<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT
Under Section 13 or 15(d) of the Securities Exchange Act of 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
Commission File No. 0-30124
SONUS COMMUNICATION HOLDINGS, INC.
A Delaware corporation
IRS Employer Identification No. 54-1939577
1600 Wilson Blvd, Suite 1008, Arlington, VA 22209
Telephone - (703) 527- 8860
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, as
amended, during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Common stock $.001 par value,
4,180,710 shares outstanding
as of November 4, 1999
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
SONUS COMMUNICATION HOLDINGS INC AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
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(unaudited) (audited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 75,942 $ 1,002
Accounts receivable, net 71,597 41,244
Installment sales receivable, net of unearned
profit of $113,104 and $131,340 at 9/30/99
and 12/31/98, respectively 199,692 231,090
Other current assets 92,657 -
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TOTAL CURRENT ASSETS 439,888 273,336
PROPERTY AND EQUIPMENT, net 553,071 231,615
OTHER ASSETS 182,754 -
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TOTAL ASSETS $1,175,713 $504,951
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 377,141 $202,842
Vendor equipment payable 364,667 356,273
Other current liabilities 115,932 26,693
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TOTAL CURRENT LIABILITIES 857,740 585,808
Due to shareholders 155,000 99,969
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TOTAL LIABILITIES 1,012,740 685,777
SHAREHOLDERS' EQUITY
Common stock, $.001 par value 4,181 3,250
Additional paid-in capital 1,606,133 12,197
Accumulated deficit (1,447,341) (196,273)
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TOTAL SHAREHOLDERS' EQUITY 162,973 (180,826)
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,175,713 $ 504,951
========== ==========
</TABLE>
See notes to condensed consolidated financial statements
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SONUS COMMUNICATION HOLDINGS INC AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Sept 30, Nine Months Ended Sept 30,
1999 1998 1999 1998
--------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
OPERATING INCOME
Telecommunications services $392,924 $ - $ 1,022,296 $ 4,000
Consulting services 0 7,000 0 35,950
--------- ---------- ----------- ----------
392,924 7,000 1,022,296 39,950
OPERATING EXPENSES
Direct expenses 470,161 65,982 1,228,688 68,830
General & administrative 309,731 20,855 761,997 55,431
--------- ---------- ----------- ----------
779,892 86,837 1,990,685 124,261
LOSS FROM OPERATIONS (386,968) (79,837) (968,389) (84,311)
OTHER INCOME (EXPENSE)
Interest, net (5,225) (1,750) (3,634) (5,249)
Merger related costs (25,000) - (279,045) -
--------- ---------- ----------- ----------
(30,225) (1,750) (282,679) (5,249)
LOSS BEFORE INCOME TAXES (417,193) (81,587) (1,251,068) (89,560)
Provision for income taxes - - - -
--------- ---------- ----------- ----------
NET LOSS $(417,193) $ (81,587) $(1,251,068) $ (89,560)
========= ========== =========== ==========
Basic loss per common share $ (0.11) $ (.03) $ (0.33) $ (0.03)
========== ========== =========== ==========
Shares used in per share calculation 3,761,548 3,250,000 3,823,501 3,250,000
========= ========= ========= =========
</TABLE>
See notes to condensed consolidated financial statements
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SONUS COMMUNICATION HOLDINGS INC AND SUBIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Sept 30,
--------------------------
1999 1998
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<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Loss $(1,251,068) $ (89,560)
Adjustments to reconcile net loss to net cash utilized
in operating activities:
Depreciation 64,622 13,291
Common shares issued for services rendered 127,500 -
Changes in assets and liabilities:
(Increase) in accounts receivable (30,353) -
(Increase) decrease in installment sales receivable 31,398 (231,090)
(Increase) in prepaid expenses (92,657) (10,886)
Increase in accounts payable 165,103 77,936
Increase in vendor equipment payable 8,393 372,088
Increase in customer deposits - 100,100
Increase in accrued expenses 98,435 5,248
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (878,627) 237,127
