UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): December 19, 2002
NOVO NETWORKS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 0-28579 75-2233445
(State of (Commission File (IRS Employer
Incorporation) Number) Identification Number
2311 Cedar Springs Road, Suite 400, 75201
Dallas, Texas (Zip Code)
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (214) 777-4100
(Former Name or Former Address, if Changed Since Last Report)
Item 2. ACQUISITION OR DISPOSITION OF ASSETS
Description of Acquisition
- --------------------------
On December 19, 2002, Novo Networks, Inc. ("we," "us" and
"our") executed a purchase agreement (the "Purchase Agreement")
with Ad Astra Holdings LP, a Texas limited partnership
("Ad Astra"), Paciugo Management LLC, a Texas limited liability
company and sole general partner of Ad Astra ("PMLLC"), and
the collective equity owners of both Ad Astra and PMLLC, being
Ugo Ginatta, Cristiana Ginatta and Vincent Ginatta (collectively
the "Equity Owners"). Pursuant to the Purchase Agreement, we
purchased a 33% membership interest in PMLLC and a 32.67 %
interest in Ad Astra, (which results in our holding an
aggregate interest, including the PMLLC general partnership
interest, in Ad Astra equal to 33%, the "Initial Interest") for a
purchase price of $2.5 million dollars.
In addition, we hold an option, exercisable for a period of
two years from December 19, 2002, to purchase an additional
interest (the "Subsequent Interest") for $1.5 million dollars.
Together, the Initial Interest and the Subsequent Interest would
result in our holding a 50.3% membership interest in PMLLC and a
49.797% limited partnership interest in Ad Astra (for an aggregate
interest in Ad Astra, including the PMLLC general partner
interest, of 50.3%).
Collectively, Ad Astra and PMLLC, through a number of wholly
owned subsidiaries, own and manage a gelato manufacturing,
retailing and catering business operating under the brand name
"Paciugo." Throughout this Current Report on Form 8-K (this "Report"),
we refer collectively to Ad Astra, PMLLC, and their subsidiaries
as "Paciugo." Under the terms of the Purchase Agreement, we will
provide services to support the business operations of Paciugo,
including administrative, accounting, financial, human resources,
information technology, legal, and marketing services (the
"Support Services"). The Support Services expressly exclude
providing certain capital expenditures as well as services that
are customarily performed by third party professionals. In
exchange for our providing the Support Services, we will receive
an annual amount equal to the greater of $0.25 million or two
percent (2%) of the consolidated gross revenues of Ad Astra,
PMLLC and any of their subsidiaries (excluding any gross revenues
shared with third parties under existing contractual
arrangements). We will receive a monthly payment from Paciugo in
the amount of $20,833, with the positive cumulative difference,
if any, between 2% of such gross revenues and $20,833 per month
to be paid within 10 days of the end of such month. Ad Astra and
PMLLC may not cancel or alter the scope of the Support Services
without our prior approval or consent.
We are entitled, under the terms of the Purchase Agreement,
to such representation on the governing board of PMLLC (the
"Board of Managers") as is proportionate to our ownership
interests therein. Effective as of December 19, 2002, PMLLC's
Board of Managers was composed of Ugo Ginatta and Cristiana
Ginatta, as the Equity Owners' designees, and Barrett N. Wissman,
as our designee. PMLLC, as the sole general partner of Ad Astra,
is empowered to make all decisions associated with Ad Astra,
except for those requiring the approval of the limited partners,
as set forth in the limited partnership agreement of Ad Astra or
under applicable law.
On December 19, 2002, the following individuals were
appointed as the officers of PMLLC:
Name Title
- ------------------- -----------------------------------------
Ugo Ginatta Chairman and Chief Executive Officer
Barrett N. Wissman Vice Chairman and President
Cristiana Ginatta Senior Vice President and Chief Operating
Officer
Susie C. Holliday Senior Vice President, Chief Financial
Officer, Assistant Secretary, and
Assistant Treasurer
Steven W. Caple Senior Vice President, General Counsel
and Secretary
Patrick G. Mackey Senior Vice President - Administration,
Treasurer and Assistant Secretary
Vincent Ginatta Senior Vice President
Barrett N. Wissman, Steven W. Caple, Patrick G. Mackey and
Susie C. Holliday will not be paid any compensation by PMLLC for
their services as officers unless approved by PMLLC's Board of
Managers.
