<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A1
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________
Commission File No. 0-29025
NETVOICE TECHNOLOGIES CORPORATION
--------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Nevada 91-1986538
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3201 West Royal Lane, Suite 160
Irving, Texas 75063
--------------------------------------------------------------------------------
(Address of principal executive offices, including zip code)
(972) 788-2988
--------------------------------------------------------------------------------
(Registrants telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
---
As of August 17, 2000, 15,478,944 shares of Common Stock were outstanding
and 254,500 shares were contingently issuable shares.
DOCUMENTS INCORPORATED BY REFERENCE
Exhibits to the following documents filed with the Securities and Exchange
Commission have been incorporated by reference in Part II of this Quarterly
Report on Form 10-Q:
1. Annual Report on Form 10-KSB, dated as of April 13, 2000
<PAGE>
NETVOICE TECHNOLOGIES CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Changes in Securities and Use of Proceeds 26
Item 3. Default Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 28
Signatures 29
</TABLE>
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
NETVOICE TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 2000 1999
(As restated,
(Unaudited) See Note 8)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,930,450 $ 20,085
Restricted cash 141,226
Accounts receivable - trade, net of allowance for doubtful accounts
of $20,000 and $0, respectively 2,159,532 190,733
Federal tax receivable 55,800
Prepaid expenses 245,763 86,505
------------ -----------
Total current assets 6,532,771 297,323
PROPERTY AND EQUIPMENT, NET 7,782,670 860,534
GOODWILL, net of accumulated amortization of $88,936 9,775,429
OTHER ASSETS 564,343 300,787
------------ -----------
TOTAL $ 24,655,213 $ 1,458,644
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 5,914,115 $ 1,519,154
Accrued expenses 180,626 180,082
Notes payable and current portion of capital lease obligations 2,518,509 3,659,905
Unearned revenue 320,000 30,000
------------ -----------
Total current liabilities 8,933,250 5,389,141
LONG-TERM DEBT 4,273,984 223,056
------------ -----------
Total liabilities 13,207,234 5,612,197
COMMITMENTS AND CONTINGENCIES (See Notes)
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock; 50,000,000 shares authorized at $0.001 par value,
3,578,349 and no shares issued and outstanding, respectively
(cumulative liquidation value of $3,578) 3,578
Common stock, 100,000,000 shares authorized at $0.001 par value;
15,314,444 and 10,741,600 shares issued and outstanding, respectively 15,315 10,742
Paid-in capital 24,267,209 2,940,739
Stock subscription receivable (1,494,123)
Unearned compensation (93,156) (366,814)
Accumulated deficit (11,250,844) (6,738,220)
------------ -----------
Total stockholders' equity (deficit) 11,447,979 (4,153,553)
------------ -----------
TOTAL $ 24,655,213 $ 1,458,644
============ ===========
</TABLE>
See notes to consolidated unaudited financial statements.
-3-
<PAGE>
NETVOICE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Month Period Ended Six Month Period Ended
June 30, June 30,
2000 1999 2000 1999
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES $ 5,296,991 $ 135,760 $ 5,706,799 $ 259,960
EXPENSES:
Direct expenses 4,946,360 307,839 5,571,932 460,805
General and administrative expenses 2,664,997 543,849 4,132,515 1,081,931
----------- ----------- ----------- -----------
Total expenses 7,611,357 851,688 9,704,447 1,542,736
----------- ----------- ----------- -----------
OPERATING LOSS (2,314,366) (715,928) (3,997,648) (1,282,776)
OTHER INCOME (EXPENSE):
Interest income 2,071 2,785 12,885 3,377
Interest expense (212,443) (272,536) (527,861) (344,472)
----------- ----------- ----------- -----------
Total other expense, net (210,372) (269,751) (514,976) (341,095)
----------- ----------- ----------- -----------
NET LOSS $(2,524,738) $ (985,679) $(4,512,624) $(1,623,871)
=========== =========== =========== ===========
BASIC AND DILUTED LOSS PER SHARE $ (0.19) $ (0.10) $ (0.35) $ (0.16)
=========== =========== =========== ===========
WEIGHTED AVERAGE BASIC AND DILUTED
SHARES OUTSTANDING 13,434,329 10,367,850 12,829,945 9,995,671
=========== =========== =========== ===========
</TABLE>
See notes to consolidated unaudited financial statements.
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<PAGE>
NETVOICE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Six Months Ended June 30, 2000
<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------------- ------------------ Stock
Paid-In Subscription
Shares Amount Shares Amount Capital Receivable
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1,
2000, AS RESTATED - $ - 10,741,600 $ 10,742 $ 2,940,739 $ -
Restricted shares granted (44,000) to
employees 163,000
Options exercised 12,500 13 6,238
Shares sold as part of private placement
memorandum at $4.25, net of
issuance costs 1,200,000 1,200 4,973,800
Amortization of unearned compensation
Restricted shares issued to officers,
directors and employees 1,100,000 1,100 (1,100)
Shares sold as part of private placement
memorandum at $7.00, net of
issuance costs 453,886 454 2,887,939 (1,494,123)
Shares issued in connection with an
acquisition at $9.50, net of issuance cost 306,458 306 2,721,045
Preferred stock sold as part of private
placement of equity at $3.25, net of
issuance costs 3,578,349 3,578 10,577,048
Cashless exercise of options 1,500,000 1,500 (1,500)
Net loss
--------- --------- ---------- --------- ----------- -----------
BALANCE, JUNE 30, 2000 (UNAUDITED) 3,578,349 $ 3,578 15,314,444 $ 15,315 $24,267,209 $(1,494,123)
========= ========= ========== ========= =========== ===========
<CAPTION>
Unearned Accumulated
Compensation Deficit Total
<S> <C> <C> <C>
BALANCE, JANUARY 1,
2000, AS RESTATED $(366,814) $(6,738,220) $(4,153,553)
Restricted shares granted (44,000) to
employees (163,000) -
Options exercised 6,251
Shares sold as part of private placement
memorandum at $4.25, net of
issuance costs 4,975,000
Amortization of unearned compensation 436,658 436,658
Restricted shares issued to officers,
directors and employees -
Shares sold as part of private placement
memorandum at $7.00, net of
issuance costs 1,394,270
Shares issued in connection with an
acquisition at $9.50, net of issuance cost 2,721,351
Preferred stock sold as part of private
placement of equity at $3.25, net of
issuance costs 10,580,626
Cashless exercise of options -
Net loss (4,512,624) (4,512,624)
--------- ------------ ------------
BALANCE, JUNE 30, 2000 (UNAUDITED) $ (93,156) $(11,250,844) $ 11,447,979
========= ============ ============
</TABLE>
See notes to consolidated unaudited financial statements.