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (386,078) (237,343)
Deposits for equipment and circuits (182,754) -
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NET CASH USED IN INVESTING ACTIVITIES (568,832) (237,343)
CASH FLOWS FROM FINANCING ACTIVITIES:
Private placement of common shares, net 626,634 -
Private placement of common shares with warrants 965,765 -
Repurchase of founder shares (70,000) -
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,522,399 -
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 74,940 (216)
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CASH AND CASH EQUIVALENTS, BEGINNING 1,002 235
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CASH AND CASH EQUIVALENTS, END $ 75,942 $ 19
=========== ============
</TABLE>
See notes to condensed consolidated financial statements
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SONUS COMMUNICATION HOLDINGS INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Nine Months
Ended September 30, 1999 and 1998
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements apply to the
Company and its wholly-owned subsidiary and reflect all adjustments which
are, in the opinion of management, necessary for a fair presentation of
the Company's consolidated financial position as of September 30, 1999 and
the results of operations for the three and nine months ended September
30, 1999 and 1998. The results of operations for such periods, however,
are not necessarily indicative of the results to be expected for a full
fiscal year. On May 14, 1999, the Company filed a Form 10SB with the
Securities and Exchange Commission to register the common stock of the
Company under the Securities Exchange Act of 1934, as amended. This Form
10-QSB should be read in conjunction with the Form 10SB.
2. MERGER
In January 1999, Sonus Communications Inc ("Sonus"), entered into merger
discussions with The Park Group Limited ("Park"). In anticipation of the
merger, Park formed Sonus Park Acquisition, Inc. as a wholly owned
subsidiary of Park. On March 4, 1999, Park Acquisition merged with and
into Sonus leaving Sonus as the surviving corporation and a wholly owned
subsidiary of Park. The former shareholders of Sonus received 92% of the
capital stock of Park.
On April 7, 1999, Park organized Sonus Communication Holdings,
Inc.("Holdings") as a Delaware corporation and wholly owned subsidiary of
Park. On April 16, 1999, Holdings merged with and into Park, leaving
Holdings as the surviving corporation. As a consequence of the merger,
Sonus became a wholly owned subsidiary of Holdings. Shares of Park were
exchanged for shares of Holdings on a one-for-one basis in the merger. The
sole purpose of the merger was to re-incorporate in the state of Delaware.
L. Flomenhaft & Co., Inc., an investment banker, acted as a consultant to
Park on the merger. As a fee for services, L. Flomenhaft received 150,000
shares of the Company. Of the 150,000 shares, the Company issued 120,000
shares to L. Flomenhaft & Co and the remaining 30,000 shares to a nominee
of L. Flomenhaft & Co.
3. ACQUISITION
At the end of the third quarter of 1999, the Company announced the signing
of a letter of intent to acquire Empire One Telecommunications, Inc.
("EOT") for approximately 1.2 million shares of Sonus common stock for all
the outstanding shares of EOT subject to adjustment at the time of signing
the merger agreement. Subsequent to September 30, 1999, the Company
expects to sign the related merger documents subject to approval by the
shareholders of EOT and approval of the Public Service Commission of New
York State as well as other state and federal regulatory agencies. EOT
expects to
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hold the shareholder meeting to approve the merger and to begin the
regulatory approval process during the fourth quarter of 1999.
As part of the acquisition agreement, the Company expects to sign
employment agreements with the three principal shareholders of EOT.
EOT is a rapidly growing, domestic Competitive Local Exchange Carrier
("CLEC"), Interexchange Carrier ("IXC"), and Internet Service Provider
("ISP") that offers a full range of services including local,
long-distance, Internet access and Web Hosting Services to approximately
12,000 subscribers. EOT's 1998 revenues were approximately $6 million.
4. FINANCING
On January 21, 1999, Sonus completed the sale of 750,000 shares of common
stock at $1.00 per share in a private placement to accredited investors.
