-----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, MtavFlVOmLgijbo4tEiQRoVm2cLJ5k3ICnzcC2IqExOVHwiWY6tbq0WKjQ6JfuZa kRUt1+X/NVjw/iN9OYaWKQ== /in/edgar/work/0001108017-00-000100/0001108017-00-000100.txt : 20001121 0001108017-00-000100.hdr.sgml : 20001121 ACCESSION NUMBER: 0001108017-00-000100 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001120 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GRACE DEVELOPMENT INC CENTRAL INDEX KEY: 0000846899 STANDARD INDUSTRIAL CLASSIFICATION: [4841 ] IRS NUMBER: 841110469 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-25582 FILM NUMBER: 773480 BUSINESS ADDRESS: STREET 1: 1690 CHANTILLY DRIVE STREET 2: UNIT 42 CITY: ATLANTA STATE: GA ZIP: 30324 BUSINESS PHONE: 6782223030 MAIL ADDRESS: STREET 1: 1690 CHANTILLY DRIVE STREET 2: UNIT 42 CITY: ATLANTA STATE: GA ZIP: 30324 10-Q 1 0001.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended September 30, 2000 --------------------- OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from _____________________ to _____________________ Commission file number: 025582 GRACE DEVELOPMENT, INC. (Exact Name of Registrant as Specified in its Charter) Colorado 84-1110469 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 1690 Chantilly Drive (678) 222-3030 Atlanta, Georgia 30324 (Registrant's Telephone Number (address of Principal Executive Offices) Including Area Code) (Zip Code) Not Applicable (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No X --------------- -------- As of October 31, 2000, there were 88,319,957 shares of the registrant's common stock, no par value, outstanding. GRACE DEVELOPMENT, INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 INDEX
Page PART I............................................................................................................2 FINANCIAL INFORMATION.............................................................................................2 ITEM 1. FINANCIAL STATEMENTS........................................................................2 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......21 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................................26 PART II..........................................................................................................26 ITEM 1. LEGAL PROCEEDINGS..........................................................................26 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...........................................................27 SIGNATURES.......................................................................................................27 EXHIBIT INDEX....................................................................................................28
PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The Company was unable to obtain the review of the Consolidated Financial Statements included herein, as required by Rule 10-01(d) of Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended. The Company will file an amendment to this Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, and, if necessary, the Quarterly Report on Form 10-Q for the quarters ended March 31 and June 30, 2000 as soon as practicable after the required review is completed. The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate the continuation of the Company as a going concern. However, the Company incurred a net loss of $2,148,913 for the quarter, and $13,601,806 for the nine-month period ended September 30, 2000 and had a working capital deficiency of $5,536,054 at September 30, 2000. The Company has sustained continuous losses from operations. The Company has used, rather than provided, cash in its operating activities of $5,243,762 during the period ended September 30, 2000 and 1999. The Company continues to grow revenues through the expansion of its product offerings to its existing and acquired customer base added during the first half of the year. This revenue model is expected to generate recurring revenues which could contribute towards a positive cash flow. Additionally, the Company will continue its efforts to raise the additional capital required to fund planned 2000-2001 activities. In view of the matters described above, there is substantial doubt about the Company's ability to continue as a going concern. The recoverability of the recorded assets and satisfaction of the liabilities reflected in the accompanying balance sheet is dependent upon continued operation of the Company, which is in turn dependent upon the Company's ability to meet its financing requirements on a continuing basis and to succeed in its future operations. There can be no assurance that management will be successful in implementing its plans. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
GRACE DEVELOPMENT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, December 31, 2000 1999 ----------------------- ------------------ (Unaudited) (Audited) ASSETS: Cash and cash equivalents $ 277,349 $ 102,481 Restricted cash 50,000 - Investment in certificates of deposit 104,773 3,700,000 Accounts receivable, net of allowance for doubtful accounts of 1,390,078 56,458 $ 200,000 at September 30, 2000 and $ 10,500 at December 31, 1999 Inventory 96,833 - Prepaid expenses and other assets 503,285 156,599 Officer advances 24,435 25,012 ----------------------- ------------------ Total current assets 2,446,754 4,040,550 Property and equipment: Leasehold improvements 179,269 45,468 Furniture and fixtures 158,027 84,949 Equipment and software 7,557,421 2,530,895 Vehicles 146,891 - ----------------------- ------------------ 8,041,609 2,661,312 Less: Accumulated depreciation and amortization (1,319,888) (263,423) ----------------------- ------------------ 6,721,721 2,397,889 Other assets: Goodwill and other intangibles, net of amortization 4,994,787 600,547 of $711,585 at September 30, 2000 and $75,931 at December 31, 1999 Notes receivable - Related party 450,000 434,500 Advances to acquisition candidates - 50,000 Other non-current assets 501,984 75,329 ----------------------- ------------------ Total assets $ 15,115,245 $ 7,598,815 ======================= ================== LIABILITIES AND STOCKHOLDERS' DEFICIT: Accounts payable $ 4,097,890 $ 360,532 Deferred revenues 164,167 141,930 Accrued compensation - officers and directors 591,800 676,666 Accrued and other liabilities 786,325 218,182 Lines of credit 50,691 3,074,339 Current portion of obligations under capital lease 1,739,588 735,170 Current portion of long term debt 552,347 - ----------------------- ------------------ Total current liabilities 7,982,808 5,206,819 Senior convertible notes payable 6,500,000 - Obligations under capital leases, net of current portion 3,737,877 1,237,634 Long term debt, net of current portion 147,368 - ----------------------- ------------------ 18,368,052 6,444,453 ----------------------- ------------------ Stockholders' deficit Grace Common stock; no par value; 800,000,000 13,464,833 4,270,195 shares authorized; 88,319,957 issued and outstanding at September 30, 2000; and 73,370,903 at December 31, 1999. Accumulated deficit (16,717,640) (3,115,833) ----------------------- ------------------ Total stockholders' deficit (3,252,807) 1,154,362 ----------------------- ------------------ Total liabilities and stockholders' deficit $ 15,115,245 $ 7,598,815 ======================= ==================