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<PAGE>
NETVOICE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Month Period Ended
June 30,
2000 1999
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(4,512,624) $(1,623,871)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 435,437 272,000
Amortization of unearned stock compensation 436,658
Bad debt expense 20,000
Changes in operating assets and liabilities:
Accounts receivable (1,969,673) 23,651
Prepaid expenses (159,258) (112,389)
Accounts payable 3,575,566 67,825
Accrued expenses 544 (6,752)
Unearned revenue 290,000
Other assets (263,092) (69,051)
----------- -----------
Net cash used in operating activities (2,146,442) (1,448,587)
----------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment (2,084,563) (202,682)
Cash outflows for acquisitions, net of acquisition costs (5,997,379)
Increase in restricted cash and cash equivalents (141,226) (23,258)
----------- -----------
Net cash used in investing activities (8,223,168) (225,940)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from the sale of common stock, net of issuance costs 7,863,393 1,103,500
Proceeds from the sale of preferred stock, net of issuance costs 9,086,503
Proceeds from long-term debt 386,026 1,121,735
Proceeds from options exercised 6,251
Payments on long-term debt and capital leases (3,062,198) (474,909)
----------- -----------
Net cash provided by financial activities 14,279,975 1,750,326
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 3,910,365 75,799
CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD 20,085 7,990
----------- -----------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 3,930,450 $ 83,789
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 519,608 $ 125,886
=========== ===========
SUPPLEMENTAL DISCLOSURE NON-CASH TRANSACTION:
Assets acquired through capital leases $ 764,230 $ -
=========== ===========
Issued 370,000 compensatory shares to officers, directors and employees $ - $ 145,000
=========== ===========
Common stock issued for the acquisition of Synetric, Inc. $ 2,721,351 $ -
=========== ===========
Acquisition of Enhanced Communications, as defined:
Fair value of assets acquired $11,495,173
Liabilities assumed (3,397,794)
Note issued to seller (2,100,000)
-----------
Cash paid $ 5,997,379
===========
</TABLE>
See notes to consolidated unaudited financial statements.
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<PAGE>
NETVOICE TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Consolidated Unaudited Interim financial statements - The accompanying
consolidated unaudited interim financial statements of NetVoice Technologies
Corporation and its subsidiaries (the "Company") have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and in a manner consistent with that
used in the preparation of the annual consolidated financial statements of the
Company at December 31, 1999. In the opinion of management, the accompanying
consolidated unaudited interim financial statements reflect all adjustments,
consisting only of normal and recurring adjustments, necessary for a fair
presentation of the financial position and results of operations and cash flows
for the periods presented.
Operating results for the three months and six months ended June 30,
2000 and 1999 are not necessarily indicative of the results that may be expected
for a full year. In addition, the unaudited interim consolidated financial
statements do not include all information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America. These
consolidated unaudited interim financial statements should be read in
conjunction with the financial statements and related notes thereto which are
included in the Company's 1999 consolidated financial statements in its Form 10-
KSB as filed with the Securities and Exchange Commission.
Business Description -- The Company is a provider of voice transmission
using Internet Protocol ("IP"), which allows our customers to make high quality,
low-cost calls via traditional telephones using a technology known as Voice over
Internet Protocol ("VoIP").
Earnings per Share - Basic earnings per share are computed by dividing
income (loss) available to common stockholders by the weighted average number of
common shares outstanding during the period. Diluted earnings per share are
computed by including contingently issuable shares would have an antidilutive
effect upon earnings per share, no diluted earnings per share is presented.
Principles of Consolidation - The consolidated unaudited interim
financial statements included the accounts of the Company and its wholly owned
subsidiaries, NetVoice Technologies, Inc., NetLD.com, Inc., Synetric, Inc.,
NetVoice Encom GP and NetVoice Encom LP. All intercompany transactions and
balances between the Company and its subsidiaries have been eliminated in
consolidation.
Comprehensive Income - For the three and six months ended June 30, 2000
and 1999, the Company has no elements of other comprehensive income, except net
loss.
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<PAGE>
Goodwill - Goodwill represents the amount in excess of the purchase
price of an acquisition over the identifiable tangible and intangible assets and
liabilities. Amortization of goodwill is provided on a straight-line basis over
the estimated useful life of ten years.
2. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
(Unaudited)
<S> <C> <C>
Furniture and equipment $ 78,965 $ 10,033
Computer and telephone equipment 8,224,453 975,765
------------ ----------
Total cost 8,303,418 985,798
Less accumulated depreciation (520,748) (125,264)
------------- -----------
$ 7,782,670 $ 860,534
============= ===========
3. OTHER ASSETS
Other assets consisted of the following:
June 30, December 31,
2000 1999
(Unaudited)
Vendor security deposits $ 342,893 $ 300,587
Other 221,450 200
--------- ----------
$ 564,343 $ 300,787
========= ==========
</TABLE>
In June 2000 in connection with the $25.0 million credit facility with
Cisco System, Inc. ("Cisco"), the Company paid $225,000, representing a 1.5%
commitment fee, to Cisco for $15.0 million of Tranche A. See Note 4. The
commitment fee will be amortized over the life of the loan, which is five years.
The Company recorded amortization expense of $3,750 for the six months ended
June 30, 2000.
-8-
<PAGE>
4. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
Notes payable and capital lease obligations consisted of the following:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
(Unaudited)
<S> <C> <C>
Notes payable $ 1,412,262 $ 3,651,932
Loans from stockholders, no interest rate, maturing from
October 2004 to December 2004 223,672 206,672
Convertible secured promissory note, LIBOR interest rate plus
2%, maturing June 30, 2005 2,100,000
Capital lease obligations, with interest rates of 13.47% to 22.5%,
maturing August 2003 3,056,559 24,357
----------- ------------
6,792,493 3,882,961
Less current portion of long-term debt (2,518,509) (3,659,905)
----------- ------------
$ 4,273,984 $ 223,056
=========== ============
</TABLE>
Notes payable are secured by a security interest in revenues from
contracts, equipment and cash reserve equal to 10% of total notes payable. The
notes bear interest at a rate of 13.35% per annum, payable on the first day of
each quarter during the term. All principal and unpaid accrued interest is due
and payable nine months from issuance. The notes are due through November 2000.
The note holder has the right to extend the terms of the notes for an additional
nine months at the same terms.
Convertible Secured Promissory Note - On June 30, 2000, NetVoice Encom
LP entered into an convertible secured promissory note ("Note") with World
Access Telecommunications Group, Inc. ("World Access") for $2.1 million. The
Note bears interest at a rate equal to the London Interbank Offering Rate
("LIBOR") plus a margin of 2% (8.78% at June 30, 2000).
Interest only is payable on quarterly basis commencing on September 30,
2000 and continuing through December 31, 2001. On December 31, 2001, the Company
shall make a principal payment of $350,000. Thereafter, the remaining
outstanding principal amount shall be payable in equal consecutive quarterly
installments, including interest, beginning on March 31, 2002 and continuing
until the maturity date of June 30, 2005.
The holder of the Note, at any time prior to or on the maturity date,
may convert the then outstanding principal amount into shares of the Company's
common stock at the current market price or a price not less than $10.00 per
share. Substantially all of the assets of this subsidiary are pledged as
collateral for this Note. Additionally, the parent Company is fully and
unconditionally liable for the payment of the Note to World Access.
