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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
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Commission file number 1-5486
QUENTRA NETWORKS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 36-2448698
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1640 South Sepulveda Boulevard, Suite 320, Los Angeles, California 90025
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(Address of principal executive offices) (Zip Code)
(800) 935-8506
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
|X| YES |_| NO
At August 1, 2000, the Registrant had issued and outstanding an aggregate of
18,388,002 shares of its common stock.
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<PAGE>
QUENTRA NETWORKS, INC.
AND SUBSIDIARIES
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets............................................. 1
Statements of Operations................................... 2
Statements of Cash Flows................................... 3
Notes to Financial Statements.............................. 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 11
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds................. 13
Item 6. Exhibits and Reports on Form 8-K.......................... 13
Signatures .......................................................... 14
i
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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QUENTRA NETWORKS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
June 30, 2000 March 31, 2000
Assets (Unaudited)
Current assets: ------------- --------------
<S> <C> <C>
Cash and cash equivalents $ 2,677 $ 16,278
Receivables, net of allowance of $700 at June 30, 2000 and
Notes receivable - current 968 284
Deposits and other current assets 931 1,558
Net current assets of discontinued operations 47 ---
--------- --------
Total current assets 8,049 21,748
Property and equipment, net 5,343 4,668
Intangible assets, net 8,542 2,070
Net long term assets of discontinued operations --- ---
Notes receivable - non-current 719 632
Investments and other assets 1,111 850
--------- ---------
$ 23,764 $ 29,968
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Lines of credit $ 541 $ 1,705
Accounts payable 3,937 6,665
Other accrued liabilities 3,721 5,657
Deferred revenue and customer deposits 910 761
Current portion of long-term debt and capital lease obligations 1,461 1,572
Notes payable - current 333 2,130
Discontinued operations - reserve for loss on disposal --- 792
--------- ---------
Total current liabilities 10,903 19,282
Notes payable 1,083 ---
Long-term debt 1,393 1,393
Capital lease obligations 1,159 1,369
Other liabilities 473 366
Shareholders' equity:
Preferred stock - $.01 par value: authorized 10,000,000 shares;
Series A: 124 shares issued and outstanding,
Series B: 3,157,895 issued and outstanding, liquidation
Common stock - $1 par value: authorized 70,000,000 shares, issued
18,139,143 and 18,106,593 shares 18,139 18,107
Additional paid-in capital 139,015 132,075
Deferred compensation (258) (278)
Accumulated deficit (171,254) (165,497)
Treasury stock at cost (5,757) (5,757)
---------- ----------
Total shareholders' equity 8,793 7,558
--------- ---------
$ 23,764 $ 29,968
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
1
<PAGE>
QUENTRA NETWORKS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
3 MONTHS ENDED
----------------------------------
June 30, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
Net sales $ 5,067 $ 1,860
Cost of goods sold 4,275 1,413
--------- ---------
Gross profit 792 447
Selling and administrative expenses 6,138 2,456
--------- ---------
Operating loss (5,346) (2,009)
Interest income (expense), net 12 (352)
Other non-operating income (expense) --- 184
--------- ---------
Loss from continuing operations (5,334) (2,177)
Loss from discontinued operations (189) (1,498)
---------- ----------
Net loss $ (5,523) $ (3,675)
========== ==========
Preferred stock dividends $ (231) $ (79)
Net loss (5,523) (3,675)
---------- ----------
Loss applicable to common shareholders $ (5,754) $ (3,754)
========== ==========
Loss per common share (basic & diluted):
Continuing operations $ (.32) $ (.20)
Discontinued operations (.01) (.14)
---------- ----------
Net loss per common share (basic & diluted) $ (.33) $ (.34)
========== ==========
Weighted average number of common shares outstanding
(basic & diluted) 17,420 11,207
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
QUENTRA NETWORKS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
3 MONTHS ENDED
