MOBILEPRO
CORP. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2005
(unaudited)
Overview
Mobilepro
Corp., incorporated under the laws of the State of Delaware in July 2000,
is a
wireless technology, telecommunications, broadband and integrated data
communication services company that delivers a comprehensive suite of voice
and
data communications services to its customers, including local exchange,
long
distance, enhanced data, Internet, cellular, and wireless broadband, through
its
operations in three industry segments - voice services, Internet services
and
technology. Together with its consolidated subsidiaries, Mobilepro Corp.
is
hereinafter referred to as “Mobilepro” or the “Company”.
The
Company’s voice services segment includes the operations of CloseCall America,
Inc. (“CloseCall”), a Stevensville, Maryland-based competitive local exchange
carrier (a “CLEC”), Davel Communications, Inc. (“Davel”), a Cleveland,
Ohio-based independent payphone provider, and American Fiber Network, Inc.
(“AFN”), a CLEC based in Kansas City, Kansas. The Company’s Internet services
segment includes DFW Internet Services, Inc. (“DFW”, doing business as
Nationwide Internet), an Irving, Texas-based Internet services provider
and its
acquired Internet service provider subsidiaries. The Company’s wireless
technology development efforts are conducted primarily in Phoenix, Arizona,
by a
wholly owned subsidiary, NeoReach, Inc. (“NeoReach”), and its subsidiary,
NeoReach Wireless, Inc.
Summary
of Acquisition Activities
In
April
2004, DFW acquired August.net Services LLC, an Internet service provider
located
in Texas, for $1,730,000 in cash and promissory notes.
In
June
2004, DFW acquired ShreveNet, Inc. (“ShreveNet”), an Internet service provider
located in Louisiana, for $1,250,000 in cash and common stock. The issued
shares
were valued at a fair value of $190,000 based on the average 20-day closing
price ($0.2162 per share) prior to June 3, 2004. Mobilepro issued the common
stock in August 2004.
In
June
2004, DFW acquired certain assets of Crescent Communications, Inc., an
Internet
service provider located in Houston, for $1,194,767 in cash and a promissory
note.
In
June
2004, the Company acquired US1 Telecommunications, Inc., a long distance
provider located in Kansas, for $135,282 in cash and conditional promissory
notes.
In
July
2004, DFW acquired Clover Computer Corporation (“Clover”), a Coshocton,
Ohio-based Internet services provider with operations in several Ohio cities,
for $1,216,993 in cash and promissory notes.
In
July
2004, DFW acquired Ticon.net, a Janesville, Wisconsin-based Internet service
provider with operations in Janesville and Milwaukee, for $1,000,000 in
cash and
promissory notes.
In
August
2004, the Company acquired Affinity Telecom (“Affinity”), a Michigan-based CLEC
and long distance carrier. The Company paid $2,513,000 in cash, notes,
and a
convertible note.
In
August
2004, DFW acquired the customer base, corporate name and certain other
assets of
Web One, Inc. (“Web One”), a Kansas City, Missouri-based Internet service and
web-hosting provider, for $1,960,000 in cash and common stock.
In
September 2004, DFW acquired World Trade Network, Inc. an Internet services
provider based in Houston, for $1,200,000 in cash and promissory
notes.
In
September 2004, DFW acquired The River Internet Access Co., an Internet
services
provider based in Tucson, Arizona, for $2,467,204 in cash and promissory
notes.
In
October 2004, Mobilepro acquired CloseCall, a CLEC offering local telephone
service, long distance service, 1.800CloseCall prepaid calling cards, and
wireless, dial-up and DSL Internet services. The purchase price included
1) a
cash payment of $8,000,000, 2) 39,999,999 shares of Mobilepro’s common stock
valued at $10,000,000, and 3) warrants to purchase 3,500,000 additional
shares
of Mobilepro’s common stock exercisable at $0.30 per share for 2,500,000 shares
and $0.35 per share for 1,000,000 shares.
In
November 2004, Mobilepro acquired Davel, the owner and operator of approximately
38,000 payphones in approximately 25,000 locations in 45 states and the
District
of Columbia. In connection with this transaction, the Company acquired
all of
Davel’s senior secured debt in the approximate principal amount of $103.1
million, a $1.3 million note receivable from Davel held by one of its secured
lenders, and approximately 95.2% of the common stock of Davel. The purchase
price included cash of $14,000,000 plus warrants to purchase up to 5,000,000
shares of common stock at the price of $0.30 per share. In May 2005, the
Company
purchased the remaining 4.8% of Davel’s outstanding common stock for $450,000
cash.
In
May
2005, NeoReach acquired WazAlliance, a network of metro-wide commercial
and
residential wireless Internet access zones for a total purchase price of
$257,500. Consideration included the issuance of 760,000 shares of Mobilepro’s
common stock valued at $110,200, a liability to issue an addition 540,000
shares
of common stock valued at $78,300, and the payment of certain liabilities
in the
amount of $69,000 on behalf of WazAlliance. The Company had previously
partnered
with WazAlliance in connection with projects to deploy full-scale metro-wide
service in both Tempe and Chandler, Arizona, known as WazTempe and WazChandler.
The network also includes WazHamptonRoads and WazMaui. This alliance provides
citywide multi-band wireless networks for municipal vehicles and personnel,
including public safety employees as well as services for residences, retail
businesses, schools, public events, hotels and resorts, and public
transportation.
In
June
2005, the Company acquired Evergreen Open Broadband (“Evergreen”), a wholesale
wireless Internet service provider based in Boston, for a purchase price
of
approximately $231,073 representing 1,505,360 shares of Mobilepro common
stock
to be issued and valued at $0.1535 per share based on the date that the
parties
reached agreement on the terms of the acquisition.
In
June
2005, the Company acquired a 51% ownership interest in Kite Broadband,
LLC
(“Kite”) with the investment of $3,825,000 cash. On June 30, 2005, Kite closed
the Master Agreement for Services (the “Sprint Agreement”) with Sprint
Communications Company L.P. (“Sprint”) under which Kite shall provide services
to Sprint’s broadband customers in fourteen (14) metropolitan markets for a
period of three years utilizing the Sprint mark. The Agreement covers,
among
other things, the provisioning of certain customer-facing services, such
as
customer operations and call center management, sales, marketing, billing,
collection, installation and repair. Kite is entitled to have Sprint remit
collected customer revenues in exchange for these services and is required
to
remit a monthly fee back to Sprint for network support and transport services.
