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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION    FORM 10-K [X]
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30,
2004[   ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
 TO
 Commission File Number 0-28579 NOVO NETWORKS, INC.  DELAWARE
(State or Other Jurisdiction of
Incorporation or Organization)
    
    75-2233445
(I.R.S. Employer
Identification No.)
 2311 CEDAR SPRINGS ROAD, SUITE 400
DALLAS, TEXAS 75201
(Address of Principal Executive Offices) 214.777.4100
(Registrants Telephone Number, Including Area Code) Securities Registered Pursuant to Section 12(b) of the Act:
    
    Name of Each Exchange on Which Registered:NONE
    
    NONE
 Securities Registered Pursuant to Section 12(g) of the Act:COMMON STOCK, PAR VALUE $0.00002 PER SHARE
(Title of Class) Indicate by a 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 [   ] Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the
Act). Yes [   ] No [X] The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant based on the last reported sale price on
September 24, 2004, was approximately $1,507,575. As of September 24, 2004, 52,323,701 shares of the registrants common stock, par value
$0.00002, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE PART III  Incorporated
by reference to the registrants proxy statement to be mailed or
sent to securities holders on or about October 22, 2004.




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TABLE OF CONTENTS PAGEINTRODUCTORY STATEMENTSNecessary Definitions
    
    
    3Forward-Looking Statements
    
    
    3PART IITEM 1. Business
    
    
    5ITEM 2. Properties
    
    
    11ITEM 3. Legal Proceedings
    
    
    11ITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    12PART IIITEM 5. Market for Registrants Common Equity and Related
Stockholder Matters
    
    
    13ITEM 6. Selected Financial Data
    
    
    14ITEM 7. Managements Discussion and Analysis of Financial
Condition and Results of Operation
    
    
    14ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    19ITEM 8. Financial Statements and Supplementary Data
    
    
    20ITEM 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
    
    
    20ITEM 9A. Controls and Procedures
    
    
    20ITEM 9B. Other Information
    
    
    20PART IIIITEM 10. Directors and Executive Officers of the Registrant
    
    
    20ITEM 11. Executive Compensation
    
    
    20ITEM 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters
    
    
    20ITEM 13. Certain Relationships and Related Transactions
    
    
    20ITEM 14. Principal Accountant Fees and Services
    
    
    20PART IVITEM 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K
    
    
    21SIGNATURES
    
    
    31EXHIBIT INDEX
    
    
    A-1SubsidiariesConsent of Grant Thornton LLPConsent of Grant Thornton LLPCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification Pursuant to Section 906
  2




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INTRODUCTORY STATEMENTS 
 NECESSARY DEFINITIONS Novo Networks, Inc. is a holding company incorporated under the laws of the
State of Delaware that is registered under the Securities Exchange Act of 1934.
Throughout this annual report (this Annual Report), we refer to Novo
Networks, Inc. as Novo Networks, we, us and our. All of our operating
subsidiaries (except Internet Global Services, Inc.), which previously provided
telecommunications services, have filed voluntary petitions for protection
under Chapter 11 of the United States Bankruptcy Code (as hereinafter defined).
Internet Global Services filed a voluntary petition for protection under
Chapter 7 of the United States Bankruptcy Code (as hereinafter defined). We
refer to these subsidiaries collectively as our debtor subsidiaries
throughout this Annual Report. Currently, we own a minority interest in
Paciugo Management, LLC and Ad Astra Holdings LP and related entities. These
entities own and manage a gelato manufacturing, retailing and catering business
operated under the brand name Paciugo. We refer to this interest as the
Paciugo interest throughout this Annual Report. We have been pursuing a Business Opportunity or Strategic Combination
during fiscal 2004 that would likely be conditioned upon our completion of a
Recapitalization Event (these terms are defined in the section entitled
Business  Plan of Operation). 
 FORWARD-LOOKING STATEMENTS Forward-looking statements appear throughout this Annual Report. We have
based these forward-looking statements on our current expectations and
projections about future events. The important factors listed in the section
entitled Business Considerations, as well as all other cautionary language in
this Annual Report, provide examples of risks, uncertainties and events that
may cause actual results to differ materially from the expectations described
in these forward-looking statements. Readers should be aware that the
occurrence of the events described in these considerations and elsewhere in
this Annual Report could have an adverse effect on the business, results of
operations or financial condition of the entity affected. Forward-looking statements in this Annual Report include, without limitation, the following: Statements concerning our financial condition and strategic direction:  
    
    statements regarding our ability to continue as a going concern;
    
    statements regarding our future capital requirements and our ability to satisfy our capital needs;
    
    statements regarding our ability to successfully pursue
causes of action against Qwest Communications Corporation
(Qwest);
    
    statements regarding the ability of our debtor
subsidiaries to successfully liquidate and distribute
substantially all of their assets, pursuant to the amended plan,
without causing a material adverse impact on us;
    
    statements regarding our ability to monetize our interest
in Paciugo;
    
    statements regarding the potential generation of revenue
resulting from the redeployment of our cash assets;
    
    statements regarding the redeployment of our remaining
cash assets, if any, in furtherance of a potential Business
Opportunity;
    
    statements regarding the possibility of accomplishing a
Recapitalization Event or a Strategic Combination and the
potential effects on us and on our stockholders, including,
without limitation, the possibility of significant stockholder
dilution; and
    
    statements regarding the potential liquidation of our
assets, whether in a voluntary wind down or a bankruptcy
proceeding. Statements concerning our debtor subsidiaries:  
    
    statements regarding the estimated liquidation value of assets and settlement amounts of liabilities; and 3




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
    
    statements regarding the impact of the bankruptcy proceedings on our financial condition. Statements concerning our interest in Paciugo:  
    
    statements regarding our ability to realize any benefit from our Paciugo interest;
    
    statements regarding Paciugo operations; and
    
    statements regarding our relationship with the Equity Owners of Paciugo (as hereinafter defined). Other statements:  
    
    statements that contain words like believe,
anticipate, expect and similar expressions are also used to
identify forward-looking statements. Readers should be aware that all of our forward-looking statements are subject
to a number of risks, assumptions and uncertainties, such as (and in no
particular order):  
    
    risks inherent in our ability to continue as a going
concern;
    
    risks inherent in our ability to redeploy our remaining
assets, including, without limitation, our remaining cash assets;
    
    risks associated with competition in the sector or industry that we may enter;
    
    risks associated with our ability to successfully prosecute the claims against Qwest;
    
    risks associated with our ability to monetize our interest in Paciugo;
    
    risks associated with Paciugos market position, the
industry in which Paciugo competes, Paciugos prospects for
meaningful success, Paciugos operations and our relationship with
the Equity Owners;
    
    risks associated with having no current operations or
revenue;
    
    risks that we will be unable to redeploy our remaining
cash assets, or if so deployed, risks that we will not be able to
generate positive cash flow or revenue after consummating such a
transaction sufficient to satisfy our current obligations;
    
    risks that we will be unable to obtain any necessary
approvals of our stockholders if we were to propose a
Recapitalization Event or a Strategic Combination;
    
    risks that we might not be able to locate a suitable
entity with which to engage in a Strategic Combination;
    
    risks that we might not be able to effect a
Recapitalization Event, or a Strategic Combination on terms that
were acceptable to us or would benefit our stockholders;
    
    risks that a Recapitalization Event may be entered into
upon terms and conditions that would result in a significant and
material dilution of our common and preferred stockholders;
    
    risks that a Strategic Combination may be entered into
upon terms and conditions that would result in a significant and
material dilution of our common and preferred stockholders;
    
    risks that any Strategic Combination would result in us
pursuing a new and unknown business model that may or may not
benefit our stockholders;
    
    risks that any wind down or liquidation would not result
in our stockholders receiving any recovery on or value for their
stock holdings;
    
    risks associated with preserving the net operating loss
carryforwards of our debtor subsidiaries;
    
    risks associated with uncertainties in the implementation
and substantial completion of the amended bankruptcy plan
concerning the liquidation of substantially all of the remaining
assets of our debtor subsidiaries and any resulting impact on us;
and
    
    risks associated with changes in the laws and regulations
that govern us. 4




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This list is only an example of the risks that may affect the forward-looking
statements. If any of these risks or uncertainties materialize (or if they
fail to materialize), or if the underlying assumptions are incorrect, then
actual results may differ materially from those projected in the
forward-looking statements. Additional factors that could cause actual results to differ materially from
those reflected in the forward-looking statements include, without limitation,
those discussed elsewhere in this Annual Report, particularly under the heading
Business Considerations. Readers are cautioned not to place undue reliance
on these forward-looking statements, which reflect our analysis, judgment,
belief or expectation only as of the date of this Annual Report. We undertake
no obligation to publicly revise these forward-looking statements to reflect
events or circumstances that arise after the date of this Annual Report. 
 PART I 
 ITEM 1. BUSINESS Readers of this Annual Report are cautioned that certain of the statements made
in this Section are forward-looking and, therefore, should only be read in
the context described under Introductory Statements  Forward-Looking
Statements. General We are a company that, through its operating subsidiaries, previously engaged
in the business of providing telecommunications services over a
facilities-based network until December of 2001. For further details regarding
our prior operations, see the section entitled (Business  Bankruptcy
Proceedings). Prior to September 22, 1999, we were a publicly held company
with no material operations. We were formerly known as eVentures Group, Inc.,
and prior to that, as Adina, Inc., which was incorporated in Delaware on June
24, 1987. During fiscal 2002, our principal telecommunications operating subsidiaries,
including AxisTel Communications, Inc. (AxisTel), e.Volve Technology Group,
Inc. (e.Volve) and Novo Networks Operating Corp. (NNOC) filed voluntary
petitions under Chapter 11 of Title 11 of the United States Code (the
Bankruptcy Code) as described more fully below. We will refer to the
subsidiaries that have filed for bankruptcy protection as our debtor
subsidiaries throughout this Annual Report. In December of 2002, we purchased
an ownership interest in an Italian gelato company, as described more fully
below. Due to the ongoing liquidation of substantially all of our debtor subsidiaries
assets, we currently have no operations or revenues. We are not providing any
products or services of any kind (including telecommunications services) to any
customers. On December 19, 2002, we executed a purchase agreement (the Purchase
Agreement) with Ad Astra Holdings LP, a Texas limited partnership (Ad
Astra), Paciugo Management LLC, a Texas limited liability company and the sole
general partner of Ad Astra (PMLLC), and the collective equity owners of both
Ad Astra and PMLLC, being Ugo Ginatta, Cristiana Acerbi Ginatta and Vincent
Ginatta (collectively, the Equity Owners). Pursuant to the Purchase
Agreement, we acquired a 33% membership interest in PMLLC and a 32.67% limited
partnership interest in Ad Astra, which results in our holding an aggregate
interest, including the PMLLC general partnership interest, in Ad Astra equal
to 33% (the Initial Interest), for a purchase price of $2.5 million. In addition, we hold an option, which expires on December 19, 2004, to purchase
a 17.3% membership interest in PMLLC and a 17.127% limited partnership interest
in Ad Astra (the Subsequent Interest) for $1.5 million. Together, the
Initial Interest and the Subsequent Interest would result in our holding a
50.3% membership interest in PMLLC and a 49.797% limited partnership interest
in Ad Astra, for a total aggregate interest in Ad Astra, including the PMLLC
general partner interest, of 50.3%. Collectively, Ad Astra and PMLLC, through a number of wholly owned
subsidiaries, own and manage a gelato manufacturing, retailing and catering
business operating under the brand name Paciugo. Throughout this Annual
Report, we refer collectively to Ad Astra, PMLLC, and their subsidiaries as
Paciugo. Under the terms of the Purchase Agreement, we were to provide
services to support the business operations of Paciugo, including
administrative, accounting, financial, human resources, information technology,
legal, and marketing services (the Support Services). The Support Services
expressly exclude providing certain capital expenditures as well as services
that are customarily performed by third party professionals. In exchange for
our providing the Support Services, we were entitled to receive an annual
amount equal to the 5




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greater of $250,000 or 2% of the consolidated gross revenues of Paciugo
(excluding any gross revenues shared with third parties under existing
contractual arrangements). Effective January 1, 2003, we began receiving
monthly payments from Paciugo in the amount of $20,833, with positive
cumulative differences, if any, between 2% of such gross revenues and $20,833
per month to be paid within ten days of the end of such month. During the
current fiscal year, we recorded other income of $41,666 from the provision of
the Support Services to Paciugo for July and August of 2003 as agreed upon in
the Purchase Agreement. In August of 2003, certain disagreements arose between
us and Paciugo concerning the amount of the monthly payment for July of 2003,
as well as our performance of the Support Services. As a result, Paciugo has
failed to make these payments since August of 2003. Under the terms of the Purchase Agreement, we are entitled to such
representation on the governing board of PMLLC (the Board of Managers) as is
proportionate to our ownership interests therein. Effective as of December 19,
2002, PMLLCs Board of Managers was composed of Ugo Ginatta and Cristiana
Acerbi Ginatta, as the Equity Owners designees, and Barrett N. Wissman, as our
designee. PMLLC, as the sole general partner of Ad Astra, is empowered to make
all decisions associated with Ad Astra, except for those requiring the approval
of the limited partners, as set forth in the limited partnership agreement of
Ad Astra or under applicable law, and those requiring our approval, as set
forth in the Purchase Agreement. We effectively maintain no ability to control the day-to-day affairs of
Paciugo. On August 1, 2003, Susie C. Holliday resigned from her positions as
Senior Vice President and Chief Financial Officer of Paciugo in connection with
her resignation from similar positions with us. On August 15, 2003, Patrick G.
Mackey was named Senior Vice President and Chief Financial Officer of Paciugo.
On August 25, 2003, Barrett N. Wissman resigned from the position of President
of Paciugo. In addition, during 2003, our Board of Directors became
increasingly concerned about Paciugos market position, the industry in which
Paciugo competes and Paciugos prospects for meaningful success therein.
Accordingly, during the fourth quarter of fiscal 2003, we concluded that it was
reasonably unlikely that we would exercise our option to acquire the Subsequent
Interest. Therefore, effective on October 1, 2003, Steven W. Caple and Patrick
G. Mackey resigned from their positions as Senior Vice President and General
Counsel and Senior Vice President and Chief Financial Officer, respectively, of
Paciugo. During the quarter ended December 31, 2003, we engaged in discussions with
Paciugo that resulted in our entering into a sales agreement on January 13,
2004 (the Sales Agreement) with Ad Astra, PMLLC, and the Equity Owners,
whereby we agreed, subject to customary closing conditions, to (i) sell and
transfer to Ad Astra all of our right, title and interest in Ad Astra, (ii)
sell and transfer to PMLLC all of our right, title and interest in PMLLC and
(iii) terminate our right to exercise the option to acquire the Subsequent
Interest, all in exchange for a total proposed Sales Price of $1.25 million
(the Sales Price), to be paid in cash at closing by Ad Astra and PMLLC. The
closing of the Sales Agreement was expected to take place on or about May 12,
2004, unless extended as provided for in the Sales Agreement. The closing date
was extended to July 11, 2004. Ad Astra, PMLLC and the Equity Owners breached
the Sales Agreement by not closing the Sales Agreement on or before this date.
Accordingly, we continue to own our 33% interest in Paciugo. Bankruptcy Proceedings On July 30, 2001, the debtor subsidiaries filed voluntary petitions for
protection under the Bankruptcy Code in the United States Bankruptcy Court for
the District of Delaware (the Delaware Bankruptcy Court) in order to
stabilize their operations and protect their assets while attempting to
reorganize their businesses. We have set forth below a table summarizing the current status of our wholly
owned subsidiaries. Status as of
    
    Subject toSeptember 24,
    
    Bankruptcy Plan orWholly Owned Subsidiary
    
    Date Acquired
    
    2004(1)
    
    Proceedings?Novo Networks Operating Corp.
    
    
    2/8/00
    (2)
    
    Inactive
    
    Yes, Chapter 11AxisTel Communications, Inc.
    
    
    9/22/99
    
    
    Inactive
    
    Yes, Chapter 11Novo Networks International Services, Inc.
    
    
    9/22/99
    
    
    Inactive
    
    Yes, Chapter 11Novo Networks Global Services, Inc.
    
    
    9/22/99
    
    
    Inactive
    
    Yes, Chapter 11Novo Networks Metro Services, Inc.
    
    
    9/22/99
    
    
    Inactive
    
    Yes, Chapter 11
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Status as of
    
    Subject toSeptember 24,
    
    Bankruptcy Plan orWholly Owned Subsidiary
    
    Date Acquired
    
    2004(1)
    
    Proceedings?Novo Networks Metro Services (Virginia), Inc.
    
    
    9/22/99
    
    
    Inactive
    
    NoNovo Networks Media Services, Inc.
    
    
    9/22/99
    
    
    Inactive
    
    Noe.Volve Technology Group, Inc.
    
    
    10/19/99
    
    
    Inactive
    
    Yes, Chapter 11Internet Global Services, Inc.
    
    
    3/10/00
    
    
    Inactive
    
    Yes, Chapter 7eVentures Holdings, LLC
    
    
    9/7/99
    (2)
    
    Active(3)
    
    No
   (1)
    
    Active status indicates current operations within the
respective entity. Inactive status indicates no current operations,
but may include certain activities associated with the administration
of an estate pursuant to a bankruptcy filing or plan.(2)
    
    Indicates the date of incorporation, if the entity was
organized by us.(3)
    
    This entity has no operations other than to hold certain equity
interests. As originally contemplated, the goal of the reorganization effort relating to
our debtor subsidiaries that filed voluntary petitions under Chapter 11 of the
Bankruptcy Code was to preserve the going concern value of our debtor
subsidiaries core assets and to provide distributions to their creditors.
However, based largely on the fact that our debtor subsidiaries ceased
receiving traffic from their sole remaining customer, Qwest, a determination
was made that the continued viability of the debtor subsidiaries was not
realistic. Accordingly, the bankruptcy plan was amended. The amended plan and
disclosure statement were filed with the Delaware Bankruptcy Court on December
31, 2001. The amended plan provides for a liquidation of substantially all of
the assets of our debtor subsidiaries, pursuant to Chapter 11 of the Bankruptcy
Code, instead of a reorganization, as previously planned. On January 14, 2002, the Delaware Bankruptcy Court approved the amended
disclosure statement, with certain minor modifications, and on March 1, 2002,
the Delaware Bankruptcy Court confirmed the amended plan, again with minor
modifications. On April 3, 2002, the amended plan became effective and a
liquidating trust was formed, with funding provided by us in the amount of
$200,000. Assets to be liquidated of $700,000 were transferred to the
liquidating trust during the fourth quarter of fiscal 2002. The purpose of the
liquidating trust is to collect, liquidate and distribute the remaining assets
of the debtor subsidiaries and prosecute certain causes of action against
various third parties, including, without limitation, Qwest. No assurance can
be given that the liquidating trust will be successful in liquidating
substantially all of the debtor subsidiaries assets pursuant to the amended
plan. Also, it is not possible to predict the outcome of the prosecution of
causes of action against third parties, including, without limitation, Qwest,
as described in the amended plan and disclosure statement. We previously
guaranteed certain indebtedness of one or more of the debtor subsidiaries and,
depending upon the treatment of and distributions to the holders of such
indebtedness under the amended plan, we may be liable for some or all of this
indebtedness. In connection with the bankruptcy proceedings, we initially provided our debtor
subsidiaries with approximately $1.9 million in secured debtor-in-possession
financing to fund their reorganization efforts. The credit facility made funds
available to permit the debtor subsidiaries to pay employees, vendors,
suppliers, customers and professionals consistent with the requirements of the
Bankruptcy Code. In connection with the amended plan being confirmed by the
Delaware Bankruptcy Court and becoming effective on April 3, 2002, the credit
facility was converted into a new secured note. During fiscal 2003, we
provided additional funding of $500,000 to the liquidating trust. The current
balance on the new secured note is approximately $3.3 million, which has been
fully reserved due to the uncertainty surrounding the collection of this note.
For further details regarding the funding provided to the debtor subsidiaries,
see Item 2 entitled Managements Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources. Plan of Operation Prior Plan of Operation. We expended considerable time and resources in fiscal
2004 pursuing a plan of operation focused on locating, negotiating and, if
possible, consummating a potential transaction for the redeployment of our
remaining cash 7