-2-
A copy of the Purchase Agreement is attached as Exhibit 10.1
to this Report.
Our decision to acquire an interest in Paciugo was based on
several factors, including, without limitation, the following:
* we believe that Paciugo has cash flow positive
operations;
* we believe that Paciugo has a high quality product with
general appeal; and
* we believe that Paciugo's concept can be expanded and
grown in such a manner as to create value for our
shareholders.
There can be no assurances that our acquisition of the
Initial Interest or the Subsequent Interest in Paciugo will
achieve any of these objectives.
Accounting Implications of the Acquisition
- ------------------------------------------
Currently, the consolidated financial statements for us and
our subsidiaries, other than those subsidiaries involved in the
bankruptcy plan administration process (our "debtor
subsidiaries"), have been prepared in accordance with accounting
principles generally accepted in the United States of America as
applicable to a going concern. As of June 30, 2002, the assets
and liabilities of our debtor subsidiaries were deconsolidated,
as the liquidating trust controls the assets of the debtor
subsidiaries. For further information, see the section entitled
"Bankruptcy Proceedings" in our Annual Report on Form 10-K for
the year ended June 30, 2002, as well as our Quarterly Report on
Form 10-Q for the period ended September 30, 2002.
Subsidiaries whose results are not consolidated, but over
whom we exercise significant influence, are generally accounted
for under the equity method of accounting. Whether we exercise
significant influence with respect to a subsidiary depends on an
evaluation of several factors including, without limitation,
representation on the subsidiary's governing board and ownership
level, which is generally a 20% to 50% interest in the voting
securities of the subsidiary, including voting rights associated
with our holdings in common stock, preferred stock and other
convertible instruments in the subsidiary.
The Initial Interest in Paciugo will be accounted for under
the equity method of accounting. Under the equity method of
accounting, Paciugo's accounts will not be reflected in our
consolidated financial statements. Our proportionate share of
Paciugo's operating earnings and losses will be included in the
caption "Equity in Loss of Investments" in our consolidated
statements of operations.
If the Subsequent Interest in Paciugo is acquired and the
aggregate ownership interest in Paciugo is increased to 50.3%, we
will account for the Subsequent Interest utilizing the
consolidation method of accounting. Companies in which we
directly or indirectly own more than 50% of the outstanding
voting securities are generally accounted for under the
consolidated method of accounting. Under this method, Paciugo's
accounts will be reflected within our consolidated financial
statements.
Special Note Regarding Forward Looking Statements
- -------------------------------------------------
"Forward looking" statements have been included throughout
this document and in our discussion of our purchase of the
Initial Interest in Paciugo. These statements describe the
attempt by us to predict future events. We have based these
forward looking statements on our current expectations and
projections about future events. The important factors listed in
the section entitled "Business Risk Factors," as well as all
other cautionary language in this Report, provide examples of
risks, uncertainties and events that may cause our actual results
or those of our subsidiaries to differ materially from the
expectations described in these forward looking statements. You
should be aware that the occurrence of the events described in
these considerations and elsewhere in this Report could have an
adverse effect on our business, results of operations or
financial condition or those of our subsidiaries.
-3-
Forward looking statements include, without limitation, the
following:
* statements regarding our future capital
requirements and our ability to satisfy our capital
needs, as well as any capital needs of Paciugo;
* statements regarding our ability to continue as a
going concern;
* statements regarding the ability of our debtor
subsidiaries to successfully liquidate and distribute
substantially all of their assets, pursuant to the
amended plan of liquidation, without causing a material
adverse impact on us;
* statements regarding our ability to successfully
redeploy our remaining cash assets through our purchase
of the Initial Interest, the Subsequent Interest, or
otherwise; and
* statements that contain words like "believe,"
"anticipate," "expect" and similar expressions are also
used to identify forward looking statements.
You should be aware that these forward looking statements
are subject to a number of risks, assumptions and uncertainties,
such as:
* uncertainties in the implementation of the amended
plan to liquidate substantially all of the remaining
assets of our debtor subsidiaries;
* risks inherent in our ability to deploy our
remaining assets in any new business venture;
* risks that, after deploying our cash to purchase
our interest in Paciugo, our remaining resources will
not allow us to pursue other potential opportunities;
* risks associated with competition in a new
business sector or industry; and
* changes in the laws and regulations that govern
us.
