UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 1999
[ ] 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:
TMEX USA, Inc.
(Exact name of registrant as specified in its charter)
Nevada 33-0248339
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5031 Birch Street, Suite G, Newport Beach, California 92660
(Address of principal executive offices) (Zip Code)
949.863.9872
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [ ] Yes [X] No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. $413,999.00
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days. (See definition of affiliate in Rule
12b-2 of the Exchange Act.) As of March 31, 2000, approximately $17,912,595.
As of March 31, 2000, there were 14,679,437 shares of the issuer's $.001 par
value common stock issued and outstanding.
Documents incorporated by reference. There are no annual reports to security
holders, proxy information statements, or any prospectus filed pursuant to Rule
424 of the Securities Act of 1933 incorporated herein by reference.
Transitional Small Business Disclosure format (check one):
[ ] Yes [X] No
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PART I
Item 1. Description of Business.
Our Background and Development. TMEX USA, Inc., a Nevada corporation, formerly
Swiss Cellular Laboratories, Inc. ("Company"), was incorporated pursuant to the
laws of the State of Nevada on July 29, 1987, as a wholly owned subsidiary of
NuTek, Inc., a Nevada corporation, formerly Swiss Technique, Inc. ("NuTek"). On
June 30, 1995, NuTek distributed 270,042 of the 300,000 outstanding shares of
the Company's $.001 par value common stock which NuTek then held as a dividend
to the shareholders of record of NuTek on a pro rata basis. The distribution of
those shares of the Company's $.001 par value common stock to the shareholders
of NuTek was effected for the purpose of facilitating the Company's ability to
expand and diversify its business. On June 30, 1995, the Company changed its
name to TMEX USA, Inc.
On April 30, 1996, the Company and TMEX USA, Inc. a Missouri corporation ("TMEX
Missouri") entered into a Plan of Reorganization and Agreement whereby the
Company issued 1,300,000 shares of common stock in exchange for the assets of
TMEX Missouri, valued at $488,220. Subsequent to that reorganization, TMEX
Missouri was wound up and dissolved.
Our Business and Communications Network. We are an international
telecommunications provider of wholesale and retail voice, video, data, private
network, and Internet services via our computer network and laser communication
connection from the United States to Mexico. We utilize communications
technology, tested and approved by telecommunications carriers, to niche markets
and deliver a full range of services through our network. We are committed to
evaluating new technologies and continuing to improve our network services,
locations, and savings to our customers.
In September 1998, we installed the first cross border laser communications
system designed to connect Laredo, Texas to Nuevo Laredo, Mexico. The
combination of wireless and fiber technology which is utilized at the border
crossing was originally designed for expansion of our Asynchronous Transfer Mode
(ATM) Network and allows us to cross the terrain barrier of the Rio Grande
River. We began offering Mexican voice and data communications services to U.S.
Telecom Corporation through this laser connection by establishing a contractual
relationship through our Mexican subsidiary with Alestra (AT&T), a major
licensed Mexican phone carrier.
Products and Services.
Our service capabilities include voice, debit access, video and
e-commerce/internet, although we concentrate our marketing efforts on voice and
debit calling card access.
Voice Services. In the telecommunications market, we provide standard voice
telephone services to support international telephone traffic to Mexico. We
anticipate that we will contract with various United States carriers for initial
system usage of approximately 20.4 million minutes per month. We anticipate an
average margin of 1.83 cents per minute for telephone calls utilizing our
network into Mexico. By servicing these contracts, we anticipate that we can
generate gross profits of approximately $360,000 per month.
Debit Card Services. We provide telephone services to Mexico via debit card
access. Calls originate within the United States, are routed within the United
States (domestically) as well as to Mexico (internationally). We are currently
negotiating with United States carriers and distributors to provide
international debit calls from the United States to other markets, such as
Central and South America, Europe and Asia. We believe that our pricing is
competitive with the pricing of other wholesale carriers for the international
calls to Mexico. Our current debit card program targets Hispanic groups living
within the United States who make long distance international calls.
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Network Services. Our high speed ATM network supports all of a business'
international data, voice, or video requirements for service by one carrier. We
can provide secure private computer networks, telecommunication switch networks
and private voice communication networks within a fully integrated ATM system.
Internet Services. We provide standard Internet Service Provider (ISP) services
to the general public. These services include internet access, web hosting, web
page design, name registration, mail services and off-site data storage.
Consulting Services. We can assist small to medium size businesses with all of
their communication requirements. We provide full "turn key" services to update
existing network infrastructure, integrate Mexico calling services and provide
computer network consultations and recommendations.
Networking Switches. Our networking switches are supported by a fault tolerant
ATM system, which insures services are delivered over our network. Our switches
utilize Cabletron Systems as the primary switching source.
Our Target Markets and Channels of Distribution. Our customers consist of
wholesalers who purchase minutes of international telephone time to Mexico.
Communication quality, bandwidth and cost are priorities of these customers.
Utilizing our technologies, these customers receive high quality service and
benefit from reduced costs.
The Company expects that it can substantially increase its revenue with these
customers and other carriers to the Mexican market. The Company also expects to
expand its network to other markets.
Our Major Customer. Our major customer is Clifton Digital, Inc., one of the
largest marketers of debit calling cards in the United States. We recently
executed an addendum to our existing agreement with Clifton Digital, Inc., for
us to provide international service on telephone calls placed using the Clifton
calling cards. These calling cards are targeted to specific retailers throughout
the United States, such as 7-11 and Circle K stores, for their customers. The
contract with Clifton Digital, Inc. provides that we will sell $5 million of
debit calling card minutes each month for a twelve-month period after an
adequate introductory period. We are currently negotiating with other companies
in order to reduce our reliance on the contract with Clifton Digital, Inc.
Our Suppliers. Our network has been developed using products supplied by the
following three primary vendors: (i) Cabletron Systems, Inc., a Delaware
corporation ("Cabletron"); (ii) AstroTerra Corporation, a California
corporation; and (iii) FORE Systems, Inc., a Delaware corporation ("FORE
Systems"). Cabletron provides the ATM system and data access products, as well
as the switch routers and Internet switches and routers utilized for our
telecommunications network. FORE Systems provides the ATM access network which
interconnects our clients with our network and destination services. AstroTerra
provides a laser communications system which transmits communications via a
wireless optical communications system across the border of the United States
and Mexico which is separated by the Rio Grande River.
Our Competition. Our competitors for our debit calling card business include
companies which provide low cost telecommunications service to Mexico, such as
Blackstone, Inc.; U.S. South Communications, Inc.; and RSL Communications Ltd.
Our competitors for our wholesale minutes business include companies such as
Bordercom International, RSL Communications Ltd., Qwest Communications, Sprint
and AT&T. We believe our competitive advantages include low cost service, the
ability to supply niche markets with increased bandwidth, and our history of
established business in Mexico.
However, competition in the telecommunications industry, generally, is
significant. We compete directly with other companies and businesses that have
developed and are in the process of developing technologies and products which
will be competitive with the products developed and offered by us. There can be
no assurance that other technologies or products which are functionally
equivalent or similar to our technologies and products have not been developed
or are not in development. We expect that there will be companies or businesses
which may have developed or are developing such technologies and products as
well as other companies and businesses which have the expertise which would
encourage them to develop and market products directly competitive with those
developed and marketed by us.
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Many of these competitors have greater financial and other resources, and more
experience in research and development, than us.
Our Intellectual Property. Our success depends in part upon our ability to
preserve our trade secrets, obtain and maintain patent protection for our
technologies, products and processes, and operate without infringing the
proprietary rights of other parties. However, we rely on certain proprietary
technologies, trade secrets, and know-how that are not patentable. Although we
may take action to protect our unpatented trade secrets, our technology and our
proprietary information, in part, by the use of confidentiality agreements with
our employees, consultants and certain of our contractors, there can be no
assurance that (i) these agreements will not be breached, (ii) we would have
adequate remedies for any breach; or (iii) our proprietary trade secrets and
know-how will not otherwise become known or be independently developed or
discovered by competitors. There is also no assurance that our actions will be
sufficient to prevent imitation or duplication of either our products and
services by others or prevent others from claiming violations of their trade
secrets and proprietary rights.
The utilization or other exploitation of the products and services developed by
us may require us to obtain licenses or consents from government regulatory
agencies or from the producers or other holders of patents, copyrights or other
similar rights relating to our products and services. In the event we are
unable, if so required, to obtain any necessary license or consent on terms and
conditions which we consider to be reasonable, we may be required to stop
developing, utilizing, or exploiting products and services affected by
government regulation or by patents, copyrights or similar rights. In the event
we are challenged by a government regulatory agency, or by the holders of
patents, copyrights or other similar rights, there can be no assurance that we
will have the financial or other resources to defend any resulting legal action,
which could be significant.
Our Research and Development. We believe that we will expand the types of
products we offer by introducing new products and technologies. New product
ideas are derived from a number of sources, including in-house research and
development, our executives, staff, and consultants and outside parties. In
advance of introducing new products and technologies, local counsel and other
representatives retained by us investigate product design matters as they relate
to regulatory compliance and other issues. Our products are then redesigned to
accommodate both the regulatory and marketing requirements of the particular
market. There can be no assurance as to the final form of any new regulations or
that an appropriate regulatory authority will not seek to impose additional
regulations, possibly prohibiting, or placing other restrictions on, the sale of
such products, or the impact, if any, of any such regulations.
Our Mexican Subsidiaries. In May 1995, we incorporated TMEX S.A. de C.V., a
Mexico corporation ("TMEX Mexico") for the purpose of supporting our
telecommunication services in Mexico. We own 9,999 shares of TMEX Mexico's
common stock (approximately 99.99% of the issued and outstanding shares of TMEX
Mexico's common stock). Our President, Cooper Lee, as Director General of the
subsidiary, owns 1 share of TMEX Mexico's common stock (the remaining .01% of
the outstanding stock of TMEX Mexico), as required by Mexican law.