-9-
<PAGE>
Facility With Cisco Systems Capital Corporation - In June 2000, the
Company completed a $25.0 million credit facility with Cisco, divided into two
tranches. Tranche A provides $15.0 million for the purchase of Cisco Systems
networking hardware; Tranche B provides $10.0 million for the soft costs
associated with the network. The applicable interest rate is LIBOR plus 5.50%
per annum, calculated on a 360-day year for actual days elapsed, and accrued
from the date of initial funding. After two consecutive quarters of positive
earnings before income taxes, depreciation and amortization ("EBITDA"), the
interest rate will be based on a sliding scale over LIBOR with a margin range
from 4.00% to 5.25%. The final maturity date for all debt is five years from the
closing date of the facility agreement, or February 25, 2005.
5. STOCKHOLDERS' EQUITY
Common stock - On January 1, 2000, the Company granted 44,000 shares of
restricted common stock to certain employees. The shares will be issued over
various vesting schedules. The grants were valued at the market value of the
Company's common stock on the date of the grant, and the Company recorded
$163,000 in unearned compensation as a result of the transaction.
From January through June 2000, certain officers and employees of the
Company vested 1.1 million shares of restricted common stock granted during
fiscal year 1999 with no exercise price. The Company had previously recorded
unearned compensation based upon the market value of the Company's stock on the
original date of the grants. The unearned compensation is being amortized as
compensation expense over the vesting schedule. Approximately $437,000 of
unearned compensation has been amortized during the six months ended June 30,
2000.
In connection with the acquisition of Synetric, Inc. ("Synetric") on
May 19, 2000, the Company issued 286,458 shares of its restricted common stock.
Pursuant to the Stock Purchase Agreement ("Stock Agreement"), it provides that
of the 286,458 shares delivered at closing, 33,229 shares will be held in escrow
for a period of one (1) year following the closing to satisfy any future
indemnification claims. Additionally, the Company issued 20,000 shares of
restricted common stock to a consultant in connection with the acquisition of
Synetric. The common stock was issued at market value on the date of the
agreement was executed. See Note 6.
On June 30, 2000, two former directors and one current director of the
Company entered into an agreement to exercise their options, issued in January
1999, to purchase 1.8 million shares of the restricted common stock, with an
exercise price of $0.50 per share. Pursuant to the exercise of these stock
options, the three individuals exchanged 300,000 shares of the Company's common
stock, which they held since January 1998 (inception of the Company). In an
effort to facilitate this cashless exercise of stock options the aforementioned
shareholders exchanged 300,000 mature shares of the Company's outstanding common
stock valued at $3.00 per share for 1.8 million shares of the Company's common
stock. The transaction had no net effect on the Company's stockholders' equity,
however, as a result of this transaction a net of 1.5 million shares of the
Company's restricted
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<PAGE>
common stock was issued. Pursuant to the agreement, the individuals will not,
directly or indirectly, offer, sell, pledge, contract to sell the common stock
issued under this transaction for a period of eighteen (18) months.
On March 31, 2000, two former employees exercised 12,500 options to
purchase common stock with an exercise price of $0.50 per share. These options
were issued with a strike price in excess of market value of the stock during
fiscal year 1999 prior to a public market for the Company's Common Stock.
Therefore, no compensation expense was recorded at the date of grant for these
stock options.
Private Placement Memorandum - In February 2000, the Company effected a
private placement of 1,200,000 shares of its common stock for $5,100,000,
excluding issuance cost of approximately $125,000. Subscribers may not sell,
transfer or otherwise dispose of the shares unless it is in compliance with Rule
144 of the Securities Act of 1933.
In May 2000, the Company completed a private placement memorandum to
accredited investors in the amount of $2.9 million for 453,886 shares of our
common stock at a price of $7.00 per share. On June 30, 2000, in connection with
this private placement, the Company had stock subscription receivable of
approximately $1.5 million. Subsequent to June 30, 2000, these funds have been
collected by the Company. Subscribers may not sell, transfer or otherwise
dispose of the shares unless it is in compliance with Rule 144 of the Securities
Act of 1933.
Stock split - In February 2000, the Company declared a 2-for-1 stock
split of all outstanding shares for all stockholders of record as of March 14,
2000. Retroactive effect has been given to the stock split in stockholders'
equity accounts as of December 31, 1999, and in all share and per-share data in
the accompany consolidated unaudited interim financial statements.
Preferred Stock - On June 30, 2000, the Company issued 3,578,349 shares
at $3.25 share of a newly created series of Series A preferred stock to certain
purchasers for approximately $10.6 million in cash pursuant to a Securities
Purchase Agreement among the Company and the purchasers (the "Securities
Purchase Agreement"). Pursuant to the Securities Purchase Agreement, if the
Company's earnings before interest, taxes, depreciation and amortization
("EBITDA"), as defined, is more than or equal to negative $2.5 million as of
December 31, 2000 then the Company must issue approximately 238,000 warrants to
certain investors to purchase additional shares of Series A preferred stock, or
common stock if the Series A preferred stock has been converted at the time of
warrant issue. The EBITDA warrants have an exercise price of $0.01 per share and
shall expire on the date immediately following the day upon which the Company's
audited financial statements are delivered to the Company by its independent
auditors, but in no event later than April 2, 2001. Pursuant to the Securities
Purchase Agreement, the Company may be required to issue approximately 201,000
warrants to certain investors to purchase additional shares of Series A
preferred stock, or common stock, if converted, by November 1, 2000 if the
Company has not been listed on NASDAQ. These warrants have an exercise price of
$0.01 per share and shall expire on June 30, 2010. The purchasers were also
granted certain registration rights with respect to the shares issued under the
Securities Purchase Agreement
-11-
<PAGE>
pursuant to a Registration Rights Agreement. Net proceeds from this offering are
to be used for continued network expansion, working capital, and acquisitions.
The Company allocated the entire net proceeds received from the issuance of
the Series A preferred stock of $10,568,626 to the beneficial conversion feature
on the issuance of the Series A preferred stock. The beneficial conversion
feature was calculated at the issuance date of the Series A preferred stock
based on the difference between the conversion price per share and the market
value of the Company's common stock at that date. The amount, however, was
limited to the proceeds received from issuing the beneficial convertible
security. The Series A preferred stock holders have the right to convert at the
option of each holder, at any time after six months of closing, into shares of
the Company's common stock. The Company will record the accretion of the
$10,568,626 to additional paid-in capital over the subsequent six-month period.
The Company can require conversion of the Series A preferred stock into the
Company's common stock if the average of the closing price of the Company's
common stock for any twenty-one (21) trading day period exceeds $27.50 per share
and the shares of common stock are registered and freely tradeable. Each share
of Series A preferred stock could be converted into one share of common stock.
The Series A preferred stock ranks senior to all classes of common stock.
Stock options - During the second quarter of 2000, the Company granted
certain executives and employees approximately 494,000 options to acquire common
stock at an exercise price equal to the market value of the Company's common
stock at the date of grant, which ranged from $7.75 to $16.08. As of June 30,
2000, the Company had approximately 1.3 million options outstanding to acquire
common stock.
