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UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
 FORM 10-Q (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended December 31, 2004 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to COMMISSION FILE NUMBER 0-28579 NOVO NETWORKS, INC.  Delaware
(State or Other Jurisdiction of Incorporation)
    
    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) Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date: On February 11, 2005, 52,323,701 shares of the registrants common stock, $.00002 par value per
share, were outstanding.




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NOVO NETWORKS, INC. QUARTERLY REPORT FORM 10-Q
INDEX  
 PAGE NO.PART I:
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsConsolidated Balance Sheets as of December 31, 2004 and June 30, 2004
    
    
    3Consolidated Statements of Operations for the three and six months ended December 31, 2004 and 2003
    
    
    4Consolidated Statements of Cash Flows for the three and six months ended December 31, 2004 and 2003
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    22Item 4.
    
    Controls and Procedures
    
    
    22PART II:
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    22Item 2.
    
    Unregistered Sale of Equity Securities and Use of Proceeds
    
    
    23Item 3.
    
    Defaults Upon Senior Securities
    
    
    23Item 4.
    
    Submission of Matters to a Vote of Securities Holders
    
    
    23Item 5.
    
    Other Information
    
    
    23Item 6.
    
    Exhibits
    
    
    23SIGNATURES
    
    
    24Mutual Settlement, Release Agreement and Covenant Not to SueCertification of the Principal Executive Officer Pursuant to Section 302Certification of the Principal Financial and Accounting Officer Pursuant to Section 302Certification Pursuant to Section 906
  2




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NOVO NETWORKS, INC. 
 CONSOLIDATED BALANCE SHEETS
 December 31, 2004
    
    
    June 30, 2004(unaudited)ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    1,980,714
    
    
    $
    1,764,370Note receivable and other receivables,
net of allowance (-0- at December 31, 2004 and $4,076,839 at June 30, 2004)
    
    
    
    
    
    
    Prepaid expenses
    
    
    261,536
    
    
    
    387,4372,242,250
    
    
    
    2,151,807LONG-TERM ASSETSPrepaid expenses
    
    
    213,042
    
    
    
    225,000Deposits
    
    
    5,745
    
    
    
    5,745Property and equipment, net
    
    
    
    
    
    
    254,746Equity investments
    
    
    256,395
    
    
    
    425,000475,182
    
    
    
    910,491$
    2,717,432
    
    
    $
    3,062,298LIABILITIES & STOCKHOLDERS EQUITYCURRENT LIABILITIESAccounts payable
    
    $
    
    
    
    $
    49,207Accrued liabilities
    
    
    215,114
    
    
    
    144,646Customer deposits
    
    
    2,000
    
    
    
    2,000217,114
    
    
    
    195,853COMMITMENTS AND CONTINGENCIES
    
    
    
    
    
    
    STOCKHOLDERS EQUITYPreferred stock, $0.00002 par value, $1,000 liquidation preference per share,
authorized 25,000,000, issued and outstanding 13,973 and 13,605,
liquidation value  $13,973,000 and $13,605,000, respectively
    
    
    
    
    
    
    Common stock, $0.00002 par value, authorized 200,000,000,
issued and outstanding, 52,323,701 shares
    
    
    1,046
    
    
    
    1,050Additional paid-in capital
    
    
    258,252,332
    
    
    
    257,874,065Accumulated deficit
    
    
    (255,753,060
    )
    
    
    (255,008,670
    )2,500,318
    
    
    
    2,866,445$
    2,717,432
    
    
    $
    3,062,298
 The accompanying notes are an integral part of these financial statements. 3




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NOVO NETWORKS, INC. 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 For the Three Months
    
    
    For the Six MonthsEnded December 31,
    
    
    Ended December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003(unaudited)
    
    
    (unaudited)Operating expenses:General and administrative expenses
    
    $
    438,506
    
    
    $
    491,761
    
    
    $
    1,042,331
    
    
    $
    1,122,409Impairment loss
    
    
    
    
    
    
    757,801
    
    
    
    
    
    
    
    757,801Depreciation and amortization
    
    
    127,374
    
    
    
    32,344
    
    
    
    254,746
    
    
    
    67,290565,880
    
    
    
    1,281,906
    
    
    
    1,297,077
    
    
    
    1,947,500Loss from operations, before
other (income) expense
    
    
    (565,880
    )
    
    
    (1,281,906
    )
    
    
    (1,297,077
    )
    
    
    (1,947,500
    )Other (income) expense:Interest income
    
    
    (5,338
    )
    
    
    (5,870
    )
    
    
    (10,104
    )
    
    
    (14,182
    )Loss in equity investments
    
    
    108,936
    
    
    
    142,290
    
    
    
    168,605
    
    
    
