2000. The increase is attributable to growth in server co-location
of $75,000, of which $53,000 relates to one customer that was added during 2000.
The Company commenced its carrier-neutral co-location services during 2000 and
recognized revenues for installation revenues and carrier-neutral co-location
services of $33,000 and $18,000, respectively, for the nine months ended
September 30, 2000 over the previous comparable period. The Company acquired
Harvest Communications, an authorized Voice Stream agent, on February 29, 2000.
Voice Stream phone sales were $42,000 for the nine months ended September 30,
2000. Equipment sales decreased $67,000 from $156,000 for the nine months ended
September 30, 1999 to $89,000 for the nine months ended September 30, 2000. The
Company historically has not actively marketed its network solutions sales, and
has typically made such sales to its existing customer base. Other income
decreased $26,000 from $27,000 for the nine months ended September 30, 1999 to
$1,000 for the nine months ended September 30, 2000. FullWeb sold a domain name
for approximately $25,000 during 1999 that comprised substantially all of the
other income during 1999. Setup fees for dial-up customers decreased $23,000
from $30,000 for the nine months ended September 30, 1999 to $7,000 for the nine
months ended September 30, 2000. This decrease is due to the Company acquiring
four of the resellers during 2000 to which it had charged these fees during
1999.
Operating Costs and Expenses
Cost of access service revenues increased $204,000 from $161,000 for
the nine months ended September 30, 1999 to $365,000 for the nine months ended
September 30, 2000, due to the increased costs of providing Internet access in
Tahlequah, Bartlesville, Enid and Nowata relating to the acquisition of ISPs in
those towns during the nine months ended September 30, 2000. The increase in
costs is attributable primarily to $185,000 of connectivity costs incurred in
conjunction with the access service customers acquired during 2000 in four
Oklahoma towns: Enid, Bartlesville, Nowata and Tahlequah. In addition, credit
card processing fees and independent sales representative commissions increased
$5,000 and $4,000, respectively, over the prior comparable quarter.
Cost of network solutions and other revenues increased $42,000 from
$150,000 for the nine months ended September 30, 1999 to $197,000 for the nine
months ended September 30, 2000. This increase is primarily due to the increase
in costs of bandwidth of $50,000 incurred by FullWeb to service the increase in
the number of web hosting and co-location customers over the prior comparative
quarter. The Company acquired Harvest Communications, an authorized Voice Stream
agent, on February 29, 2000. Voice stream cost of sales were $19,000 for the
nine months ended September 30, 2000. Cost of equipment sales decreased $38,000
from $102,000 for the nine months ended September 30, 1999 to $64,000 for the
nine months ended September 30, 2000. Installation expense for wireless Internet
connectivity increased $8,000 for the nine months ended September 30, 2000 over
the prior comparable quarter.
-16-
<PAGE>
Selling, general and administrative expenses increased $1,044,000 from
$692,000 for the nine months ended September 30, 1999 to $1,736,000 for the nine
months ended September 30, 2000. The increase includes an increase in payroll
costs of $204,000 over the prior comparable quarter related to the hiring of
additional personnel. Professional fees increased $535,000 to $602,000 during
the nine months ended September 30, 2000 from $67,000 for the nine months ended
September 30, 1999. Professional fees include legal, accounting, investment
banking and consulting fees. Approximately $304,000 of the $602,000 of
professional fees for the nine months ended September 30, 2000 is attributable
to noncash expenses relating to the fair value of common stock issued for
investment banking services. Legal fees, consulting fees and investment banking
fees increased $97,000, $124,000 and $63,000 from $3,000, $15,000 and $14,000,
respectively, for the nine months ended September 30, 1999 to $100,000, $139,000
and $77,000, respectively, for the nine months ended September 30, 2000. Rent
expense, advertising, dues and subscriptions, insurance premiums, repairs and
maintenance and equipment rental expense increased $50,000, $26,000, $22,000,
$35,000, $12,000 and $15,000, respectively, for the nine months ended September
30, 2000 over the prior comparable period. Additionally, there were various
other expenses that increased for the nine months ended September 30, 2000 over
the prior comparable period in respective amounts less than $10,000, including
office supplies, postage and delivery, operating leases, long distance, computer
supplies and utility expenses.
Depreciation and amortization expense increased $477,000 from $79,000
for the nine months ended September 30, 1999 to $556,000 for the nine months
ended September 30, 2000. Amortization of cost in excess of net assets of
businesses acquired increased $392,000 to $411,000 for the nine months ended
September 30, 2000 to from $19,000 for the nine months ended September 30, 1999.