6. ACQUISITIONS
Effective May 19, 2000, the Company completed the acquisition of Synetric,
Inc. of Dallas, Texas pursuant to a definitive Stock Purchase Agreement ("Stock
Agreement") whereby the Company acquired all of the issued and outstanding
shares of Synetric from eight (8) individuals, including officers and directors
of Synetric. Pursuant to the Stock Agreement, the Company issued 286,458 shares
of its restricted common sock. The Stock Agreement provides that of the 286,458
shares delivered at closing, 33,229 shares will be held in escrow for a period
of one (1) year following the closing to satisfy any future indemnification
claims. Additionally, the Company issued 20,000 shares of restricted common
stock to a consultant in connection with the acquisition of Synetric. The
Company recorded this transaction under the purchase method of accounting.
Concurrent with the execution of the Stock Agreement, the Company entered
into an employment agreement with a former employee for a period of two years.
The employment agreement provides for the former employee to continue to serve
as President of Synetric or in such other capacity as determined by the
Company's Board of Directors. The employment agreement contains certain
confidentially and noncompetition provisions.
On June 30, 2000, the Company completed an acquisition from World Access
Telecommunications Group, Inc. of a division doing business as Enhanced
Communications
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<PAGE>
(the "Division") pursuant to an Asset Purchase Agreement ("Asset Agreement"). As
consideration for the acquisition, the Company paid to World Access $6.0 million
in cash, issued a convertible promissory note in the principal amount of $2.1
million and assumed liabilities of approximately $3.3 million, including
approximately $2.7 million of assumed capital lease obligations. The effective
date of this acquisition was June 1, 2000. The Company recorded this transaction
under the purchase method of accounting. The acquisition was funded with the
Series A preferred stock offering on June 30, 2000.
The following unaudited pro forma information represents the
consolidated results of operations of the Company as if the acquisition of
Synetric and the Division had been consummated as of January 1, 1999. The
amounts and components of the purchase price, along with the preliminary
allocation of the purchase price to the net asset acquired attributable to the
acquisition are presented below, and are subject to change as the allocation is
finalized.
Six Months Ended June 30,
1999 2000
Revenues $ 8,262,316 $ 31,524,562
============ ============
Net loss $ (1,632,483) $ (3,744,159)
============ ============
Loss per share $ (0.16) $ (0.29)
============ ============
7. RESTATEMENT
Subsequent to the issuance of the Company's consolidated financial
statements as of and for the year ended December 31, 1999, the Company's
management determined that the cost for the purchase of a customer list from a
company owned by a shareholder in June 1999 should have been accounted for as a
capital distribution, and the proceeds from the sale of such customer list and
the excess of the proceeds from the sale of another customer list over its
amortized carrying cost, both having been sold to another minority shareholder
in December 1999, should have been accounted for as capital contribution. As a
result, the 1999 financial statements will be restated from amounts previously
reported to appropriately account for this transaction.
A summary of the significant effects of the restatement on the 1999 balance
sheet is as follows:
As Previously As
Reported Restated
Balance sheet
Paid-in Capital $ 2,881,479 $ 2,940,739
Accumulated Deficit (6,673,589) (6,738,220)
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<PAGE>
The restatement in 1999 had no effect on the Company's statement of operations
for the six-month period ended June 30, 1999.
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<PAGE>
8. SUBSEQUENT EVENTS
On July 28, 2000, the Company issued an additional 820,309 shares of the
Series A preferred stock to certain purchasers for approximately $2.6 million in
cash pursuant to the Amended and Restated Securities Purchase Agreement.
Pursuant to the Amended and Restated Securities Purchase Agreement, if the
Company's earnings before interest, taxes, depreciation and amortization
("EBITDA") is more than or equal to negative $2.5 million as of December 31,2000
then Company must issue approximately 46,000 warrants to certain investors to
purchase additional shares of Series A preferred stock, or common stock if the
Series A preferred stock has been converted at the time of warrant issuance. The
EBITDA warrants have an exercise price of $0.01 per share and shall expire on
the date immediately following the day upon which the Company's audited
financial statements are delivered to the Company by its independent auditors,
but in no event later than April 2, 2001. Pursuant to the Amended and Restated
Securities Purchase Agreement, the Company may be required to issue
approximately 39,000 warrants to certain investors to purchase additional shares
of Series A preferred stock, or common stock if converted, by November 1, 2000
if the Company has not been listed on NASDAQ. These warrants have an exercise
price of $0.01 per share and shall expire on June 30, 2010. The purchasers were
also granted certain registration rights with respect to the shares issued under
the Amended and Restated Securities Purchase Agreement pursuant to the Amended
and Restated Registration Rights Agreement. Net proceeds from this offering are
to be used for continued network expansion, working capital, and acquisition.
The Company allocated the entire net proceeds received from the issuance of
the Series A preferred stock of $2,605,184 to the beneficial conversion feature
on the issuance of the Series A preferred stock. The beneficial conversion
feature was calculated at the issuance date of the Series A preferred stock
based on the difference between the conversion price per share and the market
value of the Company's common stock at that date. The amount, however, was
limited to the proceeds received from issuing the beneficial convertible
security. The Series A preferred stock holders have the right to convert at the
option of each holder, at any time after six months of closing, into shares of
the Company's common stock. The Company will record the accretion of the
$2,605,184 to additional paid-in capital over the subsequent six-month period.
The Company can require conversion of the Series A preferred stock into the
Company's common stock if the average of the closing price of the Company's
common stock for any twenty-one (21) trading day period exceeds $27.50 per share
and the shares of common stock are registered and freely tradeable. Each share
of Series A preferred stock could be converted into one share of common stock.
The Series A preferred stock ranks senior to all classes of common stock.
******
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
This document includes statements that may constitute forward-looking
statements made pursuant to the Safe Harbor provisions of the Private Securities
Litigation Reform Act of 1995. The Company would like to caution readers
regarding certain forward-looking statements in this document and in all of its
communications to shareholders and others, press releases, securities filings,
and all other communications. Statements that are based on management's
projections, estimates and assumptions are forward-looking statements. The words
"believe," "expect," "anticipate," "intend," and similar expressions generally
identify forward-looking statements. While the Company believes in the veracity
of all statements made herein, forward-looking statements are necessarily based
upon a number of estimates and assumptions that, while considered reasonable by
the Company, are inherently subject to significant business, economic and
competitive uncertainties and contingencies and known and unknown risks. Many of
the uncertainties and contingencies can affect events and the Company's actual
results and could cause its actual results to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
Company. Some of the factors that could cause actual results or future events to
differ materially include the Company's inability to find suitable acquisition
candidates or financing on terms commercially reasonable to the Company,
inability to find suitable facilities or personnel to open or maintain new
branch locations, interruptions or cancellation of existing sources of supply,
the pricing of and demand for distributed products, the presence of competitors
with greater financial resources, economic and market factors, and other
factors. Please see the "Risk Factors" in the Company's filings with the
Securities and Exchange Commission for a description of some, but not all,
risks, uncertainties and contingencies.
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and related notes thereto which are
included in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1999 filed with the Securities and Exchange Commission.