    247,722Other (income) expense
    
    
    (1,091,850
    )
    
    
    12,723
    
    
    
    (1,089,450
    )
    
    
    (15,119
    )(988,252
    )
    
    
    149,143
    
    
    
    (930,949
    )
    
    
    218,421Net income
(loss)
    
    
    422,372
    
    
    
    (1,431,049
    )
    
    
    (366,128
    )
    
    
    (2,165,921
    )Series D preferred dividends
    
    
    (191,021
    )
    
    
    (176,436
    )
    
    
    (378,267
    )
    
    
    (349,385
    )Net income (loss) allocable to common shareholders
    
    $
    231,351
    
    
    $
    (1,607,485
    )
    
    $
    (744,395
    )
    
    $
    (2,515,306
    )Net income (loss) per share  (basic and diluted)
    
    $
    0.00
    
    
    $
    (0.03
    )
    
    $
    (0.01
    )
    
    $
    (0.05
    )Weighted average number of shares
outstanding  (basic and diluted)
    
    
    52,323,701
    
    
    
    52,323,701
    
    
    
    52,323,701
    
    
    
    52,323,701
 The accompanying notes are an integral part of these financial statements. 4




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NOVO NETWORKS, INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Six Months EndedDecember 31,2004
    
    
    2003(unaudited)CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (366,128
    )
    
    
    (2,165,921
    )Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation and amortization
    
    
    254,746
    
    
    
    67,290Other non-cash charges and credits:Loss in equity investments
    
    
    168,605
    
    
    
    247,722Impairment loss
    
    
    
    
    
    
    757,801Change in operating assets and liabilities:Prepaid expenses
    
    
    137,859
    
    
    
    (326,917
    )Accounts payable
    
    
    (49,207
    )
    
    
    (5,935
    )Accrued liabilities
    
    
    70,469
    
    
    
    18,026Net cash provided by (used in) operating activities
    
    
    216,344
    
    
    
    (1,407,934
    )NET CHANGE IN CASH AND CASH EQUIVALENTS
    
    
    216,344
    
    
    
    (1,407,934
    )CASH AND CASH EQUIVALENTS, beginning of period
    
    
    1,764,370
    
    
    
    3,894,081CASH AND CASH EQUIVALENTS, end of period
    
    $
    1,980,714
    
    
    $
    2,486,147
 The accompanying notes are an integral part of these financial statements. 5




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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 quarterly report (this
Quarterly 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
Quarterly 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 Quarterly Report. We have been pursuing a Business Opportunity or Strategic Combination during fiscal 2004 and
the six months ended December 31, 2004, that would likely be conditioned upon our completion of a
Recapitalization Event (as hereinafter defined in the section entitled Business  Plan of
Operation). NOVO NETWORKS, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. Business General The company now known as Novo Networks 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. 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 assets (a Business Opportunity).
Unfortunately, our efforts did not result in such an outcome, with negotiations ceasing prior to
the actual consummation of any of the various Business Opportunities 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 the third quarter of fiscal 2004 and began
to pursue a revised plan of operation 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 of a certain amount
of our common stock for the equity of a privately held company that values our assets, including,
without limitation, our cash, and our status as a reporting company under the Securities Exchange
Act of 1934, as amended (a Strategic Combination). In pursuing the best Strategic 6




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Combination possible, we believe that it will be necessary to effect a Recapitalization Event (as
hereinafter defined). 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 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). Despite significant efforts, we were unable to accomplish such Recapitalization Event in
the third quarter of our fiscal 2004. Our belief is that we would be in a better position to
consummate a Strategic Combination if we were able to achieve such a Recapitalization Event.
Accordingly, we proposed another Recapitalization Event on January 6, 2005, and discussions with
the holders of our preferred stock are ongoing. 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. As
previously disclosed, the term of the engagement was for three months, at a monthly rate of
$15,000, with the ability to extend on a month-to-month basis. In October of 2004, Oasis agreed to
continue providing such services for as long as it takes to consummate a Strategic Combination in
exchange for an additional payment of $30,000. If a transaction is consummated, Oasis will also be
entitled to receive warrants, which will be exercisable for a period of two years, to purchase one
percent of our issued and outstanding post-transaction common stock at an exercise price equal to
the average of the mean between the closing bid and ask prices for our common stock for the fifteen
business days immediately subsequent to the closing date of 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 binding letter of intent that involves a Strategic Combination and a possible
Recapitalization Event as of the date of this Quarterly Report. Unless we can achieve these
objectives on or before June 30, 2005, 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 (as hereinafter defined). Qwest Settlement On June 17, 2002, we, along with the liquidating trust, filed a lawsuit seeking damages resulting
from numerous disputes over business dealings and agreements with Qwest, a former customer and
vendor, and John L. Higgins, a former employee and consultant. 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. In
October of 2004, we entered into settlement discussions with Qwest that resulted in us 7




