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 September 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 (Registrant's 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 October 31, 2000, there were 88,319,957 shares of the registrant's
common stock, no par value, outstanding.
<PAGE>
GRACE DEVELOPMENT, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
INDEX
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Page
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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 8-K...........................................................27
SIGNATURES.......................................................................................................27
EXHIBIT INDEX....................................................................................................28
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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. The Company
will file an amendment to this Quarterly Report on Form 10-Q for the quarter
ended September 30, 2000, and, if necessary, the Quarterly Report on Form 10-Q
for the quarters ended March 31 and June 30, 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
$2,148,913 for the quarter, and $13,601,806 for the nine-month period ended
September 30, 2000 and had a working capital deficiency of $5,536,054 at
September 30, 2000. The Company has sustained continuous losses from operations.
The Company has used, rather than provided, cash in its operating activities of
$5,243,762 during the period ended September 30, 2000 and 1999.
The Company continues to grow revenues through the expansion of its product
offerings to its existing and acquired customer base added during the first half
of the year. This revenue model is expected to generate recurring revenues which
could contribute towards a positive cash flow. Additionally, the Company will
continue its efforts to raise the additional capital required to fund planned
2000-2001 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.
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<CAPTION>
GRACE DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2000 1999
----------------------- ------------------
<S> <C> <C>
(Unaudited) (Audited)
ASSETS:
Cash and cash equivalents $ 277,349 $ 102,481
Restricted cash 50,000 -
Investment in certificates of deposit 104,773 3,700,000
Accounts receivable, net of allowance for doubtful accounts of 1,390,078 56,458
$ 200,000 at September 30, 2000 and $ 10,500 at December 31, 1999
Inventory 96,833 -
Prepaid expenses and other assets 503,285 156,599
Officer advances 24,435 25,012
----------------------- ------------------
Total current assets 2,446,754 4,040,550
Property and equipment:
Leasehold improvements 179,269 45,468
Furniture and fixtures 158,027 84,949
Equipment and software 7,557,421 2,530,895
Vehicles 146,891 -
----------------------- ------------------
8,041,609 2,661,312
Less: Accumulated depreciation and amortization (1,319,888) (263,423)
----------------------- ------------------
6,721,721 2,397,889
Other assets:
Goodwill and other intangibles, net of amortization 4,994,787 600,547
of $711,585 at September 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 501,984 75,329
----------------------- ------------------
Total assets $ 15,115,245 $ 7,598,815
======================= ==================
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Accounts payable $ 4,097,890 $ 360,532
Deferred revenues 164,167 141,930
Accrued compensation - officers and directors 591,800 676,666
Accrued and other liabilities 786,325 218,182
Lines of credit 50,691 3,074,339
Current portion of obligations under capital lease 1,739,588 735,170
Current portion of long term debt 552,347 -
----------------------- ------------------
Total current liabilities 7,982,808 5,206,819
Senior convertible notes payable 6,500,000 -
Obligations under capital leases, net of current portion 3,737,877 1,237,634
Long term debt, net of current portion 147,368 -
----------------------- ------------------
18,368,052 6,444,453
----------------------- ------------------
Stockholders' deficit
Grace Common stock; no par value; 800,000,000 13,464,833 4,270,195
shares authorized; 88,319,957 issued and outstanding
at September 30, 2000; and 73,370,903 at December 31, 1999.
