1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 DECEMBER 31, 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 0-28579
NOVO NETWORKS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2233445
(State or other jurisdiction of incorporation) (I.R.S. Employer Identification No.)
300 CRESCENT COURT, SUITE 800
DALLAS, TEXAS 75201
(Address of principal executive offices)
(214) 777-4100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___
-----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
On February 5, 2001, 52,439,043 shares of the registrant's Common Stock $.00002
par value per share were outstanding.
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NOVO NETWORKS, INC.
QUARTERLY REPORT FORM 10-Q
INDEX
PAGE NO.
--------
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 2000 (unaudited)
and June 30, 2000...................................................................3
Consolidated Statements of Operations for the three and six months
Ended December 31, 2000 and 1999 (unaudited).........................................4
Consolidated Statements of Cash Flows for the six months ended
December 31, 2000 and 1999 (unaudited)...............................................5
Notes to Consolidated Financial Statements...........................................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations...........................................................................9
Item 3. Quantitative and Qualitative Disclosures about Market Risk..........................14
PART II: OTHER INFORMATION
Item 1. Legal Proceedings...................................................................15
Item 2. Changes in Securities...............................................................15
Item 3. Defaults Upon Senior Securities.....................................................15
Item 4. Submission of Matters to a Vote of Securities Holders...............................15
Item 5. Other Information...................................................................16
Item 6. Exhibits and Reports on Form 8-K....................................................16
Signatures........................................................................................17
Exhibit Index.....................................................................................18
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NOVO NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, June 30,
ASSETS 2000 2000
------------- -------------
(unaudited)
CURRENT ASSETS
Cash and cash equivalents .................................................... $ 30,015,644 $ 40,764,246
Accounts receivable, less allowances for
doubtful accounts ($1,159,317 - December 2000; $793,900 - June 2000) ......... 7,381,463 3,607,053
Prepaid expenses and other receivables ....................................... 3,038,901 2,979,489
Deposits ..................................................................... 1,324,503 1,020,584
VAT receivable ............................................................... 1,303,709 2,131,277
Notes receivable, affiliate .................................................. -- 100,000
------------- -------------
43,064,220 50,602,649
------------- -------------
LONG-TERM ASSETS
Restricted cash .............................................................. 554,655 281,928
Property and equipment, net .................................................. 35,347,491 35,419,120
Investments in affiliates .................................................... 19,203,598 23,373,190
Goodwill and other intangibles, net .......................................... 98,380,784 108,639,486
------------- -------------
153,486,528 167,713,724
------------- -------------
$ 196,550,748 $ 218,316,373
============= =============
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Capital leases, current portion .............................................. $ 5,083,547 $ 4,703,053
Accounts payable ............................................................. 5,920,119 5,580,873
Accrued other ................................................................ 8,986,526 5,688,892
Accrued reorganization and restructuring charge .............................. 2,411,665 --
Accrued interest payable ..................................................... 128,774 78,016
Customer deposits and deferred revenues ...................................... 821,692 619,403
Notes payable, current portion ............................................... 251,531 229,343
------------- -------------
23,603,854 16,899,580
------------- -------------
LONG-TERM LIABILITIES
Notes payable, net of current portion ........................................ 4,012,958 3,685,145
Capital leases, net of current portion ....................................... 6,024,050 5,780,851
------------- -------------
10,037,008 9,465,996
------------- -------------
COMMITMENTS AND CONTINGENCIES ..................................................... -- --
STOCKHOLDERS' EQUITY
Common stock, $0.00002 par value, authorized 200,000,000 shares,
issued and outstanding, 52,439,043 and 51,989,745 shares .......... 1,050 1,041
Common stock to be issued, 71,513 shares ..................................... 1 1
Preferred stock, $0.00002 par value, $1,000 liquidation preference, authorized
25,000,000 shares, issued and outstanding, 27,070 and
20,070 shares ..................................................... -- --
Additional paid-in capital ................................................... 257,727,510 248,907,665
Accumulated deficit .......................................................... (93,162,162) (54,634,559)
Deferred compensation ........................................................ (708,521) (1,274,479)
Notes receivable from shareholders ........................................... (947,992) (1,048,872)
------------- -------------
162,909,886 191,950,797
------------- -------------
$ 196,550,748 $ 218,316,373
============= =============
See accompanying notes to consolidated financial statements.
