SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(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.
For the transition period from _____________________ to _____________________
Commission file number: 025582
GRACE DEVELOPMENT, INC.
(Exact Name of Registrant as Specified in its Charter)
Colorado 84-1110469
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1690 Chantilly Drive (678) 222-3030
Atlanta, Georgia 30324 (Registrants Telephone Number
(address of Principal Executive Offices) Including Area Code)
(Zip Code)
Not Applicable
(Former Name, Former Address and Former
Fiscal Year, if Changed Since Last Report)
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 No X
As of August 31, 2000, there were 88,319,957 shares of the registrant's common
stock, no par value, outstanding.
GRACE DEVELOPMENT, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
INDEX
Page
PART I 2
FINANCIAL INFORMATION 2
ITEM 1. FINANCIAL STATEMENTS 2
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 26
PART II 26
ITEM 1. LEGAL PROCEEDINGS 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K 27
SIGNATURES 27
EXHIBIT INDEX 28
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The Company was unable to obtain the review of the Consolidated Financial Statements
included herein, as required by Rule 10-01(d) of Regulation S-X promulgated under the
Securities Exchange Act of 1934, as amended, due to the unavailability of certain
financial information necessary to complete the review. The Company will file an
amendment to this Quarterly Report on Form 10-Q for the quarter ended June 30, 2000,
and, if necessary, the Quarterly Report on Form 10-Q for the quarter ended March 31,
2000, as soon as practicable after the required review is completed.
The accompanying financial statements have been prepared in conformity with generally
accepted accounting principles, which contemplate the continuation of the Company as a
going concern. However, the Company incurred a net loss of $11,452,894 for the period
ended June 30, 2000 and had a working capital deficiency of $3,704,699 at June 30, 2000.
The Company has sustained continuous losses from operations. The Company has used,rather
than provided, cash in its operating activities during the period ended June 30, 2000
and 1999.
Management plans to grow revenues through the expansion of its product offerings to its
existing and acquired customer base, added during the first quarter. This revenue model
is expected to generate recurring revenues to work towards a positive cash flow.
Additionally, the Company will continue its efforts to raise the additional capital
required to fund planned 2000 activities.
In view of the matters described above, there is substantial doubt about the Company's
ability to continue as a going concern. The recoverability of the recorded assets and
satisfaction of the liabilities reflected in the accompanying balance sheet is dependent
upon continued operation of the Company, which is in turn dependent upon the Company's
ability to meet its financing requirements on a continuing basis and to succeed in its
future operations. There can be no assurance that management will be successful in
implementing its plans. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
GRACE DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2000 1999
(Unaudited) (Audited)
ASSETS:
Cash and cash equivalents $160,263 $102,481
Restricted cash 50,000 -
Investment in certificates of deposit 2,700,000 3,700,000
Accounts receivable, net of allowance for
doubtful accounts of 1,107,056 56,458
$ 96,756 at June 30, 2000 and $ 10,500 at
December 31, 1999
Inventory 18,352 -
Prepaid expenses and other assets 172,385 156,599
Officer advances 14,451 25,012
Total current assets 4,222,507 4,040,550
Property and equipment:
Leasehold improvements 147,451 45,468
Furniture and fixtures 140,490 84,949
Equipment and software 7,645,646 2,530,895
Vehicles 70,480 -
8,004,066 2,661,312
Less: Accumulated depreciation and
amortization (864,171) (263,423)
7,139,895 2,397,889
Other assets:
Goodwill and other intangibles, net of
amortization 5,262,416 600,547
of $385,666 at June 30, 2000 and $75,931
at December 31, 1999
Notes receivable - Related party 450,000 434,500
Advances to acquisition candidates - 50,000
Other non-current assets 596,025 75,329
Total assets $17,670,843 $7,598,815
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Accounts payable $2,406,477 $360,532
Deferred revenues 218,014 141,930
Accrued compensation - officers and directors 323,750 676,666
Accrued liabilities 609,634 218,182
Lines of credit 2,432,061 3,074,339
Current portion of obligations under capital lease 1,722,413 735,170
Current portion of long term debt 214,856
Total current liabilities 7,927,205 5,206,819
Senior convertible notes payable 6,500,000 -
Obligations under capital leases, net of
current portion 4,109,448 1,237,634
Long term debt, net of current portion 238,085 -
18,774,738 6,444,453
Stockholders' deficit
Grace Common stock; no par value;
800,000,000 13,464,832 4,270,195
shares authorized; 88,319,957 issued and outstanding
at June 30, 2000; and 73,370,903 at December 31, 1999.
Accumulated deficit (14,568,727) (3,115,833)
Total stockholders' deficit (1,103,895) 1,154,362
Total liabilities and stockholders'
deficit $17,670,843 $7,598,815
- -
GRACE DEVELOPMENT, INC. AND SUBDSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Predecessor Predecessor
Company Company
Three months ended Three months ended Six months ended Six months ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues $2,365,863 $185,952 $2,991,924 $192,917
Operating expenses
Cost of services 2,234,636 - 2,750,755 -
Sales and marketing expenses 620,779 12,798 1,110,037 12,798
General and administrative expenses 2,482,973 586,511 4,304,718 614,363
Depreciation and Amortization 611,397 6,907 984,256 8,000
Total operating expenses 5,949,785 606,216 9,149,766 635,161
Loss from operations (3,583,922) (420,264) (6,157,842) (442,244)
Other income (expense)
Interest income 35,784 341 78,323 341
Interest expense (237,491) (3,751) (384,319) (3,751)
Total other income (expense) (201,707) (3,410) (305,995) (3,410)
Loss before extra ordinary items (3,785,629) (423,674) (6,463,838) (445,654)
Extraordinary items
Charge for early retirement of debt (1,131,235) (1,207,508)
Transaction fees related to Private
placement (3,781,548) (3,781,548)
Total extraordinary items (4,912,783) (4,989,056)
Loss before income taxes (8,698,412) (423,674) (11,452,894) (445,654)
Income tax expense - - - -
Net loss $(8,698,412) $(423,674) $(11,452,894) $(445,654)
Net loss per common share before
extraordinary items $(0.04) N/A $(0.09) N/A
Basic and diluted net loss per common
share $(0.10) $(0.78) $(0.15) $(0.82)
Weighted average common shares
outstanding 84,798,561 543,824 73,939,643 543,824
GRACE DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Predecessor
Company
Six Months Ended Six Months Ended
June 30, June 30,
2000 1999
Cash flows from operating activities