Overview
We are a provider of telephony services using traditional technologies
and Internet Protocol ("IP"), which allows our customers to converge their data,
Internet and voice networks via our managed IP network.
We began offering our long distance and Internet services during the
past year as part of our current business plan. We have aggressively been
deploying IP gateways in 29 markets located throughout the United States with
leading manufacturers such as Cisco Systems, Inc. ("Cisco"). Currently, Cisco
supplies us with much of the equipment involved in establishing our IP gateways
and building our network.
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IP transmission uses a technology called "packet-switching" to break
voice, and other IP telephony services into discrete data packets, route them
over our managed network and reassemble them into their original form for
delivery to the end destination. Traditional long distance calls, in contrast,
are made using a technology called "circuit switching" which carries these calls
over traditional telephone networks. Circuit switching requires a dedicated
connection between the caller and the recipient that must remain open for the
duration of the call. In contrast, packet-switching technology allows data
packets representing multiple conversations to be carried over the same line.
This greater efficiency creates significant network cost savings that can be
passed on to the consumer in the form of lower long distance and other telephony
products. Additionally, IP allows various telephony products to utilize the same
network, which results in an increased flexibility for a robust product
offering.
We have filed a patent application for a communications enabled browser
and have filed a trademark application for the mark "CAB" as applied to the
browser software. Both of these applications are currently pending approval.
Effective May 19, 2000, we completed the acquisition of Synetric
pursuant to a definitive Stock Agreement whereby we acquired all of the issued
and outstanding shares of Synetric from eight (8) individuals, including
officers and directors of Synetric. Pursuant to the Stock Agreement, we issued
286,458 shares of restricted common sock. The Stock Agreement provides that of
the 286,458 shares delivered at closing, 33,229 shares will be held in escrow
for a period of one (1) year following the closing to satisfy any future
indemnification claims. Additionally, the Company issued 20,000 shares of
restricted common stock to a consultant in connection with the acquisition of
Synetric.
On June 30, 2000, we completed an acquisition from World Access
Telecommunications Group, Inc. of a division doing business as Enhanced
Communications (the "Division") pursuant to an Asset Purchase Agreement ("Asset
Agreement"). As consideration for the acquisition, we paid to World Access $6.0
million in cash, issued a convertible promissory note in the principal amount of
$2.1 million and assumed liabilities in an approximate amount of $3.3 million,
including approximately $2.7 million of assumed capital lease obligations. The
effective date of the acquisition was June 1, 2000.
Revenue From Operations
Currently, 99% of our revenues are derived from long distance services,
including pre-paid services and Internet services. One of the Company's initial
strategies is to continue to acquire existing customer bases concentrated in
specific geographical areas which complement our current markets and convert
them to our IP network. We also anticipate deriving revenues through direct
sales by our existing employees, independent agents, and by leveraging our
relationship with Cisco. In the future, in order to diversify, we plan to
introduce a variety of value added services utilizing our VoIP network
including:
. Unified messaging;
. IP video conferencing;
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<PAGE>
. IP video; and
. Wireless local loop.
Revenue from the acquisitions of Synetric and from World Access
Telecommunications Group, Inc. of a division doing business as Enhanced
Communications for the three and six months ended June 30, 2000 were
approximately $4.6 million. For the first time, for the three months ended June
30, 2000, margins from revenue exceeded our direct costs to offer those
services. These cost include leased bandwidth, connection to the Internet, local
lines within a local calling area, and minutes terminated on other carrier
networks.
We will continue to expand our network to handle projected volume,
which will result in better efficiency. This coupled with converging various
products (voice, video, data and Internet) over the same network are the key
ingredients to approach profitability. The Company, as it continues to grow and
build network, is not expected to be profitable in the foreseeable future.
There are little or no seasonal changes in the revenue stream of the
Company's business.
Cost Structure
Our costs and expenses include:
. network costs;
. selling and marketing;
. general and administrative; and
. interest and depreciation.
Network costs primarily consist of costs associated with the routing
and termination of our customers' traffic. The costs include:
. leased bandwidth and connection to the Internet;
. local lines used to carry calls to and from our network
locations;
. our network facilities; and
. calls terminated over other carrier networks.
We expect these costs to increase into the future as we further expand
our network in the United States and throughout the world. The Company will
continue to incur network costs in order to continue to grow revenue. The
network will have to be expanded to handle additional volume.
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<PAGE>
Direct expenses consist primarily of telecommunication equipment and
transportation costs. Due to the acquisitions of Synetric and from World Access
Telecommunications Group, Inc. of a division doing business as Enhanced
Communications, direct expense increased by approximately $4.2 million for the
three and six months ended June 30, 2000.
Sales and marketing expenses include the expenses associated with acquiring
customers, establishing brand recognition, commissions paid to our sales
personnel, advertising costs and customer referral fees. We expect sales and
marketing expenses to increase over time as we aggressively market our products
and services.
During the second quarter of 2000, sales and marketing expenses increased
as a result of new personnel and the start of various marketing campaigns. Sales
and marketing expenses are expected to increase both in terms of absolute
dollars and as a percentage of revenue as our revenue grows. We expect to spend
significant expenditures to build brand recognition to the extent possible due
to our relatively small size. Much of our sales and marketing expenses are
anticipated to be expanded to obtain strategic relationships with a variety of
agents, publications, portals, content providers and other key customer
destinations on the Web.
General and administrative expenses consist of the salaries of our
employees and associated benefits, and the cost of travel, business
entertainment, rent and utilities. A large portion of our general and
administrative expenses is allocated to operations and customer support.
Customer support expenses include the costs associated with customer service and
technical support, and consist primarily of the salaries and employment costs of
the employees responsible for those efforts. We expect operations and customer
support expenses to increase over time to support new and existing customers. We
expect general and administrative costs to increase to support our growth,
particularly as we establish a larger organization to implement our business
plan. We plan to incur costs for product development, though they are not
expected to increase as a percentage of revenue. Over time, we expect these
relatively fixed general and administrative expenses to decrease as a percentage
of revenue, primarily as a consequence of increased revenues.
Interest expense includes the amortization of debt issuance costs in
connection with the issuance of the short-term notes, interest on the notes,
interest expense on our capital lease obligations and amortization of commitment
fees on our Cisco debt facility. As of June 30, there were no borrowings under
the Cisco facility. The notes have a term of nine-months with an interest rate
of 13.35%. During the six months ended June 30, 2000, we had net interest
expense in the aggregate amount of $514,976.
Depreciation primarily relates to our telecommunications equipment. We
depreciate this equipment over its estimated useful life of five to seven years
using the straight-line method. In addition, we will be adding more originating
and terminating IP Gateways as traffic volumes justify. We expect depreciation
to increase in absolute terms as we grow our networks to support new and
acquired customers, but to decrease as a percentage of total revenue.
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<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the three months and six months ended
June 30, 2000 and 1999, respectively, the results of operations of the Company.