In December, 1996, we acquired approximately 24,500 shares of common stock
(approximately 49%) of Network Technologies S.A. de C.V., a Mexican corporation
("NetTech") valued at $15,000. NetTech is headquartered in Loma de Chapultepec,
Mexico City and received a concession for Internet services from the Mexican
Federal Commission of Telecommunications, which will allow NetTech to transmit
Internet and data traffic from the United States throughout Mexico.
Government Regulation. Our business is subject to regulation by the Federal
Communications Commission ("FCC") and other federal and state regulatory
agencies. These regulatory authorities impose regulations governing the rates,
terms and conditions for interstate and intrastate telecommunications services.
Changes in existing laws and regulations, including the Telecommunications Act
of 1996, which provides for greater competition among providers of
telecommunications services, may have a material impact on our activities and
operating results. We have a C-214 Facilities Bases Services permit by the FCC
to operate as a provisioned bearer circuit network.
We may also be subject to Federal Trade Commission regulation and other federal
and state laws relating to the promotion, advertising, labeling and packaging of
our products. We believe that we are in compliance with all laws,
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rules and regulations material to our operations and have obtained, or are in
the process of obtaining, all licenses, tariffs and approvals necessary for the
conduct of our business. There can be no assurance, however, that we will be
able to obtain required licenses or approvals in the future or that the FCC or
state regulatory authorities will not require us to comply with more stringent
regulatory requirements. Conformance of our operations with new statutes and
regulations could require us to alter methods of operation, at costs which could
be material, or otherwise limit the types of services offered by us.
Hazardous Materials; Environmental Matters. We may be subject to various laws
and regulations governing the use, manufacture, storage, handling, and disposal
of hazardous materials and certain waste products. The risk of accidental
contamination or injury from hazardous materials cannot be completely
eliminated. In the event of such an accident, we could be held liable for any
damages that result and any such liability could exceed our financial resources.
In addition, there can be no assurance that, in the future, we will not be
required to incur significant costs to comply with environmental laws and
regulations relating to hazardous materials. We may be subject to various laws
and regulations governing the use, storage, handling and disposal of such
materials and certain waste products. Although we believe that our safety
procedures for handling and disposing of such materials comply with the
standards prescribed by such laws and regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of such an accident, we could be held liable for any damages that
result, and any such liability could exceed our resources. There can be no
assurance that we will not be required to incur significant costs to comply with
current or future environmental laws and regulations nor that our operations,
business or assets will not be materially or adversely affected by current or
future environmental laws or regulations.
Employees. As of December 31, 1999, we had 12 full time employees and 6
part-time employees. The employees provide services such as technical support
and marketing. From time-to-time we use the services of independent contractors
and consultants to support product research and development, marketing and sales
and business development.
Item 2. Description of Property.
Our Property. The consolidated financial statements filed as exhibits to this
Form 10-KSB include our accounts and those of our subsidiary, TMEX S.A. de C.V.,
a Mexico corporation. All significant intercompany transactions have been
eliminated. As of the dates specified in the following table, we held the
following property:
================================================================================
Property December 31, 1999 December 31, 1998
- --------------------------------------------------------------------------------
Cash and equivalents $375,387 $248,515
- --------------------------------------------------------------------------------
Property & Equipment less $823,190 $539,566
Depreciation
================================================================================
We define cash equivalents as all highly liquid investments with a maturity of 3
months or less when purchased. We do not presently own any interests in real
estate.
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Our Facilities. The following table specifies the descriptions of our
properties.
================================================================================
Property Description
Newport Beach, California Our main corporate office and a
5031 Birch Street, Suite G switching facility.
Newport Beach, CA 92660 Lease expires: September 8, 2000
$2,400.00 / month
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Laredo, Texas Our United States communications laser
Howard Johnson's Hotel Rooftop site and a switching facility.
1 South Main Avenue Lease expires: August, 2001
Laredo, TX 78040 $1,750.00 / month
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Tijuana, Baja California The corporate office of our subsidiary,
Av. Rio Suchiate No. 10065-3 TMEX S.A. de C.V.
Col. Revolucion Lease term: month to month
P.O. Box 432627 $220.00 / month
Tijuana, B.C. 22400
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Nuevo Laredo, Mexico Our Mexican communications laser site.
Ave Josefa O. De Dominguez No 2853 Lease expires: August, 2000
Nuevo Laredo, Tamaulipas $200.00 / month
================================================================================
Item 3. Legal Proceedings.
Specified below is our pending litigation.
Fore Systems. On or about September 7, 1999, we filed a complaint in Orange
County Superior Court against Fore Systems, a business organization, form
unknown, and Doe Defendants 1 through 100, alleging breach of warranty of
fitness for intended purposes and negligent misrepresentation. That complaint
relates to our purchase, from Fore Systems, of certain equipment designed to
transmit electrical signals between the United States and Mexico, and the
malfunctioning of that equipment, resulting in monetary damages to us in lost
transmission time and software solution costs.
On October 6, 1999, Defendant Fore Systems filed a Notice of Removal of the
complaint to federal court; specifically, the United States District Court,
Central District of California, Southern Division. On October 12, 1999, the
complaint was ordered removed to that federal court. On or about October 27,
1999, we filed a First Amended Complaint for breach of warranty, strict
liability on defective product, negligence, and fraud, and correctly identified
Defendant Fore Systems, as a Delaware corporation.
We are seeking monetary damages of approximately $250,000. On or about January
10, 2000, Fore Systems filed a Motion to Dismiss the complaint. We opposed that
Motion to Dismiss and, on January 26, 2000, the Court denied Fore System's
Motion to Dismiss but granted permission for Fore Systems to refile that motion.
On February 9, 2000, Fore Systems refiled that Motion. We again opposed that
Motion and that Motion is currently being considered by the judge.
We are currently engaged in settlement discussions with Fore Systems and may
entertain a settlement offer which includes discounts on the purchase of
additional components and other products from Fore Systems.
Phillips, Nagel and Nagel. On or about March 8, 2000, Silas Phillips, Conrad
Nagel and Kathrina B. Nagel (collectively, "Plaintiffs") filed a complaint in
Orange County Superior Court against us for damages for conversion and fraud.
The Plaintiffs alleged, among other things, that we acquired a controlling
interest in Cellular 2000, a Nevada corporation, in 1997. Plaintiffs further
alleged that we, as compensation for services and as a bonus, had
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issued certain shares of our common stock to Plaintiffs, two of whom were
officers of Cellular 2000 and one of whom was the spouse of an officer of
Cellular 2000. Plaintiffs further allege that, on or about October 28, 1998, we
improperly canceled that common stock.
We believe that Plaintiffs' allegations are without merit, in that, the issuance
and delivery of our common stock to Plaintiffs was conditioned upon the
performance, by Plaintiffs, of certain promises, covenants and agreements, which
Plaintiffs failed to perform. We intend to oppose this complaint zealously and
intend to file a cross-complaint for breach of contract against Plaintiffs.
AstroTerra Corporation. We have been negotiating with AstroTerra Corporation
("AstroTerra"), regarding certain disputes which arose in or about June, 1999,
between AstroTerra, on the one hand, and us, on the other hand. We desire to
effect a settlement and resolution of the issues in dispute in order to promote
a long-term business relationship with AstroTerra. The disputes are not
presently being litigated; however, we anticipate that these disputes will be
litigated if no settlement is reached.
We encountered a problem with our daytime communications from our laser
transmission system located in Laredo, Texas. We considered the possibility that
the problem arose from either (1) a switching problem, or (2) a problem with the
AstroTerra laser equipment. We contacted AstroTerra and requested that
AstroTerra provide a technical support crew to investigate and suggest possible
solutions to this problem. AstroTerra requested that we perform certain tests,
which we performed. We then requested AstroTerra's presence on site and fiber
testing was performed. An AstroTerra engineer returned again to the site and,
after we performed additional tests on the fiber optic cable, we requested
AstroTerra to return to the site a third time. We expended significant time and
money removing and reconfiguring switches, testing fiber cables, installing a
new power conditioner, isolating and labeling fiber interconnections, and
testing the various systems before the transmission problem was located. The
ultimate conclusion was that a defective laser lens provided by AstroTerra was
the cause of the transmission problem.
Due to the failure of the laser system, we incurred charges from AstroTerra
totaling $52,000, which included the purchase of ZT3000 lasers at an aggregate
price of $44,631. We have refused to pay a significant portion of those charges
because of the failure of the laser system, and AstroTerra has threatened to
litigate this matter if a settlement is not reached. We are presently
negotiating with AstroTerra to purchase certain equipment, and to license or
distribute certain equipment and technology, as part of global settlement
negotiations. In the event we are unable to resolve this matter, we are prepared
to litigate this matter zealously.
Item 4. Submission of Matters to Vote of Security Holders
Not applicable.
PART II
Item 5. Market Price for Common Equity and Related Stockholder Matters.
Reports to Securities Exchange Commission ("SEC"). From January 1997 until March
20, 2000, our common stock traded on the OTC Bulletin Board (OTCBB) under the
symbol "TMXU". We have never been a "reporting company." On January 4, 1999, the
SEC required issuers of any class of securities quoted on the OTCBB to register
and become reporting companies pursuant to Section 12(b) or Section 12(g) of the
Securities Exchange Act of 1934 ("Exchange Act"), by reason of its approval of
amendments to Rules of the National Association of Securities Dealers, Inc. that
limit quotations on the OTCBB to the stock of companies that are registered and
who timely file the reports required by such sections of the Exchange Act. On or
about March 20, 2000, an "E" was affixed to our OTCBB trading symbol and our
common stock began trading under the symbol TMXUE, which indicates that we have
not completed the SEC registration process and that our stock is subject to
removal from the OTCBB, within 30 days of such date, if we do not complete that
process. About the same time, we also became required to register pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934. Accordingly, we are
concurrently filling a Registration Statement with the SEC on Form 8-A together
with this Form 10-KSB. By its terms, such Registration Statement on Form 8-A
will become
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effective upon the date of its filing with the SEC and this 10-KSB will
represent our first report as a Reporting Company.