Accumulated deficit (16,717,640) (3,115,833)
----------------------- ------------------
Total stockholders' deficit (3,252,807) 1,154,362
----------------------- ------------------
Total liabilities and stockholders' deficit $ 15,115,245 $ 7,598,815
======================= ==================
</TABLE>
<TABLE>
<CAPTION>
<PAGE>
GRACE DEVELOPMENT, INC. AND SUBDSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended Three months ended Nine months ended Nine months ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
---------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues $ 2,820,413 2,8$0307,515 $ 5,812,337 $ 500,431
Operating expenses
Cost of services 2,243,638 246,440 4,994,394 293,388
Sales and marketing expenses 459,130 54,836 1,569,166 67,635
General and administrative expenses 1,089,682 363,952 5,394,400 676,947
Depreciation and Amortization 762,751 90,271 1,747,007 96,288
---------------- ---------------- ---------------- ----------------
Total operating expenses 4,555,201 755,499 13,704,967 1,134,258
---------------- ---------------- ---------------- ----------------
Loss from operations (1,734,788) (447,984) (7,892,630) (633,827)
---------------- ---------------- ---------------- ----------------
Other income (expense)
Interest income 120,725 4,737 199,049 5,078
Interest expense (534,850) (201,558) (919,169) (205,711)
---------------- ---------------- ---------------- ----------------
---------------- ---------------- ---------------- ----------------
Total other income (expense) (414,125) (196,821) (720,120) (200,633)
---------------- ---------------- ---------------- ----------------
Loss before extra ordinary items (2,148,913) (644,805) (8,612,750) (834,460)
Extraordinary items
Charge for early retirement of debt - (1,207,508)
Transaction fees related to Private Placement - (3,781,548)
---------------- ----------------
---------------- ---------------- ---------------- ----------------
Total extraordinary items - (4,989,056)
---------------- ---------------- ---------------- ----------------
Loss before income taxes (2,148,913) (644,805) (13,601,806) (834,460)
Income tax expense - - - -
---------------- ---------------- ---------------- ----------------
Net loss $ (2,148,913) $ (644,805) $ (13,601,806) $ (834,460)
================ ================ ================ ================
Net loss per common share before extraordinary items $ (0.02) N/A $ (0.11) N/A
=========== ============== ================ ================
Basic and diluted net loss per common share $ (0.02) $ (0.02) $ (0.17) $ (0.02)
============ ============== ================ ================
Weighted average common shares outstanding 88,319,957 36,352,318 80,771,664 36,352,318
============ ================= ================ ===============
</TABLE>
<TABLE>
<CAPTION>
GRACE DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended Nine months ended
September 30, September 30,
2000 1999
---------------- ---------------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (13,601,806) $ (834,460)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation 1,056,466 96,288
Amortization 690,541
Allowance for doubtful accounts 103,244
Issuance of common stock for compensation 840,000 174,375
Issuance of common stock for origination fees 200,000
Charge for early retirement of debt 1,207,508
Transaction fees related to Private placement 3,781,548
Changes in assets and liabilities from operations
Accounts receivable (1,121,922) (9,845)
Inventory (42,149)
Prepaid expenses and other assets (287,088) (199,180)
Related party receivables (50,000)
Officer advances 577 (17,420)
Other non-current assets (78,983) (33,772)
Accounts payable 1,860,901 7,116
Deferred revenues (70,319) (24,812)
Accrued compensation - officers and directors 66,334
Accrued liabilities 201,388 290,829
---------------- ---------------
Net cash used in operating activities (5,243,762) (550,881)
---------------- ---------------
Cash flows from investing activities
Acquisition of property and equipment (309,361) (257,882)
Other intangibles 49,331
Investment in certificates of deposit (2,650,000)
Redemption of certificate of deposit 3,595,227
Issuance of notes receivable (15,500)
Acquisition of business units (107,449) (359,314)
---------------- ---------------
Net cash used in investing activities 3,212,248 (3,267,196)
---------------- ---------------
Cash flows from financing activities
Advance from officers and directors 135,000 -
Net proceeds from lines of credit 2,805,157 1,630,484
Repayment of lines of credit (6,593,392) (450,000)
Proceeds from notes payable 3,931,038 450,000
Repayment of note payable (1,650,000)
Repayment of obligations under capital leases (809,905) (18,263)
Net proceeds from issuance of common stock 4,438,469 3,030,924
---------------- ---------------
Net cash provided by financing activities 2,256,368 4,643,145
---------------- ---------------
