U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d)
Of the Securities Exchange Act of 1934
For the Quarter Ended September 30, 1999
Commission File No. 0-25582
GRACE DEVELOPMENT, INC.
(Exact Name of Registrant as Specified in its Charter)
Colorado 84-1110469
- ------------------------------- ---------------------------------
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
1690 Chantilly Road, Atlanta, Georgia 30324
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(Address of Principal Executive Offices)
(678) 222-3030
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(Registrant's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes |_| No |X|
There were 73,846,895 shares of the Registrant's common stock, no par
value (the "Common Stock") outstanding as of September 30, 1999. For purposes of
this Report, the number of outstanding shares of the Registrant's Common Stock
assumes that all shares issuable in connection with the Merger (as hereinafter
defined), are outstanding. In addition, the number of outstanding shares
includes 410,000 shares of the Registrant's Common Stock that the Registrant
considers not to have been validly issued (the "Disputed Shares"). In January
1995, the Registrant issued 80,000 shares of the Disputed Shares to an
unaffiliated third party in exchange for the recipient's contractual obligation
to identify an acquisition candidate and
consummate a merger between the Registrant and such candidate. No such merger
was consummated. In April, 1995, the Registrant issued 330,000 shares of the
Disputed Shares to an unaffiliated third party as a finders fee with respect to
two transactions which were never consummated. In May 1995, the Registrant
issued to its transfer agent a stop transfer order for all of the Disputed
Shares. Based upon the foregoing, the Registrant's auditors at that time, Dohan
and Company, CPA's, deemed 330,000 of the Disputed Shares to have been canceled
in the audited financial statements for the Company's fiscal year ended December
31, 1995 and thereafter, as reflected in the Registrant's annual and quarterly
reports on Forms 10-KSB and 10-QSB, filed on July 29, 1999. The Registrant is
seeking a judicial determination as to the validity of the Disputed Shares. The
Registrant is treating the Disputed Shares as outstanding in its financial
statements presented in this report, and will so treat the Disputed Shares in
all subsequent reports until a judicial determination as to the validity of the
Disputed Shares is made.
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
GRACE DEVELOPMENT, INC.
FORM 10-QSB
INDEX
Page
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Part I: Financial Information
Item 1. Consolidated Financial Statements
Balance Sheet (unaudited) at September 30, 1999 and
December 31, 1998
Statement of Operations (unaudited) for the Three and
Nine Months ended September 30, 1999
Statement fo Cash Flow (unaudited) for the Nine Months
Ended September 30, 1999
Statement of Shareholders Equity for the Nine Months
Ended September 30, 1999
Notes to Financial Statements for the Nine Months Ended
September 30, 1999
Item 2. Management's Discussion and Analysis or
Plan of Operation
Part II: Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
GRACE DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Predecessor
Company
SEPTEMBER 30, DECEMBER 31,
1999 1998
----------- ---------
( UNAUDITED ) ( AUDITED )
ASSETS:
Cash and cash equivalents $ 828,787 $ 3,719
Investment in certificates of deposit 2,650,000
Accounts receivable, net of $ 0 allowance 10,045
Prepaid expenses and other assets 200,000 820
Officer advances 17,420
----------- ---------
Total current assets 3,706,252 4,539
Property and equipment
Leasehold improvements 19,371
Furniture and fixtures 83,620
Equipment and software 2,833,320 13,117
Less: Accumulated depreciation and amortization (54,151) (506)
----------- ---------
2,882,160 12,611
Goodwill, net of amortization of $ 42,497 490,487
Idle Equipment 4,292,360
Other non-current assets 41,389
----------- ---------
Total assets $11,412,648 $ 17,150
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable 82,905 5,391
Deferred revenues 150,000
Accrued liabilities 290,829
Lines of credit 1,630,484
Current portion of obligations under capital lease 2,185,905
----------- ---------
Total current liabilities 4,340,123 5,391
Obligations under capital leases, net of current portion 4,645,905
----------- ---------
Total liabilities 8,986,028 5,391
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Stockholders' equity
Grace Common stock; no par value; 800,000,000 4,260,195
shares authorized; 73,846,895 issued and
outstanding as of September 30, 1999
NMM Common Stock, $1 par value; 1,000,000 32,500
shares authorized; 32,500 shares issued
and outstanding at December 31, 1998.