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assets (a Business Opportunity). Unfortunately, our efforts, with the
exception of Paciugo, did not result in such an outcome, with negotiations
ceasing prior to the actual consummation of any of the various transactions
that we have pursued to date. Revised Plan of Operation. Considering our current cash on hand and the
funding needed to satisfy our obligations for the next six months, it remains
highly unlikely that we will be able to consummate a Business Opportunity with
our remaining free cash assets and current capital structure, particularly when
such a transaction must be capable of producing positive cash flow for us in
the immediate future. We shifted our focus during our third fiscal quarter and
began to pursue a revised plan of operations because of our liquidity position,
our lack of a viable Business Opportunity, and our belief that under any
liquidation scenario our stockholders would not receive any recovery on or
value for their holdings. Given our current situation, we believe that the
most beneficial transaction for our stockholders would involve the exchange a
certain amount of our common stock for the equity of a privately held company
that values our assets and our status as a reporting company under the
Securities Exchange Act of 1934, as amended (a Strategic Combination). In
pursuing the best Strategic Combination possible, we believe that it will be
necessary to effect a Recapitalization Event. It should be noted, however,
that the pursuit of a Strategic Combination is not guaranteed to benefit us or
any specific holder of our equity securities. With our limited cash, the most
likely form of Strategic Combination would involve a substantial portion of the
consideration being paid in the form of common stock. Furthermore, a Strategic
Combination may require the approval of the holders of our common stock and
perhaps our outstanding preferred stock. We can offer no assurances that we
could obtain such stockholder approval even if we were able to locate a
suitable Strategic Combination. During the three months ended March 31, 2004, we contemplated a possible plan
of recapitalization that would have resulted in all of the holders of our
preferred stock electing to convert their shares into common stock, at a
negotiated and substantially reduced conversion price (a Recapitalization
Event). Our belief is that we would be in a better position to consummate a
Business Opportunity or a Strategic Combination if we were able to achieve such
a Recapitalization Event. Despite significant efforts, we cannot report that
we have a reasonable likelihood of completing a Business Opportunity, a
Strategic Combination or a Recapitalization Event as of the date of this Annual
Report. Even if we entered into a Strategic Combination, the consummation of such a
transaction would likely cause significant dilution in the holdings of our
existing common and possibly our preferred stockholders. If accomplishing a
Recapitalization Event is a condition to the completion of a Strategic
Combination, then the holders of our existing common stock would likely
experience significant material dilution of their holdings both at the time of
such a Recapitalization Event as well as upon the consummation of the Strategic
Combination. Similarly, our preferred stockholders, if converted as part of a
Recapitalization Event, would also experience significant material dilution of
their holdings as a result of the Strategic Combination. On June 7, 2004, we engaged Oasis Capital Partners, LLC (Oasis) to serve as
our financial consultant and advisor in the identification and implementation
of a comprehensive merger or acquisition based upon the long-term strategic
objectives as outlined above. Oasis is advising and assisting us in (i)
identifying a suitable merger or acquisition candidate, (ii) completing due
diligence, (iii) structuring and negotiating acceptable terms and (iv) closing
the transaction. While we continue to explore potential Strategic Combinations, including
ongoing discussions with entities that might be likely candidates for such a
transaction, we have not entered into any agreement or letter of intent that
involves a Strategic Combination and a possible Recapitalization Event as of
the date of this Annual Report. Unless we can achieve these objectives on or
before December 31, 2004, we will likely be required to cease operations
altogether and pursue other alternatives, such as liquidating or filing a
voluntary petition for relief under the Bankruptcy Code. Business Considerations Implementation of our plan of operation involves a number of distinct risks and
uncertainties, including, without limitation, the following: Risks Related to Our Business We may not continue as a going concern.For the year ended June 30, 2004, we
incurred a net loss of approximately $3.6 million. Further, we have no
continuing operations. These factors, among others, raise substantial doubt
about our ability to continue as a going concern, and our auditors opinion is
modified for this uncertainty. Our financial statements do not include any
adjustments that might result should we be unable to continue as a going
concern. In fact, it is unlikely that we 8




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will be able to continue as a going concern past December 31, 2004, unless we
receive the Sales Price from Paciugo or successfully realize a cash settlement
or obtain an award in connection with the Qwest arbitration or complete a
Strategic Combination. The bankruptcies of our debtor subsidiaries could negatively affect us, perhaps
materially.All of our operating subsidiaries are in the process of
liquidating their assets for the benefit of their respective creditors. We
have previously guaranteed certain indebtedness of one or more of these debtor
subsidiaries and, depending upon the treatment of and distribution to holders
of such indebtedness under the amended plan, we may be liable for some or all
of this indebtedness. Furthermore, the administration of our debtor
subsidiaries amended plan could negatively affect our relationship with our
current creditors, vendors and employees. We cannot provide any assurances
that we will not be negatively affected by the bankruptcy of our debtor
subsidiaries, including, without limitation, as it relates to the segregation
and protection of our remaining cash assets. We will be functioning as an early stage company.As previously indicated, we
have been searching for opportunities in which to deploy our remaining cash
assets. As of the date of this Annual Report, we consider it highly unlikely
that we will be able to locate, consummate and fund such a Business Opportunity
with our remaining cash resources. However, should we be able to accomplish
such a transaction, we would find ourselves in a situation where we would not
have any history upon which to base an evaluation of our business and prospects
on a going-forward basis. In this scenario, our prospects would need to be
considered in light of the many risks, uncertainties, expenses, delays and
difficulties encountered by companies adopting a new or dramatically changed
business model after the failure (for whatever reason) of a prior business
model. Some of the risks and difficulties we would expect to encounter if we
enter into a new line of business would include, without limitation, our
ability to:  
    
    create and successfully execute a revised business plan;
    
    locate, invest in and otherwise manage a commercially viable base of suitable opportunities;
    
    manage and adapt to changing operations;
    
    respond effectively to competitive developments;
    
    attract, retain and motivate qualified personnel,
including, without limitation, those with appropriate industry
experience; and
    
    overcome the impact of the failure of our previous
business model upon our current and future reputation. We have severely limited resources with which to fund a modified business plan.
Even if we are successful in identifying a suitable alternative Business
Opportunity, significant doubt exists as to whether we would possess sufficient
funds to capitalize on it. No assurances can be made that adequate levels of
financing to fund any new business venture will be available at all or on
acceptable terms. Any financing could involve the issuance of securities with
rights superior to those of our common stockholders. The issuance of additional
securities could also result in significant dilution to our existing
stockholders. We may not be able to redeploy our remaining cash assets.The time, effort and
expense associated with implementing an appropriate strategy for our remaining
cash assets cannot be predicted with any degree of accuracy. If we do not
devote adequate time to the investigation, due diligence and negotiation of
appropriate Business Opportunities or if we are precluded from doing so before
our cash assets are further depleted, we may be unable to successfully redeploy
our remaining cash assets. We can make no assurances that we will be
successful in redeploying our remaining cash assets. Further, to the extent we
are able to redeploy our remaining cash assets, we can make no assurances that
our efforts will ultimately prove successful. We will likely be unable to diversify our business risk.As of June 30, 2004,
we maintained cash and cash equivalents of approximately $1.8 million. We
currently anticipate that after paying current operating expenses for the six
months ended December 31, 2004, we will have approximately $700,000 of
remaining cash available to redeploy and to support our monthly cash
requirements. We do not believe that additional funding sources will be
available to us in the near term. Accordingly, the cash assets available for
redeployment will be severely limited. We will likely have the ability to
participate in only one Business Opportunity. A lack of diversification may
subject us to a variety of economic, competitive and regulatory risks, any or
all of which may have a substantial adverse impact on our continued viability. 9




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Our stockholders will not be afforded an opportunity to approve any possible
transaction.We do not intend to provide information to our stockholders
regarding potential Business Opportunities that we are considering. Our Board
of Directors will have the executive and voting power to unilaterally approve
all corporate actions related to the redeployment of our cash assets. As a
result, our stockholders will have no effective voice in decisions made by our
Board of Directors, except to the extent that they are asked to approve a
Strategic Combination or Recapitalization Event, and will be entirely dependent
on their judgment in the selection of an appropriate Business Opportunity and
the negotiation of the specific terms thereof. We may not realize any benefit from our interest in Paciugo.As indicated
above, we have become increasingly concerned about Paciugos market position,
the industry in which it competes and its prospects for meaningful success
therein. Depending on a variety of factors, most of which are beyond our
control, we may determine it necessary to record additional impairment charges
against our Paciugo interest in our fiscal 2005 year. It is possible that we
may need to completely write-off our interest in Paciugo. To the extent an
impairment of our Paciugo interest is necessary:  
    
    our reputation is likely to be negatively affected;
    
    we may become entangled in additional disputes or
litigation, which may demand management, financial and other
resources not available to us; and
    
    no assurances can be given that we will be able to
benefit from the Paciugo interest as originally contemplated. Equity Investments Previously, we acquired minority positions in Internet and communications
companies. As of June 30, 2004, we maintained investments in the following
companies: % Ownership *
    
    Accounting
    
    Carrying Valueas ofCompany Name
    
    Common
    
    Preferred
    
    Method
    
    June 30, 2004Paciugo Management LLC
    
    33.3%
    
    0.0%
    
    Equity
    
    $
    425,000Gemini Voice Solutions (f/k/a PhoneFree.com)
    
    17.2%
    
    31.7%
    
    Equity
    
    
    ORB Communications & Marketing, Inc.
    
    19.0%
    
    100.0%
    
    Equity
    
    
    FonBox, Inc.
    
    14.0%
    
    50.0%
    
    Equity
    
    
    Launch Center 39
    
    0.0%
    
    2.1%
    
    Cost
    
    
    Spydre Labs
    
    5.0%
    
    0.0%
    
    Cost
    
    
    $
    425,000
 * The percentage ownership reflects our ownership percentage at June 30, 2004. Currently, we have minority equity interests in Paciugo and certain development
stage Internet and communications companies. During the second quarter of
fiscal 2003, we purchased the Initial Interest in Paciugo. For further details
regarding this transaction, see the section entitled Business - General. The
Initial Interest is accounted for under the equity method. At such time, if
any, as our aggregate ownership interest in Paciugo is increased to greater
than 50% (such as the acquisition of the Subsequent Interest), we will use the
consolidation method of accounting. Companies in which we directly or
indirectly own more than 50% of the outstanding voting securities are generally
accounted for in such a way. Under consolidation, Paciugos accounts will be
reflected within our financial statements. As previously discussed, we do not
currently anticipate exercising our option to acquire the Subsequent Interest. In August of 2003, Gemini Voice obtained the approval of its stockholders to
begin the process of winding up its affairs. During fiscal 2002, an impairment
loss of $2.4 million was recorded related to our investment in ORB. On
February 14, 2003, ORB filed a voluntary petition under Chapter 7 of the
bankruptcy code. Impairment in our investments resulted from declining market
conditions, negative operating results of the investment companies, lack of
investor liquidity and other uncertainties surrounding the recoverability of
these investments. Competition We expect to encounter intense competition from other organizations that have
similar business objectives, namely the acquisition of, or participation in,
new business opportunities. In this regard, many of our potential competitors
have significant cash resources that will be available for use following the
acquisition of an initial interest. In addition, many of our potential
competitors possess more experienced management teams, business evaluation
personnel and greater technical, human and other resources than we do.
Further, some of our competitors may possess more attractive business or
industry relationships than we have. Lastly, we may encounter some resistance
from potential business partners due to our prior 10




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##### Table of Contents



business model or operating history. The inherent limitations on our
competitive position may give others an advantage in pursuing attractive
Business Opportunities. We do not have any agreements or understandings with respect to any Business
Opportunity that we currently intend to pursue. During our last fiscal year,
we discussed and conducted due diligence on a variety of Business
Opportunities. However, we later determined that these specific opportunities
were not in our best interest, and we elected not to pursue them. We can
provide no assurance that any future transaction will be completed or that, if
completed, any such transaction will prove profitable or otherwise successful.
Transactions of the type proposed involve a number of risks, including, without
limitation, the following:  
    
    the potential distraction of company management;
    
    the need for additional working capital;
    
    our ability to manage a potentially distinct different
Business Opportunity, particularly in light of our possible lack
of industry experience;
    
    the obligations associated with our debtor subsidiaries
amended plan including, without limitation, the funding of the
liquidating trust and the prosecution of claims against Qwest;
    
    the potential impairment of our reputation and
relationships; and
    
    the ability to locate, consummate, fund and integrate
suitable business opportunities while we maintain cash assets
available for redeployment and numerous other risks and
uncertainties. For further details regarding the risks associated with the types of
transactions proposed, see the section entitled Business Considerations. Employees As of June 30, 2004, we had three full-time employees. We also employ a
limited number of independent contractors and temporary employees on a periodic
basis. None of the employees are represented by a labor union. Contractual Obligations and Other Commitments As of June 30, 2004, we had the contractual obligations of $66,000 due in
fiscal 2005 for our corporate office space. 
 ITEM 2. PROPERTIES Our corporate offices are located at 2311 Cedar Springs Road, Suite 400,
Dallas, Texas, occupying approximately 3,300 square feet. Our lease expires on
April 30, 2005. 
 ITEM 3. LEGAL PROCEEDINGS As previously reported, Eos Partners, LP, Eos Partners SBIC, LP, Eos Partners
(Offshore), LP, Kuwait Fund for Arab Economic Development and TBV Holdings Ltd.
(collectively, the Plaintiffs) filed a lawsuit against us, Fred Vierra,
Barrett N. Wissman, Clark K. Hunt, Mark R. Graham, Olaf Guerrand-Hermes, Stuart
Subotnick, Jan Robert Horsfall, Stuart Chasanoff, John Stevens Robling, Jr.,
Samuel Litwin, Mitchell Arthur, BDO Seidman, LLP, Hunt Asset Management, LLC,
HW Partners, LP, HW Finance, LLC, HW Capital, LP and HW Group, LLC
(collectively, the Defendants) in the 190th Judicial District Court of Harris
County, Texas, on December 19, 2002. The lawsuit alleged breach of contract,
fraud and conspiracy in connection with the Plaintiffs purchase of certain of
our Series C Convertible Preferred Stock in December of 1999 and January of
2000. The Defendants denied the allegations and vigorously defended against
the Plaintiffs claims and sought all other appropriate relief. The Plaintiffs
claimed actual damages of approximately $17.4 million and requested additional
exemplary damages, costs of court and attorneys fees. The Defendants
submitted the claims to their insurance carriers. The district judge denied
the Plaintiffs motion to transfer the case to Dallas County and ruled that it
should instead proceed in Harris County. However, it was reassigned to the
280th Judicial District Court. The Plaintiffs and the Defendants mediated the
case on February 9, 2004, and the claims were settled at that time on terms in
which we did not expend any cash or assets. As part of the settlement, we
received all of the outstanding Series C Convertible Preferred Stock from the
holders thereof, including the Plaintiffs, without any additional
consideration, and the shares were subsequently retired. 11




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As previously reported, we, along with the liquidating trust, filed a lawsuit
on June 17, 2002, against Qwest, a former customer and vendor, and John L.
Higgins, a former employee and consultant, in the Eighth Judicial District
Court of Clark County, Nevada. The amended plan called for certain causes of
action to be pursued by the liquidating trust against various third parties,
including Qwest, in an attempt to marshal sufficient assets to make
distributions to creditors. We were a co-proponent of the amended plan and
suffered independent damages as a result of Qwests actions. Accordingly, we
and the liquidating trust asserted, among other things, the following claims
against Qwest: (i) breach of contract, (ii) conversion, (iii) misappropriation
of trade secrets, (iv) breach of a confidential relationship, (v) fraud, (vi)
breach of the covenant of good faith and fair dealing, (vii) tortious
interference with existing and prospective business relations, (viii) aiding
and abetting Mr. Higginss misconduct, (ix) civil conspiracy and (x) unjust
enrichment. The following claims also have been asserted against Mr. Higgins:
(i) breach of contract, (ii) breach of fiduciary duties, (iii) breach of a
confidential relationship, (iv) fraud, (v) aiding and abetting Qwests
misconduct, (vi) civil conspiracy and (vii) unjust enrichment. In addition to
an award of attorneys fees, we and the liquidating trust are seeking such
actual, consequential and punitive damages as may be awarded by a jury or other
trier of fact. Qwest filed a motion to stay the litigation and compel
arbitration on August 14, 2002. On March 13, 2003, a hearing was held to
determine the proper forum for the various claims. After listening to oral
arguments, the district judge granted Qwests motion. On April 2, 2003, we,
along with the liquidating trust, filed a petition with the Supreme Court of
Nevada, asking it to direct the district judge to reconsider her order. On
August 13, 2003, our petition was denied. Accordingly, an arbitrator was
appointed on December 30, 2003. He presided over a preliminary hearing on
February 4, 2004, and he originally set the matter for a final hearing on July
7, 2004. On April 22, 2004, the arbitrator granted Qwests request to postpone
the final hearing until September 27, 2004. On September 16, 2004, the
arbitrator granted Qwest an additional continuance of the final hearing until
November 1, 2004. We have previously disclosed in other reports filed with the SEC certain other
legal proceedings pending against us and our subsidiaries. Consistent with the
rules promulgated by the SEC, descriptions of these matters have not been
included in this Annual Report because they have neither been terminated nor
has there been any material developments during the fiscal year ended June 30,
2004. Readers are encouraged to refer to our prior reports for further
information concerning other legal proceedings affecting us and our
subsidiaries. We and our subsidiaries are involved in other legal proceedings from time to
time, none of which we believe, if decided adversely to us or our subsidiaries,
would have a material adverse effect on our business, financial condition or
results of operations. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 12




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PART II 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock is currently quoted on the National Association of Securities
Dealers-Over the Counter Bulletin Board (OTCBB). Our common stock has been
previously listed on the National Association of Securities Dealers Automated Quotation
System (NASDAQ) and the OTCBB as follows: From
    
    To
    
    Ticker
    
    MarketJanuary 1, 2002
    
    Present
    
    NVNW
    
    OTCBBDecember 12, 2000
    
    December 31, 2001 *
    
    NVNW
    
    NASDAQNovember 22, 2000
    
    December 11, 2000
    
    EVNT
    
    NASDAQAugust 25, 1999
    
    November 21, 2000
    
    EVNT
    
    OTCBBPrior to August 25, 1999
    
    
    
    ADII
    
    OTCBB
  *
    
    Trading was halted by NASDAQ from July 30, 2001, until December 31, 2001. The following table sets forth the high and low bid prices of our common stock
on the applicable market for the quarterly periods indicated. Such prices
reflect inter-dealer prices, without retail mark-up, markdown or commission,
and may not necessarily represent actual transactions: Quarter Ending
    
    Low
    
    HighJune 30, 2004
    
    $
    0.02
    
    
    $
    0.03March 31, 2004
    
    
    0.02
    
    
    
    0.03December 31, 2003
    
    
    0.02
    
    
    
    0.04September 30, 2003
    
    
    0.02
    
    
    
    0.04June 30, 2003
    
    
    0.03
    
    
    
    0.07March 31, 2003
    
    
    0.04
    
    
    
    0.08December 31, 2002
    
    
    0.05
    
    
    
    0.12September 30, 2002
    
    
    0.01
    
    
    
    0.25
 Our stock has experienced periods, including, without limitation, certain
extended periods, of limited or sporadic quotations. As of June 30, 2004, there were 1,212 record holders of our common stock, 18
record holders of our Series B convertible preferred stock and 2 record holders
of our Series D convertible preferred stock. Recent Sales of Unregistered Securities There were no sales of unregistered securities during our last fiscal
year. Dividend Policy The holders of our common stock are entitled to receive dividends at such time
and in such amounts as may be determined by our Board of Directors. However,
we have not paid any dividends in the past and do not intend to pay cash
dividends on our common stock for the foreseeable future. The quarterly
dividends due and payable to the holders of our Series D Preferred Stock take
precedence over any declarations or payments of any dividends or distributions
to holders of any of our other series of preferred stock or our common stock
and are accrued, in the form of additional preferred stock, on a quarterly
basis in arrears. 13




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ITEM 6. SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with
Managements Discussion and Analysis of Financial Condition and Results of
Operations and the Consolidated Financial Statements and Notes thereto
included elsewhere in this Annual Report. Fiscal Year Ended June 30,2004
    
    2003
    
    2002Revenues
    
    $
    
    
    
    $
    
    
    
    $
    10,486,982Operating expenses:Direct costs
    
    
    
    
    
    
    
    
    
    
    14,614,766Selling, general and administrative expenses
    
    
    2,153,187
    
    
    
    3,205,607
    
    
    
    14,750,870Impairment loss
    
    
    1,582,801
    
    
    
    
    
    
    
    2,400,543Depreciation and amortization
    
    
    125,036
    
    
    
    149,567
    
    
    
    1,370,9583,861,024
    
    
    
    3,355,174
    
    
    
    33,137,137Loss from operations, before
other (income) expense
    
    
    (3,861,024
    )
    
    
    (3,355,174
    )
    
    
    (22,650,155
    )Other (income) expenseInterest income
    
    
    (23,368
    )
    
    
    (109,571
    )
    
    
    (397,370
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    466,965Loss in equity investments
    
    
    247,722
    
    
    
    509,228
    
    
    
    1,720,000Foreign currency loss
    
    
    
    
    
    
    
    
    
    
    98,135Net gain on liquidation of debtor subsidiaries
    
    
    (313,500
    )
    
    
    (900,500
    )
    
    
    (16,074,355
    )Other (income) expense
    
    
    (138,894
    )
    
    
    (62,563
    )
    
    
    (668,993
    )(228,040
    )
    
    
    (563,406
    )
    
    
    (14,855,618
    )Net loss
    
    
    (3,632,984
    )
    
    
    (2,791,768
    )
    
    
    (7,794,537
    )Series D preferred dividends
    
    
    (709,011
    )
    
    
    (653,175
    )
    
    
    (603,432
    )Net loss allocable to common shareholders
    
    $
    (4,341,995
    )
    
    $
    (3,444,943
    )
    