GRACE DEVELOPMENT, INC. AND SUBDSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Three months ended Three months ended Nine months ended Nine months ended September 30, September 30, September 30, September 30, 2000 1999 2000 1999 ---------------- --------------- ---------------- ---------------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) Revenues $ 2,820,413 2,8$0307,515 $ 5,812,337 $ 500,431 Operating expenses Cost of services 2,243,638 246,440 4,994,394 293,388 Sales and marketing expenses 459,130 54,836 1,569,166 67,635 General and administrative expenses 1,089,682 363,952 5,394,400 676,947 Depreciation and Amortization 762,751 90,271 1,747,007 96,288 ---------------- ---------------- ---------------- ---------------- Total operating expenses 4,555,201 755,499 13,704,967 1,134,258 ---------------- ---------------- ---------------- ---------------- Loss from operations (1,734,788) (447,984) (7,892,630) (633,827) ---------------- ---------------- ---------------- ---------------- Other income (expense) Interest income 120,725 4,737 199,049 5,078 Interest expense (534,850) (201,558) (919,169) (205,711) ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- Total other income (expense) (414,125) (196,821) (720,120) (200,633) ---------------- ---------------- ---------------- ---------------- Loss before extra ordinary items (2,148,913) (644,805) (8,612,750) (834,460) Extraordinary items Charge for early retirement of debt - (1,207,508) Transaction fees related to Private Placement - (3,781,548) ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- Total extraordinary items - (4,989,056) ---------------- ---------------- ---------------- ---------------- Loss before income taxes (2,148,913) (644,805) (13,601,806) (834,460) Income tax expense - - - - ---------------- ---------------- ---------------- ---------------- Net loss $ (2,148,913) $ (644,805) $ (13,601,806) $ (834,460) ================ ================ ================ ================ Net loss per common share before extraordinary items $ (0.02) N/A $ (0.11) N/A =========== ============== ================ ================ Basic and diluted net loss per common share $ (0.02) $ (0.02) $ (0.17) $ (0.02) ============ ============== ================ ================ Weighted average common shares outstanding 88,319,957 36,352,318 80,771,664 36,352,318 ============ ================= ================ ===============
GRACE DEVELOPMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Nine months ended Nine months ended September 30, September 30, 2000 1999 ---------------- --------------- Cash flows from operating activities Net loss $ (13,601,806) $ (834,460) Adjustments to reconcile net loss to net cash used in operating activities Depreciation 1,056,466 96,288 Amortization 690,541 Allowance for doubtful accounts 103,244 Issuance of common stock for compensation 840,000 174,375 Issuance of common stock for origination fees 200,000 Charge for early retirement of debt 1,207,508 Transaction fees related to Private placement 3,781,548 Changes in assets and liabilities from operations Accounts receivable (1,121,922) (9,845) Inventory (42,149) Prepaid expenses and other assets (287,088) (199,180) Related party receivables (50,000) Officer advances 577 (17,420) Other non-current assets (78,983) (33,772) Accounts payable 1,860,901 7,116 Deferred revenues (70,319) (24,812) Accrued compensation - officers and directors 66,334 Accrued liabilities 201,388 290,829 ---------------- --------------- Net cash used in operating activities (5,243,762) (550,881) ---------------- --------------- Cash flows from investing activities Acquisition of property and equipment (309,361) (257,882) Other intangibles 49,331 Investment in certificates of deposit (2,650,000) Redemption of certificate of deposit 3,595,227 Issuance of notes receivable (15,500) Acquisition of business units (107,449) (359,314) ---------------- --------------- Net cash used in investing activities 3,212,248 (3,267,196) ---------------- --------------- Cash flows from financing activities Advance from officers and directors 135,000 - Net proceeds from lines of credit 2,805,157 1,630,484 Repayment of lines of credit (6,593,392) (450,000) Proceeds from notes payable 3,931,038 450,000 Repayment of note payable (1,650,000) Repayment of obligations under capital leases (809,905) (18,263) Net proceeds from issuance of common stock 4,438,469 3,030,924 ---------------- --------------- Net cash provided by financing activities 2,256,368 4,643,145 ---------------- --------------- Increase in cash and cash equivalents 224,854 825,068 Cash and cash equivalents at beginning of period 102,481 3,719 ---------------- --------------- ---------------- --------------- Cash and cash equivalents at end of period $ 327,335 $ 828,787 ================ =============== Supplemental disclosure of cash flow information --------------------------------------------------------------------- Cash paid for interest $ 111,842 $ 16,936 ================ =============== Supplemental activities of Non-Cash Transactions: --------------------------------------------------------------------- During the six months ended June 30, 2000 and 1999, the Company acquired equipment under several capital lease obligations totaling $ 3,587,439 Stock issued for compensation 871,200 $ 174,375 Stock issued as an origination/standby fee 200,000 Acquisition of business units: Total 2000 Total 1999 ------------------------------------------------------ ---------------- --------------- Goodwill $ 4,935,369 $ 532,984 Assets acquired 2,012,221 115,561 Liabilities acquired (3,617,620) (245,210) Stock issued (3,222,522) (44,021) ---------------- --------------- Net cash $ 107,449 $ 359,314 ================ ===============
GRACE DEVELOPMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY Additional Common Stock Paid-In Accumulated Shares Amount Capital Deficit Total Issuance of New Millennium Common stock $ 32,500 $ 32,500 Net loss for the period ended December 31, 1998 (20,741) (20,741) Predecessor balance at December 31, 1998 $ 32,500 $ (20,741) $ 11,759 Shares issued in repayment of Shareholder debt 31,000 31,000 Shares issued as compensation to New Millennuim shareholders 174,375 174,375 Shares issued for Avana acquisition 44,021 44,021 Private Placement of New Millennium shares 777,600 777,600 Private Placement of New Millennium shares 3,459,319 3,459,319 Warrants exercised 147,000 147,000 Warrant cancellation fees (395,620) (395,620) Assumed purchase of net assets of Grace at Predecessor cost 66,246,933 $ 4,270,195 (4,270,195) Reverse acquisition of Grace by New Millennium 7,599,962 (10,000) (10,000) Shares issued for NWGA acquisition 25,000 10,000 10,000 Net loss for the twelve months ended December 31, 1999 (3,095,092) (3,095,092) Balance at December 31, 1999 73,871,895 $ 4,270,195 $ - $ (3,115,833) $ 1,154,362 Shares cancelled; included in error (500,992) - - Shares issued for WebWizard acquisition 1,762,554 705,022 705,022 Shares issued as compensation 1,650,000 660,000 660,000 Shares issued for PVTel acquisition 2,150,000 967,500 967,500 Shares issued with Third Private Placem 2,100,000 817,800 817,800 Shares issued for Alpha Computer acquis 3,100,000 1,550,000 1,550,000 Net loss for the three months ended March 31, 2000 (2,754,482) (2,754,482) Balance as of March 31, 2000 84,133,457 8,970,517 - (5,870,315) 3,100,202 Shares issued as transaction fees 336,000 151,200 151,200 Shares issued to directors as compensatio 150,000 60,000 60,000 Shares issued with Fourth Private Place 3,500,500 4,083,115 4,083,115 Shares issued as transaction fees 200,000 200,000 200,000 Net loss for the three months ended June 30, 2000 (8,698,412) (8,698,412) Balance at June 30, 2000 88,319,957 13,464,832 - (14,568,727) (1,103,895) Net loss for the three months ended September 30, 2000 (2,148,913) (2,148,913) Balance at September 30, 2000 88,319,957 $ 13,464,832 $ - $ (16,717,639) $ (3,252,807) ======================================================================= =======================================================================