The public may read and copy any materials filed with the SEC at the SEC's
Public Reference Room at 450 Fifth Street N.W., Washington, D.C. 20549. The
public may also obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC. The address of that
site is http://www.sec.gov. We currently maintain our own Internet address at
www.tmex.com.
Prices of Common Stock. Prior to our participation on the OTCBB, there was no
public market for our common stock. Our common stock has closed at a low of
$1.5625 and a high of $4.125 for the 52-week period ended April 5, 2000. This
market is extremely limited and the prices for our common stock quoted by
brokers is not necessarily a reliable indication of the value of our common
stock. On or about March 20, 2000, an "E" was affixed to our trading symbol and
our common stock began trading under the symbol TMXUE, which indicates that we
have failed to comply with eligibility requirements specified in Rule 6530 of
the National Association of Securities Dealers, Inc. ("Rule 6530") and,
therefore, we will be delisted from the OTCBB if we do not comply with Rule 6530
on or before April 19, 2000.
The following table specifies the reported high and low sales or closing prices
of the Company's common stock on the OTCBB for the periods indicated.
================================================================================
Period High Low
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October 1, 1999 - December 31, 1999 $2.375 $1.156
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July 1, 1999 - September 30, 1999 $3.125 $1.250
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April 1, 1999 - June 30, 1999 $4.125 $2.000
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January 1, 1999 - March 31, 1999 $3.187 $0.937
================================================================================
We are authorized to issue 50,000,000 shares of common stock, $.001 par value,
each share of common stock having equal rights and preferences, including voting
privileges. We are not authorized to issue shares of preferred stock. As of
December 31, 1999, 12,688,320 shares of our $.001 par value common stock were
issued and outstanding.
Our shares of $.001 par value common stock constitute equity interests entitling
each shareholder to a pro rata share of cash distributions made to shareholders,
including dividend payments. The holders of our common stock are entitled to one
vote for each share of record on all matters to be voted on by shareholders.
There is no cumulative voting with respect to the election of our directors or
any other matter, with the result that the holders of more than 50% of the
shares voted for the election of those directors can elect all of the Directors.
The holders of our common stock are entitled to receive dividends when, as and
if declared by our Board of Directors from funds legally available therefor;
provided, however, that cash dividends are at the sole discretion of our Board
of Directors. In the event of our liquidation, dissolution or winding up, the
holders of common stock are entitled to share ratably in all assets remaining
available for distribution to them after payment of our liabilities and after
provision has been made for each class of stock, if any, having preference in
relation to our common stock. Holders of the shares of our common stock have no
conversion, preemptive or other subscription rights, and there are no redemption
provisions applicable to our common stock.
Dividend Policy. We have never declared or paid a cash dividend on our capital
stock and do not expect to pay cash dividends on our common stock in the
foreseeable future. We currently intend to retain our earnings, if any, for use
in our business. Any dividends declared in the future will be at the discretion
of the Board of Directors and subject to any restrictions that may be imposed by
our lenders.
Warrants. As of December 31, 1999, there were no outstanding warrants to
purchase shares of our $.001 par value common stock.
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Stock Option Plan. On April 12, 2000, our Board of Directors approved and
adopted a stock option plan, pursuant to which 5,000,000 shares of our $.001 par
value common stock will be reserved for issuance to satisfy the exercise of
options. The stock option plan will be designed to retain qualified and
competent officers, employees, and directors. Our Board of Directors, or a
committee thereof, shall administer the stock option plan and will be
authorized, in its sole and absolute discretion, to grant options thereunder to
all of our eligible employees, including officers, and to our directors, whether
or not those directors are also our employees. Options will be granted pursuant
to the provisions of the stock option plan on such terms, subject to such
conditions and at such exercise prices as shall be determined by our Board of
Directors. Options granted pursuant to the stock option plan shall not be
exercisable after the expiration of ten years from the date of grant.
Item 6. Management's Discussion and Analysis of Financial Condition or Plan of
Operation.
THIS FOLLOWING INFORMATION SPECIFIES CERTAIN FORWARD-LOOKING STATEMENTS OF
MANAGEMENT OF THE COMPANY. FORWARD-LOOKING STATEMENTS ARE STATEMENTS THAT
ESTIMATE THE HAPPENING OF FUTURE EVENTS ARE NOT BASED ON HISTORICAL FACT.
FORWARD-LOOKING STATEMENTS MAY BE IDENTIFIED BY THE USE OF FORWARD-LOOKING
TERMINOLOGY, SUCH AS "MAY", "SHALL", "WILL", "COULD", "EXPECT", "ESTIMATE",
"ANTICIPATE", "PREDICT", "PROBABLE", "POSSIBLE", "SHOULD", "CONTINUE", OR
SIMILAR TERMS, VARIATIONS OF THOSE TERMS OR THE NEGATIVE OF THOSE TERMS. THE
FORWARD-LOOKING STATEMENTS SPECIFIED IN THE FOLLOWING INFORMATION HAVE BEEN
COMPILED BY OUR MANAGEMENT ON THE BASIS OF ASSUMPTIONS MADE BY MANAGEMENT AND
CONSIDERED BY MANAGEMENT TO BE REASONABLE. OUR FUTURE OPERATING RESULTS,
HOWEVER, ARE IMPOSSIBLE TO PREDICT AND NO REPRESENTATION, GUARANTY, OR WARRANTY
IS TO BE INFERRED FROM THOSE FORWARD-LOOKING STATEMENTS.
THE ASSUMPTIONS USED FOR PURPOSES OF THE FORWARD-LOOKING STATEMENTS SPECIFIED IN
THE FOLLOWING INFORMATION REPRESENT ESTIMATES OF FUTURE EVENTS AND ARE SUBJECT
TO UNCERTAINTY AS TO POSSIBLE CHANGES IN ECONOMIC, LEGISLATIVE, INDUSTRY, AND
OTHER CIRCUMSTANCES. AS A RESULT, THE IDENTIFICATION AND INTERPRETATION OF DATA
AND OTHER INFORMATION AND THEIR USE IN DEVELOPING AND SELECTING ASSUMPTIONS FROM
AND AMONG REASONABLE ALTERNATIVES REQUIRE THE EXERCISE OF JUDGMENT. TO THE
EXTENT THAT THE ASSUMED EVENTS DO NOT OCCUR, THE OUTCOME MAY VARY SUBSTANTIALLY
FROM ANTICIPATED OR PROJECTED RESULTS, AND, ACCORDINGLY, NO OPINION IS EXPRESSED
ON THE ACHIEVABILITY OF THOSE FORWARD-LOOKING STATEMENTS. NO ASSURANCE CAN BE
GIVEN THAT ANY OF THE ASSUMPTIONS RELATING TO THE FORWARD-LOOKING STATEMENTS
SPECIFIED IN THE FOLLOWING INFORMATION ARE ACCURATE, AND WE ASSUME NO OBLIGATION
TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS.
Summary Financial Information. The summary financial information set forth below
is derived from the more detailed consolidated financial statements and notes
thereto appearing elsewhere in this Form 10-KSB. We have prepared our
consolidated financial statements contained in this Form 10-KSB in accordance
with generally accepted accounting principles in the United States. See "Report
of Independent Auditors" and "Consolidated Financial Statements". All
information should be considered in conjunction with our consolidated financial
statements and the notes contained elsewhere in this Form 10-KSB.
Year Ended December 31
================================================================================
Income Statement 1999 1998 1997
- --------------------------------------------------------------------------------
Revenue 413,999 80,145 146,266
- --------------------------------------------------------------------------------
Gross Profit (Loss) (128,567) 69,886 79,315
- --------------------------------------------------------------------------------
Net Income (Loss) (2,714,443) (1,107,963) (569,416)
- --------------------------------------------------------------------------------
Net Income (Loss) Per Share (0.25) (0.15) (0.10)
================================================================================
9
<PAGE>
================================================================================
Balance Sheet 1999 1998 1997
- --------------------------------------------------------------------------------
Total Assets 1,543,635 854,898 560,331
- --------------------------------------------------------------------------------
Long Term Debt 170,066 300,000 200,000
- --------------------------------------------------------------------------------
Total Liabilities 989,545 445,807 383,789
- --------------------------------------------------------------------------------
Shareholders' Equity 554,090 409,091 176,542
================================================================================
Results of Operations for the Year Ended December 31, 1999 Compared to the Year
Ended December 31, 1998. Revenues for the year ended December 31, 1998 totaled
$80,145 and increased for the year ended December 31, 1999 to $413,999. The
increase represents the beginning of two new revenue sources, (i) in May 1999,
we began offering Mexican voice and data services to United States
telecommunications companies using a laser connection in Laredo Texas which
resulted in $354,611 in 1999 only; and (ii), in December 1999, we began
generating revenues from our debit calling card business which resulted in
$14,057 in 1999 only.
We incurred a net loss of $2,714,443 for the year ended December 31, 1999,
compared to $1,107,963, for the year ended December 31, 1998. The increased loss
for the year ended December 31, 1999, resulted from 2 reasons, (i) the margins
on the telecommunications services being provided are very small; and (ii) stock
issued for services totaled $1,663,166 of compensation expenses in 1999,
compared to $328,640 in 1998.