Subscriptions receivable (978,374)
Accumulated deficit (855,201) (20,741)
----------- ---------
Total stockholders' equity 2,426,620 11,759
----------- ---------
Total liabilities and stockholders' equity $11,412,648 $ 17,150
=========== =========
See notes to consolidated financial statements
GRACE DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1999
------------------ -----------------
( UNAUDITED ) ( UNAUDITED )
Revenues $ 307,515 $ 500,431
Cost of revenues (246,440) (293,388)
------------ ------------
Gross profit 61,075 207,043
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Operating expenses
Sales and marketing expenses 54,836 67,635
General and administrative expenses 363,952 676,947
Depreciation and Amortization 90,271 96,288
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Total operating expenses 509,059 840,870
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Loss from operations (447,984) (633,827)
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Other income (expense)
Interest income 4,737 5,078
Interest expense (201,558) (205,711)
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Total other income (expense) (196,821) (200,633)
Loss before income taxes (644,805) (834,460)
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Income tax expense -- --
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Net loss $ (644,805) $ (834,460)
============ ============
Basic and diluted net loss per common share $ (0.02) $ (0.02)
============ ============
Weighted average common shares outstanding 36,352,318 36,352,318
============ ============
See notes to consolidated financial statements
GRACE DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
1999
-----------
Cash flows from operating activities
Net loss $ (834,460)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 96,288
Issuance of common stock for services 174,375
Changes in assets and liabilities from operations
Accounts receivable (9,845)
Prepaid expenses and other assets (199,180)
Officer advances (17,420)
Other non-current assets (33,772)
Accounts payable 7,116
Deferred revenues (24,812)
Accrued liabilities 290,829
-----------
Net cash used in operating activities (550,881)
-----------
Cash flows from investing activities
Acquisition of property and equipment (257,882)
Investments in Certificates of Deposits (2,650,000)
Acquisition of business unit (359,314)
-----------
Net cash used in investing activities (3,267,196)
Cash flows from financing activities
Net proceeds from lines of credit 1,630,484
Proceeds from note payable 450,000
Repayment of note payable (450,000)
Repayment on obligations under capital leases (18,263)
Net proceeds from issuance of common stock 3,030,924
-----------
Net cash provided by financing activities 4,643,145
-----------
Increase in cash and cash equivalents 825,068
Cash and cash equivalents at beginning of period 3,719
-----------
Cash and cash equivalents at end of period $ 828,787
===========
Supplemental disclosure of cash flow information
Cash paid for interest $ 16,936
===========
Supplemental activities of Non-Cash Transactions:
During the third quarter of 1999 the Company
acquired equipment under several capital
lease obligations totaling $ 6,850,073
Acquisition of business unit:
Goodwill $ 532,984
Assets acquired 115,561
Liabilities acquired (245,210)
Stock issued (44,021)
-----------
Net cash $ 359,314
===========
See notes to consolidated financial statements
GRACE DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
Additional Stock
Common Stock Paid-in Accumulated Subscription
Shares Amount Capital Deficit Receiveble Total
- ----------------------------------------------------------------------------------------------------------------------------------
Predecessor balance at December 31, 1998 $ 32,500 $ (20,741) $ 11,759
Shares issued in repayment of
Shareholder debt 31,000 31,000
Shares issued as compensation
to New Millennuim shareholders (Note 10) 174,375 174,375
Shares issued for Avana acquisition (Note 2) 44,021 44,021
Private Placement of New
Millennium shares (Note 9) 777,600 777,600
Private Placement of New
Millennium shares (Note 9) 3,459,319 (978,374) 2,480,945
Warrants exercised (Note 11) 147,000 147,000
Warant cancellation fees (Note 11) (395,620) (395,620)
Assumed purchase of net assets of
Grace at Predecessor cost 66,246,933 4,270,195 (4,270,195) --
Reverse acquisition of Grace
by New Millennium (Note 2) 7,599,962 (10,000) (10,000)
Net loss for the nine months ended
September 30, 1999 (834,460) (834,460)
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Balance at September 30, 1999 73,846,895 $ 4,260,195 $ -- $ (855,201) $(978,374) $2,426,620
====================================================================================
See notes to the Consolidated Financial Statements
GRACE DEVELOPMENT, INC. And Subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
For the Nine Months Ended September 30, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Description of the Company and Basis of Presentation:
Grace Development, Inc., is an Integrated Communications Provider offering
telecommunication and Internet services (ISP) to business and residential
customers. Telecommunication services currently offered are local and long
distance, frame relay, ATM, data private lines and calling cards.
The ISP operation focuses on serving individuals and small business. The
Company's service offerings include dial-up Internet access and business
services which are offered in various price and usage plans designed to
meet the need of our subscribers. Business services include web hosting,
which entails maintaining a customer's web site; high speed, dedicated
Internet access; web page design; domain name registration and customer
web server co-location.
Principles of consolidation and basis of financial reporting:
The consolidated financial statements include the accounts of Grace
Development, Inc. ("Grace") and its wholly owned subsidiaries
(collectively the "Company"). All significant intercompany accounts and
transactions have been eliminated.
The financial statements of the Predecessor are the accounts of New
Millenium Multimedia, Inc., a Georgia corporation ("NMM").
In the opinion of management, the accompanying financial statements
reflect all adjustments, consisting of normal, recurring adjustments,
necessary for a fair presentation of results of operations, financial
position, and cash flows. The results of operation of the interim periods
are not necessarily indicative of the results of operations, which might
be expected for the entire year. The condensed consolidated financial
statements should be read in conjunction with the Company's 1998 annual
report on Form 10-KSB, which was filed on July 29, 1999.
Cash and Cash Equivalents:
Cash and cash equivalents consist of cash and other highly liquid debt
instruments with an original maturity of three months or less.
Property and Equipment:
Property and equipment is carried at cost. Depreciation is computed using
the straight-line method based on estimated useful lives of the assets,
generally three to ten years. For income tax purposes, depreciation is
calculated using accelerated methods.
Goodwill:
The Company amortizes goodwill and organizational costs on a straight-line
basis over a period of five years.
Revenue Recognition:
The Company recognizes revenues as they are earned. Some customers pay an
annual fee for Internet services and the revenues are recognized on a
straight-line basis over the service period. Deferred revenue represents
the portion of unearned Internet service fees.