GRACE DEVELOPMENT, INC. AND SUBSIDIARIES CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 30, 2000 and 1999 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Description of the Company and Basis of Presentation: Grace Development, Inc., a Colorado corporation doing business as Avana Communications ("Grace" or the "Company"), is an integrated communications provider ("ICP") operating as a telecommunications services provider and an Internet services provider ("ISP") to business and residential customers located primarily in the Southeastern United States. Telecommunication services currently offered are local and long distance, frame relay, ATM (Asynchronous Transfer Mode), data private lines and calling cards. The ISP operation focuses on serving individuals and small businesses. The Company's service offerings include dial-up and dedicated Internet access and business services, which are offered in various price and usage plans designed to meet the needs of our subscribers. Business services include web hosting, which entails maintaining a customer's web site; high speed, dedicated Internet access; web page design; domain name registration and customer web server co-location. The Professional Services operation serves small and medium size businesses with a broad range of data products and services. The Company is a hardware and software reseller providing full, lifecycle consulting and professional services for LAN, WAN, ASP, VPN and Security. LAN/WAN technical maintenance and support completes the product offering. Principles of consolidation and basis of financial reporting: The consolidated financial statements include the accounts of Grace and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated. The financial statements of the predecessor are the accounts of New Millennium Multimedia, Inc., a Georgia corporation ("New Millennium"). New Millennium was formed on October 6, 1998, and merged with and into a subsidiary of Grace on September 28, 1999 (the "Grace Merger"). Although, as a result of the Grace Merger, New Millennium became a wholly owned subsidiary of the Company, the Grace Merger was accounted for as an acquisition of Grace by New Millennium because, following the transaction, the former shareholders of New Millennium owned a substantial majority of the outstanding common stock, no par value, of the Company ("Common Stock"). Accordingly, the historical Consolidated Financial Statements of the Company are the financial statements of New Millennium adjusted for the assumed acquisition of the net assets of Grace in exchange for the issuance of the Company's Common Stock. The Grace Merger was accounted for as a purchase and, accordingly, the net assets of New Millennium were accounted for at their historical cost, and the net assets of Grace were accounted for at their fair value as of September 28, 1999. No goodwill was recorded as a result of the Grace Merger. The predecessor acquired Avana Communications Corporation, a Georgia corporation ("Avana"), on May 5, 1999. The Company acquired WebWizard, Inc., a Delaware corporation ("WebWizard"), on January 31, 2000; P.V. Tel., Inc., a South Carolina corporation ("PVTel"), on February 24, 2000; and Alpha Computer Services, Inc., a Florida corporation ("Alpha Computer"), on March 30, 2000. Each of these acquisitions was accounted for as a purchase, and the results of operations of each acquired entity has been included in the Company's consolidated statements of operations from the date of their respective acquisitions. The accompanying unaudited consolidated financial statements reflect, in the opinion of management, all the adjustments necessary to achieve a fair presentation of the Company's financial position and results for the interim periods presented. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999, as amended. Cash and Cash Equivalents: Cash and cash equivalents consist of cash and other highly liquid debt instruments with an original maturity of three months or less. Inventory: Inventory is carried at the lower of cost or fair market value. Inventory is charged to operations as products are sold on a first-in, first-out (FIFO) method. Property and Equipment: Property and equipment is carried at cost. Depreciation is computed using the straight-line method based on estimated useful lives of the assets, generally two to ten years. Asset classifications and estimated useful lives are as follows: Leasehold Improvements Life of lease Furniture & Fixtures 5 - 10 years Equipment & Software 2 - 7 years Vehicles 2 - 5 years Goodwill: The Company amortizes goodwill on a straight-line basis over a period of five years. Revenue Recognition: Internet Services. The Company recognizes revenues for Internet services as they are earned. Some customers pay an annual fee for Internet services and the revenues are recognized on a straight-line basis over the service period. Deferred revenue represents the portion of unearned Internet service fees. Telecommunications Services. The Company recognizes revenue for telecommunications services based upon minutes of traffic processed and contracted fees. Service Contracts: The Company has service contracts that run for periods up to one year. Revenue from these contracts is recognized ratably over the life of the contract. Software Products. The Company recognizes revenues from software products in accordance with the American Institute of Certified Public Accountants' (AICPA) Statement of Position 97-2, "Software Revenue Recognition," as follows: License revenue Revenue from the licensing of software is recognized after shipment of the product and fulfillment of acceptance terms, provided no significant obligations remain and collection of the resulting receivable is deemed probable. Installation, hosting and education When services are provided. Support contract Ratably over the life of the contract from the effective date. Software Development Costs: The Company expenses research and development costs, as incurred. Statement of Financial Accounting Standards No. 86 "Accounting for the costs of computer software to be sold, leased or otherwise marketed" does not materially affect the Company. Income Taxes: Income taxes are based on the loss for financial reporting purposes and reflect a current asset for the estimated taxes recoverable in the current year tax return and changes in deferred taxes. Deferred tax liabilities and assets are recognized for the estimated tax effects of temporary differences between financial reporting and taxable income (loss) for the loss carry-forwards based on currently enacted tax laws and rates. A valuation allowance is used to reduce deferred tax assets to the amount that is more likely than not to be realized. Use of Estimates: The preparation of financial statements in conformity with Generally Accepted Accounting Principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of certain assets, liabilities, and disclosures, including the allowance for doubtful accounts, useful lives and recoverability of long-term assets. Actual amounts could differ from those estimates. Any adjustments applied to estimates are recognized in the year in which such adjustments are determined. 2. ACQUISITIONS: WebWizard Acquisition: On January 31, 2000, a wholly owned subsidiary of Grace completed its acquisition of WebWizard. The acquisition was accounted for as a purchase pursuant to Accounting Principles Board Statement No. 16, "Business Combinations" ("APB 16"), and the results of Web Wizard's operations have been included in the Company's 2000 consolidated statement of operations from the date of acquisition. Total consideration for the acquisition was the issuance of 1,287,554 shares of Grace Common Stock. 257,510 of these shares will be held in escrow until June 30, 2001, to benefit Grace in the event of any indemnifiable claims arising out of the acquisition of WebWizard. As a result of the acquisition of WebWizard, the Company recorded goodwill of approximately $534,000. Goodwill is amortized on a straight-line basis over five years. Additionally, Grace issued 475,000 shares to former shareholders of WebWizard to extinguish certain pre-acquisition debt owed by WebWizard to such shareholders. PVTel Acquisition: On February 24, 2000, a wholly owned subsidiary of Grace completed its acquisition of PVTel. The acquisition was accounted for as a purchase pursuant to APB 16, and PVTel's results of operations have been included in the Company's 2000 consolidated statement of operations from the date of acquisition. Total consideration for the acquisition was the issuance of 2,150,000 shares of Grace Common Stock. 