L. Flomenhaft & Co. acted as placement agent. The aggregate offering price
was $750,000 with Sonus netting cash proceeds of $626,634. L. Flomenhaft &
Co. received $75,000 in cash and a five year common stock purchase warrant
for 112,500 shares at an exercise price of $1.00 per share for its
services. Of the 112,500 warrants, Sonus issued a warrant for 90,000
shares to L. Flomenhaft & Co and a warrant for the remaining 22,500 shares
to a nominee of L. Flomenhaft & Co. The investors in the private placement
received piggyback registration rights in connection with the sale.
In May 1999, the Company issued an aggregate principal amount of $575,000
of its10% convertible debentures ("Debentures"). The principal amount plus
accrued interest are due on demand by the lender six months following the
date of issuance. This Debenture was automatically converted under the
terms of the agreement to common stock with the sale of the Equity Unit
offering in August 1999 as described below. Debenture holders were also
entitled to an "equity kicker" equal to one-half the number of shares of
common stock into which the Debentures were converted. The Company
converted the Debentures into common stock at $1.50 per share and, in
accordance with the terms of the Debentures, provided the additional
shares as part of the equity kicker.
In August 1999, the Company sold $500,000 of its equity Units, consisting
of an aggregate of 250,000 shares of common stock and 250,000 common stock
purchase warrants. Each warrant is exercisable at $3.00 per share of
common stock. The sale resulted in net proceeds to the Company of $435,000
after investment banking fees and other expenses.
In the third quarter of 1999, the Company entered into an equipment
leasing arrangement with its network equipment supplier. The agreement
provides for a total available facility of $2.2 million. Under the
arrangement, the Company leased $200,000 of network equipment in the third
quarter under an operating lease. The Company expects to convert the
vendor equipment payable into a leasing arrangement under this leasing
agreement.
5. WARRANTS
On January 14, 1999, Sonus Communications entered into a two year
consulting arrangement with L. Flomenhaft & Co. ("Consultant") whereby the
Consultant is to provide strategic financial, business
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planning and business development services. The Agreement became effective
January 21, 1999 when the first private placement was completed. To
compensate Consultant for his efforts, Sonus issued a five year warrant
for 487,500 shares of common stock of the Company with an exercise price
of $1.00 per share.
Effective April 1, 1999, the Company entered into a consulting agreement
with Coffin & Sons, Inc., a consulting firm owned by Mr. W. Todd Coffin,
the Company's President and CEO. The agreement provides that Mr. Coffin
will serve as CEO for a term of six months and 15 days and that Mr. Coffin
will serve on the Board of Directors of the Company during the consulting
period. For the services of Mr. Coffin, Coffin & Sons will receive cash
compensation of $10,000 per month of which $2,000 per month is deferred
until after the successful completion of the next private placement
completed after the effective date of the agreement. In addition to the
cash compensation, Coffin & Sons, Inc was issued 50,000 shares of common
stock in May 1999 and is entitled to receive (i) 50,000 shares upon the
successful completion of the private placement with gross proceeds of at
least $1 million; (ii) 50,000 shares following the registration of shares
issued in the private placement and the shares trade at or above $3.00 per
share for 20 consecutive trading days; and (iii) 50,000 shares following
the installation of a new chief executive officer identified by Coffin &
Sons, Inc and acceptable to the Company.
On April 20, 1999 the Company entered into a three month consulting
agreement with Hudson Capital, a consulting firm owned by Mr. Raleigh
Coffin, a director of the Company and the father of Mr. W. Todd Coffin.
The agreement provides for Mr. R. Coffin to help the Company develop a
comprehensive business plan along with an institutional investor
presentation. Compensation to Hudson Capital consisted of $10,000 per
month of which $5,000 per month is deferred until after the successful
completion of the next private placement and a five year warrant for
100,000 shares with an exercise price of $1.00 per share. The warrant
vests as to: (i) 25,000 shares upon the signing of the agreement; (ii)
25,000 shares upon the completion of the business plan; (iii) 25,000
shares upon successful completion of the private placement noted above and
(iv) 25,000 shares when the stock publicly trades at $3.00 per share for
at least 20 consecutive days.