<TABLE>
<CAPTION>
Three Month Period Ended Six Month Period Ended
June 30, June 30,
2000 1999 2000 1999
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES $ 5,296,991 $ 135,760 $ 5,706,799 $ 259,960
EXPENSES:
Direct expenses 4,946,360 307,839 5,571,932 460,805
General and admin. expenses 2,664,997 543,849 4,132,515 1,081,931
----------- --------- ----------- -----------
Total expenses 7,611,357 851,688 9,704,447 1,542,736
----------- --------- ----------- -----------
OPERATING LOSS (2,314,366) (715,928) (3,997,648) (1,282,776)
OTHER INCOME (EXPENSE):
Interest income 2,071 2,785 12,885 3,377
Interest expense (212,443) (272,536) (527,861) (344,472)
----------- --------- ----------- -----------
Total other expense (210,372) (269,751) (514,976) (341,095)
----------- --------- ----------- -----------
NET LOSS $(2,524,738) $(985,679) $(4,512,624) $(1,623,871)
=========== ========= =========== ===========
</TABLE>
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30,
1999
Revenue increased to $5,296,991 for the three months ended June 30, 2000
from $135,760 for the three months ended June 30, 1999. The increase is a
result of our business moving from the start-up phase into an operational entity
(approximately $568,000) and the acquisitions of Enhanced Communications on June
1, 2000 and Synetric on May 19, 2000 (approximately $4,593,000). Of revenue
generated for the three months ended June 30, 2000, revenue from wholesale voice
sales accounted for approximately 97%. The remainder was the result of
wholesale Internet and equipment sales. We expect our wholesale revenue to
continue to grow, as we continue to expand our network into additional
locations. We have expanded our points of presence ("POPs") in major markets to
handle DS-3 traffic. The focus on the wholesale revenue gives us the ability to
grow our network and offer more on-net locations to the enterprise market. The
enterprise market will primarily consist of large corporate customers interested
in converged IP telephony products.
Total direct costs increased to $4,946,360 for the three months ended June
30, 2000 from $307,839 for the three months ended June 30, 1999. Approximately
$4.2 million of the
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increase in direct costs for the three months ended June 30, 2000 as compared to
the three months ended June 30, 1999 is primarily a result of our acquisitions.
As we expand our network to DS-3 level service in each of our major markets, we
expect network cost to continue to increase. We have continued to purchase
additional equipment to expand our IP network therefore direct costs have
increased. As we continue to implement several of the new wholesale contracts,
in the second quarter of fiscal year 2000, direct costs as a percentage of
revenue are expected to decrease for a period of time and then track as a
percentage of revenue.
General and Administrative costs increased to $2,190,132 for the three
months ended June 30, 2000 from $299,646 for the three months ended June 30,
1999. As we continue to build our network, expand our product offering,
amortization of acquisition costs, amortization of deferred compensation costs
and execute our business plan, we expect these expenses to continue to increase.
The primary reason for this increase relates to expanded marketing efforts and
hiring of additional personnel. These costs are expected to increase as a
percentage of revenue for a period, until all necessary personnel and systems
are in place to handle future revenue and support future products. Thereafter,
we anticipate that general and administrative costs will increase but not as a
percentage of revenues.
Depreciation and Amortization costs increased to $474,865 for the three
months ended June 30, 2000 from $244,203 for the three months ended June 30,
1999. Depreciation consists primarily of the depreciation of our IP gateways
and other telecom equipment. We depreciate this network equipment over five to
seven years on a straight-line basis. It can be expected that depreciation will
continue to increase as we continue to expand our network. Amortization expense
consists of the amortization of goodwill from the acquisitions of Enhanced
Communications (effective June 1, 2000) and Synetric (effective May 19,
2000).
Net Interest expense decreased to $210,372 for the three months ended June
30, 2000 from $269,751 for the three months ended June 30, 1999. This decrease
is the result of the repayment of short-term notes during the second quarter
2000. We expect interest to increase throughout the rest of fiscal year 2000, as
a result of the acquisition of Enhanced Communications and the use of the Cisco
credit facility to purchase equipment.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Revenue increased to $5,706,799 for the six months ended June 30, 2000 from
$259,960 for the six months ended June 30, 1999. The increase is a result of
our business moving from the start-up phase into an operational entity
(approximately $853,000), the acquisitions of Enhanced Communications on June 1,
2000 and Synetric on May 19, 2000 (approximately $4,593,000). Of revenue
generated in for the six months ended June 30, 2000, revenue from wholesale
voice sales accounted for approximately 97%. The remainder was the result of
wholesale Internet and equipment sales. We expect our wholesale revenue to
continue to grow, as we continue to expand our network into additional
locations. We have expanded our POPs in major markets to handle DS-3 traffic.
The focus on the wholesale revenue gives us the ability to grow our network and
offer more on-net locations to
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<PAGE>
the enterprise market. The enterprise market will primarily consist of large
corporate customers interested in converged IP telephony products.
Total direct costs increased to $5,571,932 for the six months ended June
30, 2000 from $460,805 for the six months ended June 30, 1999. Approximately
$4.2 million of the increase in direct costs is primarily a result of our
acquisitions. As we expand our network to DS-3 level service in each of our
major markets, we expect network cost to continue to increase. We have continued
to purchase additional equipment to expand our IP network therefore direct costs
have increased. As we continue to implement several of the new wholesale
contracts, in the second quarter of fiscal year 2000, direct costs as a
percentage of revenue are expected to decrease for a period of time and then
track as a percentage of revenue.
General and Administrative costs increased to $3,260,400 for the six months
ended June 30, 2000 from $809,931 for the six months ended June 30, 1999. As we
continue to build our network, expand our product offering, amortization of
acquisition costs, amortization of deferred compensation costs and execute our
business plan, we expect these expenses to continue to increase. The primary
reason for this increase relates to expanded marketing efforts and hiring of
additional personnel. These costs are expected to increase as a percentage of
revenue for a period, until all necessary personnel and systems are in place to
handle future revenue and support future products. Thereafter, we anticipate
that general and administrative costs will increase but not as a percentage of
revenues.
Depreciation and Amortization costs increased to $872,115 for the six
months ended June 30, 2000 from $272,000 for the six months ended June 30, 1999.
Depreciation consists primarily of the depreciation of our IP gateways and other
telecom equipment. We depreciate this network equipment over five to seven
years on a straight-line basis. It can be expected that depreciation will
continue to increase as we continue to expand our network. Amortization expense
consists of the amortization of goodwill from the acquisitions of Enhanced
Communications (effective June 1, 2000) and Synetric (effective May 19,
2000).
Net Interest expense increased to $514,976 for the six months ended June
30, 2000 from $341,095 for the six months ended June 30, 1999. This increase is
the result of the increase in the issuance of short-term notes and the
commissions paid to broker-dealers for the sale of these notes throughout 1999
and through February 2000. In February 2000, we began to repay these notes. The
current principal balance is $1.4 million. Additionally, we incur interest
expense for the financing of our capital equipment.
