10-Q 1 g65244e10-q.txt PNV INC 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [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: 000-28151 PNV INC. (Exact name of registrant as specified in its charter) DELAWARE 65-0612435 (State or other jurisdiction of (I.R.S. employer identification no.) incorporation or organization) 11711 N.W. 39TH STREET, CORAL SPRINGS, FLORIDA 33065 (Address of principal executive offices) (Zip code) (954) 745-7800 (Registrant's telephone number, including area code) 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, par value $0.001 per share, as of November 3, 2000 was 15,997,356. 2 PNV INC. FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000 TABLE OF CONTENTS

2 3 PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements PNV INC. BALANCE SHEETS (UNAUDITED)

See notes to financial statements. 3 4 PNV INC. STATEMENTS OF OPERATIONS (UNAUDITED)

See notes to financial statements 4 5 PNV INC. STATEMENTS OF CASH FLOWS (UNAUDITED)

See notes to financial statements. 5 6 PNV INC. NOTES TO CONDENSED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The interim balance sheet as of September 30, 2000, the interim statements of operations for the three months ended September 30, 1999 and 2000 and the interim statement of cash flows for the three months ended September 30, 1999 and 2000 are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been included. All adjustments made were of a normal recurring nature. Certain information and footnote disclosure normally included in the annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. PNV Inc. (the "Company") believes that the disclosures included are adequate and provide a fair presentation of interim period results. Interim financial statements are not necessarily indicative of financial position or operating results to be expected for the entire year. These interim financial statements should be read in conjunction with the audited financial statements and notes thereto, contained in the Company's Annual Report on Form 10-K for the fiscal year end June 30, 2000. 2. NATURE OF BUSINESS, GOING CONCERN AND MANAGEMENT PLANS Nature of Business. PNV Inc. (formerly Park 'N View, Inc.), a Delaware corporation, was incorporated on September 18, 1995 and provides bundled telecommunications, cable television and internet access services over its private integrated network to long-haul truck drivers at truckstops ("sites") throughout the country. The Company also provides telecommunications and internet access services to other participants in the trucking community. The Company's name was changed effective November 1999. As of September 30, 2000, the Company's private integrated network was deployed at 288 sites. In addition, as of September 30, 2000, one or more of the telecommunications services that we offer truckstop operators for the public areas inside the truckstop were available at an additional 109 sites. Going Concern. The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has experienced net operating losses since inception and as of September 30, 2000 had an accumulated deficit of $147.5 million. The Company currently anticipates that its available cash together with anticipated cash generated from operations may not be sufficient to meet its capital needs beyond February 2001. Therefore, to fund operations, the Company must obtain additional capital resources through debt and/or equity financing, the disposition of assets or otherwise in the near term. These conditions, among others, may indicate that the Company may be unable to continue as a going concern for a reasonable period of time. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern. Management of the Company is taking several actions in its attempts to alleviate this situation. Management Plans. Management believes that the Company must significantly increase users and subscribers of its services, increase revenue, reduce overall expenses and obtain additional funding in order to reach breakeven and achieve profitability. The Company's future success will depend on achieving market acceptance in sufficient numbers and at commercially viable subscription rates, the timely and cost-effective installation of the Company's system at truckstops, effectively reducing operating expenses and obtaining the financing necessary both to fund operating losses and to install its system in additional locations. The Company has recently completed work with a consulting firm to develop operating strategies for increasing users and subscribers of its services and increasing revenues; develop financial strategies for obtaining additional funding and reducing expenses; develop a long-term business and capital requirements plan; and determine the best utilization of its assets in an effort to maximize stockholder value. The long-term business plan will result in changes to the Company's operations and business model, the timing and magnitude of which are currently uncertain. The Company is endeavoring to implement new operating strategies in an effort to increase revenues. In an initial effort to reduce expenses, in October 2000, the Company cut its work force by approximately 15%. The Company is focusing on further reducing its expenses in an effort to improve its cost structure and achieve long-term profitability. The Company has determined that it will not make the interest payment of $4.9 million due November 15, 2000 on its 13% Senior Notes due 2008. If the Company fails to make this interest payment by December 15, 2000, the holders of these notes can accelerate payment in full, which the Company would be unable to make. The Company has recently retained an investment banking firm to act as its investment advisor with respect to implementing financial strategies to improve its long-term prospects and to explore all strategic alternatives in an effort to maximize stockholder value. Initially, with the assistance of its investment advisor the Company will focus on its immediate need for additional funds. There can be no assurance that the Company will be able to obtain additional funding in amounts and on terms acceptable to it. If such funding is not available or is not available on acceptable terms, the Company will be unable to meet its operating obligations which would likely require that it cease operations. The Company also intends, with the assistance of its investment advisor, to initiate discussions with holders of its 13% Senior Notes as soon as possible, in an attempt to restructure its indebtedness. The indenture governing the 13% Senior Notes substantially restricts the Company's ability to obtain additional debt financing and also places a number of additional limitations on the Company's ability to implement certain of its contemplated operational and financial strategies. The Company's failure to comply with these limitations could result in the acceleration of the maturity of these notes. 6 7 3. PROPERTY AND EQUIPMENT Property and equipment consist of the following:

Component equipment represents equipment that is awaiting installation at a site. Upon installation the cost of the related equipment is transferred to site equipment and improvements and depreciation commences once the site is operational. Component equipment is temporarily staged at the Company's warehouse until all equipment for a site is received, certain assembly operations are complete and the site is ready to accept the equipment for installation. Component equipment is reclassified to site equipment upon completion of the site on a FIFO basis for all components. Costs incurred during the development stage of the Company's website are capitalized in accordance with EITF No. 00-2 "Accounting for Website Development Costs." Such costs are amortized over three years. 4. NET LOSS PER SHARE The following is a reconciliation of the numerators and denominators used in computing basic and diluted net loss per share.

5. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101 "Revenue Recognition" which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB No. 101 is applicable beginning with the Company's fourth quarter financial statements ending June 30, 2001. Management has not determined what effect, if any, the adoption of SAB No. 101 will have on the Company's financial statements. In June 1998, the Financial accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts, and for hedging activities. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133," which postponed the adoption of SFAS No. 133. In June 2000, FASB issued SFAS No. 138 which amended SFAS 7 8 No. 133 and provided additional guidance. The Company adopted SFAS No. 133, as amended, in the first quarter of fiscal year 2001 with no significant effect to the financial statements. 6. COMMITMENTS AND CONTINGENCIES In July 1999, Robert T. and Julie McCurry filed a lawsuit in Superior Court of Shasta County, California against the Company and a truckstop chain at which the network is deployed that seeks a total of $2.0 million in actual damages resulting from an injury suffered by Mr. McCurry. The amount sought exceeds the limit of the Company's insurance policy. The Company is unaware of any issues which would result in the denial of insurance coverage. The court ordered arbitration of the lawsuit. An arbitration award has been handed down against the Company and the other defendants in the amount of $352,000. All defendants in the lawsuit, including the Company, are appealing the arbitration award. The Company currently anticipates that the lawsuit will likely be set for trial in the first quarter of 2001. The Company continues to receive claims arising from slip and fall incidents relating to its network. The Company has advised its insurance carrier of these incidents and the carrier has denied coverage or is reserving its rights to deny coverage on several of these incidents due to the Company's alleged failure to provide timely notice of such incidents. The Company's present understanding of these claims is preliminary. Due to the inherent uncertainty as to the outcome of this lawsuit or these claims or whether such claims will be covered by insurance, the Company cannot estimate the amount of loss, if any, that will result from the resolution of these matters. The Company anticipates that it will be, from time to time, subject to claims and suits for personal injury arising in the ordinary course of its business. The Company anticipates that these claims and suits, to the extent of actual damages, will generally be covered by insurance. ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward Looking Statements The following discussion of our financial condition and results of operations should be read in conjunction with our condensed financial statements and the related notes thereto included elsewhere in this report. This document contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. When used in this document, the words "expects," "anticipates," "intends" and "plans" and similar expressions are intended to identify certain of these forward-looking statements. The cautionary statements made in this document should be read as being applicable to all related forward-looking statements wherever they appear in this document. Our actual results could differ materially from those discussed in this document. Factors that could cause or contribute to such differences include those discussed below, as well as those discussed in our Form 10-K for the fiscal year ended June 30, 2000. We do not intend to update any of the forward-looking statements after the date of this filing on Form 10-Q to conform these statements to actual results. Need for Additional Capital We currently anticipate that our available cash together with anticipated cash generated from operations may not be sufficient to meet our capital needs beyond February 2001. Therefore, to fund operations, we must obtain additional capital resources through debt and/or equity financing, the disposition of assets or otherwise in the near term. As of October 31, 2000, we had approximately $18.0 million in cash and cash equivalents and accrued expenses of approximately $5.0 million. There can be no assurance that we will be able to obtain additional funds in amounts and on terms acceptable to us. If such funds are not available or are not available on acceptable terms, we will be unable to meet operating obligations which would likely require that we cease operations. If additional funds are raised through the issuance of equity securities, our stockholders will likely experience material dilution. We have recently completed work with a consulting firm to: - develop operating strategies for increasing users and subscribers of our services and increasing revenues; - develop financial strategies for obtaining additional funding and reducing expenses; - develop a long-term business and capital requirements plan; and - determine the best utilization of our assets in an effort to maximize stockholder value. The long-term business plan will result in changes to our operations and business model, the timing and magnitude of which are currently uncertain. We are endeavoring to implement new operating strategies in an effort to increase revenues. In an initial effort to reduce expenses, in October 2000, we cut our work force by 15%. We are focusing on further reducing our expenses in an effort to improve our cost structure and achieve long-term profitability. We have determined that we will not make the interest payment of $4.9 million due November 15, 2000 on our 13% Senior Notes due 2008. If we fail to make this interest payment by December 15, 2000, the holders of these notes can accelerate payment in full, which we would be unable to make. The indenture governing our 13% notes substantially restricts our ability to obtain additional debt financing and also places a number of additional limitations on our ability to 8 9 implement certain of our contemplated operational and financial strategies. Our failure to comply with these limitations could result in the acceleration of the maturity of these notes. We have recently retained an investment banking firm to act as our investment advisor with respect to implementing financial strategies to improve our long-term prospects and to explore all our strategic alternatives in an effort to maximize stockholder value. Initially, we will focus on our immediate need for additional funds. We also intend, with the assistance of our investment advisor, to initiate discussions with the holders of our 13% note, as soon as possible, in an attempt to restructure our indebtedness. Background From November 1993 to November 1995, our predecessor, Park `N View, Ltd. developed our private integrated network and installed and operated it at one truckstop as a field test. There were no revenues or significant selling expenses generated by Park `N View, Ltd. during this period. Following the formation of PNV in September 1995, and the transfer to PNV of the business and net liabilities of Park 'N View, Ltd., we began the buildout of our private integrated network utilizing principally proceeds from sales of our securities and began offering services on our private integrated network in December 1995 with the completion of our first site. As of September 30, 2000 our private integrated network was deployed at 294 truckstops and fleet terminals. In addition, as of September 30, 2000 one or more of the telecommunications services that we offer truckstop operators for the public areas inside the truckstop were available at an additional 109 truckstops. As of September 30, 2000 we also had deployed 97 prepaid phone card machines and 226 public Internet kiosks. In an effort to conserve our available cash, we have determined to significantly slow the deployment of our network and, in the three months ended September 30, 2000, deployed our network at six additional sites. Since inception, we have incurred significant losses and negative cash flow, and as of September 30, 2000, we had an accumulated deficit of $147.5 million. We issued warrants to PACCAR Inc. on November 18, 1999, the value of which we recognize as selling, general and administrative expenses. Under these warrants, if PACCAR does not purchase $1.0 million of our advertising services in each of two years following the date we issued the warrants, the warrants will terminate. As of October 31, 2000, PACCAR had purchased $0.9 million of advertising services from us. The unvested portion of the warrants will be remeasured each quarter and if different from the fair value in determining the deferred marketing expense that we recorded in the prior quarter will be reflected as an additional charge or credit to expense at that time. Accordingly, the higher our stock price is at the time of remeasurement, the more significant will be the deferred marketing expense that we will be required to record and the portion of this amount to be recognized as selling, general and administrative expenses. At the time the warrants vest, the fair value of the vested portion will be remeasured for a final time and will not continue to be remeasured in subsequent periods. The deferred marketing expense recorded for the PACCAR warrants at September 30, 2000 was approximately $30,000, which we intend to recognize over the term of the PACCAR commitment. In March 2000, we signed an agreement with America Online, Inc., or AOL, under which our content and services for the trucking and logistics industry will be available across several AOL brands for the 26-month term of the agreement. Under this agreement, we have paid AOL $4.0 million. Of the remaining $4.0 million owed to AOL, $1.0 is due in each December 2000, March 2001, June 2001 and September 2001. The entire $8.0 million amount will be amortized on a straight line basis over the 26-month term of the agreement and will be recognized as selling, general and administrative expenses. Our agreement with AOL also provides us with the use of AOL's sales and marketing resources to generate advertising revenue for our portal website. We have agreed to pay AOL a commission on any such revenue. In April 2000, we also issued to AOL a warrant to purchase 287,590 shares of our common stock at an exercise price of $6.6875 per share. This warrant became exercisable in full in May 2000. We intend to recognize the value of this warrant as selling, general and administrative expenses. The value of this warrant was determined using the Black-Scholes option pricing model to be approximately $1.2 million. We have recorded this amount as deferred marketing expense and are recognizing this expense on a straight-line basis over the 26-month term of our agreement with AOL. In September 1999, we sold 3,000,000 shares of our Series D convertible preferred stock for $10.50 per share. We determined that the purchase price was below the deemed fair market value of the Series D preferred stock for financial reporting purposes. As a result, we have recorded the deemed fair market value of the Series D preferred stock as paid-in capital and the difference between the purchase price and deemed fair market value as a dividend. In connection with the initial public offering of our common stock completed in November 1999, our outstanding convertible preferred stock automatically converted into common stock. As a result of this conversion, we recognized unamortized preferred stock issuance costs of $3.7 million as additional paid in capital. 9 10 We had approximately $112.0 million in net operating loss carryforwards at June 30, 2000 for income tax purposes. Utilization of the net operating loss carryforwards may be subject to a substantial annual limitation due to the "change in ownership" provisions of the Internal Revenue Code of 1986. The annual limitation may result in the expiration of net operating losses before utilization of the losses. Net Revenues Our net revenues are currently generated from sales to truck drivers of monthly subscriptions and daily memberships to the telecommunications, cable television and Internet access services offered through our network, as well as advertising sales, prepaid phone card operations, resale of long distance telephone minutes and usage fees from our public Internet kiosks. The following table sets forth the number of monthly and daily subscribers to our network during the last month in each of our eight most recent fiscal quarters.

