-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Lk3jxkWVxmEWmuH3XAsFM3EcMMoCP/OMFzoa7f8rU2yk8tZhthbAU+40Z2qlm7Ku EhndpoQQe7p1YdHtZa3bZA== 0001010549-01-500096.txt : 20010516 0001010549-01-500096.hdr.sgml : 20010516 ACCESSION NUMBER: 0001010549-01-500096 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FULLNET COMMUNICATIONS INC CENTRAL INDEX KEY: 0001092570 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 731473361 STATE OF INCORPORATION: OK FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-27031 FILM NUMBER: 1639077 BUSINESS ADDRESS: STREET 1: 200 N. HARVEY STREET 2: SUITE 1704 CITY: OKLAHOMA CITY STATE: OK ZIP: 73102 BUSINESS PHONE: 4052320958 MAIL ADDRESS: STREET 1: 200 N HARVEY STREET 2: SUITE 1704 CITY: OKLAHOMA CITY STATE: OK ZIP: 73102 10QSB 1 fullnet10q33101body.txt U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period ended March 31, 2001 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________________ to ____________________. Commission File Number: 000-27031 FullNet Communications, Inc. ---------------------------- (Exact name of registrant as specified in its charter) Oklahoma 73-1473361 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 201 Robert S. Kerr Avenue, Suite 210,Oklahoma City, Oklahoma 73102 ------------------------------------------------------------------ (Address of principal executive offices and zip code) Registrant's telephone number, including area code: (405) 236-8200 Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 X No --- --- The number of shares outstanding of the Issuer's Common Stock, $.00001 par value, as of May 9, 2001 was 4,268,025. Transitional Small Business Disclosure Format (check one): Yes No X --- --- FORM 10-QSB TABLE OF CONTENTS Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - March 31, 2001 (unaudited) and December 31, 2000...................................... 3 Consolidated Statements of Operations - Three months ended March 31, 2001 and 2000 (unaudited)........................ 4 Consolidated Statement of Stockholders' Equity (Deficit) - Three months ended March 31, 2001 (unaudited).............. 5 Consolidated Statements of Cash Flows - Three months ended March 31, 2001 and 2000 (unaudited)........................ 6 Notes to Consolidated Financial Statements (unaudited) .... 8 Item 2. Management's Discussion and Analysis or Plan of Operation.. 12 PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds.................. 19 Item 4. Submission of Matters to a Vote of Security Holders........ 19 Item 6. Exhibits and Reports on Form 8-K........................... 19 Signatures.......................................................... 20 - 2 -
FullNet Communications, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS ASSETS MARCH 31, DECEMBER 31, 2001 2000 (Unaudited) CURRENT ASSETS: Cash $ 71,920 $ 13,150 Accounts receivable, net 132,979 141,712 Prepaid expenses and other current assets 30,322 35,215 ----------- ----------- Total current assets 235,221 190,077 PROPERTY AND EQUIPMENT, net 1,197,800 1,126,156 COST IN EXCESS OF NET ASSETS OF BUSINESSES ACQUIRED, net 1,698,799 1,761,548 COVENANTS NOT TO COMPETE, net 381,631 395,450 OTHER ASSETS 207,804 218,973 ----------- ----------- TOTAL $ 3,721,255 $ 3,692,204 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable - trade $ 549,836 $ 720,022 Accrued liabilities 170,562 137,501 Notes payable, current portion 418,688 438,589 Deferred revenue 270,403 178,498 ----------- ----------- Total current liabilities 1,409,489 1,474,610 NOTES PAYABLE, less current portion 2,204,527 1,988,057 OTHER 153,829 59,223 STOCKHOLDERS' EQUITY (DEFICIT) Common stock - $.00001 par value; authorized 10,000,000 shares; issued and outstanding, 4,160,275 shares in 2001 and 41 39 3,942,775 shares in 2000 Common stock issuable, 30,000 shares in 2001 30,000 -- Additional paid-in capital 5,914,820 5,250,026 Accumulated deficit (5,991,451) (5,079,751) ----------- ----------- Total stockholders'equity (deficit) (46,590) 170,314 ----------- ----------- TOTAL $ 3,721,255 $ 3,692,204 =========== ===========
See accompanying notes to financial statements. - 3 -
FullNet Communications, Inc. and Subsidiaries Consolidated Statements of Operations (Unaudited) Three Months Ended -------------------------- March 31, March 31, 2001 2000 ----------- ----------- REVENUES: Access service revenues $ 291,324 $ 176,146 Co-location and other revenues 241,610 163,857 ----------- ----------- Total revenues 532,934 340,003 OPERATING COSTS AND EXPENSES: Cost of access service revenues 144,766 87,192 Cost of co-location and other revenues 33,985 61,881 Selling, general and administrative expenses 786,706 464,041 Depreciation and amortization 226,854 130,185 ----------- ----------- Total operating costs and expenses 1,192,311 743,299 ----------- ----------- LOSS FROM OPERATIONS (659,377) (403,296) INTEREST EXPENSE (252,323) (62,331) OTHER EXPENSE -- (4,490) ----------- ----------- NET LOSS $ (911,700) $ (470,117) =========== =========== Net loss per common share: Basic and Diluted $ (.22) $ (.18) Weighted average number of common shares outstanding Basic and Diluted 4,114,858 2,645,896
See accompanying notes to financial statements. - 4 -
FullNet Communications, Inc. and Subsidiaries Consolidated Statement of Stockholders' Equity (Deficit) Three Months Ended March 31, 2001 (Unaudited) Common stock Common Additional ------------ Stock Paid-in Accumulated Shares Amount Issuable capital Deficit Total ----------- ----------- ----------- ----------- ----------- ----------- Balance at January 1, 2001 3,942,775 $ 39 $ -- $ 5,250,026 $(5,079,751) $ 170,314 Issuance of common stock in conjunction with acquisitions 35,000 -- 30,000 35,000 -- 65,000 Warrant exercise 182,500 2 -- 1,823 -- 1,825 Intrinsic value of beneficial conversion feature on issuance of debt -- -- -- 160,185 -- 160,185 Warrants issued related to financing -- -- -- 182,873 -- 182,873 Warrants issued in exchange for services -- -- -- 284,913 -- 284,913 Net loss -- -- -- -- (911,700) (911,700) ----------- ----------- ----------- ----------- ----------- ----------- Balance at March 31, 2001 4,160,275 $ 41 $ 30,000 $ 5,914,820 $(5,991,451) $ (46,590) =========== =========== =========== =========== =========== ===========
See accompanying notes to financial statements. - 5 -