-------------------------------
June 30, 2000 June 30, 1999
------------- -------------
Operating activities:
<S> <C> <C>
Net loss $ (5,523) $ (3,675)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 528 211
Compensation expense relating to stock options and warrants 261 100
Other --- (79)
Common stock and options granted for services 765 ---
Net change in discontinued operations (839) (1,750)
Changes in current assets and liabilities (3,707) 170
----------- --------
Net cash used in operating activities (8,515) (5,023)
------- ---------
Investing activities:
Purchases of property and equipment (928) (1,198)
Change in notes receivable --- (34)
Investment in joint ventures and acquisitions (1,875) ---
Net change in discontinued operations --- (91)
---------- --------
Net cash used by investing activities (2,803) (1,323)
----------- ---------
Financing activities:
Repayments (net of issuances) of debt and capital lease obligations (1,036) (271)
Common stock issued, net of expenses --- 10,226
Preferred Dividends (231) ---
Redemption of preferred stock --- (4,000)
Exercise of options & warrants 148 ---
Increase in AGT notes payable --- 866
Decrease in borrowing on line of credit (1,164) (356)
----------- ---------
Net cash provided by (used in) financing activities (2,283) 6,465
----------- --------
Increase (decrease) in cash and cash equivalents (13,601) 119
Cash and cash equivalents:
At beginning of the period 16,278 1,225
---------- --------
At end of the period $ 2,677 $ 1,344
========== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
QUENTRA NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 BASIS OF PRESENTATION
--------------------------------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Certain prior year balances have been changed to conform to the
current period presentation.
Operating results for the three months ended June 30, 2000, are not necessarily
indicative of results to be expected for the fiscal year ending March 31, 2001.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
fiscal year ended March 31, 2000.
Effective July 2000, the Company amended its Articles of Incorporation changing
its name from Coyote Network Systems, Inc. to Quentra Networks, Inc.
NOTE 2 DISCONTINUANCE OF SWITCH BUSINESS
--------------------------------------------
In May 2000, the Board of Directors of the Company approved a restructuring plan
that provides for the discontinuance and disposal of the DSS Switch segment of
the business, which includes Coyote Technologies, LLC, Coyote Communications
Services, LLC and TelecomAlliance. As a result, the Company has reported the
operations of the DSS Switch business separately as discontinued operations in
the accompanying consolidated statement of operations. Also the assets and
liabilities of this segment are presented separately and summarized in the
accompanying consolidated balance sheets as follows (dollars in thousands):
<TABLE>
<CAPTION>
June 30, 2000 March 31, 2000
------------- --------------
Current assets: (Unaudited)
<S> <C> <C>
Accounts receivable, net of reserves $ 144 $ 1,642
Inventory 456 3,716
Accrued liabilities (452) (2,189)
------- ---------
148 3,169
Less - reserve for loss on disposition (100) (3,169)
------- ---------
Net current assets of discontinued operations $ 47 $ ---
====== =========
Property and equipment, net $ --- $ 2,118
Capitalized software development and intellectual rights --- 4,921
------ --------
--- 7,039
Less - reserve for loss on disposition --- (7,039)
------ --------
Net long-term assets of discontinued operations $ --- $ ---
====== ========
</TABLE>
4
<PAGE>
On June 16, 2000, the Company entered into an agreement and bill of sale with
Carrier Solutions, LLC (Carrier Solutions) whereby the Company transferred all
of its interests in the switch business inventories and fixed assets to Carrier
Solutions. The purchase price for these assets is a percentage (60% for the
first year commencing June 16, 2000, 40% for the second year and 20% for the
third year) of the gross sale proceeds received by Carrier Solutions for its
sale of switch equipment. Additionally, the Company entered into a technology
license agreement with Carrier Solutions that grants a nonexclusive license to
use the DSS switch and all related intellectual property rights. As part of the
license agreement, the Company will receive a license fee of 10% of Carrier
Solutions' gross sales (as defined by the agreement) for three years from June
16, 2000. As of June 30, 2000, there were no amounts earned or due to the
Company from Carrier Solutions for equipment sales or license fees.