Increase in cash and cash equivalents 224,854 825,068
Cash and cash equivalents at beginning of period 102,481 3,719
---------------- ---------------
---------------- ---------------
Cash and cash equivalents at end of period $ 327,335 $ 828,787
================ ===============
Supplemental disclosure of cash flow information
---------------------------------------------------------------------
Cash paid for interest $ 111,842 $ 16,936
================ ===============
Supplemental activities of Non-Cash Transactions:
---------------------------------------------------------------------
During the six months ended June 30, 2000 and 1999, the Company acquired
equipment under several capital lease obligations totaling $ 3,587,439
Stock issued for compensation 871,200 $ 174,375
Stock issued as an origination/standby fee 200,000
Acquisition of business units: Total 2000 Total 1999
------------------------------------------------------ ---------------- ---------------
Goodwill $ 4,935,369 $ 532,984
Assets acquired 2,012,221 115,561
Liabilities acquired (3,617,620) (245,210)
Stock issued (3,222,522) (44,021)
---------------- ---------------
Net cash $ 107,449 $ 359,314
================ ===============
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<CAPTION>
GRACE DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Additional
Common Stock Paid-In Accumulated
Shares Amount Capital Deficit Total
<S> <C> <C> <C> <C> <C>
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 Placem 2,100,000 817,800 817,800
Shares issued for Alpha Computer acquis 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 compensatio 150,000 60,000 60,000
Shares issued with Fourth Private Place 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)
Net loss for the three months ended
September 30, 2000 (2,148,913) (2,148,913)
Balance at September 30, 2000 88,319,957 $ 13,464,832 $ - $ (16,717,639) $ (3,252,807)
=======================================================================
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<PAGE>
GRACE DEVELOPMENT, INC. AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 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 and dedicated 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.
The Professional Services operation serves small and medium size businesses with
a broad range of data products and services. The Company is a hardware and
software reseller providing full, lifecycle consulting and professional services
for LAN, WAN, ASP, VPN and Security. LAN/WAN technical maintenance and support
completes the product offering.
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 March 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 - 10 years
Equipment & Software 2 - 7 years
Vehicles 2 - 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.
In July 2000, the PVTel operation was moved to Atlanta, and consolidated with
existing local and long distance operations, to achieve economies of scale.
Costs of the consolidation were not material and were partially offset by the
sale of PVTel's Prepaid services. Management does not feel that the
consolidation causes any impairment of the goodwill previously record.
Alpha Computer Acquisition:
On March 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 September 30, 2000, the Company's investments consisted of
the following:
<TABLE>
<CAPTION>
Maturity Date Interest Rate Amount
-------------------------- ----------------- --------------------
<S> <C> <C> <C>
Certificate of Deposit March 2, 2001 5.03 % $ 74,773
Certificate of Deposit March 2, 2001 5.03 % 30,000
--------------------
$ 104,773
====================
</TABLE>
The certificates of deposit are pledged to secure letters of credit.
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 a portion of
its accounts receivable with recourse to a factor. As of September 30, 2000
there were approximately $354,029 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.
Sale of Internet Residential Dial-up Customers
On August 31, 2000, the Company entered into an agreement to sell its Internet
Access residential dial-up subscribers to Earthlink Enterprises,
Inc.(Earthlink). Under the terms of the agreement, payment will be made in
increments as customers are converted and billed. Initially, a portion of the
purchase price was 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 were
included in the sale. The Company has estimated revenues to be approximately
$652,000 and has recorded a receivable from Earthlink for that amount.
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 was secured by an assignment of proceeds from the sale and
matured on September 11, 2000, which coincided with the first payment from
Earthlink. The note had an interest rate of twenty-five percent. On September
11, 2000 this note was paid in full from proceeds of the sale to Earthlink.