750,000 of these shares will be held in escrow until July 31, 2001, to benefit Grace in the event of any indemnifiable claims arising out of the acquisition of PVTel. Prior to the consummation of the PVTel acquisition, the Company advanced to PVTel approximately $434,500 for working capital purposes (the "Working Capital Advances"), which advances were evidenced by a promissory note made by PVTel to the Company. At the closing of the PVTel acquisition, the promissory note evidencing the Working Capital Advances was canceled and two shareholders of PVTel delivered to the Company promissory notes, including accrued interest, totaling $450,000, in substitution thereof. The notes bear interest at the rate of 9% per annum payable on or before February 24, 2001. The indebtedness represented by these substituted promissory notes is secured by 150,000 shares of Grace Common Stock owned by the two former shareholders of PVTel. Repayment of the notes is contingent upon the note holders being afforded the right to register the shares of Common Stock they received in the PVTel acquisition in a subsequent registration by the Company during the term of the notes pursuant to a registration rights agreement executed at the closing of the PVTel acquisition. In the event that the note holders are not afforded the opportunity to register their stock within the prescribed period, the notes and all obligations under the notes will be canceled and all security interests in the Common Stock held by the note holders will be released. The Company recorded goodwill of approximately $1,673,000 as a result of this transaction. Goodwill is amortized on a straight-line basis over five years. In July 2000, the PVTel operation was moved to Atlanta, and consolidated with existing local and long distance operations, to achieve economies of scale. Costs of the consolidation were not material and were partially offset by the sale of PVTel's Prepaid services. Management does not feel that the consolidation causes any impairment of the goodwill previously record. Alpha Computer Acquisition: On March 30, 2000, an indirect wholly owned subsidiary of the Company merged with and into Alpha Computer (the "Alpha Computer Acquisition"). The Alpha Computer Acquisition was accounted for as a purchase pursuant to APB 16 and, as a result, Alpha Computer's assets have been included in the Company's 2000 consolidated statements as of the date of acquisition. Total consideration for the acquisition was the issuance of 3,100,000 shares of Grace Common Stock. 620,000 of these shares will be held in escrow until March 30, 2001, to benefit Grace in the event of any indemnifiable claims arising out of the Alpha Computer Acquisition. The Company recorded goodwill of approximately $2,734,000 as a result of this transaction. Goodwill is amortized on a straight-line basis over five years 3. INVESTMENTS IN CERTIFICATES OF DEPOSIT: The Company accounts for its investments under Financial Accounting Standards Board ("FASB") No. 115 "Accounting for Certain Investments in Debt and Equity Securities." As of September 30, 2000, the Company's investments consisted of the following:
Maturity Date Interest Rate Amount -------------------------- ----------------- -------------------- Certificate of Deposit March 2, 2001 5.03 % $ 74,773 Certificate of Deposit March 2, 2001 5.03 % 30,000 -------------------- $ 104,773 ====================
The certificates of deposit are pledged to secure letters of credit. 4. ACCOUNTS RECEIVABLE: The Company does not have a secured interest in its accounts receivable, however it does have legal recourse for defaulted amounts. The maximum accounting loss from the credit risk associated with accounts receivable is the face amount of the receivable recorded, less any allowance for doubtful accounts. Accounts Receivable Sold With Recourse In the normal course of business, the Company discounts or sells a portion of its accounts receivable with recourse to a factor. As of September 30, 2000 there were approximately $354,029 of such receivables. The factor reserves an amount equal to 35% of each receivable account sold. As each account is paid in full, the reserve associated with the paid account will be returned to the Company. The fee for factoring the receivable is 3% of the face amount of each invoice factored. After 90 days, if the receivable is not collected, the factor at its discretion may require the Company to repurchase the receivable for 68% of the net sale of the invoice. Sale of Internet Residential Dial-up Customers On August 31, 2000, the Company entered into an agreement to sell its Internet Access residential dial-up subscribers to Earthlink Enterprises, Inc.(Earthlink). Under the terms of the agreement, payment will be made in increments as customers are converted and billed. Initially, a portion of the purchase price was paid upon transfer of the customer database and acceptance by the customer of the transfer; subsequent payments will be made upon the completion of two billing /payment cycles. Approximately 4,500 subscribers were included in the sale. The Company has estimated revenues to be approximately $652,000 and has recorded a receivable from Earthlink for that amount. On August 31, 2000, in connection with the sale of the Company's dial-up subscribers described above, Greenlight Qualified, LP loaned the Company $200,000. The note was secured by an assignment of proceeds from the sale and matured on September 11, 2000, which coincided with the first payment from Earthlink. The note had an interest rate of twenty-five percent. On September 11, 2000 this note was paid in full from proceeds of the sale to Earthlink. 5. COMMITMENTS AND CONTINGENCIES: Concentrations of Credit Risk: The Company maintains the majority of its cash deposits and investments at five financial depository institutions. The amount of the accounting loss due to credit risk the Company would incur if the financial depository institutions failed would be the cash deposits in excess of the $100,000 amount per depositor that is federally insured. The amount at risk totaled approximately $111,623 at September 30, 2000. 6. LINES OF CREDIT: The Company has a line of credit with Bank of America to provide working capital of up to $50,000. The interest rate is 10.50% per annum payable monthly. The balance on the line of credit was $50,690 on September 30, 2000. The line of credit is unsecured. On January 21, 2000, the Company obtained an additional $1,000,000 line of credit from Regions Bank. The line of credit bears interest at a variable rate (initially 9.0% per annum), payable monthly. The line is secured by 500,000 shares of the Company's Common Stock that are owned by Signal Compression, Inc. ("Signal"). The shares are subject to an agreement, whereby the Company was required to pay $37,500 and issue 200,000 shares of common stock to Signal for the right to collateralize the shares. The line is personally guaranteed by Richard S. Granville, III, a former Chief Executive Officer and former director of the Company. As of May 22, 2000, the line of credit had been paid down to $10,200 and converted to a term loan with a maturity of March 24, 2001. On September 24, 2000, the line was satisfied and the collateral returned to Signal. 7. SENIOR CONVERTIBLE NOTES PAYABLE: The Company has senior convertible notes payable with a face value of $6,500,000 that were issued with the Fourth Private Placement (see Note 9). The notes bear interest at a rate of 12% per annum, payable annually. The notes are due April 14, 2002. The $6,500,000 of proceeds was allocated between the stock, stock warrants and debt issued and as a result, the note was recorded at a discount of approximately $3,740,668. The difference between the face amount of the note and the discounted amount is normally amortized over the period between date of issuance and the earliest conversion date of the related note. Since the notes were immediately convertible, the Company was required to record a charge to operations of $3,740,668, as of the issue/conversion date. 8. PREFERRED STOCK: The Company is authorized to issue 10,000,000 shares of preferred stock with no par value. The preferred stock may be issued, by the Board of Directors, in one or more series. The Board of Directors may determine the terms of each series including preferences, rights and restrictions, by resolution upon the establishment of such series. No shares of preferred stock have been issued. 