    $
    (8,397,969
    )Net loss per share - (basic and diluted)
    
    $
    (0.08
    )
    
    $
    (0.07
    )
    
    $
    (0.16
    )Weighted average number of shares outstanding - (basic and diluted)
    
    
    52,323,701
    
    
    
    52,323,701
    
    
    
    52,323,701
 
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS The following discussion should be read in conjunction with the consolidated
financial statements and the notes found on pages F-1 to F-33 of this Annual
Report. Operations Summary For the year ended June 30, 2004, we effectively had no operations, no sources
of revenue and no profits, and we do not anticipate being in a position to
resume operations until such time, if any, as we consummate a Business
Opportunity or Strategic Combination. We cannot predict when or if we will be
successful in such a new business venture or other potential Business
Opportunities that we may consider, if any. 14




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During fiscal 2004, we received $41,666 from Paciugo for the provision of
Support Services. For further details regarding the Support Services, see Item
1 entitled Business  General, above. During fiscal 2002, revenues were
generated from operations of two of our debtor subsidiaries: AxisTel and
e.Volve. e.Volves only significant customer was Qwest, which accounted for
approximately 70% of consolidated revenues for the year ended June 30, 2002.
Subsequent to December 31, 2001, AxisTel and e.Volve ceased all operations, and
as part of our debtor subsidiaries amended plan, substantially all of the
assets associated with such services were liquidated. We currently anticipate that we will not have any revenue from
telecommunications or any other services unless or until we are able to
redeploy our remaining cash assets in a Business Opportunity or Strategic
Combination. Basis of Presentation The accompanying consolidated financial statements for the year ended June 30,
2004, include our accounts and the accounts of our subsidiaries not in
liquidation. The debtor subsidiaries assets and liabilities were
deconsolidated effective June 30, 2002. For us and our subsidiaries not involved in the bankruptcy plan administration
process, the financial statements, consisting primarily of cash, investments
and office equipment, have been prepared in accordance with generally accepted
accounting principles. The assets and liabilities of our debtor subsidiaries
have been deconsolidated, as the liquidating trust controls the assets of these
entities. During the year ended June 30, 2002, all of the revenues and direct
costs reflected in our consolidated financial statements resulted from the
operations of e.Volve and AxisTel. Revenues.Historically, we derived substantially all of our consolidated
revenues from the sale of telecommunications services of AxisTel and e.Volve.
We do not expect to generate any revenues from operations until such time, if
any, we successfully redeploy some or all of our remaining cash assets in a
Business Opportunity or Strategic Combination, if at all. Direct Costs. Historically, direct costs included per minute termination
charges, lease payments and fees for fiber optic cable. Selling, General and Administrative Expenses. These expenses include general
corporate expenses, management salaries, professional fees, travel expenses,
benefits, rent and administrative expenses. Currently, we maintain our
corporate headquarters in Dallas, Texas. We provided administrative services
to our debtor subsidiaries on an hourly basis pursuant to an administrative
services agreement with the liquidating trust approved by the Delaware
Bankruptcy Court. As of June 30, 2004, we had an outstanding receivable from
the debtor subsidiaries relating to the provision of such administrative
services of approximately $653,000 that is fully reserved in our financial
statements due to the uncertainty surrounding the collection
of the receivable. Under the terms of the administrative services agreement,
any payments to us are deferred until such time that the trustee receives any
funds from the positive outcome of the Qwest arbitration. Depreciation and Amortization. Depreciation and amortization represents the
depreciation of property and equipment and amortization of leasehold
improvements. Due to significant impairment losses recorded during fiscal
years 2002 and 2001, and the deconsolidation of our debtor subsidiaries, our
depreciation and amortization costs have decreased significantly, and we do not
expect these costs to increase in the near term. Loss in equity investments. Loss in equity investments results from our
minority ownership interests in various subsidiaries that are accounted for
under the equity method of accounting. Under the equity method, our
proportionate share of each subsidiarys operating loss is included in equity
in loss of investments. In December of 2002, we purchased the Initial Interest
in Paciugo. For further details regarding Paciugo, see Item 1 entitled
Business - General, above. The value of our outstanding equity interests,
other than Paciugo, have been reduced to zero either by recording our
proportionate share of prior period losses incurred by each subsidiary to the
cost of that interest or from impairment losses. As mentioned previously, our
minority interests, other than Paciugo, are either winding up their affairs or
liquidating. We do not expect to record future charges related to those
losses, as the interests have no carrying value. We expect Paciugo to continue
in the near future to incur operating losses and will continue to record our
proportionate share of those operating losses. On February 14, 2003, ORB filed
for protection under Chapter 7 of the Bankruptcy Code, and in August of 2003,
Gemini Voice obtained the approval of its stockholders to begin the process of
winding up its affairs. Net Gain on Liquidation of Debtor Subsidiaries. Net gain on liquidation of
debtor subsidiaries results from liquidation accounting for our debtor
subsidiaries, which are involved in the bankruptcy plan administration process.
All debtor 15




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subsidiary assets were stated at estimated realizable values.
Similarly, liabilities were reflected at estimated settlement amounts, subject
to the approval of the Delaware Bankruptcy Court, with those liabilities
secured by specific assets being offset against such assets, as allowed. The
estimated realizable values and settlement amounts may be different from the
proceeds ultimately received or payments ultimately made. Other Income. Other income results from the Support Services we provided to
Paciugo, pursuant to the Purchase Agreement. There can be no assurances as to
the continuation of these payments, as Paciugo has not made the payment due
since September of 2003 due to disagreements between us and Paciugo regarding
the Support Services. For further details regarding the payments, see Item 1
entitled Business  General, above. Other income also results from the
administrative services we provided to our debtor subsidiaries pursuant to an
administrative services agreement approved by the Delaware Bankruptcy Court.
The administrative services agreement with our debtor subsidiaries initially
dictated that our debtor subsidiaries pay us $30,000 per week for legal,
accounting, human resources and other services. The original agreement expired
on April 2, 2002, and an interim agreement was reached whereby, the liquidating
trust, as successor-in-interest to our debtor subsidiaries, paid us $40,000 per
month for some of the same services. The interim agreement expired on August
15, 2002. During the fourth quarter of fiscal 2003, we negotiated an on-going
agreement with the liquidating trust, whereby we provide administrative
services to our debtor subsidiaries on a per hour basis. Due to the
uncertainty surrounding the collection of this receivable, it has been fully
reserved in our financial statements. FISCAL YEAR ENDED JUNE 30, 2004 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2003 Revenues. No revenues were generated during fiscal 2004 and 2003. We do not expect to generate any revenues from operations until such time, if
any, we successfully redeploy some or all of our remaining cash assets in a
Business Opportunity or Strategic Combination, if at all. No assurances can be
given that we will generate revenues from operations in the future. Direct Costs. No direct costs were incurred during fiscal 2004 and 2003, as we
currently have no operations. Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased approximately 31% or $1.0 million during
fiscal 2004 to $2.2 million from $3.2 million in fiscal 2003. The decrease in
selling, general and administrative expenses during fiscal 2004 resulted
primarily from (i) downsizing of the workforce, (ii) the termination of
operations as a result of the various bankruptcy proceedings, (iii) the
reduction in professional fees relating to the bankruptcy plan administrative
process and (iv) an overall reduction of overhead related to office rent,
telephone, office expenses and travel and entertainment. Selling, general and administrative expenses for the fiscal year ended June 30,
2004, consisted primarily of approximately (i) $532,000 of salaries and
benefits, (ii) $680,000 of legal and professional fees, (iii) $589,000 of
business insurance and (iv) $352,000 of other operating expenses. Selling,
general and administrative expenses for the fiscal year ended June 30, 2003,
consisted primarily of approximately (i) $972,000 of salaries and benefits,
(ii) $756,000 of legal and professional fees, (iii) $510,000 of bad debt
expense, (iv) $106,000 of office rent, (v) $586,000 of business insurance and
(vi) $244,000 of other operating expenses. We anticipate that selling, general
and administrative expenses will remain relatively constant as (i) we currently
have no operations, (ii) we completed personnel reductions and (iii) we
continue to work toward the conclusion of the various bankruptcy proceedings.
We expect our selling, general and administrative expense to continue to be
approximately $125,000 per month until such time, if any, as we choose to
redeploy our remaining cash assets. Impairment Loss. We recorded an impairment loss of $1.6 million in fiscal 2004
on our Paciugo interest as compared to none during fiscal 2003. Initially, we
impaired our interest in Paciugo during the second quarter of fiscal 2004 by
$758,000 to decrease our carrying value to the Sales Price in the Sales
Agreement, see Item 1 entitled Business  General. We further impaired our
interest by another $825,000 in the fourth quarter of fiscal 2004 to an amount
equal to our portion of the net book value of Paciugo when we determined that
the Sales Price in the Sales Agreement would not be received. Depreciation and Amortization. Depreciation recorded on fixed assets during
fiscal 2004, totaled approximately $125,000, as compared to approximately
$150,000 for fiscal 2003. We expect our depreciation expense to remain
relatively constant until such time, if any, as we choose to redeploy our
remaining cash assets. 16




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##### Table of Contents



Interest Income.We recorded interest income from cash investments of $23,000,
as compared to approximately $110,000 for fiscal 2003. The decrease in
interest income is due to decreased cash balances. Equity in Loss of Investments. Loss in equity investments results from our
minority ownership interests in various subsidiaries that are accounted for
under the equity method of accounting. Under the equity method, our
proportionate share of each subsidiarys operating loss is included in equity
in loss of investments. In December of 2002, we purchased the Initial Interest
in Paciugo. For further details regarding Paciugo, see Item 1 entitled
Business - General, above. The value of our outstanding equity interests,
other than Paciugo, have been reduced to zero either by recording our
proportionate share of prior period losses incurred by each subsidiary to the
cost of that interest or from impairment losses. As mentioned previously, our
minority interests, other than Paciugo, are either winding up their affairs or
liquidating. We do not expect to record future charges related to those losses,
as the interests have no carrying value. We expect Paciugo to continue in the
near future to incur operating losses and will record our proportionate share
of those operating losses. Net Gain on Liquidation of Debtor Subsidiaries. During fiscal 2004, we
recorded a net gain on liquidation of debtor subsidiaries of approximately
$314,000 as compared to $901,000 in fiscal 2003, both related to a reduction of
estimated liquidation costs for the debtor subsidiaries. Other (income) expense.During fiscal 2004, we recorded other income of
approximately $139,000 compared to other income, net of other expense of
approximately $63,000 in fiscal 2003. Other income for fiscal 2004, consisted
primarily of monthly payments of $20,833 from Paciugo for the provision of the
Support Services for July and August of 2003 and the elimination of an accrual
for certain state franchise taxes. Other income for fiscal 2003 consists of
payments of $20,833 per months beginning in January of 2003 from Paciugo less
state franchise tax accruals. However, there can be no assurances as to the
continuation of these payments, as Paciugo has not made the payment due since
September of 2003 due to disagreements between us and Paciugo regarding these
monthly payments see Item 1 entitled Business  General, above. FISCAL YEAR ENDED JUNE 30, 2003 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2002 Revenues. Revenues in fiscal 2003 were zero, or a 100% decrease from $10.5
million in fiscal 2002. No revenue was generated for the fiscal 2003 because
of (i) the termination of operations of our debtor subsidiaries, which
historically provided all significant revenues for us through December 2001 and
(ii) uncertainty surrounding our plans to explore other opportunities. Prior to
the elimination of our operations, fiscal 2002 revenues were generated through
the sale of: (i) 97% voice services and (ii) 3% broadband services. During fiscal 2002, our subsidiaries transmitted approximately 134 million
minutes. The average revenue per minute was approximately $0.08. Direct Costs. Direct costs were zero in fiscal 2003 as compared to $14.6
million during fiscal 2002. The decrease resulted from ceasing operations
during fiscal 2002. As a percentage of revenues, direct costs during fiscal
2002 were 139%. Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased 78% or $11.6 million during fiscal 2003 to
$3.2 million from $14.8 million in fiscal 2002. The decrease in selling,
general and administrative expenses during fiscal 2003 resulted primarily from
(i) downsizing of the workforce, (ii) closing facilities, (iii) termination of
operations as a result of the various bankruptcy proceedings and (iv) a
decrease in professional fees. Impairment Loss. We recorded no impairment loss in fiscal 2003 as compared to
$2.4 million during fiscal 2002. During fiscal 2002, we completely impaired
our investment in ORB due to a negative liquidation analysis. Depreciation and Amortization. Depreciation recorded on fixed assets during
the fiscal 2003 totaled $150,000 compared to $1.4 million in fiscal 2002.
Reduced depreciation expense during fiscal 2003 is the result of liquidation
accounting for our debtor subsidiaries during fiscal 2002, where the assets of
the debtor subsidiaries were impaired and subsequently written off. Interest Income and Expense.We recorded interest income of approximately
$110,000 in fiscal 2003 compared to interest income of approximately $397,000
in fiscal 2002. The decrease in interest income is due to lower cash balances
during fiscal 2003. We recorded no interest expense in fiscal 2003 as compared
to $467,000 in fiscal 2002. The lower interest expense is the result of
liquidation accounting for our debtor subsidiaries during fiscal 2002. 17




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##### Table of Contents



Loss in Equity Investments. Equity in loss of investments resulted from our
minority ownership in certain investments that are accounted for under the
equity method of accounting. Under the equity method, our proportionate share
of each investments operating losses is included in equity in loss of
investments. Equity in loss of investments was $509,000 in fiscal 2003 and
$1.7 million during fiscal 2002. The fiscal 2003 loss is associated with our
interest in Paciugo for the six months ended June 30, 2003, and our fiscal 2002
loss primarily resulted from our 22% equity interest in Gemini Voice. We
anticipate that our investment in Paciugo that is accounted for under the
equity method will continue to recognize operating losses, which will result in
future charges to earnings as we record our proportionate share of such losses. Net Gain on Liquidation of Debtor Subsidiaries. In fiscal 2003, we recorded a
gain on liquidation of debtor subsidiaries of $901,000 related to an adjustment
to an accrual that had previously estimated the costs of the liquidating trust.
During fiscal 2002, we recorded a net gain on liquidation of debtor
subsidiaries of $16.1 million related to (i) a write down of long-lived assets
of $8.1 million, (ii) an accrual estimate of $500,000 for the costs of
liquidating substantially all of the assets of the debtor subsidiaries, (iii)
$1.5 million in cash expenditures to settle administrative claims associated
with the bankruptcy, (iv) a gain on the write off of capital lease obligations
of $7.7 million, (v) a gain on the write off of debtor subsidiary net
liabilities of $17.8 million under liquidation accounting and (vi) a gain of
$700,000 from the deconsolidation of the debtor subsidiaries net liabilities. Other (income) expense.In fiscal 2003, we recorded other income of $62,500
related to payments from Paciugo of $20,833 per month, beginning in January of
2003, less state franchise tax accruals. During fiscal 2002, we recorded other
income, net of other expense of approximately $669,000. The net gain recorded
in fiscal 2002 is related to a $378,000 gain on the receipt of liquidation
investment proceeds from Launch Center 39, an investment written off in the
prior fiscal year, and a $263,000 net gain on the sale of our indirect
non-debtor subsidiary, e.Volve de Mexico. LIQUIDITY AND CAPITAL RESOURCES At June 30, 2004, we had consolidated current assets of $2.1 million,
including, without limitation, cash and cash equivalents of approximately $1.8
million and net working capital of $1.9 million. Historically, we have funded
our subsidiaries operations primarily through the proceeds of private
placements of our common and preferred stock and borrowings under loan and
capital lease agreements. We do not currently believe that either of these
funding sources will be available in the near term. Principal uses of cash
have been to fund (i) operating losses, (ii) acquisitions and strategic
business opportunities, (iii) working capital requirements, (iv) expenses
related to the bankruptcy plan administration process and (v) the Qwest
arbitration. Due to our financial performance, the lack of stability in the
capital markets and the economys downturn, our only current source of funding
is expected to be cash on hand. Effectively, our only ability to satisfy our current obligations is our cash on
hand. Our current obligations include funding our working capital, and the
Qwest arbitration. We estimate that it will take approximately $1.0 million of
our remaining cash to satisfy these obligations for the next six months. This
would leave us with approximately $700,000 of cash available
for use in any potential transaction for the redeployment of our remaining cash
assets in a Business Opportunity or Strategic Combination. In the event we
expend all of our $700,000 on a Business Opportunity or Strategic Combination
and achieve no return or cash flow from that transaction before December 31,
2004, or if we incur other unanticipated expenses for operations, we would
likely be required to cease operations altogether and pursue other
alternatives, such as liquidating or filing a voluntary petition for relief
under the Bankruptcy Code. We believe that under any liquidation scenario, our
stockholders would not receive any recovery on or value for their holdings. We currently anticipate that we will not generate any revenue from operations
in the near term based on (i) the termination of the operations of our debtor
subsidiaries, which have historically provided all of our significant revenues
on a consolidated basis and (ii) the uncertainties surrounding other potential
Business Opportunities that we may consider, if any. As noted above, we do not believe that any of the traditional funding sources
will be available to us and that our only option will likely be cash on hand.
Consequently, our failure to identify potential Business Opportunities, if any,
will jeopardize our ability to continue as a going concern. Due to these
factors, we are unable to determine whether current available financing will be
sufficient to meet the funding requirements of (i) our debtor subsidiaries
bankruptcy plan administration process, (ii) the Qwest arbitration and (iii)
our ongoing general and administrative expenses. No assurances can be given
that adequate levels of financing will be available to us on acceptable terms,
if at all. The net cash provided by or used in operating, investing and financing
activities for the years ended June 30, 2004, 2003 and 2002, respectively, is
summarized below: 18




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##### Table of Contents



Cash used in operating activities in fiscal 2004 totaled approximately $2.2
million as compared to approximately $3.5 million in fiscal 2003 and $6.2
million in fiscal 2002. During fiscal 2004, cash flow used by operating
activities primarily resulted from operating losses, net of non-cash charges,
totaling approximately $2.0 million, and a decrease of $144,000 in prepaid
expenses. In fiscal 2003, cash flow used by operating activities resulted from
operating losses, net of non-cash charges, totaling $2.5 million, an increase
in a note receivable and other receivables for funding the debtor subsidiaries
bankruptcy proceedings of $510,000 and the reductions in accrued expenses of
$445,000. During fiscal 2002, cash flow used by operating activities primarily
resulted from operating losses, net of non-cash charges, totaling $10.9
million, an decrease in accounts receivable of $3.6 million, increase in
prepaid expenses of $318,000, decrease in restricted cash of $186,000, a net
increase in accounts payable and accrued liabilities of $8.3 million. Net cash used in investing activities in fiscal 2004 was zero. Net cash used
in investing activities was approximately $2.5 million in fiscal year 2003.
Net cash provided by investing activities was approximately $471,000 in fiscal
2002. Cash flows used in investing activities in fiscal 2003 consisted
primarily of our acquisition of the Initial Interest in Paciugo. Investing
activities in fiscal 2002 consisted primarily of a distribution from an
investment of approximately $391,000. Cash flows from financing activities were zero in fiscal 2004 and fiscal 2003.
Cash flows used by financing activities totaled $1.1 million in fiscal 2002 and
consisted of capital lease payments. Ability to Continue as a Going Concern The accompanying consolidated financial statements have been prepared assuming
that we will continue as a going concern. They do not include any adjustments
that might result should we be unable to continue as a going concern, and no
assurances can be given that we will continue as a going concern. In fact, it
is unlikely that we will be able to continue as a going concern past December
31, 2004, unless we receive the Sales Price from Paciugo or successfully
realize a cash settlement or obtain an award in connection with the Qwest
arbitration or complete a Strategic Combination. Our independent accountants have included an explanatory paragraph in their
report on our financial statements for the year ended June 30, 2004, which
states that although our financial statements have been prepared assuming that
we will continue as a going concern, substantial doubt exists as to our ability
to do so. CRITICAL ACCOUNTING STANDARDS Basis of Presentation The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. The
consolidated financial statements include our accounts and those of our wholly
owned subsidiaries. The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America. At
June 30, 2002, the assets and liabilities of the debtor subsidiaries were
deconsolidated, as the liquidating trust controls their assets. EFFECTS OF INFLATION We do not believe that the businesses of our subsidiaries are impacted by
inflation to a significantly different extent than is the general economy.
However, there can be no assurances that inflation will not have a material
effect on operations in the future. 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK We are exposed to the impact of interest rates and other risks. We have
investments in money market funds of approximately $1.8 million at June 30,
2004. We believe that the effects of changes in interest rates are limited and
would not materially affect profitability. 19




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##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Please refer to pages F-1 to F-33. 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE None 
 ITEM 9A. CONTROLS AND PROCEDURES We have evaluated the effectiveness of the design and operation of our
disclosure controls and procedures. Based on that evaluation, our principal
executive officer and principal financial and accounting officer have concluded
that our disclosure controls and procedures were effective as of June 30, 2004,
to ensure that information required to be disclosed by us in reports that we
file or submit under the Securities Exchange Act of 1934 was recorded,
processed, summarized and reported within the time periods specified in the
SECs rules and forms. There were no changes in our internal controls over financial reporting during
our fiscal fourth quarter ended June 30, 2004, that have materially affected,
or are reasonably likely to materially affect, our internal controls over
financial reporting. 
 ITEM 9B. OTHER INFORMATION None 
 PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information called for by Item 10 will be set forth under the caption Election
of Directors in our 2004 Proxy Statement, which will be filed not later than
120 days after the end of our fiscal year ended June 30, 2004, and which is
incorporated herein by this reference. 
 ITEM 11. EXECUTIVE COMPENSATION Information called for by Item 11 will be set forth under the caption
Executive Compensation and Other Matters in our 2004 Proxy Statement, which
will be filed not later than 120 days after the end of our fiscal year ended
June 30, 2004, and which is incorporated herein by this reference. 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS Information called for by Item 12 will be set forth under the caption Security
Ownership of Directors, Management and Principal Stockholders in our 2004
Proxy Statement, which will be filed not later than 120 days after the end of
our fiscal year ended June 30, 2004, and which is incorporated herein by this
reference. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information called for by Item 13 will be set forth under the caption Certain
Relationships and Related Transactions in our 2004 Proxy Statement, which will
be filed not later than 120 days after the end of our fiscal year ended June
30, 2004, and which is incorporated herein by this reference. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information called for by Item 14 will be set forth under the caption
Principal Accountant Fees and Services in our 2004 Proxy Statement, which
will be filed not later than 120 days after the end of our fiscal year ended
June 30 2004, and which is incorporated herein by reference. 20




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##### Table of Contents



PART IV 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report. 1. Financial Statements: Our Consolidated Financial Statements of as of June 30, 2004, 2003 and 2002 2. Financial Statement Schedules Schedule II-Valuation and Qualifying Accounts and Reserves 21




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##### Table of Contents



3. Exhibits EXHIBIT
    
    
    
    
    
    FILEDNUMBER
    
    DESCRIPTION
    
    INCORPORATED BY REFERENCE
    
    HEREWITHFORM
    
    DATE
    
    NUMBER2.1
    
    Proposed Disclosure Statement with respect
to the Joint Plan by AxisTel
Communications, Inc., its Affiliated
Debtors and Novo Networks, Inc. dated
December 31, 2001
    
    
    10-Q
    
    
    2/14/02
    
    
    2.12.2
    
    Joint Plan of Liquidation by and between
AxisTel Communications, Inc., Novo
Networks Global Services, Inc., Novo
Networks, International Services, Inc.,
e.Volve, Technology Group, Inc., Novo
Networks Operating Corp., Novo Networks
Metro services, Inc., and Novo Networks,
Inc. dated December 31, 2001
    
    
    10-Q
    
    
    2/14/02
    
    
    2.23.1
    
    Amended and Restated Certificate of
Incorporation of eVentures Group, Inc.
    