In April 1999, Mr. Charles Albo, Chairman, and Ms. Maraneli, Executive
Vice President each transferred 550,000 shares of common stock to the
Company for cancellation by the Company. In exchange for the shares, the
Company issued Mr. Albo and Ms Maraneli each a five year warrant to
purchase 125,000 shares of the Company's common stock at an exercise price
of $1.50 per share. Mr. Albo and Ms. Maraneli are the original founders of
Sonus Communications, Inc.
Additionally, the Company in May 1999 redeemed from each of Mr. Albo and
Ms Maraneli 75,000 shares at $1.50 per share (the "Redemption Price"). Mr.
Albo and Ms. Maraneli agreed that payment of the Redemption Price will be
deferred until the closing of a private placement resulting in gross
proceeds to the Company of at least $1 million. In exchange for the
deferral of the Company's payment obligations, the Company agreed to
advance each of Mr. Albo and Ms. Maraneli up to $7,000 per month not to
exceed the total Redemption Price. All amounts advanced will be deducted
from the redemption price when paid. Although the repayment was required
to be made at the time of the Unit Equity sale in August, Mr. Albo and Ms
Maraneli have continued to accept advances from the Company in lieu of
full payment until the Company's cash position is better able to support
the
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remaining amounts due. As of September 30, 1999, $70,000 had been paid
leaving a balance due for the redemption of $155,000.
Pursuant to employment contracts, the Company has issued warrants to Mr.
Stephen Albo, the Company's Chief Technical Officer and to Mr. Richard
Rose, the Company's Chief Financial Officer. Initially, Mr. Albo received
in lieu of a salary, a five year warrant to acquire 75,000 shares of
common stock of the Company at $1.00 per share which is fully vested and
at the time Mr. Albo became a full time employee, a second five year
warrant to purchase 75,000 shares of common stock of the Company which
vests over three years. Mr. Rose received upon execution of an employment
agreement, a five year warrant to purchase 75,000 shares of common stock
of the Company at $1.00 per share which vests over three years.
In conjunction with the hiring of an investment relations firm, the
Company issued a five year warrant to purchase 150,000 shares of common
stock of the Company at $2.50 per share, the market value on the date of
the agreement.
6. OPTION PLANS
Employee Stock Option Plan: On June 10, 1999, the Company adopted the 1999
Stock Incentive Plan (the "1999 Plan") which was approved by a majority of
the stockholders on July 12, 1999. Under the terms of the 1999 Plan, which
expires on June 10, 2009, employees of the Company and its subsidiaries
may be granted incentive stock options, non-statutory stock options and
restricted stock awards. The option price of shares of common stock
generally will not be less than 100% of the fair market value on the date
of grant or 110% of fair market value in the case of a grant to a 10%
shareholder. No option will be exercisable more than ten years from the
date of grant. The Company has reserved 500,000 shares for issuance under
the 1999 Plan. At September 30, 1999, employees had been granted 206,000
shares.
Options typically vest quarterly over a three-year period unless the Board
of Directors in its discretion provides otherwise. Options shall become
fully vested upon a "change of control" as defined in the 1999 Plan.
Directors Option Plan: On June 10, 1999, the Company adopted the 1999
Director Stock Incentive Plan (the "Director Plan") which was approved by
a majority of the stockholders on July 12, 1999. Under the terms of the
Director Plan, which expires on June 10, 2009, non-employee directors of
the Company may be granted non-statutory stock options at an exercise
price equal to 100% of the fair market value on the date of grant. No
option will be exercisable more than ten years from the date of grant. The
Company has reserved 350,000 shares for issuance under the 1999 Plan. At
September 30, 1999, the Company had granted to a new director an option
for 50,000 shares under the Director Plan.