Net loss $(11,452,894) $(445,654)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation 598,590 8,000
Amortization 385,666
Allowance for doubtful accounts 86,256
Amortization of deferred compensation 31,250
Issuance of common stock for compensation 720,000 382,500
Issuance of common stock for origination fees 200,000
Charge for early retirement of debt 817,800
Transaction fees related to Private placement 3,740,668
Changes in assets and liabilities from operations
Accounts receivable (821,912)
Inventory 36,332
Prepaid expenses and other assets (6,187) (19,044)
Officer advances 10,561
Other non-current assets (173,024)
Accounts payable 169,488 93,219
Deferred revenues (16,472)
Accrued compensation - officers and directors (201,716)
Accrued liabilities 72,198
Net cash used in operating activities (5,803,397) 19,021
Cash flows from investing activities
Acquisition of property and equipment (292,818) (13,126)
Other intangibles (3,000)
Redemption of certificate of deposit 1,000,000
Escrow deposits - (38,000)
Issuance of notes receivable (15,500)
Acquisition of business units (107,449) (353,294)
Net cash used in investing activities 581,233 (404,420)
Cash flows from financing activities
Advance from stockholder - 2,519
Net proceeds from lines of credit 357,722
Repayment of lines of credit (1,000,000)
Proceeds from notes payable 3,219,264 450,000
Repayment of note payable (1,400,000)
Repayment of obligations under capital leases (455,509)
Net proceeds from issuance of common stock 4,558,468 31,000
Net cash provided by financing activities 5,279,945 483,519
Increase in cash and cash equivalents 57,782 98,120
Cash and cash equivalents at beginning of period 102,481 3,719
Cash and cash equivalents at end of period $160,263 $101,839
Supplemental disclosure of cash flow information
Cash paid for interest $384,319 $3,751
Supplemental activities of Non-Cash Transactions:
During the six months ended June 30, 2000 the Company
acquired equipment under several capital lease obligations
totaling $3,566,439
Stock issued for compensation $871,200 $382,500
Stock issued as an origination/standby fee $200,000
Stock issued in conjunction with third private placement $817,800
Stock issued in conjunction with fourth private placement $4,083,115
Acquisition of business units: Total 2000 Total 1999
Goodwill 4,935,369 $676,477
Assets acquired 2,012,221 237,998
Liabilities acquired (3,617,620) (507,176)
Stock issued (3,222,522) (54,005)
Net cash $107,449 $353,294
GRACE DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
Additional
Common Stock Paid-In Accumulated
Shares Amount Capital Deficit Total
Issuance of New Millennium Common stock $32,500 $32,500
Net loss for the period ended
December 31, 1998 (20,741) (20,741)
Predecessor balance at December 31, 1998 $32,500 $(20,741) $11,759
Shares issued in repayment of
Shareholder debt 31,000 31,000
Shares issued as compensation
to New Millennuim shareholders 174,375 174,375
Shares issued for Avana acquisition 44,021 44,021
Private Placement of New
Millennium shares 777,600 777,600
Private Placement of New
Millennium shares 3,459,319 3,459,319
Warrants exercised 147,000 147,000
Warrant cancellation fees (395,620) (395,620)
Assumed purchase of net assets of
Grace at Predecessor cost 66,246,933 $4,270,195 (4,270,195)
Reverse acquisition of Grace
by New Millennium 7,599,962 (10,000) (10,000)
Shares issued for NWGA acquisition 25,000 10,000 10,000
Net loss for the twelve months ended
December 31, 1999 $(3,095,092) $(3,095,092)
Balance at December 31, 1999 73,871,895 $4,270,195 $- $(3,115,833) $1,154,362
Shares cancelled; included in error (500,992) - -
Shares issued for WebWizard acquisition 1,762,554 705,022 705,022
Shares issued as compensation 1,650,000 660,000 660,000
Shares issued for PVTel acquisition 2,150,000 967,500 967,500
Shares issued with Third Private
Placement 2,100,000 817,800 817,800
Shares issued for Alpha Computer
acquisition 3,100,000 1,550,000 1,550,000
Net loss for the three months ended
March 31, 2000 (2,754,482) (2,754,482)
Balance as of March 31, 2000 84,133,457 $8,970,517 - $(5,870,315) 3,100,202
Shares issued as transaction fees 336,000 151,200 151,200
Shares issued to directors as
compensation 150,000 60,000 60,000
Shares issued with Fourth Private
Placement 3,500,500 4,083,115 4,083,115
Shares issued as transaction fees 200,000 200,000 200,000
Net loss for the three months ended
June 30, 2000 (8,698,412) (8,698,412)
Balance at June 30, 2000 88,319,957 $13,464,832 $- $(14,568,727) $(1,103,895)
GRACE DEVELOPMENT, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 and 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Description of the Company and Basis of Presentation:
Grace Development, Inc., a Colorado corporation doing business as Avana Communications ("Grace"
or the "Company"), is an integrated communications provider ("ICP") operating as a
telecommunications services provider and an Internet services provider ("ISP") to business and
residential customers located primarily in the Southeastern United States. Telecommunication services
currently offered are local and long distance, frame relay, ATM (Asynchronous Transfer Mode), data private
lines and calling cards.
The ISP operation focuses on serving individuals and small businesses. The Company's service offerings
include dial-up Internet access and business services which are offered in various price and usage plans
designed to meet the needs of our subscribers. Business services include web hosting, which entails
maintaining a customer's web site; high speed, dedicated Internet access; web page design; domain
name registration and customer web server co-location.
Principles of consolidation and basis of financial reporting:
The consolidated financial statements include the accounts of Grace and its wholly owned subsidiaries.
All significant inter-company accounts and transactions have been eliminated. The financial statements
of the predecessor are the accounts of New Millennium Multimedia, Inc., a Georgia corporation ("
New Millennium"). New Millennium was formed on October 6, 1998, and merged with and into a
subsidiary of Grace on September 28, 1999 (the "Grace Merger"). Although, as a result of
the Grace Merger, New Millennium became a wholly owned subsidiary of the Company, the Grace Merger was
accounted for as an acquisition of Grace by New Millennium because, following the transaction, the
former shareholders of New Millennium owned a substantial majority of the outstanding common stock, no
par value, of the Company ("Common Stock"). Accordingly, the historical Consolidated
Financial Statements of the Company are the financial statements of New Millennium adjusted for the
assumed acquisition of the net assets of Grace in exchange for the issuance of the Company's Common
Stock. The Grace Merger was accounted for as a purchase and, accordingly, the net assets of New Millennium
were accounted for at their historical cost, and the net assets of Grace were accounted for at their fair
value as of September 28, 1999. No goodwill was recorded as a result of the Grace Merger.