The customers remain Sprint customers during the three-year term of the
Agreement. Upon expiration of the Agreement, Kite will have the option
to
acquire the then existing customers pursuant to the terms of the Agreement.
All
network and spectrum assets will remain Sprint property. Should Kite exercise
this bargain purchase option, Sprint has a right of first refusal to acquire
the
customer base back at estimated fair value. The remaining 49% minority
ownership
of Kite was reflected in the condensed consolidated balance sheet at June
30,
2005 as minority interest in the amount of $3,675,000.
In
June
2005, Mobilepro acquired AFN, a CLEC that is licensed to provide local
telephone, long distance and Internet services in the forty-eight (48)
states,
for consideration of $3,000,000, including a liability to issue 10,000,000
shares of Mobilepro common stock and a cash payment of $1,500,000. The
Company
also assumed liabilities totaling $1,549,784 including $1,337,103 payable
to a
related party company that supplies administrative and support services
to
AFN.
NOTE
2- |
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Financial
Statement Presentation
The
condensed consolidated financial statements include the accounts of the
Company
and its subsidiaries. All significant inter-company accounts and transactions
have been eliminated in consolidation. In accordance with the requirements
of
Statement of Financial Accounting Standard (“SFAS”) No. 131, “Disclosures about
Segments of an Enterprise and Related Information”, the Company has provided
certain financial information relating to the operating results and assets
of
its industry segments (see Note 9) based on the manner in which management
disaggregates the Company in making internal operating decisions.
The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management
to
make estimates and assumptions that affect the reported amounts of assets
and
liabilities, the disclosure of contingent assets and liabilities at the
date of
the financial statements and the reported amounts of revenue and expenses
during
the reporting periods. Actual results could differ from those
estimates.
These
financial statements are unaudited and have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission
regarding interim financial reporting. Accordingly, they do not include
all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements, and it is suggested that
these
financial statements be read in conjunction with the financial statements,
and
notes thereto, included in the Company’s Annual Report on Form 10-KSB for the
fiscal year ended March 31, 2005. In the opinion of management, the comparative
financial statements for the periods presented herein include all adjustments
that are normal and recurring, and that are necessary for a fair presentation
of
results for the interim periods. The results of operations for the three
months
ended June 30, 2005 are not necessarily indicative of the results that
will be
achieved for the fiscal year ending March 31, 2006.
Reclassifications
Certain
prior-period financial statement balances have been reclassified to conform
to
the June 30, 2005 presentation. The reclassifications resulted in no changes
to
the accumulated deficits reported in prior periods.
Revenue
Recognition
The
Company recognizes revenue related to local telephone, long distance, wireless
calling and Internet access services when such services are rendered and
collection is reasonably assured; it defers revenue for services that the
Company bills in advance.
Revenue
from product sales that contain embedded software is recognized in accordance
with the provisions of the American Institute of Certified Public Accountants
Statement of Position 97-2, “Software Revenue Recognition.” Accordingly, revenue
related to shipments to credit-worthy customers without the collection
of any
portion of the corresponding fees being dependent on a future event is
recorded
at the time of shipment. The Company may grant extended payment terms to
customers without established credit. Revenue related to shipments to such
customers is recorded only upon the receipt of cash until a significant
portion
of the sales price is received. The Company considers the recognition of
revenue
related to shipments to value-added-resellers to be dependent upon the
occurrence of a future event. Accordingly, revenue is deferred until a
significant portion of the sales price is received in cash. On certain
transactions, payment by the customer is contingent upon installation or
acceptance. Until it is accepted, the customer may have a right to return
the
product. The Company does not recognize revenue on these transactions until
these related rights have lapsed. Certain of the Company’s product are sold with
accompanying maintenance/service contracts. The Company allocates revenue
to
such maintenance/service contracts based on vendor-specific objective evidence
of fair value as determined by the Company’s contract renewal rates. Revenue
related to maintenance/service contracts is deferred and recognized ratably
over
the periods covered by the contracts.
Davel
derives its payphone revenue from two principal sources: coin calls and
non-coin
calls. Revenue related to all calls, including dial-around compensation
and
operator service revenue, is recognized in the periods that the customers
place
the calls. Any variations between recorded amounts of revenue and actual
cash
receipts are accounted for at the time of receipt.
Non-coin
operator service calls are handled by independent operator service providers.
These carriers assume billing and collection responsibilities for
operator-assisted calls originating on Davel’s payphone network and pay
commissions to Davel based upon gross revenue. Davel recognizes revenue
related
to operator service calls in amounts equal to the commissions that it is
entitled to receive in the periods that the services are rendered.
Davel
also recognizes revenue related to non-coin dial-around calls that are
initiated
from a Company payphone in order to gain access to a long distance company
or to
make a standard toll free call. Revenue related to such dial-around calls
is
recognized initially based on estimates. The inter-exchange carriers have
historically paid for fewer dial-around calls than are actually made and
the
collection period for dial-around revenue is generally four to six months,
but
can be in excess of a year. Davel’s estimates of revenue are based on the
historical analysis of calls placed versus amounts collected. These analyses
are
updated on a periodic basis. Recorded amounts of revenue are adjusted based
on
actual receipts and/or the subsequent revision of prior estimates.
Financing
Fees
The
financing fees paid in May 2004 to Cornell Capital Partners, L.P. (“Cornell
Capital”) and others related to the negotiation of the Standby Equity
Distribution Agreement (the “SEDA”) were deferred and, in the current year, are
being amortized against additional paid-in-capital on a straight-line basis
over
the twenty-four (24) month term of the SEDA. These fees were paid with
the
issuance of 8,000,000 shares of Mobilepro common stock valued in the amount
of
$1,760,000. The Company recorded amortization of approximately $73,000
and
$220,000 in the three-month periods ended June 30, 2004 and 2005, respectively.
Fees paid to Cornell Capital and others at the time that funds are drawn
under
the SEDA, amounting to $315,000 in the three-month period ended June 30,
2005,
are charged to additional paid-in-capital. The discount amounts provided
to
Cornell Partners upon the conversion of SEDA notes payable to shares of
common
stock, approximately $95,000 in the three-month period ended June 30, 2005,
are
included in interest expense.