FullNet Communications, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) Three Months Ended -------------------------- March 31, March 31, 2001 2000 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (911,700) $ (470,117) Adjustments to reconcile net loss to net cash provided by (used in) operating activities Noncash compensation expense -- 23,438 Depreciation and amortization 226,854 130,185 Stock issued or issuable for services -- 25,000 Options and warrants issued for services 284,913 -- Amortization of discount related to financing 136,194 -- Provision for uncollectible accounts receivable 13,056 3,349 Net (increase) decrease in Accounts receivable (4,323) 40,862 Prepaid expenses and other current assets 4,893 (65,445) Other assets 1,750 (1,257) Net increase (decrease) in Accounts payable - trade 146,152 (42,461) Accrued and other liabilities 47,383 (29,766) Deferred revenue 91,905 (13,308) ----------- ----------- Net cash provided by (used in) operating activities 37,077 (399,520) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (213,335) (45,857) Acquisitions of businesses, net of cash acquired (33,915) (122,947) ----------- ----------- Net cash used in investing activities (247,250) (168,804) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Common stock issuable -- 77,732 Deferred offering costs 10,750 -- Principal payments on borrowings under notes payable (49,967) (14,499) Proceeds from issuance of interim financing and warrants, net of offering costs 225,000 721,250 Proceeds from issuance of convertible notes payable 100,000 -- Debt issue costs (14,336) -- Principal payments on capital lease obligations (4,329) (659) Proceeds from exercise of warrants related to financing 1,825 -- Issuance of common stock, net of offering costs -- 122,808 ----------- ----------- Net cash provided by financing activities 268,943 906,632 ----------- ----------- NET INCREASE IN CASH 58,770 338,308 Cash at beginning of period 13,150 12,671 ----------- ----------- Cash at end of period $ 71,920 $ 350,979 =========== =========== (continued)
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FullNet Communications, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) Three Months Ended -------------------------- March 31, March 31, 2001 2000 ----------- ----------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for interest $ 39,145 $ 15,532 NONCASH INVESTING AND FINANCING ACTIVITIES Assets acquired through issuance of capital lease 84,613 24,548 Conversion of trade payable to convertible note payable 94,680 -- Conversion of acquisition notes payable to convertible notes payable 232,944 -- Assets financed through accounts payable 15,388 -- Harvest Communications, Inc. Merger Fair value of liabilities assumed $ -- $ 97,358 Fair value of common stock issuance -- 1,612,500 Fair value of covenant not to compete -- (408,388) Cost in excess of net assets acquired and covenant not to compete -- (1,601,470) Note payable issued -- 175,000 ----------- ----------- Cash paid to acquire Harvest Communications, Inc. $ -- $ (125,000) =========== =========== FullNet of Bartlesville Asset Purchase Fair value of liabilities assumed $ -- $ 16,380 Fair value of common stock issuance -- 128,232 Fair value of covenant not to compete -- (42,715) Cost in excess of net assets acquired and covenant not to compete -- (152,065) Note payable issued -- 50,168 ----------- ----------- Cash paid to purchase Bartlesville assets $ -- $ -- =========== =========== FullNet of Tahlequah Asset Purchase Fair value of assets acquired $ -- $ (4,086) Fair value of covenant not to compete -- (21,919) Cost in excess of net assets acquired and covenant not to compete -- (71,730) Note payable issued -- 61,845 ----------- ----------- Cash paid to purchase Tahlequah assets $ -- $ (35,890) =========== =========== LawtonNet Asset Purchase Fair value of common stock issuance 35,000 $ -- Fair value of covenant not to compete (13,000) Cost in excess of net assets acquired and covenant not to compete (42,000) -- ----------- ----------- Cash paid to purchase LawtonNet assets $ (20,000) $ -- =========== =========== Sonet Asset Purchase Fair value of assets acquired $ (11,516) $ -- Fair value of common stock issuable 30,000 -- Fair value of covenant not to compete (6,022) Cost in excess of net assets acquired and covenant not to compete (26,377) -- ----------- ----------- Cash paid to purchase Sonet assets $ (13,915) $ -- =========== =========== (concluded)
See accompanying notes to financial statements. - 7 - FullNet Communications, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. UNAUDITED INTERIM FINANCIAL STATEMENTS The unaudited financial statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. The accompanying financial statements and related notes should be read in conjunction with the audited consolidated financial statements of the Company and notes thereto for the year ended December 31, 2000. The information furnished reflects, in the opinion of management, all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results of the interim periods presented. Operating results of the interim period are not necessarily indicative of the amounts that will be reported for the year ending December 31, 2001. 2. 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 assets and liabilities and disclosures 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. 3. EARNINGS (LOSS) PER SHARE Basic earnings (loss) per common share is computed based upon net earnings (loss) divided by the weighted average number of common shares outstanding during each period. Diluted earnings (loss) per common share is computed based upon net earnings (loss) divided by the weighted average number of common shares outstanding during each period adjusted for the effect of dilutive potential common shares calculated using the treasury stock method. The basic and diluted earnings (loss) per common share are the same since the Company had a net loss for 2001 and 2000 and the inclusion of stock options and warrants would be anti-dilutive. 