The predecessor acquired Avana Communications Corporation, a Georgia corporation ("Avana"),
on May 5, 1999. The Company acquired WebWizard, Inc., a Delaware corporation ("WebWizard"),
on January 31, 2000; P.V. Tel., Inc., a South Carolina corporation ("PVTel"), on February 24,
2000; and Alpha Computer Services, Inc., a Florida corporation ("Alpha Computer"), on June 30,
2000. Each of these acquisitions was accounted for as a purchase, and the results of operations of each
acquired entity has been included in the Company's consolidated statements of operations from the date
of their respective acquisitions.
The accompanying unaudited consolidated financial statements reflect, in the opinion of management, all the
adjustments necessary to achieve a fair presentation of the Company's financial position and results
for the interim periods presented. These consolidated financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K
for the year ended December 31, 1999, as amended.
Cash and Cash Equivalents:
Cash and cash equivalents consist of cash and other highly liquid debt instruments with an original
maturity of three months or less.
Inventory:
Inventory is carried at the lower of cost or fair market value. Inventory is charged to operations as
products are sold on a first-in, first-out (FIFO) method.
Property and Equipment:
Property and equipment is carried at cost. Depreciation is computed using the straight-line method based
on estimated useful lives of the assets, generally two to ten years. Asset classifications and estimated
useful lives are as follows:
Leasehold Improvements Life of lease
Furniture & Fixtures 5 to 10 years
Equipment & Software 2 to 7 years
Vehicles 2 to 5 years
Goodwill:
The Company amortizes goodwill on a straight-line basis over a period of five years.
Revenue Recognition:
Internet Services. The Company recognizes revenues for Internet services as they are earned. Some
customers pay an annual fee for Internet services and the revenues are recognized on a straight-line
basis over the service period. Deferred revenue represents the portion of unearned Internet service
fees.
Telecommunications Services. The Company recognizes revenue for telecommunications services based upon
minutes of traffic processed and contracted fees.
Service Contracts: The Company has service contracts that run for periods up to one year. Revenue from
these contracts is recognized ratably over the life of the contract.
Software Products. The Company recognizes revenues from software products in accordance with the American
Institute of Certified Public Accountants' (AICPA) Statement of Position 97-2, "Software
Revenue Recognition," as follows:
License revenue
Revenue from the licensing of software is recognized after shipment of the product and
fulfillment of acceptance terms, provided no significant obligations remain and collection of the
resulting receivable is deemed probable.
Installation, hosting and education
When services are provided.
Support contract
Ratably over the life of the contract from the effective date.
Software Development Costs:
The Company expenses research and development costs, as incurred. Statement of Financial Accounting
Standards No. 86 "Accounting for the costs of computer software to be sold, leased or otherwise
marketed" does not materially affect the Company.
Income Taxes:
Income taxes are based on the loss for financial reporting purposes and reflect a current asset for
the estimated taxes recoverable in the current year tax return and changes in deferred taxes. Deferred
tax liabilities and assets are recognized for the estimated tax effects of temporary differences between
financial reporting and taxable income (loss) for the loss carry-forwards based on currently enacted tax
laws and rates. A valuation allowance is used to reduce deferred tax assets to the amount that is more
likely than not to be realized.
Use of Estimates:
The preparation of financial statements in conformity with Generally Accepted Accounting Principles
("GAAP") requires management to make estimates and assumptions that affect the reported
amounts of certain assets, liabilities, and disclosures, including the allowance for doubtful accounts,
useful lives and recoverability of long-term assets. Actual amounts could differ from those estimates.
Any adjustments applied to estimates are recognized in the year in which such adjustments are determined.
2. ACQUISITIONS:
WebWizard Acquisition:
On January 31, 2000, a wholly owned subsidiary of Grace completed its acquisition of WebWizard. The
acquisition was accounted for as a purchase pursuant to Accounting Principles Board Statement No. 16,
"Business Combinations" ("APB 16"), and the results of Web Wizard's
operations have been included in the Company's 2000 consolidated statement of operations from the
date of acquisition. Total consideration for the acquisition was the issuance of 1,287,554 shares of
Grace Common Stock. 257,510 of these shares will be held in escrow until June 30, 2001, to benefit
Grace in the event of any indemnifiable claims arising out of the acquisition of WebWizard.
As a result of the acquisition of WebWizard, the Company recorded goodwill of approximately $534,000.
Goodwill is amortized on a straight-line basis over five years.
Additionally, Grace issued 475,000 shares to former shareholders of WebWizard to extinguish certain
pre-acquisition debt owed by WebWizard to such shareholders.
PVTel Acquisition:
On February 24, 2000, a wholly owned subsidiary of Grace completed its acquisition of PVTel. The
acquisition was accounted for as a purchase pursuant to APB 16, and PVTel's results of
operations have been included in the Company's 2000 consolidated statement of operations from
the date of acquisition. Total consideration for the acquisition was the issuance of 2,150,000 shares
of Grace Common Stock. 750,000 of these shares will be held in escrow until July 31, 2001, to benefit
Grace in the event of any indemnifiable claims arising out of the acquisition of PVTel.
Prior to the consummation of the PVTel acquisition, the Company advanced to PVTel approximately
$434,500 for working capital purposes (the "Working Capital Advances"), which advances
were evidenced by a promissory note made by PVTel to the Company. At the closing of the PVTel
acquisition, the promissory note evidencing the Working Capital Advances was canceled and two
shareholders of PVTel delivered to the Company promissory notes, including accrued interest, totaling
$450,000, in substitution thereof. The notes bear interest at the rate of 9% per annum payable on
or before February 24, 2001. The indebtedness represented by these substituted promissory notes is
secured by 150,000 shares of Grace Common Stock owned by the two former shareholders of PVTel.
Repayment of the notes is contingent upon the note holders being afforded the right to register the
shares of Common Stock they received in the PVTel acquisition in a subsequent registration by the
Company during the term of the notes pursuant to a registration rights agreement executed at the
closing of the PVTel acquisition. In the event that the note holders are not afforded the opportunity
to register their stock within the prescribed period, the notes and all obligations under the notes
will be canceled and all security interests in the Common Stock held by the note holders will be
released.
The Company recorded goodwill of approximately $1,673,000 as a result of this transaction. Goodwill
is amortized on a straight-line basis over five years.
Alpha Computer Acquisition:
On June 30, 2000, an indirect wholly owned subsidiary of the Company merged with and into Alpha
Computer (the "Alpha Computer Acquisition"). The Alpha Computer Acquisition was
accounted for as a purchase pursuant to APB 16 and, as a result, Alpha Computer's assets
have been included in the Company's 2000 consolidated statements as of the date of acquisition.
Total consideration for the acquisition was the issuance of 3,100,000 shares of Grace Common Stock.
620,000 of these shares will be held in escrow until March 30, 2001, to benefit Grace in the event of
any indemnifiable claims arising out of the Alpha Computer Acquisition.