    
    10-Q
    
    
    5/15/2000
    
    
    3.13.2
    
    Amended and Restated Certificate of
Designation of Rights, Preferences and
Privileges of Series A Convertible
Preferred Stock, dated October 14, 1999.
    
    
    10
    
    
    12/20/1999
    
    
    3.63.3
    
    Certificate of Designation of Rights,
Preferences and Privileges Series B
Convertible Preferred Stock, dated as of
November 10, 1999
    
    
    10
    
    
    12/20/1999
    
    
    3.73.4
    
    Certificate of Amendment, dated as of
December 15, 1999, to the Certificate of
Designation of Rights, Preferences and
Privileges of Series B Convertible
Preferred Stock.
    
    
    10
    
    
    12/20/1999
    
    
    3.83.5
    
    Certificate of Designation, Preferences
and Rights of Series C Convertible
Preferred Stock, dated as of February 22,
2000.
    
    
    10/a
    
    
    3/8/2000
    
    
    3.93.6
    
    Amendment to Amended and Restated
Certificate of Incorporation, filed with
the Secretary of State of the State of
Delaware on November 13, 2000.
    
    
    10-Q
    
    
    2/14/2001
    
    
    3.13.7
    
    Amendment to Amended and Restated
Certificate of Incorporation, filed with
the Secretary of State of the State of
Delaware on December 11, 2000.
    
    
    10-Q
    
    
    2/14/2001
    
    
    3.23.8
    
    Certificate of Designation, Rights and
Preferences of Series D Convertible
Preferred Stock, filed on December 5,
2000.
    
    
    10-Q
    
    
    2/14/2001
    
    
    4.13.9
    
    Amended and Restated By-Laws of eVentures
Group, Inc.
    
    
    10-Q
    
    
    5/15/2000
    
    
    3.2
 22




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##### Table of Contents



EXHIBIT
    
    
    
    
    
    FILEDNUMBER
    
    DESCRIPTION
    
    INCORPORATED BY REFERENCE
    
    HEREWITHFORM
    
    DATE
    
    NUMBER4.1
    
    Registration Rights Agreement, dated as of
September 22, 1999, among the Registrant
and the persons and entities set forth on
Schedule 1 thereto (the First
Registration Rights Agreement).
    
    
    8-K
    
    
    10/7/1999
    
    
    4.14.2
    
    Addendum to the First Registration Rights
Agreement, dated as of October 19, 1999,
among eVentures Group, Inc., the persons
set forth n Schedule 1 thereto and the
other parties to the First Registration
Rights Agreement.
    
    
    10/A
    
    
    3/8/2000
    
    
    4.24.3
    
    Registration Rights Agreement, dated as of
November 24, 1999, between eVentures
Group, Inc. and the person and entities
signatories thereto, as holders of shares
of Series B Convertible Preferred Stock.
    
    
    10/A
    
    
    3/8/2000
    
    
    4.34.4
    
    Letter Agreement, dated December 15, 1999,
to the parties to the Registration Rights
Agreement dated as of September 27, 1999.
    
    
    10/A
    
    
    3/8/2000
    
    
    4.44.5
    
    Registration Rights Agreement, dated as of
December 31, 1999, between eVentures
Group, Inc. and the persons and entities
signatories thereto, as holders of shares
of Series C Convertible Preferred Stock.
    
    
    10/A
    
    
    3/8/2000
    
    
    4.54.6
    
    Registration Rights Agreement, dated as of
March 10, 2000, among eVentures Group,
Inc. and the persons and entities listed
on Schedule 1 thereto.
    
    
    8-K
    
    
    3/27/2000
    
    
    4.14.7
    
    Registration Rights Agreement, dated as of
April 4, 2000, by and among eVentures
Group, Inc. and the signatories thereto.
    
    
    10-Q
    
    
    5/15/2000
    
    
    4.24.8
    
    Registration Rights Agreement, dated as of
May 26, 2000, by and among eVentures
Group, Inc., Andrew Pakula and Laura
Berland.
    
    
    10-K
    
    
    9/28/2000
    
    
    4.84.9
    
    Registration Rights Agreement, dated as of
June 16, 2000, between eVentures Group,
Inc. and U.S. Telesource.
    
    
    10-K
    
    
    9/28/2000
    
    
    4.94.10
    
    Registration Rights Agreement, dated as of
December 5, 2000, among Rock Creek
Partners, II, Ltd., CB Private Equity
Partners L.P. and eVentures Group, Inc.
    
    
    10-Q
    
    
    2/14/2001
    
    
    10.19.1
    
    Voting Agreement, dated as of December 5,
2000, among Rock Creek Partners II, Ltd,
CB Private Equity Partners L.P. and
eVentures Group, Inc.
    
    
    10-Q
    
    
    2/14/2001
    
    
    9
 23




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##### Table of Contents



EXHIBIT
    
    
    
    
    
    FILEDNUMBER
    
    DESCRIPTION
    
    INCORPORATED BY REFERENCE
    
    HEREWITHFORM
    
    DATE
    
    NUMBER10.1
    
    Securities Purchase Agreement, dated as of
June 11, 1998, among Orix Global
Communications, Inc., certain of its
shareholders and the purchasers named
thereunder and Exhibits thereto.
    
    
    10/A
    
    
    3/8/2000
    
    
    10.110.2
    
    Debenture, dated as of June 11, 1998.
    
    
    10
    
    
    12/20/1999
    
    
    10.210.3
    
    Letter Agreement, dated as of August 19,
1998 between Orix Global Communications
and Infinity Investors Limited.10.4
    
    Debenture, dated as of August 19, 1998.
    
    
    10
    
    
    12/20/1999
    
    
    10.410.5
    
    Letter Agreement, dated as of February 9,
1999 between Orix Global Communications
and Infinity Investors Limited.
    
    
    10
    
    
    12/20/1999
    
    
    10.510.6
    
    Debenture, dated as of February 9, 1999.
    
    
    10
    
    
    12/20/1999
    
    
    10.610.7
    
    Letter Agreement, dated as of April 15,
1999 among Orix Global Communications,
Inc., Infinity Investors Limited and the
Founders (as defined therein).
    
    
    10
    
    
    12/20/1999
    
    
    10.710.8
    
    Amended and Restated Debenture, dated as
of April 15, 1999.
    
    
    10
    
    
    12/20/1999
    
    
    10.810.9
    
    Letter Agreement, dated as of April 29,
1999 between Orix Global Communications
and Infinity Investors Limited.
    
    
    10
    
    
    12/201999
    
    
    10.910.10
    
    Debenture, dated as of April 29, 1999.
    
    
    10
    
    
    12/20/1999
    
    
    10.1010.11
    
    Letter Agreement, dated as of April 30,
1999, between Orix Global Communications,
Inc. and Infinity Investors Limited.
    
    
    10
    
    
    12/20/1999
    
    
    10.1110.12
    
    Debenture, dated as of April 30, 1999.
    
    
    10
    
    
    12/20/1999
    
    
    10.1210.13
    
    Note, dated as of August 20, 1999.
    
    
    10/A
    
    
    3/8/2000
    
    
    10.1310.14
    
    Promissory Note, dated as of March 2, 2000.
    
    
    10/A
    
    
    3/8/2000
    
    
    10.1410.15
    
    Warrant Agreement, dated as of March 2,
2000, between i2v2.com Inc. and eVentures
Group, Inc.
    
    
    10/A
    
    
    3/8/2000
    
    
    10.1510.16
    
    Lease Agreement, dated December, 1998,
between AxisTel International, Inc. and
Evergreen America Corporation.
    
    
    10
    
    
    12/20/1999
    
    
    10.1310.17
    
    Lease Agreement, dated November 24, 1997,
between Orix Global Communications, Inc.
and Trust F/3959 of Banco del Atlantico.
    
    
    10
    
    
    12/20/1999
    
    
    10.14
 24




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##### Table of Contents



EXHIBIT
    
    
    
    
    
    FILEDNUMBER
    
    DESCRIPTION
    
    INCORPORATED BY REFERENCE
    
    HEREWITHFORM
    
    DATE
    
    NUMBER10.18
    
    Assignment Agreement, dated April 1, 1998,
among Orix Global Communications, Inc.,
Latin Gate de Mexico S.A. de C.V. and
Trust F/3959 of Banco del Atlantico.
    
    
    10
    
    
    12/20/1999
    
    
    10.1510.19
    
    Letter Agreement, dated April 3, 2000,
between Marcus & Partners, L.P. and
eVentures Group, Inc.
    
    
    10-K
    
    
    9/28/2000
    
    
    10.2610.20
    
    Guaranty Agreement by eVentures Group,
Inc. as inducement to Telecommunications
Finance Group to provide a lease to
AxisTel Communications, Inc., dated as of
October 13, 1999.
    
    
    10
    
    
    12/20/1999
    
    
    10.2010.21
    
    Amended and Restated 1999 Omnibus
Securities Plan, dated as of September 22,
1999. (compensatory agreement)
    
    
    10/A
    
    
    3/8/2000
    
    
    10.2310.22
    
    Employment Agreement, dated as of April 4,
2000, between eVentures Group, Inc. and
Daniel J. Wilson. (compensatory agreement)
    
    
    10-Q
    
    
    5/15/2000
    
    
    10.510.23
    
    Amendment No. 1 to Employment Agreement
between eVentures Group, Inc. and Daniel
J. Wilson, dated as of September 25, 2000.
    
    
    10-Q
    
    
    11/14/2000
    
    
    10.210.24
    
    Stock Option Agreement, dated as of April
4, 2000 between eVentures Group, Inc. and
Daniel J. Wilson. (compensatory agreement)
    
    
    10-Q
    
    
    5/15/2000
    
    
    10.610.25
    
    Employment Agreement, dated as of April 4,
2000, between eVentures Group, Inc. and
Chad E. Coben. (compensatory agreement)
    
    
    10-Q
    
    
    5/15/2000
    
    
    10.710.26
    
    Amendment No. 1 to Employment Agreement
between eVentures Group, Inc. and Chad E.
Coben, dated as of September 25, 2000.
    
    
    10-Q
    
    
    11/14/2000
    
    
    10.510.27
    
    Stock Option Agreement, dated as of April
4, 2000 between eVentures Group, Inc. and
Chad E. Coben. (compensatory agreement).
    
    
    10-Q
    
    
    5/15/2000
    
    
    10.810.28
    
    Employment Agreement, dated as of April 4,
2000, between eVentures Group, Inc. and
Barrett N. Wissman. (compensatory
agreement).
    
    
    10-Q
    
    
    5/15/2000
    
    
    10.910.29
    
    Stock Option Agreement, dated as of April
4, 2000 between eVentures Group, Inc. and
Barrett N. Wissman. (compensatory
agreement).
    
    
    10-Q
    
    
    5/15/2000
    
    
    10.1010.30
    
    Employment Agreement, dated as of April
17, 2000, between eVentures Group, Inc.
and Susie C. Holliday. (compensatory
agreement).
    
    
    10-Q
    
    
    5/15/2000
    
    
    10.13
 25




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##### Table of Contents



EXHIBIT
    
    
    
    
    
    FILEDNUMBER
    
    DESCRIPTION
    
    INCORPORATED BY REFERENCE
    
    HEREWITHFORM
    
    DATE
    
    NUMBER10.31
    
    Amendment No. 1 to Employment Agreement
between eVentures Group, Inc. and Susie C.
Holliday, dated as of September 25, 2000.
    
    
    10-Q
    
    
    11/14/2000
    
    
    10.610.32
    
    Stock Option Agreement, dated as of April
17, 2000 between eVentures Group, Inc. and
Susie C. Holliday. (compensatory
agreement).
    
    
    10-Q
    
    
    5/15/2000
    
    
    10.1410.33
    
    Amendment to Non-Qualified Stock Option
Agreement between eVentures Group, Inc.
and Susie C. Holliday, dated October 2,
2000.
    
    
    10-Q
    
    
    11/14/2000
    
    
    10.710.34
    
    Employment Agreement, dated as of March
10, 2000, between IGS Acquisition
Corporation and David N. Link.
(compensatory agreement).
    
    
    10-K
    
    
    9/28/2000
    
    
    10.4410.35
    
    Amendment No. 1 to Employment Agreement
between eVentures Group, Inc. and David N.
Link, dated as of September 25, 2000.
    
    
    10-Q
    
    
    11/14/2000
    
    
    10.810.36
    
    Common Stock Subscription Agreement, dated
as of April 4, 2000, by and among
eVentures Group, Inc. and the signatories
thereto.
    
    
    10-Q
    
    
    5/15/2000
    
    
    10.1510.37A
    
    Form of New Directors and Officers
Indemnification Agreement.
    
    
    10-K
    
    
    9/28/2000
    
    
    10.49A10.37B
    
    Schedule of Parties to New Directors and
Officers Indemnification Agreement.
    
    
    10-K
    
    
    9/28/2000
    
    
    10.49B10.38A
    
    Form of Incumbent Directors and Officers
Indemnification Agreement.
    
    
    10-K
    
    
    9/28/2000
    
    
    10.50A10.38B
    
    Schedule of Parties to Incumbent Directors
and Officers Indemnification Agreement.
    
    
    10-K
    
    
    9/28/2000
    
    
    10.50B10.39
    
    Securities Purchase Agreement, dated as of
May 3, 2000, by and among PhoneFree.com,
Inc. and the purchasers listed on Schedule
A attached thereto.
    
    
    10-Q
    
    
    5/15/2000
    
    
    10.2310.40
    
    Issuer Option Agreement, dated as of April
10, 2000, between eVentures Group, Inc.
and Samuel L. Litwin. (compensatory
agreement).
    
    
    10-Q
    
    
    5/15/2000
    
    
    10.1610.41
    
    Issuer Option Agreement, dated as of April
10, 2000, between eVentures Group, Inc.
and Mitchell C. Arthur. (compensatory
agreement)
    
    
    10-Q
    
    
    5/15/2000
    
    
    10.1710.42
    
    2001 Equity Incentive Plan
    
    
    10-Q
    
    
    5/15/2000
    
    
    10.1
 26




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##### Table of Contents



EXHIBIT
    
    
    
    
    
    
    
    
    
    
    
    FILEDNUMBER
    
    DESCRIPTION
    
    INCORPORATED BY REFERENCE
    
    HEREWITHFORM
    
    DATE
    
    NUMBEREmployment Agreement, dated as of July 17,
2001, between Novo Networks Operating
Corp. and Steven R. Loglisci.
    
    10-K
    
    9/28/2001
    
    
    10.42Consulting Agreement, dated as of July 30,
2001, between Novo Networks Operating
Corp. and John L. Higgins.
    
    10-K
    
    9/28/2001
    
    
    10.42Employment Agreement, dated as of March
10, 2000, between IGS Acquisition
Corporation and Patrick G. Mackey.
(compensatory agreement)
    
    10-K
    
    9/28/2001
    
    
    10.42Amendment No. 1 to Employment Agreement
between eVentures Group, Inc. and Patrick
G. Mackey, dated as of September 25, 2000.
    
    10-K
    
    9/28/2001
    
    
    10.42Amendment No. 2 to Employment Agreement
between Novo Networks, Inc. and Patrick G.
Mackey, dated as of January 10, 2001.
    
    10-K
    
    9/28/2001
    
    
    10.42
 27




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##### Table of Contents



EXHIBIT
    
    
    
    
    
    
    
    
    
    
    
    FILEDNUMBER
    
    DESCRIPTION
    
    INCORPORATED BY REFERENCE
    
    HEREWITHFORM
    
    DATE
    
    NUMBERCredit and Guaranty Agreement dated as of
August 9, 2001 among AxisTel
Communications, Inc., a corporation
organized and existing Under the laws of
Delaware and a debtor and
debtor-in-possession (AxisTel), Novo
Networks Global Services, Inc., a
corporation organized and existing under
the laws of Delaware and a debtor and
debtor-in-possession (NNGS), Novo
Networks International Services, Inc., a
corporation organized and existing under
the laws of Delaware and a debtor and
debtor-in-possession (NNIS), and e.Volve
Technology Group, Inc., a corporation
organized and existing under the laws of
Nevada and a debtor and
debtor-in-possession (e.Volve), Novo
Networks Operating Corp., a corporation
organized and existing under the laws of
Delaware and a debtor and
debtor-in-possession (NNOC and
collectively with AxisTel, NNGS, NNIS and
e.Volve, the Borrowers), Novo Networks
(UK) Ltd., a corporation organized and
existing under the laws of the United
Kingdom (NNL), Web2dial Communications,
Inc., a corporation organized and existing
under the laws of Delaware (Web2Dial),
Servicios Profesionales J.R.J.S., S.A. DE
C.V., a corporation organized and existing
under the laws of Mexico (Servicios),
Novo Networks Metro Services, Inc., a
corporation organized and existing under
the laws of Delaware (NNMS), Novo
Networks Media Services, Inc., a
corporation organized and existing under
the laws of Delaware (NNMedia), Novo
Networks Metro Services (Virginia), Inc.,
a corporation organized and existing under
the laws of Virginia (NNMSV), and
e.Volve Technology Group De Mexico, S.A.
DE C.V., a corporation organized and
existing under the laws of Mexico (EGM
and collectively with NNL, Web2Dial,
Servicios, NNMS, NNMedia and NNMSV, the
Guarantors), and Novo Networks, Inc., a
corporation organized and existing under
the laws of Delaware (the Lender).
    
    10-K
    
    9/28/2001
    
    
    10.4210.43
    
    Switched Services Agreement, dated April
29, 1998, by and between Orix Global
Communications, Inc. and Qwest
Communications Corporation.
    
    10-K/A
    
    2/19/02
    
    
    10.4310.44
    
    Carrier Service Agreement for
International Terminating Traffic, dated
September 17, 1998, by and between Qwest
Communications Corporation and Orix Global
Communications, Inc.
    
    10-K/A
    
    2/19/02
    
    
    10.44
 28




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##### Table of Contents



EXHIBIT
    
    
    
    
    
    
    
    
    
    
    
    FILEDNUMBER
    
    DESCRIPTION
    
    INCORPORATED BY REFERENCE
    
    HEREWITHFORM
    
    DATE
    
    NUMBER10.45
    
    Qwest Communications Corporation Carrier
Service Agreement, dated April 12, 1999,
by and between Qwest Communications
Corporation and Orix Global
Communications, Inc.
    
    10-K/A
    
    2/19/02
    
    
    10.4510.46
    
    IRU Agreement, dated September 30, 1999,
by and between Qwest Communications
Corporation and e.Volve Technologies.
    