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NOVO NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months For the Six Months
Ended December 31, Ended December 31,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(unaudited) (unaudited)
Revenues ...................................... $ 20,593,654 $ 13,986,119 $ 39,190,681 $ 22,661,838
Direct costs .................................. 20,692,793 13,030,262 38,034,125 21,759,782
------------ ------------ ------------ ------------
Gross profit (loss) ........................... (99,139) 955,857 1,156,556 902,056
Selling, general and administrative expenses .. 7,860,432 7,262,493 15,004,010 8,581,170
Reorganization and restructuring charge ....... 4,325,451 -- 4,325,451 --
Depreciation and amortization ................. 6,471,673 1,276,283 12,940,608 1,773,638
------------ ------------ ------------ ------------
Loss from operations, before
other (income) expense ................... (18,756,695) (7,582,919) (31,113,513) (9,452,752)
Other (income) expense
Interest (income) expense, net ........... (148,270) 78,831 (454,325) 598,062
Write off of unamortized debt discount ... -- -- -- 917,615
Equity in loss of affiliates ............. 1,341,585 13,089 5,412,574 31,819
Foreign currency loss (gain) ............. 25,026 4,470 22,181 (2,032)
Other .................................... 19,989 7,662 95,020 1,074
------------ ------------ ------------ ------------
1,238,330 104,052 5,075,450 1,546,538
------------ ------------ ------------ ------------
Net loss ...................................... (19,995,025) (7,686,971) (36,188,963) (10,999,290)
Imputed preferred dividend .................... (2,299,750) (1,115,943) (2,299,750) (1,115,943)
------------ ------------ ------------ ------------
Net loss available to common
shareholders ............................. $(22,294,775) $ (8,802,914) $(38,488,713) $(12,115,233)
============ ============ ============ ============
Net loss per share - (basic and diluted) ...... $ (0.43) $ (0.20) $ (0.74) $ (0.40)
============ ============ ============ ============
Weighted average number of shares
outstanding - (basic and diluted) ........ 52,121,108 44,309,461 52,055,335 30,428,396
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
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NOVO NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended December 31,
----------------------------
2000 1999
------------ ------------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ...................................................................................... $(36,188,963) $(10,999,290)
Adjustments to reconcile net loss to net cash used in
net operating activities:
Depreciation and amortization .............................................................. 12,940,608 1,773,638
Equity in loss of affiliates ............................................................... 5,412,574 31,819
Other non-cash expenses .................................................................... 3,178,144 2,287,468
Change in operating assets and liabilities:
Accounts receivable ...................................................................... (4,813,002) (582,920)
Prepaid expenses and other receivables ................................................... (179,504) (82,217)
VAT receivable ........................................................................... 827,568 976,014
Restricted cash .......................................................................... (272,727) 1,107,437
Accounts payable ......................................................................... 339,246 3,760,810
Accrued other ............................................................................ 5,670,410 220,647
Accrued interest payable ................................................................. 50,758 185,879
Customer deposits and deferred revenue ................................................... 202,289 (1,214,650)
------------ ------------
Net cash used in operating activities .............................................................. (12,832,599) (2,535,365)
------------ ------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Deposits ...................................................................................... (303,919) (361,442)
Purchase of property and equipment ............................................................ (2,062,649) (1,667,894)
Net cash acquired in acquisitions ............................................................. -- 299,687
Long-term investments ......................................................................... -- (475,000)
Investments in affiliates ..................................................................... (1,056,112) (598,852)
------------ ------------
Net cash used in investing activities .............................................................. (3,422,680) (2,803,501)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Shareholder repayments (advances) ............................................................. 96,984 (246,560)
Payments on capital leases .................................................................... (1,380,211) (585,632)
Advances (repayments) on notes payable ........................................................ 350,000 (823,278)
Issuance of notes receivable - affiliate, net ................................................. (84,096) --
Issuance of common and preferred stock, net ................................................... 6,524,000 13,224,850
------------ ------------
Net cash provided by financing activities .......................................................... 5,506,677 11,569,380
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS ............................................................ (10,748,602) 6,230,514
CASH AND CASH EQUIVALENTS, beginning of year ....................................................... 40,764,246 39,379
------------ ------------
CASH AND CASH EQUIVALENTS, end of period ........................................................... $ 30,015,644 $ 6,269,893
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid for interest ........................................................................ $ 580,957 $ 258,000
============ ============
Cash paid for taxes ........................................................................... $ -- $ --
============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH OPERATING,
INVESTING AND FINANCING ACTIVITIES:
Purchases of equipment under capital leases ................................................... $ 2,003,904 $ 5,206,790
============ ============
Goodwill arising from change in ownership and acquisitions settled through issuance of stock .. $ -- $ 28,824,974
============ ============
Net assets of subsidiaries acquired through an issue of stock ................................. $ -- $ 196,169
============ ============
Stock issued for settlement of accounts payable ............................................... $ -- $ 5,399,480
============ ============
See accompanying notes to consolidated financial statements.
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NOVO NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS
Novo Networks, Inc. ("Novo Networks" or the "Company") is a global
broadband network services company providing broadband and voice services
over a facilities-based network which consists of digital switching,
routing and signal management equipment, as well as digital fiber optic
cable lines. The network currently reaches 35 domestic and 4 international
cities in North America, Europe, the Middle East and Mexico. Prior to
December 12, 2000, the Company was known as eVentures Group, Inc.
2. GENERAL
The accompanying consolidated financial statements for the three and six
month periods ended December 31, 2000 and 1999, have been prepared by the
Company without audit, pursuant to the interim financial statements rules
and regulations of the SEC. In the opinion of management, the accompanying
consolidated financial statements include all adjustments, consisting only
of those of a normal recurring nature, necessary to present fairly the
results of the Company's operations and cash flows at the dates and for the
periods indicated. The results of operations for the interim periods are
not necessarily indicative of the results for the full fiscal year. The
accompanying financial statements should be read in conjunction with the
Company's audited consolidated financial statements included in the
Company's Annual Report on Form 10-K for the fiscal year ended June 30,
2000 filed with the Securities and Exchange Commission.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates. The consolidated financial statements include the accounts
of the Company and all wholly owned and majority owned subsidiaries. The
financial results of e.Volve Technology Group, Inc. ("e.Volve") are
included in the financial statements for all periods presented. The
financial results for AxisTel Communications, Inc. ("AxisTel") are included
in the financial statements since September 22, 1999, the date of
acquisition. The financial results of Internet Global Services, Inc.
("iGlobal") are included in the financial statements since its acquisition
on March 10, 2000. All significant inter-company accounts have been
eliminated.
Certain fiscal 2000 balances have been reclassified for comparative
purposes to be consistent with the fiscal 2001 presentation.
3. GOODWILL
Goodwill arising from the excess of cost over net assets of businesses
acquired by the Company is amortized on a straight-line basis over periods
ranging from five to ten years. The Company assesses the recoverability of
goodwill by determining whether the amortization over its remaining life
can be recovered through projected undiscounted future cash flows. The
amount of impairment, if any, is measured based on fair value and is
charged to operations in the period in which impairment is determined by
management. As of December 31, 2000, the Company's management has not
identified any material impairment of goodwill.