We began to offer Internet access service on our network in July 1999. We initially offered this service free of charge on a promotional basis. In November 1999, we began to charge separate fees for monthly subscriptions and daily memberships to this service. We launched our portal website in October 1999 and through this portal website we provide content for the trucking community, including drivers and their families, industry suppliers and manufacturers, truckstop operators and trucking fleets. During September 2000, we had 6,150 monthly subscribers to our Internet access service, many of whom were also subscribers to our telecommunications and cable television services. Because a substantial number of our subscriptions have historically been sold through vending machines and due to the deployment of our network over a four-year period, our subscriptions have not followed the typical pattern exhibited by a mature subscriber-based business with recurring and automatically renewing subscriptions. In addition to monthly subscriptions purchased at vending machines located at truckstops where our network is deployed, our monthly subscribers consist of the following categories: - Drivers whose subscription fees are automatically charged to their credit cards or deducted from their checking accounts, until cancelled, or directly billed in advance under a program we refer to as the "power plan program;" - Fleet drivers whose subscription fees are automatically deducted from their compensation, until cancelled, under our payroll deduction program in which their fleets participate. As of September 30, 2000, 59 fleets were participating; and - Fleet drivers whose subscription fees are paid by their fleets. As of September 30, 2000, we have contracts with eight fleets under which they have agreed to pay ongoing monthly subscription fees for our services over varying periods of time. 10 11 The following table sets forth our monthly subscribers by category during the last month in each of our eight most recent quarters:

We have experienced a decrease in monthly subscribers since June 2000 principally in those under the power plan program. We attributed this unanticipated decrease to a change in our field sales incentive plan that was less focused on power plan subscribers acquisition. In September 2000, we realigned incentives in an effort to increase subscriptions under the power plan program. Prior to the commencement of our power plan program in October 1997, all of our monthly subscriptions were purchased at vending machines at truckstops at which our network was deployed. Currently, all purchases of daily subscriptions are limited to vending machines at these truckstops. We recognize revenue in the period earned. Pre-paid revenues are recorded as deferred revenue until earned. Monthly subscription fees are recorded as revenue ratably over the subscription period. During the fourth quarter of fiscal 1999, we also began to generate revenue from our prepaid phone card operations in one major truckstop chain and sales of advertising principally in Connect!. In July 1999, we began to offer Internet access service on our network free of charge on a promotional basis. In November 1999, we charged separate fees for monthly and daily subscriptions to this service. We have contracted with two truckstop chains to provide one or more of the following services: a total communications solution to truckstop owners and operators consisting of public phone and prepaid phone card operations as well as public Internet kiosks. In addition, since January 2000, we have generated revenues from sales of advertising on our portal website. Cost of Revenues Our fixed operating expenses currently consist principally of: - amortization and depreciation of the capitalized costs of our network, as well as our Internet kiosks, prepaid phone card machines and increased switching capacity to accommodate our public phone operations; - cable programming, which we purchase on a per parking stall basis; - T-1 lines, local telephone lines and routers for our frame relay, which are installed at each truckstop at which our network is deployed; - commissions paid to one truckstop chain under a contract we entered into in the first quarter of fiscal 2000; and - long distance telephone time under a contract with AT&T. Our variable operating expenses consist principally of purchases of long distance and other telephone services, repairs and maintenance of our network, commissions paid to truckstop operators under our contracts with them for services through our network, publication of our Connect! magazine, payments to the provider of certain components of our prepaid phone card 11 12 operations, development of our portal, incentive payments to one truckstop chain relating to subscription sales quotas and the starter kit equipment. We intend to implement further cost-cutting measures to improve our cost structure which will include fixed and variable expenses. Selling Expenses We market our network to drivers through a direct sales force. In October 2000, we reduced and restructured our sales force in an effort to conserve our remaining cash. We currently maintain additional sales personnel at a number of our largest truckstop locations. Our sales force also sells to fleet drivers through a fleet sales program or to the fleet driver individual through this truckstop. We also have a sales force that sells our advertising media. Selling expenses have therefore consisted principally of salaries, benefits, travel and marketing expenses. In addition, we have marketed subscriptions through point-of-sale merchandising materials and, at larger sites, through field sales representatives. In connection with our cost-cutting efforts, we are exploring alternative methods of marketing our services. We do not intend to add to our sales force in the short-term. General and Administrative Expenses We significantly increased the size of our management team during fiscal year 2000 and the number of our employees increased to 353 as of September 30, 2000 from 250 as of September 30, 1999, which resulted in an increase in general and administrative expenses. As part of our cost reduction efforts, in October 2000, we have recently reduced our work force. RESULTS OF OPERATIONS Three months ended September 30, 2000 compared to the three months ended September 30, 1999 Net Revenues. Our net revenues increased 62% to $5.5 million for the three months ended September 30, 2000 from $3.4 million for the three months ended September 30, 1999. The increase in revenues for fiscal year 2000 was primarily attributable to additional subscription revenues and revenues from prepaid phone card operations. For the three months ended June 30, 2000, our net revenues were $5.5 million. Cost of Revenues. Cost of revenues, excluding service depreciation, increased 35% to $6.6 million for three months ended September 30, 2000 from $4.9 million for the three months ended September 30, 1999. The increase in cost of revenues, excluding service depreciation, for fiscal 2000 was principally due to costs associated with the increases in the number of truckstops at which our network was deployed and in sales volume, partially offset by $.3 million in credits received from AT&T. For the three months ended June 30, 2000, cost of revenues were $8.4 million and included expenses of redoing connection points which we did in the third and fourth quarters of fiscal 2000. The number of truckstops and fleet terminals at which our network is deployed increased 24% to 294 as of September 30, 2000 from 237 sites as of September 30, 1999. We have recently slowed significantly the buildout of our network to conserve our available cash. Service costs (which includes commissions payable to truckstops, cable programming, T-1 lines, local telephone lines, long distance minutes purchased for resale, routing equipment leases, prepaid phone card operations and site repairs) increased 34% to $5.5 million for three months ended September 30, 2000 from $4.1 million for the three months ended September 30, 1999. This increase was principally due to increase in the number of truckstops at which our network is deployed, long distance telephone minutes included with subscriptions and long distance minutes included with prepaid phone cards. Service depreciation increased $.7 million to $2.2 million for the three months ended September 30, 2000 from $1.5 million for the three months ended September 30, 1999. These increases in service depreciation reflect the additional buildout of our network. 12 13 Advertising expense is principally associated with advertising revenue generated from Connect!, our monthly cable television guide and lifestyle magazine. Advertising expense increased 50% to $0.6 million for the three months ended September 30, 2000 from $0.4 million for the three months ended September 30, 1999. Gross Margin. Gross margin was a negative $3.3 million for the three months ended September 30, 2000 compared to a negative $2.9 million for the three months ended September 30, 1999. Selling Expense. Selling expense increased 72% to $5.5 million for the three months ended September 30, 2000 from $3.2 million for the three months ended September 30, 1999. The increase was primarily attributable to an increase in marketing and salaries including per diem. Marketing expense increased 217% to $2.5 million for the three months ended September 30, 2000 from $.8 million for the three month period ended September 30, 1999. Salaries increased 85% to $2.4 million for the three months ended September 30, 2000 from $1.3 million in the three months ended September 30, 1999. The increase in marketing and salary expenses reflects additional costs associated with personnel to expand our sales and marketing programs. Also categorized as marketing expense are the warrants granted to AOL and the marketing fee required under our agreement with AOL which was $1.1 million. General and Administrative Expenses. General and administrative expenses increased 75% to $6.5 million for the three months ended September 30, 2000 from $3.7 million for the three months ended September 30, 1999. The increase was primarily attributable to an increase in salaries and consulting expense as well as depreciation expense related to our portal website and the growth of our operations. Salaries and consulting expense increased 61% to $3.7 million for the three months ended September 30, 2000 from $2.3 million for the three months ended September 30, 1999. Salaries and consulting expense primarily increased due to additional personnel related to the creation and maintenance of our portal website and the development of additional service offerings and fees paid to the consulting firm with which we recently completed work on a long-term business and capital requirements plan and other strategies. Stock-Based Compensation Expense. During fiscal year 2000 and fiscal