In total, compensation increased from $183,953 for the year ended December 31,
1998, to $1,714,641 for the year ended December 31, 1999, due primarily to
additional services and compensation paid in stock.
We have incurred losses since our inception. As of December 31, 1999, we had an
accumulated deficit of $2,714,443. We expect to incur operating losses during
2000. Our results of operations have been and may continue to be subject to
significant fluctuations. The results for a particular period may vary due to a
number of factors, many of which are beyond our control, including (i) the
impact of price competition on our prices for products and services; (ii) market
acceptance of new product or service introductions by us or our competitors;
(iii) the timing of expenditures in anticipation of future sales; and, (iv)
economic conditions generally.
Results of Operations for the Year Ended December 31, 1998 Compared to the Year
Ended December 31, 1997. Revenues for the year ended December 31, 1997 totaled
$146,266 and decreased for the year ended December 31, 1998 to $80,145. The
decrease in revenues was primarily attributed to the decrease in the amount of
computer network consulting services provided by us.
We incurred a net loss of $1,107,963 for the year ended December 31, 1998,
compared to approximately $569,416, for the year ended December 31, 1997. The
increased loss for the fiscal year ending December 31, 1998, resulted primarily
from stock issued for services which totaled $328,640 of compensation expenses
in 1998.
Liquidity and Capital Resources. In 1998 and 1999 we funded our operations
primarily from equity investments through issuances of our securities and
through the issuance of notes payable.
In March 1999, we issued 315,789 shares of our $.001 par value common stock
pursuant to Section 4(2) of the Securities Act of 1933 and Rule 506 of
Regulation D promulgated pursuant to that Act in connection with the conversion
of a $300,000 convertible note payable, or at a conversion rate of $0.95 per
share. In connection with the conversion, the parties agreed to modify an option
to purchase shares of our $.001 par value common stock. The original option was
granted in October 1998, whereby the note holder had the option to purchase
280,000 shares of shares of our $.001 par value common stock for cash at $1.25
per share at the time of conversion of the note payable into shares of shares of
our $.001 par value common stock through October 16, 1999. In March 1999, such
option was terminated, and an existing stockholder issued options to the note
holder.
10
<PAGE>
Our available cash and equivalents increased from $248,515 at December 31, 1998,
to $375,387 at December 31, 1999. Our current liabilities increased from
$145,807 to $819,479. Our net property and equipment increased from $539,566 to
$823,190 due primarily to the purchase of additional telecom equipment. Our
property and equipment consists primarily of equipment with an expected useful
life of 5 years. Depreciation expense for the years ended December 31, 1999 and
1998, were $184,748 and $86,655, respectively.
Our cash flows used in operating activities were $400,579 for the year ended
December 31, 1998, and $708,981 for the year ended December 31, 1999. The
increase in funds expended was primarily the result of ongoing capital
acquisitions necessary to effectuate our business plan. Cash provided by
financing activities increased from $884,278 for the year ended December 31,
1998, to $1,008,808 for the year ended December 31, 1999, due to $896,276
received from a private placement of our common stock.
Our available cash and equivalents increased from $73,880 at December 31, 1997
to $248,515 at December 31, 1998. Our net property and equipment increased from
$317,157 to $539,566, and our current liabilities decreased from $183,789 to
$145,807.As of December 31, 1998 we had $146,573 of working capital, which is an
increase from the working capital deficit of $25,817 we had at December 31,
1997.
We believe that current and future available capital resources, including
revenues generated from operations and planned issuances of our capital stock,
will be adequate to meet our anticipated working capital and capital expenditure
requirements for at least the next 12 months. If, however, our capital
requirements or cash flows vary materially from our current projections or if
unforeseen circumstances occur, we may require additional financing sooner than
we anticipate. Failure to raise necessary capital could restrict our growth,
limit our development of new products and services, or hinder our ability to
compete. Such capital may be raised through public or private financing as well
as borrowing and other sources.
There can be no assurance that funding for our operations will be available
under favorable terms, if at all. If adequate funds are not available, we may be
required to curtail operations significantly or to obtain funds by entering into
arrangements with collaborative partners or others that may require us to
relinquish rights to certain products and services that we would not otherwise
relinquish.
Our Plan of Operation For Next 12 Months. We have entered into substantial
contracts in connection with the debit calling card business, and we anticipate
that we will have significant revenue growth in 2000. In addition, we are in the
process of increasing our capacity through the acquisition of new telephone
circuitry which will allow us to enter into new and more cost efficient
contracts in the purchase of wholesale telephone and data minutes.
To fulfill current contracts, we must expand our infrastructure and facilities.
The current capacity of our network is 4 million minutes per month. Our capacity
limitation is primarily based on current access to the Alestra fiber network in
Mexico. We have entered into an agreement for additional connections to
Alestra's fiber network, and we anticipate that the proposed expansion of our
network will increase our capacity to more than 50 million minutes a month with
100% redundancy. We believe that 12 weeks is required from the receipt of
additional financing to complete the connection process.
We anticipate that we will seek additional capital to expand our global Network
Point of Presence (POPs) in Atlanta and New York. With this additional capital
and expansion of our network, we can support existing wholesale and debit
calling card contracts, hire additional personnel, attract more strategic
partners, and implement our sales and marketing strategy.
We believe that the expansion of our POPs in Atlanta and New York will allow us
greater access to competitive rates into telecommunications markets on a global
basis, therefore, lowering the costs of goods sold. The majority of telephone
minutes for our current debit card programs are mainly targeted towards the
Mexican and Latin markets, which traditionally operate upon lower profit
margins. We plan to expand our debit calling card programs globally, including
Central and South America, Europe and Asia upon the completion of our network
expansion.
11
<PAGE>
We also anticipate that the expansion of our POPs in Atlanta and New York will
allow for quicker implementation time for connecting to our customers and
vendors. By having switching facilities in the major United States telephony
cross-connection facilities, we will reduce the implementation time and
bandwidth required to facilitate wholesale contracts for Mexican telephone
traffic and vendors. Delays in implementation could result in the loss of
wholesale contracts due to the changing market prices.
Business Interruption; Reliance on Computer and Telecommunications
Infrastructure. Our success is dependent, in large part, on our continued
investment in sophisticated telecommunications, computer systems and computer
software. We anticipate making significant expenditures for the acquisition,
development and maintenance of such technologies in an effort to remain
competitive and anticipates that such expenditures will be necessary on an
ongoing basis. Moreover, computer and telecommunication technologies are
evolving rapidly and are characterized by short product life cycles, which
requires us to anticipate technological developments. There can be no assurance
that we will be successful in anticipating, managing or adopting such
technological changes on a timely basis or that we will have the cash necessary
to acquire new technologies or improve existing technologies. In addition, our
business is highly dependent on its computer and telecommunications equipment
and software systems, the temporary or permanent loss of which, by physical
damage or operating malfunction, could have a material adverse effect on our
business. Operating malfunctions in the software systems of financial
institutions, market makers and other parties might have an adverse affect on
our operations. Our business is materially dependent on service provided by
various local and long distance telephone companies. A significant increase in
the cost of telephone services that is not recoverable through an increase in
the price of our services, or any significant interruption in telephone
services, could have a material adverse effect on us.
Our systems may fail due to natural disasters, telecommunications failures and
other events, any of which would limit user traffic. Fire, floods, earthquakes,
power loss, telecommunications failures, break-ins and similar events could
damage our communications hardware and computer hardware operations and cause
interruptions in services. Computer viruses, electronic break-ins or other
similar disruptive problems could cause failures in our systems. If any of these
circumstances occurred, our business could be harmed. Our insurance policies, if
any, may not adequately compensate us for any losses that may occur due to any
failures of or interruptions in our systems. We do not presently have a formal
disaster recovery plan. Our telecommunications must accommodate a high volume of
traffic. Our telecommunications may experience slower response times or
decreased traffic for a variety of reasons. In addition, we depend on third
party service providers. Many of these providers and operators have experienced
significant outages in the past and could experience outages, delays and other
difficulties due to system failures unrelated to our systems. Any of these
system failures could harm our business.
Impact of the Year 2000. The Year 2000 (commonly referred to as "Y2K") issue
results from the fact that many computer programs were written using two, rather
than four, digits to identify the applicable year. As a result, computer
programs with time-sensitive software may recognize a two-digit code for any
year in the next century as related to this century. For example, "00", entered
in a date-field for the year 2000, may be interpreted as the year 1900,
resulting in system failures or miscalculations and disruptions of operations,
including, among other things, a temporary inability to process transactions or
engage in other normal business activities. Although companies and governments
in the United States spent an estimated $150 billion to $225 billion repairing
the problem, countries such as Russia and China, which spent relatively minor
amounts, seemed to clear the New Year's Day hurdle with equal success. Major
news media in the United States are reporting that, after years of work and
billions of dollars spent repairing the Year 2000 computer glitch; the
technological tranquility of New Year's Day has raised a new concern that the
United States overreacted to this problem. Although it is still too soon to
conclude positively that the Y2K transition has passed without mishap, we
believe that Y2K issues will not have a material adverse affect on our business.
Changes in Number of Employees. During the next 12 months, depending on the
success of our market expansion plan, we may be required to hire additional
employees; however, we are not able to provide a reasonable estimate of the
number of such additional employees which may be required at this time.
12
<PAGE>
Item 7. Financial Statements
Copies of the financial statements specified in Regulation 228.310 (Item 310)
are filed with this Annual Report on Form 10-KSB.
TMEX USA, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 1999 AND 1998
<PAGE>
TMEX USA, INC. AND SUBSIDIARY
CONTENTS
December 31, 1999
- --------------------------------------------------------------------------------
Page
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1 - F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity F-5 - F-6
Consolidated Statements of Cash Flows F-7 - F-8
Consolidated Notes to Financial Statements F-9 - F-24
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders of
TMEX USA, Inc.