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receiving $1,150,000, in December of 2004, which has been included in other income in the accompanying Statement of Operations. Since we funded the costs of prosecuting the Qwest claim and provided
financing and administrative services to the liquidating trust and the debtor subsidiaries during
their bankruptcy proceedings, all of which required repayment, the settlement proceeds were paid to
us instead of the liquidating trust in accordance with the amended plan. However, we may still be
required to pay certain of the expenses of the remaining efforts of the liquidating trust. For
further details regarding this litigation, see Note 9 entitled Legal Proceedings. 2. Liquidity and Capital Resources At December 31, 2004, we had consolidated current assets of $2.2 million, including, without
limitation, cash and cash equivalents of approximately $2.0 million and net working capital of $2.0
million. Historically, we 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 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 economic downturn, our only current source of funding is
expected to be cash on hand. Again, our ability to satisfy our current obligations is dependent upon our cash on hand. Our
current obligations consist of funding working capital. We estimate that it will take
approximately $600,000 of our remaining cash to satisfy these obligations for the next six months.
We also expect to incur legal and advisory fees in connection with our efforts to locate and
consummate a Strategic Combination. In addition, we may have to fund certain expenses of the
liquidating trust. Accordingly, we will be left with approximately $1.2 million or less of cash
available for use in a Strategic Combination. In the event we expend all $1.2 million or less on a
Strategic Combination and achieve no return or cash flow from that transaction before June 30, 2005
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 (as hereinafter defined). We believe that under any
such 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 Strategic Combinations 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 in the near future. Consequently, our failure to identify potential Strategic Combinations, 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 our other obligations. No
assurances can be given that adequate levels of financing will be available to us on acceptable
terms, if at all. 3. General The accompanying consolidated financial statements as of December 31, 2004, and for the three and
six month periods ended December 31, 2004, and 2003, respectively, have been prepared by us,
without audit, pursuant to the interim financial statements rules and regulations of the United
States Securities and Exchange Commission (SEC). In our opinion, the accompanying consolidated
financial statements include all adjustments necessary to present fairly the results of our
operations and cash flows at the dates and for the periods indicated. The results of operations
for the interim periods are not necessarily indicative of the results for the full fiscal year.
The accompanying consolidated financial statements should be read in conjunction with the audited
consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year
ended June 30, 2004. The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires us to make estimates and assumptions that affect the
reported amounts of assets and 8




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liabilities and disclosures 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. As of June 30, 2002, the assets and liabilities of the debtor subsidiaries were deconsolidated, as
a liquidating trust controls their assets. For further details regarding the bankruptcy
proceedings, see Note 2 entitled Managements Discussion of Financial Condition and Results of
Operations  Bankruptcy Proceedings. The estimated realizable values and settlement amounts may
be different from the proceeds ultimately received or payments ultimately made. 4. Basis of Presentation The accompanying consolidated financial statements for the three and six months ended December 31,
2004, include our accounts and the accounts of our wholly owned subsidiaries that are not involved
in the bankruptcy plan administration process. Revenues.We do not expect to generate any revenues from operations until such time, if any, as we
successfully redeploy some or all of our remaining cash assets in a Strategic Combination, if at
all. General and Administrative Expenses. These expenses include general corporate expenses, management
salaries and benefits, professional fees, travel expenses, rent and administrative expenses.
Currently, we maintain our corporate headquarters in Dallas, Texas. Depreciation and Amortization. Depreciation and amortization represents the depreciation of
property and equipment and amortization of leasehold improvements. Due to going concern
considerations, we reduced the useful lives of our assets in fiscal 2005, and we have fully
depreciated our assets as of December 31, 2004. Loss in Equity Investments. Loss in equity investments results from our minority ownership
interest in Paciugo, which is accounted for under the equity method of accounting. Under the
equity method, our proportionate share of each subsidiarys operating loss is included in
loss in equity investments. In December of 2002, we purchased the Initial Interest in Paciugo (as
hereinafter defined). For further details regarding Paciugo, see Item 2 entitled Managements
Discussion and Analysis of Financial Condition and Results of Operations  Acquisition of the
Initial Interest in Paciugo. The values 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. On February
14, 2003, ORB Communications & Marketing, Inc. filed for protection under Chapter 7 of the
Bankruptcy Code (as hereinafter defined), and in August of 2003, Gemini Voice Solutions, Inc.
obtained the approval of its stockholders to begin the process of winding-up its affairs. 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 we will
continue to record our proportionate share of those operating losses. Other Income. Other income, net of other expense, in the three and six months ended December 31,
2004, resulted from our receipt of $1,150,000 from the Qwest settlement. Other income, net of
other expense, in the three and six months ended December 31, 2003, resulted 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 a payment since September of 2003,
due to disagreements between us and Paciugo regarding the Support Services. For further details
regarding the payments, see Item 2 entitled Managements Discussion and Analysis of Financial
Condition and Results of Operations  Acquisition of the Initial Interest in Paciugo. 5. 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. 9