The Company recorded goodwill of approximately $2,734,000 as a result of this transaction. Goodwill
is amortized on a straight-line basis over five years
3. INVESTMENTS IN CERTIFICATES OF DEPOSIT:
The Company accounts for its investments under Financial Accounting Standards Board ("FASB")
No. 115 "Accounting for Certain Investments in Debt and Equity Securities." As of June 30,
2000, the Company's investments consisted of the following:
Maturity Date Interest Rate Amount
Certificate of Deposit September 24, 2000 4.689 % $2,000,000
Certificate of Deposit July 29, 2000 5.250 % 700,000
$2,700,000
These certificates of deposit are pledged against lines of credit (see Note 6).
4. ACCOUNTS RECEIVABLE:
The Company does not have a secured interest in its accounts receivable, however it does have legal
recourse for defaulted amounts. The maximum accounting loss from the credit risk associated with
accounts receivable is the face amount of the receivable recorded, less any allowance for doubtful
accounts.
Accounts Receivable Sold With Recourse
In the normal course of business, the Company discounts or sells accounts receivable with recourse
to a factor. As of June 30, 2000 there were approximately $396,300 of such receivables. The factor
reserves an amount equal to 35% of each receivable account sold. As each account is paid in full,
the reserve associated with the paid account will be returned to the Company. The fee for factoring
the receivable is 3% of the face amount of each invoice factored. After 90 days, if the receivable
is not collected, the factor at its discretion may require the Company to repurchase the receivable
for 68% of the net sale of the invoice.
5. COMMITMENTS AND CONTINGENCIES:
Concentrations of Credit Risk:
The Company maintains the majority of its cash deposits and investments at five financial depository
institutions. The amount of the accounting loss due to credit risk the Company would incur if the
financial depository institutions failed would be the cash deposits in excess of the $100,000 amount
per depositor that is federally insured. The amount at risk totaled approximately $2,500,000 at June
30, 2000.
6. LINES OF CREDIT:
The Company has a line of credit with Bank of America to provide working capital of up to $50,000.
The interest rate is 10.50% per annum payable monthly. The balance on the line of credit was $50,300
on June 30, 2000. The line of credit is unsecured.
The Company has a line of credit with BankTennessee to provide working capital of up to $650,000.
The interest rate is 7.250% per annum payable monthly. The balance on the line of credit was
$649,900 on June 30, 2000. The line of credit is secured by a Certificate of Deposit in the amount
of $700,000, which matured on July 29, 2000. The proceeds were used to satisfy the outstanding balance.
The Company has a line of credit with Regions Bank to provide working capital of up to $2,000,000.
The interest rate is 5.998% per annum payable monthly. The balance on the line of credit was
$1,721,661 on June 30, 2000. The line of credit is secured by a Certificate of Deposit in the amount
of $2,000,000, and matures on September 24, 2000.
A second line of credit with Regions Bank to provide working capital of up to $1,000,000 was paid off
on June 15, 2000.
On January 21, 2000, the Company obtained an additional $1,000,000 line of credit from Regions Bank.
The line of credit bears interest at a variable rate (initially 9.0% per annum), payable monthly.
The line is secured by 500,000 shares of the Company's Common Stock that are. owned by Signal
Compression, Inc. ("Signal"). The shares are subject to an agreement, whereby the Company
was required to pay $37,500 and issue 200,000 shares of common stock to Signal for the right to
collateralize the shares. The line is personally guaranteed by Richard S. Granville, III, a former
Chief Executive Officer and director of the Company. As of May 22, 2000, the line of credit had been
paid down to $10,200 and converted to a term loan with a maturity of March 24, 2001.
7. SENIOR CONVERTIBLE NOTES PAYABLE:
The Company has senior convertible notes payable with a face value of $6,500,000 that were issued with
the Fourth Private Placement (see Note 9). The notes bear interest at a rate of 12% per annum, payable
annually. The notes are due April 14, 2002. The $6,500,000 of proceeds was allocated between the stock,
stock warrants and debt issued and as a result, the note was recorded at a discount of approximately
$3,740,668. The difference between the face amount of the note and the discounted amount is normally
amortized over the period between date of issuance and the earliest conversion date of the related note.
Since the notes were immediately convertible, the Company was required to record a charge to operations
of $3,740,668, as of the issue/conversion date.
8. PREFERRED STOCK:
The Company is authorized to issue 10,000,000 shares of preferred stock with no par value. The preferred
stock may be issued, by the Board of Directors, in one or more series. The Board of Directors may
determine the terms of each series including preferences, rights and restrictions, by resolution upon
the establishment of such series. No shares of preferred stock have been issued.
9. PRIVATE PLACEMENTS:
Third Private Placement
On March 1, 2000, the Company entered into a private placement agreement with C'S Private Equity Fund,
LP ("C'S)" (the "Third Private Placement"), pursuant to which the Company issued
to C'S 14 units ("C'S Units") for $100,000 per C'S Unit. Each C'S Unit consisted of (i) a
$100,000 convertible senior secured note of the Company and (ii) 150,000 shares of the Company's
Common Stock. An aggregate of 2,100,000 shares of the Company's Common Stock were issued along
with a convertible senior secured note payable to C'S in the principal amount of $1,400,000. The net
proceeds of $1,363,000 were used for the purchase and working capital requirements of WebWizard and
PVTel. The note was due March 2, 2001, and bore interest at a rate of 12% per year, payable quarterly.
On April 14, 2000, approximately $1,421,000 of the proceeds from the Fourth Private Placement was used
to repay all of the outstanding principle and interest on this note. As a result of the early payoff,
the Company incurred a one-time charge to operations of $1,207,508 in the second quarter of 2000
representing the difference between the face value of the note and the discount recorded in the financial
statements of $770,000, together with all deferred transaction fees and costs of $237,508.