4. NOTES PAYABLE On January 5, 2001, the Company entered into an agreement with a third party pursuant to which the Company obtained an interim loan for $250,000. The loan bears interest at 10% per annum and requires payments equal to 50% of the net proceeds received by the Company from its private placement of convertible notes payable. Through March 31, 2001, the Company had made payments of principal and interest aggregating $35,250. On March 31, 2001, the Company entered into an agreement with the note holder to increase the principal balance of the note to $320,000, and the due date for the unpaid principal and interest was extended to July 31, 2001. Proceeds from the note payable increase were received in April. - 8 - During February 2001, the Company received $100,000 of subscriptions to its private placement of convertible notes payable. During February 2001, the Company converted accounts payable of $94,680 to a note with terms equivalent to the Company's private placement of convertible notes payable. Effective February 1, 2001, the Company exchanged a non-interest bearing acquisition note payable for an interest-bearing note at 10% per annum, accruing from January 1, 2001, in return for a six-month deferral of payments of principal and interest from April 2001 to September 2001. Payments of principal and interest will resume in October 2001, and the note matures in June 2002. During March 2001, the Company converted acquisition notes payable of $232,944 to notes with terms equivalent to the Company's private placement of convertible notes payable. Pursuant to the provisions of the private placement of the Company's convertible notes payable, the conversion price of the convertible notes payable was reduced by 2% from $1.00 to $.98 per share on February 15, 2001. The decrease was a result of the fact that a registration statement for the common stock underlying the convertible notes payable had not been declared effective as of that date. In addition, the conversion price will be reduced by an additional 2% for every 30 days thereafter until the registration is effective. As of May 15, 2001, a registration statement had not been filed. In addition, pursuant to the provisions of the private placement, the interest rate on the convertible notes payable increased to 12.5% per annum from 11% per annum due to the fact that a registration statement for the common stock underlying the convertible notes payable had not been filed on or before February 28, 2001. The interest rate will remain at 12.5% per annum until such time as a registration statement is filed. As of May 15, 2001, a registration statement had not been filed. The Company has not made the required convertible notes payable interest payments due on January 1 and April 1, 2001, in the approximate amounts of $28,000 and $54,000, respectively. Pursuant to the terms of the convertible notes payable the Company will be considered in default upon the receipt of written notice informing it of such default from the note holder and if such default shall continue for a period of ten days after receiving said written notice. As of May 15, 2001, the Company has not received any such notice of default. Subsequent to March 31, 2001, the Company has segregated the cash needed to make the required convertible notes payable interest payments in an interest-bearing money market account; however, the Company is in the process of soliciting the holders of the convertible notes payable to accept shares of the Company's common stock valued at $1.00 per share in lieu of cash for the accrued interest and to convert the principal balance to common stock at a conversion price of $.90 per share. For every $25,000 of principal converted, the note holder will also receive 6,250 warrants to purchase shares of the Company's common stock at an exercise price of $2.00 per share. The warrants are exercisable for five years from their date of issuance. 5. ACQUISITIONS On February 28, 2001, the Company purchased substantially all of the assets of LawtonNET Communications (LAWTONNET), an Oklahoma sole proprietorship, including approximately 700 individual and business Internet access accounts. Pursuant to the terms of the asset purchase agreement, the Company issued LAWTONNET 35,000 shares of the Company's common stock. The Company will pay LAWTONNET an amount based upon the future collected revenues received from all active LAWTONNET customers transferred at the time of closing, net of the 100% recovery of $30,000 in advance payments made to LAWTONNET during the 30 days following closing. - 9 -
On February 28, 2001, the Company purchased substantially all of the assets of Computer Concepts & Research, Inc., d/b/a SONET Communications (SONET), an Oklahoma corporation, including approximately 915 individual and business Internet access accounts. Pursuant to the terms of the asset purchase agreement, the Company issued SONET 30,000 shares of the Company's common stock. In addition, the Company will pay SONET an amount based upon the future collected revenues received from all active SONET customers transferred at the time of closing. These transactions have been accounted for as purchases. The purchase price has been allocated to the underlying net assets purchased based on their fair market values at the respective acquisition date 6. COMMON STOCK OPTIONS AND WARRANTS The following table summarizes the Company's stock option activity for the three months ended March 31, 2001: Three Months Ended Weighted average March 31, 2001 Exercise price ------------------ --------------- Options outstanding, beginning of period 1,198,409 $1.36 Options issued during the period 41,970 1.03 Options exercised during the period -- -- ------------ ----- Options outstanding, end of period 1,240,379 $1.35 ============ ===== The following table summarizes the Company's common stock warrant activity for the three months ended March 31, 2001: Three Months Ended Weighted average March 31, 2001 Exercise price ------------------ --------------- Warrants outstanding, beginning of period 919,375 $ .19 Warrants issued during the period 728,907 .43 Warrants exercised during the period -- .01 ------------ ----- 182,500 Warrants outstanding, end of period 1,465,782 $ .33 ============ =====
- 10 - 7. MANAGEMENT'S PLANS The Company has sustained substantial net losses through March 31, 2001. In addition, at March 31, 2001, current liabilities exceed current assets by $1,174,000. In view of the matters described in the preceding paragraph, the ability of the Company to continue as a going concern is dependent upon continued operations of the Company, which in turn is dependent upon the Company's ability to meet its financing requirements on a continuing basis, to maintain present financing, to achieve the objectives of its business plan and to succeed in its future operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence. The Company's business plan includes, among other things, expansion of its Internet access services through mergers and acquisitions and the development of its web hosting and co-location services. Execution of the Company's business plan will require significant capital to fund capital expenditures, working capital needs, debt service and