The remainder of the increase is attributable to depreciation expense related to
the purchase of equipment and equipment acquired through acquisition during the
nine months ended September 30, 2000.
Interest Expense
Interest expense increased $650,000 from $61,000 for the nine months
ended September 30, 1999 to $711,000 for the nine months ended September 2000.
This increase is due to $575,000 of interest expense recorded for the nine
months ended September 30, 2000 associated with amortization of the loan
discount relating to bridge financing issued with warrants, and $63,000 of
interest expense on bridge financing obtained in 2000. In addition, the Company
incurred interest expense of $12,000 on notes issued in conjunction with four
acquisitions during 2000 and loans assumed in conjunction with the Harvest
Communications merger.
Other Expense
Other expense increased $14,000 from $43,000 for the nine months ended
September 30, 1999 to $57,000 for the nine months ended September 30, 2000. The
most significant portion of the increase was attributable to $24,000 in fees
paid to local exchange carriers for the collocation of DSL equipment with such
carriers in three cities, a necessary predicate to enable the Company to provide
DSL services during 2001.
Liquidity and Capital Resources
The Company used $693,000 and $103,000 of cash for operating activities
for the nine months ended September 30, 2000 and 1999, respectively, as a result
of a net loss for the periods. As of September 30, 2000, the Company had $111 in
cash and $2,496,000 in current liabilities, including $1,105,000 of bridge
financing that was negotiated with three-month or six-month terms and $183,000
of deferred revenues that will not require settlement in cash. On November 9,
2000, $1,005,000 of the bridge loans were exchanged for three-year notes. See
"-Financing Activities," below.
-17-
<PAGE>
Capital expenditures relating to business acquisitions net of cash
acquired were $127,000 for the nine months ended September 30, 2000. In
addition, property, plant and equipment purchases amounted to $363,000 for the
nine months ended September 30, 2000, The Company also received net proceeds of
$110,000 from the sale of a building acquired in conjunction with the Harvest
Communications merger. Proceeds received from the sale were used to repay the
note payable relating to the building.
Net cash provided by financing activities was $1,060,000 and $309,000
for the nine months ended September 30, 2000 and 1999, respectively. The cash
provided in 2000 was due primarily to the issuance of bridge notes payable and
the sale of equity securities pursuant to Regulation D of the Securities Act of
1933. The Company received net proceeds of $1,038,000 from the bridge financing
and $123,000 from the Regulation D offering.
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 completion of the Company's Network Operations Center
* the purchase and installation of telephone switches in Oklahoma,
Arkansas and Kansas
* purchase and installation of wireless and DSL Internet access
equipment
* mergers and acquisitions
* further development of operations support systems and other
automated back office systems
* domain name registration startup costs
The Company expects to make additional capital outlays exceeding $2
million during 2001 in order to continue activities called for in its current
business plan and to fund expected operating losses. As the Company's cost of
developing new networks and services, funding other strategic initiatives and
operating its business will depend on a variety of factors (including, among
other things, the number of subscribers and the service for which they
subscribe, the nature and penetration of services that may be offered by the
Company, regulatory changes, and actions taken by competitors in response to the
Company's strategic initiatives), it is almost certain that actual costs and
revenues will vary from expected amounts, very likely to a material degree, and
that such variations are likely to affect the Company's future capital
requirements. Current cash balances will not be sufficient to fund the Company's
current business plan beyond the next three months. As a consequence, the
Company currently is seeking additional convertible debt and/or equity financing
as well as the placement of a credit facility to fund the Company's liquidity
needs. There can be no assurance that the Company will be able to raise
additional capital on satisfactory terms or at all.
The ability of the Company to fund the capital expenditures and other
costs contemplated by its business plan and to make scheduled payments with
respect to bank and other borrowings will depend upon, among other things, its
ability to seek and obtain additional financing within the next year. Capital
will be needed in order to implement its business plan, deploy its network,
expand its operations and obtain and retain a significant number of customers in
its target markets. Each of these factors is, to a large extent, subject to
economic, financial, competitive, political, regulatory and other factors, many
of which are beyond the Company's control.