This list is only an example of some of the risks that may
affect the forward looking statements. If any of these risks or
uncertainties materialize, or if they fail to materialize, or if
the underlying assumptions are incorrect, then actual results may
differ materially from those projected in the forward looking
statements. We undertake no obligation to revise these statements
to reflect future events or circumstances. For a complete list
of risk factors that relate to our operations, please see the
section entitled "Business Risk Factors" in our Annual Report on
Form 10-K for the year ended June 30, 2002.
Business of Paciugo
- -------------------
Paciugo is in the business of owning and operating a series
of retail locations that sell authentic Italian gelato to the
general public. Italian gelato differs from traditional ice
cream in terms of ingredients, consistency and flavor. Paciugo
has developed 182 different flavors of its gelato, with each
location offering a selection of 32 flavors made fresh daily. In
addition to serving gelato in a cone or cup, Paciugo sells a
variety of derivative desserts and milkshakes. Paciugo also has
a line of soy-based gelato, which is dairy free.
Paciugo opened its first store in September of 2000. As of
December 19, 2002, it has seven retail locations in the Dallas
area, which are either dedicated Paciugo stores or kiosks that
operate in larger retail venues as a small "store within a store."
Paciugo is currently preparing to open an additional location in
the Dallas area as well as another "store within a store" in the
Fort Worth area. In addition to the retail gelato business, a
portion of its revenues are derived from catering activities
conducted primarily out of its corporate headquarters. These
activities typically involve the serving of Paciugo gelato
at a variety of special events, including, without limitation,
private celebrations, philanthropic gatherings and third-party
retail promotions.
-4-
A small portion of Paciugo's business is conducted in the
wholesale sector, mostly involving delivery of Paciugo's gelato
and related products to select hotel, restaurant and special
event venues. While this portion of Paciugo's operations
accounts for a small part of its current revenues, such
activities could, in the future, account for a larger portion of
Paciugo's sales.
In general, the market for frozen desserts experiences a
certain degree of seasonal fluctuation, which is less marked in
regions that experience consistently colder year-round climates.
Paciugo enjoys higher sales volume during the period between May
and August.
Industry Background
- -------------------
The frozen dessert industry is divided, in general, between
two different business models. The first group is represented by
large companies and brands, such as Ben & Jerry's, Haagen Daaz,
Blue-Bell, and Braums, for example, which produce and market
their products on a national or even international scale and
generate sales through specialty stores, franchising, wholesale
distribution or a combination of these methods. The second group
is represented by small, local or regional producers of frozen
desserts, which market their products in reliance on local
goodwill and without either the advantages of national brand name
recognition or the economies of scale which are available to the
first group.
Paciugo's Strategy
- ------------------
Paciugo's strategy, as well as its challenge, is to position
itself between these two groups, by employing certain of the
strategies of its larger competitors, including, without
limitation, the use of an identifiable and positive brand name
recognition as well as expansion plans which are narrowly focused
only on select markets rather than the nation as a whole. The
challenge is to manage such expansion while maintaining the
appeal of the small retailer, including, without limitation, high
quality products, personal service to customers and involvement
in local communities. The present focus is primarily on its
retail outlets, which involves the addition of dedicated Paciugo
stores and new arrangements with third-party retailers, food and
beverage vendors, and specialty venues that enable sales of
Paciugo products to be conducted within the context of the
products or services already being provided by such businesses.
Paciugo currently has a registered trademark for "Paciugo
Italian Gelato Renaissance Ante Lucrum Nomen" and the associated
design. Its trademark for the name "Paciugo" alone is currently
pending.
Competition
- -----------
Many of Paciugo's existing and potential competitors have
longer operating histories, larger customer bases and more
resources than Paciugo. Such competitors can generally undertake
more aggressive pricing policies, conduct more extensive
marketing and advertising promotions and benefit from greater
economies of scale than Paciugo.
In general, Paciugo competes primarily on the basis of:
* Quality - Paciugo believes it has a product that
is superior to the average frozen dessert available to
consumers in terms of quality, taste and freshness,
but which is not significantly more expensive that
other frozen dessert products.