4. NET LOSS PER SHARE
The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings per Share (EPS).
SFAS No. 128 requires dual presentation of basic EPS and diluted EPS on the
face of all income statements for entities with complex capital structures.
Basic EPS is computed as net income divided by the weighted average number
of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur from common shares issuable through
stock options, warrants, convertible preferred stock and convertible
debentures. Diluted EPS has not been presented for the effects of
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stock options, warrants, convertible preferred stock and convertible
debentures as the effect would be antidilutive. Accordingly, basic and
diluted EPS did not differ for any period presented. For purposes of
computation of EPS, the shares issued for the acquisition of e.Volve
(11,365,614 shares) are deemed to have been in existence for the entire six
month period ended December 31, 1999.
5. INVESTMENTS IN AFFILIATES
The Company has minority investments in the following companies:
% OWNERSHIP ACCOUNTING DECEMBER 31, JUNE 30,
ACCOUNTING COMPANY NAME COMMON PREFERRED METHOD 2000 2000
- ------------------------------------------------- -------------------- --------------- ---------------- ---------------
(unaudited)
PhoneFree.com, Inc. ("PhoneFree") ................ 17.2% 31.7% Equity $ 8,565,585 $ 11,897,831
ORB Communications & Marketing, Inc ("ORB") ...... 19.0% 100.0% Equity 6,839,391 7,713,650
FonBox, Inc. ..................................... 14.0% 50.0% Equity 2,798,622 2,034,632
Launch Center 39 ................................. 0.0% 2.1% Cost 1,000,000 1,000,000
Televant, Inc. (d/b/a CallRewards) ............... 0.0% 0.0% Equity -- 727,077
----------- ------------
$19,203,598 $ 23,373,190
=========== ============
On September 1, 2000, CallRewards was merged with a subsidiary of
PhoneFree. Novo Networks received 102,240 shares of PhoneFree common stock
in exchange for Novo Networks' equity interest in CallRewards and as
repayment of $184,096 advanced to CallRewards pursuant to note agreements.
During the six months ended December 31, 2000, the Company advanced an
additional $1,000,000 to FonBox, Inc. in exchange for 510,733 shares of
FonBox, Inc. Series C Preferred stock.
On October 7, 2000, the Company's obligation to invest additional funds in
ORB was terminated without further liability.
6. SEGMENT INFORMATION
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, established standards for reporting information about
operating segments in the Company's financial statements. Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker, or decision making group, in deciding how to
allocate resources and in assessing performance. The Company's chief
operating decision maker is the Chief Executive Officer of the Company.
The Company has determined that it operates in one segment.
7. REORGANIZATION AND RESTRUCTURING CHARGE
In October, the Company began execution of a plan to consolidate the
assets, network and management of its wholly owned operating subsidiaries
into a single broadband network and communication services company. The
plan has a renewed focus on providing broadband and voice services to other
service providers, which resulted in the discontinuation of retail Internet
access services offered, principally, digital subscriber line access and
dial-up access. The Company recorded reorganization and restructuring
expense totaling approximately $4.3 million during the quarter ended
December 31, 2000.
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A summary of the completed and planned reorganization and restructuring
activities follows:
(In Thousands)
Personnel severance $ 1,517
Property, plant & equipment 1,374
Abandonment of leased facilities 1,044
Discontinuation and divestiture of retail Internet access operations 390
---------
$ 4,325
========
The restructuring charge of $4.3 million includes cash expenditures
totaling $2.8 million related to (i) personnel severance of $1.5 million,
of which $0.2 million has been paid as of December 31, 2000, (ii) lease
abandonment of $1.0 million, and (iii) other costs of $0.3 million and
non-cash charges of $1.5 million, primarily for the write-down of impaired
assets. The positions eliminated included three senior management
positions as a result of the management consolidation and 16 technical and
support positions related to the discontinuation of retail Internet access
services.
The Company anticipates that the reorganization and restructuring will be
completed by fiscal year end.
7. INCENTIVE PLAN
During the three months ended December 31, 2000, the Company adopted a new
incentive plan, the Novo Networks 2001 Equity Incentive Plan, (the "Plan")
for its officers and employees. The maximum number of shares of common
stock covered by options to be granted under the Plan is 12,000,000
shares. Option grants under the Plan will become effective twenty business
days after the mailing to the Company's shareholders of an Information
Statement in accordance with Regulation 14C of the Securities Exchange Act
of 1934.
At December 31, 2000, no Gap Options had been granted.
8. SIGNIFICANT TRANSACTION
On December 5, 2000, the Company issued 7,000 shares of Series D
Convertible Preferred Stock and 450,001 shares of the Company's common
stock for $7.0 million in cash and a minority interest in a private
communications company. The par value of shares of Series D Convertible
Preferred Stock is $0.00002 with a liquidation value of $1,000 per share.
The shares of Series D Convertible Preferred Stock are convertible into
shares of the Company's common stock at a price of $7.00 per share. The
Company has assigned no value to the minority interest received in this
transaction, and has treated the issuance of the 7,000 shares of Series D
Convertible Preferred Stock and 450,001 shares of common stock as a single
transaction. Due to the issuance of common stock and the beneficial
conversion feature of the securities issued, an imputed preferred dividend
of approximately $2.3 million was recorded during the three months ended
December 31, 2000.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. These statements may be identified by the use of words such as
"expects," "anticipates," "intends," "plans" and similar expressions. Factors
that could cause actual results to differ materially from those reflected in the
forward-looking statements include, but are not limited to, those discussed in
this section, elsewhere in this report and the risks discussed in the "Risk
Factors Related to Our Company" section included in our Annual Report on Form
10-K for our fiscal year ended June 30, 2000 filed with the SEC. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's analysis, judgment, belief or expectation only as of the
date hereof. We undertake no obligation to publicly revise these forward-looking
statements to reflect events or circumstances that arise after the date of this
report.