year 1999, we granted options to purchase our common stock to employees and consultants at exercise prices below the deemed fair market value of our common stock on the grant dates for financial reporting purposes. We recognized stock-based compensation expense of $1.1 million for the three months ended September 30, 2000 and $2.0 million for the three months ended September 30, 1999. During the three months ended September 30, 2000, we have not granted options at an exercise price below fair market value of our common stock on the grant dates for financial reporting purposes. Interest Expense (Income) and Other-Net. Interest expense (income) and other-net decreased to $2.0 million, for the three months ended September 30, 2000 from $2.5 million of interest income and other-net for the three months ended September 30, 1999. The changes in net interest expense compared to the three months ended September 30, 1999 is primarily attributable to the change in the three months ended September 30, 2000 interest income over those periods that was earned on cash proceeds from various equity offerings. Net Loss. Net loss increased 27% to $18.2 million for the three months ended September 30 2000 from $14.3 million for the three months ended September 30, 1999. We expect to incur significant net losses and experience substantial negative cash flows for the foreseeable future. LIQUIDITY AND CAPITAL RESOURCES We completed our initial public offering of our common stock in November 1999. The net proceeds to us from this offering after deducting underwriting discounts and commissions and other offering expenses were $57.5 million. Since our incorporation in September 1995, and prior to our initial public offering, we satisfied our cash requirements through the proceeds of sales of common stock, sales of preferred stock, certain debt securities and 13% notes which we sold together with warrants to purchase 505,375 shares of our common stock. To date, we have raised $204.0 million in debt and equity capital. At September 30, 2000, we had $23.1 million in cash and cash equivalents and short-term investments. This amount has been further reduced during the second fiscal quarter of the year ending June 30, 2001 as we have continued to fund our operating losses. Net cash used in operating activities was $12.0 million and $6.1 million for the three months ended September 30, 2000 and 1999, respectively. The $5.9 million increase in net cash used in operating activities for the three months ended 13 14 September 30, 2000 compared to the three months ended September 30, 1999 primarily resulted from an increase in the net loss of $3.9 million to $18.2 million for the three months ended September 30, 2000 compared to a net loss of $14.3 million for the three months ended September 30, 1999. For the three months ended September 30, 2000, our net loss was partially offset by an increase in non-cash expenditures for depreciation, amortization and stock option compensation expense of $1.1 million to $4.9 million for the three months ended September 30, 2000 from $3.8 million for the three months ended September 30, 1999. Net cash (used in) provided by investing activities was $10.0 million and $(19.0) million for the three months ended September 30, 2000 and for the three months ended September 30, 1999, respectively. The $29.0 million decrease in net cash used in investing activities for the three months ended September 30, 2000 compared to the three months ended September 30, 1999 resulted from the increase in net sale of short-term investments in the amount of $12.0 million for the three months ended September 30, 2000 to fund operating expenses, as well as a decrease in capital expenditures of $2.3 million to $1.5 million for the three months ended September 30, 2000 from $3.8 million for the three months ended September 30, 1999. Net cash provided by (used in) financing activities was $(.10) million and $29.3 million for the three months ended September 30, 2000 and 1999, respectively. The $29.4 million decrease in net cash provided by financing activities for the three months ended September 30, 2000 compared to the three months ended September 30, 1999 resulted primarily from our Series D Preferred Stock offering completed in September 1999. For the three months ended September 30, 2000, our working capital decreased $15.9 million. The decrease was primarily attributable to an decrease in cash and short term investments of $13.6 million to fund operating expenses. We currently estimate that our capital expenditures for fiscal year 2001 will range between $2.0 million and $2.5 million, principally for the deployment of our network and services at truckstops and equipment for internal use. Our capital commitments consist primarily of requirements under our co-marketing agreement with AOL, capital leases, commissions payable to one truckstop chain, noncancelable leases of routers for our frame relay and contracts for T-1 lines and for long distance and other telephone services. At June 30, 2000, our minimum commitments under capital leases and noncancelable operating leases with terms in excess of one year, including commitments under the contracts relating to our purchase of T-1 lines and long distance services and the routers for our frame relay, totaled $5.6 million, $5.2 million, $4.9 million and $3.4, for the four years ending June 30, 2001 through 2004, respectively. These amounts do not include our obligations to AOL. We owe AOL $4.0 million under our agreement with it, which is payable in installments of $1.0 million each in each of December 2000, March 2001, June 2001 and September 2001. If we make these payments from our remaining cash, we will further reduce the resources available for our operations. Semiannual interest payments on our 13% notes are due in May and November of each year. The 13% notes mature in May 2008. We made the first four interest payments from funds in restricted investments in an escrow account established in connection with and from the proceeds of our sale of these notes. No funds remain in this escrow account. We have recently determined that we will not make the interest payment of $4.9 million due November 15, 2000 in order to conserve our remaining cash. Our cash and short-term investments as of September 30, 2000 was approximately $23.1 million available for working capital. As of October 31, 2000, we had approximately $18.0 million in cash and short-term investments and accrued expenses of approximately $5.0 million. We currently anticipate that our available cash resources together with anticipated cash generated by operations may not be sufficient to meet our cash requirements beyond February 2001. Our financing requirements will depend on numerous factors, including principally our ability to reduce our expenditures as well as our ability to increase our revenues. With the assistance of a consulting firm, management recently completed the development of strategies for increasing users of our services, increasing revenues, obtaining additional funding and reducing expenses along with the development of a long-term comprehensive business and capital requirements plan and a study of the best utilization of our assets. The long-term 14 15 business plan will result in changes to our operations and business model, the timing and magnitude of which are currently uncertain. The indenture governing our 13% notes substantially restricts our ability to obtain additional debt financing and imposes additional restrictions on our ability to implement some of our contemplated operational and financial strategies. Furthermore, there can be no assurance that additional financing will be available when needed or that, if available, such financing will include terms favorable to our stockholders or us. If our efforts to meet our funding requirements are not successful, not completed on a timely basis as the business plan requires or falls short of our complete needs, we expect that we may experience insufficient liquidity, which will likely require us to cease our operations. RISK FACTORS WE MAY NOT BE ABLE TO CONTINUE AS A GOING CONCERN. We currently anticipate that our available cash resources will not be sufficient to meet our capital needs beyond February 2001. We have experienced net losses since inception and, as of September 30, 2000, had an accumulated deficit of $147.5 million. As a result of these losses, working capital deficiencies, our outstanding debt, our contractual commitments and other liquidity issues, there is substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to: - conserve our available cash and reduce our expenses in an effort to improve our cost structure; - obtain additional financing in the near future; and - increase our revenues. We recently completed work with a consulting firm to develop operating and financial strategies and a long-term business plan which will result in changes to our operations and business model, the timing and magnitude of which are currently uncertain. We cannot assure you that our business strategy will be successful. IF WE DO NOT SECURE ADDITIONAL FINANCING TO FUND OUR BUSINESS WE WILL LIKELY BE UNABLE TO CONTINUE OUR OPERATIONS. We have substantial near term demands on our available cash to fund operations. Our existing cash resources are limited. Therefore, we seek additional debt and/or equity financing or to otherwise raise capital, which may involve the disposition of assets. Any debt financings could result in the imposition of operational or financial restrictions and increased interest expense. Any equity financings would likely result in substantial dilution to holders of our common stock and the grant of significant control and other rights to any new investors. Any disposition of assets could result in a decrease in revenues or could otherwise adversely affect our results of operations or financial condition. There can be no assurance that we will be able to obtain needed capital in the near future on terms acceptable to us or at all. WE ARE NOT ABLE TO REPAY CERTAIN OBLIGATIONS. In May 1998, we issued 75,000 units consisting of $75.0 million in aggregate principal amount of 13% Senior Notes due 2008. Interest on these notes accrues at the rate of 13% per annum and is payable semiannually in arrears on May 15 and November 15 of each year. We made our first four scheduled interest payments from funds in an escrow account. No funds remain in this account. Due to our limited cash, we have recently determined that we will not make the interest payment of $4.9 million due November 15, 2000 on these notes. We will have a 30-day grace period following which the noteholders can declare the notes in default and accelerate the maturity of these notes which we would be unable to pay. With the assistance of the investment bank we have recently retained, we intend to initiate discussions with these noteholders as soon as possible in an 15 