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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. 6. Income (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 the
per share computation, 67,111,320 and 67,826,400 shares would have been included in the diluted
earnings per share calculation for the three and six months ended December 31, 2004, and 2003,
respectively. 7. 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, without limitation, 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 investments
in our consolidated statements of operations. Currently, we have minority equity interests in Paciugo and certain development stage Internet and
communications companies. The values of those 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. During the second quarter of
fiscal 2003, we purchased the Paciugo Interest. For further details regarding this transaction,
see the Item 2 entitled Managements Discussion and Analysis of Financial Condition and Results of
Operations  Acquisition of the Initial Interest in Paciugo. The Paciugo Interest is accounted
for under the equity method. During the six months ended December 31, 2004 and 2003, we recorded equity losses totaling $168,600
and $247,700, respectively. During the three months ended December 31, 2004 and 2003, we recorded
equity losses totaling $108,900 and $142,300, respectively. As previously mentioned, 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. As of June 30, 2004, we impaired our interest in Paciugo to equal our
interest in the net book value of Paciugo when we determined that the
Sales Price (as hereinafter defined) in the Sales
Agreement (as hereinafter defined) would not be received. For further
details regarding the Sales Agreement, see Item 2 entitled
Managements Discussion and Analysis of Financial Condition and
Results of Operations  Acquisition of the Initial Interest in
Paciugo. For the equity interests that were previously impaired
completely, we ceased recording our share of losses incurred by the subsidiary. Equity investments consists of the following at December 31, 2004: 10




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##### Table of Contents



% Ownership *
    
    
    Accounting
    
    CarryingCompany Name
    
    Common
    
    
    Preferred
    
    
    Method
    
    ValuePaciugo Management LLC
    
    
    33.3
    %
    
    
    0.0
    %
    
    Equity
    
    $
    256,395Gemini Voice Solutions, Inc. (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
    
    
    $
    256,395
 *
    
    Reflects our ownership percentage at December 31, 2004.**
    
    Gemini Voice began the process of winding up its affairs in August of 2003.***
    
    ORB filed a voluntary petition under Chapter 7 of the bankruptcy code in February of 2003.
 For the six months ended December 31, 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 six months ended December 31, 2004, and 2003, is as
follows: December 31,2004
    
    
    2003Financial position information:Current assets
    
    $
    548,143
    
    
    $
    656,852Non-current assets
    
    
    1,100,263
    
    
    
    1,654,157Current liabilities
    
    
    392,714
    
    
    
    411,031Non-current liabilities
    
    
    479,970
    
    
    
    484,081Net assets
    
    
    1,230,026
    
    
    
    1,397,397Income statement information:Revenues
    
    
    957,445
    
    
    
    1,004,655Gross profit
    
    
    736,664
    
    
    
    788,395Net loss
    
    
    (529,926
    )
    
    
    (715,121
    )Our equity in Paciugos net loss
    
    $
    168,605
    
    
    $
    247,722
 8. Stock Options At December 31, 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 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 measure compensation cost related to stock and stock options issued to employees using
the intrinsic method of accounting prescribed by 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 will
be required to comply with SFAS 123(R) that was adopted in December of 2004, which will require us
to record compensation expense in our results of operations for the first reporting period after
June 15, 2005. 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: 11




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##### Table of Contents



For the six months endedDecember 31,2004
    
    
    2003Expected volatility
    
    
    2667.4
    %
    
    
    2667.4
    %Risk-free interest rate
    
    
    0.9
    %
    
    
    0.9
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Expected life (years)
    
    
    10.0
    
    
    
    10.0
 For purposes of pro forma disclosure, the estimated fair values of the options are amortized
to expense over the options vesting periods of one to three years. For the three months ended
    
    
    For the six months endedDecember 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003(unaudited)
    
    
    (unaudited)
    
    
    (unaudited)
    
    
    (unaudited)Pro Forma Net Income (Loss)Net income (loss) allocable to common shareholders as reported
    
    $
    231,351
    
    
    $
    (1,607,485
    )
    
    $
    (744,395
    )
    
    $
    (2,515,306
    )Compensation recorded
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Add: stock based compensation expense determined under intrinsic value methodLess: stock-based compensation expense determined under fair value-based method
    
    $
    2,500
    
    
    $
    2,500
    
    
    $
    6,000
    
    
    $
    5,000Pro forma net income (loss)
    