Expected operating losses relating to the discontinued operations from April 1,
2000 until the expected disposal date was included in a reserve against net
assets of discontinued operations at March 31, 2000. The Company recorded a
charge for estimated loss on disposal of the switch business of approximately
$11.0 million in the fourth quarter of fiscal 2000, which included an estimated
$3.0 million of expected losses of the segment for the first two quarters of
fiscal 2001. As of June 30, 2000, an additional reserve of $100,000 for expected
future operating losses is included in the net current assets of discontinued
operations.
The operating results relating to the discontinued segments are as follows
(dollars in thousands):
3 Months Ended
-------------------------------
(Unaudited)
June 30, 2000 June 30, 1999
------------- -------------
Net sales $ 0 $ 2,646
===== ========
Income (loss) from discontinued operations $(189) $ (1,188)
====== ========
After the decision to discontinue the switch business, the Company is operating
in only one segment, long distance services.
Included in the June 1999 loss from discontinued operations is $310,000 that was
related to a restructuring that took place in November 1996.
NOTE 3 ACQUISITIONS
---------------------------------------------
On April 30, 2000, the Company purchased certain assets, consisting of a
customer base of approximately 4,000 residential and small business long
distance customers (the "Matrix Base") from Group Long Distance, Inc., or GLDI,
a non-facilities based reseller of long distance services to more than 15,000
small and medium-sized businesses and residential customers. The purchase price
for the Matrix Base was $1,000,000, payable with $100,000 in cash and a
promissory note in the principal amount of $900,000 bearing interest at 8%, with
interest only payable monthly, maturing April 30, 2002, secured by the assets
sold. On May 1, 2000, the Company entered into a Merger Agreement with GLDI
pursuant to which a subsidiary of the Company would merge into GLDI. The Company
will issue 750,000 shares of the Company's common stock (subject to adjustment
based upon the trading price of the common stock prior to closing) to GLDI's
shareholders upon the consummation of the merger; however, the minimum number of
shares of common stock that the Company will issue in the merger is 562,500
shares. Under the terms of the merger agreement, either party may cancel the
merger if the five-day average price of the Company's common stock is less
5
<PAGE>
than $4.00 per share. The merger is subject to certain closing conditions,
including approval of the GLDI shareholders and effectiveness of a registration
statement registering the 750,000 shares to be issued in the merger.
On May 10, 2000, the Company entered into an Agreement and Plan of Merger,
subsequently amended on May 26, 2000 and July 28, 2000 (the "Merger Agreement"),
under which the Company agreed to acquire Primary Knowledge, Inc., a California
corporation in the process of changing its name to HomeAccess MicroWeb, Inc.
("HomeAccess"). HomeAccess is a developer of local community on-line exchange
services that are expected to enable customers to select, order and pay for
products and services on-line from local merchants using personal computers or
less expensive screen phones. Upon consummation of the merger, the Company has
agreed to issue 1,384,178 shares of Series C Preferred Stock and between
10,631,250 and 5,315,625 shares of Common Stock (dependent upon the price of the
Common Stock on the closing date) to the stockholders of HomeAccess. The shares
of Series C Preferred Stock are convertible into between 4,556,252 and 2,278,126
shares of Common Stock, dependent upon the price of the Common Stock on the
closing date. For a period of four years after consummation of the merger, the
Company has agreed to issue to the shareholders of HomeAccess, collectively, two
shares of Common Stock for each new customer acquired by HomeAccess; provided
the customer has been preapproved by the Company and has met certain performance
criteria. In no event will the maximum number of shares issued under this
program exceed 13% of the total number of shares of Common Stock outstanding, on
a fully diluted basis, on the closing date. The Company has also agreed to issue
a warrant to purchase up to 3,600,000 shares of Common Stock at an exercise
price of $12 per share if certain performance criteria are met. The consummation
of the transactions contemplated by the Merger Agreement are subject to certain
contingencies, including stockholder approval.