BASIS OF PRESENTATION
Prior to September 22, 1999, we were a public company with no material
operations. We changed our name from eVentures, Inc. to Novo Networks, Inc. in
December 2000. We were formerly known as Adina, Inc., which was incorporated in
the state of Delaware on June 24, 1987. In September and October 1999, we
completed a series of transactions whereby we acquired (i) 100% of the
outstanding shares of e.Volve, (ii) 100% of the outstanding shares of AxisTel,
(iii) 17% of the outstanding shares of PhoneFree and (iv) a note receivable from
e.Volve in the amount of approximately $8.5 million ("Notes"), including accrued
interest. All of the acquisitions and the purchase of the Notes were settled
through the issuance of 42,787,863 shares of our common stock and are
collectively referred to as the "Initial Transaction".
Since we had no material operations prior to the Initial Transaction, the
reorganization was accounted for as a recapitalization of e.Volve. Accordingly,
the historical financial statements presented through September 22, 1999 are
those of e.Volve. The financial statements presented herein reflect the
consummation of the reorganization, and therefore are the consolidated financial
statements of Novo Networks and subsidiaries as of December 31, 2000 and June
30, 2000 and for the period from September 22, 1999 through December 31, 1999
and for the three and six months ended December 31, 2000. On March 10, 2000, we
acquired iGlobal, which has been incorporated into our consolidated financial
statements from the date of acquisition.
Revenues. Revenues are generated through the sale of our products and services,
which can be divided into two primary product groups: broadband services and
voice services. Broadband services consist of transport services such as private
line, asynchronous transfer mode and frame relay, co-location services and
managed web hosting. Voice services include software services that leverage the
packet-based infrastructure of our network to deliver advanced communications
services to end-users. Voice services consist principally of
voice-over-Internet-protocol or VoIP services, VoIP integration services and
prepaid calling services. The majority of our products and services are measured
and billed on a per minute basis.
Historically, we have derived substantially all of our revenues from the sale of
VOIP and transport services. Our agreements with our wholesale customers are
short term in duration and the rates are subject to change from time to time.
Due to increasing competition, management expects these rates to decline, which
could result in lower revenues and increased losses. Our three largest customers
accounted for 60% and 53% of our revenues during the three and six-month periods
ended December 31, 2000, respectively. We anticipate that our dependence on
these three customers will continue to decline as we broaden our sales and
marketing initiatives to include (i) adding new customers, (ii) increasing sales
to existing customers and (iii) increasing sales of broadband and voice
services.
Direct Costs. Direct costs include per minute termination charges and lease
payments and fees for fiber optic cable. Historically, the call termination
expense component of these direct costs has declined as measured on a cost per
minute basis. The direct costs incurred for leasing communications network
capacity has also declined. However, the agreements we enter into for leasing
such capacity are generally at fixed rates for periods of one year or longer. We
anticipate that our aggregate direct costs will continue to increase over time
as we build out our global network and enter into additional capacity leases in
advance of sales. We expect our call termination expenses, as measured on a cost
per minute basis, will decline over time, offset by increases in the volume of
traffic on our network.
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Selling, General and Administrative Expenses. These expenses include general
corporate expenses, management and operations salaries and expenses,
professional fees, sales and marketing expenses, travel expenses, benefits,
facilities costs and administrative expenses. Currently we maintain our
corporate headquarters in Dallas, Texas, and have additional offices in Jersey
City, New York, Kansas City, Dallas, Miami and Mexico City. We anticipate that
our selling, general and administrative expenses will continue to increase over
time as we expand the size of our staff and facilities to meet the demands of
our global network expansion and increased product offerings.
Depreciation and Amortization. Depreciation and amortization represent the
depreciation of property, plant & equipment and the amortization of goodwill
resulting from the reorganization transactions and the acquisition of iGlobal.
We anticipate that depreciation expense will continue to increase over time as
we continue to make investments in our communications network and facilities.
Equity in Loss of Affiliates. Equity in losses of affiliates results from our
minority ownership in certain investments that are accounted for under the
equity method of accounting. Under the equity method, our proportionate share of
each affiliate's operating losses and amortization of our net excess investment
over our equity in each affiliate's net assets is included in equity in losses
of affiliates.