    $
    233,851
    
    
    $
    (1,604,985
    )
    
    $
    (738,395
    )
    
    $
    (2,510,306
    )Net income (loss) per share, pro forma
    
    $
    0.00
    
    
    $
    (0.03
    )
    
    $
    (0.01
    )
    
    $
    (0.05
    )Net income (loss) per share, basic and diluted, as reported
    
    $
    0.00
    
    
    $
    (0.03
    )
    
    $
    (0.01
    )
    
    $
    (0.05
    )
 9. Legal Proceedings 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. In
October of 12




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##### Table of Contents



2004, we entered into settlement discussions with Qwest that resulting in us receiving
$1,150,000 in December, 2004. Since we funded the costs of prosecuting the Qwest claim and
provided financing and administrative services to the liquidating trust and the debtor subsidiaries
during their bankruptcy proceedings, all of which required repayment, the settlement proceeds were
paid to us instead of the liquidating trust in accordance with the amended plan. However, we may
still be required to pay certain of the expenses of the remaining efforts of the liquidating trust. 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 Quarterly Report because they have
neither been terminated nor has there been any material
developments during the fiscal quarter ended December 31, 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 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements Forward-looking statements appear throughout this Quarterly Report. We have based these
forward-looking statements on our current expectations and projections about future events. The
important factors listed in our Annual Report on Form 10-K for our fiscal year ended June 30, 2004
(the Annual Report), under the heading entitled Business Considerations, as well as all other
cautionary language in this Quarterly 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 Quarterly Report and in our 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 Quarterly 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 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 Strategic Combination;
    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: 13




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##### Table of Contents




    statements regarding the estimated liquidation value of assets and settlement
amounts of liabilities; and
    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 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 result in our stockholders
receiving no recovery on or value for their stock holdings;
    risks associated with preserving the net operating loss carryforwards of our
debtor subsidiaries; 14




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##### Table of Contents




    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. 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 Quarterly
Report, and particularly in our Annual Report 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 Quarterly Report. We undertake no obligation to publicly revise these forward-looking
statements to reflect events or circumstances that arise after the date of this Quarterly Report or
the Annual Report, respectively. Acquisition of the Initial Interest in Paciugo 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 held an option, which expired 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 have
resulted, if exercised, 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. As
mentioned previously, throughout this Quarterly 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 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 first quarter of our fiscal 2004, 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. 15




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##### Table of Contents



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.
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 later 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. Depending upon a variety of factors, including, without limitation, those outlined above, most of
which are beyond our control, we may determine it necessary to record additional impairment charges
against the Paciugo Interest in our 2005 fiscal year. The factors that may result in the impairment
of our Paciugo Interest include, without limitation:  
    Paciugos ability to locate additional working capital;
    Paciugos ability to expand sales while controlling and reducing costs; and
    Paciugos ability to compete against more well-known gelato, frozen dessert, and
ice cream stores, many of which maintain greater management, financial and other
resources. Bankruptcy Proceedings 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 mentioned previously, we will refer to the subsidiaries
that have filed for bankruptcy protection as our debtor subsidiaries throughout this Quarterly
Report. At this same time, we announced that we were exploring the option of diversifying our
business by entering into other lines of business. On April 2, 2001, our subsidiary iGlobal filed a voluntary petition under Chapter 7 of Title 11 of
the United States 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 acquisition of iGlobal in March of 2000. 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 NNOC, 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. 16




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##### Table of Contents



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. Our principal operating
subsidiaries, AxisTel and eVolve, ceased operations in September of 2001 and December of 2001,
respectively in connection with the conversion from a reorganization to a liquidation. 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. 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, as described in the amended plan and disclosure statement. Prior to the debtor subsidiaries bankruptcy filings, we had 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. 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
balance on the new secured note was approximately $3.3 million that had been fully reserved due to
the uncertainty surrounding the collection of this note. The new secured note and the reserve was
written off in the period covered by this Quarterly Report. 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. 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 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 our creditors or stockholders. 17




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##### Table of Contents



Operations Summary For the three and six months ended December 31, 2004, and 2003, we effectively had no operations or
sources of revenue, and we do not anticipate being in a position to resume operations until such
time, if any, as we consummate a Strategic Combination. We cannot predict when or if we will be
successful in such a Strategic Combination or a new business venture that we may consider, if any. We currently anticipate that we will not have any revenue unless or until we are able to redeploy
our remaining cash assets in a Strategic Combination. Summary of Operating Results The table below summarizes our operating results. For the Three Months
    
    
    For the Six MonthsEnded December 31,
    
    
    Ended December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003(unaudited)
    