16 attempt to restructure our indebtedness. In March 2000, we signed a marketing agreement with America Online, Inc., or AOL. Under this agreement, we have paid AOL $4.0 million and agreed to pay an additional $4.0 million. Of the remaining $4.0 million owed to AOL, $1.0 million is due in each of December 2000, March 2001, June 2001 and September 2001. If we make these payments from our remaining cash, we will reduce the resources available for our operations. If we fail to make any scheduled payment under this agreement, AOL may terminate this contract which could harm our marketing efforts and our business. This transaction with AOL was premised on the assumption that the traffic we would obtain from this arrangement would permit us to earn revenues in excess of the payments made to AOL. This assumption has to date proved to be incorrect. WE HAVE NOT BEEN PROFITABLE AND EXPECT FUTURE LOSSES AND NEGATIVE CASH FLOW. From November 1993 to November 1995, our predecessor, Park `N View, Ltd., developed our network and installed and operated it at one truckstop as a field test. We began offering services on our network in December 1995 with the completion of our first site. We deployed our network at 14 truckstops in 1996, 59 truckstops in 1997, 113 truckstops in 1998, 71 truckstops in 1999 and 31 for the period from January 2000 to September 2000. Consequently, we have a limited operating history upon which you may evaluate us and we face all of the risks and uncertainties of early-stage companies. To date, we have not been profitable. We may never be profitable or, if we become profitable, we may be unable to sustain profitability. We have recognized limited revenues since our inception and have incurred substantial costs to build and deploy our network, offer our services and operate our business. We have incurred net losses of $147.5 million from our inception through September 30, 2000. To date, our cash flow from operations has been substantially insufficient to meet our cash requirements. MANY OF OUR COSTS ARE FIXED ON BOTH A LONG-TERM AND SHORT-TERM BASIS AND WE MAY NOT BE ABLE TO REDUCE THEM IN A TIMELY MANNER; WE HAVE PLANNED TO REDUCE OUR COSTS WHICH MAY HARM OUR ABILITY TO INCREASE OUR REVENUES. A high percentage of the costs of operating our network are fixed, including our commitments under our contract with AT&T for T-1 lines and our equipment leases with Cisco for routers. If our revenues do not increase, we may not be able to reduce our costs in a timely manner to account for any shortfall in revenues. In addition, many of our costs are based on our expectations of the future demand for our services and are relatively fixed in the short-term. We are endeavoring to reduce the costs of operating our business, including some of our fixed costs. Any such reduction could harm our ability to increase subscribers to our services and our revenues. OUR FAILURE TO INCREASE OUR REVENUES OR GENERATE REVENUE FROM NEW SOURCES WOULD PREVENT US FROM ACHIEVING AND MAINTAINING PROFITABILITY. Currently, our revenues are generated primarily from sales of subscriptions to the telecommunications and cable television services offered on our network and to a lesser extent from prepaid phone card operations and resales of long distance telephone minutes and advertising sales. Our continued ability to remain in business depends upon, among other things, our ability to increase revenues from our current sources and generate revenues from additional sources. If we are unable to increase our revenues from our current sources and generate revenue from other sources, we may be required to curtail or cease our operations. We may not be able to sustain our current revenues or successfully generate additional revenue. OUR CONTINUED NASDAQ NATIONAL MARKET LISTING IS NOT ASSURED. Our common stock is presently authorized for quotation on the Nasdaq National Market. We remain subject to all requirements of our listing agreement with Nasdaq. Among the events which could cause us to have our status as a National Market Issuer terminated are a failure to maintain a minimum bid price for our common stock of $1.00 per share. Since October 2000, our common stock has traded significantly below the minimum $1.00 bid. If the bid does not increase to at least $1.00 for 10 consecutive trading days by February 2001, this could result in our delisting or the need to effect a reverse stock split. 16 17 If we lose our Nasdaq National Market status, our common stock might trade in the over-the-counter market, which is viewed by most investors as a less desirable, less liquid marketplace. In such event, the market price of the common stock may be adversely impacted and a stockholder may find it difficult to dispose, or obtain accurate quotations as to the market value, of our common stock. LIMITATIONS IMPOSED BY RESTRICTIVE COVENANTS COULD LIMIT HOW WE CONDUCT BUSINESS AND OUR ABILITY TO GENERATE REVENUES AND PROFITS. The indenture governing our 13% notes contains covenants that restrict our ability to, among other things: - incur additional debt; - pay dividends and make other distributions; - prepay subordinated indebtedness; - repurchase capital stock; - make investments and other restricted payments; - engage in transactions with affiliates; - engage in business other than the provision of telecommunications, television, Internet and other related services to the trucking industry; - enter into sale and leaseback transactions; - create liens; - sell assets; and - engage in mergers and consolidations and certain other events which could cause an event of default. As a result of these restrictions, we are limited in how we conduct our business and in our ability to raise additional debt and to implement some of our contemplated operational and financial strategies. IF WE DO NOT RETAIN OUR CURRENT SUBSCRIBERS OR INCREASE SALES OF SUBSCRIPTIONS TO SERVICES OFFERED ON OUR NETWORK, OUR RECURRING REVENUES WILL NOT INCREASE AND OUR INCREMENTAL COSTS OF ACQUIRING AND RETAINING CUSTOMERS MAY INCREASE. Our future success depends upon our ability to significantly increase the number of subscribers to services currently offered on our network and to increase our revenues from our subscribers. The number of our total active subscribers has not increased significantly since March 2000 and increases in subscribers to date have been below expectations. Even if truck drivers initially subscribe to our network, they may not renew their subscriptions. There are many factors that could cause a subscriber to cancel an ongoing monthly subscription or fail to purchase a subscription, including dissatisfaction with our network and the services offered, or with the number and location of the truckstops at which our network is available, or truck driver turnover. Truck drivers may be unwilling to purchase a subscription to our Internet access service. Many truck drivers may not own a computer for accessing the Internet. If ongoing monthly subscriptions do not increase, our recurring revenues will not increase, our incremental costs of acquiring and retaining subscribers may increase and our business may suffer. We intend to slow significantly the buildout of our network during our fiscal year ending June 30, 2001 and deployed our network at only six additional sites in the three months ended September 30, 2000. This slowdown in our buildout schedule may negatively impact any increase in our subscribers and our revenues. 17 18 IF ELECTRONIC COMMERCE TRANSACTIONS ON OUR PORTAL WEBSITE DO NOT DEVELOP, WE MAY NOT BE ABLE TO OPERATE OUR PORTAL OR OUR BUSINESS PROFITABLY. To date, we have been unable to develop and generate any meaningful revenue from electronic commerce activities on our portal website. If we are unable to develop electronic commerce activities on our portal or if business-to-business electronic commerce within the trucking industry does not grow or grows more slowly than expected, our portal website and our business may not achieve or maintain profitability. Many truck drivers may not have a computer for accessing the Internet from their trucks which may adversely affect the growth of electronic commerce in the trucking industry and on our portal. IF THE INTERNET IS NOT ADOPTED AS AN ADVERTISING MEDIUM OR IF WE CANNOT ATTRACT ADVERTISERS, OUR ADVERTISING REVENUES WILL NOT INCREASE AS PLANNED. We began publishing Connect! in July 1999 and launched our portal in October 1999. Although we have generated revenues from sales of advertising, to date these revenues have been insufficient to cover the related costs. If we do not successfully develop content for Connect! and the portal that attracts a significant number of truck drivers and other trucking industry participants, it is unlikely that we will be able to attract sufficient advertisers to cover our costs. The growth of Internet advertising requires validation of the Internet as an effective advertising medium. This validation has yet to fully occur. Acceptance of the Internet among advertisers will also depend on growth in the commercial use of the Internet. If we do not generate advertising revenue or if widespread commercial use of the Internet does not develop, or if the Internet does not develop as an effective and measurable medium for advertising, our revenues will not increase as planned and we may not be able to operate our portal website or business profitably. IF WE DO NOT MEET OUR OBLIGATIONS UNDER CONTRACTS WITH TRUCKSTOP OPERATORS, THESE TRUCKSTOP OPERATORS MAY ENTER INTO CONTRACTS WITH OTHER PROVIDERS. Most of our current revenues are generated from our operations at truckstops. We expect that the provision of telecommunications, cable television and Internet access services through our network will continue to be a primary source of revenue for the foreseeable future. TravelCenters of America owns or operates over 150 of the truckstops that we have under contract. We also have a contract with TravelCenters of America to provide a total telecommunications system, including prepaid phone cards, public phone operations and public Internet kiosks, to approximately 120 truckstops. We have contracted with truckstop operators located throughout the United States. While most independent truckstop owners who own a single truckstop execute a standard contract, the contracts executed by truckstop chains that operate multiple truckstops vary significantly. These contracts generally provide that the truckstop chains and independent truckstop owners may terminate the contracts, and our rights under the contracts, if we fail in any material respect to perform any of our obligations under the contracts and fail to remedy the breach within 30 days after we receive notice of the breach. Any failure by us to meet our contractual obligations that results in the termination of our contracts could impair our network and the sale of services over our network. OUR CONTRACTS WITH TRUCKING ASSOCIATIONS TO INSTALL OUR NETWORK AT APPROXIMATELY 300 MEMBER TRUCKSTOPS ARE NOT LEGALLY BINDING ON THEIR MEMBERS AND MAY NOT RESULT IN THE INSTALLATION OF OUR NETWORK AT THESE TRUCKSTOPS. As of June 30, 2000, we had entered into contracts with the three largest trucking associations representing more than 300 additional independent truckstops pursuant to which these associations have agreed to permit us to offer our services to their members. These associations do not have authority to legally bind their members. Therefore, while each association has granted us the right to offer cable television and telephone services to their members, this contractual provision is not binding on any member. Prior to installation of our network at an association member's truckstop, we must enter into a contract with the association member granting us the right to install our network at the member's truckstops. Accordingly, our contracts with truckstop associations may not result in our network being installed at additional truckstop locations. In addition, we have determined to significantly slow the deployment of our network to conserve our remaining cash and did not deploy or network at any additional truckstop sites in the three months ended September 30, 2000. 