SUMMARY OF OPERATING RESULTS
The table below summarizes our operating results:
Three Months Ended December 31,
-------------------------------------------------
2000 % 1999 %
------------ ----- ------------ -----
(unaudited)
Revenues ....................................... $ 20,593,654 100.0% $ 13,986,119 100.0%
Direct costs ................................... 20,692,793 100.5% 13,030,262 93.2%
------------ ----- ------------ -----
Gross (loss) profit ............................ (99,139) (0.5)% 955,857 6.8%
Selling, general and administrative expenses ... 7,860,432 38.2% 7,262,493 51.9%
Restructuring charge ........................... 4,325,451 21.0% -- 0.0%
Depreciation and amortization .................. 6,471,673 31.4% 1,276,283 9.1%
------------ ----- ------------ -----
Loss from operations, before
other (income) expense .................... (18,756,695) (91.1)% (7,582,919) (54.2)%
Other (income) expenses:
Interest expense (income), net ............ (148,270) (0.7)% 78,831 0.6%
Write off of unamortized debt discount .... -- 0.0% -- 0.0%
Equity in loss of affiliates .............. 1,341,585 6.5% 13,089 0.1%
Foreign currency loss (gain) .............. 25,026 0.1% 4,470 0.0%
Other ..................................... 19,989 0.1% 7,662 0.1%
------------ ----- ------------ -----
1,238,330 6.0% 104,052 0.7%
------------ ----- ------------ -----
Net loss ....................................... (19,995,025) (97.1)% (7,686,971) (55.0)%
Imputed preferred dividend ..................... (2,299,750) (11.2)% (1,115,943) (8.0)%
------------ ----- ------------ -----
Net loss available to
common shareholders ....................... $(22,294,775) (108.3)% $ (8,802,914) (62.9)%
============ ===== ============ =====
Net loss per share - (basic and diluted) $ (0.43) $ (0.20)
============ ============
Weighted average number of shares
outstanding - (basic and diluted) 52,121,108 44,309,461
============ ============
Six Months Ended December 31,
-------------------------------------------------
2000 % 1999 %
------------ ----- ------------ -----
(unaudited)
Revenues ....................................... $ 39,190,681 100.0% $ 22,661,838 100.0%
Direct costs ................................... 38,034,125 97.0% 21,759,782 96.0%
------------ ----- ------------ -----
Gross (loss) profit ............................ 1,156,556 3.0% 902,056 4.0%
Selling, general and administrative expenses ... 15,004,010 38.3% 8,581,170 37.9%
Restructuring charge ........................... 4,325,451 11.0% -- 0.0%
Depreciation and amortization .................. 12,940,608 33.0% 1,773,638 7.8%
------------ ----- ------------ -----
Loss from operations, before
other (income) expense .................... (31,113,513) (79.4)% (9,452,752) (41.7)%
Other (income) expenses:
Interest expense (income), net ............ (454,325) (1.2)% 598,062 2.6%
Write off of unamortized debt discount .... -- 0.0% 917,615 4.0%
Equity in loss of affiliates .............. 5,412,574 13.8% 31,819 0.1%
Foreign currency loss (gain) .............. 22,181 0.1% (2,032) (0.0)%
Other ..................................... 95,020 0.2% 1,074 0.0%
------------ ----- ------------ -----
5,075,450 13.0% 1,546,538 6.8%
------------ ----- ------------ -----
Net loss ....................................... (36,188,963) (92.3)% (10,999,290) (48.5)%
Imputed preferred dividend ..................... (2,299,750) (5.9)% (1,115,943) (4.9)%
------------ ----- ------------ -----
Net loss available to
common shareholders ....................... $(38,488,713) (98.2)% $(12,115,233) (53.5)%
============ ===== ============ =====
Net loss per share - (basic and diluted) $ (0.74) $ (0.40)
============ ============
Weighted average number of shares
outstanding - (basic and diluted) 52,055,335 30,428,396
============ ============
THREE MONTHS ENDED DECEMBER 31, 2000 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1999
Revenues. Revenues increased to $20.6 million during the three months ended
December 31, 2000 from $14.0 million during the three months ended December 31,
1999, an increase of 47%. Revenues for the three months ended December 31, 2000
were generated through the sale of (i) 95% voice services, (ii) 3% broadband
services and (iii) 2% Internet services. Sales during the three months ended
December 31, 1999 were comprised 98% of voice services and 2% broadband
services.
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The increase in revenues during the three months ended December 31, 2000
primarily resulted from an increase in the number of minutes transmitted. During
the three months ended December 31, 2000, we transmitted 214.9 million minutes
versus 141.3 million minutes during the three months ended December 31, 1999, an
increase of 52%. The increase in traffic during the current three-month period
was partially offset by a decrease in the average price per minute. The average
price per minute decreased to $0.095 during the three months ended December 31,
2000 versus $0.099 during the comparable period in fiscal 2000.
Direct Costs. Direct costs increased to $20.7 million during the three months
ended December 31, 2000 from $13.0 million during the three months ended
December 31, 1999, an increase of 59%. Approximately $6.8 million of the
increase during the current year period is a result of the increased volume of
minutes transmitted over our network. The remainder of the increase is primarily
related to fixed line costs associated with adding network capacity to enable
growth in the broadband and voice service product lines.
Selling, General and Administrative. Selling, general and administrative
expenses increased to $7.9 million during the three months ended December 31,
2000 from $7.3 million in the prior year period, an increase of 8%. Selling,
general and administrative expenses during the three months ended December 31,
2000 increased primarily due to increases related to our global network
build-out and the related expansion of staffing and facilities of $4.3 million,
offset in part by decreases in (i) professional fees and consulting expense of
$2.1 million, (ii) stock-based compensation of $1.0 million and (iii) vendor
settlement costs included in the prior year period of $0.6 million. At December
31, 2000, Novo Networks employed approximately 160 employees compared to
approximately 35 employees at December 31, 1999.
Reorganization and Restructuring Charge. In October, the Company began execution
of a plan to consolidate the assets, network and management of its wholly-owned
operating subsidiaries into a single broadband network and communication
services company. Additionally, the plan has a renewed focus on providing
broadband and voice services to other service providers, which resulted in the
discontinuation of retail Internet access services offered, principally, digital
subscriber line access and dial-up access. The Company recorded reorganization
and restructuring expense totaling $4.3 million during the quarter ended
December 31, 2000. The reorganization and restructuring resulted in the
elimination of 19 positions, which occurred over approximately a three-month
period. The restructuring charge of $4.3 million includes cash expenditures
totaling $2.8 million related to (i) personnel severance of $1.5 million (ii)
lease abandonment of $1.0 million, and (iii) other costs of $0.3 million and
non-cash charges of $1.5 million, primarily for the write-down of impaired
assets.
Depreciation and Amortization. As a result of the reorganization transactions in
September 1999 and October 1999 and the acquisition of iGlobal in March 2000, we
recorded approximately $116.0 million in goodwill. Amortization of goodwill
during the three months ended December 31, 2000 totaled $5.1 million.