Newport Beach, California
We have audited the accompanying consolidated balance sheet of TMEX USA, Inc.
and subsidiary as of December 31, 1999, and the related consolidated statements
of operations, stockholders' equity, and cash flows for the year then ended.
These consolidated 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 audit in accordance with generally accepted auditing standards.
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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of TMEX USA, Inc. and
subsidiary as of December 31, 1999, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Santa Ana, California
March 27, 2000, except
for Notes 7 and 9, as
to which the date is
April 12, 2000
F-1
<PAGE>
TMEX USA, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
December 31, 1999
- --------------------------------------------------------------------------------
ASSETS
Current assets
Cash $ 375,387
Accounts receivable 291,350
Prepaid expenses and other current assets 38,708
-----------
Total current assets 705,445
Property and equipment, net 823,190
Investment in affiliate, at cost 15,000
-----------
Total assets $ 1,543,635
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of note payable $ 78,160
Accounts payable and accrued expenses 279,341
Accrued compensation and related benefits 11,437
Deferred revenue 264,943
Due to related party 59,798
Income taxes payable 800
Convertible note payable to stockholder 125,000
-----------
Total current liabilities 819,479
Note payable, net of current portion 170,066
-----------
Total liabilities 989,545
-----------
Commitments and contingencies
Stockholders' equity
Common stock, $0.001 par value
50,000,000 shares authorized
12,688,320 shares issued and outstanding 12,688
Common stock committed 50,000
Additional paid-in capital 3,205,845
Accumulated deficit after December 31, 1998 (2,714,443)
-----------
Total stockholders' equity 554,090
-----------
Total liabilities and stockholders' equity $ 1,543,635
===========
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
TMEX USA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
- --------------------------------------------------------------------------------
1999 1998
------------ ------------
(as restated)
Revenues $ 413,999 $ 80,145
Cost of sales 542,566 10,259
------------ ------------
Gross profit (loss) (128,567) 69,886
------------ ------------
Operating expenses
Compensation and related benefits 1,714,641 183,953
Selling, marketing, and advertising 19,191 26,179
General and administrative 852,363 681,907
------------ ------------
Total operating expenses 2,586,195 892,039
------------ ------------
Loss from operations (2,714,762) (822,153)
------------ ------------
Other income (expense)
Interest income 3,128 --
Interest expense (4,436) (222,760)
Realized loss on available-for-sale securities -- (62,250)
Gain on sale of property and equipment 2,427 --
------------ ------------
Total other income (expense) 1,119 (285,010)
------------ ------------
Loss before provision for income taxes (2,713,643) (1,107,163)
Provision for income taxes 800 800
------------ ------------
Net loss $ (2,714,443) $ (1,107,963)
============ ============
Basic and diluted loss per share $ (0.25) $ (0.15)
============ ============
Weighted-average shares outstanding 10,848,741 7,531,816
============ ============
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
TMEX USA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock
Common Stock Committed Additional
--------------------- ---------------- Paid-In Subscription Accumulated
Shares Amount Shares Amount Capital Receivable Deficit Total
---------- ------- ------ ------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997,
as previously reported 5,578,886 $ 5,579 -- $ -- $ 2,417,872 $ -- $(1,161,909) $ 1,261,542
Prior period adjustment 87,700 87 208,886 (22,500) (1,271,473) (1,085,000)
---------- ------- ------ ------- ----------- -------- ----------- -----------
Balance, December 31, 1997,
as restated 5,666,586 5,666 -- -- 2,626,758 (22,500) (2,433,382) 176,542
Common stock issued for
cash, pursuant to an
offering under Regulation D 495,943 496 203,854 204,350
Common stock issued for
cash 1,039,959 1,040 358,642 359,682
Common stock issued in
connection with the
conversion of a note
payable 1,000,000 1,000 399,000 400,000
Common stock issued to
officers and employees
for services 308,250 308 77,917 78,225
Common stock issued to
third parties for services 715,600 716 249,699 250,415
Interest and compensation
expense related to the
issuance of stock options 25,340 25,340
Payment received for common
stock subscribed 22,500 22,500
Net loss (1,107,963) (1,107,963)
Quasi reorganization,
restated (3,541,345) 3,541,345
---------- ------- ------ ------- ----------- -------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
Common Stock
Common Stock Committed Additional
--------------------- ---------------- Paid-In Subscription Accumulated
Shares Amount Shares Amount Capital Receivable Deficit Total
---------- ------- ------ ------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998,
as restated 9,226,338 $ 9,226 -- $ -- $ 399,865 $ -- $ -- $ 409,091
Common stock issued for
cash, pursuant to an
offering under Regulation D 44,947 45 28,455 28,500
Common stock issued for
services, pursuant to an
offering under Regulation D 30,000 30 29,970 30,000
Common stock issued for
cash 966,386 966 866,810 867,776
Common stock issued to
officers and employees
for services 1,922,500 1,923 1,396,077 1,398,000
Common stock issued to
third parties for services 182,360 182 184,984 185,166
Common stock issued in
connection with the
conversion of a note payable,
pursuant to an offering under
Regulation D 315,789 316 299,684 300,000
Common stock committed for
services 50,000 50,000 50,000
Net loss (2,714,443) (2,714,443)
---------- ------- ------ ------- ----------- -------- ----------- -----------
Balance, December 31, 1999 12,688,320 $12,688 50,000 $50,000 $ 3,205,845 $ -- $(2,714,443) $ 554,090
========== ======= ====== ======= =========== ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
TMEX USA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
----------- ------------
(as restated)
<S> <C> <C>
Cash flows from operating activities
Net loss $(2,714,443) $(1,107,963)
Adjustments to reconcile net loss to net cash
used in operating activities
Accounts receivable - bad debt 20,943 --
Due from related parties - bad debt 6,761 --
Depreciation and amortization 184,748 86,655
Gain on sale of property and equipment (2,427) --
Realized loss on available-for-sale securities -- 62,250
Issuance of common stock for services 1,663,166 328,640
Interest expense recorded in connection with
conversion of a note payable into common stock -- 200,000
Interest and compensation expense related to the
issuance of stock options -- 25,340
(Increase) decrease in
Accounts receivable (291,189) 14,026
Due from related parties -- 4,151
Prepaid expenses and other current assets (47,052) 22,050
Increase (decrease) in
Accounts payable and accrued expenses 196,099 (27,942)
Accrued compensation and related benefits 9,450 1,987
Due to related party 20 (10,573)
Income taxes payable -- 800
Deferred revenue 264,943 --
----------- -----------
Net cash used in operating activities (708,981) (400,579)
----------- -----------
Cash flows from investing activities
Purchase of property and equipment (198,955) (309,064)
Proceeds from sale of available-for-sale securities 22,000 --
Proceeds from sale of property and equipment 4,000 --
----------- -----------
Net cash used in investing activities (172,955) (309,064)
----------- -----------
Cash flows from financing activities
Borrowings on note payable -- 300,000
Borrowings on convertible note payable to stockholder 125,000 --
Principal payments on note payable (12,468) (2,254)
Stock subscription collected -- 22,500
Proceeds from issuance of common stock 896,276 564,032
----------- -----------
Net cash provided by financing activities 1,008,808 884,278
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
TMEX USA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
----------- ------------
(as restated)
<S> <C> <C>
Net increase in cash $ 126,872 $ 174,635
Cash, beginning of year 248,515 73,880
----------- -----------
Cash, end of year $ 375,387 $ 248,515
=========== ===========
Supplemental disclosures of cash flow information
Interest paid $ 4,436 $ 360
=========== ===========
Income taxes paid $ 800 $ 800
=========== ===========
</TABLE>
Supplemental schedule for non-cash investing and financing activities
During the year ended December 31, 1999, the Company entered into the following
non-cash transactions:
o Purchased equipment through long-term debt financing totaling $260,694
o Issued common stock in connection with the conversion of a note payable
totaling $300,000
o Received an equity investment as payment on a related party receivable
totaling $15,500
During the year ended December 31, 1998, the Company entered into the following
non-cash transaction:
o Issued common stock valued at $400,000 in connection with the conversion of
a note payable totaling $200,000 plus accrued interest of $200,000
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
TMEX USA, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
December 31, 1999
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND BUSINESS
Business Activities
TMEX USA, Inc. ("TMEX"), previously Swiss Cellular Laboratories, Inc.
("SCL"), is a Nevada corporation organized in July 1987 for the purpose of
providing wholesale and retail telecommunication service. TMEX provides
telephone, video, data, private network, and Internet services via laser
communication links to wholesalers and retailers throughout the United
States and Mexico and through its own switching stations and the purchase
of wholesale telephone service with major carriers.
TMEX S.A. de C.V. ("TMEX Mexico") is a majority owned subsidiary of TMEX
established for the purpose of supporting telecommunication services in
Mexico.
Organization
Effective June 30, 1995, the Board of Directors of NuTek, Inc., previously
Swiss Technique, Inc., approved the pro rata distribution of approximately
90% (270,000 shares) of the 300,000 outstanding shares of TMEX as a tax
free dividend to the holders of record of NuTek, Inc. stock. Such was
effected for the purpose of facilitating the ability of TMEX to expand and
diversify its business.
Effective April 30, 1996, TMEX and TMEX USA, Inc. a Missouri corporation
("TMEX Missouri") entered into a Plan of Reorganization and Agreement,
whereby TMEX issued 1,300,000 shares of common stock in exchange for the
net assets of TMEX Missouri valued at $488,220. In connection with this
agreement, TMEX Missouri was dissolved as a corporation.