In June 2000, the Company entered into a Stock Purchase Agreement with Ariana
Telecommunications, Inc. (Ariana) and its shareholders. Under this agreement, on
June 1, 2000 the Company acquired 100% of the stock of Ariana for 437,139 shares
of Company common stock valued at $3,000,000. The number of shares issued was
based on the average closing price of the Company's stock over the five trading
days preceding May 6, 2000. The agreement provides for up to an additional
$3,000,000 of Company stock to be issued if certain earn-out events occur.
Ariana provides long distance services, primary through prepaid calling cards,
to targeted ethnic markets. Its core business is concentrated in the Los
Angeles-San Diego corridor.
In June 2000, the Company entered into a Stock Purchase Agreement to acquire
100% of the stock of Polylink Development, Ltd. for $250,000 cash and 150,000
shares of Company common stock valued at $900,000. Polylink Development, Ltd. is
a Hong Kong based telecommunications provider. The agreement provides for an
additional payment of $250,000 cash if an earn-out event occurs. Additionally,
the Company entered into an agreement to acquire 100% of the stock of Polylink
Gateway International, Inc., an affiliate of Polylink Development, Ltd. for
108,064 shares of Company common stock valued at $648,384. These acquisitions
were consumated on June 2, 2000.
In connection with the above acquisitions, the Company recorded goodwill of
approximately $5.8 million. These acquisitions had an insignificant effect on
results of operations for the quarter ended June 30, 2000.
6
<PAGE>
NOTE 4 DISPOSITION OF ASSETS
---------------------------------------------
On October 27, 1999, pursuant to a Purchase Agreement, dated September 30, 1999,
among the Company, American Gateway Telecommunications, Inc. ("AGTI"), Coyote
Gateway, LLC d/b/a American Gateway Telecommunications, ("AGT"), Prinvest Corp.
("PVC"), Prinvest Financial Corp. ("PFC"; together with PVC, "Prinvest") and
Arnold A. Salinas ("Salinas"), the Company sold its approximately 80% membership
interest in AGT to AGT's remaining member, AGTI, which previously held an
approximately 20% membership interest in AGT (the "Sale"). As specified in the
Purchase Agreement, the sale was effective on September 30, 1999 and AGTI
established 100% control of the business as of that date. The revenue related to
AGT for the quarter ended June 30, 1999 was approximately $800,000. The Company
recognized a gain of $6.2 million from this sale in the second quarter of fiscal
year 2000.
NOTE 5 SHAREHOLDERS' EQUITY
----------------------------------------------
Common Stock and Convertible Preferred Stock
--------------------------------------------
At the Annual Stockholders Meeting on July 27, 2000, the Company's stockholders
approved an amendment to the Company's Restated Certificate of Incorporation to
increase the authorized number of shares of capital stock. The authorized number
of shares was increased from 35,000,000 to 80,000,000, of which 70,000,000 were
designated as Common Stock and 10,000,000 were designated as Preferred Stock.
In June 2000, the Board of Directors approved the First Amendment to Stock
Acquisition by Merger Agreement with the former shareholders of INET Interactive
Network System, Inc. ("INET"). This amendment reflects that pursuant to the
original Merger Agreement, the former shareholders of INET have earned an
additional 170,000 shares of Company Common Stock based on certain earnings
targets. The 170,000 shares earned will be issued in August 2000.