The
Company also incurred financing costs of $1,295,000 in May 2005 in connection
with issuance of the $15.5 million convertible debenture to Cornell Partners
and
the early retirement of the bridge loan (see Note 3). These costs, including
fees paid in cash to Cornell Partners, were charged to additional
paid-in-capital.
Basic
and Diluted Income (Loss) Per Share
SFAS
No. 128, “Earnings Per Share,” requires dual presentation of basic and
diluted income (loss) per share. Basic income (loss) per
share
includes no dilution and is computed by dividing net income
(loss) available to common stockholders by the weighted-average
number of
common shares outstanding for the period. Diluted income (loss) per
share
includes the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock.
Options
and warrants to purchase shares
of
common stock outstanding
at
June 30, 2004,
were
not
included in the computation of diluted loss
per
share
for
the three-month period then ended as their effect
would be
anti-dilutive. The effects of debentures and other notes payable that were
convertible into
shares
of
common stock at June 30, 2004, were not included in the computations of
diluted
loss per share for the three-month period then ended as they would be
anti-dilutive.
Accounting
for Stock Options and Warrants
The
Company accounts for its stock-based compensation under the recognition
and
measurement principles of Accounting Principles Board (“APB”) Opinion
No. 25, “Accounting for Stock Issued to Employees,” and related
interpretations. APB Opinion No. 25 provides that compensation expense
relative to a Company’s employee stock options is measured based on the
intrinsic value of the stock options at the measurement date.
If
compensation expense had been determined based on the fair value of the
options
at the grant dates consistent with the method of accounting proscribed
by SFAS
No. 123, “Accounting for Certain Transactions Involving Stock
Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based
Compensation-Transition and Disclosure,” the Company’s net income (loss) per
share would have changed to the pro forma amounts for the three-month periods
ended June 30, 2004 and 2005 as indicated below:
|
|
2004
|
|
2005
|
|
Net
income (loss), as reported
|
|
$
|
(
757,439
|
)
|
$
|
419,191
|
|
Add:
Stock-based employee compensation expense included in reported
net income
(loss)
|
|
|
-
|
|
|
-
|
|
Deduct:
Total stock-based employee compensation expense determined under
fair
value based method for all awards
|
|
|
(4,595,592
|
)
|
|
(1,820,768
|
)
|
|
|
|
|
|
|
|
|
Pro
forma net loss
|
|
$
|
(5,353,031
|
)
|
$
|
(1,401,577
|
)
|
|
|
|
|
|
|
|
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
Diluted,
as reported
|
|
$
|
(0.0033
|
)
|
$
|
0.0010
|
|
|
|
|
|
|
|
|
|
Diluted,
pro forma
|
|
$
|
(0.0230
|
)
|
$
|
(0.0034
|
)
|
|
|
|
|
|
|
|
|
The
fair
value of each option is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions used for grants during
the
three-month periods ended June 30, 2004 and 2005:
|
|
2004
|
|
2005
|
|
Dividend
yield
|
|
|
None
|
|
|
None
|
|
Expected
volatility
|
|
|
60
|
%
|
|
60
|
%
|
Risk-free
interest rate
|
|
|
4.50
|
%
|
|
3.00
|
%
|
Expected
term (in years)
|
|
|
9.58
|
|
|
10.00
|
|
For
stock
options granted during the three-month periods ended June 30, 2004 and
2005, the
weighted-average grant-date fair value was $0.20 per share and $0.30 per
share,
respectively.
Property,
Plant and Equipment
Furniture
and equipment are included in fixed assets in the accompanying balance
sheets
and are stated at cost. Depreciation expense is computed using the straight-line
method during the estimated useful life of each asset. When an asset is
retired
or otherwise disposed of, the cost and related accumulated depreciation
are
removed from the accounts, and any resulting gain or loss is recognized
in
income for the period. The costs of maintenance and repairs are charged
to
expense as incurred; significant renewals and betterments are capitalized.
Fixed
assets were as follows:
|
|
Estimated
Useful
Lives
(in years)
|
|
March
31, 2005
|
|
June
30,
2005
|
|
|
|
|
|
(audited)
|
|
(unaudited)
|
|
Furniture
and fixtures
|
|
|
7
|
|
|
|
|
|
|
|
Machinery
and equipment
|
|
|
5
|
|
|
13,584,088
|
|
|
14,277,462
|
|
Leasehold
improvements
|
|
|
7
|
|
|
263,452
|
|
|
351,487
|
|
Vehicles
|
|
|
5
|
|
|
287,733
|
|
|
287,732
|
|
Subtotals
|
|
|
|
|
|
14,523,134
|
|
|
15,314,244
|
|
Less
accumulated depreciation
|
|
|
|
|
|
(
1,330,078
|
)
|
|
(
1,957,308
|
)
|
Fixed
assets, net
|
|
|
|
|
|
|
|
|
|
|
The
Company recorded depreciation expense of $39,944 and $619,177 for the
three-month periods ended June 30, 2004 and 2005, respectively.
Customer
Contracts and Relationships
In
order
to acquire certain customer rights under its agreement with Sprint, Kite
made an
up-front payment of $6,578,550, after adjustment for the difference in
the
closing number of customers subscribing to the service as compared to a
target
subscriber number. The purpose of the up-front payment was to acquire the
existing customers and related revenue base, increasing the Company’s
opportunity to leverage its broadband wireless market share.
Accordingly,
the entire opportunity payment, net of the portion allocated to the value
of the
tangible assets and adjusted to include payments for legal and direct
professional advisory fees, was capitalized as an intangible asset ascribed
to
the subscriber customer contracts and relationships and will be amortized
on a
straight-line basis over the finite life of the subscriber base. The Company
has
estimated this life to be ten years based upon an analysis of the operating
history of the base and the average monthly disconnects. In addition, the
Company intends to evaluate the value of this intangible asset for potential
impairment at least annually and to adjust both the asset value and the
prospective life in the future if determined necessary.
Goodwill
and Other Intangible Assets
The
Company accounts for goodwill and other intangible assets in accordance
with
SFAS No. 142, “Goodwill and Other Intangible Assets”. Through June 30, 2005, the
Company has recorded goodwill in the aggregate amount of $37,190,456 in
connection with its acquisitions, including $4,611,357 recorded in the
three-month period ended June 30, 2005. The Company has also recorded certain
other intangible assets in connection with the acquisitions of CloseCall,
Davel
and certain Internet service provider companies. The Company performs its
annual
impairment tests for goodwill at fiscal year-end. However, on a quarterly
basis,
management looks for events or circumstances that would more likely than
not
reduce the fair value of a reporting segment below its carrying amount.