9. PRIVATE PLACEMENTS: Third Private Placement On March 1, 2000, the Company entered into a private placement agreement with C&S Private Equity Fund, LP ("C&S)" (the "Third Private Placement"), pursuant to which the Company issued to C&S 14 units ("C&S Units") for $100,000 per C&S Unit. Each C&S Unit consisted of (i) a $100,000 convertible senior secured note of the Company and (ii) 150,000 shares of the Company's Common Stock. An aggregate of 2,100,000 shares of the Company's Common Stock were issued along with a convertible senior secured note payable to C&S in the principal amount of $1,400,000. The net proceeds of $1,363,000 were used for the purchase and working capital requirements of WebWizard and PVTel. The note was due March 2, 2001, and bore interest at a rate of 12% per year, payable quarterly. On April 14, 2000, approximately $1,421,000 of the proceeds from the Fourth Private Placement was used to repay all of the outstanding principal and interest on this note. As a result of the early payoff, the Company incurred a one-time charge to operations of $1,207,508 in the second quarter of 2000 representing the difference between the face value of the note and the discount recorded in the financial statements of $770,000, together with all deferred transaction fees and costs of $237,508. Fourth Private Placement On April 14, 2000, the Company entered into a Securities Purchase Agreement (the "Fourth Private Placement") with Greenlight Capital, L.P. (Greenlight) and certain affiliates of Greenlight (the "Purchasers") pursuant to which the Company agreed to issue for an aggregate purchase price of $6.5 million, (a) 3,000,000 shares of Common Stock, (b) the Company's 12% senior secured convertible promissory notes with an original principal amount of $6,500,000 (the "Greenlight Notes") convertible into shares of Common Stock at a conversion price of $1.00 per share, (c) stock purchase warrants (the "Greenlight Warrants") to purchase 6,500,000 shares of Common Stock at an exercise price of $1.00 per share, and (d)(1) options, exercisable on August 14, 2000, and December 14, 2000, to purchase for an aggregate purchase price of $4.5 million on each date, (A) 1,575,000 shares of Common Stock, (B) Notes with an original principal amount of $2,925,000 convertible into shares of Common Stock at a conversion price of $1.00 per share, and (C) Warrants to purchase 2,925,000 shares of Common Stock at an exercise price of $1.00 per share, and (2) an option, exercisable on April 14, 2001, to purchase for an aggregate purchase price of $4.5 million, (A) 1,050,000 shares of Common Stock, (B) Notes with an original principal amount of $2,925,000 convertible into shares of Common Stock at a conversion price of $1.50 per share, and (C) Warrants to purchase 1,950,000 shares of Common Stock at an exercise price of $1.50 per share (the "Greenlight Options"). The Greenlight Note is guaranteed by all of the subsidiaries of the Company and is secured by all of the issued and outstanding capital stock of all of the Company's subsidiaries. $1,421,000 of the net proceeds of the Fourth Private Placement were used to repay all of the outstanding principal and interest on the note issued in the Third Private Placement, and the remainder of the net proceeds will be used for the Company's working capital requirements. All of the shares of Common Stock issued pursuant to the Fourth Private Placement, including any shares issued pursuant to the Greenlight Note, the Greenlight Warrant and the Greenlight Options, are "restricted securities" under Rule 144 promulgated under the Securities Act. Such securities may not be sold in the absence of registration under the Securities Act unless an exemption from registration is available, including the exemptions contained in Rule 144. Pursuant to a registration rights agreement executed at the closing of the Fourth Private Placement, all of the shares of Common Stock issued pursuant to the Fourth Private Placement, including any shares issued pursuant to the Greenlight Note, the Greenlight Warrant and the Greenlight Options, were granted "demand" and "piggyback" registration rights. Subject to certain conditions set forth in the registration rights agreement, the demand registration rights require that, 30 days following the date on which the Company becomes eligible to use Form S-3, the Company use its reasonable best efforts to register the applicable shares as soon as practicable. Subject to certain conditions set forth in the registration rights agreement, the piggyback registration rights permit the holders of the covered shares to include such shares in a registration by the Company when and if the Company proposes to register any Common Stock under the Securities Act for sale to the public on a form that would also permit the registration of the covered shares (other than registrations on Forms S-8 or S-4). As of August 14, 2000, Greenlight had elected not to exercise their option to purchase additional stock from the Company. 10. STOCK COMPENSATION: On February 16, 2000, pursuant to an amended and restated employment agreement, the Company awarded the President of the Company 1,000,000 shares of the Company's Common Stock for prior services rendered during 1999 and 2000. The shares were valued at $400,000 and a non-cash expense was recorded in the statement of operations for the year ended December 31, 1999 of $266,666 and in the statement of operations for the quarter ended March 31, 2000 of $133,334. Additionally, the Company will provide funds to pay all taxes associated with the stock grant, and has agreed to accept a promissory note in the amount of $141,800 from the President. If the President of the Company has not been terminated for cause or voluntarily resigned without good cause as of December 31, 2001, then the Company will forgive 50% of the principle and accrued interest then payable under such note. The liability for the tax payment has been recorded and upon payment, the note will then be recorded. On April 14, 2000, the Company awarded Louis Friedman, currently a Director of the Company, 500,500 shares of the Company's Common Stock for services rendered in conjunction with the Fourth Private Placement. The shares were valued at $500,500 and a non-cash expense was recorded in the statement of operations for the quarter ended June 30, 2000. In the event Greenlight exercises certain options it received in conjunction with the Fourth Private Placement, Mr. Friedman will be eligible for additional shares. In March 2000, the Company awarded Louis Friedman an additional 336,000 shares in conjunction with the third private placement to C & S Private Equity Fund, LP. The shares were valued at $151,200 and a non-cash expense was recorded in the statement of operations for the quarter ended June 30, 2000. 11. RELATED PARTY TRANSACTIONS: On August 3, 2000, the Company borrowed $100,000 from Dr. Lee Silverstein, a Director of the Company, and $35,000 from James M. Blanchard, President and a Director of the Company. The loans bear an interest rate of the prime rate plus 4%. In consideration of the loans, the Company agreed to repay the loans as soon as adequate additional funding is obtained. Additionally, the Company has agreed to issue discounted warrants to purchase up to 1,000,000 shares and 350,000 shares of the Company's common stock ("restricted securities" under Rule 144 promulgated under the Securities Act) to Dr. Silverstein and Mr. Blanchard, respectively, at a purchase price of $.10 per share with an exercise period of five years. 12. STOCK OPTIONS: The Company has not yet adopted a stock option plan but has awarded stock options to certain directors, officers, and employees. The options vest in varying percentages, over varying time frames ranging from "date of grant," up to 4 years. The options, after vesting, will expire in varying periods ranging from 1 to 10 years. At September 30, 2000, 1,975,000 options were vested, with none being exercised or expired.