SCL was a public company listed on NASDAQ's over-the-counter market with
dormant operations and no assets or liabilities.
Quasi Reorganization
Effective December 31, 1998, the Board of Directors of TMEX elected to
reduce additional paid-in capital by the amount of the accumulated deficit
as of December 31, 1998 totaling $3,541,345 as part of a quasi
reorganization. The balance sheet accounts were not restated as no assets
or liabilities were deemed by management to be impaired.
F-9
<PAGE>
TMEX USA, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
December 31, 1999
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of
TMEX and its wholly owned subsidiary, TMEX Mexico (collectively, the
"Company"). All intercompany accounts and transactions have been eliminated
in the consolidation.
Basis of Presentation
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles which contemplate continuation of
the Company as a going concern. However, since the Company's inception, it
has incurred net losses of $6,255,788, and as of December 31, 1999, its
total current liabilities exceeded its current assets by $113,034. In
addition, cash used in operating activities totaled $708,981 for the year
ended December 31, 1999. Recovery of the Company's assets is dependent upon
future events, the outcome of which is indeterminable. The successful
transition to the attainment of profitable operations is dependent upon
obtaining adequate financing or capital and achieving a level of sales
adequate to support the Company's cost structure. In view of these matters,
realization of a major portion of the assets in the accompanying balance
sheet is dependent upon the Company's ability to meet its financing
requirements and the success of its plans to generate sufficient revenues.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue in existence.
Management of the Company plans to raise additional equity capital and to
continue to develop its business to achieve sufficient revenues to cover
its cost structure.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosures of contingent assets and liabilities at the date of the
financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could materially
differ from those estimates.
Fair Value of Financial Instruments
The Company measures its financial assets and liabilities in accordance
with generally accepted accounting principles. The carrying amounts of the
Company's financial instruments, including cash, accounts receivable,
accounts payable and accrued expenses. The amounts shown for notes payable
also approximate fair value because current interest rates offered to the
Company for debt of similar maturities are substantially the same.
F-10
<PAGE>
TMEX USA, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
December 31, 1999
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization
are provided using the Modified Accelerated Cost Recovery System ("MACRS")
method, which approximates the double-declining method over the assets
estimated useful lives as follows:
Equipment 5 years
Office furniture 7 years
Leasehold improvements shorter of lease term or useful life
Maintenance and minor replacements are charged to expense as incurred.
Accounting for the Impairment of Long-Lived Assets
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." SFAS No. 121 requires impairment
losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets'
carrying amount. Management determined that there was no impairment of
long-lived assets for all periods presented.
Investments in Available-for-Sale Securities
The Company accounts for its investments under the provisions of SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities."
Available-for-sale securities, representing an investment in the Company's
prior parent, were reported at fair market value with unrealized holding
gains and losses included as a separate component of stockholders' equity
until realized. During the year ended December 31, 1998, management of the
Company determined that the decline in the fair market was not temporary.
Accordingly, during the year ended December 31, 1998, the Company
recognized a realized loss totaling $62,250. During the year ended December
31, 1999, all available-for-sale securities were sold, resulting in an
insignificant realized loss.
F-11
<PAGE>
TMEX USA, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
December 31, 1999
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes and
encourages the use of the fair value based method of accounting for
stock-based compensation arrangements under which compensation cost is
determined using the fair value of stock-based compensation determined as
of the date of grant and is recognized over the periods in which the
related services are rendered. The statement also permits companies to
elect to continue using the current implicit value accounting method
specified in Accounting Principles Bulletin ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," to account for stock-based
compensation issued to employees. The Company has elected to use the fair
value based method. For stock-based compensation issued to non-employees,
the Company uses the fair value method of accounting under the provisions
of SFAS No. 123.
Loss per Share
The Company calculates loss per share in accordance with SFAS No. 128,
"Earnings Per Share." SFAS No. 128 replaced the presentation of primary and
fully diluted loss per share with the presentation of basic and diluted
loss per share. Basic loss per share excludes dilution and is calculated by
dividing loss available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted loss per share
includes the potential dilutive effects that could occur if securities or
other contracts to issue common stock were exercised or converted into
common stock ("potential common stock") that would then share in the loss
of the Company.
As of December 31, 1999 and 1998, the Company had potential common stock,
including options and warrants. The effects of such potential common stock
were not included in diluted loss per share as their effects would have
been anti-dilutive.
Income Taxes
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax basis of assets and liabilities and
their financial reporting amounts at each period end, based on enacted tax
laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized. The provision for income taxes represents the tax
payable for the period, if any, and the change during the period in
deferred tax assets and liabilities.
F-12
<PAGE>
TMEX USA, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
December 31, 1999
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Comprehensive Income
For the year ended December 31, 1999, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." This statement establishes standards for
reporting comprehensive income and its components in a financial statement.
Comprehensive income as defined includes all changes in equity (net assets)
during a period from non-owner sources. Examples of items to be included in
comprehensive income, which are excluded from net income, include foreign
currency translation adjustments and unrealized gains and losses on
available-for-sale securities. Comprehensive income is not presented in the
Company's financials statements since the Company did not have any of the
items of comprehensive income in any period presented.
Revenue Recognition
The Company recognizes revenues for contracted one-time services upon
completion of the services. The Company recognizes revenues for sales of
equipment and supplies upon shipment of the goods.
The Company recognizes revenues associated with phone debit cards based
upon actual usage. Amounts collected by the Company for the sale of such
cards are deferred, net of related commissions, until such time amounts are
used by the cardholder. As of December 31, 1999, the Company had deferred
revenues totaling $264,943 related to unused phone debit cards.
Recently Issued Accounting Pronouncements
In June 1999, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 136, "Transfer of Assets to a Not-for-Profit Organization or Charitable
Trust that Raises or Holds Contributions for Others." This statement is not
applicable to the Company.
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities." This statement is not applicable to
the Company.
Reclassifications
Certain amounts have been reclassified in the prior year balances to
conform to the current year presentation.
NOTE 3 - RISKS AND UNCERTAINTIES
Technological Obsolescence
The telecommunications industry is characterized by rapid technological
advancement and change. Should demand for the Company's products prove to
be significantly less than anticipated, the ultimate realizable value of
such products could be substantially less than the amounts reflected in the
accompanying balance sheet.
F-13
<PAGE>
TMEX USA, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
December 31, 1999
- --------------------------------------------------------------------------------
NOTE 3 - RISKS AND UNCERTAINTIES (Continued)
Reliance on Independent Service Providers
The Company is party to various contracts with service providers to obtain
"direct access links" that provide telecommunications connections. The
agreements specify minimum usage and payment amounts and require the
Company to prepay estimated monthly usage and pay certain one-time costs
for initial installation costs, as defined. The Company has the option to
terminate these agreements, subject to early termination charges, to
reimburse the service provider for installation costs related to
connections provided.
The Company is also party to a contract with a reseller to provide the
manufacturing and distribution of prepaid debit phone cards, whereby the
reseller is obligated to sell minimum amounts, as defined, and the Company
is obligated to provide the underlying service for cards sold at specified
rates. Fraudulent calls are at the expense of the reseller. The agreement
can be terminated, as defined, and renews automatically on a year-to-year
basis, as defined.
The Company relies on these carriers to provide service in the United
States and Mexico. Should the Company be unable to maintain these
contracts, use specified minimums, or to obtain service to support its
current or future operations, the Company could experience difficulties in
supplying telecommunications service to its customers or could experience
excessive costs in relation to revenues, which would have a material
adverse effect on the financial position and operations of the Company.
Government Regulation
The telecommunication industry is subject to regulation by various
governmental authorities in the United States and other countries. The
Company's services currently are required to obtain regulatory approval
from the Federal Communications Commission ("FCC"). Management of the
Company believes appropriate approvals by the FCC have been granted. There
can be no assurance that regulatory renewal, approvals, or clearances will
be granted by the FCC on a timely basis, or at all. Not obtaining necessary
regulatory approvals in the United States or in other countries would have
an adverse effect on the Company's business, financial condition, and
results of operations.
Listing and Maintenance Criteria for Over-the-Counter
The Company has been notified by the Securities and Exchange Commission
that the Company is required to file as a reporting company by April 19,
2000. There is no assurance that the Company will be able to obtain or
maintain the standards of a reporting company on the over-the-counter.
F-14
<PAGE>
TMEX USA, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
December 31, 1999
- --------------------------------------------------------------------------------
NOTE 4 - CONCENTRATIONS OF RISK
Cash
As of December 31, 1999, the Company maintained cash balances with
financial institutions totaling $174,322 in excess of federally insured
amounts of $100,000.
Major Customers and Suppliers
During the year ended December 31, 1999, the Company had one customer that
represented 85% of net sales and had one customer that represented 96%
accounts receivable. During the year ended December 31, 1998, the Company
had one customer that represented 66% of net revenues.
During the year ended December 31, 1999, the Company had two service
providers that represented 81% and 12% of purchases. As of December 31,
1999, such service suppliers represented 56% and 21%, respectively, of
accounts payable.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1999 consisted of the following:
Equipment $1,142,551
Furniture and fixtures 22,376
Leasehold improvements 29,776
----------
1,194,703
Less accumulated depreciation and amortization 371,513
----------
Total property and equipment $ 823,190
==========
NOTE 6 - NOTE PAYABLE
As of December 31, 1999, note payable consisted of a note payable to a
financial institution bearing interest at 12.23% per annum, secured by
certain equipment, payable monthly at $8,690, including principal and
interest, and maturing in October 2002.