Options and Warrants
--------------------
In July 2000, the stockholders approved the Company's 2000 Equity Incentive Plan
(the "Equity Plan"). The Equity Plan provides that 4,000,000 of the authorized
shares of the Common Stock are available for issuance as awards under the Equity
Plan. Options may be either "incentive stock options" within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") or
non-qualified options. The Equity Plan is administered by the Board of
Directors, which determines, among other things, those individuals who receive
options or awards, the time period during which the options may be partially or
fully exercised, the terms of the restrictions, if any, on awards, the number of
shares of Common Stock issued as an award or issuable upon the exercise of each
option and the option exercise price and the award purchase and repurchase
price. The term of each award of a stock option shall be determined by the Board
of Directors. However, the term of any incentive stock options or stock
appreciation rights may not exceed a period of ten years from the date of grant.
As of June 30, 2000, options to purchase an aggregate of 2,187,500 shares of
Common Stock were granted. The per share exercise price of these grants is equal
to the closing market price of the Company's common stock on the date of grant
and range from $4.81 to $8.56. These options vest over various periods.
During the quarter ended June 30, 2000 the Board of Directors granted, under the
Employees Non-Qualified Stock Option Plan of CTL, options to purchase a total of
1,224,000 shares of the Company's common stock to certain
7
<PAGE>
executives, employees and non-employee directors. The per share exercise price
of these grants are equal to the closing market price of the company's common
stock on the grant date and range from $4.81 to $11.75. These options vest over
various periods.
During the quarter ended June 30, 2000, a total of 32,550 options were exercised
for shares of Company common stock at exercise prices totaling $148,000.
NOTE 6 RELATED PARTY TRANSACTIONS
--------------------------------------------
In June 2000 in consideration of additional services provided under the
consulting agreement with KRJ, the Company's Board of Directors resolved to
present for shareholder approval the issuance of 2,500,000 shares of common
stock and the grant of warrants to purchase 2,400,000 shares of common stock at
an exercise price per share of $7.00 to KRJ. The vesting of the shares and the
exercisability of the warrants are dependent on the average bid price of our
common stock for twenty consecutive trading days exceeding certain amounts that
range from $12 to $30 per share. The Company will determine the charge to
earnings, if any, if and when shareholder approval is obtained.
In June 2000 the Board of Directors approved the grant of options under the
Equity Plan to purchase an additional 750,000 shares of Common Stock to James
McCullough, CEO at $7.00 per share. The exercisability of the options is
dependent on the closing bid price of the Company's Common Stock for twenty
consecutive trading days exceeding certain amounts ranging from $12.00 to $20.00
per share. All options will vest if Mr. McCullough is terminated without cause
or there is a change in control of the Company (other than as a result of the
HomeAccess Merger described in Note 3).
NOTE 7 LOSS PER COMMON SHARE
-------------------------------------------
The basic loss per common share is determined by using the weighted average
number of shares of common stock outstanding during each period. Diluted loss
per common share is equal to the basic loss per share for all periods with a
loss from continuing operations. The effect of options and warrants would be
anti-dilutive. Dividends on preferred stock have been added to the losses to
arrive at the losses applicable to common shares.
At June 30, 2000 and 1999 the following convertible securities, outstanding
options and warrants to purchase common stock were not included in the
computation of diluted loss per common share as the effect would be antidilutive
due to the net loss.
2000 1999
---- ----
Options 6,254,000 1,718,000
Warrants 5,015,000 3,690,000
Units 161,000 779,000
Warrants to be issued related to
securities litigation settlement 2,225,000 2,225,000
Convertible preferred stock 3,365,000 1,000,000
---------- ----------
17,020,000 9,412,000
========== ==========
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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General
-----------
Discontinuance of Switch Segment
In May 2000, we decided to discontinue and dispose of our switch business
including the manufacture, development, sale and service of DSS Switches and IP
Gateway equipment. Prior to the May 2000 decision, this segment was our largest
segment in terms of revenues.