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 $111,623 at
September 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 $50,690 on September 30, 2000. The line of
credit is unsecured.
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 former 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. On
September 24, 2000, the line was satisfied and the collateral returned to
Signal.
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 principal 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 elected not to exercise 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.
In March 2000, the Company awarded Louis Friedman an additional 336,000 shares
in conjunction with the third private placement to C & S Private Equity Fund,
LP. The shares were valued at $151,200 and a non-cash expense was recorded in
the statement of operations for the quarter ended June 30, 2000.
11. RELATED PARTY TRANSACTIONS:
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 ("restricted securities" under Rule 144
promulgated under the Securities Act) to Dr. Silverstein and Mr. Blanchard,
respectively, at a purchase price of $.10 per share with an exercise period of
five years.
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 September 30, 2000, 1,975,000 options were vested, with
none being exercised or expired.
<TABLE>
<CAPTION>
Number of Options Weighted Average
Outstanding Exercise Price Outstanding
<S> <C> <C>
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
---------- -----
Awarded 0
Exercised 0
Cancelled/Expired 0
----------
September 30, 2000 10,155,738 $ .70
---------- -----
</TABLE>
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 September 30, 2000, would have been as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
As reported Adjustments Pro Forma
Net Loss $ 13,601,806 $ (279,777) $ 13,881,583
Loss per share $ -- $ (.15)
(.15)
</TABLE>
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 - 10 years
Dividends: none
Volatility: 100% - 124%
Weighted average grant debt fair value: $0.40
13. SUBSEQUENT EVENTS
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 existed 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 sought
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.
On October 5, 2000, Grace successfully resolved all disputes with Mr. Holcomb
and entered into a settlement agreement. The terms of the settlement are
confidential and, in managements' view, not material to the financial condition
of the Company.
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 was
expected to be completed in the third quarter, however, in October 2000, the
Company and CPSS mutually agreed to terminate the transaction.
<PAGE>
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:
o whether the Company can obtain additional capital to cover its operating
losses, fund working capital requirements and continue as a going concern
o whether the Company will achieve the desired results of its recently
implemented cost reduction and consolidation initiatives;
o significant increases in competitive pressure in our industry;
o whether the Company can successfully implement new business strategies
and manage projected growth;
o changes in political conditions or the legislative or regulatory
environment;
o 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;
o changes occurring in business conditions and inflation;
o changes in technology;
o changes in the securities markets; and
o 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
$13,601,806 for the nine months ended September 30, 2000 and had a working
capital deficiency of $5,536,054 at September 30, 2000. The Company has
sustained continuous losses from operations. The Company has used, rather than
provided, cash in its operating activities during the periods ended September
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 third quarter of 1999, and as such, the comparison
would not be meaningful.
RESULTS OF OPERATIONS
Revenues: Revenues for the third quarter ended September 30, 2000, totaled
$2,820,413 and indicates an increase of $454,550 or 19% over second quarter
revenues of $2,365,863. The increase can be attributed primarily to first
quarter acquisitions, however, internal growth in existing businesses generated
approximately $224,369, a 36% increase over second 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 September 30, 2000, cost of
services was $2,243,638, or 80% of revenues; a $9,002 increase from second
quarter costs of $2,234,636, or 94% of revenues; resulting in a 14% margin
improvement for the period.
Sales and Marketing Expenses: Sales and marketing expenses include the salaries
and wages of sales and marketing personnel, advertising costs and development of
the promotional campaign for both telecommunications sales and corporate
branding. For the quarter ended September 30, 2000, sales and marketing expenses
were $459,130; a decrease over second quarter expense of $620,779. This
represents a decrease of $161,649 or 26%; however, on a comparative basis to
revenues, the third quarter indicates an improvement over the second quarter;
16% vs. 28%.