Depreciation recorded on fixed assets during the current year period totaled
$1.4 million compared to $0.5 million for the prior year period. At December 31,
2000 fixed assets, consisting primarily of network equipment, totaled $35.3
million compared to $12.9 million at December 31, 1999.
Interest (Income) Expense, Net. We recorded interest income, net of expense, of
$0.1 million for the three months ended December 31, 2000 compared to net
interest expense of $0.1 million for the three months ended December 31, 1999.
The interest income, net during the three months ended December 31, 2000
resulted from interest income on greater cash balances maintained from the
proceeds of private placements completed in fiscal 2000 and 2001 together with
lower interest expense. The reduction in interest expense was due to the
elimination of $8.0 million of e.Volve's debentures as a result of the
reorganization transaction on September 22, 1999.
Equity in Losses of Affiliates. Equity in loss of affiliates was $1.3 million
during the three months ended December 31, 2000 and resulted primarily from our
22% equity interest in PhoneFree. We anticipate that our strategic investments
accounted for under the equity method will continue to invest in the development
of their products and services, and will continue to recognize operating losses,
which will result in future charges to earnings as we record our proportionate
share of such losses.
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SIX MONTHS ENDED DECEMBER 31, 2000 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1999
Revenues. Revenues increased to $39.2 million during the six months ended
December 31, 2000 from $22.7 million during the same prior year period, an
increase of 73%. Revenues for the six months ended December 31, 2000 were
generated through the sale of (i) 94% voice services, (ii) 4% broadband services
and (iii) 2% Internet services. Sales during the six months ended December 31,
1999 were comprised of 99% voice services and 1% broadband services.
The increase in revenues during the six months ended December 31, 2000 is
primarily a result of both (i) revenues generated from AxisTel, which was
acquired as part of the Initial Transaction, being included for the full six
months during the current year period verses three months in the prior year
period and (ii) increased minutes transmitted, principally wholesale minutes.
During the six months ended December 31, 2000, we transmitted 384.2 million
minutes versus 218.4 million minutes during the six months ended December 31,
1999, an increase of 76%. Although revenues increased as a result of increased
traffic volumes, the average price per minute decreased 2% to $0.1020 during the
six months ended December 31, 2000 from $0.1038 during the comparable period in
fiscal 2000.
Direct Costs. Direct costs increased to $38.0 million during the six months
ended December 31, 2000 from $21.8 million during the six months ended December
31, 1999, an increase of 74%. The increase in direct costs is principally a
result of the increased traffic volume during the current year, partially offset
by a nominal decrease in the average cost per minute to terminate calls.
Selling, General and Administrative. Selling, general and administrative
expenses increased to $15.0 million during the six months ended December 31,
2000 from $8.6 million in the prior year period. The increase in selling,
general and administrative expenses during the six months ended December 31,
2000 resulted primarily from expenses incurred by companies acquired during
fiscal 2000 being included for a full six-month period and increases related to
our global network build-out and the associated expansion of staffing and
facilities. The increase was offset in part by decreases in (i) professional
fees and consulting expense of $2.1 million, (ii) stock-based compensation of
$0.6 million and (iii) vendor settlement costs included in the prior year period
of $0.6 million.
Reorganization and Restructuring Charge. In October 2000, the Company began
execution of a plan to consolidate the assets, network and management of its
wholly owned operating subsidiaries into a single broadband network and
communication services company. Additionally, the plan has a renewed focus on
providing broadband and voice services to other service providers, which
resulted in the discontinuation of retail Internet access services offered,
principally, digital subscriber line access and dial-up access. The Company
recorded reorganization and restructuring expense totaling $4.3 million during
the six months ended December 31, 2000. The reorganization and restructuring
resulted in the elimination of 19 positions, which occurred over approximately a
three-month period. The reorganization and restructuring charge of $4.3 million
includes cash expenditures totaling $2.8 million related to (i) personnel
severance of $1.5 million (ii) lease abandonment of $1.0 million, and (iii)
other costs of $0.3 million and $1.5 million of non-cash charges, primarily for
the write-down of impaired assets.
Depreciation and Amortization. As a result of the reorganization transactions in
September 1999 and October 1999 and the acquisition of iGlobal in March 2000, we
recorded approximately $116.0 million in goodwill. The current year period
includes amortization of goodwill associated with both the reorganization
transactions and the iGlobal acquisition for the full six months totaling $10.2
million compared to goodwill amortization of $1.4 million related to the
reorganization representing approximately three months of amortization for the
six months ended December 31, 1999. Depreciation recorded on fixed assets during
the current year period totaled $2.7 million compared to $0.4 million for the
prior year period.
Interest (Income) Expense, Net. We recorded interest income, net of expense, of
$0.5 million for the six months ended December 31, 2000 compared to net interest
expense of $0.6 million for the six months ended December 31, 1999. The interest
income, net during the six months ended December 31, 2000 resulted from interest
income on greater cash balances maintained from the proceeds of private
placements completed in fiscal 2000 and 2001 together with lower interest
expense. The reduction in interest expense was due to the elimination of $8.0
million of e.Volve's debentures as a result of the reorganization transaction on
September 22, 1999.
Equity in Losses of Affiliates. Equity in loss of affiliates for the six months
ended December 31, 2000 totaled $5.4 million and resulted primarily from our 22%
equity interest in PhoneFree.
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Write Off Of Unamortized Debt Discount. The $0.9 million write off of
unamortized debt discount in fiscal 2000 resulted from the elimination of
e.Volve's outstanding debentures as a result of the reorganization transaction.