* Price - Paciugo's products are competitively
priced with other premium frozen desserts but are more
expensive than non-premium frozen dessert products
generally available at other retail outlets or in
grocery stores.
* Availability - Paciugo is currently available at
its individual retail outlets with no plans to become
widely available through wholesale distributors or
grocery store chains. This is due, in large part, to
Paciugo's focus on providing a product which is made
fresh daily. As a result, Paciugo does not compete
with other frozen dessert products generally available
for customers to purchase in bulk and consume at home.
-5-
* Brand Recognition - Paciugo has not as yet
employed any widespread advertising or marketing
campaigns. Its current level of brand recognition
is due in large part to customer satisfaction, loyalty,
word of mouth and the visibility achieved through the
physical presence of the Paciugo name at strategically
selected site locations. Paciugo regularly
participates in local community events, many of them
charitable in nature, as part of a community-based
product awareness campaign. Paciugo also benefits from
the visibility associated with the private and commercial
events that it caters. Other than these types of
activities, however, Paciugo has not employed traditional
print, radio, television or other types of advertising
promotions for its products.
Employees
- ---------
As of December 19, 2002, Paciugo employs 26 full-time and 26
part-time employees. It has no immediate plans to increase that
portion of its work force engaged in production activities, but
intends to proportionately increase its retail work force in
connection with the expansion of its retail locations. None of
its employees are represented by labor unions.
Facilities
- ----------
As of December 19, 2002, Paciugo leases or has contractual
arrangements to utilize approximately 26,150 square feet for its
operations. Paciugo's current facilities are as follows:
Approximate Current
Size in Square Monthly End of
Location Feet Description Cost Lease Term
- ---------------------------- -------------- --------------------- -------- -----------
<s> <c> <c> <c> <c>
9761 Justice Way, Suite 170 16,000 Corporate Offices of $6,862 5/31/07
Dallas, Texas 75220 PMLLC and
Ad Astra
5509 West Lovers Lane 2,300 Retail Location $4,025 9/14/05
Dallas, Texas 75029 Lovers Lane Store
32 Highland Park Village 900 Retail Location $2,860 3/31/06
Dallas, Texas 75205 Highland Park Village
Store
3699 McKinney Avenue, 1,013 Retail Location $3,356 8/31/08
Building B, Suite 101 West Village Store
Dallas, Texas 75204
1201 Elm Street 1,313 Retail Location $2,927 8/14/09
LL30 Renaissance Tower
Dallas, Texas 75270 Store
975 W John Carpenter Fwy 1,926 Retail Location $5,096 10/14/12
Suite 118 Las Colinas Store
Irving, Texas 75039
2301 Preston Road 2,001 Future Retail $5,369 9/4/17
Suite 210 Location
Plano, Texas 75287 Preston & Park Store
320 Coit Road 350 Kiosk within Central * *
Plano, Texas 75075 Market
5750 East Lovers Lane 350 Kiosk within Central * *
Dallas, Texas 75206 Market
-6-
* Paciugo's concession agreements for the kiosks within
both Central Market locations include revenue sharing
arrangements that incorporate the costs of doing business
including, without limitation, those associated with the
use of space. These concession agreements can be
terminated by either party with 30 days written notice
of termination.
Legal Proceedings
- -----------------
As of December 19, 2002, Paciugo was not involved with any
litigation it considered to be material to its business
operations.
As of the date of this Report, it has come to our
attention that certain holders of our Series C Convertible
Preferred Stock have filed a lawsuit against us and certain
of our current and former officers and directors for claims
arising out of the issuance of such stock. Upon the receipt
of service of the complaint, we will thoroughly review the
allegations and make appropriate determinations as to how
best to defend against such claims.
We have previously disclosed in other reports filed with the
SEC certain other legal proceedings pending against us and our
subsidiaries, including, without limitation, the bankruptcy plan
administration process that involves several of our
subsidiaries. For further information relating to these
proceedings, see the section entitled "Bankruptcy Proceedings" as
well as the section entitled "Legal Proceedings" in our Annual
Report on Form 10-K for the year ended June 30, 2002, as well as
our Quarterly Report on Form 10-Q for the period ended September
30, 2002. Consistent with the rules promulgated by the SEC,
descriptions of these matters have not been included in this
Report because they have not been terminated and there have not
been any material developments. Readers are encouraged to refer
to our prior reports, as filed with the SEC, for further
information concerning other legal proceedings affecting us and
our subsidiaries.