F-15
<PAGE>
TMEX USA, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
December 31, 1999
- --------------------------------------------------------------------------------
NOTE 6 - NOTE PAYABLE (Continued)
As of December 31, 1999, scheduled future maturities of the note payable
were as follows:
Year Ending
December 31,
------------
2000 $ 78,160
2001 88,271
2002 81,795
--------
248,226
Less current portion 78,160
--------
Long term portion $170,066
========
NOTE 7 - COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its facilities and certain equipment under
non-cancelable, operating lease agreements, expiring through August 2001.
The Company also leases certain facilities on a month-to-month basis.
As of December 31, 1999, future aggregate minimum annual lease payments
under operating lease arrangements for the years ending December 31, 2000
and 2001, total $40,200 and $14,000, respectively.
For the years ended December 31, 1999 and 1998, rent expense totaled
$44,734 and $32,128, respectively. Rent expense is included in general and
administrative expenses in the accompanying statements of operations.
Internet Service Agreement
The Company has an Internet service agreement with a provider that expires
in May 2001, whereby for monthly service, the Company is obligated to pay
$1,136 per month. As of December 31, 1999, future aggregate minimum
payments under this agreement for the years ending December 31, 2000 and
2001, total $13,632 and $4,885, respectively.
F-16
<PAGE>
TMEX USA, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
December 31, 1999
- --------------------------------------------------------------------------------
NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)
Employment Contracts
On April 12, 2000, the Company entered into contracts with three officers,
whereby for successive one-year terms, the employees will receive an
aggregate annual base salary totaling $340,000 and will be entitled to cash
bonuses equal to 2% of net profits, as defined.
In October 1999, the Company entered into a three-year contract with an
employee, which provides for successive automatic one-year renewals unless
terminated, as defined. The Company is obligated to pay a base salary of
$5,000 per month through December 1999, $10,000 per month from January 2000
through October 2000, and 10% annual increases thereafter, plus a 1.5%
commission on all sales of debit cards. The Company also committed to issue
50,000 shares of common stock upon signing the agreement, and contingent
bonus compensation is to be paid totaling up to 960,000 shares of the
Company's common stock over a period of three years in equal quarterly
installments of 80,000 shares, provided the employee meets minimum profit
targets, as defined. For the year ended December 31, 1999, included in the
accompanying statement of operations is compensation expense totaling
$50,000, representing the fair market value (based on recent cash
transactions) of the 50,000 committed shares of common stock.
Litigation
The Company is party to various matters of litigation that arise in the
normal course of business. Management believes there will not be any
significant impact to the Company's financial position or operations as a
result of these matters.
NOTE 8 - RELATED PARTY TRANSACTIONS
Due to Related Party
As of December 31, 1999, due to related party consists of amounts due to an
entity owned by the President and major stockholder of the Company for
operating services provided.
Convertible Note Payable to Stockholder
Effective December 21, 1999, the Company issued a note payable to a
stockholder for cash used for operations. The note is unsecured,
non-interest bearing, and is convertible into restricted shares of the
Company's common stock at a conversion rate of $1.25 per share. The note is
payable or convertible on demand any time after March 15, 2000.
F-17
<PAGE>
TMEX USA, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
December 31, 1999
- --------------------------------------------------------------------------------
NOTE 9 - CAPITAL TRANSACTIONS
Common Stock Offerings
Commencing in June 1998, the Company began selling shares of common stock
under Regulation D, Rule 504 of the Securities Exchange Act of 1934,
permitting the sale of stock with an aggregate cash offering price of
$1,000,000 or less. Under Rule 504, the Company was exempt from filing
complete registration statements for this offering. Free trading common
stock was issued for cash under this offering. During 1998, the Company
issued 495,943 shares for cash totaling $204,350, or ranging from $0.20 to
$0.64 per share, pursuant to this offering. During 1999, the Company issued
44,947 shares for cash totaling $28,500, or ranging from $0.50 to $1 per
share, and issued 30,000 shares for services valued at $1 per share
pursuant to this offering. Insignificant costs were incurred in association
with issuance of these shares.
In March 1999, the Company issued 315,789 shares of common stock under the
Regulation D offering, discussed below, in connection with the conversion
of a $300,000 convertible note payable, or at a conversion rate of $0.95
per share. In connection with the conversion, the parties agreed to modify
an option to purchase common stock of the Company. The original option was
granted in October 1998, whereby the note holder had the option to purchase
280,000 shares of the Company's restricted common stock for cash at $1.25
per share at the time of conversion of the note payable into shares of
common stock through October 16, 1999. In March 1999, such option was
terminated, and an existing stockholder issued options to the note holder.
Included in the accompanying statement of operations is interest expense
totaling $22,400, representing the value ascribed to these options. The
value of these options was estimated at the date of grant using the
Black-Scholes option-pricing model.
Common Stock Issued for Cash
In December 1997, the Company accepted a subscription for 30,000 restricted
shares of common stock valued at $0.75 per share, or $22,500. Such amounts
were collected in 1998.
During 1998, the Company issued 1,039,959 restricted shares of common stock
for cash totaling $359,682, or ranging from $0.13 to $0.69 per share.
F-18
<PAGE>
TMEX USA, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
December 31, 1999
- --------------------------------------------------------------------------------
NOTE 9 - CAPITAL TRANSACTIONS (Continued)
Common Stock Issued for Cash (Continued)
During 1999, the Company issued 966,386 restricted shares of common stock
for cash totaling $867,776, or ranging from $0.35 to $2 per share.
No offering costs were incurred in association with the issuance of the
above common stock issued for cash.
Common Stock Issued for Services
The Company values all shares issued for services based on the fair value
of the common shares issued for such services.
During 1998, the Company issued 715,600 restricted shares of common stock
for legal, professional, and outside services valued at $250,415, or
ranging from $0.125 to $0.50 per share. The Company also issued 308,250
restricted shares of common stock for salaries and bonuses to officers and
employees valued at $78,225, or ranging from $0.125 to $0.50 per share.
During 1999, the Company issued 182,360 restricted shares of common stock
for legal, professional, and outside services valued at $185,166, or
ranging from $0.35 to $2 per share. The Company also issued 1,922,500
restricted shares of common stock for salaries and bonuses to officers and
employees valued at $1,398,000, or ranging from $0.60 to $1.90 per share.
Other Common Stock Transactions
In February 1997, the Company sold 86,000 units for cash at $0.75 per unit.
Each unit consisted of one share of common stock and one warrant to
purchase one share of common stock for cash at $0.75 per share. The warrant
was exercisable between June 1, 1998 and June 30, 1998, and expired. The
value ascribed to the warrants totaled $30,100. The value of these warrants
was estimated at the date of grant using the Black-Scholes option-pricing
model.
In April 1998, the Company issued 1,000,000 restricted shares of common
stock in connection with the conversion of a $200,000 convertible note
payable. Interest expense totaling $200,000, representing the difference
between the principal amount and the value of the restricted shares, has
been recorded in the accompanying statement of operations.
F-19
<PAGE>
TMEX USA, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
December 31, 1999
- --------------------------------------------------------------------------------
NOTE 9 - CAPITAL TRANSACTIONS (Continued)
Options and Warrants
On April 12, 2000, the Board of Directors approved and adopted an incentive
stock option and non-qualified stock option plan (the "Plan") for
directors, officers, key employees, and consultants. The Plan provides for
the granting of options for common shares at exercise prices equal to or
exceeding the fair market value at the date of grant, as determined by an
option committee consisting of a minimum of three parties (the "Option
Committee"), as defined. Options become exercisable over a period as
determined by the Option Committee. In no event are options to be
exercisable after 10 years from the date of grant. The Board of Directors
has authorized a total of 5,000,000 shares to be available for grant under
the Company's stock option plans.
Options granted under the Plan may be either "incentive stock options,"
within the meaning of Section 422 of the Internal Revenue Code, or
"non-qualified stock options," as determined by the Option Committee at the
time of grant. No incentive stock option may be granted to any person who
owns stock possessing more than 10% of the combined voting power of all
classes of the Company's stock or of its parent ("10% Stockholders"),
unless the exercise price is at least equal to 110% of the fair market
value on the date of grant. Options may be granted under the Plan for terms
of up to five years, except for incentive stock options granted to 10%
Stockholders, which are limited to three-year terms.
The exercise price in the case of incentive stock options granted under the
Plan must be at least equal to the fair market value of the common stock as
of the date of grant. No incentive stock options may be granted to an
optionee under the Plan if the aggregate fair market value (determined on
the date of grant) of the stock with respect to which incentive stock
options are exercisable by such optionee in any calendar year under all
such plans of the Company and its affiliates exceeds $100,000.
No options have been granted under the Plan.
During 1997, in connection with a consulting agreement for common stock and
warrants, the Company issued two options, each for 50,000 shares of common
stock. The two options were exercisable at $0.10 and $0.25, subject to a
share value exceeding $1 and $2, respectively, for five consecutive trading
days. The options expired in June 1998. The Company recorded compensation
expense totaling $36,000, representing the value ascribed to these options.
The value of these options was estimated at the date of grant using the
Black-Scholes option-pricing model.
During 1998, options for 42,000 shares of common stock exercisable at $1
were issued in connection with services provided. The options expired in
December 1998. The value ascribed to these options was insignificant and
was estimated at the date of grant using the Black-Scholes option-pricing
model and was insignificant.