Liquidity And Capital Resources
Since January of 1998 NVT, Inc. has privately issued a series of promissory
notes. These funds were used primarily to continue the build-out of our IP
network, which includes equipment purchases, and for working capital. The terms
of these notes are nine-months with an interest rate of 13.35%. The notes are
secured by revenues from contracts, equipment and a 10% cash reserve. The
Company received a waiver from the Trustee to waive this requirement as of
December 31, 1999, and as of February 23, 2000, the Company has
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complied with the debt covenant requirement. Since February 2000, the Company
has not issued any of these promissory notes and has begun to repay the amount
of short-term debt.
At June 30, 2000, we had approximately $1.4 million outstanding in such
notes. All of the Notes will mature on or before November 2000. At this time,
we intend to repay the Notes with existing cash.
In February 2000, we sold to all accredited investors 1,200,000 shares of
our Common Stock at $4.50 per share through a Private Placement Memorandum for
$5.1 million. The cost of the offering was $125,000 for finder's fees. On
February 3, 2000, closing sale of our common stock as quoted in the Pink Sheets
was $9.69 per share. The net proceeds were primarily used for marketing,
network expansion, working capital and the repayment of short-term debt.
On May 31, 2000, we completed a credit facility with Cisco that provides
$25.0 million in funding. The funding will be used primarily to fund equipment
purchases in order to expand our network. The funding, in the form of a loan,
is to be used for equipment purchases from Cisco and soft costs to install that
equipment. The Company will receive the funding from Cisco over a period of 5
years and will be required to repay the principal plus interest at a rate of
approximately 5.5% over LIBOR. There are no principal payments due until
September 30, 2001. As of June 30, 2000, we have no balance outstanding on this
facility.
On May 18, 2000, we completed the acquisition of 100% of the outstanding
shares of Synetric for 286,458 shares of the Company's restricted common stock.
The stock purchase agreement provides that of the 286,458 shares delivered at
closing, 33,229 shares will be held in escrow for a period of one (1) year
following the closing to satisfy any future indemnification claims. As part of
the acquisition approximately $2.7 million of goodwill has been recorded and is
being amortized over 10 years. Additionally, the Company issued 20,000 shares
of restricted common stock to a consultant in connection with the acquisition of
Synetric.
On June 30 and July 28, 2000, we completed the issuance of 4,398,658 shares
of the Series A preferred stock at $3.50 per share for approximately $13.2
million to certain investors in a private equity offering. The closing price of
common stock on June 30, 2000 as quoted in the Pink Sheets was $8.75 per share
and the closing sale price on July 28, 2000 was $8.25 per share. Pursuant to
the Amended and Restated Securities Purchase Agreement, if the Company's
earnings before interest, taxes, depreciation and amortization ("EBITDA") is
more than or equal to negative $2.5 million as of December 31, 2000 then Company
must issue approximately 284,000 warrants to certain investors to purchase
additional shares of Series A preferred stock, or common stock if the Series A
preferred stock has been converted at the time of warrant issuance. The EBITDA
warrants have an exercise price of $0.01 per share and shall expire on the date
immediately following the day upon which the Company's audited financial
statements are delivered to the Company by its independent auditors, but in no
event later than April 2, 2001. Pursuant to the Amended and Restated Securities
Purchase Agreement, the Company may be required to issue approximately 240,000
warrants to certain investors to purchase additional shares of Series
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<PAGE>
A preferred stock, or common stock if converted, by November 1, 2000 if the
Company has not been listed on NASDAQ. These warrants have an exercise price of
$0.01 per share and shall expire on June 30, 2010. The investors were also
granted certain registration rights with respect to the shares issued under the
Securities Purchase Agreement pursuant to a Registration Rights Agreement. Net
proceeds from this offering are to be used for continued network expansion and
for working capital.
The Company allocated the entire net proceeds received from the issuance of
the Series A preferred stock of $13,173,810 to the beneficial conversion feature
on the issuance of the Series A preferred stock. The beneficial conversion
feature was calculated at the issuance date of the Series A preferred stock
based on the difference between the conversion price per share and the estimated
market value of the common stock at that date. The amount, however, was limited
to the proceeds received from issuing the beneficial convertible security. The
Series A preferred stock holders have the right, at no additional cost, to
convert at the option of each holder, at any time after six months of closing,
into a like number of shares of the Company's common stock. The Company will
record the accretion of $13,173,810 to additional paid-in capital over the
subsequent six-month period. The Company can convert the Series A preferred
stock into the Company's common stock if the average of the closing price of the
common stock for any twenty-one (21) trading day period exceeds $27.50 per share
and the shares of common stock are registered and freely tradeable. In this
instance, each share of Series A preferred stock could be converted, at no
additional cost to the shareholder, into one share of common stock. The Series A
preferred stock ranks senior to all classes of common stock.
On June 30, 2000, we completed an acquisition of certain assets and
liabilities of Enhanced Communications, a division of World Access
Telecommunications Group, Inc. for $6.0 million in cash, $2.1 million in a
convertible secured note and assumed liabilities of approximately $3.3 million,
including approximately $2.7 million of assumed capital lease obligations. The
debt is payable to World Access over a period of four years at a rate of 2% over
LIBOR. There are no principal payments due until December 31, 2001. The holder
of the convertible secured note, at any time prior to or on the maturity date,
may convert the then outstanding principal amount into shares of the Company's
common stock at the current market price or a price not less than $10.00 per
share. Substantially all of the assets of this subsidiary are pledged as
collateral for this Note. Additionally, the parent Company is fully and
unconditionally liable for the payment of the Note to World Access. As part of
the acquisition approximately $7.1 million of goodwill has been recorded and is
being amortized over 10 years.
As of June 30, 2000, we had approximately $3.9 million in cash and cash
equivalents. Our operating activities used cash of approximately $2.1 million
for the six months ended June 30, 2000, compared to approximately $1.4 million
for the six months ended June 30, 1999. Our cash used in operating activities
was principally for the result of the Company losses. Cash used in investing
activities for the six months ended June 30, 2000 was approximately $8.2 million
and $0.2 million for the six months ended June 30, 1999. Our cash used in
operating and investing activities was principally for the acquisition of
Enhanced Communications, the purchase of telecommunications and Internet
equipment.
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<PAGE>
Our financing activities provided cash of approximately $14.3 million and $1.8
million for the six months ended June 30, 2000 and 1999, respectively. The
principal sources of the cash provided were additional funding from the sale of
the Series A preferred stock and common stock offerings in February and May
2000.
Our future capital requirements will depend on numerous factors, including:
. market acceptance of our services;
. brand promotions;
. the amount of resources we devote to the development of our current and
future products; and
. the expansion of our in-house sales force and marketing our services.
We may experience a substantial increase in our capital expenditures and
lease arrangements consistent with the growth in our operations and adding
additional personnel. Our current cash flow from operations is not sufficient to
meet our working capital and capital expenditure needs for at least the next
twelve (12) months and accordingly, we have obtained and will continue to seek
additional financing. Accordingly, there can be no assurance that we will have
sufficient capital to finance potential acquisitions or other growth oriented
activities, and may issue additional equity securities, incur debt or obtain
other financing. We have no other material capital commitments.