If the
Company determines that the fair value of an acquired entity is less than
the
net assets of the entity, including goodwill, an impairment loss would
be
identified and recorded at that time. As of March 31, 2005 and June 30,
2005,
the Company determined that there was no impairment of its
goodwill.
Other
intangible assets include location contracts with net balances of $2,965,456
and
$2,805,663 at March 31, 2005 and June 30, 2005, respectively, representing
Davel
acquisition costs allocated to location owner payphone contracts and other
costs
associated with obtaining written and signed location contracts. These
other
assets are amortized on a straight-line basis over their estimated useful
lives
based on contract terms (generally 5 years). Accumulated amortization related
to
these contracts at March 31, 2005 and June 30, 2005 was $267,586 and $427,879,
respectively. Amortization related to location contracts was $160,292 for
the
three-month period ended June 30, 2005.
Investments
During
the year ended March 31, 2005, the Company provided certain management
services
to two emerging technology firms. As consideration, the Company received
a 5%
ownership in each firm. These investments were recorded in the amounts
of
$300,000 and $150,000, approximating the value of the services provided,
and
were included in the consolidated balance sheets at March 31, 2005 and
June 30,
2005.
Accounts
Payable and Accrued Liabilities
Accounts
payable and accrued liabilities consisted of the following:
|
|
March
31,
|
|
June
30,
|
|
|
|
2005
|
|
2005
|
|
|
|
(audited)
|
|
(unaudited)
|
|
Accounts
payable
|
|
$
|
17,250,586
|
|
$
|
14,943,656
|
|
Accrued
compensation
|
|
|
1,675,124
|
|
|
1,874,915
|
|
Accrued
interest expense
|
|
|
937,378
|
|
|
688,438
|
|
Totals
|
|
$
|
19,863,088
|
|
$
|
17,507,009
|
|
Income
Taxes
Effective
July 14, 2000, the Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes”. The
statement requires an asset and liability approach for financial accounting
and
reporting for income taxes, and the recognition of deferred tax assets
and
liabilities for the temporary differences between the financial reporting
bases
and tax bases of the Company’s assets and liabilities at enacted tax rates
expected to be in effect when such amounts are realized or settled. Because
of
its history of losses, the Company has not had any material federal state
income
tax obligations.
Recent
Accounting Pronouncements
In
December 2004, the Financial Accounting Standards Board revised SFAS
No. 123. The revision was entitled “Share-Based Payment” (“SFAS
No. 123R”), replacing SFAS 123 and superseding APB No. 25, and its
scope encompasses a wide range of share-based compensation arrangements
including share options, restricted share plans, performance-based awards,
share
appreciation rights and employee share purchase plans.
SFAS
123R
requires that the compensation cost relating to share-based payment transactions
be recorded in financial statements. For each transaction, compensation
cost is
to be measured based on the fair value of the equity or liability instrument
issued. The
pro
forma disclosures previously permitted under SFAS No. 123 no longer
will be
an alternative to financial statement recognition of compensation expense.
In
accordance with a recently-issued Securities and Exchange Commission rule,
companies will be allowed to implement SFAS No. 123R as of the beginning
of
the first interim or annual period that begins after June 15, 2005.
The
Company currently expects that it will adopt SFAS No. 123R for the
fiscal
quarter ending September 30, 2005.
Under
SFAS No. 123R, the Company must determine the appropriate fair value
model
to be used for valuing share-based payments, the amortization method for
compensation cost and the transition method to be used at date of adoption.
The
permitted transition methods include either retrospective or prospective
adoption. Under the retrospective method, prior periods may be restated
either
as of the beginning of the year of adoption or for all periods presented.
The
prospective method requires that compensation expense be recorded for all
unvested stock options at the beginning of the first quarter of adoption
of SFAS
No. 123R, while the retrospective methods would record compensation
expense
for all unvested stock options beginning with the first period presented.
The
Company is evaluating the requirements of SFAS No. 123R and expects
that
its adoption will have a material impact on the company’s consolidated financial
position and consolidated results of operations including an increase
in compensation expense for equity and liability instruments issued to
employees.
The
company has not yet determined the method of adoption or the effect of
adopting
SFAS No. 123R, and it has not determined whether the adoption will
result
in amounts that are similar to the current pro forma disclosures under
SFAS
No. 123.
Convertible
Debenture
On
May 13, 2005, the Company issued a convertible debenture (the “Debenture”)
in the aggregate amount of $15.5 million to Cornell Capital. The
Company
used a significant portion of the proceeds to repay in full the remaining
$13,000,000 balance of a note payable that bore interest at the rate of
23% and
was due on November 15, 2005; the retired note was the source of bridge
financing for the Company’s acquisition of Davel. Interest expense related to
the retired note was $381,225 in the three-month period ended June 30,
2005.
The
Debenture bears interest at an annual rate of 7.75% and is due and payable
in
the following installments over a three-year period: $500,000 is due on
November
15, 2005; $1,500,000 is due on May 15, 2006; $1,000,000 is due on each
of August
15, 2006, November 15, 2006 and February 15, 2007; $2,000,000 is due on
each of
May 15, 2007, August 15, 2007, November 15, 2007 and February 15, 2008;
and the
remaining $2,500,000 is due on May 15, 2008. The interest payable under
the
Debenture is due at the time of conversion or maturity; the holder of the
Debenture may elect to receive the interest in cash or in the form of common
stock of Mobilepro. Until the Debenture is repaid in full, Cornell Capital
may
elect to convert any portion of the outstanding principal amount of the
Debenture, plus accrued interest, into shares of common stock of Mobilepro
at a
conversion price of $0.30 per share. The conversion price of the Debenture
will
adjust if the Company issues additional equity or instruments convertible
into
equity in connection with a transaction such as a stock dividend or a stock
split pursuant to a formula included in the Debenture. For the three-month
period ended June 30, 2005, the amount of percentage interest expense related
to
the Debenture was $157,973; this amount was also included in accrued liabilities
at June 30, 2005.
The
Debenture is secured by the assets of the Company. The terms of
the
Debenture obligate the Company to comply with certain covenants including
an
agreement that, on March 1, 2006, if the Company’s aggregate indebtedness to
Cornell Partners exceeds $4,000,000, the parties will enter a new SEDA
in an
amount not less than the amount of the indebtedness.
