10-Q 1 a2056684z10-q.txt FORM 10-Q -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ (MARK ONE) ~~/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001 OR ~~/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NUMBER 0-25957 ------------------------ BIZNESSONLINE.COM, INC. (Exact name of registrant as specified in its charter) ------------------------ DELAWARE 06-15191132 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)

1720 ROUTE 34 P.O. BOX 1347 WALL, NEW JERSEY 07719 (732) 280-6408 (732) 280-6409 (FAX) (Address and telephone number of principal executive offices and principal place of business including zip code and area code) ------------------------ NONE (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 /X/ No / / The number of shares outstanding of the Registrant's Common Stock as of August 3, 2001 was 10,826,538. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- BIZNESSONLINE.COM, INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001 INDEX Part I--Financial Information Item 1 Condensed Consolidated Balance Sheets as of June 30, 2001 (unaudited) and December 31, 2000......................... 1 Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2001 and 2000 (unaudited)............................................... 2 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2001 and 2000 (unaudited)........... 3 Condensed Consolidated Statement of Stockholder's Equity for the Six Months Ended June 30, 2001 (unaudited)............ 4 Notes to Condensed Consolidated Financial Statements........ 5 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 7 Item 3 Quantitative and Qualitative Disclosure About Market Risk... 11 Part II--Other Information Item 2 Changes in Securities and Use of Proceeds................... 12 Item 6 Exhibits and Reports on Form 8-K............................ 12 Signatures.................................................................. 13 Exhibit Index............................................................... 14

PART I--FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS BIZNESSONLINE.COM, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)

See accompanying notes to condensed consolidated financial statements. 1 BIZNESSONLINE.COM, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

See accompanying notes to condensed consolidated financial statements. 2 BIZNESSONLINE.COM, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)

See accompanying notes to condensed consolidated financial statements. 3 BIZNESSONLINE.COM, INC. CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE DATA) SIX MONTHS ENDED JUNE 30, 2001

See accompanying notes to condensed consolidated financial statements. 4 BIZNESSONLINE.COM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1) BASIS OF PRESENTATION The accompanying condensed consolidated financial statements include the accounts of BiznessOnline.com, Inc. and its wholly owned subsidiaries(hereinafter collectively referred to as the "Company", "we", "our" or "us"). We derive revenue from providing enhanced Internet services, including server co-location, Web design and e-commerce solutions, Web hosting, high speed Internet access and dial-up Internet access. Also, as a result of our acquisition of Telecon Communications Corp. on March 31, 2000, we now resell local and long distance telephone service in New York. Prior to the acquisition of Telecon, we operated in one business segment. With the acquisition of Telecon, we now operate in two business segments. The financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial information, including the instructions to Form 10-Q and rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally required in complete financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. In the opinion of management these financial statements include all adjustments necessary for a fair presentation of the results of operations for the interim periods presented. Results of operations for interim periods are not necessarily indicative of the results that may be expected for the year ended December 31, 2001. 2) DEBT On March 16, 2000, we obtained a $15 million senior secured credit facility from MCG Finance Corporation. This facility is secured by all the assets of the company including our subsidiaries. We used the initial proceeds from this facility to fund the cash purchase price for Telecon Communications Corp. which we acquired on March 31, 2000.On December 13, 2000 the credit facility was increased to $17 million, the timing of the repayment of principal was restructured, and certain of the financial covenants were amended. The increase in the amount of the facility was used primarily for working capital. On July 9, 2001 the credit facility was further amended to change the timing of interest payments from monthly to quarterly and to temporarily suspend the application of certain financial covenants. Under the amended MCG credit facility, the principal amount of the indebtedness is to be repaid using the following schedule: February 2002............................................... $ 600,000 May 2002, August 2002, November 2002 and February 2003...... 937,500 May 2003, August 2003, November 2003, February 2004, May 2004, August 2004 and November 2004............................. 1,125,000 February 2005............................................... remaining principal