7. NOTE PAYABLE - SHAREHOLDER
At December 31, 1998, Sonus Communications had a note payable to a
shareholder for $99,969 plus accrued interest. In conjunction with an
agreement made with the shareholder effective April 16, 1999, the note was
converted into 44,431 shares of common stock of the Company.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
The Private Securities Litigation Reform Act provides a "safe harbor" for
forward-looking statements. Certain statements included in this Form
10-QSB are forward-looking and are based on the Company's current
expectations and are subject to a number of risks and uncertainties that
could cause actual results to differ materially from results expressed or
implied in any forward-looking statements made by, or on behalf of, the
Company. The Company assumes no obligation to update any forward-looking
statements contained herein or that may be made from time to time by, or
on behalf of, the Company.
For the third quarter of 1999, Sonus had revenues of $393,000 compared to
$7,000 for the third quarter of 1998. For the first nine months of 1999,
the Company had revenues of $1,022,000 compared to $40,000 for the first
nine months of 1998. During 1998, Sonus began installing its network with
the first revenues generated from telecommunications services occurring in
the fourth quarter of 1998. Revenues prior to the fourth quarter of 1998
were mostly from consulting services. As the Company has focused on
telecommunications services and expanding its network, revenues from
consulting have decreased with no consulting service revenues during 1999.
The first circuit installed was to the Republic of Georgia which began
generating revenues in the fourth quarter of 1998. During the first
quarter of 1999, the Company began installing the network to China. This
circuit began carrying traffic during the 1999 second quarter. Since
beginning service to China, the Company has experienced significant
declines in prices due to competitive pressures. As a result, the original
circuit to China has become uncompetitive. Consequently, the Company made
the decision to take the circuit out of service until a new circuit can be
located that will be competitive in the market place. During the third
quarter of 1999, Sonus installed a point of presence in Pakistan. The
circuit carried minor traffic in the third quarter and became fully
operational during the fourth quarter. The Company anticipates demand for
this circuit to increase sufficiently during the fourth quarter that the
capacity will need to be expanded during the first quarter of 2000 if not
sooner. The Company also expects to add additional points of presence in
other locations in the last part of 2000.
The Company had direct operating expenses of $470,000 and $1,229,000 for
the quarter and nine months ended September 30, 1999, respectively. These
expenses relate to the installation and operation of the network. Since
the network was not installed until the fourth quarter of 1998, there are
no comparable expenses in 1998. Direct operating expenses include costs
that are incurred during the installation and testing phases of the
network, as well as the fixed costs and the operating costs of carrying
telephone traffic. These costs have increased quarter over quarter as the
Company has been adding to its network.
General and administrative expenses were $309,000 for the quarter ended
September 30, 1999 compared to $21,000 for the comparable 1998 quarter.
General and administrative expenses were $762,000 for the first nine
months of 1999 compared to $55,000 for the first half of 1998. This
increase is directly attributable to the increase from wages since the two
founders in 1998 did not take a salary in the first quarter of 1998 and
minimal salary in the second and third quarters of 1998 as compared to
staffing of nine at September 30, 1999 and all associated costs of
establishing and maintaining an office. Sonus will continue to make an
investment in staffing as 1999 progresses. The Company expects that in
order to increase capacity of the current installed locations and to
expand into additional locations, as well as to
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obtain the administrative support necessary in connection with being a
public company, a significant investment in both equipment and personnel
will be needed. The result will be to increase operating expenses with no
assurance of any return on investment.
On March 4, 1999, Sonus merged with and into Sonus Park Acquisitions, Inc,
a newly formed wholly owned subsidiary of the Park Group, Ltd. Sonus,
which was the surviving entity, became a wholly owned subsidiary of the
Park Group and the only asset of Park. On April 7, 1999, Park organized
Sonus Communication Holdings, Inc as a Delaware corporation and a wholly
owned subsidiary of Park. On April 16, 1999, Sonus Holdings merged with
and into Park leaving Sonus Holdings as the surviving corporation. Shares
of Park were exchanged for shares of Sonus Holdings on a one-for-one
basis. The sole purpose of the merger was to re-incorporate in Delaware.