LIQUIDITY AND CAPITAL RESOURCES
Our business plan contemplates expanding our network operations and related
services both domestically and internationally. Our primary expenditures will be
for equipment, network expansion, increased personnel costs and working capital.
This strategy may also include strategic acquisitions and investments. Sources
of funding for our financing requirements may include vendor financing, bank
loans, and public offerings or private placements of equity and/or debt
securities. There can be no assurance that additional financing will be
available or, if available, that financing can be obtained on a timely basis and
on acceptable terms. The failure to obtain such financing on acceptable terms
could significantly reduce our ability to fund our expense, development,
acquisitions and operations.
Since July 1, 1999, we have funded our operations primarily through cash flow
from operations, private placements of common and preferred stock and borrowings
under loan and capital lease agreements. Our principal uses of cash are to fund
(i) the expansion of our operations; (ii) working capital requirements; (iii)
capital expenditures, primarily for our network; (iv) operating losses; and (v)
acquisitions and strategic investments. As of December 31, 2000, we had current
assets of $43.1 million, including cash and cash equivalents of $30.0 million.
The working capital surplus at December 31, 2000 was $19.5 million. While this
amount is not sufficient to fund our current plans for global network expansion,
the cash and cash equivalents at December 31, 2000 are expected to provide
sufficient liquidity to meet our operating and capital requirements over the
next twelve months.
We estimate that our current network expansion plans will require approximately
$97 million of capital and operating expenses over the next 24-months. This
represents a decrease of approximately $90 million from our original business
plans. The decrease in capital and operating requirements resulted primarily
from a reduction in the planned number of gateways from 34 to 16 and a
significant reduction in the number of planned co-location facilities.
Additionally, scaling back the gateway rollout also resulted in reductions in
planned additions of sales and technical personnel and corporate staff. We
expect to fund these capital requirements through existing cash balances,
expansion of our capital lease facilities and public and private placements of
equity and/or debt securities. If we are not able to raise additional funds
within the next six months we may not be able to complete our global network
expansion and increase our revenues pursuant to our business strategy.
Cash flows from operating activities. Cash used in operating activities for the
six months ended December 31, 2000 totaled $12.8 million compared to $2.5
million for the six months ended December 31, 1999. The increased use of cash in
our operating activities is primarily attributable to increased costs associated
with expanding our overall operations, which encompasses (i) networks, (ii)
facilities, and (iii) employee costs. During the six months ended December 31,
2000 cash flow used by operating activities primarily resulted from operating
losses, net of non-cash charges, totaling $14.7 million and an increase in
accounts receivable of $4.8 million, partially offset by a net increase in
accounts payable and accrued liabilities of $6.0 million. At December 31, 1999,
cash flows used in operating activities resulted from operating losses, net of
non-cash charges, totaling $6.9 million offset partially by increases in current
liabilities.
Cash flows from investing activities. Net cash used in investing activities was
$3.4 million for the six months ended December 31, 2000 compared to $2.8 million
for the same period in the prior fiscal year. Investing activities in the
current fiscal year period consisted primarily of purchases of network equipment
$2.1 million and investments in affiliated companies of $1.1 million. Investing
activities for the prior year period consisted principally of fixed asset
purchases of $1.7 million and investments in affiliates of $0.6 million.
Cash flows from financing activities. Cash flows provided by financing
activities during the six months ended December 31, 2000 totaled $5.5 million
and consisted principally of (i) net proceeds from the issuance of 7,000 shares
of Series D Preferred Stock and 450,001 shares of our common stock totaling $6.5
million, and (ii) borrowings under a credit agreement for equipment purchases of
$0.4 million, offset partially by capital lease payments of $1.4 million. Cash
flows provided from financing activities during the prior year period totaled
$11.6 million and was attributable to proceeds from the issuance of common and
preferred stock of $13.2 million, reduced partially by the repayment of a bridge
loan and capital lease payments.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to the impact of political instability, foreign currency,
interest rate and other risks.
Political Instability Risks. We have relationships with foreign suppliers in
Mexico, India and other countries. We have not experienced any negative economic
consequences as a result of relationships with foreign suppliers in these
countries, but may be negatively affected should political instability in any of
these countries develop.
Foreign Currency Risks. Since the agreements we have entered into with foreign
suppliers in India and other countries are denominated in U.S. dollars, we are
not exposed to risks associated with fluctuations in these foreign currencies.
However, because our agreements with certain Mexican suppliers are denominated
in Mexican pesos, we may be exposed to fluctuations in the Mexican peso, as well
as to downturns in the Mexican economy, all of which may affect profitability.
During the six months ended December 31, 2000, $11.0 million of our direct costs
were denominated in Mexican pesos.
Interest Rate Risks. We have investments in money market funds of approximately
$29.4 million at December 31, 2000. We also have a variable rate credit facility
to purchase equipment with outstanding borrowings at December 31, 2000 of $4.1
million. Due to the short-term nature of our investments and the relatively low
amount of variable rate debt on our balance sheet, we believe that the effects
of changes in interest rates are limited and would not materially impact our
profitability.
Other Market Risks. We are also exposed to potential risks in dealing with
foreign suppliers in foreign countries associated with potentially weaker
protection of intellectual property rights, unexpected changes in regulations
and tariffs, and varying tax consequences.
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PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 20, 2000, the arbitration panel awarded Gayath Saad $248,000 in
respect of the dispute previously described in our Annual Report on Form 10-K
for the fiscal year ended June 30, 2000. Subsequent to this ruling, we
negotiated a mutual release with Mr. Saad and delivered it to him overseas. Mr.
Saad executed the release on January 29, 2001 and we paid him the judgment in
accordance with the terms of the award.