18 19 OUR TELECOMMUNICATIONS AND CABLE TELEVISION SERVICES COMPETE WITH THOSE OFFERED BY MANY WELL-ESTABLISHED COMPETITIVE PROVIDERS. The market for telecommunications services, particularly long distance telecommunications services, is highly competitive. Carriers compete principally on the basis of ease of access, functionality and cost. Our telecommunications services currently compete with traditional long distance services, with public phones, cellular and other wireless telephones, calling cards, prepaid phone cards, as well as collect call and toll-free number services. We believe that drivers currently use public phones located at truckstops for a significant number of the calls they make and we may not successfully attract drivers who predominantly use these public phones. Moreover, we face particular constraints in our ability to keep our prices competitive for our prepaid phone cards. Specifically, our contractual arrangements with third parties relating to the prepaid phone cards that we offer may make it difficult or impossible for us to reduce our prices for prepaid long distance minutes to compete effectively on a profitable basis. Finally, competitive pressures on companies like ours in the long distance telecommunications sector, in particular, also seems likely to increase with the entry of one or more Regional Bell Operating Companies into their own home long distance markets, which appears imminent. Competition in the markets for cable and other video services is becoming increasingly more competitive. While our competition today largely consists of alternatives located outside the truck cab and primarily in the truckstop (e.g., community television and game rooms inside the truckstop), we believe that some professional truck drivers have purchased direct broadcast satellite dishes to receive television programming in their cabs. Cable, direct broadcast satellite, and other video service providers to such users as residential apartment buildings could seek to compete by offering cable television programming to truckstops. We may not be able to compete successfully against these providers, most of which will have access to greater resources and provide more programming than our network. Some of our competitors, including those arising from the consolidation of or strategic alliances between telecommunications and/or cable television companies are well established companies with significantly greater financial, marketing and programming resources than we have. Our failure to compete successfully with these and future competitors, including those arising from the emergence or increased utilization of new and developing technologies, could have a material adverse effect on our financial condition and results of operation. COMPETITION FOR OUR INTERNET ACCESS SERVICES IS LIKELY TO INCREASE IN THE FUTURE AND MAY PRECLUDE US FROM OFFERING THESE SERVICES ON A PROFITABLE BASIS. The market for providing Internet access is extremely competitive and highly fragmented. There are no substantial barriers to entry, and we expect that competition will continue to intensify. We may not be able to compete successfully against current or future Internet service providers, many of whom may have financial resources greater than ours. Increased competition could cause us to increase the sales and marketing expenses related to our Internet access services as well as cause our users to obtain Internet access from other sources. We may not be able to offset the effects of these increased costs through an increase in the number of subscribers to our Internet access service and we may not have the resources to continue to compete successfully as an Internet service provider. We believe that new competitors, including large computer hardware and software, media, and telecommunications companies, will continue to enter the Internet access market. As consumer awareness of the Internet grows, existing competitors are likely to further increase their emphasis on their Internet access services, resulting in even greater competition. In addition, telecommunications companies may be able to offer customers reduced communications costs in connection with these services, reducing the overall cost of their Internet access solutions and significantly increasing pricing pressures on our Internet access services. The ability of our competitors to acquire other Internet service providers, to enter into strategic alliances or joint ventures or to bundle other services and products with Internet access could also put us at a significant competitive disadvantage. We have deployed public Internet kiosks in the truckstops of two major chains. Our revenues to date have been less than anticipated. There is at least one company that has installed Internet/e-mail kiosks in a number of truckstops. COMPETITION FOR OUR CURRENT AND PLANNED INTERNET PRODUCTS AND SERVICES IS LIKELY TO INCREASE IN THE FUTURE AND MAY PREVENT US FROM ESTABLISHING CUSTOMER AND ADVERTISING BASES FROM WHICH TO GENERATE REVENUES AS PLANNED. Competition for Internet products and services and electronic commerce is intense. We expect that competition will continue to intensify. Barriers to entry are minimal, and competitors can launch new websites at a relatively low cost. Various websites currently exist that provide content and commerce solutions to the trucking community. Several of these websites have market acceptance, established customer and advertising bases and offer a greater variety of content and applications 19 20 than our portal may initially offer. Our competitors may develop new Internet products or services that are superior to, or have greater market acceptance than, our products and services. WE ARE DEPENDENT ON THIRD PARTIES FOR THE PUBLIC PHONE AND PREPAID PHONE CARD OPERATIONS WE OFFER AND, IF THESE THIRD PARTIES DISCONTINUE DOING BUSINESS WITH US, WE MAY NOT BE ABLE TO MAINTAIN THESE OPERATIONS IF WE ARE UNABLE TO FIND ADEQUATE REPLACEMENTS. We are currently dependent on third parties for the public phone and a portion of the prepaid phone card operations that we offer truckstops. We are obligated to provide public phone operations in the truckstops of one major chain. We have contracted with a third party to provide these operations and do not intend to provide this service directly. This third party's failure to provide public phone operations would result in our breach of our contract with the truckstop chain. Our system is currently unable to provide all of the components necessary for prepaid phone card operations. Although we believe that other third parties could provide these services for us or, over time, we could develop the systems so that we could provide these services, any inability to rely on third party systems without disruption prior to such development would eliminate our ability to offer prepaid phone card operations to truckstops. WE DEPEND ON THIRD PARTIES TO SUPPLY US WITH PROGRAMMING AND EQUIPMENT AND, IF THESE THIRD PARTIES DISCONTINUE DOING BUSINESS WITH US, OUR ABILITY TO PROVIDE COMPETITIVE TELECOMMUNICATIONS AND CABLE TELEVISION SERVICES MAY SUFFER IF WE ARE UNABLE TO FIND ADEQUATE REPLACEMENTS. We purchase our satellite equipment, headend equipment, telephone switching equipment, computer hardware and cable programming from outside suppliers and do not have purchase agreements with any supplier. We presently purchase our satellite equipment and computer hardware from a sole supplier and we believe that limited alternative sources for these items exist. If we were required to purchase alternative telephone switching equipment from another source, it would require the reprogramming of some of our software or if we were required to purchase any alternative equipment from another source, it could require that we modify and redesign our network in certain respects which, in each case, could result in service delays and expense to us. In addition, we purchase the cable programming offered on our network from Echostar. Although we believe that limited alternative sources for cable programming exist, utilizing an alternative source could require retrofitting certain equipment at each truckstop site and could result in an interruption in our ability to offer cable television services through our network for a limited period of time. If we are unable to obtain any of the foregoing equipment, particularly telephone switching equipment, or cable programming, our ability to buildout and operate our network and expand our business in a timely fashion could suffer. We depend on a few third-party suppliers of hardware components. Currently, we acquire routers used to provide our networking services from only one source. From time to time, we have experienced delayed delivery from some suppliers. If we are unable to develop alternative sources of supply, if required, we could experience delays and increased costs in expanding our network infrastructure. SECURITY BREACHES OF OUR NETWORK AND INAPPROPRIATE USE BY INTERNET USERS COULD DISRUPT OUR SERVICE AND PREVENT US FROM INCREASING OUR SUBSCRIBER BASE AND DISRUPT TRANSACTIONS ON OUR NETWORK. The future success of our business will depend on the security of our network and, in part, on the security of the network infrastructures of our third-party providers, over which we have no control. Despite the implementation of security measures, our infrastructure is vulnerable to computer viruses or similar disruptive problems. Computer viruses or problems caused by third parties, including the sending of excessive volumes of unsolicited bulk e-mail or "spam," could lead to interruptions, delays, or cessation in service to our subscribers. Third parties could