    
    (unaudited)Operating expenses:General and administrative expenses
    
    $
    438,506
    
    
    $
    491,761
    
    
    $
    1,042,331
    
    
    $
    1,122,409Impairment loss
    
    
    
    
    
    
    757,801
    
    
    
    
    
    
    
    757,801Depreciation and amortization
    
    
    127,374
    
    
    
    32,344
    
    
    
    254,746
    
    
    
    67,290565,880
    
    
    
    1,281,906
    
    
    
    1,297,077
    
    
    
    1,947,500Loss from operations, before
other (income) expense
    
    
    (565,880
    )
    
    
    (1,281,906
    )
    
    
    (1,297,077
    )
    
    
    (1,947,500
    )Other (income) expense:Interest income
    
    
    (5,338
    )
    
    
    (5,870
    )
    
    
    (10,104
    )
    
    
    (14,182
    )Loss in equity investments
    
    
    108,936
    
    
    
    142,290
    
    
    
    168,605
    
    
    
    247,722Other (income) expense
    
    
    (1,091,850
    )
    
    
    12,723
    
    
    
    (1,089,450
    )
    
    
    (15,119
    )(988,252
    )
    
    
    149,143
    
    
    
    (930,949
    )
    
    
    218,421Net income (loss)
    
    
    422,372
    
    
    
    (1,431,049
    )
    
    
    (366,128
    )
    
    
    (2,165,921
    )Series D preferred dividends
    
    
    (191,021
    )
    
    
    (176,436
    )
    
    
    (378,267
    )
    
    
    (349,385
    )Net income (loss) allocable to common shareholders
    
    $
    231,351
    
    
    $
    (1,607,485
    )
    
    $
    (744,395
    )
    
    $
    (2,515,306
    )Net income (loss) per share  (basic and diluted)
    
    $
    0.00
    
    
    $
    (0.03
    )
    
    $
    (0.01
    )
    
    $
    (0.05
    )Weighted average number of shares
outstanding  (basic and diluted)
    
    
    52,323,701
    
    
    
    52,323,701
    
    
    
    52,323,701
    
    
    
    52,323,701
 Three months ended December 31, 2004 Compared to Three months ended December 31, 2003 Revenues. No revenues were generated during the three months ended December 31, 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 Strategic Combination, if at all. No
assurances can be given that we will generate revenues from operations in the future. 18




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Direct Costs. No direct costs were incurred during the three months ended December 31, 2004, and
2003, as we currently have no operations. General and Administrative Expenses. General and administrative expenses decreased approximately
11% or $53,300 during three months ended December 31, 2004, to $438,500 from $491,800 in the three
months ended December 31, 2003. The decrease in selling, general and administrative expenses
during the three months ended December 31, 2004, resulted primarily from the continued downsizing
of our workforce and the reduction in business insurance offset by an increase in legal and
professional fees associated with litigation matters. General and administrative expenses for the three months ended December 31, 2004, consisted
primarily of approximately (i) $111,600 of salaries and benefits, (ii) $195,100 of legal and
professional fees, (iii) $47,700 of business insurance and (iv) $84,100 of other operating
expenses. General and administrative expenses for the three months ended December 31, 2003,
consisted primarily of approximately (i) $131,400 of salaries and benefits, (ii)
$107,000 of legal and professional fees, (iii) $141,700 of business insurance and (vi) $111,700 of
other operating expenses. We anticipate that 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 general and administrative expense to continue to be approximately $100,000 per month
until such time, if any, as we choose to redeploy our remaining cash assets. Depreciation and Amortization. Depreciation recorded on fixed assets during the three months ended
December 31, 2004, totaled approximately $127,400, as compared to approximately $32,300 for three
months ended December 31, 2003. Due to going concern considerations, we changed the estimate of
the useful lives of our assets in fiscal 2005, and we have fully depreciated our assets as of
December 31, 2004. Interest Income.We recorded interest income from cash investments of $5,300 in the three months
ended December 31, 2004, as compared to approximately $5,900 for the three months ended December
31, 2003. The decrease in interest income is due to decreased cash balances. Loss in Equity Investments. Loss in equity investments results from our minority ownership
interest in Paciugo that is 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 2 entitled Managements Discussion and Analysis of Financial
Condition and Results of Operations  Acquisition of the Initial Interest in Paciugo. The values
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. 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 we will record our proportionate share of those operating
losses. Other (Income) Expense.During the three months ended December 31, 2004, we recorded other income,
net of other expense of $1.1 million as compared other expense of approximately $12,700 in the
three months ended December 31, 2003. Other income for the three months ended December 31, 2004
consists of the Qwest settlement in the amount of $1.1 million. Other income for the three months
ended December 31, 2003 consists of payments of $20,833 per month for July and August of 2003 from
Paciugo. However, there can be no assurances that we will receive any future 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 2 entitled Managements Discussion and Analysis of
Financial Condition and Results of Operations  Acquisition of the Initial Interest in Paciugo. Income Taxes.There is no provision for income tax expense for the three months ended December 31,
2004, due to net operating loss carryforwards (NOLs) available. There is no provision for the
three months ended December 31, 2003, since we incurred a net loss. At June 30, 2004, we had NOLs
of approximately $92.9 million. The NOLs expire incrementally through 2024. 19