Expected operating results relating to the discontinued operations from April 1,
2000 until the expected disposal date was included in a reserve against net
assets of discontinued operations at March 31, 2000. We recorded a charge for
estimated loss on disposal of the switch business of approximately $11.0 million
in the fourth quarter of fiscal 2000, which included an estimated $3.0 million
of expected losses of the segment for the first two quarters of fiscal 2001. We
recorded an additional charge of $189,000 for the three months ended June 30,
2000 for estimated loss on disposal. As of June 30, 2000, a reserve of $100,000
was included in the net current assets of discontinued operations. We disposed
of this segment as of June 30, 2000.
Following this decision to discontinue the operations of the telecommunications
switching business, our business is reported for as one continuing operating
segment, long distance services.
As a result of the discontinuances, dispositions, acquisitions and other events
described above, the comparison of year-to-year results may not be meaningful.
Results of Operations
-------------------------
The results for the three months ended June 30, 2000 and the comparative
historical results have been restated to reflect the operations of our DSS
Switch business segment separately as discontinued operations. The following
discussion relates to the continuing operations of the long distance services
and our corporate administration offices.
The long distance services business was comprised of two subsidiaries during the
periods reported: American Gateway Telecommunications, or AGT, which was
acquired in April 1998 and sold effective September 1999; and INET, which was
acquired in September 1998.
Three Months Ended June 30, 2000 versus Three Months Ended June 30, 1999
------------------------------------------------------------------------
During the first quarter of fiscal year 2001, the core business of providing
international long distance service continued to grow. Revenues were up 175% to
$5.1 million compared to $1.9 million during the first quarter of fiscal year
2000. This increase was due primarily to new wholesale customers in the Pacific
Rim and the acquisition of Ariana Communications Inc., a prepaid calling card
provider. Consequently, due to the increase in wholesale and prepaid traffic
(which had lower margins than retail traffic), gross profit decreased from 24%
of revenues (or $450,000) for the first quarter of fiscal 2000 to 15% (or
$790,000) during the first quarter of fiscal 2001. Although the actual costs of
minutes has not increased, wholesale and prepaid traffic are sold at lower
prices causing gross margins to be smaller.
9
<PAGE>
The business has continued to improve its operations as selling and
administrative expenses continue to decline as a percentage of sales from 132%
(or $6.1 million) for the first quarter of fiscal 2000 to 121% (or $2.5 million)
for the first quarter of fiscal 2001. This ongoing improvement can be attributed
to our efforts to control costs and efficiently utilize resources across
subsidiaries. Because of these improvements, the operating loss has decreased
two percent despite the smaller gross margin associated with the shift in
revenue streams. The operating loss for the first quarter of fiscal 2000 was
108% (or $2.0 million) of sales compared to 106% (or $5.3 million) of sales for
the first quarter of fiscal 2001. Actual selling and administrative costs have
increased in dollar value due primarily to the growth of INET. Selling and
administrative costs of INET have increased from $0.8 million during the first
quarter of fiscal 2000 to $2.4 million during the first quarter of fiscal 2001.
Other factors contributing to the increase in selling and administrative costs
are $0.7 million of accounting and legal fees associated with additional
regulatory filings, business acquisitions and dispositions and write-off of bad
debt of $0.6 million.
For the first quarter of fiscal 2001 there was net interest income of $12,000
compared to net interest expense of $350,000 for the first quarter of fiscal
2000. This difference is due to the significant decrease in outstanding notes
and leases payable from $13.0 million at June 30, 1999 compared to $4.0 million
at June 30, 2000.
Overall, the loss from continuing operations continues to move towards breakeven
at 105% of sales for the first quarter of fiscal 2001, compared to 117% for the
first quarter of fiscal 2000.
The loss from discontinued operations for the first quarter of fiscal year 2001
was $0.2 million compared to $1.5 million for the first quarter of fiscal 2000.
Overall, the net loss was $5.5 million or 108% of sales for the first quarter of
fiscal year 2001, an improvement compared to the loss of $3.7 million or 197% of
sales a year earlier.