We are involved in other legal proceedings from time to time, none of which, if
decided adversely to us, would, in our opinion, have a material adverse effect
on our business, financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES
On December 5, 2000, we completed a private placement of 7,000 shares of newly
issued Series D Convertible Preferred Stock and 450,001 shares of our common
stock to two institutional investors in a private placement under Rule 506 of
Regulation D. We received proceeds of $7.0 million cash and 900,001 Series A
Preference shares of Telnext Communications Ltd. as consideration for this
issuance. We anticipate incurring commissions of $420,000 in connection with
this private placement. The Series D Convertible Preferred Stock is convertible
into shares of our common stock at price of $7.00 per share.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 9, 2000, we held our 2000 Annual Meeting of Stockholders (the
"Annual Meeting"). At the Annual Meeting, the following persons were re-elected
to our Board of Directors as Class I Directors, with their term of office
lasting until our annual meeting of stockholders in 2004:
Mark R. Graham
Jan. R. Horsfall
Stuart A. Subotnick
Fred A. Vierra and David Leuschen continued in office as Class II Directors, and
Clark K. Hunt, Jeffrey A. Marcus and Barrett N. Wissman continued in office as
Class III Directors.
The following table sets forth the number of votes for and against with respect
to the election of Class I directors at the Annual Meeting:
Name For Against
---- ---- -------
Mark R. Graham 40,934,489 284,711
Stuart A. Subotnick 40,934,489 284,711
Jan R. Horsfall 37,834,654 3,384,546
At the Annual Meeting, our stockholders also voted to ratify certain amendments
to our 1999 Omnibus Securities Plan and to amend our Amended and Restated
Certificate of Incorporation to increase the number of authorized shares of our
capital stock from 80,000,000 to 225,000,000. In connection with the increase in
authorized shares of capital stock, the number of authorized shares of preferred
stock was increased from 5,000,000 to 25,000,000, and the number of shares of
common stock was increased from 75,000,000 to 200,000,000. The following table
sets forth the number of votes for, against, abstained and broker non-votes cast
in respect of these proposals:
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16
Proposal For Against Abstentions Broker Non-Votes
-------- --- ------- ----------- ----------------
Plan Amendments 38,028,017 3,063,657 127,226 None
Amendment to Amended and
Restated Certificate of
Incorporation 36,802,597 3,166,361 13,110 1,237,132
On October 31, 2000, the holders of approximately 62% of the outstanding shares
of our common stock, acting by written consent pursuant to Section 228 of the
Delaware General Corporate Law, approved an amendment to our Amended and
Restated Certificate of Incorporation changing our name from "eVentures Group,
Inc." to Novo Networks, Inc.
On December 12, 2000, the holders of approximately 51% of the outstanding shares
of our voting stock, acting by written consent pursuant to Section 228 of the
Delaware General Corporate Law, approved the Novo Networks 2001 Equity Incentive
Plan. Option grants under this plan will become effective 20 business days after
the mailing to our stockholders of an Information Statement in accordance with
Regulation 14C of the Securities Exchange Act of 1934 (which we expect to occur
on or about March 15, 2001). On January 10, 2001, the Option Sub-Committee of
the Board of Directors approved the grant of a total of 10,227,163 Gap Options
to purchase our common stock at an exercise price of $4.625 per share under the
2001 Equity Incentive Plan. Of the 10,227,163 Gap Options granted, 9,975,000
were granted to our executive officers.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amendment to Amended and Restated Certificate of
Incorporation, filed with the Secretary of State of the
State of Delaware on November 13, 2000.
3.2 Amendment to Amended and Restated Certificate of
Incorporation, filed with the Secretary of State of the
State of Delaware on December 11, 2000.
4.1 Certificate of Designation, Rights and Preferences of Series
D Convertible Preferred Stock, filed on December 5, 2000.
9 Voting Agreement, dated as of December 5, 2000, among Rock
Creek Partners II, Ltd, CB Private Equity Partners L.P. and
eVentures Group, Inc.
10.1 Registration Rights Agreement, dated as of December 5, 2000,
among Rock Creek Partners, II, Ltd., CB Private Equity
Partners L.P. and eVentures Group, Inc.
(b) Reports on Form 8-K
On November 13, 2000, we filed a Report on Form 8-K announcing our
intended name change from eVentures Group, Inc. to Novo Networks, Inc.
and announcing our financial results for the fiscal quarter ended
September 30, 2000.
On January 4, 2001, we filed a Report on Form 8-K disclosing the
dismissal of BDO Seidman, LLP as our independent public accountants and
the retention of Arthur Andersen, LLP as our independent public
accountants for our fiscal year ended June 30, 2001.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NOVO NETWORKS, INC.
Date: February 14, 2001 By: /s/ Jeffrey A. Marcus
Jeffrey A. Marcus
(Authorized Signatory and Chief Executive Officer)
Date: February 14, 2001 By: /s/ Daniel J. Wilson
Daniel J. Wilson
(Principal Financial and Accounting Officer)
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INDEX TO EXHIBITS
Exhibit
No. Description
- ------- -----------
3.1 Amendment to Amended and Restated Certificate of
Incorporation, filed with the Secretary of State of the State
of Delaware on November 13, 2000.
3.2 Amendment to Amended and Restated Certificate of
Incorporation, filed with the Secretary of State of the State
of Delaware on December 11, 2000.
4.1 Certificate of Designation, Rights and Preferences of Series
D Convertible Preferred Stock, filed on December 5, 2000.
9 Voting Agreement, dated as of December 5, 2000, among Rock
Creek Partners II, Ltd, CB Private Equity Partners L.P. and
eVentures Group, Inc.
10.1 Registration Rights Agreement, dated as of December 5, 2000,
among Rock Creek Partners, II, Ltd., CB Private Equity
Partners L.P. and eVentures Group, Inc.
18