    10-K/A
    
    2/19/02
    
    
    10.4610.47
    
    Amendment No. 1 to IRU Agreement, dated
June 16, 2000, by and between Qwest
Communications Corporation, e.Volve
Technologies and AxisTel Communications,
Inc.
    
    10-K/A
    
    2/19/02
    
    
    10.4710.48
    
    Letter Agreement, dated June 19, 2000, by
and between Qwest Communications
Corporation and AxisTel Communications,
Inc.
    
    10-K/A
    
    2/19/02
    
    
    10.4810.49
    
    Purchase Agreement by and among Novo
Networks, Inc., Paciugo Management LLC, Ad
Astra Holdings LP, Ugo Ginatta, Cristiana
Ginatta and Vincent Ginatta
    
    8-K
    
    1/03/03
    
    
    10.110.50
    
    Amendment No. 2 to That Certain Agreement
Between Barrett N. Wissman and Novo
Networks, Inc. dated April 4, 2000.
    
    10-Q
    
    5/15/03
    
    
    10.110.51
    
    Nonqualified Stock Option Agreement
between the Registrant and Barrett N.
Wissman
    
    10-Q
    
    5/15/03
    
    
    10.110.52
    
    Nonqualified Stock Option Agreement
between the Registrant and Steven W. Caple
    
    10-Q
    
    5/15/03
    
    
    10.210.53
    
    Nonqualified Stock Option Agreement
between the Registrant and Jan Robert
Horsfall
    
    10-Q
    
    5/15/03
    
    
    10.310.54
    
    Nonqualified Stock Option Agreement
between the Registrant and John Stevens
Robling
    
    10-Q
    
    5/15/03
    
    
    10.410.55
    
    Nonqualified Stock Option Agreement
between the Registrant and Russell W.
Beiersdorf
    
    10-Q
    
    5/15/03
    
    
    10.510.56
    
    Nonqualified Stock Option Agreement
between the Registrant and Patrick Mackey
    
    10-Q
    
    5/15/03
    
    
    10.610.57
    
    Nonqualified Stock Option Agreement
between the Registrant and Susie C.
Holliday
    
    10-Q
    
    5/15/03
    
    
    10.710.58
    
    Non-Qualified Stock Option Agreement dated
as of February 27, 2004 between Novo
Networks, Inc. and Barrett N. Wissman
    
    10-Q
    
    5/17/07
    
    
    10.1
 29




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##### Table of Contents



EXHIBIT
    
    
    
    
    
    
    
    
    
    
    
    FILEDNUMBER
    
    DESCRIPTION
    
    INCORPORATED BY REFERENCE
    
    HEREWITHFORM
    
    DATE
    
    NUMBER10.59
    
    Non-Qualified Stock Option Agreement dated
as of February 27, 2004 between Novo
Networks, Inc. and John Stevens Robling,
Jr.
    
    10-Q
    
    5/17/04
    
    
    10.210.60
    
    Non-Qualified Stock Option Agreement dated
February 27, 2004 between Novo Networks,
Inc. and Russell W. Beiersdorf
    
    10-Q
    
    5/17/04
    
    
    10.321.1
    
    Subsidiaries of Novo Networks, Inc.
    
    
    
    
    
    
    
    
    
    X23.1
    
    Consent of Grant Thornton LLP
    
    
    
    
    
    
    
    
    
    X23.2
    
    Consent of Grant Thornton LLP
    
    
    
    
    
    
    
    
    
    X


31.1
    
    Certification of the Chief Executive
Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
    
    
    
    
    
    
    
    
    
    X31.2
    
    Certification of the Chief Financial
Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
    
    
    
    
    
    
    
    
    
    X32.1
    
    Certification Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
    
    
    
    
    
    
    
    
    
    X
  (b)
    
    On June 7, 2004, we filed a Current Report on Form
8-K to announce the engagement of Oasis Capital Partners, LLC to
serve as a financial consultant and advisor in the identification and
implementation of a comprehensive merger or acquisition based upon
our long-term strategic objectives.  On July 9, 2004, we filed a Current Report on Form 8-K
to announce the appointment of Peter J. Mixter as a Class I Director. Mr.
Mixter was selected to fill the vacancy left by the resignation of
Russell W. Beiersdorf, who stepped down as a Class I Director on May
11, 2004. 30




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized in Dallas, Texas, on
the 24th day of September, 2004. Novo Networks, Inc.By:
    
    /s/ Steven W. CapleName: Steven W. CapleTitle: President
 Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report has been signed by the following persons in the capacities and on
the dates indicated: SIGNATURE
    
    TITLE
    
    DATE/s/ Steven W. Caple
    
    President
    
    September 24, 2004(Principal Executive Officer)Steven W. Caple/s/ Patrick G. Mackey
    
    Senior Vice President
(Principal Financial and Accounting Officer)
    
    September 24, 2004Patrick G. Mackey/s/ Barrett N. Wissman
    
    Chairman and Director
    
    September 24, 2004Barrett N. Wissman/s/ Peter J. Mixter
    
    Director
    
    September 24, 2004Peter J. Mixter/s/ John Stevens Robling, Jr.
    
    Director
    
    September 24, 2004John Stevens Robling, Jr.
 31




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##### Table of Contents



NOVO NETWORKS, INC. AND SUBSIDIARIESINDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm for the fiscal years ended
June 30, 2004, 2003 and 2002
    
    
    F-2Consolidated Balance Sheets as of June 30, 2004 and 2003
    
    
    F-3Consolidated Statements of Operations for the fiscal years ended
June 30, 2004, 2003 and 2002
    
    
    F-4Consolidated Statements of Shareholders Equity (Deficit) for the fiscal years ended
June 30, 2004, 2003 and 2002
    
    
    F-5Consolidated Statements of Cash Flows for the fiscal years ended
June 30, 2004, 2003 and 2002
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7Report of Independent Certified Public Accountants on Schedule II
    
    
    F-21Financial Statement Schedule:Schedule II - Valuation and Qualifying Accounts and Reserves
    
    
    F-22Financial Statements of Paciugo Management, LLC
    
    
    F-23
 F-1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors of Novo Networks, Inc.: We have audited the accompanying consolidated balance sheets of Novo
Networks, Inc. and subsidiaries (a Delaware corporation) as of June 30, 2004
and 2003 and the related consolidated statements of operations, stockholders
equity (deficit), and cash flows for each of the three years in the period
ended June 30, 2004. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits in accordance with auditing standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Novo Networks, Inc. and subsidiaries as of June 30, 2004 and 2003, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended June 30, 2004, in conformity with
accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. However, as discussed in Note 2 to
the financial statements, the Company has no operations and no sources of
capital to fund business opportunities. These matters raise substantial doubt
about the Companys ability to continue as a going concern. Managements plans
in regards to these matters are described in Note 2. The financial statements
do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern. Grant Thornton LLP Dallas, Texas
August 27, 2004 F-2




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##### Table of Contents



NOVO NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS As of June 30,2004
    
    2003ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    1,764,370
    
    
    $
    3,894,081Note receivable and other receivables,
net of allowance ($4,076,636 - 2004 and 2003)
    
    
    
    
    
    
    Prepaid expenses
    
    
    387,437
    
    
    
    441,9402,151,807
    
    
    
    4,336,021NON-CURRENT ASSETSPrepaid expenses
    
    
    225,000
    
    
    
    26,736Deposits
    
    
    5,745
    
    
    
    5,745Property and equipment, net
    
    
    254,746
    
    
    
    379,783Equity investments
    
    
    425,000
    
    
    
    2,255,523910,491
    
    
    
    2,667,787$
    3,062,298
    
    
    $
    7,003,808LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESAccounts payable
    
    $
    49,207
    
    
    $
    5,935Accrued expenses
    
    
    144,646
    
    
    
    496,443Customer deposits
    
    
    2,000
    
    
    
    2,000195,853
    
    
    
    504,378COMMITMENTS AND CONTINGENCIES
    
    
    
    
    
    
    STOCKHOLDERS EQUITYPreferred stock, $0.00002 par value, $1,000 liquidation preference per share,
authorized 25,000,000 for 2004 and 2003, issued
and outstanding 13,605 and 27,480 for 2004 and 2003,
liquidation value - $13,605,000 and $27,480,000 for 2004 and 2003
    
    
    
    
    
    
    Common stock, $0.00002 par value, authorized 200,000,000 for 2004
and 2003, issued and outstanding, 52,323,701 for 2004 and 2003
    
    
    1,050
    
    
    
    1,050Additional paid-in capital
    
    
    257,874,065
    
    
    
    257,165,054Accumulated deficit
    
    
    (255,008,670
    )
    
    
    (250,666,674
    )2,866,445
    
    
    
    6,499,430$
    3,062,298
    
    
    $
    7,003,808
 The accompanying notes are an integral part of these financial statements. F-3




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##### Table of Contents



NOVO NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS Fiscal Year Ended June 30,2004
    
    2003
    
    2002Revenues
    
    $
    
    
    
    $
    
    
    
    $
    10,486,982Operating expenses:Direct costs
    
    
    
    
    
    
    
    
    
    
    14,614,766Selling, general and administrative expenses
    
    
    2,153,187
    
    
    
    3,205,607
    
    
    
    14,750,870Impairment loss
    
    
    1,582,801
    
    
    
    
    
    
    
    2,400,543Depreciation and amortization
    
    
    125,036
    
    
    
    149,567
    
    
    
    1,370,9583,861,024
    
    
    
    3,355,174
    
    
    
    33,137,137Loss from operations, before
other (income) expense
    
    
    (3,861,024
    )
    
    
    (3,355,174
    )
    
    
    (22,650,155
    )Other (income) expenseInterest income
    
    
    (23,368
    )
    
    
    (109,571
    )
    
    
    (397,370
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    466,965Loss in equity investments
    
    
    247,722
    
    
    
    509,228
    
    
    
    1,720,000Foreign currency loss
    
    
    
    
    
    
    
    
    
    
    98,135Net gain on liquidation of debtor subsidiaries
    
    
    (313,500
    )
    
    
    (900,500
    )
    
    
    (16,074,355
    )Other (income) expense
    
    
    (138,894
    )
    
    
    (62,563
    )
    
    
    (668,993
    )(228,040
    )
    
    
    (563,406
    )
    
    
    (14,855,618
    )Net loss
    
    
    (3,632,984
    )
    
    
    (2,791,768
    )
    
    
    (7,794,537
    )Series D preferred dividends
    
    
    (709,011
    )
    
    
    (653,175
    )
    
    
    (603,432
    )Net loss allocable to common shareholders
    
    $
    (4,341,995
    )
    
    $
    (3,444,943
    )
    
    $
    (8,397,969
    )Net loss per
share - (basic and diluted)
    
    $
    (0.08
    )
    
    $
    (0.07
    )
    
    $
    (0.16
    )Weighted average number of shares
outstanding - (basic and diluted)
    
    
    52,323,701
    
    
    
    52,323,701
    
    
    
    52,323,701
 The accompanying notes are an integral part of these financial statements. F-4




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##### Table of Contents



NOVO NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT) Preferred Stock
    
    Common Stock
    
    AdditionalPaid-in
    
    Accumulated
    
    DeferredShares
    
    Amount
    
    Shares
    
    Amount
    
    Capital
    
    Deficit
    
    Compensation
    
    TotalBalance, June 30, 2001
    
    
    26,395
    
    
    $
    
    
    
    
    52,323,701
    
    
    $
    1,050
    
    
    $
    255,908,447
    
    
    $
    (238,823,763
    )
    
    $
    (439,438
    )
    
    $
    16,646,296Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    407,494
    
    
    
    407,494Series D Preferred Stock dividends
    
    
    444
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    603,432
    
    
    
    (603,432
    )
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,794,537
    )
    
    
    
    
    
    
    (7,794,537
    )Balance, June 30, 2002
    
    
    26,839
    
    
    
    
    
    
    
    52,323,701
    
    
    
    1,050
    
    
    
    256,511,879
    
    
    
    (247,221,732
    )
    
    
    (31,944
    )
    
    
    9,259,253Amortization of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31,944
    
    
    
    31,944Series D Preferred Stock dividends
    
    
    641
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    653,175
    
    
    
    (653,175
    )
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,791,768
    )
    
    
    
    
    
    
    (2,791,768
    )Balance, June 30, 2003
    
    
    27,480
    
    
    
    
    
    
    
    52,323,701
    
    
    
    1,050
    
    
    
    257,165,054
    
    
    
    (250,666,675
    )
    
    
    
    
    
    
    6,499,429Series C Preferred Stock cancelled
    
    
    (14,570
    )
    
    
    Series D Preferred Stock dividends
    
    
    695
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    709,011
    
    
    
    (709,011
    )
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,632,984
    )
    
    
    
    
    
    
    (3,632,984
    )Balance, June 30, 2004
    
    
    13,605
    
    
    $
    
    
    
    
    52,323,701
    
    
    $
    1,050
    
    
    $
    257,874,065
    
    
    $
    (255,008,670
    )
    
    $
    
    
    
    $
    2,866,445
 The accompanying notes are an integral part of these financial statements. F-5




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##### Table of Contents



NOVO NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS For the Fiscal Year Ended June 30,2004
    
    2003
    
    2002CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (3,632,984
    )
    
    $
    (2,791,768
    )
    
    $
    (7,794,537
    )Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation and amortization
    
    
    125,036
    
    
    
    149,567
    
    
    
    1,370,958Other non-cash charges and credits:Stock-based compensation
    
    
    
    
    
    
    31,944
    
    
    
    407,493Bad debt expense
    
    
    
    
    
    
    510,281
    
    
    
    5,895,989Loss in equity investments
    
    
    247,722
    
    
    
    509,228
    
    
    
    1,720,000Loss on sale of property and equipment
    
    
    
    
    
    
    (1,661
    )
    
    
    69,907Impairment loss
    
    
    1,582,801
    
    
    
    
    
    
    
    2,400,543Write off of VAT receivable
    
    
    
    
    
    
    
    
    
    
    1,405,929Net gain on liquidation of debtor subsidiaries
    
    
    (313,500
    )
    
    
    (900,500
    )
    
    
    (16,074,355
    )Gain on sale of subsidiary
    
    
    
    
    
    
    
    
    
    
    (268,853
    )Change in operating assets and liabilities:Accounts receivable
    
    
    
    
    
    
    
    
    
    
    (3,585,608
    )Note receivable and other receivables
    
    
    
    
    
    
    (510,282
    )
    
    
    (167,310
    )Prepaid expenses
    
    
    (143,761
    )
    
    
    (6,199
    )
    
    
    317,765Restricted cash
    
    
    
    
    
    
    
    
    
    
    (186,070
    )Accounts payable
    
    
    43,272
    
    
    
    (22,400
    )
    
    
    9,613,825Accrued expenses
    
    
    (38,297
    )
    
    
    (444,522
    )
    
    
    (1,160,425
    )Accrued interest payable
    
    
    
    
    
    
    
    
    
    
    115,688Customer deposits and deferred revenues
    
    
    
    
    
    
    
    
    
    
    (257,693
    )Net cash used in operating activities
    
    
    (2,129,711
    )
    
    
    (3,476,311
    )
    
    
    (6,176,754
    )CASH FLOWS FROM INVESTING ACTIVITIES:Deposits received
    
    
    
    
    
    
    
    
    
    
    17,335Purchase of property and equipment
    
    
    
    
    
    
    (11,633
    )
    
    
    (77,110
    )Sale of property and equipment
    
    
    
    
    
    
    10,720
    
    
    
    241,605Net cash resulting from dispositions
    
    
    
    
    
    
    
    
    
    
    (102,300
    )Distributions from (investments in)
investments
    
    
    
    
    
    
    (2,500,000
    )
    
    
    391,478Net cash provided by (used in) investing
activities
    
    
    
    
    
    
    (2,500,913
    )
    
    
    471,008CASH FLOWS FROM FINANCING ACTIVITIES:Payments on capital leases
    
    
    
    
    
    
    
    
    
    
    (1,119,486
    )Net cash used in financing activities
    
    
    
    
    
    
    
    
    
    
    (1,119,486
    )NET DECREASE IN CASH AND CASH
EQUIVALENTS
    
    
    (2,129,711
    )
    
    
    (5,977,224
    )
    
    
    (6,825,232
    )CASH AND CASH EQUIVALENTS, beginning of year
    
    
    3,894,081
    
    
    
    9,871,305
    
    
    
    16,696,537CASH AND CASH EQUIVALENTS, end of year
    
    $
    1,764,370
    
    
    $
    3,894,081
    
    
    $
    9,871,305SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:Cash paid for interest
    
    $
    
    
    
    $
    
    
    
    $
    496,839
 The accompanying notes are an integral part of these financial statements. F-6




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##### Table of Contents



NOVO NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Business (a) General The company now known as Novo Networks (Novo, we, us and our) was
originally incorporated in Delaware in 1987 as Adina, Inc. (Adina). Adinas
corporate existence was permitted to lapse in February of 1996 and was
subsequently reinstated as eVentures Group, Inc., (eVentures) in August of
1999. During the Fall of 1999, eVentures completed a series of transactions
whereby it became a holding company with two wholly-owned operating
subsidiaries, e.Volve Technology Group, Inc. (e.Volve) and AxisTel
Communications, Inc. (AxisTel), and made a strategic investment in Gemini
Voice Solutions, Inc. (Gemini Voice), formerly PhoneFree.com, Inc. During
the Spring of 2000, eVentures acquired Internet Global Services, Inc.
(iGlobal) and made additional strategic investments. In December of 2000,
eVentures changed its name to Novo Networks. Currently, we own a minority
interest in Paciugo Management, LLC and Ad Astra Holdings LP and related
entities. These entities own and manage a gelato manufacturing, retailing and
catering business operated under the brand name Paciugo. This interest is
referred to herein as the Paciugo Interest. During the quarter ended December 31, 2003, we engaged in discussions with
Paciugo that resulted in our entering into a sales agreement on January 13,
2004 (the Sales Agreement) with Ad Astra, PMLLC, and the Equity Owners,
whereby we agreed, subject to customary closing conditions, to (i) sell and
transfer to Ad Astra all of our right, title and interest in Ad Astra, (ii)
sell and transfer to PMLLC all of our right, title and interest in PMLLC, and
(iii) terminate our right to exercise the option to acquire the Subsequent
Interest, all in exchange for a total proposed Sales Price of $1.25 million
(the Sales Price), to be paid in cash at closing by Ad Astra and PMLLC. The
closing of the Sales Agreement was expected to take place on or about May 12,
2004, unless extended as provided for in the Sales Agreement. The closing date
was extended to July 11, 2004. Ad Astra, PMLLC and the Equity Owners breached
the Sales Agreement by not closing the Sales Agreement on or before this date.
Accordingly, we continue to own our 33% interest in Paciugo. (b) Bankruptcy Proceedings On April 2, 2001, our subsidiary iGlobal filed a voluntary petition under
Chapter 7 of Title 11 of the United States Bankruptcy Code (the Bankruptcy
Code) in the United States Bankruptcy Court for the Northern District of Texas
(the Texas Bankruptcy Court) due to iGlobals inability to service its debt
obligations, potential contingent liabilities and the Companys inability to
raise sufficient capital to fund operating losses at iGlobal. As a result of
the filing, we recorded an impairment loss of $62.4 million for the year ended
June 30, 2001, primarily relating to non-cash goodwill recorded in connection
with the March 2000 acquisition of iGlobal. On July 30, 2001, five of our direct and indirect wholly-owned subsidiaries
filed voluntary petitions under Chapter 11 of the Bankruptcy Code in the United
States Bankruptcy Court for the District of Delaware (the Delaware Bankruptcy
Court), in order to stabilize their operations and protect their assets while
attempting to reorganize their businesses. The five subsidiaries that filed
for bankruptcy protection were Novo Networks Operating Corp., AxisTel, e.Volve,
Novo Networks International Services, Inc. and Novo Networks Global Services,
Inc. On September 14, 2001, Novo Networks Metro Services, Inc., a subsidiary
of AxisTel, also filed a voluntary petition under Chapter 11 of the Bankruptcy
Code. F-7




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##### Table of Contents



Set forth below is a table summarizing the current status of our debtor
subsidiaries. DateBankruptcy
    
    Status as of
    
    Subject toProtection
    
    September 24,
    
    Bankruptcy Plan orDebtor Subsidiary(1)
    
    Date Acquired(2)
    
    Sought
    
    2004(3)
    
    Proceedings?Novo Networks Operating Corp.
    
    2/8/00(3)
    
    7/30/01
    
    Inactive
    
    Yes, Chapter 11(5)AxisTel Communications, Inc.
    
    9/22/99
    
    7/30/01
    
    Inactive
    
    Yes, Chapter 11(5)Novo Networks International
Services, Inc.
    
    9/22/99
    
    7/30/01
    
    Inactive
    
    Yes, Chapter 11(5)Novo Networks Global Services, Inc.
    
    9/22/99
    
    7/30/01
    
    Inactive
    
    Yes, Chapter 11(5)Novo Networks Metro Services, Inc.
    
    9/22/99
    
    7/30/01
    
    Inactive
    
    Yes, Chapter 11(5)e.Volve Technology Group, Inc.
    