Income Taxes:
Income taxes are based on the loss for financial reporting purposes and
reflect a current liability [asset] for the estimated taxes payable
[recoverable] in the current year tax return and changes in deferred
taxes. Deferred tax liabilities and assets are recognized for the
estimated tax effects of temporary differences between financial reporting
and taxable income [loss] for the loss carryforwards based on enacted tax
laws and rates. A valuation allowance is used to reduce deferred tax
assets to the amount that is more likely than not to be realized.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets,
liabilities, and disclosures including the allowance for doubtful
accounts, useful lives and recoverability of long-term assets. Actual
amounts could differ from those estimates. Any adjustments applied to
estimated amounts are recognized in the year in which such adjustments are
determined.
Advertising:
The Company expenses advertising as incurred. The advertising costs for
the three and nine months ended September 30, 1999 were approximately
$42,000 and $47,000, respectively.
2. MERGER AND REORGINAZATION:
Avana Merger:
On May 5, 1999, NMM completed its acquisition of Avana Communications
Corporation ("Avana"). The acquisition was accounted for as a purchase
pursuant to Accounting Principles Board Statement No. 16, "Business
Combinations" ("APB 16") and the result of Avana's operations were
included in the Company's 1999 consolidated statements of operation from
the date of acquisition. Total consideration included the issuance of
6,485,858 shares of Grace stock (97,824 shares of NMM stock later
converted to Grace stock at a 66.3013:1 ratio), and cash of $364,000. As a
result of the merger, the Company recorded goodwill of approximately
$533,000, which is being amortized, on a straight-line basis over five
years.
Additionally, NMM agreed to pay contingent consideration of up to $100,000
based upon Avana maintaining a certain percentage of the acquired customer
base. The Company will record a liability when the contingency is resolved
and consideration is issued or becomes issuable.
New Millennium Multimedia, Inc.:
On September 28, 1999 a wholly-owned subsidiary of the Company merged with
NMM. The shareholders of NMM exchanged 100% of the outstanding stock of
NMM in exchange for shares of Grace stock. Each share of NMM common stock
was exchanged for 66.3013 shares of Grace common stock and a total of
66,246,933 shares of Grace common stock were issued to NMM stockholders.
The merger is intended to qualify as a tax-deferred reorganization under
Section 368(a) of the Internal Revenue Code.
The acquisition set out in the preceding paragraph was accounted for as
the reverse acquisition of Grace by an "accounting entity" consisting of
NMM and its wholly-owned subsidiary, Avana, because following the
transaction, the former shareholders of NMM are in control of the Company.
Accordingly, the financial statements of the Company are the financial
statements of the "accounting entity" adjusted for the assumed acquisition
of the net assets of Grace in exchange for the issuance of Grace common
stock outstanding before the transaction. The net assets of the
Predecessor are accounted for at their historical cost.
In accordance with purchase accounting principles under APB 16, the
Company accounted for the net assets of Grace, acquired at the fair value
of such net assets as of September 28, 1999. No goodwill was recorded as a
result of this transaction.
Pro forma Financial Statements:
For the Nine Months Ended September 30, 1999
--------------------------------------------
As Reported Adjustments Pro Forma
----------- ----------- ---------
Revenues 500,431 313,908 814,339
Net income (loss) (834,460) (77,781) (912,241)
Earnings per share (.02) (.00) (.03)
3. INVESTMENTS:
The Company accounts for its investments under Financial Accounting
Standards Board ("FASB") No. 115 "Accounting for Certain Investments in
Debt and Equity Securities" as of September 30, 1999 investments consisted
of the following:
Maturity Date Interest Rate Amount
------------- ------------- ------
Certificate of Deposit March 24, 2000 4.498% $2,000,000
Certificate of Deposit August 4, 2000 5.250% $ 650,000
Total $2,650,000
4. IDLE EQUIPMENT
The Company acquired equipment under several capital lease obligations.
Included in these lease obligations was $4,292,360 of equipment not placed
in service as of September 30, 1999. Management expects this equipment to
be returned to the vendor in exchange for equipment of equal value and
with technology that better addresses the needs of the Company.
Amortization has not been recorded on this equipment.
5. COMMITMENTS AND CONTINGENCIES:
Concentrations of Credit Risk:
The Company does not have a security interest in their accounts
receivable; however, they do have legal recourse for defaulted amounts.
The Company maintains the majority of its cash deposits and investments at
three financial depository institutions. The amount of the accounting loss
due to credit risk the Company would incur if the financial depository
institutions failed would be the cash deposits in excess of the $100,000
amount per depositor that is federally insured. The amount at risk totaled
approximately $3,200,000 at September 30, 1999.
Operating Leases:
The Companies lease office space and equipment under several operating
lease agreements. Rent expense for the office space and equipment totaled
$42,000 and $44,000 for the three and nine months ended September 30,
1999, respectively.
At September 30 1999, future minimum lease payments under non-cancelable
leases having remaining terms in excess of one year are as follows:
September 30, Amount
------------ --------
2000 $167,790
2001 $155,658
2002 $160,326
2003 $165,138
2004 $126,621
--------
$775,533
--------
Obligations Under Capital Lease:
The Company leases equipment under capital lease obligations. $2,833,320
of the equipment is included in the property and equipment section and
$4,292,360 is included in the idle equipment section of the balance sheet.