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Six Months Ended December 31, 2004 Compared To Six Months Ended December 31, 2003 Revenues.No revenues were generated during either period presented. No revenues were generated
based on (i) the termination of all operations of our debtor subsidiaries by December of 2001,
which historically provided all of our significant revenues and (ii) the uncertainty surrounding
our plans to explore other opportunities. Direct Costs.No direct costs were incurred during the six months ended December 31, 2004, and
2003. General and Administrative.General and administrative expenses decreased approximately $80,100
during the six months ended December 31, 2004, from approximately $1.1 million during the six
months ended December 31, 2003, a decrease of 7%. The drop in selling, general and administrative
expenses is primarily due to (i) the downsizing of the workforce, (ii) the reduction business
insurance, (iii) reduction in legal fees and (iv) an overall reduction of overhead related to
office expenses offset by increase in professional fees associated with the Qwest arbitration. General and administrative expenses for the six months ended December 31, 2004, consisted primarily
of approximately (i) $237,600 of salaries and benefits, (ii) $209,200 of legal fees, (iii) $260,500
of consulting and professional fees, (iv) $172,000 of business
insurance, (v) $47,200 of office
rent and expenses and (vi) $115,900 of other operating expenses. Selling, general and
administrative expenses for the six months ended December 31, 2003, consisted primarily of
approximately (i) $275,200 of salaries and benefits, (ii) $224,700 of legal fees, (iii) $126,700 of
professional and consulting fees, (iv) $302,800 of business insurance, (v) $47,200 of office rent
and expenses and (vi) $115,900 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 general and administrative expense to be
approximately $100,000 per month until such time, if any, as we are able to develop an alternative
business strategy. Impairment Loss. Due to the execution of the Sales Agreement with Paciugo, we recorded an
impairment loss of $757,801 during the six months ended December 31, 2003, reducing the net book
value of the investment to the proposed Sales Price. Depreciation and Amortization.Depreciation recorded on fixed assets during the six months ended
December 31, 2004, totaled approximately $254,800, as compared to approximately $67,300 for the six
months ended December 31, 2003. Due to going concern considerations, we changed the estimate of
the useful lives of our assets in fiscal 2005, and we have fully depreciated our assets as of
December 31, 2004. Interest Income.We recorded interest income from cash investments of approximately $10,100 for
the six months ended December 31, 2004, as compared to approximately $14,200 for the six months
ended December 31, 2003. The decrease in interest income during the current period is a result of
lower amounts of cash available to be invested. Loss in Equity Investments.Loss in equity investments resulted from our minority ownership in
Paciugo that is accounted for under the equity method of accounting. Under the equity method, our
proportionate share of each of our subsidiarys operating loss is included in equity in loss of
investments. During the six months ended December 31, 2004, there was a loss of approximately
$168,600, as compared to $247,700 during the six months ended December 31, 2003. The current
six-month loss resulted from our 33% Initial Interest in Paciugo. For further details regarding
Paciugo, see Item 2 entitled Managements Discussion and Analysis of Financial Condition and
Results of Operations  Acquisition of Initial Interest in Paciugo, 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 up to the cost of that
investment or from impairment losses. As mentioned previously, our previous strategic investments
are either winding-up their affairs or liquidating; however, we do not expect to record future
charges related to them since they are completely impaired. We expect Paciugo to continue in the
near future to incur operating losses and we will record our proportionate share of those operating
losses. 20