Fourth Private Placement
On April 14, 2000, the Company entered into a Securities Purchase Agreement (the "Fourth Private
Placement") with Greenlight Capital, L.P. (Greenlight) and certain affiliates of Greenlight (the
"Purchasers") pursuant to which the Company agreed to issue for an aggregate purchase price
of $6.5 million, (a) 3,000,000 shares of Common Stock, (b) the Company's 12% senior secured
convertible promissory notes with an original principal amount of $6,500,000 (the "Greenlight
Notes") convertible into shares of Common Stock at a conversion price of $1.00 per share, (c)
stock purchase warrants (the "Greenlight Warrants") to purchase 6,500,000 shares of Common
Stock at an exercise price of $1.00 per share, and (d)(1) options, exercisable on August 14, 2000, and
December 14, 2000, to purchase for an aggregate purchase price of $4.5 million on each date, (A)
1,575,000 shares of Common Stock, (B) Notes with an original principal amount of $2,925,000 convertible
into shares of Common Stock at a conversion price of $1.00 per share, and (C) Warrants to purchase
2,925,000 shares of Common Stock at an exercise price of $1.00 per share, and (2) an option, exercisable
on April 14, 2001, to purchase for an aggregate purchase price of $4.5 million, (A) 1,050,000 shares of
Common Stock, (B) Notes with an original principal amount of $2,925,000 convertible into shares of Common
Stock at a conversion price of $1.50 per share, and (C) Warrants to purchase 1,950,000 shares of Common
Stock at an exercise price of $1.50 per share (the "Greenlight Options"). The Greenlight
Note is guaranteed by all of the subsidiaries of the Company and is secured by all of the issued and
outstanding capital stock of all of the Company's subsidiaries. $1,421,000 of the net proceeds of
the Fourth Private Placement were used to repay all of the outstanding principal and interest on the
note issued in the Third Private Placement, and the remainder of the net proceeds will be used for the
Company's working capital requirements.
All of the shares of Common Stock issued pursuant to the Fourth Private Placement, including any shares
issued pursuant to the Greenlight Note, the Greenlight Warrant and the Greenlight Options, are "
restricted securities" under Rule 144 promulgated under the Securities Act. Such securities may
not be sold in the absence of registration under the Securities Act unless an exemption from registration
is available, including the exemptions contained in Rule 144.
Pursuant to a registration rights agreement executed at the closing of the Fourth Private Placement, all
of the shares of Common Stock issued pursuant to the Fourth Private Placement, including any shares issued
pursuant to the Greenlight Note, the Greenlight Warrant and the Greenlight Options, were granted "
demand" and "piggyback" registration rights. Subject to certain conditions set forth
in the registration rights agreement, the demand registration rights require that, 30 days following the
date on which the Company becomes eligible to use Form S-3, the Company use its reasonable best efforts to
register the applicable shares as soon as practicable. Subject to certain conditions set forth in the
registration rights agreement, the piggyback registration rights permit the holders of the covered shares
to include such shares in a registration by the Company when and if the Company proposes to register any
Common Stock under the Securities Act for sale to the public on a form that would also permit the
registration of the covered shares (other than registrations on Forms S-8 or S-4).
As of August 14, 2000, Greenlight had not exercised their option to purchase additional stock from the
Company.
10. STOCK COMPENSATION:
On February 16, 2000, pursuant to an amended and restated employment agreement, the Company awarded the
President of the Company 1,000,000 shares of the Company's Common Stock for prior services rendered
during 1999 and 2000. The shares were valued at $400,000 and a non-cash expense was recorded in the
statement of operations for the year ended December 31, 1999 of $266,666 and in the statement of operations
for the quarter ended March 31, 2000 of $133,334. Additionally, the Company will provide funds to pay all
taxes associated with the stock grant, and has agreed to accept a promissory note in the amount of $141,800
from the President. If the President of the Company has not been terminated for cause or voluntarily
resigned without good cause as of December 31, 2001, then the Company will forgive 50% of the principle
and accrued interest then payable under such note. The liability for the tax payment has been recorded and
upon payment, the note will then be recorded.
On April 14, 2000, the Company awarded Louis Friedman, currently a Director of the Company, 500,500 shares
of the Company's Common Stock for services rendered in conjunction with the Fourth Private Placement.
The shares were valued at $500,500 and a non-cash expense was recorded in the statement of operations for
the quarter ended June 30, 2000. In the event Greenlight exercises certain options it received in
conjunction with the Fourth Private Placement, Mr. Friedman will be eligible for additional shares.
11. RELATED PARTY TRANSACTIONS:
On April 19, 2000, the Company paid $150,000 in fees to Team Warlock Racing, an affiliate of Mr. Richard
S. Granville, a former Chief Executive Officer and Director of the Company. The fees are pursuant to a
marketing agreement, whereby Team Warlock will promote Avana Communications as a major sponsor as part of
a national marketing campaign.
12. STOCK OPTIONS:
The Company has not yet adopted a stock option plan but has awarded stock options to certain directors,
officers, and employees. The options vest in varying percentages, over varying time frames ranging from
"date of grant," up to 4 years. The options, after vesting, will expire in varying periods
ranging from 1 to 10 years. At June 30, 2000, 1,975,000 options were vested, with none being exercised
or expired.
Number of Options Outstanding Weighted AverageExercise Price Outstanding
December 31, 1998 0 N/a
Awarded 1,592,540 $1.00
Exercised 0 ______
December 31, 1999 1,592,540 $1 .00
Awarded 7,987,480 $.68
Exercised 0
Cancelled/Expired 0 ______
March 31, 2000 9,580,020 $.73
Awarded 1,444,678 $1.00
Exercised 0
Cancelled/Expired (868,960) $(.68)
June 30, 2000 10,155,738 $.70
The Company follows Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees," to account for stock options and employee stock purchase plans. Accordingly,
employee stock options are valued at the difference between the exercise price and the estimated
fair market value of the underlying shares on the date of grant, and recorded as deferred compensation,
which is then amortized over the life of the options.
An alternative method of accounting for stock options is SFAS 123, "Accounting for Stock-Based
Compensation." Under SFAS 123, employee stock options are valued at the grant date using the
Black-Scholes valuation model, and compensation cost is recognized ratably over the vesting period.
Had compensation cost for the Company's stock options and employee stock purchase plans been
determined based on the Black-Scholes model at the various grant dates, pro forma statements of
operations for the period ended June 30, 2000, would have been as follows:
As reported Adjustments Pro Forma
Net Loss $11,610,947 $(279,777) $11,890,724
Loss per share (.15) (.15)
The fair value of cash options on each date of grant is determined based on the following assumptions:
Risk free interest rate: 6.25%
Life: 4 to 10 years
Dividends: none
Volatility: 100% 124%
Weighted average grant debt fair value: $0.40
13. SUBSEQUENT EVENTS
Sale of ISP dial-up customers:
On August 31, 2000, the Company entered into an agreement to sell its Internet Access dial-up subscribers
to Earthlink Enterprises, Inc. Under terms of the agreement, payment will be made in increments. Initially,
a portion of the purchase price will be paid upon transfer of the customer database and acceptance by the
customer of the transfer; subsequent payments will be made upon the completion of two billing /payment
cycles. Approximately 4,500 subscribers will be included in the sale. Because of the contingent nature
of the sale no estimate of revenue has been made. Revenue will be recorded as received in the third and
fourth quarters of 2000.