the cash flow deficits generated by operating losses. Current cash balances will not be sufficient to fund the Company's current business plan beyond the next few months. As a consequence, the Company is currently seeking additional convertible debt and/or equity financing as well as the placement of a credit facility to fund the Company's liquidity. There can be no assurance that the Company will be able to raise additional capital on satisfactory terms or at all. - 11 - Item 2. Management's Discussion and Analysis or Plan of Operation The following discussion is qualified in its entirety by the more detailed information in our Form 10-KSB and the financial statements contained therein, including the notes thereto, and our other periodic reports filed with the Securities and Exchange Commission since December 31, 2000 (collectively referred to as the "Disclosure Documents"). Certain forward-looking statements contained herein and in such Disclosure Documents regarding our business and prospects are based upon numerous assumptions about future conditions which may ultimately prove to be inaccurate and actual events and results may materially differ from anticipated results described in such statements. Our ability to achieve such results is subject to certain risks and uncertainties, such as those inherent generally in the Internet service provider and competitive local exchange carrier industries, the impact of competition and pricing, changing market conditions, and other risks. Any forward-looking statements contained herein represent our judgment as of the date hereof. We disclaim, however, any intent or obligation to update these forward-looking statements. As a result, the reader is cautioned not to place undue reliance on these forward-looking statements. References to us in this Form 10-QSB include our subsidiaries:FullNet, Inc. (FullNet), FullTel, Inc. (FullTel) and FullWeb, Inc. (FullWeb). Overview We are a facilities-based Integrated Communications Provider engaged in consumer and business Internet services, including 1) dial-up, dedicated and broadband wireless access, with customers in 25 communities in Oklahoma, and 2) web hosting, server co-location and telecommunications premise co-location, with customers throughout the United States and more than 40 countries. Our overall strategy is to become the dominant ICP and Internet service provider (ISP) for residents and small to medium-sized businesses in Oklahoma and contiguous states. Our principal executive offices are located at 201 Robert S. Kerr Avenue, Suite 210, Oklahoma City, Oklahoma 73102, and our telephone number is (405) 236-8200. We also maintain an Internet site on the World Wide Web (WWW) at www.fullnet.net. Information contained on our Web site is not, and should not be deemed to be, a part of this Form 10-QSB. Company History We were founded in 1995 as CEN-COM of Oklahoma, Inc., an Oklahoma corporation, to bring dial-up Internet access and education to rural locations in Oklahoma that did not have dial-up Internet access. We changed our name to FullNet Communications, Inc. in December 1995, and shifted our focus from offering dial-up services to providing wholesale and private label network connectivity and related services to other ISPs. During 1995 and 1996, we furnished wholesale and private label network connectivity services to ISPs in Bartlesville, Cushing, Durant, Perry, Tahlequah, and Tulsa. During 1996, we sold our ISP operations in Enid, Oklahoma and began ISP operations in Ponca City, Oklahoma. In 1997 we continued our focus on being a backbone provider by upgrading and acquiring more equipment. We also started offering our own ISP brand access and services to our wholesale customers. As of March 31, 2001, there were two ISPs in Oklahoma that used the FullNet brand name where we provide the backbone to the Internet. There are an additional two ISPs that use a private label brand name, where we are their access backbone and provide their technical support, managing and operating their systems on an outsource basis. Additionally, we provide high-speed broadband connectivity, website hosting, network management and consulting solutions to businesses in Oklahoma. In 1998 our gross revenues exceeded $1,000,000 and we made the Metro Oklahoma City Top 50 Fastest Growing Companies list. In 1998 we commenced the process of organizing a competitive local exchange carrier (CLEC) through FullTel, and acquired Animus Communications, Inc. (Animus), a wholesale Web-service company, thereby enabling us to become a total solutions provider to individuals and companies seeking a "one-stop shop" in Oklahoma. Animus was renamed FullWeb in January 2000. - 12 - With the incorporation of FullTel and the acquisition of FullWeb, our current business strategy is to become the dominant ICP in Oklahoma and surrounding states, focusing on rural areas. We expect to grow through the acquisition of additional customers for our carrier-neutral co-location space and the acquisition of ISPs. During the first three months of 2000, we completed three separate acquisitions of ISP companies, operating in, respectively, Tahlequah, Oklahoma; Bartlesville, Oklahoma and Enid, Oklahoma. During the month of February 2000, our common stock began trading on the NASD Electronic Bulletin Board under the symbol FULO. While our common stock trades on the NASD Electronic Bulletin Board, it is very thinly traded, and there can be no assurance that stockholders will be able to sell their shares should they desire to do so. Any market for the common stock that may develop, in all likelihood, will be a limited one, and if such a market does develop, the price may be volatile. Recent Developments In January 2001, we completed our new $1.0 million carrier-neutral co-location facility and corporate headquarters. The 10,000 square foot facility is located in the Bank of Oklahoma Plaza building in downtown Oklahoma City and has an expandable high-speed fiber connection to the Southwestern Bell Central Office ("CO") in downtown Oklahoma City, with conduit capacity expandable to carry in excess of 160 gigabits per second of digital information. At those speeds, the connection could carry 10 million encyclopedia pages, 12.5 million phone calls or 20,000 songs in MP3 format per second. This facility gives us a significant competitive advantage due to our direct fiber connection to the central office, which provides for almost limitless capacity and the ability to connect to the many carriers having facilities there. As a