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Other (Income) Expense.During the six months ended December 31, 2004, we recorded other income,
net of other expense, of $1.1 million as compared other income, net of other expense, of
approximately $15,100 in the six months ended December 31, 2003. Other income for the six months
ended December 31, 2004, consists of the Qwest settlement in the amount of $1.1million. Other
income for the six months ended December 31, 2003, consists of payments of $20,833 per month for
July and August of 2003 from Paciugo. However, there can be no assurances that we will receive any
future payments, as Paciugo has not made a payment since September of 2003, due to disagreements
between us and Paciugo regarding these monthly payments, see Item 2 entitled Managements
Discussion and Analysis of Financial Condition and Results of Operations  Acquisition of the
Initial Interest in Paciugo. Income Taxes.There is no provision for income tax expense since we incurred net losses for the
six months ended December 31, 2004, and 2003. At June 30, 2004, we had NOLs of approximately $92.9
million. The NOLs expire incrementally through 2024. Liquidity and Capital Resources At December 31, 2004, we had consolidated current assets of $2.2 million, including, without
limitation, cash and cash equivalents of approximately $2.0 million and net working capital of $2.0
million. Historically, we 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 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 economic downturn, our only current source of funding is expected to be cash on
hand. Again, our ability to satisfy our current obligations is dependent upon our cash on hand. Our
current obligations consist of funding working capital. We estimate that it will take
approximately $600,000 of our remaining cash to satisfy these obligations for the next six months.
We also expect to incur legal and advisory fees in connection with our efforts to locate and
consummate a Strategic Combination. In addition, we may have to fund certain expenses of the
liquidating trust. Accordingly, we will be left with approximately $1.2 million or less of cash
available for use in a Strategic Combination. In the event we expend all of our $1.2 million or
less on a Strategic Combination and achieve no return or cash flow from that transaction before
June 30, 2005 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 such
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 Strategic Combinations that we may consider, if any. As mentioned previously, 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 Strategic
Combinations, 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 our other
obligations. 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 six
months ended December 31, 2004, and 2003, respectively, is summarized below: Cash provided by operating activities in the six months ended December 31, 2004, totaled
approximately $216,300 as compared to cash used in operating activities of approximately $1.4
million in the six months ended December 31, 2003. During the six months ended December 31, 2004,
cash flow provided by operating activities primarily resulted from operating losses that were less
than normal due to the negotiated settlement with Qwest of $1.15 million, net of non-cash charges,
totaling approximately $57,200, a decrease of $137,800 in prepaid expenses, a decrease in accounts
payable of $49,200 and an increase in accrued liabilities of $70,500. In the six months ended 21




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December 31, 2003, cash flow used by operating activities resulted from operating losses, net of
non-cash charges, totaling $1.1 million and the increase in prepaid expenses of $326,900. Net cash used in investing activities in the six months ended December 31 2004, and 2003, was zero. Cash flows from financing activities in the six months ended December 31, 2004, and 2003, were
zero. 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
June 30, 2005, unless we successfully complete a Strategic Combination. Our independent registered public accounting firm has 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. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk We are exposed to the impact of interest rate and other risks. We have investments in money market
funds of approximately $2.0 million at December 31, 2004. Due to the short-term nature of our
investments, we believe that the effects of changes in interest rates are limited and would not
materially affect profitability. 
 Item 4. Controls and Procedures We carried out an evaluation, under the supervision and with the participation of our Principal
Executive Officer and Principal Financial and Accounting Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures as defined in Rule 13a-15 of the
Securities Exchange Act of 1934. Based upon that evaluation, the Principal Executive Officer and
the Principal Financial and Accounting Officer concluded that our disclosure controls and
procedures are effective, as of the end of the period covered by this report, in timely alerting
them to material information relating to us (including our consolidated subsidiaries) required to
be included in this Quarterly Report. There have been no significant changes in our internal
controls over financial reporting or in other factors, which could significantly affect such
internal controls, subsequent to the date that we carried out our evaluation. 
 PART II: OTHER INFORMATION 
 Item 1. Legal Proceedings 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 22




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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. In October of 2004, we entered into settlement discussions with
Qwest that resulting in us receiving $1,150,000 in December, 2004. Since we funded the costs of
prosecuting the Qwest claim and provided financing and administrative services to the liquidating
trust and the debtor subsidiaries during their bankruptcy proceedings, all of which required
repayment, the settlement proceeds were paid to us instead of the liquidating trust in accordance
with the amended plan. However, we may still be required to pay certain of the expenses of the
remaining efforts of the liquidating trust. 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 Quarterly Report because they have
neither been terminated nor has there been any material developments during the fiscal quarter
ended December 31, 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 2. Unregistered Sale of Equity Securities and Use of Proceeds None. 
 Item 3. Defaults Upon Senior Securities None. 
 Item 4. Submission of Matters to a Vote of Security Holders None. 
 Item 5. Other Information None 
 Item 6. Exhibits  (a)
    Exhibits 10.61
    
    Mutual Settlement and Release Agreement and Covenant Not to Sue with Qwest Communications Corporation dated December 10, 2004.31.1
    
    Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of the Principal Financial and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 23




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, Novo Networks, Inc. has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NOVO NETWORKS, INC.Date: February 11, 2005
    
    By:
    
    /s/ Steven W. CapleSteven W. Caple
President
(Principal Executive Officer)Date February 11,2005
    
    By:
    
    /s/ Patrick G. MackeyPatrick G. Mackey
Senior Vice President
(Principal Financial and Accounting Officer)
 24