Additional borrowings:
On August 3, 2000, the Company borrowed $100,000 from Dr. Lee Silverstein, a Director of the Company,
and $35,000 from James M. Blanchard, President and a Director of the Company. The loans bear an
interest rate of the prime rate plus 4%. In consideration of the loans, the Company agreed to repay
the loans as soon as adequate additional funding is obtained. Additionally, the Company has agreed to
issue discounted warrants to purchase up to 1,000,000 shares and 350,000 shares of the Company's
common stock to Dr. Silverstein and Mr. Blanchard, respectively, at a purchase price of $.10 per share
with an exercise period of five years.
On August 31, 2000, in connection with the sale of the Company's dial-up subscribers described
above, Greenlight Qualified, LP loaned the Company $200,000. The note is secured by an assignment of
proceeds from the sale and matures on September 11, 2000, which coincides with the first payment from
Earthlink. The note has an interest rate of twenty-five percent.
Litigation:
On June 15, 2000, the Board of Directors of the Company voted to terminate for cause the employment
of Mr. Benjamin F. Holcomb, Chairman of the Board and Chief Executive Officer of the Company, pursuant
to the terms of Mr. Holcomb's Employment Agreement with the Company dated February 1, 2000. The
termination date was effective as of July 15, 2000.
A dispute exists between Mr. Holcomb and the Company concerning the events related to the termination
of Mr. Holcomb's employment, and the Company has received from Mr. Holcomb a purported Notice of
Termination of the Employment Agreement, dated June 14, 2000. Mr. Holcomb has also resigned from the
Company's Board of Directors, effective June 15, 2000.
On July 13, 2000, Benjamin J. Holcomb, former CEO and Chairman, filed a lawsuit in the Superior Court
of DeKalb County, Georgia, naming Grace Development, Inc. and Louis Friedman, a Director of the Company,
as defendants. The lawsuit seeks to enforce a purported settlement agreement between Holcomb and the
Company, or alternatively to recover damages for fraud, negligent misrepresentation, and breach of
contract against Grace and for fraud, negligent misrepresentation, and tortious interference with
contractual relations against Mr. Friedman. The lawsuit seeks a judgment of at least $150,000 under
the purported settlement agreement or at least $500,000 under the alternative damages theories. The
Company and Friedman deny the allegations in the lawsuit and intend to defend the lawsuit vigorously.
Computer Plus Sales and Services, Inc. Acquisition:
On July 31, 2000, a wholly owned subsidiary of Grace entered into an agreement to acquire ComputerPlus
Sales and Services, Inc. (CPSS). The acquisition is expected to be completed in the third quarter, and
will be accounted for as a purchase pursuant to Accounting Principles Board Statement No. 16, "
Business Combinations" ("APB 16"), and, upon the closing of the transaction, the
results of CPSS's operations will be included in the Company's 2000 consolidated statement
of operations from the date of acquisition. Total consideration for the acquisition will be the issuance
of approximately 3,000,000 shares of Grace Common Stock, with a portion of these shares to be held in
escrow to benefit Grace in the event of any indemnifiable claims arising out of the acquisition.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Report contains statements that constitute forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and the Securities Exchange Act of 1934. These statements are based on
many assumptions and estimates and are not guarantees of future performance. Our actual results may differ
materially from those projected in any forward-looking statements, as they will depend on many factors
about which we are unsure, including many factors that are beyond our control. The words "may," "would,"
"could," "will," "expect," "anticipate," "believe," "intend," "plan," and "estimate," as well as similar
expressions, are meant to identify such forward-looking statements. Other potential risks and uncertainties
include, but are not limited to:
whether the Company can obtain additional capital to cover its operating losses and fund working
capital requirements;
whether the Company will achieve the desired results of its recently implemented cost reduction
and consolidation initiatives;
significant increases in competitive pressure in our industry;
whether the Company can successfully implement new business strategies and manage projected growth;
changes in political conditions or the legislative or regulatory environment;
general economic conditions, either nationally or regionally and especially in primary service area,
becoming less favorable than expected resulting in, among other things, a deterioration in business
activity;
changes occurring in business conditions and inflation;
changes in technology;
changes in the securities markets; and
other risks and uncertainties detailed from time to time in our filings with the Securities and
Exchange Commission, including our Form 10-KSB for the year ended December 31, 1999.
OVERVIEW
The predecessor to the Company, New Millennium, was formed on October 6, 1998, and merged with and into
a subsidiary of Grace on September 28, 1999 (the "Grace Merger"). Although, as a result of
the Grace Merger, New Millennium became a wholly owned subsidiary of the Company, the Grace Merger was
accounted for as an acquisition of Grace by New Millennium because, following the transaction, the former
shareholders of New Millennium owned a substantial majority of the Company's outstanding Common Stock.
Accordingly, the historical Consolidated Financial Statements of the Company are the financial statements
of New Millennium adjusted for the assumed acquisition of the net assets of Grace in exchange for the
issuance of the Company's Common Stock. In accordance with purchase accounting principles, the net
assets of New Millennium have been accounted for at their historical cost, and the net assets of Grace
have been accounted for at their fair value as of September 28, 1999. No goodwill was recorded as a result
of the Grace Merger.
The predecessor acquired Avana Communications Corporation on May 5, 1999. The Company acquired WebWizard
on January 31, 2000; PVTel on February 24, 2000; and Alpha Computer on June 30, 2000. Each of these
acquisitions was accounted for as a purchase, and the results of operations of each acquired entity has
been included in the Company's consolidated statements of operations from the date of the respective
acquisition.
REALIZATION OF ASSETS AND SATISFACTION OF LIABILITIES
The accompanying financial statements have been prepared in conformity with generally accepted accounting
principles, which contemplate the continuation of the Company as a going concern. However, the Company
incurred a net loss of $11,452,894 for the period ended June 30, 2000 and had a working capital deficiency
of $3,704,699 at June 30, 2000. The Company has sustained continuous losses from operations. The Company
has used, rather than provided, cash in its operating activities during the period ended June 30, 2000 and
1999.
Management plans to grow revenues through the expansion of its product offerings to its existing and
acquired customer base, added during the first quarter. This revenue model is expected to generate
recurring revenues to work towards a positive cash flow. Additionally, the Company will continue its
efforts to raise the additional capital required to fund planned 2000 activities.
In view of the matters described above, there is substantial doubt about the Company's ability to continue
as a going concern. The recoverability of the recorded assets and satisfaction of the liabilities reflected
in the accompanying balance sheet is dependent upon continued operation of the Company, which is in turn
dependent upon the Company's ability to meet its financing requirements on a continuing basis and to succeed
in its future operations. There can be no assurance that management will be successful in implementing its
plans. The financial statements do not include any adjustments that might result from the outcome of this
uncertainty.