Liquidity and Capital Resources
-------------------------------
As of June 30, 2000, we had negative working capital of $2.9 million as compared
to a positive working capital of $2.5 million at March 31, 2000.
During the first three months of fiscal 2001 we used $8.5 million for operating
activities compared to $5.0 million during the first three months of fiscal
2000. Cash for operating activities during the quarter ended June 30, 2000 was
used primarily to fund losses incurred in the continuing long distance services
and in the discontinued switch business as well as significant repayments of
current liabilities.
We used cash for investing activities of $2.8 million during the first three
months of fiscal 2001 compared to net cash used for investing activities of $1.3
million in the corresponding period of fiscal 2000. Cash used for investing
activities during the quarter ended June 30, 2000 was for capital expenditures
of $0.9 million, and investments in acquisitions of $1.9 million.
Net cash used for financing activities for the first three months of fiscal 2001
was $2.3 million, compared to net cash provided of $6.5 million for the
corresponding period of fiscal 2000 primarily resulting from a private placement
of our common stock in May 1999 for net proceeds of $10.2 million. Net cash used
during the quarter ended June 30, 2000 was primarily used to repay long-term
debt and capital lease obligations, and borrowings under a line of credit.
10
<PAGE>
We had capital lease obligations of $2.5 million at June 30, 2000 payable
through 2004.
We have a $2.2 million revolving line of credit secured against certain trade
receivables. As of June 30, 2000, $0.5 million had been drawn against the line
representing the maximum amount available at that time. This line of credit
bears interest at the bank's prime rate (9.5% at June 30, 2000) plus 3%. The
line of credit expires on August 31, 2000.
We have a long-term obligation in the amount of $1.6 million in connection with
principal and interest due on subordinated debentures, which bear interest of
11.25% per year. The debentures mature in January 2002 and interest only is due
until such time.
We have a long-term obligation of $0.9 million in connection with a promissory
note issued in connection with the acquisition of the Matrix Base from Group
Long Distance, which bears interest at 8% per annum. The promissory note
provides for monthly interest only payments, with the entire principal balance
due on April 30, 2002.
We believe that our cash on hand at June 30, 2000 and the proceeds of our
anticipated debt and equity placements will fund our debt obligations and
ongoing operations through the second quarter of fiscal 2001. We are in the
process of negotiating third-party lease funding in connection with previously
purchased switch equipment. Additionally, we continue to pursue other sources of
debt and equity funding in order to provide working capital necessary to run
future operations. We believe that we will be able to continue to fund our
operations and acquisitions by obtaining additional outside financing; however,
we cannot assure you that we will be able to obtain the necessary financing when
needed on acceptable terms or at all. If we are not able to obtain the necessary
financing, it could have a significant adverse affect on our business including
our ability to pay our outstanding indebtedness and other liabilities, and to
operate our business as planned.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
--------------------------------------------------------------------
The Company is not currently subject to a significant level of direct market
risk related to foreign currency exchange rates, commodity prices or equity
prices. The Company has no derivative instruments and does not expect to derive
a material amount of its revenues from interest bearing securities. Currently
the Company has no significant foreign operations. To the extent that the
Company establishes significant foreign operations in the future, it will
attempt to mitigate risks associated with foreign currency exchange rates
contractually and through the use of hedging activities and other means
considered appropriate. The Company holds no equity market securities, but does
face equity market risk relative to its own equity securities. This risk is most
likely to be manifested by influencing the Company's ability to raise debt or
equity financing, if needed.
The Company's primary market risk exposure is interest rate risk related to
borrowings under its revolving line of credit.
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Interest Rate Sensitivity Model
-------------------------------
The table below presents the principal (or notional) amounts and related
interest of our borrowings by expected maturity dates. The table presents the
borrowings that are sensitive to changes in interest rates and the effect on
interest expense of future hypothetical changes in such rates.