    10/19/99
    
    9/14/01
    
    Inactive
    
    Yes, Chapter 11(5)Internet Global Services, Inc.
    
    3/10/00
    
    4/02/01
    
    Inactive
    
    Yes, Chapter 7eVentures Holdings, LLC
    
    9/7/99(3)
    
    N/A
    
    Active(4)
    
    No
   (1)
    
    Web2Dial Communications, Inc., Novo Networks Metro Services
Virginia, Inc., Novo Networks Media Services, Inc. and Novo Networks
(UK) Ltd., which are not debtor subsidiaries, have been dissolved.  (2)
    
    Indicates date of incorporation, if organized by the Company.  (3)
    
    Active status indicates current operations within the
respective entity; Inactive status indicates no current
operations, but may include certain activities associated with the
administration of an estate pursuant to a bankruptcy filing or plan.  (4)
    
    This entity has no operations other than to hold certain equity
interests.  (5)
    
    Subsequently amended to a liquidating Chapter 11 proceeding. As originally contemplated, the goal of the reorganization effort relating to
our debtor subsidiaries that filed voluntary petitions under Chapter 11 of the
Bankruptcy Code was to preserve the going concern value of the debtor
subsidiaries core assets and to provide distributions to their creditors.
However, based largely on the fact that the debtor subsidiaries ceased
receiving traffic from their sole remaining customer, Qwest Communications
Corporation (Qwest), we determined that the continued viability of the debtor
subsidiaries was not realistic. Accordingly, the bankruptcy plan was amended.
The amended plan and disclosure statement were filed with the Delaware
Bankruptcy Court on December 31, 2001. The amended plan provides for a
liquidation of substantially all of the assets of our debtor subsidiaries,
pursuant to Chapter 11 of the Bankruptcy Code, instead of a reorganization as
previously planned. On January 14, 2002, the Delaware Bankruptcy Court approved the amended
disclosure statement, with certain minor modifications, and on March 1, 2002,
the Delaware Bankruptcy Court confirmed the amended plan, again with minor
modifications. On April 3, 2002, the amended plan became effective and a
liquidating trust was formed, with funding provided by the Company in the
amount of $200,000. Assets to be liquidated of approximately $700,000 were
transferred to the liquidating trust during the fourth quarter of fiscal 2002.
The purpose of the liquidating trust is to collect, liquidate and distribute
the remaining assets of the debtor subsidiaries and prosecute certain causes of
action against various third parties, including, without limitation, Qwest
Communications Corporation. No assurance can be given that the liquidating
trust will be successful in liquidating substantially all of the debtor
subsidiaries assets pursuant to the amended plan. Also, it is not possible to
predict the outcome of the
prosecution of causes of action against third parties, including, without
limitation, Qwest, as described in the amended plan and disclosure statement.
We previously guaranteed certain indebtedness of one or more of the debtor
subsidiaries and, depending upon the treatment of and distributions to holders
of such indebtedness under the amended plans, we may be liable for some or all
of this indebtedness. F-8




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##### Table of Contents



In connection with the bankruptcy proceedings, we provided our debtor
subsidiaries with approximately $1.9 million in secured debtor-in-possession
financing to fund their reorganization efforts. The credit facility made funds
available to permit the debtor subsidiaries to pay employees, vendors,
suppliers, customers and professionals consistent with the requirements of the
Bankruptcy Code. In connection with the amended plan being confirmed by the
Delaware Bankruptcy Court and becoming effective on April 3, 2002, the credit
facility was converted into a new secured note. During fiscal 2003, we provided
additional funding of $514,000 to the liquidating trust. The current balance
on the new secured note is approximately $3.3 million that has been fully
reserved due to the uncertainty surrounding the collection of this note. For
further details regarding the funding provided to the debtor subsidiaries, see
the section entitled Managements Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources. We originally provided administrative services to its debtor subsidiaries
pursuant to an administrative services agreement approved by the Delaware
Bankruptcy Court. The agreement provided that the debtor subsidiaries pay us
$30,000 per week for legal, accounting, human resources and other services.
The original agreement expired on April 2, 2002, and an interim agreement was
reached whereby, the liquidating trust, as successor-in-interest to the debtor
subsidiaries, paid us $40,000 per month for the same services. The interim
agreement expired on August 15, 2002. During the fourth quarter of fiscal
2003, we negotiated an on-going agreement with the liquidating trust, whereby
we provided administrative services to our debtor subsidiaries on a per hour
basis. Pursuant to the terms of this arrangement, the debtor subsidiaries owed
us $653,000 at June 30, 2004. Due to the uncertainty surrounding the
collection of this receivable, it has not been recorded in our financial
statements. It is not possible to predict the outcome or success of any bankruptcy
proceeding or plan or the effects of such efforts on our business or the
interests of its creditors or stockholders. Our principal operating subsidiaries, AxisTel and eVolve, ceased operations in
September 2001 and December 2001, respectively. We are not currently providing
any products or services of any kind to any customers. 2. Liquidity And Capital Resources General At June 30, 2004, we had consolidated current assets of $2.1 million,
including, without limitation, cash and cash equivalents of approximately $1.8
million and net working capital of $1.9 million. Historically, we funded our
subsidiaries operations primarily through the proceeds of private placements of
its common and preferred stock and borrowings under loan and capital lease
agreements. We do not currently believe that either of these funding sources
will be available in the near term. Principal uses of cash have been to fund
(i) operating losses, (ii) acquisitions and strategic business opportunities,
(iii) working capital requirements and (iv) expenses related to the bankruptcy
plan administration process. Due to our financial performance, the lack of
stability in the capital markets and the economys downturn, our only current
source of funding is expected to be cash on hand. Effectively, our only ability to satisfy our current obligations is our cash on
hand. Our current obligations include funding working capital and the Qwest
arbitration. We estimate that it will take approximately $1.0 million of our
remaining cash to satisfy these obligations for the next six months. This
would leave us with approximately $700,000 of cash available for use in any
potential transaction for the redeployment of our remaining cash assets (a
Business Opportunity). In the event we expend all of our $700,000 on a
Business Opportunity and achieve no return or cash flow from that transaction
before December 31, 2004, or if we incur other unanticipated expenses for
operations, we would likely be required to cease operations altogether and
pursue other alternatives, such as liquidating or filing a voluntary petition
for relief under the Bankruptcy Code. We believe that under any liquidation
scenario, our stockholders would not receive any recovery on or value for their
holdings. We currently anticipate that we will not generate any revenue from operations
in the near term based on (i) the termination of the operations of our debtor
subsidiaries, which historically provided all of our revenues on a consolidated
basis and (ii) the uncertainties surrounding other potential Business
Opportunities that we may consider, if any. F-9




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##### Table of Contents



As noted above, we do not believe that any of the traditional funding sources
will be available to us in the near future. Consequently, our failure to
identify potential Business Opportunities, if any, will jeopardize our ability
to continue as a going concern. Due to these factors, we are unable to
determine whether current available financing will be sufficient to meet the
funding requirements of our ongoing general and administrative expenses and the
Qwest arbitration. No assurances can be given that adequate levels of
financing will be available to us on acceptable terms, if at all. 3. Summary of Significant Accounting Policies Basis of Presentation The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates. Principles of Consolidation and Accounting for Ownership in Subsidiaries We have accounted for our ownership interests in subsidiaries under two
methods: consolidation and equity method. The applicable accounting method is
generally determined based on our voting interest in the subsidiary, as well as
our degree of influence over each of the subsidiaries. All of the debtor
subsidiaries were deconsolidated as of June 30, 2002, as the liquidating trust
controls the assets of these entities. As of June 30, 2003, we have either
recorded our share of the operating losses or impaired our interest equal to
our investment in our other subsidiaries except the Paciugo Interest. We account for our interest in Paciugo under the equity method of accounting.
Under the equity method of accounting, Paciugos accounts are not reflected
within the accompanying consolidated statements of operations. The Companys
proportionate share of Paciugos operating earnings and losses are included in
the caption Loss in equity investments in the accompanying consolidated
statements of operations. As of December 31, 2003 and June 30, 2004, we
impaired our interest in Paciugo as of December 31, 2003 to reflect our
carrying value in the assets equal to the Sales Price in the Sales Agreement
and further impaired our carrying value at June 30, 2004 to equal our interest
in the net book value of Paciugo. The consolidated financial statements include the accounts of Novo and all of
its wholly owned subsidiaries not in bankruptcy. All significant inter company accounts have been eliminated. Cash and Cash Equivalents We consider all highly liquid instruments purchased with an original maturity
of three months or less to be cash equivalents. At June 30, 2004, cash
equivalents totaled approximately $1.8 million and consisted of a money market
account. We maintain our cash and cash equivalents with one financial
institution. A significant amount of the cash balance is in excess of the FDIC
insurance limit. Prepaid Expenses Prepaid expenses are recorded as assets and expensed in the period in which the
related services are received. At June 30, 2004, current prepaid expenses
totaled $387,000 and consisted mainly of insurance and expenses associated
with the Qwest arbitration. Non-current prepaid expense of $225,000 is for
insurance. We record prepaid items and amortize the cost over period covered
by the expense. F-10




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##### Table of Contents



Deposits Deposits at June 30, 2004 and 2003, were for our corporate office space. Long-lived Assets Our long-lived assets consist of property and equipment. The Company evaluates
impairment of its long-lived assets in accordance with the Financial Accounting
Standards Board (FASB) Statement of Financial Accounting Standards (SFAS)
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS
No. 144 establishes one accounting model to be used for long-lived assets to be
disposed of by sale and broadens the presentation of discontinued operations to
include more disposal transactions. SFAS No. 144 supercedes SFAS No. 121,
Accounting for the Impairment of Long-lived Assets and for Long-lived Assets
to be Disposed of and the accounting and reporting provisions of APB Opinion
No. 30. We assess the recoverability of long-lived assets by determining whether the
net book value of the assets can be recovered through projected undiscounted
future cash flows. The amount of impairment, if any, is measured based on fair
value and is charged to operations in the period in which the impairment
occurs. During the fiscal year ended June 30, 2002, long-lived assets related
to the debtor subsidiaries were written off by recording a charge of $7.5
million and is included in the net gain on liquidation of debtor subsidiaries
account. Property and Equipment Property and equipment consist of leasehold improvements, computer equipment
and furniture and fixtures. Each class of assets is recorded at cost and
depreciated using the straight-line method over the estimated useful lives of
the related assets. Leasehold improvements are amortized over the term of the
lease or the estimated useful life, whichever is shorter. Maintenance and
repairs are charged to expense as incurred. Significant renewals and
betterments are capitalized. As of the time of retirement or other disposition
of property and equipment, the cost and accumulated depreciation are removed
from the accounts and any resulting gain or loss is reflected in operations.
We will reduce the useful lives of our assets in fiscal 2005 due to going
concern matters. Accrued Liabilities At June 30, 2003, an accrual of $314,000 was included in accrued liabilities,
which represented the estimated costs of liquidating substantially all of the
assets of the debtor subsidiaries. As of June 30, 2004, we did not have any
such liabilities accrued since it was determined that the estimated costs of
liquidating all of the assets of the liquidating subsidiaries was zero. Revenue Recognition During the fiscal years ended June 30, 2004 and 2003, we had no operations or
sources of revenue. Income Taxes We account for income taxes in accordance with SFAS No. 109, Accounting for
Income Taxes. Under the asset and liability method of SFAS No. 109, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the carrying amounts of existing assets and
liabilities in the financial statements and their respective tax basis.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS No. 109, the
effect on the deferred tax assets and liabilities of a change in tax rates is
recognized as income in the period that includes the enactment date. A
valuation allowance is provided for significant deferred tax assets when it is
more likely than not, that such assets will not be recovered. Stock Based Compensation The FASB issued SFAS No. 123, Accounting for Stock Based Compensation, which
defines a fair value based method of accounting for stock-based compensation.
However, SFAS No. 123 allows an entity to continue to F-11




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##### Table of Contents



measure compensation cost related to stock and stock options issued to
employees using the intrinsic method of accounting prescribed by Accounting
Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to
Employees. Entities electing to follow APB No. 25 must make pro forma
disclosures of net income and earnings per share, as if the fair value method
of accounting defined in SFAS No. 123 had been applied. We have elected to
account for our stock-based compensation to employees under APB No. 25. We have adopted the disclosure-only provision of SFAS 123, Accounting for
Stock Based Compensation. SFAS 123 requires pro forma information to be
presented as if we had accounted for the stock options granted during the
fiscal periods presented using the fair value method. We did not grant any
stock options during fiscal 2002. The fair value for options granted during
the fiscal years ended 2004 and 2003 were estimated as of the date of grant
using the Black-Scholes option-pricing model with the following weighted
average assumptions: Fiscal
    
    Fiscal2004
    
    2003Expected volatility
    
    
    2667.4
    %
    
    
    4865.0
    %Risk-free interest rate
    
    
    0.9
    %
    
    
    3.9
    %Dividend
yield
    
    
    0.0
    %
    
    
    0.0
    %Expected life (years)
    
    
    10.0
    
    
    
    9.9
 For purposes of pro forma disclosure, the estimated fair values of the options
are amortized to expense over the options vesting period of one to three
years. Pro forma net loss
    
    Fiscal 2004
    
    Fiscal 2003
    
    Fiscal 2002Net loss allocable
to common
shareholders as
reported
    
    $
    (4,341,995
    )
    
    $
    (3,444,943
    )
    
    $
    (8,397,969
    )Compensation expense
recorded
    
    
    
    
    
    
    31,944
    
    
    
    407,494Additional
compensation expense
under SFAS
123
    
    
    (11,500
    )
    
    
    (12,350,255
    )
    
    
    (25,356,776
    )Net loss allocable
to common
shareholders, pro
forma
    
    $
    (4,353,495
    )
    
    $
    (15,763,254
    )
    
    $
    (33,347,251
    )Net loss per share,
pro
forma
    
    $
    (0.08
    )
    
    $
    (0.30
    )
    
    $
    (0.64
    )Net loss per share,
basic and diluted,
as
reported
    
    $
    (0.08
    )
    
    $
    (0.07
    )
    
    $
    (0.16
    )
 Loss Per Share We calculate earnings (loss) per share in accordance with SFAS No. 128,
Earnings Per Share (EPS). SFAS No. 128 requires dual presentation of basic
EPS and diluted EPS on the face of the income statement for all entities with
complex capital structures. Basic EPS is computed as net income (loss) less
preferred dividends divided by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur from common shares issuable through stock options, warrants and
convertible debentures. Diluted EPS has not been presented, as the effect
would be antidilutive. Accordingly, basic and diluted EPS did not differ for
any period presented. Had the effect not been antidilutive due to losses for
per share computation, 67,035,838, 68,580,645, and 71,227,758 shares would have
been included in the diluted earnings per share calculation for the year ended
June 30, 2004, June 30, 2003, and June 30, 2002, respectively. Fair Value of Financial Instruments The carrying value of cash equivalents approximated fair value as of June 30,
2004, and 2003 due to their short maturity. Accounting Estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates. F-12




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##### Table of Contents



4. Property and Equipment Property and equipment consists of the following: Useful
    
    June 30,Life
    
    2004
    
    2003Leasehold
improvements
    
    3 Yrs.
    
    $
    22,929
    
    
    $
    22,929Computer
equipment
    
    3-5 Yrs.
    
    
    302,941
    
    
    
    302,941Furniture and
fixtures
    
    3-7 Yrs.
    
    
    479,882
    
    
    
    479,882805,752
    
    
    
    805,752Accumulated depreciation and amortization
    
    
    
    
    
    
    (551,006
    )
    
    
    (425,969
    )$
    254,746
    
    
    $
    379,783
 During the years ended June 30, 2004, 2003 and 2002, depreciation and
amortization expense totaled approximately $0.13 million, $0.15 million, and
$1.4 million, respectively. 5. Equity Investments Subsidiaries whose results are not consolidated, but over whom we exercise
significant influence, are generally accounted for under the equity method of
accounting. Whether we exercise significant influence with respect to a
subsidiary depends on an evaluation of several factors, including, without
limitation, representation on the subsidiarys governing board and ownership
level, which is generally a 20% to 50% interest in the voting securities of the
subsidiary, including voting rights associated with our holdings in common
stock, preferred stock and other convertible instruments in the subsidiary.
Under the equity method of accounting, the subsidiarys accounts are not
reflected in our consolidated financial statements. Our proportionate share of
a subsidiarys operating earnings and losses are included in the caption Loss
in equity of investments in our consolidated statements of operations. Currently, we have minority equity interests in Paciugo and certain development
stage Internet and communications companies. During the second quarter of
fiscal 2003, we purchased the Paciugo Interest. For further details regarding
this transaction, see Note 1(a) Business - General. The Paciugo Interest is
accounted for under the equity method. During the fiscal years ended June 30, 2004, 2003 and 2002, we recorded equity
losses totaling $248,000, $509,000 and $1.7 million, respectively. The value
of our outstanding equity interests, other than Paciugo, have been reduced to
zero either by recording our proportionate share of losses incurred by the
subsidiary up to the cost of that interest
or from impairment losses. Due to declining market conditions, negative
operating results of those companies, lack of subsidiary liquidity and other
uncertainties surrounding the recoverability of those interests, we recorded
impairment losses of $1.6 million, and $2.4 million in fiscal 2004 and 2002,
respectively. We impaired our interest in Paciugo as of December 31, 2003 by
$758,000 to reflect our carrying value in the assets equal to the Sales Price
in the Sales Agreement and further impaired our carrying value at June 30, 2004
by $825,000 to equal our interest in the net book value of Paciugo when we
determined that the Sales Price in the Sales Agreement would not be received.
For those equity interests previously impaired completely, the Company ceased
recording its share of losses incurred by the subsidiary. F-13




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##### Table of Contents



Equity investments consists of the following at June 30, 2004 and 2003: % Ownership *
    
    Accounting
    
    Balance at June 30,Company Name
    
    Common
    
    Preferred
    
    Method
    
    2004
    
    2003Paciugo Management
LLC
    
    
    33.3
    %
    
    
    0.0
    %
    
    Equity
    
    $
    425,000
    
    
    $
    2,225,523Gemini Voice
Solutions (f/k/a
PhoneFree.com)
    
    
    17.2
    %
    
    
    31.7
    %
    
    Equity
    
    
    
    
    
    
    ORB Communications & Marketing, Inc.
    
    
    19.0
    %
    
    
    100.0
    %
    
    Equity
    
    
    
    
    
    
    FonBox, Inc.
    