carrier-neutral location, we offer much needed flexibility to companies looking for quality co-location space without having to be locked into a specific carrier for their bandwidth. However, since we do have both CLEC and ISP divisions, we can also offer a one-provider solution to co-location, bandwidth and Internet backbone requirements. On February 28, 2001, we purchased substantially all of the assets of LawtonNET Communications (LAWTONNET), an Oklahoma sole proprietorship, including approximately 700 individual and business Internet access accounts. Pursuant to the terms of the asset purchase agreement, we issued LAWTONNET 35,000 shares of our common stock. We will pay LAWTONNET an amount based upon the future collected revenues received from all active LAWTONNET customers transferred at the time of closing, net of the 100% recovery of $30,000 in advance payments made to LAWTONNET during the 30 days following closing. On February 28, 2001, we purchased substantially all of the assets of Computer Concepts & Research, Inc., d/b/a SONET Communications (SONET), an Oklahoma corporation, including approximately 915 individual and business Internet access accounts. Pursuant to the terms of the asset purchase agreement, we issued SONET 30,000 shares of our common stock. In addition, we will pay SONET an amount based upon the future collected revenues received from all active SONET customers transferred at the time of closing. On March 31, 2001, we completed a private placement pursuant to which we raised $925,000. Working with a number of accredited investors, we placed $925,000 of 11% convertible promissory notes. The notes are due in three years, are convertible into the Company's common stock at $1.00 per share and were accompanied by warrants to purchase 231,250 shares of the Company's common stock for $.01 per share. Concurrently with the private placement, the Company exchanged $1,288,000 of matured obligations for the same securities sold in the private placement. - 13 - During April, 2001, we executed an agreement with IP Communications, Inc. (www.ip.net) pursuant to which we will roll out high-speed broadband DSL access in 33 Oklahoma Communities. IP Communications is the only independent facilities-based broadband service provider reaching large, medium and small markets served by Southwestern Bell Corporation and has the largest independent broadband network in Oklahoma, Texas, Kansas and Missouri. In partnership with IP Communications, we will offer users a fast, always connected DSL line that eliminates the delays, busy signals and non-connects common to dial-up services. With data transfer speeds up to 50 times faster than 28.8K modems, our DSL solutions will be great solutions for business and residential users. - 14 - Results of Operations The following table sets forth certain statement of operations data as a percentage of revenues for the three months ended March 31, 2001 and 2000: Three Months Ended -------------------------------- March 31, 2001 March 31, 2000 -------------- -------------- Revenues: Access service revenues 54.7% 51.8% Co-location and other revenues 45.3 48.2 --------- --------- Total revenues 100.0 100.0 Cost of access service revenues 27.2 25.6 Cost of co-location and other revenues 6.4 18.2 Selling, general and administrative expenses 147.6 136.5 Depreciation and amortization 42.5 38.3 --------- --------- Total operating costs and expenses 223.7 218.6 Loss from operations (123.7) (118.6) Interest expense (47.3) (18.3) Other expense - (1.3) --------- --------- Net loss (171.0)% (138.3)% ========= ========= Three Months Ended March 31, 2001 compared to Three Months Ended March 31, 2000 Revenues Access service revenues increased $115,000 to $291,000 for the three months ended March 31, 2001 from $176,000 for the three months ended March 31, 2000. This additional revenue is due to the acquisition of two ISPs in the first quarter 2001, one ISP in the second quarter of 2000 and three ISPs in the first quarter 2000. Co-location and other revenues increased $78,000 to $242,000 for the three months ended March 31, 2001 from $164,000 for the three months ended March 31, 2000. This increase is attributable to the opening of our carrier-neutral premise co-location services during the end of the third quarter 2000. We recognized revenue of $137,000 related to one customer for the three months ended March 31, 2001. This was offset primarily by a decrease in equipment sales of $34,000 for the three months ended March 31, 2001 compared to the same period in 2000. We do not actively market network solutions sales and consulting, and typically make such sales to our existing customer base only. Operating Costs and Expenses Cost of access service revenues increased $58,000 to $145,000 for the three months ended March 31, 2001 from $87,000 for the three months ended March 31, 2000, due to the increased costs of providing Internet access in Tahlequah, Bartlesville, Enid, Nowata and Lawton relating to the acquisition of ISPs in those towns during 2000 and 2001. - 15 - Cost of co-location and other revenues decreased $28,000 to $34,000 for the three months ended March 31, 2001 from $62,000 for the three months ended March 31, 2000. This decrease is due to a decrease in cost of equipment sales over the prior comparative quarter. Selling, general and administrative expenses increased $323,000 to $787,000 for the three months ended March 31, 2001 from $464,000 for the three months ended March 31, 2000. This increase includes an increase in payroll costs of $59,000 over the prior comparable quarter related to hiring of additional personnel. Professional fees increased $202,000 for the three months ended March 31, 2000 over the prior comparable quarter. Professional fees included legal, accounting, investment banking and consulting fees. Approximately $285,000 of the $349,000 of the professional fees for the three months ended March 31, 2001 were attributable to noncash expenses relating to the fair value of common stock, options and warrants issued for services. Rent expense, insurance and bad debt expense increased $28,000, $18,000 and $13,000, respectively, for the three months ended March 31, 2001 over the prior comparable period. Depreciation and amortization expense increased $97,000 to $227,000 for the three months ended March 31, 2001 from $130,000 for the three months ended March 31, 2000. Amortization of cost in excess of net assets of businesses acquired increased $28,000 for the three months ended March 31, 2001 over the prior