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 decreased due to decline in the number of
employees and decreased costs related to pursuing potential acquisitions and
related financing activities. For the quarter ended September 30, 2000, General
and Administrative expenses were $1,089,682; a decrease of $1,393,291 or 56%
over the second quarter expense of $2,482,937.
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 September 30 and June 30, 2000,
depreciation expense and amortization expense were $457,876 and $304,875; and
$318,835 and $292,562, respectively. The increase in depreciation and
amortization is attributed primarily to asset additions and full quarter
amortization.
Interest Expense: The Company currently incurs interest expense on its lines of
credit and under capitalized leases. For the quarter ended September 30, 2000,
interest expense was $534,850; an increase of $297,359 over second quarter cost
of $237,491. The increase is attributable to new financing leases, additional
financing, 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 September 30, 2000, interest
income was $ 71,344; an increase of $35,559 over second quarter income of
$35,784.
Balance Sheet:
Accounts receivable, net of the allowance for doubtful accounts, increased from
$56,458 at the end of 1999, to $1,390,078 as of September 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
$7,557,421 as of September 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
$4,994,787 as of September 30, 2000, due to the acquisition of WebWizard, PVTel
and Alpha Computer.
Accounts payable increased from $360,532 at the end of 1999, to $4,097,890 as of
September 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 $786,325 as
of September 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 $50,691 as of
September 30, 2000, due primarily to the payoff of lines of credit with Regions
Bank and BankTennessee totaling approximately $3,023,648 (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 $5,477,465 as of September 30, 2000, due
primarily to the purchase of approximately $5,500,000 in new network equipment
from Lucent Technologies and to the acquisition of WebWizard, PVTel and Alpha
Computer. The current portion of obligations under capital leases increased from
$735,170 at the end of 1999, to $ 1,739,588 as of September 30, 2000.
Long-term debt increased to $699,715 at September 30, 2000. There was no
long-term debt at December 31, 1999. This debt is directly related to the Alpha
Computer acquisition.
Stockholders' equity represented by Common Stock outstanding increased from
$4,270,195 at the end of 1999, to $13,464,833 as of September 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
$16,717,640 as of September 30, 2000, due primarily to a net loss from
operations of $11,728,584 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 September 30, 2000, the Company's operating activities
required net cash of $5,243,762. Working capital decreased by $1,029,825 in the
nine-month period ended September 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 second 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 used by a decrease in accounts payable and accrued liabilities
of $366,699.
Cash provided by investing activities was $3,212,248 for the nine months ended
September 30, 2000. Expenditures of cash for property and equipment were made
totaling $16,543 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. There
were no such financing activities in the quarter ended September 30, 2000.
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 September 30, 2000, the Company had cash and cash equivalents of $277,349.
The Company also had $104,773 in certificates of deposit less offsetting related
liabilities in the form of letters of credit of $104,773. With $277,349 of cash
and cash equivalents and $0 of net proceeds available from certificates of
deposit, the Company had $277,349 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 existd 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, Mr. Holcomb 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 sought 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 sought
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
denied the allegations in the lawsuit.
On October 5, 2000, Grace successfully resolved all disputes with Mr. Holcomb
and entered into a settlement agreement. The terms of the settlement are
confidential and, in managements' view, not material to the financial condition
of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(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. Report on Form 8-K, dated August 9, 2000, filed in connections with
a lawsuit filed August 18, 2000 by the former Chairman of the Board, Mr. Ben
Holcomb, against Grace Development, Inc.
2. Current Report on Form 8-K, dated October 5, 2000, filed October 5,
2000, in connection with the resolution of disputes with Mr. Holcomb.
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: November 15, 2000 By: /s/ James M. Blanchard
----------------------
James M. Blanchard
President and CEO
By: /s/ James C. Foregger
James C. Foregger
Vice President of Finance and Accounting
(Principal financial and accounting officer)
<PAGE>
EXHIBIT INDEX
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Exhibit
Number Exhibit Title
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27.1 Financial Data Schedule.
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