Amortization was $38,248 and $38,248 for the three and nine months ended
September 30, 1999, respectively. The capitalized cost and accumulated
amortization at September 30, 1999 were as follows:
Total Equipment Placed in Service $ 2,833,320
Accumulated amortization $ (38,248)
-----------
Book Value $ 2,795,072
-----------
The future minimum lease payments under the capital leases at September
30, 1999:
9/30/2000 $ 2,914,383
9/30/2001 $ 2,992,477
9/30/2002 $ 2,193,453
-----------
$ 8,100,313
Less amount representing interest $(1,268,563)
-----------
$ 6,831,810
Less current portion $(2,185,905)
-----------
$ 4,645,905
Note Payable:
On April 26, 1999, the company signed a $600,000 promissory note with
Lucent Technologies,
Inc. ("Lucent"). Lucent advanced the Company $450,000 and made available
an additional $150,000 based on the Company's customer list. The note bore
interest at a rate of 10% per annum, payable monthly. The note was secured
by fixed assets of the Company. The Company repaid the note in total on
September 29, 1999.
6. LINES OF CREDIT:
The Company has a line of credit with the Bank of Tennessee to provide
working capital of up to $650,000. The interest rate is 7.25% per annum
payable monthly. The balance on the line of credit was $575,900 on
September 30, 1999. The line of credit is secured by a CD and matures on
August 4, 2000.
The Company has a line of credit with Regions Bank to provide working
capital of up to $2,000,000. The interest rate is 5.998% per annum payable
monthly. The balance on the line of credit was $1,054,585 on September 30,
1999. The line of credit is secured by a CD and matures on March 24, 2000.
7. PREFERRED STOCK:
The Company is authorized to issue 10,000,000 shares of preferred stock
with no par value. The preferred stock may be issued by the Board of
Directors in one or more series. The Board of Directors shall determine
the distinguishing features of each series including preferences, rights
and restrictions, by resolution upon the establishment of such series. No
shares of preferred stock had been issued as of September 30, 1999.
8. INCOME TAXES:
The sources of temporary differences and their effect on the net deferred
taxes are as follows:
Deferred tax asset resulting from
net operating loss carryforwards $ 635,000
Less valuation allowances $(635,000)
---------
$ -0-
---------
The valuation allowance fully reserves the net deferred tax asset that
arose from the tax loss carryforwards generated.
At September 30, 1999, the Company had available for carryforward a net
operating loss of approximately $1,099,650. On September 28, 1999, the
Company had a significant change in ownership (note 2). As a result of the
ownership change, and in accordance with Section 382 of the Internal
Revenue Code, the Company's net operating loss is limited in total and
each year. The net operating loss available for the year ending December
31, 1999 is approximately $93,000. For each year thereafter, the net
operating loss will be limited to approximately $93,000 plus any unused
loss from the prior year (1999 and forward). In addition to the limitation
from Section 382 of the Internal Revenue Code, the losses are limited to a
fifteen-year carryforward, with losses from 1989 beginning to expire in
the year 2004.
9. SEGMENT REPORTING
The Company operates two business segments: telecommunications sales and
services; and Internet service including dial-up accounts, web-hosting and
web-design services.
Three Months Nine Months
Ended 9/30/99 Ended 9/30/99
------------- -------------
Revenues
Telecommunications 100,266 239,080
Internet 207,249 261,351
---------- ----------
307,515 500,431
Gross Profit (Loss)
Telecommunications 87,746 226,561
Internet (26,671) (19,518)
---------- ----------
61,075 207,043
Profit (Loss)
Telecommunications (536,531) (706,156)
Internet (108,274) (128,304)
---------- ----------
(644,805) (834,460)
Depreciation and Amortization
Telecommunications 79,320 82,774
Internet 10,951 13,514
---------- ----------
90,271 96,288
Identifiable Assets
Telecommunications 11,342,573 11,342,573
Internet 70,075 70,075
---------- ----------
11,412,648 11,412,648
10. PRIVATE PLACEMENTS
During July 1999, NMM effected a private placement of shares of its common
stock. The shares were sold at $3.20 per share. For every three shares of
NMM common stock stock sold, warrants were issued to the purchaser, which
gives the purchaser the right to purchase two shares of Grace common stock
at $4.50 per share. In aggregate, 251,000 shares of NMM common stock and
167,292 warrants for Grace common stock were issued for net proceeds of
$777,600. All warrants expire July 29, 2001. The shares of NMM common
stock were converted to Grace common stock at a ratio of 66.3013:1.
During September 1999, NMM effected a private placement of shares of its
common stock. The shares were sold at $23.34 per share. In aggregate,
150,356 shares of NMM common stock were issued for net proceeds of
$3,459,319. The shares were converted to Grace stock at a ratio of
66.3013:1.
11. STOCK COMPENSATION:
NMM issued 387,500 shares of its common stock in consideration for
services rendered. The shares were valued at $174,375 and a non-cash
expense was recorded to the statement of operations. The shares were
converted to Grace common stock at a ratio of 66.3013:1.
12. Stock Warrants
On April 26, 1999, NMM entered into several capital lease agreements (note
4) and a secured note payable agreement (note 5) with Lucent. As part of
these financing agreements, NMM issued a warrant to purchase a maximum of
200,000 shares of NMM stock at a price of $3 per share. In September 1999,
Lucent exercised the warrant and purchased 49,000 shares of NMM stock
(later converted to 3,248,764 shares of Grace stock) for $147,000. The
warrants were valued at $0 based on the following assumptions:
Risk free interest rate 5.5%
Life 7 years
FMV of stock on date of grant $.45 per share
Volatility Not applicable
On September 27, 1999, NMM paid Lucent $395,620 to cancel the remaining
151,000 warrants issued.