comparable period. Amortization of covenants not to compete was $33,000 for the three months ended March 31, 2001 compared to $0 for the three months ended March 31, 2000. Amortization of leasehold improvements increased $24,000 for the three months ended March 31, 2001 over the prior comparable period. The remainder of the increase was attributable to depreciation expense related to the purchase of equipment and equipment acquired through acquisition of ISPs. Interest Expense Interest expense increased $190,000 to $252,000 for the three months ended March 31, 2001 from $62,000 for the three months ended March 31, 2000. Noncash interest expense associated with the amortization of the loan discount relating to interim financing issued with warrants increased $111,000 for the three months ended March 31, 2001 over the prior comparable period. Interest expense on interim financing obtained in 2000 increased $26,000 for the three months ended March 31, 2001 over the three months ended March 31, 2000. Interest expense related to the private placement of convertible notes payable during the first quarter of 2001 and the fourth quarter of 2000 increased $51,000 for the three months ended March 31, 2001 over the prior comparable period. Acquisitions On February 28, 2001, we purchased substantially all of the assets of LawtonNET Communications (LAWTONNET), an Oklahoma sole proprietorship, including approximately 700 individual and business Internet access accounts. Pursuant to the terms of the asset purchase agreement, we issued LAWTONNET 35,000 shares of our common stock. We will pay LAWTONNET an amount based upon the future collected revenues received from all active LAWTONNET customers transferred at the time of closing, net of the 100% recovery of $30,000 in advance payments made to LAWTONNET during the 30 days following closing. On February 28, 2001, we purchased substantially all of the assets of Computer Concepts & Research, Inc., d/b/a SONET Communications (SONET), an Oklahoma corporation, including approximately 915 individual and business Internet access accounts. Pursuant to the terms of the asset purchase agreement, we issued SONET 30,000 shares of our common stock. In addition, we will pay SONET an amount based upon the future collected revenues received from all active SONET customers transferred at the time of closing. - 16 - These transactions have been accounted for as purchases. The purchase price will be allocated to the underlying net assets purchased based on their fair market values at the respective acquisition date Liquidity and Capital Resources Cash provided by operations was $37,000 for the three months ended March 31, 2001. This is an increase from cash used of $400,000 for the three months ended March 31, 2000. This improvement is a result of acquisitions made and our focus on revenue enhancement and cost cutting measures. We were able to reduce employee costs through lay-offs of 20% of our employees during December 2000. As of March 31, 2001, we had $72,000 in cash and $1,409,000 in current liabilities, including $215,000 of interim financing which is due July 31, 2001, $270,000 of deferred revenues that will not require settlement in cash and $82,000 of accrued and past due interest on our convertible debt (see "Financing Activities"). Capital expenditures relating to business acquisitions net of cash acquired were $34,000 and $123,000 for the three months ended March 31, 2001 and 2000, respectively. In addition, property and equipment purchases amounted to $213,000 for the three months ended March 31, 2001, including $201,000 related to leasehold improvements for our new office space and construction on our network operations center, which was completed during the first quarter 2001. Net cash provided by financing activities was $269,000 and $907,000 for the three months ended March 31, 2001 and 2000, respectively. The cash provided in 2000 is due primarily to the issuance of interim notes payable and the sale of equity securities pursuant to Rule 504 of Regulation D of the Securities Act of 1933. During 2001, we received net proceeds of $225,000 from the issuance of interim notes payable and $85,000 from the sale of convertible promissory notes payable pursuant to Rule 506 of Regulation D. The planned expansion of our business will require significant capital to fund capital expenditures, working capital needs, debt service and the cash flow deficits generated by operating losses. Our principal capital expenditure requirements will include: * purchase and installation of broadband Internet access equipment * mergers and acquisitions * further development of operations support systems and other automated back office systems As our cost of developing new networks and services, funding other strategic initiatives and operating our business will depend on a variety of factors (including, among other things, the number of subscribers and the service for which they subscribe, the nature and penetration of services that may be offered by us, regulatory changes, and actions taken by competitors in response to our strategic initiatives), it is almost certain that actual costs and revenues will vary from expected amounts, very likely to a material degree, and that such variations are likely to affect our future capital requirements. Current cash balances as of March 31, 2001 will not be sufficient to fund our current business plan beyond the next three months. As a consequence, we are currently seeking conversion of our existing convertible debt, additional convertible debt and/or equity financing as well as the placement of a credit facility to fund our liquidity needs. There can be no assurance that we will be able to raise additional capital on satisfactory terms or at all. In the event that we are unable to obtain such additional capital or to obtain it on acceptable terms or in sufficient amounts, we will be required to delay the development of our network or take other actions. This could have a material adverse effect on our business, operating results and financial condition and our ability to achieve sufficient cash flow to service debt requirements. Our ability to fund the capital expenditures and other costs contemplated by our business plan and to make scheduled payments with respect to bank borrowings will depend upon, among other things, our ability to seek and obtain additional financing within the next year. Capital will be needed in order to implement our business plan, deploy our network, expand our operations