This section does not contain a quarter-to-quarter comparison of the Company's 2000 and 1999 financial
information because the Company did not have any significant operations in the first and second quarters of
1999,and as such, the comparison would not be meaningful.
RESULTS OF OPERATIONS
Revenues: Revenues for the second quarter ended June 30, 2000, totaled $2,365,863 and indicates an increase
of $1,739,802 or 278% over first quarter revenues of $626,061. The increase can be attributed primarily to
first quarter acquisitions, however, internal growth in existing businesses generated approximately $224,369,
a 36% increase over first quarter revenues.
Cost of Services: Cost of services for providing Internet and Telecom services includes salaries and wages
of those employed in customer and field service and in the technical support areas needed to maintain and
upgrade the Company's network and systems. In addition, cost of services includes those cost associated
with the design and implementation, including product cost, of network installations. For the quarter ended
June 30, 2000, cost of services was $2,234,636, or 94% of revenues; a $1,718,517 increase from first quarter
costs of $516,119. Management has addressed and identified various causes of the margin erosion, and steps
have been taken to reduce and eliminate the cause.
Sales and Marketing Expenses: Sales and marketing expenses include the salaries and wages of sales and
marketing personnel, advertising costs for the Internet operations and development of the promotional
campaign for both telecommunications sales and corporate branding. For the quarter ended June 30, 2000,
sales and marketing expenses were $620,779; an increase over first quarter expense of $489,258. This
represents an increase of $131,521 or 27%; however, on a comparative basis to revenues, the second quarter
indicates an improvement over the first quarter; 28% vs. 82%. Sales and marketing expenses are expected
to increase as the Company pursues an aggressive sales effort.
General and Administrative Expenses: Included in General and Administrative expenses are salaries and wages
of senior management and corporate headquarters personnel, professional fees, travel expenses, office supplies
and other general expenses. Expenses in these categories increased due to growth in the number of employees,
the closing of several acquisitions and financings, and increased costs related to pursuing potential
acquisitions and related financing activities. For the quarter ended June 30, 2000, General and Administrative
expenses were $2,482,937; an increase of $661,192 or 36% over the first quarter expense of $1,821,745.
Depreciation and Amortization: Depreciation expenses are computed using the straight-line method based upon
the estimated useful lives of assets, generally two to ten years. Goodwill and other intangible costs are
amortized over a five-year period. For the quarters ended June 30 and March 31, 2000, depreciation expense
and amortization expense were $318,835 and $292562; and $279,755 and $93,104, respectively. The increase in
depreciation and amortization is attributed primarily to first quarter acquisitions and their related asset
base and acquired goodwill.
Interest Expense: The Company currently incurs interest expense on its lines of credit and under capitalized
leases. For the quarter ended June 30, 2000, interest expense was $237,491; an increase of $90,663 over first
quarter cost of $146,828. The increase can be attributable to the maturation of certain financing leases,
and the inclusion of related interest for a full quarter.
Interest Income: The Company currently earns interest income on cash and cash equivalents and investments.
For the quarter ended June 30, 2000, interest income was $35,784; a minor decrease over first quarter income
of $42,540.
Balance Sheet:
Accounts receivable, net of the allowance for doubtful accounts, increased from $56,458 at the end of 1999, to
$1,107,056 as of June 30, 2000, due primarily to the acquisition of WebWizard, PVTel and Alpha Computer, and
increased billings from sales of telecommunications services.
Equipment and software increased from $2,530,895 at the end of 1999, to $7,645,895 as of June 30, 2000, due
in part to the acquisition of WebWizard, PVTel and Alpha Computer, but primarily to the purchase of
approximately $3,500,000 in new network equipment from Lucent Technologies.
Goodwill, net of amortization, increased from $600,547 at the end of 1999, to $5,262,416 as of June 30, 2000,
due to the acquisition of WebWizard, PVTel and Alpha Computer.
Accounts payable increased from $360,532 at the end of 1999, to $2,406,477 as of June 30, 2000, due primarily
to the acquisition of WebWizard, PVTel and Alpha Computer, and to the increased purchasing activity related to
the growth of internally generated revenues.
Accrued liabilities increased from $218,182 at the end of 1999, to $609,634 as of June 30, 2000, due in part
to the acquisition of WebWizard, PVTel and Alpha Computer; and also related to costs associated with the third
and fourth private placement financings.
Lines of credit decreased from $3,074,339 at the end of 1999, to $2,432,061 as of June 30, 2000, due primarily
to the payoff of lines of credit with Regions Bank totaling approximately $2,000,000 (net of draws). These
lines of credit had been paid down to approximately $10,000, with a portion of the proceeds from the Fourth
Private Placement.
Obligations under capital leases, net of current portion, increased from $1,237,634 at the end of 1999, to
$4,109,448 as of June 30, 2000, due primarily to the purchase of approximately $3,500,000 in new network
equipment from Lucent Technologies and to the acquisition of WebWizard, PVTel and Alpha Computer. The current
portion of obligations under capital lease increased from $735,170 at the end of 1999, to $1,631,941 as of June
30, 2000.
Stockholders' equity represented by Common Stock outstanding increased from $4,270,195 at the end of
1999, to $13,622,885 as of June 30, 2000, due primarily to the issuance of shares related to the acquisition
of WebWizard, PVTel and Alpha Computer, the Third and Fourth Private Placements, and the issuance of shares
as compensation, as discussed in the notes to the financial statements.
The accumulated deficit increased from $3,115,833 at the end of 1999, to $14,726,780 as of June 30, 2000, due
primarily to a net loss from operations of $6,463,838 and extraordinary one time charge of $4,989,056 related
to the Third and Fourth private placement financings.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 2000, the Company's operating activities required net cash of $5,669,743.
Working capital decreased by $1,029,825 in the period ended June 30, 2000. Working capital was provided by
proceeds from the Third and Fourth Private Placement financing, which was offset in part by the current portion
of leases capitalized during the quarter and draws against the lines of credit used for the same period.
Changes in net cash from operations resulted primarily from the loss for the period offset in part by non-cash
items of depreciation, amortization and compensation paid in the form of stock. The changes in net cash were
also affected by a net increase of $499,222 in accounts receivable, prepaid expenses, other assets; with
additional cash us by a decrease in accounts payable and accrued liabilities of $366,699.
Cash provided investing activities was $841,988 for the six months ended June 30, 2000. Expenditures of cash
for property and equipment were made totaling $277,241 for the quarter ended June 30, 2000.
The Company's financing activities occurring in the first half of 2000 consisted of the Third and Fourth
Private Placements and four lines of credit. This activity generated $4,885,537 net of certain repayments,
to the Company. Notes 7,8, and 10 to the Consolidated Financial Statements of the Company (included in Item
1 of Part I of this Form 10-Q are incorporated herein by reference) describe the Third and Fourth Private
Placements, and the lines of credit.