Number of Options Weighted Average Outstanding Exercise Price Outstanding December 31, 1998 0 N/a Awarded 1,592,540 $1.00 Exercised 0 ______ -------------- ------ December 31, 1999 1,592,540 $ 1 .00 --------- ------- Awarded 7,987,480 $ .68 Exercised 0 Cancelled/Expired 0 ______ -------------- ------ March 31, 2000 9,580,020 $ .73 --------- ----- Awarded 1,444,678 $ 1.00 Exercised 0 Cancelled/Expired ( 868,960) $ ( .68) ---------- --------- June 30, 2000 10,155,738 $ .70 ---------- ----- Awarded 0 Exercised 0 Cancelled/Expired 0 ---------- September 30, 2000 10,155,738 $ .70 ---------- -----
The Company follows Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees," to account for stock options and employee stock purchase plans. Accordingly, employee stock options are valued at the difference between the exercise price and the estimated fair market value of the underlying shares on the date of grant, and recorded as deferred compensation, which is then amortized over the life of the options. An alternative method of accounting for stock options is SFAS 123, "Accounting for Stock-Based Compensation." Under SFAS 123, employee stock options are valued at the grant date using the Black-Scholes valuation model, and compensation cost is recognized ratably over the vesting period. Had compensation cost for the Company's stock options and employee stock purchase plans been determined based on the Black-Scholes model at the various grant dates, pro forma statements of operations for the period ended September 30, 2000, would have been as follows:
As reported Adjustments Pro Forma Net Loss $ 13,601,806 $ (279,777) $ 13,881,583 Loss per share $ -- $ (.15) (.15)
The fair value of cash options on each date of grant is determined based on the following assumptions: Risk free interest rate: 6.25% Life: 4 - 10 years Dividends: none Volatility: 100% - 124% Weighted average grant debt fair value: $0.40 13. SUBSEQUENT EVENTS Litigation: On June 15, 2000, the Board of Directors of the Company voted to terminate for cause the employment of Mr. Benjamin F. Holcomb, Chairman of the Board and Chief Executive Officer of the Company, pursuant to the terms of Mr. Holcomb's Employment Agreement with the Company dated February 1, 2000. The termination date was effective as of July 15, 2000. A dispute existed between Mr. Holcomb and the Company concerning the events related to the termination of Mr. Holcomb's employment, and the Company has received from Mr. Holcomb a purported Notice of Termination of the Employment Agreement, dated June 14, 2000. Mr. Holcomb has also resigned from the Company's Board of Directors, effective June 15, 2000. On July 13, 2000, Benjamin J. Holcomb, former CEO and Chairman, filed a lawsuit in the Superior Court of DeKalb County, Georgia, naming Grace Development, Inc. and Louis Friedman, a Director of the Company, as defendants. The lawsuit sought to enforce a purported settlement agreement between Holcomb and the Company, or alternatively to recover damages for fraud, negligent misrepresentation, and breach of contract against Grace and for fraud, negligent misrepresentation, and tortious interference with contractual relations against Mr. Friedman. On October 5, 2000, Grace successfully resolved all disputes with Mr. Holcomb and entered into a settlement agreement. The terms of the settlement are confidential and, in managements' view, not material to the financial condition of the Company. Computer Plus Sales and Services, Inc. Acquisition: On July 31, 2000, a wholly owned subsidiary of Grace entered into an agreement to acquire ComputerPlus Sales and Services, Inc. (CPSS). The acquisition was expected to be completed in the third quarter, however, in October 2000, the Company and CPSS mutually agreed to terminate the transaction. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Report contains statements that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and the Securities Exchange Act of 1934. These statements are based on many assumptions and estimates and are not guarantees of future performance. Our actual results may differ materially from those projected in any forward-looking statements, as they will depend on many factors about which we are unsure, including many factors that are beyond our control. The words "may," "would," "could," "will," "expect," "anticipate," "believe," "intend," "plan," and "estimate," as well as similar expressions, are meant to identify such forward-looking statements. Other potential risks and uncertainties include, but are not limited to: o whether the Company can obtain additional capital to cover its operating losses, fund working capital requirements and continue as a going concern o whether the Company will achieve the desired results of its recently implemented cost reduction and consolidation initiatives; o significant increases in competitive pressure in our industry; o whether the Company can successfully implement new business strategies and manage projected growth; o changes in political conditions or the legislative or regulatory environment; o general economic conditions, either nationally or regionally and especially in primary service area, becoming less favorable than expected resulting in, among other things, a deterioration in business activity; o changes occurring in business conditions and inflation; o changes in technology; o changes in the securities markets; and o other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission, including our Form 10-KSB for the year ended December 31, 1999. OVERVIEW The predecessor to the Company, New Millennium, was formed on October 6, 1998, and merged with and into a subsidiary of Grace on September 28, 1999 (the "Grace Merger"). Although, as a result of the Grace Merger, New Millennium became a wholly owned subsidiary of the Company, the Grace Merger was accounted for as an acquisition of Grace by New Millennium because, following the transaction, the former shareholders of New Millennium owned a substantial majority of the Company's outstanding Common Stock. Accordingly, the historical Consolidated Financial Statements of the Company are the financial statements of New Millennium adjusted for the assumed acquisition of the net assets of Grace in exchange for the issuance of the Company's Common Stock. In accordance with purchase accounting principles, the net assets of New Millennium have been accounted for at their historical cost, and the net assets of Grace have been accounted for at their fair value as of September 28, 1999. No goodwill was recorded as a result of the Grace Merger. The predecessor acquired Avana Communications Corporation on May 5, 1999. The Company acquired WebWizard on January 31, 2000; PVTel on February 24, 2000 and Alpha Computer on June 30, 2000. Each of these acquisitions was accounted for as a purchase, and the results of operations of each acquired entity has been included in the Company's consolidated statements of operations from the date of the respective acquisition. REALIZATION OF ASSETS AND SATISFACTION OF LIABILITIES The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate the continuation of the Company as a going concern. However, the Company incurred a net loss of $13,601,806 for the nine months ended September 30, 2000 and had a working capital deficiency of $5,536,054 at September 30, 2000. The Company has sustained continuous losses from operations. The Company has used, rather than provided, cash in its operating activities during the periods ended September 30, 2000 and 1999. Management plans to grow revenues through the expansion of its product offerings to its existing and acquired customer base, added during the first quarter. This revenue model is expected to generate recurring revenues to work towards a positive cash flow. Additionally, the Company will continue its efforts to raise the additional capital required to fund planned 2000 activities. In view of the matters described above, there is substantial doubt about the Company's ability to continue as a going concern. The recoverability of the recorded assets and satisfaction of the liabilities reflected in the accompanying balance sheet is dependent upon continued operation of the Company, which is in turn dependent upon the Company's ability to meet its financing requirements on a continuing basis and to succeed in its future operations. There can be no assurance that management will be successful in implementing its plans. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. This section does not contain a quarter-to-quarter comparison of the Company's 2000 and 1999 financial information because the Company did not have any significant operations in the third quarter of 1999, and as such, the comparison would not be meaningful. RESULTS OF OPERATIONS Revenues: Revenues for the third quarter ended September 30, 2000, totaled $2,820,413 and indicates an increase of $454,550 or 19% over second quarter revenues of $2,365,863. The increase can be attributed primarily to first quarter acquisitions, however, internal growth in existing businesses generated approximately $224,369, a 36% increase over second quarter revenues. Cost of Services: Cost of services for providing Internet and Telecom services includes salaries and wages of those employed in customer and field service and in the technical support areas needed to maintain and upgrade the Company's network and systems. In addition, cost of services includes those cost associated with the design and implementation, including product cost, of network installations. For the quarter ended September 30, 2000, cost of services was $2,243,638, or 80% of revenues; a $9,002 increase from second quarter costs of $2,234,636, or 94% of revenues; resulting in a 14% margin improvement for the period. Sales and Marketing Expenses: Sales and marketing expenses include the salaries and wages of sales and marketing personnel, advertising costs and development of the promotional campaign for both telecommunications sales and corporate branding. For the quarter ended September 30, 2000, sales and marketing expenses were $459,130; a decrease over second quarter expense of $620,779. This represents a decrease of $161,649 or 26%; however, on a comparative basis to revenues, the third quarter indicates an improvement over the second quarter; 16% vs. 28%. General and Administrative Expenses: Included in General and Administrative expenses are salaries and wages of senior management and corporate headquarters personnel, professional fees, travel expenses, office supplies and other general expenses. Expenses in these categories decreased due to decline in the number of employees and decreased costs related to pursuing potential acquisitions and related financing activities. For the quarter ended September 30, 2000, General and Administrative expenses were $1,089,682; a decrease of $1,393,291 or 56% over the second quarter expense of $2,482,937. Depreciation and Amortization: Depreciation expenses are computed using the straight-line method based upon the estimated useful lives of assets, generally two to ten years. Goodwill and other intangible costs are amortized over a five-year period. For the quarters ended September 30 and June 30, 2000, depreciation expense and amortization expense were $457,876 and $304,875; and $318,835 and $292,562, respectively. The increase in depreciation and amortization is attributed primarily to asset additions and full quarter amortization. Interest Expense: The Company currently incurs interest expense on its lines of credit and under capitalized leases. For the quarter ended September 30, 2000, interest expense was $534,850; an increase of $297,359 over second quarter cost of $237,491. The increase is attributable to new financing leases, additional financing, and the inclusion of related interest for a full quarter. Interest Income: The Company currently earns interest income on cash and cash equivalents and investments. For the quarter ended September 30, 2000, interest income was $ 71,344; an increase of $35,559 over second quarter income of $35,784. Balance Sheet: Accounts receivable, net of the allowance for doubtful accounts, increased from $56,458 at the end of 1999, to $1,390,078 as of September 30, 2000, due primarily to the acquisition of WebWizard, PVTel and Alpha Computer, and increased billings from sales of telecommunications services. Equipment and software increased from $2,530,895 at the end of 1999, to $7,557,421 as of September 30, 2000, due in part to the acquisition of WebWizard, PVTel and Alpha Computer, but primarily to the purchase of approximately $3,500,000 in new network equipment from Lucent Technologies. Goodwill, net of amortization, increased from $600,547 at the end of 1999, to $4,994,787 as of September 30, 2000, due to the acquisition of WebWizard, PVTel and Alpha Computer. Accounts payable increased from $360,532 at the end of 1999, to $4,097,890 as of September 30, 2000, due primarily to the acquisition of WebWizard, PVTel and Alpha Computer, and to the increased purchasing activity related to the growth of internally generated revenues. Accrued liabilities increased from $218,182 at the end of 1999, to $786,325 as of September 30, 2000, due in part to the acquisition of WebWizard, PVTel and Alpha Computer; and also related to costs associated with the third and fourth private placement financings. Lines of credit decreased from $3,074,339 at the end of 1999, to $50,691 as of September 30, 2000, due primarily to the payoff of lines of credit with Regions Bank and BankTennessee totaling approximately $3,023,648 (net of draws). These lines of credit had been paid down to approximately $10,000, with a portion of the proceeds from the Fourth Private Placement. Obligations under capital leases, net of current portion, increased from $1,237,634 at the end of 1999, to $5,477,465 as of September 30, 2000, due primarily to the purchase of approximately $5,500,000 in new network equipment from Lucent Technologies and to the acquisition of WebWizard, PVTel and Alpha Computer. The current portion of obligations under capital leases increased from $735,170 at the end of 1999, to $ 1,739,588 as of September 30, 2000. Long-term debt increased to $699,715 at September 30, 2000. There was no long-term debt at December 31, 1999. This debt is directly related to the Alpha Computer acquisition. Stockholders' equity represented by Common Stock outstanding increased from $4,270,195 at the end of 1999, to $13,464,833 as of September 30, 2000, due primarily to the issuance of shares related to the acquisition of WebWizard, PVTel and Alpha Computer, the Third and Fourth Private Placements, and the issuance of shares as compensation, as discussed in the notes to the financial statements. The accumulated deficit increased from $3,115,833 at the end of 1999, to $16,717,640 as of September 30, 2000, due primarily to a net loss from operations of $11,728,584 and extraordinary one time charge of $4,989,056 related to the Third and Fourth private placement financings. LIQUIDITY AND CAPITAL RESOURCES For the six months ended September 30, 2000, the Company's operating activities required net cash of $5,243,762. Working capital decreased by $1,029,825 in the nine-month period ended September 30, 2000. Working capital was provided by proceeds from the Third and Fourth Private Placement financing, which was offset in part by the current portion of leases capitalized during the second quarter and draws against the lines of credit used for the same period. Changes in net cash from operations resulted primarily from the loss for the period offset in part by non-cash items of depreciation, amortization and compensation paid in the form of stock. The changes in net cash were also affected by a net increase of $499,222 in accounts receivable, prepaid expenses, other assets; with additional cash used by a decrease in accounts payable and accrued liabilities of $366,699. Cash provided by investing activities was $3,212,248 for the nine months ended September 30, 2000. Expenditures of cash for property and equipment were made totaling $16,543 for the quarter ended June 30, 2000. The Company's financing activities occurring in the first half of 2000 consisted of the Third and Fourth Private Placements and four lines of credit. This activity generated $4,885,537 net of certain repayments, to the Company. Notes 7,8, and 10 to the Consolidated Financial Statements of the Company (included in Item 1 of Part I of this Form 10-Q are incorporated herein by reference) describe the Third and Fourth Private Placements, and the lines of credit. There were no such financing activities in the quarter ended September 30, 2000. Cash provided by financing activities consisted