We and our subsidiaries are involved in other legal
proceedings from time to time, none of which we believe, if
decided adversely to us or our subsidiaries, would have a
material adverse effect on our business, financial condition or
results of operations.
Plan of Operation
- -----------------
This Current Report contains forward looking statements that
involve risks and uncertainties. Our actual results could differ
materially from those anticipated in forward looking statements
for many reasons, including the risks described in "Business Risk
Factors" and elsewhere in this Report. See "Special Note
Regarding Forward Looking Statements."
On August 21, 2001, we announced that we were attempting to
redeploy some or all of our existing cash assets into one or more
new business ventures. Since that time, we have discussed and
conducted preliminary due diligence on various investment
opportunities, and considered many factors, including, without
limitation, the following in deciding upon an appropriate use for
our remaining cash assets:
* the historical liquidity, financial condition and
results of operation of the business or opportunity, if
any;
* the growth potential and future capital
requirements of the business or opportunity;
* the nature, competitive position and market
potential of the products, processes or services of the
business or opportunity;
* the relative strengths and weaknesses of the
intellectual property of the business or opportunity;
-7-
* the education, experience and abilities of
management and key personnel of the business or
opportunity;
* the regulatory environment within the business
industry or opportunity; and
* the market performance of equity securities of
similarly companies in the particular industry or
opportunity.
The foregoing is not an exhaustive list of the factors that
we considered in our evaluation of a potential business
opportunity. Eventually, we determined that the acquisition of
the Initial Interest in Paciugo was the best opportunity for us
to pursue in an attempt to build a new operating business model
and to maximize shareholder value.
Our plan of operation for the upcoming twelve months calls
for the following:
* opening approximately two new Paciugo locations
and six small "store within a store" outlets in Texas;
* improving production operations through the use of
automatic production equipment;
* improving labor costs by staffing stores with the
minimum full-time personnel with additional part-time
staff during peak store hours;
* improving Paciugo's utilization of inventory
levels at both the production facility and the
individual retail sales outlets;
* expanding product availability at the store
outlets including, without limitation, gelato pies,
Italian chocolates and candies and other complementary
items; and
* increasing marketing and advertising for the
retail outlets as well as the catering and wholesale
services.
Funding for these items will come from our Initial Interest,
current cash flow from operations, the refinancing of existing
bank debt on more favorable terms, the possibility of additional
bank financing and our Subsequent Interest, if made.
Management's Discussion
- -----------------------
Paciugo derives substantially of all of its revenues from
the sale of Italian gelato products and related items to its
customers at the retail outlets. Revenue is recognized when the
sale occurs. Paciugo obtains the raw materials for its gelato
products from various sources in Italy and the dairy and fruit
products from various local sources. The cost of revenues
consists primarily of raw gelato materials, dairy products,
fruits, rent and employee costs. General and administrative
expenses are primarily comprised of salaries, corporate office
rent, advertising and marketing expenses, and professional fees.
We anticipate that Paciugo's operating expense as a
percentage of revenues will decrease in the near future due
primarily to the current base of employees, automated production
equipment, ample corporate office and production facilities, and
services provided by us.
In the future, the level of Paciugo's net revenues will
depend on a number of factors, including, without limitation, the
following:
* the ability to keep the quality of its product at
current levels or better during the expansion of retail
outlets;
* continued customer acceptance of its gelato
products;
* the ability to expand its product offerings;
* the opportunity to select attractive sites for
additional retail outlets;
-8-
* the ability to successfully differentiate its
gelato products from other frozen dessert products;
* the ability to capitalize on its current brand
name and goodwill as it expands its operation beyond
its traditional retail customer base;
* the ability to continue to expand upon its
catering and wholesale operations;
* the ability to successfully compete against larger
national and international manufacturers, distributors,
and retailers of frozen dessert products, many of whom
will have significantly greater resources;
* the ability to comply with all federal and state
regulations regarding the manufacture, transportation,
and sale of Paciugo's gelato products, including,
without limitation, regulations regarding the
importation of raw materials and equipment and the
production and transportation of dairy and fruit-based
products; and
* the ability to overcome any negative association
with its line of products with others in the retail
food industry, which has recently experienced
increased scrutiny from both private and governmental
sources regarding the effects of consumption of such
products on the general health and well-being of
consumers.