also potentially jeopardize the security of confidential information stored in our computer systems or our subscribers' computer systems by their inappropriate use of the Internet, which could cause losses to us or our subscribers or deter persons from subscribing to our services. Inappropriate use of the Internet includes attempting to gain unauthorized access to information or systems, commonly known as "cracking" or "hacking." Although we intend to continue to implement security measures to prevent this, "hackers" have circumvented security measures adopted by others in the past, and may be able to circumvent our security measures in the future. To alleviate problems caused by computer viruses or other inappropriate uses or security breaches, we may have to interrupt, delay, or cease service to our subscribers, which could result in cancellations of subscriptions, failures to renew subscriptions or reduced sales of subscriptions. In addition, we expect that our subscribers will increasingly use the Internet for commercial transactions in the future. Any network malfunction or security breach could cause these 20 21 transactions to be delayed, not completed at all, or completed with compromised security. Subscribers or others may assert claims of liability against us as a result of any failure by us to prevent these network malfunctions and security breaches. Until more comprehensive security technologies are developed, the security and privacy concerns of existing and potential subscribers may inhibit the growth of the Internet service industry in general and our subscriber base and revenues in particular. WE MAY INCUR SUBSTANTIAL EXPENSES OR DISCONTINUE CERTAIN SERVICES IF WE ARE FOUND LIABLE FOR INFORMATION DISSEMINATED ON OUR NETWORK OR IF WE MUST IMPLEMENT MEASURES TO REDUCE OUR EXPOSURE TO THESE LIABILITIES. Since the law relating to liability of Internet service providers for information carried on or disseminated through their networks is not settled, even with the defenses available in Section 223 of the Communications Decency Act of 1996 and the recent enactment of the Digital Millennium Copyright Acts, we may be subject to such liability. A number of lawsuits have sought to impose liability for defamatory speech, indecent materials and infringement of copyrighted materials. The United States Supreme Court has let stand a lower court ruling that an Internet service provider was protected from liability for material posted on its system by a provision of the Communications Decency Act. However, the findings in that case may not apply in other circumstances. Other courts have held that online service providers and Internet service providers may be subject to damages for copying or distributing copyrighted materials. Provisions of the Communications Decency Act that imposed criminal penalties for using an interactive computer service for transmitting obscene or indecent communications have been found unconstitutional by the United States Supreme Court. However, the Child Online Protection Act requires limits on access to pornography and other material deemed "harmful to minors." This legislation imposes criminal penalties and civil liability. Numerous states have adopted or are adopting similar types of legislation. We may be subject to claims relating to content that is published on or downloaded from our site. We also could be subject to liability for content that is accessible from our website through links to other websites or that is posted by users in chat rooms or bulletin boards. Potential liability imposed on Internet service providers like us for material carried on or disseminated through our network could require us to implement measures to reduce our exposure to that liability. These measures may require us to spend substantial resources or discontinue certain service offerings. We do not have errors and omissions insurance that would cover claims relating to these risks. The imposition of liability could expose us to significant costs and cause our business to suffer. WE MUST ADAPT TO TECHNOLOGY TRENDS AND EVOLVING CUSTOMER NEEDS OR WE WILL NOT BE COMPETITIVE. The services that we offer through our network are characterized by evolving technology, changes in customer needs, rapidly growing competition and frequent new product and service introductions. Our future success will depend, in part, on our ability to: - effectively use and offer leading technologies; - continue to develop our technical expertise; - enhance our current networking services; - develop new products and services that meet changing customer needs; - advertise and market our services; and - influence and respond to emerging industry standards and other technological changes. We must accomplish these tasks in a timely and cost-effective manner. New technologies, such as broadband wireless, or industry standards may replace or provide lower cost alternatives to our existing products and services or could render our existing products and services noncompetitive and adversely affect their marketability. We also believe that our ability to compete successfully depends on the continued compatibility and interoperability of our services with products and architectures offered by other vendors. Although we intend to support emerging standards in the market for the Internet and 21 22 other network connectivity, new industry standards could emerge, and we may not be able to conform to these new standards in a timely fashion and maintain a competitive position in the market. Our pursuit of necessary technological advances and maintenance of technological compatibility may require substantial time and expense. BECAUSE WE DO NOT HAVE REMOTE BACK-UP FACILITIES, THE FAILURE OF OUR COMPUTER AND COMMUNICATIONS HARDWARE SYSTEMS COULD RESULT IN CUSTOMER DISSATISFACTION AND REDUCED USE OF OUR NETWORK. We depend on the efficient and uninterrupted operation of our computer and communications hardware systems in Coral Springs, Florida. However, we do not have remote back-up facilities for our computer systems. Interruptions could result from natural disasters, technical failures, including power loss, the failure of telecommunications equipment and systems and similar events. Any interruptions in the delivery of our services could result in customer dissatisfaction and which in turn could adversely affect usage of our network and our revenues. OUR FAILURE TO COMPLY WITH THE BURDENSOME GOVERNMENT REGULATIONS OF THE TELECOMMUNICATIONS INDUSTRY OR CHANGES IN THESE REGULATIONS COULD RESULT IN OUR INABILITY TO PROVIDE CERTAIN SERVICES AND COULD DECREASE OUR REVENUES AND INCREASE OUR COSTS. Regulation of the telecommunications industry is changing rapidly. As a provider of telecommunications services nationwide, we are subject to varying degrees of regulation in each of the jurisdictions in which we provide our services. Laws and regulations, and the interpretation of such laws and regulations, differ significantly among the jurisdictions in which we operate. These laws and regulations are, moreover, subject to changes as a result of ongoing regulatory implementation proceedings, subject to review by courts and otherwise. This is particularly true in regard to Internet services, which, while not heavily regulated at this time, are the subject of intense debate over the degree that they should be regulated in the future, if at all. There can be no assurance that future regulatory, judicial and legislative changes will not have a material adverse effect on the company, that regulators and/or third parties will not raise material issues with regard to our compliance or non-compliance with applicable regulations, and/or that we will be in compliance with all such laws and regulations at any one point in time. Regulatory considerations that affect and may limit our business include: - certification, tariffing and other market entry requirements; - requirements to obtain prior approval from or notify the FCC and state public utility commissions of certain corporate actions including transfers of control of certificated carriers, transfers of carrier assets including customer bases, carrier stock offerings, the incurrence by carriers of significant indebtedness and name changes; and - universal service and other ongoing filing and, in some cases, contribution requirements. Delay or failure in complying with applicable regulations could result in sanctions, including fines or other penalties, and our authorizations being conditioned, modified, canceled, terminated or revoked, which would limit or eliminate our ability to provide telecommunications services. Conditions, modifications, cancellations, termination or revocation could result in a significant loss of revenues and may cause our business to suffer. We may be subject to sanctions, including fines, penalties, and/or revocation of our existing authorizations for our provision of telecommunications services in certain jurisdictions prior to our having obtained necessary regulatory authorization. We may also be subject to fines or other sanctions for failure to seek prior approval, where necessary, for certain corporate actions, and/or failure to notify the FCC and/or state public utility commissions in a timely enough fashion. IF WE BECOME SUBJECT TO GOVERNMENTAL REGULATION OF CABLE TELEVISION COMPANIES, WE COULD INCUR SIGNIFICANT COSTS AND THE CONTINUED BUILDOUT OF OUR NETWORK COULD BE DELAYED. Cable television companies are subject to extensive governmental regulation. Because our cable system equipment is installed exclusively on private property, we do not believe that we are subject to such regulations. Were we to be required 22 23 to comply with such regulations, however, our business may suffer due to greatly increased expense, potential delay or prevention of the continued buildout of our network and management distraction. OUR INTERNET ACCESS SERVICE MAY BECOME REGULATED BY THE FEDERAL COMMUNICATIONS COMMISSION OR OTHER GOVERNMENT AGENCIES WHICH COULD DECREASE OUR REVENUES AND INCREASE OUR COSTS. Internet service providers are not currently regulated like telecommunications service providers by the Federal Communications Commission or any other United States governmental agency. Nevertheless, Internet-related regulatory policies are continuing to develop, primarily as determined by the industry itself, and it is possible that we could be exposed to direct governmental regulation in the future. For example, in its April 10, 1998 Report to Congress, while reaffirming that Internet service providers should be classified as "information service providers" rather than regulated "telecommunications providers" under the terms of the Telecommunications Act of 1996, the FCC stated its intention to consider whether to regulate voice and fax telephony services provided over the Internet as "telecommunications" even though Internet access itself would not be regulated. We cannot predict whether