The costs incurred during the first half of 1999 under the caption Merger
Related Costs amounting to $254,000 relate to these transactions. In
addition, the Company has incurred costs during the third quarter of 1999
related to the acquisition of EOT. Please see the Footnotes to Condensed
Consolidated Financial Statements for additional information on the
mergers.
As a result of the limited revenue, the increased costs associated with
the expansion and the costs of the merger, the Company had a net loss of
$417,000 for the third quarter of 1999 and of $1,251,000 for the first
nine months of 1999. This is compared to a net loss of $81,000 for the
third quarter of 1998 and a net loss of $90,000 for the first nine months
of 1998 when operations were limited.
LIQUIDITY
At December 31, 1998, the Company had cash of $1,000, negative working
capital of $312,000 and negative shareholders' equity of $181,000. During
the first nine months of 1999, the Company has been successful in
completing three separate rounds of financing. The first round was
completed in January 1999 when Sonus sold 750,000 shares of its common
stock in a private offering realizing net proceeds aggregating $627,000.
In May 1999, the Company completed the second round by selling $575,000 in
convertible debentures. These Debentures were automatically converted
under the terms of the agreement to common stock with the sale of the
Equity Unit offering in August 1999. The third round of financing
consisted of the sale of Equity Units comprised of one share of common
stock of the Company and one warrant exercisable for one share of common
stock at an exercise price of $3.00. The Company closed the minimum under
the Equity Unit Offering in August 1999 by selling 250,000 Units thereby
netting the Company $435,000 in cash after investment banking fees and
other expenses. See the Footnotes to Condensed Consolidated Financial
Statements included in this Form 10-QSB for more details related to these
transactions.
Even though the Company has been successful in completing the financing
noted above, the Company had negative working capital of $417,852 at
September 30, 1999 with positive shareholders' equity of $162,973. As a
result, Sonus will need to continue its efforts to raise capital or find
other sources of funds to finance the growth of the Company and the
continued losses. As part of this effort, on September 29, 1999, the
Company entered into an equipment leasing arrangement with its network
equipment supplier. The agreement provides for a total available facility
of $2.2 million. Under the arrangement, the Company leased $200,000 of
network equipment in the third quarter under an operating lease. In
addition, it is anticipated that the vendor equipment payable of $364,667
will be put under the lease during the fourth quarter of 1999.
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As noted in the footnotes to the Condensed Consolidated Financial
Statements, the Company entered into a letter of intent to acquire Empire
One Telecommunications. The acquisition is expected to be accomplished by
swapping shares of stock of the Company for shares of EOT. In conjunction
with the signing of the acquisition documents, the Company anticipates
being able to complete an additional round of financing amounting to
approximately $1.25 million to fund the working capital and other needs of
the combined entity.
On May 14, 1999, the Company filed a Form 10SB with the Securities and
Exchange Commission to allow the Company's common stock to be traded
publicly. The Form 10SB became effective July 14, 1999 and the Company's
stock began trading publicly on the NASDAQ electronic bulletin board on
August 13, 1999. This may afford the Company the availability of the
public market place as a potential source of additional capital. Besides
the monies being raised in conjunction with the EOT acquisition, the
Company believes it will be necessary to continue to raise funds in both
the public and private markets to have enough cash to pay for the expected
expansion of the Company and to continue the operations of the Company.
During the first nine months of 1999, the Company has acquired $386,000 of
equipment most of which was for the Company's network. During 1999, the
Company has installed equipment in Pakistan, China and the United States
as part of the effort to increase its network capabilities. The network
equipment was financed by the manufacturer and is shown as vendor
equipment payable. The additional equipment financing has been offset by
payments made to the manufacturer on equipment acquired and financed in
1998 resulting in an increase of $8,000 in the amount owed the
manufacturer.
As part of the expenses associated with the mergers as noted above, the
Company hired L. Flomenhaft & Co. as a consultant. The relationship
extends for two years. As a fee for these services, L. Flomenhaft & Co.
agreed to take shares of the Company's common stock valued at $90,000 in
lieu of cash.