No assurances can be given that Paciugo will be able to
either maintain or grow existing revenues.
Paciugo does not currently experience significant
concentration in terms of its suppliers or customers. It does,
however, obtain a significant amount of its ingredients and
certain equipment from overseas suppliers. Any disruption in
such supply, or any increase in costs associated with such
supplies, such as the imposition of trade barriers, may have a
substantial negative impact on the operations of Paciugo as
currently conducted.
Liquidity and Capital Resources
- -------------------------------
Upon consummation of the acquisition of the Initial Interest
in Paciugo on December 19, 2002, we had consolidated current
assets of $6.3 million, including cash and cash equivalents of
approximately $5.7 million and $4.6 million of net working
capital. We currently have a monthly cash requirement of
approximately $0.2 million to fund recurring corporate general
and administrative expenses, excluding costs associated with our
debtor subsidiaries' bankruptcy proceedings. Historically, we
have funded our subsidiary operations primarily through the
proceeds of private placements of our common and preferred stock
and borrowings under loan and capital lease agreements. We do not
currently believe that either of these funding sources will be
available in the near term. Principal uses of cash have
historically been to fund (i) operating losses; (ii) acquisitions
and strategic investments; (iii) working capital requirements and
(iv) capital expenditures, primarily related to network equipment
and capacity. Due to our financial performance, the lack of
stability in the capital markets and the economy's downturn, our
only source of funding, at least in the near term, is expected
to be cash on hand.
Taking into account the purchase of our Initial Interest and
assuming that we complete the purchase of the Subsequent Interest
as of this date, and assuming no current return from the
acquisition of our interest in Paciugo, and given our current
obligations, we would be left with $2.85 million dollars with
which to continue our operations. Consequently, our purchase of
the Initial Interest, and potentially the Subsequent Interest, in
Paciugo may be the only such interests we are able to purchase
with our remaining cash assets. Further diversification is
possible, should we find another suitable opportunity, but it
seems unlikely at the present time.
Our current obligations include (i) funding working capital,
(ii) funding the liquidating trust and (iii) funding litigation
as required by the amended bankruptcy plan. For further
information regarding such litigation, see the section entitled
"Bankruptcy Proceedings" and the section entitled "Legal
Proceedings" in our Annual Report on Form 10-K for the year ended
June 30, 2002, as well as our Quarterly Report on Form 10-Q for
the period ended September 30, 2002, and other periodic and
current reports filed with the SEC. No assurance can be given
that we will be able to deploy any remaining cash assets or that,
if deployed, we can continue as a going concern with our Initial
Interest or our potential Subsequent Interest in Paciugo.
-9-
As discussed in greater detail in our Annual Report on Form
10-K for the fiscal year ended June 30, 2002 and our Quarterly
Report on Form 10-0Q for the period ended September 30, 2002, our
debtor subsidiaries have gone through bankruptcy proceedings
under Chapter 11 of the bankruptcy code. As the ultimate parent,
we agreed to provide our debtor subsidiaries with up to $1.6
million in secured debtors-in-possession financing. Immediately
prior to the confirmation hearing, we increased the credit
facility to approximately $1.9 million, which had been advanced
as of March 31, 2002. The credit facility made funds available to
permit the debtor subsidiaries to pay employees, vendors,
suppliers, customers and professionals consistent with the
requirements of the bankruptcy code. This credit facility
provided for interest at the rate of prime plus 3.0% per annum
and provided "super-priority" lien status, meaning that we had a
valid first lien pursuant to the bankruptcy code on substantially
all of the debtor subsidiaries' assets. The facility maintained a
default interest rate of prime plus 5.0% per annum.
In connection with the amended plan being confirmed by the
bankruptcy court and becoming effective on April 3, 2002, the
credit facility was converted into a new secured note in the
principal amount of approximately $2.5 million, representing the
principal amount of the debtors-in-possession financing, accrued
interest and applicable attorneys fees. Subsequent to fiscal year
end, the new secured note was amended to approximately $2.9
million, representing additional trust funding, payments to an
employee, accrued interest and applicable attorneys fees. The new
secured note is guaranteed by the debtor subsidiaries under an
agreement in which the debtor subsidiaries have pledged
substantially all of their remaining assets as collateral. Due to
the uncertainty surrounding the collection of the note, it has
been fully reserved.