and obtain and retain a significant number of customers in our target markets. Each of these factors is, to a large extent, subject to economic, financial, competitive, political, regulatory and other factors, many of which are beyond our control. - 17 - No assurance can be given that we will be successful in developing and maintaining a level of cash flow from operations sufficient to permit us to pay the principal of, and interest and any other payments on, outstanding indebtedness. If we are unable to generate sufficient cash flow from operations to service our indebtedness, we may have to modify our growth plans, limit our capital expenditures, restructure or refinance our indebtedness or seek additional capital or liquidate our assets. There can be no assurance (i) that any of these strategies could be effected on satisfactory terms, if at all, or (ii) that any such strategy would yield sufficient proceeds to service our debt or otherwise adequately fund operations. Financing Activities On January 5, 2001, we entered into an agreement with a third party pursuant to which we obtained an interim loan for $250,000. The loan bears interest at 10% per annum and requires payments equal to 50% of the net proceeds received by us from our private placement of convertible notes payable. Through March 31, 2001, we had made payments of principal and interest aggregating $35,250. On March 31, 2001, we entered into an agreement with the note holder to increase the principal balance of the note to $320,000, and the due date for the unpaid principal and interest was extended to July 31, 2001. Proceeds from the note payable increase were received in April. During February 2001, we received $100,000 of subscriptions to our private placement of convertible notes payable. During February 2001, we converted accounts payable of $94,680 to a note with terms equivalent to our private placement of convertible notes payable. Effective February 1, 2001, we exchanged a non-interest bearing acquisition note payable for an interest-bearing note at 10% per annum, accruing from January 1, 2001, in return for a six-month deferral of payments of principal and interest from April 2001 to September 2001. Payments of principal and interest will resume in October 2001, and the note matures in June 2002. During March 2001, we converted acquisition notes payable of $232,944 to notes with terms equivalent to our private placement of convertible notes payable. Pursuant to the provisions of the private placement of our convertible notes payable, the conversion price of the convertible notes payable was reduced by 2% from $1.00 to $.98 per share on February 15, 2001. The decrease was a result of the fact that a registration statement for the common stock underlying the convertible notes payable and underlying warrants had not been declared effective as of that date. In addition, the conversion price shall be reduced by an additional 2% for every 30 days thereafter until the registration is effective. As of May 15, 2001, a registration statement had not been filed. In addition, pursuant to the provisions of the private placement, the interest rate on the convertible notes payable increased to 12.5% per annum from 11% per annum due to the fact that a registration statement for the common stock underlying the convertible notes payable Notes and warrants had not been filed on or before February 28, 2001. The interest rate will remain at 12.5% per annum until such time as a registration statement is filed. As of May 15, 2001, a registration statement had not been filed. We have not made the required convertible notes payable interest payments due on January 1 and April 1, 2001, in the approximate amounts of $28,000 and $54,000, respectively. Pursuant to the terms of the convertible notes payable Notes , we will be considered in default upon the receipt of written notice informing it of such default from the note holder and if such default shall continue for a period of ten days after receiving said written notice. As of May 15, 2001, we have not received any such notice of default. - 18 - Subsequent to March 31, 2001, we have segregated the cash needed to make the required convertible notes payable these interest payments in an interest-bearing money market account; however, we are in the process of soliciting the convertible notes payable note holders to accept shares of our common stock valued at $1.00 per share in lieu of cash for the accrued interest and to convert the principal balance and interest payable to common stock at a conversion price of $.90 per share. For every $25,000 of principal and interest converted, the note holder will also receive 6,250 warrants to purchase shares of our common stock at an exercise price of $2.00 per share. The warrants are exercisable for five years from their date of issuance conversion date PART II-OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds See "Item 2. Management's Discussion and Analysis or Plan of Operation - Financing Activities" of this Report, incorporated by reference. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Number Exhibit ------- ------------------------------------------------------------------ 4.1 Interim note payable to Generation Capital Associates dated January 5, 2001 * 4.2 Amended interim note payable to Generation Capital Associates dated March 31, 2001 * - ------------------------ *Filed electronically herewith (b) Reports on Form 8-K None - 19 - SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FULLNET COMMUNICATIONS, INC., An Oklahoma corporation Date: May 15, 2001 /s/ Timothy J. Kilkenny --------------------------------------- Timothy J. Kilkenny Chairman of the Board of Directors; President and Chief Executive Officer Date: May 15, 2001 /s/ Roger P. Baresel --------------------------------------- Roger P. Baresel Chief Financial and Accounting Officer - 20 - EX-4.1 2 fullnetmar10qex41.txt INTERIM NOTE PAYABLE Exhibit 4.1 PROMISSORY NOTE $ 250,000 Atlanta, GA January 5, 2001 FOR VALUE RECEIVED, Fullnet Communications, Inc. an Oklahoma corporation (the Borrower), promises to pay to the order of Generation Capital Associates, a New York limited partnership and assigns (Lender) at 1085 Riverside Trace, Atlanta, GA 30328, or at such other place as might be designated in writing by the Lender, the principal sum of $250,000.00 in lawful money of the United States of America, on March 31, 2001 (Maturity Date), together with interest on the unpaid principal balance of said principal sum at the rate of ten