As noted above, expansion of the current network as well as the addition
of more locations requires substantial investment of both equipment and
personnel. The Company expects that it will have to continue to raise
funds in both the private and public markets to have enough cash to pay
for this expected expansion and to continue the operations of the Company.
The Company believes that ability to raise money in the public sector will
enhance these efforts although there can be no assurances that this will
be the case or that any public offering of the Company's securities will
be made.
IMPACT OF THE YEAR 2000 ON INFORMATION SYSTEMS
The year 2000 issue arises as the result of computer programs having been
written and systems having been designed using two digits rather than four
to define the applicable year. Consequently, such software has the
potential to recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations
causing inability to process transactions, send invoices, or engage in
similar normal business activities.
Holdings is not expected to be affected by Year 2000 because it does not
rely on date-sensitive software or affected hardware. The Company's
current accounting software was is an "off-the shelf" software package
installed during the third quarter of 1999 with the Company ensuring that
the software was Year
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2000 compliant prior to installation. If the Company finds it is using any
other software that is found to be non-compliant, it expects to be able to
timely update to compliant versions. However, there are no assurances that
a material adverse effect could not occur.
The Company has not contacted other companies on whose services it depends
to determine whether such companies' systems are Year 2000 compliant. If
any systems of the Company, or other companies, including Holdings'
customers, are not Year 2000 compliant, there could be a material adverse
effect on the Company's financial condition or results of operations.
PART II. OTHER INFORMATION
Item 2. CHANGES IN SECURITIES
On June 28, 1999, the Company commenced a private placement of equity
units, each unit consisting of one share of Common Stock and one Common
Stock purchase warrant (the "Units"), through L. Flomenhaft & Co., Inc.,
as placement agent, in order to raise a minimum of $500,000 and a maximum
of $2,500,000. On August 4, 1999, the Company sold $500,000 of its Units
to accredited investors, resulting in the issuance of 250,000 shares of
Common Stock and 250,000 Common Stock purchase warrants. As a result of
such sales, L. Flomenhaft & Co., Inc. and a nominee of L. Flomenhaft & Co.
received a total of $50,000 and 37,500 Common Stock purchase warrants,.
The sale of the Units in the Unit offering was exempt from registration
under the Securities Act pursuant to Section 4(2) of the Securities Act
and under Rule 506 of Regulation D promulgated under the Securities Act.
The Company relied upon representations and warranties made by investors
in the Unit offering in the Subscription Agreement ("Subscription
Agreement") attached as Exhibit 4.1 to the Company's Form 10-QSB for the
quarter ended June 30, 1999 and filed with the SEC on August 13, 1999 and
upon Statements of Accredited Investors signed by such investors and
delivered to the Company.
As part of the Unit offering, the Company has granted to the investors
certain registration rights as set forth in the Subscription Agreement
attached as Exhibit 4.1 to the Company's Form 10-QSB for the quarter ended
June 30, 1999. The registration rights provide that, within 45 days after
the later of the completion of the last closing in the offering or the
date the offering is terminated by the Company, the Company will: (i) file
a registration statement covering the resale of the shares, warrants and
shares underlying the warrants, (ii) undertake commercially reasonable
efforts to cause such registration statement to be declared effective by
the SEC within 90 days after such filing, and (iii) undertake commercially
reasonable efforts to keep the registration statement continuously
effective, supplemented and amended for a period of one year. The
registration rights also provide, however, that the Company is not
obligated to file or maintain the effectiveness of any registration
statement if the Company determines, in the exercise of its reasonable
good faith judgement that such registration would have a material adverse
effect on the business prospects, finances or operations of the Company;
or that such registration would interfere with any material financing,
disposition, corporate reorganization or other material transaction
involving the Company or any of its subsidiaries. The Company closed the
offering on September 30, 1999 after completing only the minimum offering
and by the terms of the offering, expects to file a registration statement
with the SEC in December 1999.