In
connection with the issuance of the Debenture, the Company also issued
to
Cornell Capital a five-year warrant to purchase 6,000,000 shares of its
common
stock at an exercise price of $0.50 per share (the “Warrant”). If the Company
issues additional equity or instruments convertible into equity as described
in
the Warrant, or is deemed to have done so, at a lower per share price than
the
then-effective Warrant exercise price, the exercise price may be adjusted
downward to such lower per share price.
The
face
amount of the Debenture is reflected in the balance sheet at June 30, 2005,
net
of unamortized debt discount of $802,725. The net amount reflects the fair
market value on the date of issuance after allocating the proceeds between
the
Debenture and the Warrant. Proceeds of $853,200 were allocated to the value
of
the Warrant. The discount on the Debenture resulting from the allocation
of
proceeds to the value of the Warrant is being amortized as a charge to
interest
expense over the three-year period until the Debentures become due in
May 2008. Interest expense for the three-month period ended June
30, 2005
included debt discount amortization in the amount of $50,475.
Standby
Equity Distribution Agreement (the “SEDA”)
On
May
13, 2004, the Company entered into the SEDA with Cornell Capital that provides,
generally, that Cornell Capital will purchase up to $100 million of the
common
stock of Mobilepro over a two-year period, with the time and amount of
such
purchases, if any, at the Company’s discretion. Cornell Capital will purchase
the shares at a 2% discount to the prevailing market price of the common
stock.
There are certain conditions applicable to the Company’s ability to draw down on
the SEDA including the continuing effectiveness of a registration statement
covering the resale of all shares of common stock that may be issued to
Cornell
Capital under the SEDA, the Company’s payment of a fee to Cornell Capital and
other advisors at the time of each draw (5% of the amount of each draw),
and the
Company’s adherence with certain other covenants.
In
the
event that Cornell Capital would hold more than 9.9% of the then outstanding
common stock of the Company, the Company would be unable to draw down on
the
SEDA. At June 30, 2005, Cornell did not hold more than 9.9% of the then
outstanding common stock of the Company.
In
the
three-month periods ended June 30, 2004 and 2005, the Company transferred
borrowings under existing notes payable to Cornell Partners to the SEDA
in the
amounts of $2,000,000 and $7,200,000, respectively, and advanced 15,000,000
shares of its common stock in each of the periods to the escrow agent in
accordance with the terms of the SEDA. In the three-month period ended
June 30,
2005, the Company converted $7,800,000 in borrowings under the SEDA into
29,303,762 shares of common stock that were issued to Cornell Capital by
the
escrow agent. There were no borrowings converted to common stock under
the SEDA
in the three-month period ended June 30, 2004. At March 31, 2005 and June
30,
2005, borrowings under the SEDA of $6,500,000 and $5,900,000 were outstanding,
respectively, and were classified in the accompanying balance sheets as
current
liabilities.
The
SEDA
replaced a similar equity line of credit arrangement with Cornell Capital
that
was negotiated in May 2002 and that was intended to provide $10 million
in
equity financing to the Company. In the three months ended June 30, 2004,
the
Company drew $2,000,000 from Cornell Capital in accordance with this arrangement
and advanced 10,000,000 shares of its common stock to the escrow agent.
During
the three months ended June 30, 2004, 18,298,438 shares of common stock
were
issued to Cornell Capital under this arrangement. At March 31, 2005 and
June 30,
2005, there were no outstanding borrowed amounts under this
arrangement.
Notes
Payable to Cornell Capital
On
June
24, 2005, the Company borrowed $6,300,000 from Cornell Capital, and
simultaneously transferred $2,200,000 of the note balance into debt under
the
SEDA. The remaining amount of the note, $4,100,000, is due in one year
with
interest applied at an annual rate of 8% and was classified as a current
liability in the balance sheet. Proceeds from this borrowing were used
to fund
the $1,500,000 cash consideration portion of the AFN purchase price and
the
$3,825,000 cash investment in Kite.
In
September 2004, the Company borrowed $3,700,000 from Cornell Capital. The
amount
was due in one year with interest applied at an annual rate of 12%. At
March 31,
2005, the Company classified the outstanding principal balance of this
note
payable of $3,700,000 as a current liability in the balance sheet. During
the
three-month period ended June 30, 2005, this remaining outstanding principal
amount was transferred into debt under the SEDA.
In
August
2004, the Company borrowed $8,500,000 from Cornell Capital. The amount
was due
in one-year with interest applied at an annual rate of 12%. Prior to March
31,
2005, the Company converted $7,200,000 of the note balance into debt under
the
SEDA; the remaining principal balance of the note payable, classified as
a
current liability in the balance sheet, was $1,300,000 at March 31, 2005.
During
the three-month period ended June 30, 2005, this remaining outstanding
principal
amount was transferred into debt under the SEDA.
During
the three-month period ended June 30, 2005, the interest expense on the
notes
payable to Cornell Capital, including amounts transferred to the SEDA,
was
$234,312. Accrued and unpaid interest at June 30, 2005 related to these
notes
was $530,465.
The
aggregate amount expensed for interest, conversion and financing
fees and
discounts related to notes payable to Cornell Capital in the three-month
period
ended June 30, 2004 was $290,567.
Notes
Payable Related to Acquisitions
As
a
portion of the consideration paid to owners of acquired companies, the
Company
may issue promissory notes. These notes typically are payable over terms
ranging
from 4 months to two years and bear interest at annual rates ranging from
3% to
7%. At March 31, 2005 and June 30, 2005, the aggregate balances due under
the
acquisition notes payable were $1,723,201 and $2,408,726, respectively.
At March
31, 2005 and June 30, 2005, accrued interest amounts related to these notes
were
$43,066 and $25,984, respectively. During the three-month periods ended
June 30,
2004 and 2005, interest expense amounts related to these notes payable
were
$10,370 and $17,680, respectively. At June 30, 2005, notes maturing in
March
2006 payable to the former owners of The River Internet Access Co. with
a total
principal balance of $388,236 are also convertible into common stock of
Mobilepro at a price of $0.20 per share at the option of the note holders.
During
the three-month period ended June 30, 2005, the balance of two promissory
notes
payable to the prior owners of Clover Computer Corporation and the related
accrued interest in the aggregate amount of $535,188 was converted into
2,200,000 shares of common stock of Mobilepro.