13. SUBSEQUENT EVENTS:
Acquisitions
On November 8, 1999 the Company acquired substantially all the business
assets of Rob Ballard and Sabrina Ballard d/b/a Northwest Georgia Internet
for $160,000 in cash and 25,000 shares of the Company's common stock. The
transaction will be accounted for as a purchase under APB 16. The fair
market value of the consideration and the resulting goodwill has not yet
been determined. If any goodwill is booked as a result of this transaction
it will be amortized over five years. Northwest Georgia Internet provides
Internet access, web hosting and web design to businesses and individuals
located in areas northwest of Atlanta, Georgia.
Letter of Intent:
On October 14, 1999, the Company executed a letter of intent to acquire
100% of the outstanding stock of The Telephone Company of Central Florida
("TCCF") from TCCF's parent company, Phoenix International Industries,
Incorporated ("Phoenix"). The terms of the agreement, including payment
terms, are still being negotiated. The Company advanced $100,000.00 to
TCCF, which advance is guaranteed by the Chief Executive Officer of
Phoenix.
Notes Receivable:
The Company loaned a corporation $250,000. The note is due on demand and
bears interest at a rate of 9% payable annually. The note is secured by
stock of the corporation.
GRACE DEVELOPMENT, INC.
dba AVANA COMMUNICATIONS
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis provides information that management
believes is relevant to an assessment and understanding of the consolidated
results of operations and financial condition of Grace Development, Inc. and its
subsidiaries (collectively, the "Company"). The discussion should be read in
conjunction with the Company's consolidated financial statements for the quarter
and nine months ending September 30, 1999.
Certain statements included in this document are forward-looking, such as
statements relating to estimates of operating and capital expenditure
requirements, future revenue and operating income, and cash flow and liquidity.
Such forward-looking statements are based on the Company's current expectations,
estimates and projections about the Company's industry, management's beliefs and
certain assumptions made by the Company, and are subject to a number of risks
and uncertainties that could cause actual results in the future to differ
significantly from results expressed or implied in any such forward-looking
statements. These risks and uncertainties include, but are not limited to,
uncertainties relating to economic and business conditions, governmental and
regulatory policies, and the competitive environment in which the Company
operates. Words such as "anticipates," "expects," "intends," "plans,"
"believes," "may," "will" or similar expressions are intended to identify
forward-looking statements. In addition, any statements that refer to
expectations, projections or other characterizations of future events or
circumstances, including any underlying assumptions, are forward-looking
statements. Such statements are not guarantees of future performance and are
subject to the risks and uncertainties referred to above. Therefore, the
Company's actual results could differ materially and adversely from those
expressed in any forward-looking statements as a result of various factors. The
Company undertakes no obligation to revise or update publicly any
forward-looking statements for any reason. The information contained in this
document is not a complete description of the Company's business or the risks
associated with an investment in the Company's common stock. The Company urges
you to carefully review and consider the various disclosures made in this report
and in the Company's other reports filed with the Securities and Exchange
Commission.
Overview
Grace Development, Inc. ("GDI") dba Avana Communications is seeking to become a
"bundled services" communications provider offering an array of communication
and related services including, but not limited to, local dial tone, intra and
inter-state access, long distance, enhanced services, Internet, data private
lines, frame relay, ATM (Asynchronous Transfer Mode), calling cards, wireless
and related communications services. As an integrated telecommunications
provider the Company intends to use a "one bill" approach with its customers.
This strategy will allow the Company to take advantage of cross selling
opportunities with current and future customers.
Currently the Company is operating in two areas, as an Internet Service Provider
("ISP") and as a provider of telecommunications solutions.
The Company's ISP operation focuses on serving individuals and small business.
The primary services offered by the Company are dial-up Internet access and
business services which are offered in various price and usage plans designed to
meet the needs of the Company's subscribers. Other business services include:
web hosting, which entails maintaining a customer's web site; high speed,
dedicated Internet access; web page design; domain name registration; and
customer web server co-location.
The Company's telecommunication operations focus on providing communications
solutions to business of all sizes and to residential customers. The Company
currently concentrates its sales efforts in the Atlanta, GA market. To date,
most revenues earned have been from sales commissions related to lines placed
with business, mainly for long distance, frame relay and other date related
communications. The Company is a master agent for Qwest Communications.
In July 1999, The Company began the licensing process for Competitive Local
Exchange Carrier ("CLEC") and Interexhange Carrier ("IXC") status. These
licenses will allow GDI to sell to, and maintain, local dial tone and
inter/intra state long-distance customers. GDI intends to have all nine
Southeastern states (Georgia, Florida, Louisiana, Mississippi, Alabama,
Kentucky, North Carolina, South Carolina and Tennessee) under license agreements
not later than the end of 1999.
In August 1999, The Company entered into an agreement with Lucent Technologies
to supply GDI with certain network infrastructure equipment necessary for
network expansion. As of September 30, 1999, GDI had Internet systems in four of
the nine southeastern states listed above. GDI intends to have systems in seven
of the nine states by March 2000, and in all nine states by June 30, 2000.
Existing facilities are based in Georgia, North Carolina, Alabama and Tennessee.
In September 1999, The Company entered into reseller agreements to offer certain
telecommunications services to residential and commercial customers. These
agreements are an essential part of GDI's plan to gain market share and revenues
while network infrastructure is under construction. Management believes that the
majority of the network will be operational on or before June 30, 2000.