Cash provided by financing activities consisted primarily of proceeds from private placements of $1,400,000
(Third Private Placement) and $6,500,000 (Fourth Private Placement), and net proceeds from line of credit
borrowings of $357,722. These amounts were offset by repayment of the third private placement note of
$1,400,000; repayment of lines of credit of $1,450,000; payment on obligations under capital leases of
$472,185 and deferred debt transaction costs of $50,000.
As of June 30, 2000, the Company had cash and cash equivalents of $160,263. The Company also had $2,700,000
in certificates of deposit less offsetting related liabilities in the form of lines of credit of $2,432,061.
The net proceeds available from certificates of deposit less the corresponding liability totaled $267,939.
With $160,263 of cash and cash equivalents and $267,939 of net proceeds available from certificates of
deposit, the Company had $428,202 with which to meet its current obligations and fund its operations.
Management believes this amount is not sufficient to cover the Company's anticipated operating losses
and expand its business as currently planned. The Company will therefore require additional capital to
fund its anticipated operating losses and planned capital expenditure requirements.
In order to fund these requirements, the Company anticipates that it will be required to raise additional
financing from public or private equity or debt sources. Additionally, if the Company's plans or
assumptions change (including those with respect to the development of the network, the level of its
operations and its operating cash flow), if its assumptions prove inaccurate, if it consummates additional
investments or acquisitions, if it experiences unexpected costs or competitive pressures, or if existing cash
and any other borrowings otherwise prove to be insufficient, the Company may be required to seek additional
capital sooner than expected. The Company's operations and financial condition will be materially and
adversely affected if the Company is unable to obtain such additional capital or is unable to obtain such
additional capital on acceptable terms. There can be no assurances that the Company will be able to raise
equity capital, obtain capital leases or bank financing or incur other borrowings on commercially reasonable
terms, if at all.
To accelerate its growth rate and to finance the launch or build-out of additional markets, the Company
will consider obtaining financing from various sources, including additional vendor financing provided
by equipment suppliers, project financing from commercial banks, bank lines of credit and the sale of
equity and debt securities. To the extent that the Company or any of its subsidiaries issues debt, its
leverage and debt service obligations will increase.
As part of its business strategy, the Company intends to continue to evaluate potential acquisitions;
joint ventures and strategic alliances in companies that own existing networks or companies that provide
services that complement the Company's existing businesses. The Company continues to consider
potential acquisitions from time to time. New sources of capital such as credit facilities and other
borrowings, and additional debt and equity investments in the Company will be necessary to fund any
material acquisitions and similar strategic investments.
YEAR 2000 COMPLIANCE
The Company dedicated resources to address the potential hardware, software, and other computer and
technology issues and related concerns associated with the transition to the Year 2000 and to confirm
that its service providers took similar measures. As a result of these efforts, the Company has not
experienced any material disruptions in its operations in connection with, or following, the transition
to the Year 2000. Given that the majority of the Company's telecommunications network infrastructure
and critical back office systems were acquired after 1997, Year 2000 compliance was substantially ensured
at the time of acquisition. The total cost to complete the Company's Year 2000 compliance efforts
was negligible. While the Company tested its own mission-critical systems for Year 2000 compliance, the
Company does not control the systems of its suppliers, strategic partners and customers. The Company
received assurances prior to December 31, 1999, from its suppliers and strategic partners regarding the
Year 2000 readiness of their systems. We will continue to monitor our critical computer applications
and those of our suppliers and vendors throughout the year 2000 to ensure that any latent year 2000 matters
that may arise are addressed promptly.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has not invested in financial instruments that subject the Company to material market risk.
Financial instruments which the Company holds are disclosed in Note 3 to the Company's Consolidated
Financial Statements on page 9 herein.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 15, 2000, the Board of Directors of the Company voted to terminate for cause the employment of
Mr. Benjamin F. Holcomb, Chairman of the Board and Chief Executive Officer of the Company, pursuant to
the terms of Mr. Holcomb's Employment Agreement with the Company dated February 1, 2000.The termination
date was effective as of July 15, 2000.
A dispute exists between Mr. Holcomb and the Company concerning the events related to the termination
of Mr. Holcomb's employment, and the Company has received from Mr. Holcomb a purported Notice of
Termination of the Employment Agreement, dated June 14, 2000. Mr. Holcomb has also resigned from the
Company's Board of Directors, effective June 15, 2000.
On July 13, 2000, Benjamin J. Holcomb, former CEO and Chairman, filed a lawsuit in the Superior Court
of DeKalb County, Georgia, naming Grace Development, Inc. and Louis Friedman, a Director of the Company,
as defendants. The lawsuit seeks to enforce a purported settlement agreement between Holcomb and the
Company, or alternatively to recover damages for fraud, negligent misrepresentation, and breach of
contract against Grace and for fraud, negligent misrepresentation, and tortious interference with
contractual relations against Mr. Friedman. The lawsuit seeks a judgment of at least $150,000 under
the purported settlement agreement or at least $500,000 under the alternative damages theories. The
Company and Friedman deny the allegations in the lawsuit and intend to defend the lawsuit vigorously.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
(a) Exhibits.
The exhibits that are required to be filed or incorporated by reference herein are listed in the
Exhibit Index.
(b) Reports on Form 8-K.
1. Amendment No. 1 to Current Report on Form 8-K, dated January 31, 2000, filed April 14, 2000,
pursuant to the acquisition of WebWizard, Inc.
2. Current Report on Form 8-K, dated March 30, 2000, filed April 14, 2000, disclosing the
acquisition of Alpha Computer Services, Inc.
3. Amendment No. 2 to Current Report on Form 8-K, dated January 31, 2000, filed May 8, 2000 in
connection with the acquisition of WebWizard, Inc.
4. Amendment No. 1 to Current Report on Form 8-K, dated February 24, 2000, filed May 9, 2000 in
connection with the acquisition of P.V. Tel., Inc.
5. Amendment No. 2 to Current Report on Form 8-K dated February 24, 2000, filed May 16, 2000 in
connection with the acquisition of P.V. Tel., Inc.
6. Current Report on Form 8-K dated June 15, 2000, filed June 30, 2000 in connection with the
termination of the employment of the Chairman of the Board and Chief Executive Officer of the
Registrant.
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.
GRACE DEVELOPMENT, INC.
(Registrant)
Date: September 12,2000 By: /s/ James M. Blanchard
James M. Blanchard
President
By: /s/ James C. Foregger
James C. Foregger
Director of Finance
(Principal financial and accounting officer)
27.1 Financial Data Schedule.
</TEXT>
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