per cent (10%) per annum (computed on the basis of a 365 day year) from the date hereof until such principal sum is fully paid; provided, however, Borrower shall reduce the principal amount outstanding by fifty per cent (50%) of the net proceeds collected by Borrower from its ongoing private placement. Such principal reductions shall be made at the closing of each additional investment in such private placement. Borrower has also agreed to pay to Lender, in lieu of an origination fee, an equity kicker (Kicker) in the form and amount as set forth on Exhibit A attached hereto. Borrower and Lender acknowledge that Bathgate McColley Capital Group, LLC have acted as placement agents (Placement Agent) in this transaction and Lender agrees to pay a placement agent fee to Placement Agent in accordance with the terms of a separate agreement dated as of the date hereof between borrower and Placement Agent. The Borrower will have the right at any time and from time to time to prepay the unpaid principal balance of this Note in whole or in part without penalty, but with interest on the unpaid principal balance accrued to the date of prepayment. This Note shall be governed and construed in accordance with the internal laws of the state of Georgia without regard to the principles of conflict of laws. Borrower consents to the jurisdiction of the Superior Court of the State of Georgia, Fulton County and/or any Federal District Court located in the state of Georgia for any suit brought under this Note. The Borrower agrees that a facsimile of this Note signed on behalf of Borrower shall constitute an enforceable obligation against Borrower. If suit is brought for the collection of this Note Borrower shall not be entitled to raise as a defense that a facsimile of this Note and not an original has been placed in evidence. The Borrower agrees that if, and as often as, this Note is placed in the hands of an attorney for collection or to defend or enforce any of the Lender's rights under this Note the Borrower will pay the Lender's reasonable attorneys' fees, all court costs and all other expenses incurred by the Lender in connection therewith. IN WITNESS WHEREOF, the Borrower has executed this instrument effective the 5th day of January 2001. Fullnet Communication, Inc. By: ------------------------------------------- Timothy J. Kikkenny, President and CEO By: ------------------------------------------- Roger Baresel, Chief Financial Officer Attest: - ---------------------- - ---------------------- (Print Name & Title) EXHIBIT A EQUITY KICKER This Exhibit A constitutes part of the Promissory Note dated January 5,2001 issued by Fullnet Communications, Inc. (Borrower) to Generation Capital Associates (Lender) in the principal amount of $250,000. 1. Borrower hereby issues to Lender warrants to purchase 125,000 shares of the common stock of Lender at an exercise price of $0.01 per share for a period of five years from the date hereof. These warrants shall be exercisable immediately for cash. 2. Borrower hereby issues to Lender warrants to purchase 125,000 shares of the common stock of Lender at an exercise price of $1.00 per share for a period of five years from the date hereof. These warrants shall be exercisable immediately for cash, unless at the time of exercise the common stock underlying the warrants has not been registered for resale with a current prospectus available, in which case the warrants shall be exercised on a "cashless basis." IN WITNESS WHEREOF, the Borrower has executed this Exhibit A effective January 5, 2001 Fullnet Communication, Inc. By: ----------------------------------------- Timothy J. Kikkenny, President and CEO By: ----------------------------------------- Roger Baresel, Chief Financial Officer Attest: - ---------------------- - ---------------------- (Print Name & Title) EX-4.2 3 fullnetmar10qex42.txt AMENDED INTERIM NOTE PAYABLE Exhibit 4.2 PROMISSORY NOTE $ 320,000.00 Atlanta, GA March 31, 2001 FOR VALUE RECEIVED, the undersigned Fullnet Communications, Inc. an Oklahoma corporation (Borrower), promises to pay to the order of Generation Capital Associates, a New York limited partnership and assigns (Lender) at 1085 Riverside Trace, Atlanta, GA 30328, or at such other place as might be designated in writing by the Lender, the principal sum of $320,000 in lawful money of the United States of America, on July 31, 2001, (Maturity Date), together with interest on the unpaid principal balance of said principal sum at the rate of ten per cent (10%) per annum (computed on the basis of a 365 day year) from the date hereof until such principal sum is fully paid: provided, however, Borrower shall reduce the principal amount outstanding by fifty per cent (50%) of the net proceeds collected from any private placement. Such principal reductions shall be made at the closing of each additional investment in such private placement. The Borrower will have the right at any time and from time to time to prepay the unpaid principal balance of this Note in whole or in part without penalty with interest on the unpaid principal balance accrued to the date of prepayment. This Note shall be governed and construed in accordance with the internal laws of the State of Georgia without regard to the principals of conflict of laws. Borrower consents to the jurisdiction of the Superior Court of the State of Georgia, Fulton County and/or any Federal District Court located in the state of Georgia for any suit brought under this Note. The Borrower agrees that a facsimile of this Note signed on behalf of Borrower shall constitute an enforceable obligation against Borrower. If suit is brought for the collection of this Note Borrower shall not be entitled to raise as a defense that a facsimile of this Note and not an original has been placed in evidence. The Borrower agrees that if, and as often as, this Note is placed in the hands of an attorney for collection or to defend or enforce any of the Lender's rights under this Note the Borrower will pay the Lender's reasonable attorneys' fees, all court costs and all other expenses incurred by the Lender in connection therewith. IN WITNESS WHEREOF, the Borrower has executed this instrument effective the date first above written. Fullnet Communications, Inc. By --------------------------------------- Timothy J. Kilkenny, President and CEO By --------------------------------------- Roger Baresel, Chief Financial Officer Attest: - ----------------------- - ----------------------- (Print Name & Title) -----END PRIVACY-ENHANCED MESSAGE-----