During the quarter ended September 30, 1999, the Company made progress in many
areas related to reaching its goals. Two private placements were completed by a
subsidiary of the Company prior to the recent merger of that subsidiary with
another wholly-owned subsidiary of the Company. Funding of these private
placements allowed the Company to repay in full its working capital loan from
Ascend Communications and provided liquidity for operations. The Company
renegotiated its largest equipment lease, allowing for more favorable terms and
the ability to capitalize the lease for accounting purposes. The Company entered
into an office lease and relocated its operations to a larger and better-suited
location under favorable terms. Consolidation of the Company's Internet
operations in the same building took place shortly after the end of the quarter.
Build out of the Internet network was nearly complete by quarter's end.
Co-location facilities in Charlotte, NC; Birmingham, AL; and Nashville, TN were
equipped, tested and are ready for operations.
The Company has completed deployment of hardware, circuits and configuration for
extending and replacing its prior infrastructure in Atlanta. This involved
moving the Company's data center into new premises with raised floor, commercial
grade HVAC and line interactive UPS facilities. The Company's previous server
configuration has been entirely replaced with rack-mounted Compaq servers that
have improved the Company's ability to service more clients efficiently.
The Company has implemented a tape library unit that automatically backs up all
servers every night, requiring manual intervention only once weekly. Back-up
time has been reduced to less than 40% of the prior requirement. The Company has
deployed over 50 new workstations and has standardized most configurations with
Windows NT software to ensure minimal support and maintenance efforts. All
systems are Y2K compliant.
The Company's telecommunications infrastructure has also been upgraded to
support scalable growth and enhanced performance. Thus, the Company's Atlanta
market now has over 1300 ports supporting V.90 service, its Birmingham market
has 644 ports supporting V.90 service, its Charlotte market has 644 ports
supporting V.90 service and its Nashville market has 644 ports supporting V.90
service.
Results of Operations
Revenues: Revenues for the three months ended September 30, 1999 were derived
from telecommunications sales commissions and from providing Internet and web
hosting services. Telecommunications revenues were $100,266 while Internet and
web hosting revenues were $207,249. Revenues for the nine month period ended
September 30, 1999 totaled $500,431. Telecommunications sales accounted for
$239,080 of the total, while revenues from Internet and web hosting services
accounted for $261,351. The acquisition of Avana Communications Corporation was
completed on May 5, 1999. The acquisition was accounted for as a purchase and
the results of Avana's operations were included in the consolidated statement of
operations from the date of acquisition.
Cost of Revenues: Cost of revenues for providing Internet service includes
salaries and wages of those employed in customer service and sales and in the
technical areas needed to maintain and upgrade the system. Cost of revenues for
the quarter and nine months ending September 30, 1999 were $246,440 and $293,388
respectively.
Sales and Marketing Expenses: Sales and marketing expenses include advertising
costs for the Internet operations and development of the promotional campaign
for both telecommunications sales and corporate branding. For the quarter and
nine months ended September 30, 1999, Sales and Marketing expenses were $54,836
and $67,635 respectively. These expenses are expected to increase as the Company
pursues an aggressive sales effort.
General and Administrative Expenses: Included in General and Administrative
expenses are salaries and wages, professional fees, travel expenses, office
supplies and other general expenses. Expenses in these categories increased due
to growth in the number of employees, the closing if the merger and related
financing activities. For the quarter and nine months ended September 30, 1999,
General and Administrative expenses were $363,889 and $676,947 respectively.
Depreciation and Amortization: Depreciation expenses are computed using the
straight-line method based on estimated useful lives of the asset, generally
three to ten years. For the quarter and nine months ended September 30, 1999,
Depreciation expense was $18,378 and $23,127 respectively.
Amortization expenses for organization costs are Amortized over a 60-month
period. Goodwill related to the purchase of Avana is also being amortized over a
6-month period. For the quarter and nine months ended September 30, 1999,
Amortization expense was $71,893 and $73,161 respectively.
Interest Expense: The Company currently incurs interest expense on the lines of
credit and under capitalized leases. For the quarter and nine months ended
September 30, 1999, Interest Expense was $201,558 and $205,711 respectively.
Interest Income: The Company currently earns interest income on cash and cash
equivalents, and investments. For the quarter and nine months ended September
30, 1999, Interest Income was $4,737 and $5,078 respectively.
Liquidity and Capital Resources
The Company's operating activities required net cash of $550,881 more than the
cash generated from such activities for the nine months ended September 30,
1999, thereby producing a negative net cash flow in that amount for that period.
Working capital increased by $633,019 for the nine months ended September 30,
1999. Working capital was increased by proceeds from two private placements, as
described in footnote 9 of the financial statements, which increase was offset
by the current portion of leases capitalized during the nine month period and
draws against the lines of credit used for the same period. Changes in net cash
from operations resulted primarily from the loss for the period offset by
noncash items of depreciation, amortization and compensation paid in the form of
stock. The changes in net cash were also affected by an increase in accounts
receivable, prepaid expenses, other assets, advances to officers and deferred
revenue partially offset by an increase in accounts payable and accrued
liabilities.
Cash used for investing activities was $3,267,196 for the nine months ended
September 30, 1999. The cash was used primarily to fund investments in
certificates of deposits totaling $2,650,000. Expenditures of property and
equipment for acquisitions were made totaling $257,882 for the nine months ended
September 30, 1999. Expenditures for acquisitions of businesses were net
$359,314.