primarily of proceeds from private placements of $1,400,000 (Third Private Placement) and $6,500,000 (Fourth Private Placement), and net proceeds from line of credit borrowings of $357,722. These amounts were offset by repayment of the third private placement note of $1,400,000; repayment of lines of credit of $1,450,000; payment on obligations under capital leases of $472,185 and deferred debt transaction costs of $50,000. As of September 30, 2000, the Company had cash and cash equivalents of $277,349. The Company also had $104,773 in certificates of deposit less offsetting related liabilities in the form of letters of credit of $104,773. With $277,349 of cash and cash equivalents and $0 of net proceeds available from certificates of deposit, the Company had $277,349 with which to meet its current obligations and fund its operations. Management believes this amount is not sufficient to cover the Company's anticipated operating losses and expand its business as currently planned. The Company will therefore require additional capital to fund its anticipated operating losses and planned capital expenditure requirements. In order to fund these requirements, the Company anticipates that it will be required to raise additional financing from public or private equity or debt sources. Additionally, if the Company's plans or assumptions change (including those with respect to the development of the network, the level of its operations and its operating cash flow), if its assumptions prove inaccurate, if it consummates additional investments or acquisitions, if it experiences unexpected costs or competitive pressures, or if existing cash and any other borrowings otherwise prove to be insufficient, the Company may be required to seek additional capital sooner than expected. The Company's operations and financial condition will be materially and adversely affected if the Company is unable to obtain such additional capital or is unable to obtain such additional capital on acceptable terms. There can be no assurances that the Company will be able to raise equity capital, obtain capital leases or bank financing or incur other borrowings on commercially reasonable terms, if at all. To accelerate its growth rate and to finance the launch or build-out of additional markets, the Company will consider obtaining financing from various sources, including additional vendor financing provided by equipment suppliers, project financing from commercial banks, bank lines of credit and the sale of equity and debt securities. To the extent that the Company or any of its subsidiaries issues debt, its leverage and debt service obligations will increase. As part of its business strategy, the Company intends to continue to evaluate potential acquisitions; joint ventures and strategic alliances in companies that own existing networks or companies that provide services that complement the Company's existing businesses. The Company continues to consider potential acquisitions from time to time. New sources of capital such as credit facilities and other borrowings, and additional debt and equity investments in the Company will be necessary to fund any material acquisitions and similar strategic investments. YEAR 2000 COMPLIANCE The Company dedicated resources to address the potential hardware, software, and other computer and technology issues and related concerns associated with the transition to the Year 2000 and to confirm that its service providers took similar measures. As a result of these efforts, the Company has not experienced any material disruptions in its operations in connection with, or following, the transition to the Year 2000. Given that the majority of the Company's telecommunications network infrastructure and critical back office systems were acquired after 1997, Year 2000 compliance was substantially ensured at the time of acquisition. The total cost to complete the Company's Year 2000 compliance efforts was negligible. While the Company tested its own mission-critical systems for Year 2000 compliance, the Company does not control the systems of its suppliers, strategic partners and customers. The Company received assurances prior to December 31, 1999, from its suppliers and strategic partners regarding the Year 2000 readiness of their systems. We will continue to monitor our critical computer applications and those of our suppliers and vendors throughout the year 2000 to ensure that any latent year 2000 matters that may arise are addressed promptly. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has not invested in financial instruments that subject the Company to material market risk. Financial instruments which the Company holds are disclosed in Note 3 to the Company's Consolidated Financial Statements on page 9 herein. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On June 15, 2000, the Board of Directors of the Company voted to terminate for cause the employment of Mr. Benjamin F. Holcomb, Chairman of the Board and Chief Executive Officer of the Company, pursuant to the terms of Mr. Holcomb's Employment Agreement with the Company dated February 1, 2000. The termination date was effective as of July 15, 2000. A dispute existd between Mr. Holcomb and the Company concerning the events related to the termination of Mr. Holcomb's employment, and the Company has received from Mr. Holcomb a purported Notice of Termination of the Employment Agreement, dated June 14, 2000. Mr. Holcomb has also resigned from the Company's Board of Directors, effective June 15, 2000. On July 13, 2000, Mr. Holcomb filed a lawsuit in the Superior Court of DeKalb County, Georgia, naming Grace Development, Inc. and Louis Friedman, a Director of the Company, as defendants. The lawsuit sought to enforce a purported settlement agreement between Holcomb and the Company, or alternatively to recover damages for fraud, negligent misrepresentation, and breach of contract against Grace and for fraud, negligent misrepresentation, and tortious interference with contractual relations against Mr. Friedman. The lawsuit sought a judgment of at least $150,000 under the purported settlement agreement or at least $500,000 under the alternative damages theories. The Company and Friedman denied the allegations in the lawsuit. On October 5, 2000, Grace successfully resolved all disputes with Mr. Holcomb and entered into a settlement agreement. The terms of the settlement are confidential and, in managements' view, not material to the financial condition of the Company. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. The exhibits that are required to be filed or incorporated by reference herein are listed in the Exhibit Index. (b) Reports on Form 8-K. 1. Report on Form 8-K, dated August 9, 2000, filed in connections with a lawsuit filed August 18, 2000 by the former Chairman of the Board, Mr. Ben Holcomb, against Grace Development, Inc. 2. Current Report on Form 8-K, dated October 5, 2000, filed October 5, 2000, in connection with the resolution of disputes with Mr. Holcomb. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GRACE DEVELOPMENT, INC. (Registrant) Date: November 15, 2000 By: /s/ James M. Blanchard ---------------------- James M. Blanchard President and CEO By: /s/ James C. Foregger James C. Foregger Vice President of Finance and Accounting (Principal financial and accounting officer) EXHIBIT INDEX - ----------------- -------------------------------------------------------------- Exhibit Number Exhibit Title - ----------------- -------------------------------------------------------------- - ----------------- -------------------------------------------------------------- - ----------------- -------------------------------------------------------------- - ----------------- -------------------------------------------------------------- 27.1 Financial Data Schedule. - ----------------- -------------------------------------------------------------- - ----------------- -------------------------------------------------------------- - ----------------- -------------------------------------------------------------- EX-27 2 0002.txt FINANCIAL DATA SCHEDULE
5 1000 9-MOS DEC-31-2000 JUL-01-2000 SEP-30-2000 327 105 1,390 (200) 96 2,447 8,041 (1,320) 15,115 7,982 0 0 0 13,465 (16,718) 15,115 5,812 5,812 4,994 13,704 0 0 534 (8,613) 0 0 0 (4,989) 0 (13,602) (0) (0)
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