Twelve Months Ended June 30
------------------------------
(U.S. Dollars - Thousands)
2000 2001 2002 2003
---- ---- ---- ----
Line of credit borrowings $541 $2000 $2000 $2000
Interest expense (A) 68 250 250 250
Interest expense (B) 270 270 270 270
Interest expense (C) 62 230 230 230
- The borrowings bear interest at the bank's prime rate plus 3%.
- The interest expense shown for line (A) is based upon the actual
bank's prime rate at June 30, 2000 of 9.5%.
- The interest expense shown for line (B) is based upon a hypothetical
increase of one percentage point in the bank's prime rate to 10.5%.
- The interest expense shown for line (C) is based upon a hypothetical
decrease of one percentage point in the bank's prime rate to 8.5%.
Forward Looking Statements
-------------------------------
All statements other than historical statements contained in this Report on Form
10-Q constitute "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Without limitation, these forward
looking statements include statements regarding new products to be introduced by
the Company in the future, statements about the Company's business strategy and
plans, statements about the adequacy of the Company's working capital and other
financial resources, and in general statements herein that are not of a
historical nature. Any Form 10-K, Annual and Quarterly Reports to Shareholders,
Form 10-Q, Form 8-K or press release of the Company may include forward looking
statements. In addition, other written or oral statements which constitute
forward looking statements have been made or may in the future be made by the
Company, including statements regarding future operating performance, short- and
long-term revenue and earnings estimates, backlog, the status of litigation, the
value of new contract signings, and industry growth rates and the Company's
performance relative thereto. These forward-looking statements rely on a number
of assumptions concerning future events, and are subject to a number of
uncertainties and other factors, many of which are outside of the Company's
control, that could cause actual results to differ materially from such
statements. These include, but are not limited to: risks associated with recent
operating losses, no assurance of profitability, the need to increase sales,
liquidity deficiency and, in general, the other risk factors set forth in the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2000.
The Company does not undertake any obligation to update or revise any forward
looking statements whether as a result of new information, future events or
otherwise.
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PART II. OTHER INFORMATION
--------------------------
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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a) At the Annual Stockholders Meeting on July 27, 2000, the Company's
stockholders approved an amendment to the Company's Restated Certificate of
Incorporation to increase the authorized number of shares of capital stock. The
authorized number of shares was increased from 35,000,000 to 80,000,000, of
which 70,000,000 were designated as Common Stock and 10,000,000 were designated
as Preferred Stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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a) Exhibits:
3.01 Restated Certificate of Incorporation (incorporated herein by
reference to Exhibit 3.01 of Registrant's Form 10-Q for the quarter
ended September 30, 1998 filed on November 16, 1998).
3.02 Certificate of Correction of Certificate of Amendment of Restated
Certificate of Incorporation.
3.03 Certificate of Amendment of Restated Certificate of Incorporation.
3.04 Certificate of Designations, Preferences and Rights of Series B
Preferred Stock, filed January 31, 2000 (incorporated herein by
reference to Exhibit 4.2 of Registrant's form 8-K filed on February
14, 2000).
3.05 By-Laws of the Company (incorporated herein by reference to Exhibit
3.2 of the Company's Form 10-K for the year ended March 31, 1997).
27 Financial Data Schedule
b) Reports on Form 8-K:
(1) A Form 8-K dated May 10, 2000 was filed by the Company on June 9,
2000, which reported under Item 5 the Company's Agreement and Plan of
Merger with Primary Knowledge, Inc. a California corporation which is
in the process of changing its name to HomeAccess MicroWeb, Inc.
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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.
QUENTRA NETWORKS, INC.
DATE: August 14, 2000 By: /s/ James R. McCullough
------------------------------------
James R. McCullough
Chief Executive Officer and Director
(Principal Executive Officer)
DATE: August 14, 2000
By: /s/ Cheryl Johnson
-------------------------------------
Cheryl Johnson
Controller
(Principal Financial and
Accounting Officer)
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