Cash provided by financing activities was $4,643,145 for the nine months ended
September 30, 1999. Cash provided consisted primarily of proceeds from private
placements of $3,030,924 and proceeds from line of credit borrowing of
$1,630,484. These amounts were partially offset by repayment on obligations
under capital leases of $18,263. A working capital loan in the amount of
$450,000 was funded and repaid during this nine-month period.
As of September 30, 1999, the Company had $848,787 in cash and cash equivalents.
The Company also had $2,650,000 in certificates of deposits less offsetting
related liabilities in the form of lines of credit of $1,630,484. The net
proceeds available from investments less the corresponding liability totaled
$1,019,516. Combined with $848,787 above, the Company has $1,848,303 to meet its
current obligations and fund its operations. Management believes this amount is
not sufficient to enable the Company to expand its business as currently
planned. The Company will therefore require additional capital to fund its
anticipated operating losses and planned capital expenditure requirements.
In order to fund these requirements, the Company anticipates that it will be
required to raise additional financing from public or private equity or debt
sources. Additionally, if the Company's plans or assumptions change (including
those with respect to the development of the network, the level of its
operations and its operating cash flow), if its assumptions prove inaccurate, if
it consummates additional investments or acquisitions, if it experiences
unexpected costs or competitive pressures, or if existing cash and any other
borrowings otherwise prove to be insufficient, the Company may be required to
seek additional capital sooner than expected. In the event that the Company is
unable to obtain such additional capital or is unable to obtain such additional
capital on acceptable terms, it may be required to reduce the scope of its
expansion, which could adversely affect its business prospects and its ability
to compete. There can be no assurance that the Company will be able to raise
equity capital, obtain capital lease or bank financing or incur other borrowings
on commercially reasonable terms, if at all, to fund any such expansion.
To accelerate its growth rate and to finance the launch or build-out of
additional markets, the Company will consider obtaining financing from various
sources, including additional vendor financing provided by equipment suppliers,
project financing from commercial banks, bank lines of credit and the sale of
equity and debt securities. To the extent that the Company or any of its
subsidiaries issue debt, its leverage and debt service obligations will
increase.
As part of its business strategy, the Company intends to continue to evaluate
potential acquisitions, joint ventures and strategic alliances in companies that
own existing networks or companies that provide services that complement the
Company's existing businesses. The Company continues to consider potential
acquisitions from time to time. New sources of capital such as credit facilities
and other borrowings, and additional debt and equity investments in the Company
will be necessary to fund any material acquisitions and similar strategic
investments.
Impact of Year 2000
The Year 2000 issue is the result of computer-controlled systems using two
digits rather than four to define the applicable year. This could result in
system failure or miscalculations causing disruptions in the Company's
operations including, among other things, temporary inability to process
transactions, send invoices or engage in similar normal business activities. To
ensure that its computer-based systems and applications will function properly
beyond 1999, the Company has implemented a Year 2000 program.
The Company's Year 2000 Program (the "Program") consists of the following
phases:
(i) Preliminary Assessment - During this phase the Company will
inventory all existing hardware and software and assess Year 2000
compliance. This assessment is based on documented representations
from vendors and Company personnel and third party consultants for
Company developed software. As of September 30, 1999, approximately
99% of this phase was completed.
(ii) Action Definition - For items identified as requiring an upgrade,
replacement or other action to achieve Year 2000 compliance, a
detailed action plan, including estimated completion times and
corrective steps, is developed. As of September 30, 1999,
approximately 95% of this phase was completed.
(iii) Execution - During this phase the action steps as defined in phase
(ii) are performed. Any additional action items identified are
prioritized and added to the action plan. As of September 30, 1999,
approximately 95% of this phase was completed.
(iv) Operational Compliance - The Company anticipated completing phases
(i) through (iii) by October 31, 1999, prior to any anticipated
impact on its operating systems.
Given that the majority of the Company's telecommunications network
infrastructure and critical back office systems have been purchased since 1997,
Year 2000 compliance was substantially ensured at the time of purchase. The
Company does not anticipate total Year 2000 compliance costs to exceed $4000.
These estimated costs and the date the Company anticipates completion of all
Year 2000 modifications are based on management's estimates, which are derived
utilizing assumptions of future events, including the continued availability of
certain resources, third-party assistance and other factors. However, there can
be no guarantee that these estimates will be achieved and actual results could
differ from those anticipated.
While the Company is working to test its own mission-critical systems for Year
2000 compliance, the Company does not control the systems of its suppliers. The
Company is
currently seeking assurances from its suppliers and strategic business partners
regarding the Year 2000 readiness of their systems. The Company is currently
planning interoperability tests to ensure that its suppliers' and business
partners' systems will accurately interact with the Company's systems into and
beyond the Year 2000. Notwithstanding these measures, there is some risk that
the interaction of the Company's systems and those of its suppliers or business
partners may be impacted by the Year 2000 date change. In addition, in light of
the vast interconnection and interoperability of telecommunications networks
worldwide, the ability of any telecommunications provider, including the
Company, to provide services to its customers (e.g., to complete calls and
transport data and to bill for such services) is dependent, to some extent, on
the networks and systems of other carriers. To the extent the networks and
systems of those carriers are adversely impacted by the Year 2000 problems, the
ability of the Company to service its customers may be adversely impacted as
well. Any such impact could have a material adverse effect on the Company's
operations.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial conditions. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. The Program is expected to
significantly reduce the Company's level of uncertainty about the Year 2000
problem. The Company believes that, with the completion of the Program as
scheduled, the possibility of significant interruptions of normal operations
should be reduced.