No assurance can be given that the Company will be successful in
developing and maintaining a level of cash flow from operations sufficient to
permit it to pay the principal of, and interest and any other payments on,
outstanding indebtedness. If the Company is unable to generate sufficient cash
flow from operations to service its indebtedness, it will have to modify its
growth plans, limit its capital expenditures, restructure or refinance its
indebtedness or seek additional capital or liquidate its assets. There can be no
assurance (i) that any of these strategies could be effected on satisfactory
terms, if at all, or (ii) that any such strategy would yield sufficient proceeds
to service the Company's debt or otherwise adequately fund operations.
-18-
<PAGE>
Acquisitions
The Company's acquisition strategy is designed to leverage its existing
network backbone and internal operations to enable it to enter new markets in
Oklahoma, Arkansas and Kansas, as well as to expand its presence in existing
markets, and to benefit from economies of scale.
The Company has acquired four Internet service provider businesses in
Oklahoma during the nine months ended September 30, 2000.
On January 25, 2000, the Company entered into an Asset Purchase
Agreement with FullNet of Tahlequah, Inc. ("FOT"), an Oklahoma corporation, in
which the Company purchased substantially all of FOT's assets including
approximately 400 individual and business Internet access accounts. The Company
paid FOT an aggregate amount of $97,735, comprised of $35,890 in cash and a note
payable for $61,845. The note is payable in eighteen monthly installments.
On February 4, 2000, the Company entered into an Asset Purchase
Agreement with David Looper, d/b/a FullNet of Bartlesville ("FOB"), a sole
proprietorship, in which the Company purchased substantially all of FOB's
assets, including approximately 400 individual and business Internet access
accounts. The Company paid FOB an aggregate amount of $178,400, payable in
42,744 shares of the Company's common stock (valued for purposes of the
acquisition at $3.00 per share) and a note payable for $50,168. The note bears
an interest rate of 8% per annum, with the principal and interest thereon
payable on earlier to occur of (a) the closing of any private equity placement
in excess of $351,000, (b) the closing of any underwritten offering of the
Company's common stock, or (c) one year from the closing date of the Asset
Purchase Agreement.
On February 29, 2000, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Harvest Communications, an Oklahoma
corporation, pursuant to which Harvest merged with and into FullNet. Harvest had
approximately 2,500 individual and business dial up Internet access accounts, 15
wireless Internet access accounts and 35 web-hosting accounts. Pursuant to the
terms of the Merger Agreement, the Company paid the shareholders of Harvest an
aggregate amount of $1,912,500 payable in 537,500 shares of the Company's common
stock (valued for purposes of the merger at $3.00 per share), a note payable for
$175,000 and $125,000 in cash. The note bears an interest rate of 8% per annum,
with the principal and interest thereon payable on the earlier to occur of (a)
the closing of any single funding (whether debt or equity) obtained by the
Company subsequent to the date of the Merger Agreement in an aggregate amount of
at least $2,000,000, (b) the closing of any underwritten offering of the
Company's common stock, or (c) March 6, 2001.
On June 2, 2000, the Company entered into an Asset Purchase Agreement
with Lary Smith, d/b/a FullNet of Nowata ("FON"), an Oklahoma sole
proprietorship, in which the Company purchased substantially all of FON's
assets, including approximately 300 individual and business Internet access
accounts. Pursuant to the terms of the Agreement, the Company agreed to pay FON
an aggregate purchase price of $137,000, payable in 38,198 shares of the
Company's common stock (valued for purposes of the acquisition at $2.33125 per
share) and a note payable for $47,950. The note bears an interest rate of 8% per
annum with the principal and interest thereon payable on the earlier to occur of
(a) the closing of any single funding (whether debt or equity) obtained by the
Company subsequent to the date of the Agreement in an aggregate amount of
$2,000,000, or (b) one year from the closing date of the Agreement.
These acquisitions were accounted for as purchases. The aggregate
purchase price has been allocated to the underlying net assets purchased or net
liabilities assumed based on their estimated fair values at the respective
acquisition date. This allocation results in cost in excess of net assets of
businesses acquired of $2.4 million, which is being amortized over the estimated
periods benefited of three to five years. Prior to the acquisitions, each of
FOT, FOB FON and Harvest was a customer of the Company's ISP access services.
-19-
<PAGE>
Financing Activities
In February 2000, the Company raised an aggregate $135,600 in an
offering of its common stock. The offering was made pursuant to an exemption
from the registration requirements of the Securities Act pursuant to Regulation
D of such act.