We currently anticipate that we will not generate any
revenue in the near term based on (i) the termination of the
operations of our debtor subsidiaries which have historically
provided all of our significant revenues on a consolidated basis
and (ii) uncertainties surrounding the return, if any, we will
realize as a result of our acquisition of an interest in Paciugo.
Accordingly, we may be required to obtain additional outside
funding which could be difficult to obtain on acceptable terms,
if at all. Failure to obtain adequate funding will jeopardize our
ability to continue as a going concern. Due to these
uncertainties, we are unable to determine whether current
available financing will be sufficient to meet the funding
requirements of (i) the liquidating trust and our debtor
subsidiaries through the plan administration process, (ii) our
ongoing general and administrative expenses and (iii) the
undetermined capital requirements relating to our Initial
Interest, or potential Subsequent Interest, in Paciugo.
Business Risk Factors
- ---------------------
There are many risks associated with the operations of our
subsidiaries and our efforts to redeploy our assets, including,
without limitation, our acquisition of the Initial Interest in
Paciugo. These risks are outlined in our Annual Report on Form
10-K for the year ended June 30, 2002, and our Quarterly Report
on Form 10-Q for the period ended September 30, 2002, as well as
in other of our annual and periodic reports filed with the SEC.
The following is a list of certain of such risks as they relate
to or are modified by our purchase of the Initial Interest in
Paciugo.
We Will Be Functioning as an Early Stage Company
We currently have no plans to re-enter the
telecommunications industry. Instead, we have chosen to deploy a
portion of our remaining cash assets in acquiring the Initial
Interest in Paciugo. We may acquire the Subsequent Interest, and
we may explore other related or unrelated opportunities.
Consequently, we have no history upon which to base an evaluation
of any new business going forward. Our prospects must be
considered in light of the many risks, uncertainties, expenses,
delays and difficulties encountered by companies adopting a new
or dramatically changed business model after the failure (for
whatever reason) of a prior business model.
-10-
Some of the risks and difficulties we expect to encounter
include, without limitation, our ability to:
* create and successfully execute our new business
plan;
* manage and adapt to changing operations;
* respond effectively to competitive developments;
* attract, retain and motivate qualified personnel,
including, particularly those with appropriate industry
experience; and
* overcome the impact of the failure of our previous
business model upon our current and future reputation.
Because of our lack of industry experience in the frozen
dessert market, we have limited insight into trends and
conditions that may exist or might emerge and affect our Initial
Interest in Paciugo. Also, we have similarly limited insights
into other non-telecommunications industries.
We May Not Be in a Position to Diversify Our Business Beyond Our
Purchase of the Initial or Subsequent Interest In Paciugo
Upon completion of the purchase of our Initial Interest in
Paciugo, we maintain cash and cash equivalents of approximately
$5.7 million. We currently anticipate that, after paying certain
bankruptcy obligations related to our debtor subsidiaries and
assuming we fund the purchase of the Subsequent Interest of $1.5
million sometime in 2003, we will have approximately
$2.85 million of remaining cash available. We currently have a
monthly cash requirement of approximately $0.2 million to fund
recurring corporate general and administrative expenses,
excluding costs associated with our debtor subsidiaries'
bankruptcy plan administration process. We do not believe that
additional funding sources will be available to us in the near
term. Consequently, our purchase of the Initial Interest, and
potentially the Subsequent Interest, may serve as the only
redeployment of our remaining cash assets. Further
diversification is possible, should we find another suitable
opportunity, but it seems unlikely at the present time. A lack of
diversification may subject us to a variety of economic,
competitive and regulatory risks, any or all of which may have a
substantial adverse impact on our continued viability.
We May Not Be Able to Adequately Fund Our New Business Venture in
Paciugo
Although we have adequate resources to fund our purchase of
the Initial Interest as well as the Subsequent Interest, if we so
choose, we may not possess sufficient funds, should they be
needed, to provide further capital to Paciugo. No assurances can
be made that adequate levels of cash to fund this new business
venture will be available at all or on acceptable terms. Any
financing could involve the issuance of securities with rights
superior to those of our common stockholders. The issuance of
additional securities could also result in significant dilution
to our existing stockholders.