in the future the FCC will modify its current policies against regulation of Internet service providers. Moreover, a number of state commissions have initiated proceedings relating to the regulation of, and adopted laws impacting, certain Internet-related services. Others could do the same in the future. Due to the increasing popularity and use of the Internet, it is possible that additional laws and regulations may be adopted with respect to the Internet, covering issues such as content, privacy, access to some types of content by minors, pricing, bulk e-mail or "spam," encryption standards, consumer protection, electronic commerce, taxation, copyright infringement, and other intellectual property issues. Internet service providers are, of course, subject to certain regulations applicable to businesses generally. We cannot predict the impact, if any, that any future regulatory changes or developments may have on our business, financial condition, and results of operations. Changes in the regulatory environment relating to the Internet services industry, including regulatory changes that directly or indirectly affect telecommunications costs or increase the likelihood or scope of competition from regional telephone companies or others, could increase our costs and make it difficult for us to compete effectively. THE PROVISIONS OF OUR CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW THAT HINDER A CHANGE IN CONTROL COULD NEGATIVELY AFFECT OUR COMMON STOCK PRICE, DISCOURAGE BIDS FOR OUR COMPANY OR REDUCE ANY PREMIUMS THAT COULD BE PAID TO OUR STOCKHOLDERS. Provisions of our certificate of incorporation and bylaws may discourage, delay or make more difficult changes in control that are not approved by our board of directors or prevent the removal of incumbent directors. The existence of these provisions may have a negative impact on the price of the common stock and may discourage third-party bidders from making a bid for our company or may reduce any premiums paid to stockholders for their common stock. In addition, our 13% notes are redeemable on changes in our control and the removal of directors under certain circumstances, which may have a similar effect. In particular, these provisions prohibit stockholder action by written consent, require advance notice for nomination of directors and for stockholders proposals and allow only the chairman of the board or a majority of the directors to all a special stockholders' meeting. We have 8,750,000 shares of preferred stock authorized, none of which is currently designated. As a result, our board of directors may designate and issue preferred stock without stockholder approval. Furthermore, as a Delaware corporation, we are subject to Section 203 of the Delaware General Corporation Law. In general, this law prevents a person who becomes the owner of 15% or more of the corporation's outstanding voting stock from engaging in specified business combinations for three years unless specified conditions are satisfied. OUR STOCK PRICE HAS BEEN AND WILL BE VOLATILE. The stock market has experienced extreme price and volume fluctuations. The market prices of the securities of Internet-related and technology companies have been especially volatile. The trading prices of many Internet-related and technology companies' stocks have reached historical highs within the last 52 weeks and have reflected relative valuations substantially above historical levels. During the same period, these companies' market prices have also been highly volatile and have recorded lows well below their historical highs. Since our initial public offering in November 1999, we have suffered significant declines in the market price of our common stock and low trading volumes. The trading price of our common stock may continue to decline or may fluctuate in the future. In the past, companies that have experienced volatility in the 23 24 market price of their stock have been the object of securities class action litigation. If we were the object of securities class action litigation, it could result in substantial costs and a diversion of our management's attention and resources. FUTURE SALES OF OUR COMMON STOCK MAY NEGATIVELY AFFECT OUR STOCK PRICE. We have a large number of shares of common stock outstanding and available for resale beginning at various points in time in the future. The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market, or the perception that such sales could occur. These sales also might make it more difficult for us to sell equity securities in the future at a price that we think is appropriate, or at all. WE MAY NOT HAVE IDENTIFIED ALL THE RISKS AND UNCERTAINTIES THAT WE MAY FACE. The risks described in this section or elsewhere in this report are not the only ones that we may face. Although this report includes the material risks that we are aware of at this time, additional risks that are not yet identified or that we currently think are immaterial may materially adversely affect our business, results of operations and financial condition in the future. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The following discusses our exposure to market risk related to changes in interest rates, equity prices and foreign currency exchange rates. This discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results could vary materially as a result of a number of factors including those set forth in the section entitled "Risk Factors." We do not use any derivative financial instruments for hedging, speculative or trading purposes. As of September 30, 2000, we had short-term investments of approximately $22.0 million. Substantially all of the short-term investments consisted of highly liquid investments with remaining maturities at the date of purchase of less than one year. These investments are subject to interest rate risk and will decrease in value if market interest rates increase. A hypothetical increase or decrease in market interest rates by 10 percent from the September 30, 2000 rates would cause the fair value of these investments to decline by an insignificant amount. We have the ability to hold these investments until maturity and, therefore, we do not expect our operating results, cash flows or the value of these investments to be affected to any significant degree by the effect of a sudden change in market interest rates. Declines in interest rates over time will, however, reduce our interest income. We own equity investments in the amount of $4.0 million at September 30, 2000. A hypothetical 10% change in fair value of these equity securities would result in a $400,000 impact on our statement of operations. At September 30, 2000, we had fixed interest rate debt of $75.0 million. A hypothetical increase or decrease in market interest rates by 10% from the June 30, 2000 rates would not have a material impact on the fair market value of this debt. We do not hedge any interest rate exposure. All of our revenues are realized currently in U.S. dollars. In addition, we do not maintain any asset or cash account balances in currencies other than the United States dollar. Therefore, we do not believe that we currently have any significant direct foreign currency exchange rate risk. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. In July 1999, Robert T. and Julie McCurry filed a lawsuit in Superior Court of Shasta County, California against us and a truckstop chain at which our network is deployed that seeks a total of $2.0 million in actual damages resulting from an injury suffered by Mr. McCurry. The amount sought exceeds the limit of our insurance policy. We are unaware of any issues which would result in the denial of insurance coverage. The court ordered arbitration of the lawsuit. An arbitration award has been handed down against the us and the other defendants in the amount of $352,000. All defendants in the lawsuit are appealing the arbitration award. We currently anticipate that the lawsuit will likely be set for trial in the first quarter of 2001. Due to the inherent uncertainty as to the outcome of this lawsuit, we cannot estimate the amount of loss, if any, that will result from the resolution of this matter, or whether this amount will be within our liability insurance limit of $1.0 million for each truckstop at which our network is deployed. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. (c) In the three months ended June 30, 2000, we did not issue any unregistered securities. 24 25 (d) On November 30, 1999, we completed an initial public offering of our common stock. The managing underwriters in this offering were CIBC World Markets, Allen & Company Incorporated, Volpe Brown Whelan & Company and William Blair & Company. The shares of common stock sold in the offering were registered under the Securities Act of 1933, as amended, under a registration statement on Form S-1 (the "Registration Statement") (File No. 333-87343) that was declared effective by the SEC on November 23, 1999. Pursuant to the Registration Statement, 3,750,000 shares of common stock were sold at a price to the public of $17.00 per share. The aggregate offering price of the initial public offering to the public was $63.8 million. In connection with this offering, we paid an aggregate of $4.5 million in underwriting discounts to the underwriters. Additional related expenses incurred by us through March 31, 2000 were approximately $1.8 million. The net proceeds to us from the initial public offering, after deducting underwriting discounts and commissions and other offering expenses, were approximately $57.5 million. Of the net proceeds, through September 30, 2000, we have used $4.9 million to redeem our Series A preferred stock and $23.1 million for working capital and capital expenditures. Pending use, the balance of the net proceeds are invested in short-term, investment grade interest-bearing securities. Other than amounts paid in connection with the redemption of the Series A preferred stock held by entities affiliated with Patricof & Co. Ventures, Inc., with which one of our directors are affiliated and which, as of June 30, 2000 beneficially owns approximately 15% of PNV's outstanding common stock, none of the net proceeds of our initial public offering were paid directly or indirectly to any director or officer or their associates, any person owning 10% or more of any class of our equity securities of PNV, or any affiliate. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits.

(b) Reports on Form 8-K (for SEC use only). No reports on Form 8-K were filed on behalf of PNV during the three months ended September 30, 2000. 25 26 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PNV INC. /s/ ROBERT P. MAY ---------------------------------------------- Robert P. May, Chief Executive Officer and President Date: November 14, 2000 /s/ CASEY L. GUNNELL ---------------------------------------------- Casey L. Gunnell, Chief Financial Officer 26

PNV INC 10-Q