    
    14.0
    %
    
    
    50.0
    %
    
    Equity
    
    
    
    
    
    
    Launch Center 39
    
    
    0.0
    %
    
    
    2.1
    %
    
    Cost
    
    
    
    
    
    
    Spydre Labs
    
    
    5.0
    %
    
    
    0.00
    %
    
    Cost
    
    
    
    
    
    
    $
    425,000
    
    
    $
    2,225,523
  *
    
    The percentage ownership reflects Novo Networks ownership percentage at June 30, 2004. During fiscal 2003, ORB Communications & Marketing, Inc. filed for Chapter 7
bankruptcy and is in the process of liquidating that entity. During fiscal
2002, Novo Networks received a cash distribution from Launch Center 39 of
approximately $765,000, of which $387,000 was recorded against the investment
balance and $378,000 in other income. For the fiscal years ended June 30, 2004 and 2003, Paciugo met the criteria for
a significant subsidiary as set forth in Rule 1.02(w) of Regulation S-X.
Summarized financial information for Paciugo as of and for the years ended June
30, 2004 and 2003 is as follows: 2004
    
    2003Financial position information:Current assets
    
    $
    744,179
    
    
    $
    1,285,028Non-current assets
    
    
    1,317,941
    
    
    
    1,883,502Current liabilities
    
    
    281,459
    
    
    
    558,487Non-current liabilities
    
    
    486,450
    
    
    
    497,525Net assets
    
    
    1,294,211
    
    
    
    2,112,518Income statement information:Revenues
    
    
    2,062,389
    
    
    
    1,893,523Gross profit
    
    
    1,602,037
    
    
    
    1,576,340Net loss
    
    
    (1,088,307
    )
    
    
    (1,420,299
    )Our equity in Paciugos net loss
    
    $
    (247,722
    )
    
    $
    (244,477
    )Impairment loss
    
    $
    (1,582,801
    )
    
    $
    
 6. Commitments and Contingencies Operating Leases We are a lessee under a non-cancelable operating lease. During the years ended
June 30, 2004, 2003 and 2002, we incurred rental expense of approximately
$83,000, $106,000 and $1.0 million, respectively. Future minimum lease
payments under these non-cancelable operating leases are $66,000 for the fiscal
year ended June 30, 2005. Litigation Eos Partners, LP, Eos Partners SBIC, LP, Eos Partners (Offshore), LP, Kuwait
Fund for Arab Economic Development and TBV Holdings Ltd. (collectively, the
Plaintiffs) filed a lawsuit against us, Fred Vierra, Barrett N. Wissman,
Clark K. Hunt, Mark R. Graham, Olaf Guerrand-Hermes, Stuart Subotnick, Jan
Robert Horsfall, Stuart Chasanoff, John Stevens Robling, Jr., Samuel Litwin,
Mitchell Arthur, BDO Seidman, LLP, Hunt Asset Management, LLC, HW Partners, LP,
HW Finance, LLC, HW Capital, LP and HW Group, LLC (collectively, the
Defendants) in the 190th Judicial District Court of Harris County, Texas, on
December 19, 2002. The lawsuit alleged breach of contract, fraud and
conspiracy in connection with the Plaintiffs purchase of certain of our Series
C Convertible Preferred Stock in December of 1999 and January of 2000. The
Defendants denied the allegations and vigorously defended against the
Plaintiffs claims and sought all other appropriate relief. The Plaintiffs
claimed actual damages of approximately $17.4 million and requested additional
exemplary damages, costs of court and attorneys fees. The Defendants
submitted the claims to their insurance carriers. The district judge denied
the F-14




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##### Table of Contents



Plaintiffs motion to transfer the case to Dallas County and ruled that it
should instead proceed in Harris County. However, it was reassigned to the
280th Judicial District Court. The Plaintiffs and the Defendants mediated the
case on February 9, 2004, and the claims were settled at that time on terms in
which we did not expend any cash or assets. As part of the settlement, we
received all of the outstanding Series C Convertible Preferred Stock from the
holders thereof, including the Plaintiffs, without any additional
consideration, and the shares were subsequently retired. We, along with the liquidating trust, filed a lawsuit on June 17, 2002, against
Qwest, a former customer and vendor, and John L. Higgins, a former employee and
consultant, in the Eighth Judicial District Court of Clark County, Nevada. The
amended plan called for certain causes of action to be pursued by the
liquidating trust against various third parties, including Qwest, in an attempt
to marshal sufficient assets to make distributions to creditors. We were a
co-proponent of the amended plan and suffered independent damages as a result
of Qwests actions. Accordingly, we and the liquidating trust asserted, among
other things, the following claims against Qwest: (i) breach of contract, (ii)
conversion, (iii) misappropriation of trade secrets, (iv) breach of a
confidential relationship, (v) fraud, (vi) breach of the covenant of good faith
and fair dealing, (vii) tortious interference with existing and prospective
business relations, (viii) aiding and abetting Mr. Higginss misconduct, (ix)
civil conspiracy and (x) unjust enrichment. The following claims also have
been asserted against Mr. Higgins: (i) breach of contract, (ii) breach of
fiduciary duties, (iii) breach of a confidential relationship, (iv) fraud, (v)
aiding and abetting Qwests misconduct, (vi) civil conspiracy and (vii) unjust
enrichment. In addition to an award of attorneys fees, we and the liquidating
trust are seeking such actual, consequential and punitive damages as may be
awarded by a jury or other trier of fact. Qwest filed a motion to stay the
litigation and compel arbitration on August 14, 2002. On March 13, 2003, a
hearing was held to determine the proper forum for the various claims. After
listening to oral arguments, the district judge granted Qwests motion. On
April 2, 2003, we, along with the liquidating trust, filed a petition with the
Supreme Court of Nevada, asking it to direct the district judge to reconsider
her order. On August 13, 2003, our petition was denied. Accordingly, an
arbitrator was appointed on December 30, 2003. He presided over a preliminary
hearing on February 4, 2004, and he originally set the matter for a final
hearing on July 7, 2004. On April 22, 2004, the
arbitrator granted Qwests request to postpone the final hearing until
September 27, 2004. On September 16, 2004, the arbitrator granted Qwest an
additional continuance of the final hearing until November 1, 2004. We and our subsidiaries are involved in other legal proceedings from time to
time, including those described above of which the we believe, if decided
adversely to us or our subsidiaries, would have a material adverse effect on
our business, financial condition or results of operation. Employment Agreements We have previously entered into multi-year employment agreements or management
contracts with two of our senior executives. The last of the agreements
expired in April of 2004 and provided for annual salaries ranging between
$180,000 and $190,000. In addition, these employees were granted options to
purchase Novo Networks common stock. These options, if exercised, would
represent the right to purchase 1,620,000 shares of common stock at various
exercise prices ranging from $0.055 to $28.50 per share. 7. Income Taxes There is no provision for income tax expense since we incurred net losses for
all periods presented. At June 30, 2004, we had net operating loss
carryforwards (NOLs) of approximately $92.9 million. The NOLs expire through
2024. NOLs generated from
operations prior to the Initial Transaction may be reduced
due to limitations on the annual amount of NOLs which can be utilized if
certain changes in ownership occur. The NOLs were reduced by $28.7 million in
fiscal 2002 from the forgiveness of the debtor subsidiaries liabilities
pursuant to Internal Revenue Code Section 108 (b). F-15




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##### Table of Contents



Deferred tax assets and liabilities for fiscal 2004 and fiscal 2003 reflect the
impact of carryforwards and temporary differences between the amounts of assets
and liabilities for financial reporting and income tax reporting purposes.
Temporary differences that give rise to deferred tax assets and liabilities at
June 30, 2004, and June 30, 2003, are as follows: 2004
    
    2003Deferred tax assets:Net operating loss
carryforwards
    
    $
    34,381,518
    
    
    $
    33,779,984Accounts receivable
reserves
    
    
    1,611,119
    
    
    
    1,611,119Investment basis
difference
    
    
    8,705,785
    
    
    
    8,028,491Total gross
deferred tax
assets
    
    
    44,698,422
    
    
    
    43,419,594Less valuation
allowance
    
    
    (44,615,805
    )
    
    
    (43,407,083
    )Net deferred tax assets
    
    
    82,617
    
    
    
    12,511Deferred tax liabilities:Accelerated
depreciation
    
    
    82,617
    
    
    
    12,511Total gross
deferred tax
liabilities
    
    
    82,617
    
    
    
    12,511Net deferred tax
assets
    
    $
    
    
    
    $
    
 Net deferred tax assets at June 30, 2004, and June 30, 2003, have been fully
reserved by valuation allowances as it is more likely than not that we will not
ultimately realize any benefits resulting from such deferred tax assets.
Deferred tax assets resulting from net operating losses include $3.4 million
relating to NOLs that we obtained through acquisitions. A reconciliation setting forth the differences between our effective tax rate
and the United States statutory rate is as follows: 2004
    
    2003
    
    2002Statutory federal
income tax
benefit
    
    $
    1,235,215
    
    
    
    34
    %
    
    $
    949,201
    
    
    
    34
    %
    
    $
    2,650,143
    
    
    
    34
    %State tax rate, net
of federal
benefit
    
   
    107,900
    
    
    
    3
    %
    
    
    82,916
    
    
    
    3
    %
    
    
    290,977
    
    
    
    4
    %Non-deductible
expense
    
    
    (170
    )
    
    
    
    
    
    
    (11,262
    )
    
    
    
    
    
    
    (141,439
    )
    
    
    (2
    %)Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    822,347
    
    
    
    10
    %NOLs not
benefited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,982,248
    
    
    
    153
    %NOL reduction
    
    
    (134,223
    )
    
    
    (3
    %)
    
    
    (3,573,023
    )
    
    
    (127
    %)
    
    
    (10,627,035
    )
    
    
    (136
    %)Decrease (increase)
in valuation
allowance
    
    
    (1,208,722
    )
    
    
    (34
    %)
    
    
    2,552,168
    
    
    
    91
    %
    
    
    (4,977,241
    )
    
    
    (67
    %)Effective rate,
net
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
 8. Stockholders Equity As of June 30, 2004, pursuant to the Amendment to our Amended and Restated
Certificate of Incorporation dated November 13, 2000, we are authorized to
issue 225,000,000 shares, consisting of (i) 200,000,000 shares of common stock,
par value $0.00002 per share, and (ii) 25,000,000 shares of preferred stock,
par value $0.00002 per share. Preferred Stock Our Board of Directors is authorized to establish and designate series of
preferred stock, to fix the number of shares constituting each series, and to
fix the designations and the preferences, limitations, and relative rights,
including voting rights, of the shares of each series. As of June 30, 2004,
our Board of Directors had designated four series of preferred stock consisting
of the following: Series A Convertible Preferred Stock ($.00002 par value, 5,000 shares
authorized, 0 shares issued and outstanding at June 30, 2004). Holders of
Series A Convertible Preferred Stock are not entitled to vote, except as
provided by law and are not entitled to receive any dividends. In the event of
liquidation, holders of Series A Convertible Preferred Stock are entitled to
receive $1,000 per share out of the assets available for distribution to our
stockholders. Series B Convertible Preferred Stock ($.00002 par value, 25,000 shares
authorized, 4,500 shares issued and outstanding at June 30, 2004). Holders of
Series B Convertible Preferred Stock are not entitled to vote, except as
provided by law and are not entitled to receive any dividends. In the event of
liquidation, holders of Series B F-16




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##### Table of Contents



Convertible Preferred Stock are entitled to receive $1,000 per share out of the
assets available for distribution to our stockholders under the same terms as
the holders of any outstanding shares of Series A Convertible Preferred Stock. Series C Convertible Preferred Stock ($.00002 par value, 30,000 shares
authorized, 0 shares issued and outstanding at June 30, 2004). Holders of
Series C Convertible Preferred Stock are not entitled to vote, except as
provided by law and are not entitled to receive any dividends. In the event of
liquidation, holders of Series C Convertible Preferred Stock are entitled to
receive $1,000 per share out of the assets available for distribution to our
stockholders under the same terms as the holders of any outstanding shares of
Series A and Series B Convertible Preferred Stock. Series D Convertible Preferred Stock (50,000 shares authorized, 9,105 shares
issued and outstanding at June 30, 2004). The par value of shares of Series D
Convertible Preferred Stock is $0.00002 with a liquidation value of $1,000 per
share. Holders of Series D Convertible Preferred Stock are entitled to vote on
all matters to be voted on by our stockholders. Each share of Series D
Convertible Preferred Stock shall have one vote for each share of common stock
into which it may be converted. On December 5, 2000, we issued 7,000 shares of Series D Convertible Preferred
Stock and 450,001 shares of our common stock for approximately $7.0 million in
cash and a minority interest in a private communications company. The shares
of Series D Convertible Preferred Stock are convertible into shares of our
common stock at a price of $7.00 per share. During fiscal 2004, 2003 and 2002
an additional 695, 641 and 444 shares of Series D Convertible Preferred Stock
were reserved for payment of dividends, respectively. Stock Options At June 30, 2004, we sponsored two stock option plans, the 1999 Omnibus
Securities Plan (the 1999 Plan) and the 2001 Equity Incentive Plan (the 2001
Plan). We have elected to account for those plans under Accounting Principles
Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees. The 1999 Plan provides for the grant of incentive stock options and
non-qualified stock options. The terms of the options are set by our Board of
Directors. The options expire no later than ten years after the date the stock
option is granted. The number of shares authorized for grants under the Plan
is 15% of the total outstanding common stock, provided that no more than 4
million options can be incentive stock options. The 2001 Plan provides for
the grant of a maximum of 12 million incentive stock options that expire no
later than ten years after the date the stock option is granted. F-17




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##### Table of Contents



During February of 2004, we issued 75,000 options to our directors under the
1999 Plan. Our three members of the Board of Directors were issued 25,000
shares each, which vested immediately. The exercise price for all of the
options granted is $0.027. The options expire no later than ten years after
the date the stock option is granted. A summary of stock option activity is
presented below: 2001 Plan
    
    1999 Plan
    
    Non-PlanWeighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    Average
    
    
    
    
    
    AverageNumber
    
    Exercise
    
    Number
    
    Exercise
    
    Number
    
    Exerciseof Shares
    
    Price
    
    of Shares
    
    Price
    
    of Shares
    
    PriceOptions Outstanding at June 30,
2001
    
    
    6,946,125
    
    
    $
    4.63
    
    
    
    3,313,165
    
    
    $
    13.24
    
    
    
    6,253,907
    
    
    $
    22.50Options
Cancelled
    
    
    (184,125
    )
    
    $
    4.63
    
    
    
    (1,991,665
    )
    
    $
    8.87
    
    
    
    (60,333
    )
    
    $
    23.00Options Outstanding at June 30,
2002
    
    
    6,762,000
    
    
    $
    4.63
    
    
    
    1,321,500
    
    
    $
    19.84
    
    
    
    6,314,240
    
    
    $
    21.73Options exercisable at June 30,
2002
    
    
    5,541,000
    
    
    $
    4.63
    
    
    
    1,009,540
    
    
    $
    18.61
    
    
    
    5,326,549
    
    
    $
    22.23Options GrantedAt Fair Market Value
    
    
    
    
    
    $
    
    
    
    
    1,600,000
    
    
    $
    0.06
    
    
    
    
    
    
    $
    Options
Cancelled
    
    
    (1,184,949
    )
    
    $
    4.63
    
    
    
    (661,500
    )
    
    $
    22.04
    
    
    
    (382,500
    )
    
    $
    23.00Options Outstanding at June 30,
2003
    
    
    5,577,051
    
    
    $
    4.63
    
    
    
    2,260,000
    
    
    $
    5.19
    
    
    
    5,811,074
    
    
    $
    21.73Options exercisable at June 30,
2003
    
    
    5,213,311
    
    
    $
    4.63
    
    
    
    1,085,000
    
    
    $
    10.29
    
    
    
    5,811,074
    
    
    $
    22.23Weighted average fair value of
options granted during fiscal 2003
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    0.06
    
    
    
    
    
    
    $
    Options GrantedAt Fair Market Value
    
    
    
    
    
    $
    
    
    
    
    75,000
    
    
    $
    0.03
    
    
    
    
    
    
    $
    Options Cancelled
    
    
    (200,000
    )
    
    $
    4.63
    
    
    
    (375,000
    )
    
    $
    0.06
    
    
    
    (200,000
    )
    
    $
    18.00Options Outstanding at June 30, 2004
    
    
    5,377,051
    
    
    $
    4.63
    
    
    
    1,960,000
    
    
    $
    5.97
    
    
    
    5,611,074
    
    
    $
    22.62Options exercisable at June 30, 2004
    
    
    5,377,051
    
    
    $
    4.63
    
    
    
    1,460,000
    
    
    $
    8.00
    
    
    
    5,611,074
    
    
    $
    22.62Weighted average fair value of
options granted during fiscal 2004
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    0.03
    
    
    
    
    
    
    $
    
 F-18




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##### Table of Contents



At June 30, 2004, the range of exercise prices, weighted average exercise price
and weighted average remaining contractual life for options outstanding are as
follows: Options Outstanding
    
    Options ExercisableWeighted
    
    Weighted
    
    
    
    
    
    WeightedNumber
    
    Average
    
    Average
    
    Number
    
    AverageOption Price
    
    of
    
    Exercise
    
    Remaining
    
    of
    
    ExerciseRange
    
    Shares
    
    Price
    
    Contractual Life
    
    Shares
    
    Price2001 Plan
    
    
    
    
    
    
    
    
    $
    4.63
    
    
    
    5,377,051
    
    
    $
    4.63
    
    
    6.81 years
    
    
    5,377,051
    
    
    $
    4.631999 Plan
    
    $
    0.03
    
    to
    
    $
    0.06
    
    
    
    1,300,000
    
    
    $
    0.05
    
    
    8.93 years
    
    
    800,000
    
    
    $
    0.05$
    5.01
    
    to
    
    $
    10.00
    
    
    
    350,000
    
    
    $
    10.00
    
    
    5.96 years
    
    
    350,000
    
    
    $
    10.00$
    15.01
    
    to
    
    $
    20.00
    
    
    
    60,000
    
    
    $
    16.88
    
    
    7.00 years
    
    
    60,000
    
    
    $
    16.88$
    25.01
    
    to
    
    $
    30.00
    
    
    
    250,000
    
    
    $
    28.50
    
    
    6.71 years
    
    
    250,000
    
    
    $
    28.50Non-Plan
    
    $
    10.01
    
    to
    
    $
    15.00
    
    
    
    191,574
    
    
    $
    12.00
    
    
    6.25 years
    
    
    191,574
    
    
    $
    12.00$
    20.01
    
    to
    
    $
    25.00
    
    
    
    5,419,500
    
    
    $
    23.00
    
    
    5.79 years
    
    
    5,419,500
    
    
    $
    23.00
 We follow APB 25 in accounting for our stock options, and, accordingly, in
fiscal 2000, recorded deferred compensation of approximately $3.3 million equal
to the intrinsic value of options granted to employees that had an exercise
price lower than the market price of the underlying stock on the day of the
grant. The deferred compensation was amortized over the related vesting
periods and amortization of $31,900 and $407,000 is included in selling,
general and administrative expenses in the statement of operations during
fiscal periods 2003 and 2002. At June 30, 2004, the Company had no remaining
deferred compensation. Warrants and Options Issued in Connection with the iGlobal Acquisition In connection with the iGlobal acquisition on March 10, 2000, we issued 139,378
warrants to purchase shares of our common stock to holders of iGlobal warrants.
The warrants have exercise prices of $0.01384 and $9.6899 and expire from 2004
through 2006. The fair value of the warrants on March 10, 2000, of
approximately $3.8 million was included in the initial cost of the iGlobal
acquisition. Additionally, we issued 209,732 options to purchase our common
stock in exchange for fully vested options of iGlobal. The fair value of the
options of approximately $5.5 million was included in the initial cost of the
iGlobal acquisition. The fair value of the warrants and options was determined
using the Black-Scholes option-pricing model. 9. Related Party Transactions Administrative Expenses We originally provided administrative services to our debtor subsidiaries
pursuant to an administrative services agreement approved by the Delaware
Bankruptcy Court. The agreement provided that our debtor subsidiaries pay to
us $30,000 per week for legal, accounting, human resources and other services.
The original agreement expired on April 2, 2002, and an interim agreement was
reached whereby, the liquidating trust, as successor-in-interest to the debtor
subsidiaries, paid us $40,000 per month for the same services. The interim
agreement expired on August 15, 2002. During the fourth quarter of fiscal
2003, we negotiated an on-going agreement with the liquidating trust, whereby
we provide administrative services to its debtor subsidiaries on a per hour
basis. Pursuant to the terms of this arrangement, the debtor subsidiaries owed
us $653,000 at June 30, 2004. Due to the uncertainty surrounding the
collection of this receivable, it has not been recorded in our financial
statements. During fiscal 2002, we paid a former e.Volve employee approximately $64,000 for
consulting services. F-19




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##### Table of Contents



10. Unaudited Quarterly Results of Operations The following table presents unaudited summary data relating to our results of
operations for each quarter of the fiscal years ended June 30, 2004, 2003 and
2002: For the Fiscal Year Ended June 30, 2004First Quarter
    
    Second Quarter
    
    Third Quarter
    
    Fourth Quarter
    
    Total(unaudited)Revenues
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Loss from
operations before
other (income)
expense
    
    $
    (665,594
    )
    
    $
    (1,281,906
    )
    
    $
    (484,710
    )
    
    $
    (1,428,814
    )
    
    $
    (3,861,024
    )Net loss
    
    $
    (734,872
    )
    
    $
    (1,431,049
    )
    
    $
    (501,974
    )
    
    $
    (965,089
    )
    
    $
    (3,632,984
    )Net loss
allocable to common
shareholders
    
    $
    (907,821
    )
    
    $
    (1,607,485
    )
    
    $
    (681,968
    )
    
    $
    (1,144,721
    )
    
    $
    (4,341,995
    )Net loss per share
(basic and diluted)
    
    $
    (0.02
    )
    
    $
    (0.03
    )
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    (0.08
    )Avg. shares
outstanding (basic
and diluted)
    
    
    52,323,701
    
    
    
    52,323,701
    
    
    
    52,323,701
    
    
    
    52,323,701
    
    
    
    52,323,701
 For the Fiscal Year Ended June 30, 2003First Quarter
    
    Second Quarter
    
    Third Quarter
    
    Fourth Quarter
    
    Total(unaudited)Revenues
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Loss from
operations before
other (income)
expense
    
    $
    (761,888
    )
    
    $
    (832,567
    )
    
    $
    (1,071,654
    )
    
    $
    (689,065
    )
    
    $
    (3,355,174
    )Net loss
    
    $
    (909,727
    )
    
    $
    (544,349
    )
    
    $
    (958,573
    )
    
    $
    (379,119
    )
    
    $
    (2,791,768
    )Net loss allocable
to common
shareholders
    
    $
    (1,069,506
    )
    
    $
    (707,349
    )
    
    $
    (1,121,245
    )
    
    $
    (546,843
    )
    
    $
    (3,444,943
    )Net loss per share
(basic and
diluted)
    
    $
    (0.02
    )
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    (0.01
    )
    
    $
    (0.07
    )Avg. shares
outstanding (basic
and
diluted)
    
    
    52,323,701
    
    
    
    52,323,701
    
    
    
    52,323,701
    
    
    
    52,323,701
    
    
    
    52,323,701
 For the Fiscal Year Ended June 30, 2002First Quarter
    
    Second Quarter
    
    Third Quarter
    
    Fourth Quarter
    
    Total(unaudited)Revenues
    
    $
    8,687,677
    
    
    $
    1,799,305
    
    
    $
    
    
    
    $
    
    
    
    $
    10,486,982Loss from
operations before
other (income)
expense
    
    $
    (7,485,041
    )
    
    $
    (6,326,113
    )
    