Other
Notes Payable and Long-Term Liabilities
The
Company has other notes and long-term liabilities payable to banks and
various
other creditors and with aggregate balances due at March 31, 2005 and June
30,
2005 of $209,357 and $1,262,343, respectively.
Debt
Maturities
A
summary
of the balances of notes payable and other debts at June 30, 2005 was as
follows
(unaudited):
Convertible
debenture payable to Cornell Capital
|
|
$
|
15,500,000
|
|
Notes
payable to Cornell Capital (including $5,900,000 transferred
to the
SEDA)
|
|
|
10,000,000
|
|
Notes
payable related to acquisitions
|
|
|
2,408,726
|
|
Other
notes payable and long-term obligations
|
|
|
1,262,343
|
|
|
|
|
29,171,069
|
|
Less:
Unamortized debt discount on convertible debenture
|
|
|
(802,725
|
)
|
Less:
Amounts due within one year
|
|
|
(14,009,253
|
)
|
Long-term
portion of debt
|
|
$
|
14,359,091
|
|
At
June
30, 2005, a summary of the future scheduled payments of the long-term portion
of
debt was as follows (unaudited):
The
twelve-month period ending--
|
|
|
|
|
June
30, 2007
|
|
$
|
4,625,431
|
|
June
30, 2008
|
|
|
8,015,048
|
|
June
30, 2009
|
|
|
2,515,048
|
|
June
30, 2010
|
|
|
6,289
|
|
|
|
|
15,161,816
|
|
Less
- Unamortized debt discount on convertible debenture
|
|
|
(802,725
|
)
|
Long-term
portion of debt
|
|
$
|
14,359,091
|
|
NOTE
4- |
STOCKHOLDERS’
EQUITY
|
Common
Stock Transactions in the Fiscal Year Ended March 31, 2005
During
the fiscal year ended March 31, 2005, the Company issued 1) 2,946,037 shares
of
its common stock in connection with the exercise of stock options and warrants
for aggregate cash proceeds of approximately $100,000, 2) 2,000,000 shares
of
its common stock under a settlement agreement with a former executive valued
at
$90,000, and 3) 100,000 shares of common stock to an agency as compensation
for
personnel recruiting services.
In
June
2004, the Company issued 8,000,000 shares of common stock in payment of
the
financing fees associated with the SEDA that were valued at $1,760,000.
This
cost was reflected as a deferred financing fee in the consolidated balance
sheet.
In
August
2004, the Company issued 878,816 shares of common stock to the former owners
of
ShreveNet as partial consideration for the acquisition of their company.
The
issued shares were valued at $190,000 based on the average 20-day closing
price
($0.2162 per share) prior to June 3, 2004.
In
September 2004, the Company issued 5,000,000 shares of common stock to
the
former owners of Affinity as partial consideration for the acquisition
of their
company. The issued shares were valued at $1,000,000 based upon the date
of
agreement and the terms of the deal. The distribution of such value amount
included an allocation of $995,000 to the terminated put agreement.
In
November 2004, the Company issued 39,999,999 shares of common stock in
connection with the acquisition of CloseCall that was completed in October
2004.
The 39,999,999 shares were recorded at a fair value of $10,000,000.
In
March
2005, the Company issued 1,500,000 shares of common stock in connection
with the
acquisition of Web One that was completed in August 2004. The 1,500,000
shares
were recorded at a fair value of $300,000.
During
the year ended March 31, 2005, the Company issued 10,000,000 shares of
common
stock to the escrow agent for use in the conversion of borrowings made
under the
$10 million equity line of credit, and converted $3,800,000 of borrowings
into
25,276,134 shares of common stock.
During
the year ended March 31, 2005, the Company issued 65,000,000 shares of
common
stock to the escrow agent for use in the conversion of borrowings made
under the
SEDA, and converted $9,200,000 of debt into 52,172,192 shares of common
stock.
The Company also converted $13,907 of interest into 81,355 shares of common
stock.
Common
Stock Transactions in the Three-Month Period Ended June 30,
2005
The
Company issued 760,000 shares of common stock in connection with the acquisition
of WazAlliance that was completed in May 2005; the shares were recorded
at a
fair value of $110,200. The Company also issued 100,000 shares of common
stock
to an agency as compensation for broker fees relating to this acquisition
that
were valued at $15,000.
In
June
2005, the Company issued 2,200,000 shares of common stock in full satisfaction
of the promissory notes, and related accrued interest, totaling $535,188
that
were issued in connection with the July 2004 acquisition of Clover.
During
the three months ended June 30, 2005, the Company issued 15,000,000 shares
of
common stock to the escrow agent for use in the conversion of borrowings
made
under the SEDA, and converted $7,800,000 of SEDA debt into 29,303,762 shares
of
common stock.
Stock
Options and Warrants
The
stockholders of the Company have approved the issuance of 1,000,000 shares
of
common stock in connection with stock options granted pursuant to the 2001
Equity Performance Plan (the “2001 Plan”). The board of directors subsequently
authorized an increase in the number of shares available under the 2001
Equity
Performance Plan from 1,000,000 to 30,000,000. In addition, the Company
has
issued options and warrants to purchase common stock to key personnel pursuant
to specific authorization of the board of directors outside the scope of
the
2001 Plan. The following tables summarize the stock option activity and
the
warrant activity for the three months ended June 30, 2005 (unaudited):
|
|
Number
of
|
|
Weighted-Average
|
|
Stock
Options --
|
|
Options
|
|
Exercise
Price
|
|
|
|
|
|
|
|
Outstanding
- March 31, 2005
|
|
|
1,725,000
|
|
$
|
0.192
|
|
Granted
|
|
|
-
|
|
$
|
-
|
|
Exercised
|
|
|
-
|
|
$
|
-
|
|
Cancelled
|
|
|
-
|
|
$
|
-
|
|
Outstanding
- June 30, 2005
|
|
|
1,725,000
|
|
$
|
0.192
|
|
|
|
|
|
|
|
|
|
Exercisable
- June 30, 2005
|
|
|
885,416
|
|
$
|
0.170
|
|
|
|
Number
of
|
|
Weighted-Average
|
|
Stock
Warrants --
|
|
Warrants
|
|
Exercise
Price
|
|
|
|
|
|
|
|
Outstanding
- March 31, 2005
|
|
|
61,232,500
|
|
$
|
0.117
|
|
Granted
|
|
|
18,850,000
|
|
$
|
0.296
|
|
Exercised
|
|
|
-
|
|
$
|
-
|
|
Cancelled
|
|
|
-
|
|
$
|
-
|
|
Outstanding
- June 30, 2005
|
|
|
80,082,500
|
|
$
|
0.159
|
|
|
|
|
|
|
|
|
|
Exercisable
- June 30, 2005
|
|
|
58,153,275
|
|
$
|
0.163
|
|
NOTE
5- |
LIABILITY
FOR COMMON STOCK TO BE
ISSUED
|
As
the
purchase prices of certain acquisitions are subject to post-closing adjustments,
all of the common stock of the Company due to the former owners of such
acquired
companies has not yet been issued. The liability for common stock to be
issued
at June 30, 2005 reflects an obligation to issue 12,045,360 shares in the
aggregate, including $78,300, $231,073 and $1,500,000 relating to the
acquisitions of WazAlliance, Evergreen and AFN, respectively.