In a recent Securities and Exchange Commission release regarding Year 2000
disclosure, the SEC stated that public companies must disclose the most
reasonably likely worst-case Year 2000 scenario. Although it is not possible to
assess the likelihood of any of the following events, each must be included in a
consideration of worst-case scenarios: widespread failure of electrical, gas and
similar supplies serving the Company; widespread disruption of services provided
by common communications carriers; similar disruption to the means and modes of
transportation for the Company and its employees, contractors, suppliers and
customers; significant disruption to the Company's ability to gain access to,
and remain working in, office buildings and other facilities; the failure of
substantial numbers of the Company's critical computer hardware and software
systems, including both internal business systems and systems controlling
operational facilities such as electrical generation, transmission and
distribution systems; and the failure of outside entities' systems, including
systems related to banking and finance.
If the Company cannot operate effectively after December 31, 1999, the Company
could, among other things, face substantial claims by customers or loss of
revenue due to service interruptions, inability to fulfill contractual
obligations or to bill customers accurately and on a timely basis, and increased
expenses associated with litigation, stabilization of operations following
critical system failures, and the execution of
contingency plans. The Company could also experience an inability by customers
and others to pay, on a timely basis or at all, obligations owed to the Company.
Under these circumstances, the adverse effects, although not quantifiable at
this time, would be material.
The Company believes that its critical systems should be Year 2000 compliant
before January 1, 2000. Having identified the mission-critical systems of the
Company and their key suppliers, and the associated risks of failure to ensure
that those systems are Year 2000 ready, the Company is in the process of
devising contingency plans which will be implemented in the event any such
systems are not Year 2000 compliant in a timely manner. Additionally, to the
extent the networks and systems of other carriers are adversely impacted by the
Year 2000 problem, the ability of the Company to service its customers may be
adversely impacted.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) As previously reported in the Registrant's Current Report on Form 8-K
dated September 28, 1999 , a change in control of the Registrant occurred on
September 28, 1999 (the "Effective Time") pursuant to the terms and conditions
of an Agreement and Plan of Merger (the "Merger Agreement") dated as of August
20, 1999 between the Registrant, New Millennium Multimedia, Inc., a Georgia
corporation ("NM"), Grace Newco, Inc., a Georgia corporation and wholly-owned
subsidiary of the Registrant ("Merger Sub") and Signal Compression, Inc., a
Nevada corporation ("Signal"). The Merger Agreement provided for the merger (the
"Merger) of Merger Sub with and into NM, with NM as the surviving corporation.
As a result of the Merger, NM became a wholly-owned subsidiary of the Registrant
and the former shareholders of NM received an aggregate of 66,246,933 or 89.70%
of the Registrant's Common Stock. The shares of Common Stock received by the
former shareholders of NM were not registered under the Securities Act of 1933,
as amended (the "Act"), in reliance on the exemption from registration provided
by Section 4(2) of the Act. Such shares are "restricted securities" (as defined
in Rule 144 promulgated under the Act) and accordingly, may not be sold or
transferred by the holders thereof unless such shares are registered under the
Act or are sold or transferred pursuant to an exemption therefrom.
On September 30, 1999, the Board of Directors of the Registrant approved
the issuance of certain warrants (the "Warrants") to purchase an aggregate of
167,292 shares of the Registrant's Common Stock. As part of a private placement
of securities made by NM to certain "accredited investors" (as defined in Rule
501 promulgated under the Act), NM agreed to issue the Warrants to such
investors as, if and when the Merger was completed. The Warrants were issued by
the Registrant in reliance upon the exemption from registration provided by
Section 4(2) of the Act. The terms of the Warrants provide that they may be
exercised at any time following issuance upon payment of the exercise price of
$4.50 per share of Common Stock. The Warrants expire on July 29, 2001.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3(ii) Exhibit 3(ii) - Amendment to By-Laws. A complete copy of the
By-laws, as amended, is filed herewith.
10.1 Master Lease Agreement dated as of May 21, 1999 between New
Millennium Multimedia, Inc. and Ascend Credit Corporation.
10.2 Wholesale Services Agreement dated as of September 21, 1999
between New Millennium Multimedia, Inc. and Qwest
Communications Corportion.
10.3 ICG Authorized Distributor Agreement dated September 28, 1999
by and between ICG Telecom Group, Inc. and New Millennium
Multimedia, Inc.
27 Financial Data Schedule
(b) Reports on Form 8-K
Current Report on Form 8-K dated September 28, 1999 reporting a
change in control of the Registrant and the acquisition of assets.
Current Report on Form 8-K dated August 20, 1999 reporting execution
of the Merger Agreement and a related press release.
Current Report on Form 8-K dated July 10, 1999 reporting changes in
Registrant's certifying accounts, as amended on each of August 17
and September 2, 1999.
EXHIBIT INDEX
Exhibit Method of Filing
- ------- ----------------
3(ii) Filed herewith electronically
10.1 Filed herewith electronically
10.2 Filed herewith electronically
10.3 Filed herewith electronically
27 Filed herewith electronically
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GRACE DEVELOPMENT, INC.
Date: November 22, 1999 /s/ Richard S. Granville, III
-----------------------------
Richard S. Granville
President and Chief
Operating Officer
Date: November 22, 1999 /s/ Ronald R. McCallum
-----------------------
Ronald R. McCallum
Chief Financial Officer