In February, March, June and September 2000, the Company obtained
bridge loans totaling $505,000 through the issuance of 14% promissory notes to
14 accredited investors. The terms of the financing additionally provided for
the issuance of five-year warrants to purchase an aggregate of 250,000 shares of
the Company's common stock at $0.01 per share, and provided for certain
registration rights. The promissory notes require monthly interest payments,
mature in six months and are extendible for two 90-day periods upon issuance of
additional warrants for an aggregate 235,000 shares exercisable at $0.01 per
share for each extension. In August 2000, the Company extended the terms of ten
of the bridge loans for an additional 90 days, and, in connection therewith,
issued warrants for an additional 137,500 shares. As of September 30, 2000,
warrants to purchase an aggregate 275,000 shares of common stock have been
exercised at an aggregate exercise price of $2,800.
In March 2000, the Company obtained bridge loans totaling $500,000
through the issuance of 14% promissory notes to two accredited investors. The
terms of the financing additionally provided for the issuance of five-year
warrants to purchase 100,000 shares of the Company's common stock at $0.01 per
share, and provided for certain registration rights. The promissory notes
require quarterly interest payments, mature in six months, and initially were
extendible for two 90-day periods upon issuance of additional warrants for an
aggregate 10,000 shares exercisable at $0.01 per share for each extension. In
October 2000, the terms of the two bridge loans were amended to provide that, in
the event of a second 90-day extension, the Company will issue warrants to
purchase an aggregate 160,000 shares of common stock. On March 8, 2000, the
bridge loan investors exercised their warrants and purchased 100,000 shares of
common stock of the Company at an aggregate exercise price of $1,000. In August
2000, the Company extended the terms of the two bridge loans for an additional
90 days, and, in connection therewith, issued warrants for an additional 10,000
shares, of which warrants to purchase an aggregate 5,000 shares of common stock
have been exercised at an aggregate exercise price of $50 as of September 30,
2000.
In August 2000, the Company obtained a short-term loan of $100,000 from
Timothy J. Kilkenny, Chairman of the board and CEO, through the issuance of a 9%
promissory note. The terms of the financing additionally provided for the
issuance of five year warrants to purchase an aggregate of 50,000 shares of the
Company's common stock at $0.01 per share, and provided for certain registration
rights. The promissory note requires monthly interest payments, matures on the
earlier of (i) the date which is within five days of receipt of funds by the
Company of any offering raising gross proceeds to the Company of at least
$1,000,000 or (ii) in three months, and is extendible for two 90-day periods
upon issuance of additional warrants for an aggregate 50,000 shares exercisable
at $0.01 per share for each extension.
Proceeds from the Regulation D offering, bridge loans and the
short-term loan from Mr. Kilkenny were used for acquisitions, working capital
and general corporate purposes.
On September 29, 2000, the Company began offering through a private
placement a minimum of $700,000 and a maximum of $2.0 million in the form of
three-year term 11% convertible promissory notes (the "Notes"), which can be
increased to $2.5 million at the election of the Placement Agent. The initial
closing of $700,000 occurred on November 9, 2000. Each of the Notes is
convertible into common stock of the Company at the election of the holder
thereof, at a conversion rate of $1.00 per share, subject to adjustment under
certain circumstances. The Notes are accompanied by warrants to purchase a
number of shares of the Company's common stock equal to the number obtained by
dividing 25% of the face amount of the Notes purchased by $1.00. Said warrants
may be exercised at any time after the date of grant for five years at a price
of $0.01 per share. The Company will utilize the funds from this offering for
primarily for the retirement of debt, completion of its NOC and working capital.
Additionally, $1,005,000 of bridge loans were converted to the Notes on November
9, 2000.
-20-
<PAGE>
PART II-OTHER INFORMATION
Item 2. Changes in Securities
See "Item 2. Management's Discussion and Analysis or Plan of
Operation-Financing Activities" of this Report, incorporated herein by
reference.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Exhibit
--------------- -------------------------
*27.1 Financial Data Schedule.
-------------------------------
*Filed electronically herewith.
(b) Reports on Form 8-K
None.
-21-
<PAGE>
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 14, 2000 /s/ Timothy J. Kilkenny
--------------------------------------------
Timothy J. Kilkenny
Chairman of the Board of Directors;
President and Chief Executive Officer
Date: November 14, 2000 /s/ Travis Lane
--------------------------------------------
Travis Lane
Vice-President and Chief Accounting Officer
(Chief Accounting Officer)
-22-
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Name of Exhibit Page
------- --------------- ----
27.1 Financial Data Schedule 24
-23-