NOTE
6- |
EARNINGS
PER SHARE
|
Options
and warrants to purchase 81,807,500 shares were outstanding at June 30,
2005.
The dilutive effect of these agreements resulted in the addition of 39,571,209
shares in the computation of diluted earnings per share for the three months
ended June 30, 2005. The dilutive effect of the Debenture and other convertible
notes payable resulted in the addition of 13,098,800 shares in the computation
of diluted earnings per share for the three months ended June 30, 2005.
The
computation of dilutive earnings per share for the three-month period ended
June
30, 2005 was as follows (unaudited):
Net
income
|
|
$
|
419,191
|
|
|
|
|
|
|
Weighted
average number of shares outstanding during the period
|
|
|
360,778,231
|
|
Add:
the treasury stock effect of stock options and warrants
|
|
|
39,571,209
|
|
Add:
the effect of the assumed conversion of SEDA notes payable to
common
stock
|
|
|
11,157,620
|
|
Add:
the effects of the assumed conversion of the debenture and notes
payable
|
|
|
1,941,180
|
|
|
|
|
|
|
Diluted
number of shares outstanding
|
|
|
413,448,241
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
Basic
|
|
$
|
0.0012
|
|
Diluted
|
|
$
|
0.0010
|
|
During
the three-month period ended June 30, 2005, Mr. Jay O. Wright, the Company’s
President and Chief Executive Officer, extended his employment agreement
with
the Company through 2007, with the extension stipulating annual salary
amounts
during the term, restructuring the basis for bonus awards, and providing
severance payment terms. The Company also has an employment contract with
each
senior executive, including the chief financial officer, the general counsel,
and the general managers of the technology segment, the Internet service
segment, CloseCall and Davel.
In
August
2004, the Company announced its intention to issue a property dividend
of
3,073,113 shares of common stock of Solution Technology International,
Inc.
(“STI”). The Company has a 5% ownership interest in STI. The Company
stockholders are expected to receive one share of registered (i.e.
“free-trading”) STI stock for approximately every 93 shares of the Company stock
that they own, based on the existing shares outstanding and certain warrants.
The Company’s board of directors set September 15, 2004 as the record date for
the stock dividend. In March 2005, STI withdrew its registration statement
from
the United States Securities and Exchange Commission. STI is contemplating
other
options to become a publicly traded company. The Company intends to pursue
issuance of the property dividend upon STI obtaining its public listing.
At this
time, no date has been established for such listing.
During
the fiscal year ended March 31, 2005, management concluded that uncertainty
pertaining to the Company’s ability to operate as a going concern should be
eliminated. The events and factors considered by management in reaching
its
decision included the ability of the Company to obtain short-term and bridge
loans, the commitment received from Cornell Capital to provide the Company
with
up to $100 million in equity financing through the SEDA, and the ability
of the
Company to consummate a series of fourteen acquisitions in the fifteen-month
period ended March 31, 2005. The acquired Internet and voice service providers
are expected to generate revenues and to provide cash flow from operations.
In
the three-month period ended June 30, 2005, the Company refinanced a high
interest, short-term bridge loan in the amount of $13 million with the
proceeds
of the Debenture that is scheduled to be paid over a three-year term (see
Note
3) bearing an annual interest rate 7.75%, and established or extended the
employment arrangements with the Company’s key executives.
Litigation
and Other Legal Proceedings
As
of
June 30, 2005, the Company was party to the following material legal
proceedings.
At
the
time that the Company acquired 95.2 % of the stock of Davel, Davel was
a
defendant in a civil patent infringement lawsuit captioned Gammino
v. Cellco Partnership d/b/a Verizon Wireless, et al.,
filed
in the United States District Court for the Eastern District of Pennsylvania.
The plaintiff claims that Davel and other defendants allegedly infringed
its
patent involving the prevention of fraudulent long-distance telephone calls
and
is seeking damages in connection with the alleged infringement. Davel continues
to review and investigate the allegations set forth in the complaint, continues
to assess the validity of the Gammino Patents and is in the process of
determining whether the technology purchased by Davel from third parties
infringes upon the Gammino Patents. According to the terms of the Davel
acquisition agreement, the former secured lenders, subject to certain
limitations, have agreed to reimburse the Company for the litigation costs
and
any losses resulting from the Gammino lawsuit from future regulatory receipts
that were assigned previously to them by Davel. Any such regulatory receipts
are
deposited into a third-party escrow account and are used to reimburse the
Company for costs incurred. The secured lenders are not required to fund
the
escrow account or otherwise reimburse the Company for amounts, if any,
in excess
of actual regulatory receipts collected. Any amount remaining in the escrow
account at the conclusion of the litigation is to be returned to the former
secured lenders. During the three-month period ended June 30, 2005, the
Company
received significant regulatory receipts that are being held in escrow.
The case
is in the discovery phase of the litigation, and it is unable to predict
the
likely outcome or assess the sufficiency of the escrowed receipts to cover
legal
costs and losses, if any, related to this matter.