    $
    (1,958,837
    )
    
    $
    (6,880,164
    )
    
    $
    (22,650,155
    )Net income
(loss)
    
    $
    (7,655,136
    )
    
    $
    8,412,975
    
    
    $
    (4,128,002
    )
    
    $
    (5,027,806
    )
    
    $
    (8,397,969
    )Net income (loss)
per share (basic
and
diluted)
    
    $
    (0.14
    )
    
    $
    0.16
    
    
    $
    (0.08
    )
    
    $
    (0.10
    )
    
    $
    (0.16
    )Avg. shares
outstanding (basic
and
diluted)
    
    
    52,323,701
    
    
    
    52,323,701
    
    
    
    52,323,701
    
    
    
    52,323,701
    
    
    
    52,323,701
  F-20




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##### Table of Contents



Report of Independent Registered Public Accounting Firm on Schedule II Board of Directors and Stockholders
Novo Networks, Inc. We have audited in accordance with the standards of the Public Company
Accounting Oversight Board (United States) the consolidated financial
statements of Novo Networks, Inc. and subsidiaries referred to in our report
dated August 27, 2004, which is included in Part II of this Form 10-K. Our
audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II is presented for purposes
of additional analysis and is not a required part of the basic financial
statements. This schedule has been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion, is
fairly stated in all material respects in relation to the basic financial
statements taken as a whole. Grant Thornton LLP Dallas, Texas
August 27, 2004 F-21




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##### Table of Contents



NOVO NETWORKS, INC. AND SUBSIDIARIESSchedule
IIValuation and Qualifying Accounts and Reserves Balance
    
    Charged
    
    
    
    
    
    Balanceat
    
    to Costs
    
    
    
    
    
    atBeginning
    
    and
    
    Deductions/
    
    End ofof Period
    
    Expenses
    
    Writeoffs
    
    PeriodAllowance for doubtful accounts:Year ended June 30, 2002
    
    $
    4,589,647
    
    
    $
    6,063,299
    
    
    $
    (10,652,946
    )
    
    $
    Year ended June 30, 2003
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Year ended June 30, 2004
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Reserve for notes and other receivables:Year ended June 30, 2002
    
    $
    
    
    
    $
    3,566,355
    
    
    $
    
    
    
    $
    3,566,355Year ended June 30, 2003
    
    $
    3,566,355
    
    
    $
    510,281
    
    
    $
    
    
    
    $
    4,076,636Year ended June 30, 2004
    
    $
    4,076,636
    
    
    $
    
    
    
    $
    
    
    
    $
    4,076,636
 F-22




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##### Table of Contents



To the Partners
Paciugo Management LLC We have audited the accompanying combined balance sheets of Paciugo Management
LLC and related entities (collectively, the Company) as of June 30, 2004 and
2003, and the related combined statements of operations, changes in partners
capital and cash flows for the years then ended. These financial statements
are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audit. We conducted our audits in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to
above present fairly, in all material respects, the combined financial position
of the Company as of June 30, 2004 and 2003, and the combined results of their operations
and their combined cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note C to the
financial statements, the Company incurred net losses of $1,088,307 and
$1,420,299 for the years ended June 30, 2004 and 2003, respectively, and
used $475,046 and $848,767, respectively, in operating activities. These
matters, among others, raise substantial doubt about the Companys ability
to continue as a going concern. Managements plans in regards to these
matters are also described in Note C. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty. Grant Thornton LLP Dallas, Texas
August 27, 2004 F-23




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##### Table of Contents



Paciugo Management LLC COMBINED BALANCE SHEETS June 30, 2004
    
    2003ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    259,404
    
    
    $
    776,781Accounts Receivable
    
    
    79,223
    
    
    
    54,147Inventories
    
    
    293,944
    
    
    
    328804Prepaid expenses
    
    
    111,608
    
    
    
    125,296744,179
    
    
    
    1,285,028NON-CURRENT ASSETSProperty and equipment, at cost  net
    
    
    1,304,899
    
    
    
    1,875,247Other assets
    
    
    13,042
    
    
    
    8,2551,317,941
    
    
    
    1,883,502$
    2,062,120
    
    
    $
    3,168,530LIABILITIES AND PARTNERS CAPITALCURRENT LIABILITIESCurrent maturities of long-term debt
    
    $
    37,148
    
    
    $
    322,828Accounts payable
    
    
    81,649
    
    
    
    125,921Related party accounts payable
    
    
    83,332
    
    
    
    Accrued liabilities
    
    
    79,330
    
    
    
    109,738281,459
    
    
    
    558,487LONG-TERM DEBT, less current maturities
    
    
    36,450
    
    
    
    47,525NOTE PAYABLE TO FOUNDING PARTNERS
    
    
    450,000
    
    
    
    450,000COMMITMENTS AND CONTINGENCIES
    
    
    
    
    
    
    PARTNERS CAPITALPartners capital
    
    
    4,062,962
    
    
    
    3,792,962Accumulated deficit
    
    
    (2,768,751
    )
    
    
    (1,680,444
    )1,294,211
    
    
    
    2,112,518$
    2,062,120
    
    
    $
    3,168,530
 The accompanying notes are
an integral part of these statements. F-24




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##### Table of Contents



Paciugo Management LLC COMBINED STATEMENTS OF OPERATIONS For the years ended June 30, 2004
    
    2003Net sales
    
    $
    2,062,389
    
    
    $
    1,893,523Operating expensesCost of goods sold
    
    
    460,352
    
    
    
    317,183Selling, general and administrative expenses
    
    
    2,222,870
    
    
    
    2,452,870Depreciation and amortization
    
    
    480,145
    
    
    
    473,8653,163,367
    
    
    
    3,243,918Operating loss
    
    
    (1,100,978
    )
    
    
    (1,350,395
    )Interest expense  long-term debt
    
    
    5,943
    
    
    
    24,798Interest expense on note payable to founding partners
    
    
    
    
    
    
    45,106Other income
    
    
    (18,614
    )
    
    
    NET LOSS
    
    $
    (1,088,307
    )
    
    $
    (1,420,299
    )
 The accompanying notes are
an integral part of these statements. F-25




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##### Table of Contents



Paciugo Management LLC COMBINED STATEMENT OF CHANGES IN PARTNERS CAPITAL For the two years ended June 30, 2004 Partners
    
    Accumulatedcapital
    
    deficit
    
    TotalBalance at July 1, 2002
    
    $
    50,000
    
    
    $
    (260,145
    )
    
    $
    (210,145
    )Conversion of note payable to partners to
partners capital
    
    
    1,242,962
    
    
    
    
    
    
    
    1,242,962Capital contribution from Novo Networks, Inc.
    
    
    2,500,000
    
    
    
    
    
    
    
    2,500,000Net loss
    
    
    
    
    
    
    (1,420,299
    )
    
    
    (1,420,299
    )Balance at June 30, 2003
    
    
    3,792,962
    
    
    
    (1,680,444
    )
    
    
    2,112,518Capital contribution from founding partners
    
    
    270,000
    
    
    
    
    
    
    
    270,000Net loss
    
    
    
    
    
    
    (1,088,307
    )
    
    
    (1,088,307
    )Balance at June 30, 2004
    
    $
    4,062,962
    
    
    $
    (2,768,751
    )
    
    $
    1,294,211
 The accompanying notes are
an integral part of these statements. F-26




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##### Table of Contents



Paciugo Management LLC COMBINED STATEMENTS OF CASH FLOWS For the years ended June 30, 2004
    
    2003Cash flows from operating activitiesNet loss
    
    $
    (1,088,307
    )
    
    $
    (1,420,299
    )Adjustments to reconcile net loss to net cash used in
operating activitiesDepreciation and amortization
    
    
    480,145
    
    
    
    473,865Impairment charge
    
    
    122,783
    
    
    
    Gain on sale of asset
    
    
    (17,004
    )
    
    
    Change in operating assets and liabilitiesAccounts receivable
    
    
    (25,076
    )
    
    
    8,554Inventories
    
    
    34,860
    
    
    
    (222,724
    )Prepaid expenses and other assets
    
    
    8,901
    
    
    
    152,464Accounts payable and accrued liabilities
    
    
    (74,680
    )
    
    
    159,373Related party  accounts payable
    
    
    83,332
    
    
    
    Net cash used in operating activities
    
    
    (475,046
    )
    
    
    (848,767
    )Cash flows from investing activitiesPurchase of property and equipment
    
    
    (77,960
    )
    
    
    (926,441
    )Proceeds from sale of property and equipment
    
    
    62,384
    
    
    
    Net cash used in investing activities
    
    
    (15,576
    )
    
    
    (926,441
    )Cash flows from financing activitiesPayment on long-term debt
    
    
    (325,686
    )
    
    
    (250,994
    )Advances from note payable
    
    
    28,931
    
    
    
    726,358Payment on note payable to partners
    
    
    
    
    
    
    (450,000
    )Capital contribution from Novo Networks, Inc.
    
    
    
    
    
    
    2,500,000Capital contribution from founding partners
    
    
    270,000
    
    
    
    Net cash provided by (used in) financing activities
    
    
    (26,755
    )
    
    
    2,525,364Net change in cash and cash equivalents
    
    
    (517,377
    )
    
    
    750,156Cash and cash equivalents at beginning of year
    
    
    776,781
    
    
    
    26,625Cash and cash equivalents at end of year
    
    $
    259,404
    
    
    $
    776,781Supplemental disclosure of cash flows informationCash paid for interest
    
    $
    4,957
    
    
    $
    71,020Supplemental disclosure of non-cash financing activitiesConversion of notes payable to partners to partners capital
    
    $
    
    
    
    $
    1,242,962
 The accompanying notes are
an integral part of these statements. F-27




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##### Table of Contents



Paciugo Management LLC NOTES TO COMBINED FINANCIAL STATEMENTS June 30, 2004 and 2003 NOTE A - BUSINESS General Paciugo Management LLC (PMLLC), a Texas limited liability company formed in
May 2001, is the sole general partner of Ad Astra Holdings LP (Ad Astra), a
Texas limited partnership (formerly Paciugo Holdings LLC) and Authentic
Gelato LP, Paciugo Supply Company LP, Paciugo Franchising LP and Paciugo
Properties LP (collectively the Operating Partnerships). PMLLC, through its
partnership interest in Ad Astra and the Operating Partnerships, manages a
gelato manufacturing, retailing and catering business operating under the
brand name Paciugo. Throughout these financial statements, we refer
collectively to PMLLC, Ad Astra and the Operating Partnerships as Paciugo
or the Company. Prior to May 2001, the Company operated as Authentic Gelato LLC, a Texas
limited liability company that was formed on April 5, 2000. In May 2001,
Authentic Gelato LLC reorganized into Authentic Gelato LP. Nature of Operations Paciugo is in the business of owning and operating a series of retail
locations that sell authentic Italian gelato. Paciugo opened its first store
in September 2000. As of June 30, 2004, the Company has ten retail locations
in Dallas, Texas, which are either dedicated Paciugo stores or kiosks that
operate in larger retail venues as a small store within a
store. In addition
to the retail gelato business, a portion of its revenues are derived from
catering activities conducted primarily out of its corporate
headquarters. These activities typically involve the serving of Paciugo gelato
at a variety of special events, including, private celebrations,
philanthropic gatherings and third-party retail promotions. Seasonality In general, the market for frozen desserts experiences a certain degree of
seasonal fluctuation, which is less marked in regions that experience
consistently colder year-round climates. Paciugo enjoys higher sales volume
during the period between May and August. Investment by Novo Networks, Inc. On December 19, 2002, PMLLC and Ad Astra executed a purchase agreement (the
Purchase Agreement) with Novo Networks, Inc. Pursuant to the Purchase
Agreement, Novo Networks purchased a 33% membership interest in PMLLC and a
32.67% interest in Ad Astra, which results in Novo Networks holding an
aggregate interest,
including the PMLLC general partnership interest, in Ad Astra equal to 33%
(the Initial Interest), for a purchase price of $2.5 million. Novo Networks holds an option, exercisable for a period of two years from
December 19, 2002, to purchase an additional 17.3% membership interest in
PMLLC and a 17.127% interest in Ad Astra (the Subsequent Interest) for $1.5
million. Together, the Initial Interest and the Subsequent Interest would
result in Novo Networks holding a 50.3% membership interest in PMLLC and a
49.797% limited partnership interest in Ad Astra, for a total aggregate
interest in Ad Astra, including the PMLLC general partner interest, of 50.3%. F-28




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##### Table of Contents



NOTE A - BUSINESS - Continued Novo Networks provided services to support the business operations of Paciugo
through August 2003, including administrative, accounting, financial, human
resources, information technology, legal, and marketing services (the
Support Services). The Support Services expressly exclude providing certain
capital expenditures as well as services that are customarily performed by
third party professionals. In exchange for Novo Networks providing the
Support Services, Paciugo is required to pay Novo Networks an annual amount
equal to the greater of $0.25 million or 2% of the combined gross revenues of
Paciugo (excluding any gross revenues shared with third parties under
existing contractual arrangements). Paciugo made its monthly payments to Novo
Networks in the amount of $20,833 through August 2003. Paciugo may not cancel
or alter the scope of the Support Services without Novo Networks prior
approval or consent. Novo Networks
is entitled to and currently maintains representation on the governing board
of PMLLC (the Board of Managers) as is proportionate to its ownership
interests therein. PMLLC, as the sole general partner of Ad Astra, is empowered to make all decisions associated with Ad
Astra, except for those requiring the approval of the limited partners, as
set forth in the limited partnership agreement of Ad Astra or under
applicable law. Due to certain disagreements in August 2003 between Paciugo and Novo
Networks, Paciugo discontinued making the Support Services payments to Novo
Networks beginning in September 2003. The Company accrued approximately
$83,000 for unpaid Support Services fees from September through December 2003
and did not accrue any fees from January until June 2004. NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The combined financial statements of Paciugo include the accounts of PMLLC,
Ad Astra and the Operating Partnerships. Control of each entity is vested in
the same group of owners, their operations are interrelated and they are
under common management. All material intercompany balances and transactions
have been eliminated. Cash and Cash Equivalents Paciugo considers all highly liquid instruments purchased with an original
maturity of three months or less to be cash equivalents. Cash equivalents
totaled approximately $-0- and $577,000 at the end of June 30, 2004 and 2003,
respectively. The Company maintains its cash and cash equivalents with two
financial institutions. Inventory Inventory is comprised of gelato ingredients, used in producing gelato and
other ingredients needed for the retail sale of gelato, which are valued at
the lower of cost or market on a first-in first-out basis. Inventory reserves
are provided for excess inventory based on managements estimate of demand
and future sales. F-29




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##### Table of Contents



NOTE B - SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES - Continued Long-Lived Assets The Companys long-lived assets consist of property and equipment, vehicles
and leasehold improvements. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 144, impairment is measured based on the
difference between the carrying amount of the asset and the fair value of the
asset and is charged to operations in the period in which the impairment
occurs. Income Taxes Paciugo consists of partnerships and limited liability companies in which the
partners individually report their share of taxable income or loss. Revenue Recognition Revenue is
recognized at the time of sale. Revenues include the net concession
fees resulting from revenue sharing agreements with two retail grocery store
chains. Accounts receivable represent the concession fees not yet collected at
the balance sheet date. No reserve is provided against these amounts as they
are believed to be fully collectible. Fair Value of Financial Instruments The carrying value of financial instruments consisting of cash, accounts
receivable, trade payables and notes payable approximate fair value as of
June 30, 2004 and 2003 due to their short maturity. Accounting Estimates In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and revenues during the reporting
period. Actual results could differ from those estimates. NOTE C - LIQUIDITY MATTERS The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America,
which contemplate continuation of the Company as a going concern. However, the
Company incurred net losses of $1,088,307 and $1,420,299, respectively, for
the years ended June 30, 2004 and 2003 and used $475,046 and $848,767,
respectively, in operations. In December 2002, Novo Networks contributed $2.5
million to acquire an interest in Paciugo (see Note A and Note G) which was
used for opening a new location and for operations. As of June 30, 2004 and
2003, the Company had $259,404 and $776,781, respectively, in cash. F-30




---



##### Table of Contents



NOTE C - LIQUIDITY MATTERS
- Continued The Companys ability to continue as a going concern is dependent on
improving operating results and cash flows or obtaining another source of
financing, such as further cash contributions from the founding partners. There can be no assurance that the
Company will be successful in any of these matters or that the founding
partners will provide further funds. NOTE D - PROPERTY AND EQUIPMENT Depreciation
is provided on a straight-line basis for owned assets. Leased
assets and improvements are amortized over the shorter of the lease term or
the useful life of the asset. Property and equipment consists of the
following: Usefullife
    
    2004
    
    2003Equipment
    
    3-5 years
    
    $
    1,170,909
    
    
    $
    1,178,729Leasehold improvements
    
    2-5 years
    
    
    809,131
    
    
    
    951,776Furniture and fixtures
    
    5-7 years
    
    
    109,169
    
    
    
    108,629Vehicles
    
    5 years
    
    
    250,968
    
    
    
    250,9682,340,177
    
    
    
    2,490,102Accumulated depreciation and amortization
    
    
    
    
    
    
    (1,035,278
    )
    
    
    (614,855
    )$
    1,304,899
    
    
    $
    1,875,247
 NOTE E - LONG-TERM DEBT 2004
    
    2003Note payable to a law firm,
non-interest bearing. Principal payments
are due in monthly installments of
$12,045. The note was paid during 2004.
    
    $
    
    
    
    $
    108,404Note payable to a bank, bearing
interest at the higher of (i) the daily
Prime Rate or (ii) the daily Federal
Funds Rate plus 50 basis points (4.5%
at June 30, 2003). Interest and
principal are due in monthly
installments of approximately $26,000,
with the term expiring on December 31,
2003. The note is collateralized by
certain assets of the Company and a
personal guarantee from a founding
partner. The note payable contains
financial covenants. The note was paid
during 2004.
    
    
    
    
    
    
    161,864
 F-31




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##### Table of Contents



NOTE E - LONG-TERM
DEBT - Continued 2004
    
    2003Notes payable to four lenders for
financing business vehicles and
equipment, bearing interest at fixed
rates ranging from 4.75% to
11.89%. Interest and principal are due
in monthly installments ranging from
$334 to $850. These notes mature from
December 2004 to October 2007. These
notes are collateralized by and
equipment.
    
    $
    47,382
    
    
    $
    78,187Notes payable to banks, bearing
interest at a fixed rate of
5.75%. Interest and principal are due in
monthly installments of $2,000, with
the final payment due June 2004. These
notes are collateralized by computers.
    
    
    26,216
    
    
    
    21,89873,598
    
    
    
    370,353Less: current portion
    
    
    37,148
    
    
    
    322,828$
    36,450
    
    
    $
    47,525
 The following are scheduled maturities of notes payable as of June 30, 2004: For theyear endedJune 30,2005
    
    $
    37,1482006
    
    
    29,2562007
    
    
    5,6812008
    
    
    1,513$
    73,598
 NOTE F - COMMITMENTS AND CONTINGENCIES  Operating LeasesPaciugo is a lessee under certain non-cancelable operating leases. Terms of
the leases call for monthly payments ranging from $2,860 to $10,290. For the
year ended June 30, 2004 and 2003, the Company incurred rental expense of
approximately $520,136 and $366,000, respectively. F-32




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NOTE F - COMMITMENTS AND
CONTINGENCIES - Continued Future minimum lease payments under these non-cancelable operating leases are
as follows: For theyear endedJune 30,2005
    
    $
    475,8102006
    
    
    417,7362007
    
    
    353,7892008
    
    
    36,048$
    1,283,383
 Employment Agreement The Company has entered into multi-year employment agreements with three of
its executives. These agreements mature during December 2005 and provide for
annual salaries ranging between $80,000 and $150,000. NOTE G - RELATED PARTY TRANSACTIONS In December of 2002, Novo Networks acquired an Initial Interest in Paciugo by
contributing $2.5 million. Under the Purchase Agreement, certain partners
received a $450,000 payment on their outstanding note payable. The Purchase
Agreement required all amounts due to the partners, including outstanding
interest to be converted to partners capital except for an outstanding
balance of $450,000. Under the terms of the Purchase Agreement, in the event
that Novo Networks purchases the Subsequent Interest in Paciugo, the note
payable of $450,000 will be paid to the partners. If Novo Networks does not
purchase the Subsequent Interest, any remaining debt to the partners will be
converted to partners capital. During 2004, the partners contributed $270,000 as additional equity to the
Company. For the years ended June 30, 2004 and 2003, the Company paid $62,500 and
$125,000, respectively, to Novo Networks for management fees. F-33




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##### Table of Contents



INDEX TO EXHIBITS EXHIBIT
    
    
    
    FILEDNUMBER
    
    DESCRIPTION
    
    HEREWITHX21.1
    
    Subsidiaries of Novo Networks, Inc.
    
    X23.1
    
    Consent of Grant Thornton LLP
    
    X23.2
    
    Consent of Grant Thornton LLP
    
    X24
    
    Power of Attorney
    
    See Signature Pages31.1
    
    Certification of the Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
    
    X31.2
    
    Certification of the Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
    
    X32.1
    
    Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
    
    X
 A-1