As of June 30, 2001, the principal balance of the MCG credit facility has been classified as current since we were in default under certain of the financial covenants of the facility. In connection with the MCG credit facility, we have paid certain cash fees and issued a total of 761,757 shares of our common stock to MCG and/or its affiliates. In addition, we have issued common stock purchase warrants to MCG exercisable for 1,376,868 shares of common stock at an exercise price of $.01 per share, 375,487 shares of common stock at an exercise price of $.507025 per share, 550,000 shares of common stock at an exercise price of $3.50 per share, and 275,000 shares of common stock at an exercise price of $8.50 per share. 5 BIZNESSONLINE.COM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The warrants and shares of common stock issued to the lender have been estimated by an independent valuation to have a value of $5.4 million using (i) the Black-Scholes method of valuation for the warrants, and (ii) the closing price on the NASDAQ National Market and OTC Bulletin Board on the date of issuance for the shares. The fair value of the warrants and shares issued were recorded as a discount to the related debt and was being accreted as interest expense over the life of the loan. As of March 31, 2001, since we were in default under the terms of the loan, the remaining discount of $4.1 million was recorded as expense. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This filing contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Those statements reflect the intent, belief or current expectations of BiznessOnline.com, Inc. and members of its management team. Prospective investors are cautioned that any forward-looking statements are not guarantees of future performance, and involve uncertainties, and that actual results may differ materially from those contemplated by the forward-looking statements as a result of, among other things, reflecting changed assumptions or the occurrence of unanticipated events or changes to future operating results over time. INTRODUCTION The following discussion of results of operations and of the liquidity and capital resources of BiznessOnline.com, Inc. should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto appearing in this filing on Form 10-Q. OVERVIEW We derive revenues from a variety of sources. We provide web site development, e-commerce solutions and Internet marketing/web media services. These services are predominantly utilized by small to medium sized business looking to establish a presence on the World Wide Web. We host commercial and individual web sites. We also provide our customers with server co-location and managed services from our state-of-the-art Internet data centers located in Albany, New York and Amherst, New York. We also provide Internet access via dedicated high-speed broadband products such as DSL, Frame relay, T-1 and T-3 connections along with dial up connectivity. Our customers are individuals and small to medium sized businesses. Subscription fees for dial up connectivity vary between $9.95 and $24.95 per month among our Internet service providers and by the billing plans for a particular Internet service provider. We also provide local dial tone, long distance services, cellular services, paging services and natural gas. Most of our individual subscribers pay us by credit card automatically on a monthly basis. Our revenue composition may change as we develop our strategy to provide additional e-commerce and other enhanced IP services to our clients. RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000 We were formed in June 1998, and conducted no significant operations between then and January 31, 1999, the date we acquired our first Internet service provider. We acquired four additional Internet service providers on May 17, 1999 in conjunction with our initial public offering, one Internet service provider on July 30, 1999, a web application service provider on August 18, 1999, a web hosting company on September 30, 1999, an Internet service provider on December 14, 1999, an Internet service provider on December 15, 1999, an Internet service provider on December 29, 1999, a competitive local exchange carrier on March 31, 2000, an Internet service provider on March 31, 2000 and an Internet service provider on June 30, 2000. We recorded revenue of $6.2 million during the quarter, a decrease of $.9 million, or 13%, from $7.1 million in the first quarter of 2000. The decrease was primarily a result of natural gas sales decreases due to warmer weather, and web development sales decreases. 7 The following table provides a comparison of connectivity and operations, sales and marketing and general and administrative expenses as a percentage of revenues:

Connectivity and operations expenses decreased $0.7 million, from $5.6 million to $4.9 million. The decrease was primarily a result of the consolidations of services provided upon completion of acquisitions we completed during the first half of 2000 and to a lower volume of sales. Sales and marketing expenses decreased $.8 million, from $1.6 million to $.8 million. The decrease is primarily attributable to less advertising and less sales personnel during 2001 As a result of cost saving actions taken to improve our operating results. General and administrative expenses decreased $.4 million, from $1.2 million to $.8 million. The decrease was primarily a result of the decreases in administrative personnel due to consolidation efficiencies and the closing of offices. At June 30, 2001 we evaluated the carrying value of our goodwill. We evaluated a number of factors in coming to the decision that the goodwill was not impaired. These included the discounted cash flows to be received from the acquired companies along with comparing the purchase price paid, as a multiple of revenue, and comparing that multiple to current comparable multiples. We also evaluated recent merger and acquisition activity in order to determine the correct carrying value of goodwill. Depreciation expense increased $.1 million, from $.5 million to $.6 million. The increase was a result of the acquisitions completed during the first half of 2000 along with the capital equipment purchased during the first half of 2000. These purchases were related to the integration of the common billing and accounting systems and the building of our data centers in Albany, New York, Amherst, New York and Hartford, Connecticut. Amortization expense decreased $1.0 million, from $2.5 million to $1.5 million. The decrease was a result of the write down of goodwill which occurred in the fourth quarter of 2000. Our policy with respect to completed acquisitions and for future acquisitions is to amortize the portion of purchase price attributable to goodwill and other intangibles over the appropriate period, generally five years. We also assess the recoverability of our intangible assets by determining whether the amortization over the remaining life can be recovered through undiscounted future operating cash flows. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting our average cost of funds. The recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved. INTEREST INCOME (EXPENSE), NET Interest expense, net was $1.1 million for the quarter ended June 30, 2001, as compared to interest expense, net of $1.0 million during the same period of 2000. The difference was a result of increases on our outstanding debt during 2000 and 2001. Net loss for the quarter ended June 30, 2001 was $3.7 million, or $0.37 per share, as compared to $6.3 million, or $0.69 per share during 2000. 8 SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000 We recorded revenue of $13.3 million during 2001, an increase of $2.1 million, or 19%, from $11.2 million during 2000. The increase was a result of the acquisitions we completed during 2000, combined with internal growth. The following table provides a comparison of connectivity and operations, sales and marketing and general and administrative expenses as a percentage of revenues:

Connectivity and operations expenses increased $.9 million, from $9 million to $9.9 million. The increase was primarily a result of the acquisitions we completed during 2000. Sales and marketing expenses decreased $1.1 million, from $2.7 million to $1.6 million. The decrease is primarily attributable to less advertising and less sales personnel during 2001. General and administrative expenses remained even at $2.0 million. At June 30, 2001 we evaluated the carrying value of our goodwill. We evaluated a number of factors in coming to the decision that the goodwill was not impaired. These included the discounted cash flows to be received from the acquired companies along with comparing the purchase price paid, as a multiple of revenue, and comparing that multiple to current comparable multiples. We also evaluated recent merger and acquisition activity in order to determine the correct carrying value of goodwill. Depreciation expense increased $.4 million, from $.9 million to $1.3 million. The increase was a result of the acquisitions completed during 2000 along with the capital equipment purchased during 2000. These purchases were related to the integration of the common billing and accounting systems and the building of our centralized data center in Albany, New York. Amortization expense decreased $1.3 million, from $4.2 million to $2.9 million. The decrease was a result of the write down of goodwill which occurred in the fourth quarter of 2000. Our policy with respect to completed acquisitions and for future acquisitions is to amortize the portion of purchase price attributable to goodwill and other intangibles over the appropriate period, generally five years. We also assess the recoverability of our intangible assets by determining whether the amortization over the remaining life can be recovered through undiscounted future operating cash flows. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting our average cost of funds. The recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved. INTEREST INCOME (EXPENSE), NET Interest expense, net was $6.5 million for the six months ended June 30, 2001, as compared to interest expense, net of $1.0 million during the same period of 2000. The difference was a result of interest expense on our outstanding debt during 2001 of $1.1 million on the debt we issued during the first quarter of 2000 and the expensing of the remaining discount on the debt of $4.3 million. Income tax expense for the six months ended June 30, 2001, which consisted solely of state income taxes, was $24,000 compared to $139,000 for the same period in 2000. We have not recorded any income tax benefit from the non-deductible amortization of goodwill. 9 Net loss for the six months ended June 30, 2001 was $11.1 million, or $1.12 per share, as compared to $9.7 million, or $1.09 per share during 2000. LIQUIDITY AND CAPITAL RESOURCES At June 30, 2001, we had $1.0 million of cash and cash equivalents, an increase of $.3 million from December 31, 2000. Net cash used by operating activities was $.6 million. Net cash used for investing activities was $.2 million. Net cash provided by financing activities was $1.1 million, primarily as a result of additional borrowings under our $17 million senior secured credit facility with MCG Finance Corporation. Our existing cash and cash equivalents and cash that may be generated from operations are expected to be sufficient to meet our anticipated cash needs including debt service requirements to approximately September 30, 2001. In order to continue operations and comply with our debt service requirements beyond that date, we may require an additional capital infusion and/or we may need to restructure our existing debt. In view of the relatively tight capital markets that we have experienced during recent months, we can provide no assurance that additional capital will be available to us to fund our cash requirements including debt service requirements for the year or thereafter or that we will be able to restructure our existing debt. Investors in our securities should consider the risk that we may be required to cease operations during the year or thereafter, particularly if we are unsuccessful in acquiring a capital infusion, restructuring our debt or completing a strategic transaction as described above, in which case our common stock may have no value. All statements set forth in this Form 10-Q are qualified by reference to those facts. NASDAQ DELISTING AND LIQUIDITY OF COMMON STOCK On August 4, 2000, NASDAQ informed us that we had failed to comply with continued listing requirements and commenced an action to delist our common stock from the National Market System. We appealed the decision and requested an extension of time to comply with the National Market standards. NASDAQ denied our appeal and effective October 2, 2000 our common stock was delisted from the NASDAQ National Market. Our stock immediately began trading on the over-the-counter electronic bulletin board sponsored by NASDAQ. The delisting of our common stock may result in limited release of the market price of the common stock and limited news coverage of our company and could restrict investors' interest in the common stock and materially adversely affect the trading market and prices for our common stock and our ability to issue additional securities or to secure additional financing. In addition, our common stock could be subject to Rule 15g-9 under the Securities Exchange act of 1934 which, among other things, requires that broker/dealers satisfy special sales practice requirements, including making individualized written suitability determinations and receiving a purchaser's written consent prior to any transaction. In such case, our common stock could also be deemed to be a "penny stock" under the Securities Enforcement and Penny Stock Reform Act of 1990, which would require additional disclosure in connection with trades in the common stock, including the delivery of a disclosure schedule explaining the nature and risks of the penny stock market. Such requirements could severely limit the liquidity of our common stock. MATTERS INVOLVING SENIOR DEBT As of June 30, 2001, we were not in compliance with the requirements under our $17 million senior credit facility with MCG Finance Corporation, under certain of the financial covenants. Although MCG recently agreed to suspend the application of certain financial covenants and to change the timing of interest payments on our debt from monthly to quarterly, they have reserved their rights 10 to exercise any lawful remedies arising from our existing defaults, including acceleration of the entire indebtedness and foreclosure on our assets. EFFECTS OF INFLATION We do not believe that inflation has had a material impact on our results of operations during the three months ended June 30, 2001. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." Statement 133 changes the previous accounting definition of "derivative" which focused on freestanding contracts like options and forwards, including futures and swaps, expanding it to include embedded derivatives and many commodity contracts. Under Statement 133, every derivative is recorded in the balance sheet as either an asset or liability measured at its fair value. Statement 133 requires that changes in the derivative fair value be recognized currently in earnings unless specified hedge accounting criteria are met. This Statement as amended by Statement 137 is effective for fiscal years beginning after June 15, 2000. Earlier application is allowed as of the beginning of any quarter beginning after issuance. Statement 133 did not have a material impact on our financial position or results of operations. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial Statements. The Company was required to adopt this accounting guidance, as amended by SAB 101A, no later than the first quarter of fiscal 2001. The company believes its existing revenue recognition policies and procedures are in compliance with SAB 101, and therefore, SAB 101s adoption did not have a material impact on the Company's financial condition, results of operations or cash flows. In July 2001, the Financial Standards Board issued Statement of Financial Accounting Standards 141, BUSINESS COMBINATIONS and Statement of Financial Accounting Standards 142, GOODWILL AND OTHER INTANGIBLE ASSETS. Statement of Financial Accounting Standards 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Statement of Financial Accounting Standards 141 also specifies the criteria that intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. Statement of Financial Accounting Standards 142 requires that goodwill and intangible assets with indefinite useful lives will no longer be amortized, but instead by tested for impairment, at least annually in accordance with the provisions of Statement of Financial Accounting Standards 142. Statement of Financial Accounting Standard 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with Statement of Financial Accounting Standards 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS TO BE DISPOSED OF. The provisions of Statement of Financial Accounting Standards 141 are effective immediately, except with regard to business combinations initiated prior to June 30, 2001. Statement of Financial Accounting Standards 142 will be effective as of January 1, 2002. Goodwill and other intangible assets determined to have an indefinite useful life that are acquired in a business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with appropriate pre-Statement of Financial Accounting Standards 142 accounting literature. Goodwill and other intangible assets acquired in business combinations completed before July 30, 2001 will continue to be amortized prior to the adoption of Statement of Financial Accounting Standards 142. The Company is currently evaluating the effect that the adoption of Statement of Financial Accounting Standards 141 and Statement of Financial Accounting Standards 142 will have on its results of operations and financial position. 11 ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK We provide Internet access and related services to individuals and small to medium sized businesses in northeastern New York state, Massachusetts and Connecticut. We are not subject to changes in foreign currency exchange rates or weak economic conditions in foreign markets. Our interest income is subject to changes in the general level of U.S. interest rates, particularly since the majority of our investments are in short-term instruments. Due to the nature of our short-term investments, we have concluded that there is no material market risk exposure. Therefore, no quantitative tabular disclosures are required. Our investment policy requires us to invest funds in excess of current operating requirements in obligations of the U.S. government and its agencies and investment grade obligations of state and local governments and U.S. corporations. 12 PART II--OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (d) Pursuant to Item 701 (f) of Regulation S-K, the following information is being furnished to disclose certain information regarding the uses of proceeds by BiznessOnline.com, Inc. in its initial public offering of common stock: (i) The Registration Statement for the initial public offering (File Number 333-73067) was declared effective on May 11, 1999. (ii) From the effective date of the initial public offering registration through June 30, 2001, the amount of net offering proceeds of $25 million used for any purpose for which at least 5% of the offering proceeds or $100,000 (whichever is less) was used is as follows: Repayment of promissory notes to the stockholders of Global 2000 Communications, Inc....................................... $ 580,000 Payment of the cash portion of the purchase price due to the four Internet service providers we acquired in May 1999.................................................. 5,730,000 Acquisition of Ascent Networking............................ 1,050,000 Acquisition of WebWay, LLC.................................. 830,000 Acquisition of Infoboard, Inc............................... 1,380,000 Acquisition of Cyberzone, LLC............................... 1,900,000 Acquisition of NECAnet, Inc................................. 1,575,000 Acquisition of Prime Communications Systems, Incorporated... 1,240,000 Repayment of indebtedness of Internet service providers..... 342,000 Purchases of capital equipment, primarily relating to our data center in Albany, NY................................. 6,747,000 Working capital............................................. 3,626,000 ----------- Total....................................................... $25,000,000 ===========

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 10.31 Form of Warrant Agreement between BiznerssOnline.com, Inc. and MCG Finance Corporation (filed as Exhibit 10.31 to the Company's Annual report on Form 10-K for the fiscal year ended December 31, 1999, as filed on March 30, 2000 and incorporated herein by reference). MCG Finance Corporation currently holds the following warrants to purchase common stock of BiznessOnline.com, Inc., all of which are in the form of Exhibit 10.31:

11 Statement re Computation of Per Share Earnings (b) Reports on Form 8-K: None 13 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: August 10, 2001 BIZNESSONLINE.COM, INC. By: /s/ DANIEL J. SULLIVAN ----------------------------------------- Daniel J. Sullivan VICE PRESIDENT AND CHIEF FINANCIAL OFFICER (AUTHORIZED OFFICER ON BEHALF OF REGISTRANT AND PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)

14 EXHIBIT INDEX

BIZNESS ONLINE COM 10-Q