In
2002,
Davel was served with a complaint, in an action captioned Sylvia
Sanchez et al. v. Leasing Associates Service, Inc., Armored Transport Texas,
Inc., and Telaleasing Enterprises, Inc.
alleging that Davel was grossly negligent or acted with malice, and that
such
actions proximately caused the death of Thomas Sanchez, Jr., a former Davel
employee. This complaint was forwarded to Davel’s insurance carrier for action;
however, Davel’s insurance carrier denied coverage based upon the workers
compensation coverage exclusion contained in the insurance policy. The
parties
are currently engaged in the discovery process. The trial originally scheduled
for June 2004 was continued to November 2004; however, the trial has been
delayed further by motion of the plaintiff and approval of the court. It
is
anticipated that the trial will be scheduled for November 2005. While Davel
believes that it has meritorious defenses to the allegations contained
in the
second amended complaint and intends to vigorously defend itself, Davel
cannot
at this time predict its likelihood of success on the merits.
The
Company terminated Mr. Kevin Kuykendall, former President of the Company’s voice
division, for cause under the terms of his executive employment agreement,
effective Wednesday, December 29, 2004. In May 2005, the Company and Mr.
Kuykendall dropped all complaints and legal proceedings against each other
and
signed a confidential settlement agreement and mutual general
release.
NOTE
9- |
SEGMENT
INFORMATION
|
The
Company’s reportable operating segments include voice services, Internet
services and technology. Results of operations and certain asset data relating
to the Company’s business segments for the three-month periods ended June 30,
2004 and 2005 are as follows (unaudited):
The
Three Month Period
|
|
Voice
|
|
Internet
|
|
|
|
|
|
|
|
Ended
June 30, 2004
|
|
Services
|
|
Services
|
|
Technology
|
|
Corporate
|
|
Total
|
|
Revenues
|
|
$
|
-
|
|
$
|
1,020,164
|
|
$
|
-
|
|
$
|
150,000
|
|
$
|
1,170,164
|
|
Costs
of revenues
|
|
|
-
|
|
|
357,939
|
|
|
-
|
|
|
-
|
|
|
357,939
|
|
Gross
profit
|
|
|
-
|
|
|
662,225
|
|
|
-
|
|
|
150,000
|
|
|
812,225
|
|
Operating
expenses
|
|
|
-
|
|
|
424,314
|
|
|
523,620
|
|
|
279,320
|
|
|
1,227,254
|
|
Depreciation,
amortization
and
impairment charges
|
|
|
-
|
|
|
36,297
|
|
|
-
|
|
|
3,647
|
|
|
39,944
|
|
Interest,
net
|
|
|
-
|
|
|
11,899
|
|
|
-
|
|
|
290,567
|
|
|
302,466
|
|
Net
income (loss)
|
|
$
|
-
|
|
$
|
189,715
|
|
$
|
(523,620
|
)
|
$
|
(423,534
|
)
|
$
|
(757,439
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
275,000
|
|
$
|
6,428,298
|
|
$
|
22,725
|
|
$
|
3,498,401
|
|
$
|
10,224,424
|
|
Fixed
assets, net of accumulated depreciation
|
|
$
|
-
|
|
$
|
600,196
|
|
$
|
18,234
|
|
$
|
-
|
|
$
|
618,430
|
|
Goodwill,
net of impairment
|
|
$
|
-
|
|
$
|
4,462,469
|
|
$
|
-
|
|
$
|
-
|
|
$
|
4,462,469
|
|
The
Three Month Period
|
|
Voice
|
|
Internet
|
|
|
|
|
|
|
|
Ended
June 30, 2005
|
|
Services
|
|
Services
|
|
Technology
|
|
Corporate
|
|
Total
|
|
Revenues
|
|
$
|
18,462,451
|
|
$
|
4,037,400
|
|
$
|
5,994
|
|
$
|
-
|
|
$
|
22,505,845
|
|
Costs
of revenues
|
|
|
9,054,032
|
|
|
1,956,024
|
|
|
11,806
|
|
|
-
|
|
|
11,021,862
|
|
Gross
profit
|
|
|
9,408,419
|
|
|
2,081,376
|
|
|
(5,812
|
)
|
|
-
|
|
|
11,483,983
|
|
Operating
expenses
|
|
|
6,940,911
|
|
|
1,752,806
|
|
|
227,949
|
|
|
388,574
|
|
|
9,310,240
|
|
Depreciation,
amortization
and
impairment charges
|
|
|
736,543
|
|
|
81,799
|
|
|
388
|
|
|
3,647
|
|
|
822,377
|
|
Interest,
net
|
|
|
549
|
|
|
18,464
|
|
|
(74
|
)
|
|
913,236
|
|
|
932,175
|
|
Net
income (loss)
|
|
$
|
1,730,416
|
|
$
|
228,307
|
|
$
|
(234,075
|
)
|
$
|
(1,305,457
|
)
|
$
|
419,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
35,744,527
|
|
$
|
17,960,916
|
|
$
|
8,082,405
|
|
$
|
23,414,931
|
|
$
|
85,202,778
|
|
Fixed
assets, net of accumulated depreciation
|
|
$
|
11,729,485
|
|
$
|
1,366,679
|
|
$
|
257,127
|
|
$
|
3,645
|
|
$
|
13,356,936
|
|
Goodwill,
net of impairment
|
|
$
|
22,709,478
|
|
$
|
13,986,759
|
|
$
|
494,219
|
|
$
|
-
|
|
$
|
37,190,456
|
|
NOTE
10- |
SUBSEQUENT
EVENTS
|
On
July
1, 2005, the Company issued 906,753 shares of its common stock in satisfaction
of an obligation for accrued interest in the amount of $290,433 related
to the
$8,500,000 note payable to Cornell Capital.
On
July
5, 2005, the Company announced that it had signed a letter of intent to
acquire
Tiger Communications, Inc., an Internet and telecommunications company
located
in Chicago. The Company expects to close this transaction in its second
fiscal
quarter, subject to the execution of definitive agreements and the satisfaction
of customary closing conditions.
On
July
11, 2005, the Company signed a letter of intent to acquire certain Internet
service provider assets of ATX Communications, Inc. that are clustered
in
several mid-western states. A closing would be subject to the execution
of
definitive agreements and the satisfaction of customary closing
conditions.
On
July
13, 2005, the Company issued 6,000,000 of the 10,000,000 shares owed to
the
former owner of AFN. The Company expects to issue the remaining 4,000,000
shares
in the second quarter ending September 30, 2005.
Subsequent
to June 30, 2005, The Company converted $500,000 of the $5,900,000 balance
of
outstanding SEDA debt at June 30, 2005 into 1,684,942 shares of its common
stock. The remaining balance of $5,400,000 in SEDA borrowings is scheduled
to
convert into shares of common stock in installments over the period ending
December 31, 2005.