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<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are not currently a party to any legal proceedings, nor are we aware of
pending or threatened litigation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
In February 2000, the Company sold 1,200,000 shares of its Common Stock at
$4.25 to 79 investors for a total of $5,100,000. Finders fee of $125,000 were
paid in connection with the sales. The shares of Common Stock issued by the
Company in connection with this offering are deemed "restricted securities"
within the meaning of that term as defined in Rule 144 of the Securities Act of
1933, as amended ("Act") and were issued pursuant to certain "private placement"
exemptions under Section 4(2) and rule 506 of Regulation D of the Act, as
promulgated by the Securities and Exchange Commission. The sales of the Common
Stock were to "accredited" investors, as that term is defined in rule 501 of
Regulation D of the Act, and were transactions by the Company not involving any
public offering. Although not required, all such accredited investors had access
to information on the Company necessary to make an informed investment decision.
All of the aforesaid purchasers were fully informed and advised concerning the
Company, its business, financial and other matters by way of a Private Placement
Memorandum. All of the aforesaid securities have been appropriately marked with
a restricted legend and are "restricted securities," as defined in Rule 144 of
the rules and regulations of the Securities and Exchange Commission. The
Company's transfer agent has been instructed to mark "stop transfer" on its
ledgers to assure that these securities will not be transferred absent
registration or until the availability of an exemption therefrom is determined.
The proceeds of this offering were used for working capital, marketing efforts
and payment of short-term debt.
In February 2000, the Company declared a 2-for-1 stock split of all
outstanding shares for all stockholders of record as of March 14, 2000.
Retroactive effect has been given to the stock split in stockholders' equity
accounts as of December 31, 1999, and in all share and per-share data in the
accompany consolidated unaudited interim financial statements.
On June 30, 2000, the Company issued 3,578,349 shares at $3.25 share of a
the Series A preferred stock to certain purchasers for approximately $10.6
million in cash pursuant to a Securities Purchase Agreement among the Company
and the purchasers (the "Securities Purchase Agreement"). Pursuant to the
Securities Purchase Agreement, if the Company's earnings before interest, taxes,
depreciation and amortization ("EBITDA") is more than or equal to negative $2.5
million as of December 31,2000 then Company must issue approximately 238,000
warrants to certain investors to purchase additional shares of Series A
preferred stock, or common stock if the Series A preferred stock has been
converted at the time of warrant issuance. The EBITDA warrants have an exercise
price of
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<PAGE>
$0.01 per share and shall expire on the date immediately following the day upon
which the Company's audited financial statements are delivered to the Company by
its independent auditors, but in no event later than April 2, 2001. Pursuant to
the Securities Purchase Agreement, the Company may be required to issue
approximately 201,000 warrants to certain investors to purchase additional
shares of Series A preferred stock, or common stock if converted, by November 1,
2000 if the Company has not been listed on NASDAQ. These warrants have an
exercise price of $0.01 per share and shall expire on June 30, 2010. The
purchasers were also granted certain registration rights with respect to the
shares issued under the Securities Purchase Agreement pursuant to a Registration
Rights Agreement. The proceeds of this offering were used fund the acquisition
of a division doing business as Enhanced Communications from World Access
Telecommunications Group, Inc.
On July 28, 2000, the Company issued an additional 820,309 shares of the
Series A preferred stock to certain purchasers for approximately $2.6 million in
cash pursuant to the Amended and Restated Securities Purchase Agreement.
Pursuant to the Amended and Restated Securities Purchase Agreement, if the
Company's earnings before interest, taxes, depreciation and amortization
("EBITDA") is more than or equal to negative $2.5 million as of December 31,2000
then Company must issue approximately 46,000 warrants to certain investors to
purchase additional shares of Series A preferred stock, or common stock if the
Series A preferred stock has been converted at the time of warrant issuance.
The EBITDA warrants have an exercise price of $0.01 per share and shall expire
on the date immediately following the day upon which the Company's audited
financial statements are delivered to the Company by its independent auditors,
but in no event later than April 2, 2001. Pursuant to the Amended and Restated
Securities Purchase Agreement, the Company may be required to issue
approximately 39,000 warrants to certain investors to purchase additional shares
of Series A preferred stock, or common stock if converted, by November 1, 2000
if the Company has not been listed on NASDAQ. These warrants have an exercise
price of $0.01 per share and shall expire on June 30, 2010. The purchasers were
also granted certain registration rights with respect to the shares issued under
the Amended and Restated Securities Purchase Agreement pursuant to the Amended
and Restated Registration Rights Agreement. The proceeds of this offering were
used for working capital, marketing efforts and payment of short-term debt.
ITEM 3. DEFAULT UPON SENIOR SECURITIES.
There was no default upon our senior securities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
None.
(b) Reports on Form 8-K
(1) On May 19, 2000, we filed a Form 8-K (pursuant to Item 2 and 7) in
connection with the acquisition of Synetric, Inc. pursuant to a
definitive Stock Purchase Agreement ("Agreement") whereby we acquired
all of the issued and outstanding shares of Synetric from eight (8)
individuals, including officers and directors of Synetric. Pursuant to
the Agreement, we issued 286,458 shares of the Company's restricted
common stock. The Agreement provides that of the 286,458 shares
delivered at closing, 33,229 shares will be held in escrow for a
period of one (1) year following the closing to satisfy any future
indemnification claims.
(2) On June 23, 2000, we filed a Form 8-K (pursuant to Item 5) in
connection to a Credit Agreement with Cisco Systems Capital
Corporation. The Credit Agreement permits the Company to borrow up to
$15,000,000 for a twelve-month period and an additional $10,000,000
for a twelve-month period after year one. We must utilize the proceeds
of the Credit Agreement of up to $20,000,000 for the financing of the
purchase of Cisco Systems networking hardware and up to $5,000,000 for
the costs of integration and installation of Cisco Systems solutions.
(3) On June 30, 2000, we filed a Form 8-K (pursuant to Item 2, 5 and 7) in
connection with the acquisition of certain assets and liabilities of
Enhanced Communications, a division of World Access Telecommunications
Group, Inc. for $6.0 million in cash, $2.1 million in a convertible
secured note and assumed liabilities of approximately $3.3 million and
the issuance of 3,578,349 shares of newly created series of Series A
preferred stock to certain purchasers for approximately $10.6 million
in cash.
(4) On August 17, 2000, we filed a Form 8-K (pursuant to Item 5) in
connection with the issuance of an additional 818,309 shares of a
newly created series of Series A preferred stock to certain purchasers
for approximately $2.6 million in cash pursuant to the Amended and
Restated Securities Purchase Agreement among the Company and the
purchasers.
(5) On September 24, 2000, we filed an amended Form 8-K (pursuant to Item
5 and 7) in connection with the acquisition of Synetric, Inc. pursuant
to a definitive Stock Purchase Agreement.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NETVOICE TECHNOLOGIES CORPORATION
Date: November 3, 2000 By: /s/ JEFFREY ROTHELL
-------------------------------------------
Jeffrey Rothell, President, Chief Executive
Officer
Date: November 3, 2000 By: /s/ GARTH COOK
-------------------------------------------
Garth Cook, Treasurer, Chief Financial
Officer and Chief Accounting Officer
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