There Is Substantial Doubt Concerning Our Ability to Continue as
a Going Concern
The financial statements contained in our Annual Report on
Form 10-K for the fiscal year ended June 30, 2002, as well as
those included in our Quarterly Report on Form 10-Q for the
period ended September 30, 2002, were prepared assuming we will
continue as a going concern. However, substantial doubt exists
concerning our ability to do so. The auditor's opinion to our
financial statements as of and for the year ended June 30, 2002,
noted the fact that we have no operations and no sources of
capital to fund business operations, which raises substantial
doubt as to our ability to continue as a going concern. On a
consolidated basis, we incurred operating losses of
$22.7 million, $172.5 million and $28.8 million for the fiscal
years ended June 30, 2002, 2001 and 2000, respectively. As of
June 30, 2002, we had an accumulated deficit of $247.2 million.
We do not expect to incur material liabilities on behalf of our
debtor subsidiaries in connection with the bankruptcy
proceedings, other than certain guarantee obligations and funding
for the liquidating trust of the debtor subsidiaries. However,
there can be no assurances that we will not incur additional
operating losses or other liabilities in connection with our
debtor subsidiaries' bankruptcy filings. Further, there is no
assurance that our purchase of the Initial Interest or the
Subsequent Interest in Paciugo will generate sufficient returns
so as to remove such concerns. The financial statements
contained in our Annual Report did not include any adjustments
related to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities
that might result should we be unable to continue as a going
concern.
-11-
The Bankruptcies of Our Subsidiaries Could Negatively Affect Us
By September of 2001, all of our wholly owned subsidiaries
had filed voluntary petitions for relief under the bankruptcy
code. For further details regarding such filings, see the section
entitled "Bankruptcy Proceedings" in our Annual Report on Form 10-
K for the year ended June 30, 2002 as well as our Quarterly
Report on Form 10-Q for the period ended September 30, 2002. As
a result of such filings, we may encounter the following risks:
* we guaranteed certain indebtedness of our debtor
subsidiaries and, depending on the treatment of and
distributions to holders of such obligations under the
amended plan, we may be liable for some or all of this
indebtedness;
* the administration of our debtor subsidiaries'
amended plan could negatively affect our relationship
with our vendors and employees; and
* we cannot assure you that we will be successful in
protecting or segregating our remaining cash assets.
There is a risk that negative associations with our debtor
subsidiaries may effect Paciugo. In addition, the diversion of
our capital resources and our time and attention in dealing with
our debtor subsidiaries may result in less time and fewer
resources to develop our interests in Paciugo, which could result
in a material adverse impact on our operations.
Where to Find More Information
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We file annual, quarterly and special reports, as well as
proxy statements and other information with the SEC. These
filings are available to the public from commercial document
retrieval services and at the web site maintained by the SEC at
www.sec.gov.
Item 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Business Acquired
As permitted by Form 8-K, the historical financial
information required by Regulation S-X will be filed by an
amendment to this Report no later than March 4, 2003.
(b) Pro forma Financial Information
As permitted by Form 8-K, the pro forma financial
information required by Regulation S-X will be filed by an
amendment to this Report no later than March 4, 2003.
(c) Exhibits
10.1 Purchase Agreement by and among Novo Networks, Inc.,
Paciugo Management LLC, Ad Astra Holdings LP, Ugo
Ginatta, Cristiana Ginatta and Vincent Ginatta (filed
herewith).
-12-
Pursuant to the requirements of the Securities Exchange Act
of 1934, as amended, we have duly caused this report to be signed
on our behalf by the undersigned hereunto duly authorized.
NOVO NETWORKS, INC.
By: /s/ STEVEN W. CAPLE
--------------------------------
Date: January 3, 2002 Steven W. Caple
Senior Vice President,
General Counsel and Secretary
-13-
INDEX TO EXHIBITS
-----------------
EXHIBIT NO. DOCUMENT
- ----------- -----------------------------------------------
10.1 Purchase Agreement by and among Novo Networks,
Inc., Paciugo Management LLC, Ad Astra Holdings
LP, Ugo Ginatta, Cristiana Ginatta and Vincent
Ginatta (filed herewith).