If the Company breaches its obligations as set forth above to file or to
maintain the effectiveness of the registration statement and, in the case
of a failure to maintain such effectiveness, and such effectiveness is
-11-
<PAGE> 13
not restored within 90 days thereafter, the Company will pay liquidated
damages to each holder of registrable securities. The liquidated damages
shall be equal to 5% per month of the number of such investor's shares
which were issued and outstanding and entitled to be registered on the
date of the registration default. Such liquidated damages shall begin 30
days after the registration default and continue until such time as the
Company is current in its obligations or until the shares are exempt from
registration provisions pursuant to Rule 144 of the Securities Act.
In May 1999, the Company issued $575,000 original principal amount of its
10% convertible debentures (the "Debentures") to accredited corporate and
individual investors pursuant to Rule 506 of Regulation D promulgated
under the Exchange Act. Selling commissions of approximately $57,500
payable to L. Flomenhaft & Co., Inc., as placement agent, were deferred
pending the closing of the minimum offering of the Unit Equity offering
closed in August 1999 as discussed above. The Company relied on
information provided and representations made by purchasers of the
Debentures in claiming exemption from the registration obligations of the
Securities Act.
Under the terms of the Debenture Agreement, the principal amount of the
Debentures plus accrued interest was automatically converted into shares
of the Company's common stock. Debenture holders were also entitled to an
"equity kicker" equal to one-half the number of shares of common stock
into which the Debentures were converted. The Company converted the
Debentures into common stock at $1.50 per share and, in accordance with
the terms of the Debentures, provided the additional shares as part of the
equity kicker.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 12, 1999, the stockholders of the Company adopted the Company's
1999 Stock Incentive Plan and the 1999 Directors Stock Incentive Plan by
written consent in lieu of a special meeting of stockholders in accordance
with Delaware General Corporation Law. The written consent in lieu of a
special meeting was signed by holders of 2,094,431 shares of common stock,
constituting a majority of common stock issued and outstanding and being
sufficient to approve the adoption of the 1999 Stock Incentive Plan and
the 1999 Directors Stock Incentive Plan. Holders of 1,247,954 shares of
common stock did not participate in the stockholder action by written
consent in lieu of special meeting. There were no votes against the
adoption of the plans nor any broker non-votes.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
<TABLE>
<S> <C>
Exhibit No. Description
---------- -----------
27. Financial Data Schedule
</TABLE>
REPORTS ON FORM 8-K
NONE
-12-
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereto duly authorized.
SONUS COMMUNICATION HOLDINGS, INC
---------------------------------------
(Registrant)
DATE: NOVEMBER 15, 1999 BY:/s/ W. Todd Coffin
---------------------------------------
W. Todd Coffin
President and Chief Executive Officer
DATE: NOVEMBER 15, 1999 BY: /s/ R. D. Rose
---------------------------------------
Richard D. Rose
Chief Financial Officer
-13-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY FOR THE THIRD QUARTER ENDED
SEPTEMBER 30, 1999 INCLUDED IN THE COMPANY'S FORM 10-QSB
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 75,942
<SECURITIES> 0
<RECEIVABLES> 80,551
<ALLOWANCES> (8,954)
<INVENTORY> 0
<CURRENT-ASSETS> 439,888
<PP&E> 643,428
<DEPRECIATION> (90,357)
<TOTAL-ASSETS> 1,175,713
<CURRENT-LIABILITIES> 857,740
<BONDS> 0
0
0
<COMMON> 4,181
<OTHER-SE> 158,792
<TOTAL-LIABILITY-AND-EQUITY> 1,175,713
<SALES> 0
<TOTAL-REVENUES> 1,022,296
<CGS> 0
<TOTAL-COSTS> 1,228,688
<OTHER-EXPENSES> 996,316
<LOSS-PROVISION> 44,726
<INTEREST-EXPENSE> 3,634
<INCOME-PRETAX> (1,251,068)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,251,068)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,251,068)
<EPS-BASIC> (0.33)
<EPS-DILUTED> 0
</TABLE>