F-20
<PAGE>
TMEX USA, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
December 31, 1999
- --------------------------------------------------------------------------------
NOTE 9 - CAPITAL TRANSACTIONS (Continued)
Options and Warrants (Continued)
The following summarizes options and warrants granted and outstanding
through December 31, 1999:
Number of Shares Weighted-
-------------------- Average
Non- Exercise
Employee Employee Total Price
-------- -------- ----- -----
Balance, December 31,
1997 -- 186,000 186,000 $ 0.44
Granted -- 322,000 322,000 $ 1.22
Expired, cancelled -- (186,000) (186,000) $(0.44)
-------- -------- --------
Balance, December 31, 322,000 322,000 1.22
1998 -- -- -- $ --
Expired, cancelled -- (322,000) (322,000) $(1.22)
-------- -------- --------
Balance, December 31,
1999 -- -- -- $ --
======== ======== ========
NOTE 10 - INCOME TAXES
The components of the income tax provision for the years ended December 31,
1999 and 1998 were as follows:
1999 1998
----- -----
Current $ 800 $ 800
Deferred -- --
----- -----
Total $ 800 $ 800
===== =====
F-21
<PAGE>
TMEX USA, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
December 31, 1999
- --------------------------------------------------------------------------------
NOTE 10 - INCOME TAXES (Continued)
Income tax expense (benefit) for the years ended December 31, 1999 and 1998
differed from the amounts computed applying the federal statutory rate of
34% to pre-tax income as a result of:
1999 1998
--------- ---------
Computed "expected" tax benefit $(922,979) $(346,107)
Deferred state tax benefit (64,546) --
Expenses not deducted for tax purposes 550,643 174,556
Change in beginning of the year balance of the
valuation allowance for deferred tax assets 437,154 171,823
State and local income taxes, net of tax benefit 528 528
--------- ---------
Total $ 800 $ 800
========= =========
Significant components of the Company's deferred tax assets and liabilities
for federal and state income taxes as of December 31, 1999 consisted of the
following:
Deferred tax assets
Net operating loss carryforwards $ 782,779
Value of stock options not exercised 38,402
Other 2,696
Valuation allowance (784,622)
---------
Total deferred tax assets 39,255
Deferred tax liabilities
Depreciation and amortization (9,019)
State taxes (30,236)
---------
Total $ --
=========
The valuation allowance for deferred tax assets as of December 31, 1999
totaled approximately $785,000. The net change in the valuation allowance
for the year ended December 31, 1999 was an increase of approximately
$419,000.
As of December 31, 1999, the Company had net tax operating loss
carryforwards of approximately $2,071,000 available to offset future
federal taxable income and tax liabilities. The federal carryforwards
expire in varying amounts through 2019. The Company also had net tax
operating loss carryforwards of approximately $890,000 available to offset
future California taxable income and tax liabilities. The state
carryforwards expire through 2004.
F-22
<PAGE>
TMEX USA, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
December 31, 1999
- --------------------------------------------------------------------------------
NOTE 11 - PRIOR PERIOD ADJUSTMENTS
As of December 31, 1998, the Company did not reflect charges to operations
for certain assets or the valuation of certain issuances of stock. As of
December 31, 1998, this resulted in a decrease to assets totaling $29,356,
an increase to common stock totaling $90, and a net decrease to additional
paid-in capital totaling $29,386. The impact for 1998 of these adjustments
was reduced by the offsetting the adjustment related to the quasi
reorganization (see Note 1) totaling $1,864,282, representing the
additional adjustment required to reclassify the accumulated deficit to
additional paid-in capital.
As of December 31, 1997, the Company did not reflect the transferor's cost
basis for assets purchased from an officer and stockholder, the issuance of
certain shares of common stock, or the valuation of certain issuances of
stock, options, and warrants. As of December 31, 1997, this resulted in a
decrease to investments totaling $1,085,000, an increase to common stock
totaling $87, an increase to additional paid-in capital totaling $208,886,
and an increase to the accumulated deficit totaling $1,271,473.
Accordingly, the 1998 and 1997 financial statements and balances have been
restated.
NOTE 12 - YEAR 2000 ISSUE
The issue whether computer systems would properly recognize date-sensitive
information when the year changed to 2000 resulted in no system failures to
the Company. The Company is dependent on computer processing in the conduct
of its business activities.
While the Company has taken steps to communicate with outside suppliers, it
cannot guarantee that they have all taken the necessary steps to prevent
any service interruption that may affect the Company.
Based on the current operations of the Company's computer systems,
management believes there will not be any additional costs related to this
issue.
NOTE 13 - SUBSEQUENT EVENTS
Capital Transactions
In February and March 2000, the Company accepted subscriptions for 667,250
shares of the Company's common stock for cash ranging from $1.45 to $1.55
per share, or an aggregate of $937,915, net of costs of $62,085. The per
share price included a 30% discount.
F-23
<PAGE>
TMEX USA, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
December 31, 1999
- --------------------------------------------------------------------------------
NOTE 13 - SUBSEQUENT EVENTS (Continued)
Capital Transactions (Continued)
Subsequent to the year ended December 31, 1999 and through the date of this
report, the Company issued 544,000 shares of restricted common stock for
services valued at $0.80 to $1.75 per share, or an aggregate of $796,450.
The Company also issued 24,786 shares of restricted common stock for cash
at $1.75 per share to two individuals, or an aggregate of $43,376.
F-24
<PAGE>
<PAGE>
Item 8. Changes in and Disagreements with Accountants.
There have been no changes in or disagreements with our accountants since our
formation required to be disclosed pursuant to Item 304 of Regulation S-B,
except for the following:
In February 2000, our former accountant, the firm of Haynie and Company, a
California corporation ("Haynie"), resigned as our independent auditor. Haynie's
reports on the financial statements for either of the past two (2) years did not
contain an adverse opinion or disclaimer of opinion and the reports were not
modified as to audit scope or accounting principles. The decision to change
accountants was recommended and approved by our Board of Directors and did not
result from any disagreement regarding our policies or procedures. In February
2000, we engaged new accountants, the firm of Singer, Lewak, Greenbaum &
Goldstein, LLP as the principal accountants to audit our financial statements. A
correspondence from Haynie dated April 12, 2000 specifying that our disclosures
regarding the change in accountants are true and correct is attached to this
Form 10-KSB as Exhibit 99.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons.
Executive Officers and Directors. We are dependent on the efforts and abilities
of certain of our senior management. The interruption of the services of key
management could have a material adverse effect on our operations, profits and
future development, if suitable replacements are not promptly obtained. We have
entered into employment agreements with our key executives; however, no
assurance can be given that each executive will remain with us during or after
the term of his or her employment agreement. In addition, our success depends,
in part, upon our ability to attract and retain other talented personnel.
Although we believe that our relations with our personnel are good and that we
will continue to be successful in attracting and retaining qualified personnel,
there can be no assurance that we will be able to continue to do so. All of our
officers and directors will hold office until their resignation or removal.
Our principal executive officers and the directors are specified in the
following table:
================================================================================
Name Age Position
- --------------------------------------------------------------------------------
Cooper Lee 23 President, Director
- --------------------------------------------------------------------------------
Crofton Cooper 74 Chief Executive Officer,
Secretary, Treasurer, Director
- --------------------------------------------------------------------------------
Cecil Zeringue 33 Vice President, Director
- --------------------------------------------------------------------------------
Ray Taylor 64 Vice President
================================================================================
Cooper Lee. Mr. Lee is the President and a director of the Company since 1995.
Mr. Lee is primarily responsible for our technology development as well as our
computer networking infrastructure. Mr. Lee, whose specialty is computer code
programming, has developed an advanced computer network infrastructure, which
was designed to minimize the human involvement necessary to manage the system
and, therefore, allows us to offer communication-networking services at
significant lower rates. In 1994 while attending Nicholls State University as a
student, Mr. Lee began teaching computer classes and was responsible for
maintaining 600 of the school's 1,400 computers.
Crofton Cooper. Mr. Cooper is the Chief Executive Officer, Secretary, Treasurer
and a director of the Company since 1995. Mr. Cooper has extensive background
and experience in corporate finance, including both private and public
13
<PAGE>
equity financing and has financed our operations since our inception. Prior to
joining the Company in 1995, Mr. Cooper concentrated his business activities as
a real estate developer in Orange, Los Angeles, and Riverside counties.
Cecil Zeringue. Cecil Zeringue is the Vice President of Operations and a
director of the Company since 1995. Mr. Zeringue is responsible for our
operations. Prior to joining the Company in 1995, Mr. Zeringue managed the
day-to-day operations of Valley Electric, an electrical supply house in Houma,
Louisiana. Mr. Zeringue graduated with a Masters of Business Administration from
Nicholls State University in 1993 and a Bachelor of Science in Computer Science
in 1989.
Ray Taylor. Mr. Taylor is the Executive Vice President of Marketing of the
Company. From 1997 to the present, Mr. Taylor has been responsible for the real
estate acquisitions of our network POPs. Mr. Taylor is responsible for contract
negotiations, both in the United States and Mexico. Mr. Taylor has also been
responsible for pricing and rate structures for the wholesale voice traffic.
Prior to joining the Company in 1997, Mr. Taylor was a real estate developer,
specializing in locating properties and performing market analysis.
Crofton Cooper, the Chief Executive Officer, Secretary, Treasurer and a director
of the Company, is the grandfather of Cooper Lee, the President and a director
of the Company. There are no orders, judgments, or decrees of any governmental
agency or administrator, or of any court of competent jurisdiction, revoking or
suspending for cause any license, permit or other authority to engage in the
securities business or in the sale of a particular security or temporarily or
permanently restraining any officer or director of the Company from engaging in
or continuing any conduct, practice or employment in connection with the
purchase or sale of securities, or convicting such person of any felony or
misdemeanor involving a security, or any aspect of the securities business or of
theft or of any felony, nor are any of the officers or directors of any
corporation or entity affiliated with the Company so enjoined.
Section 16(a) Beneficial Ownership Reporting Compliance. We do not presently
have knowledge as to whether all of our officers, directors, and principal
shareholders have filed all reports required to be filed by those persons on,
respectively, Form 3 (Initial Statement of Beneficial Ownership of Securities),
a Form 4 (Statement of Changes of Beneficial Ownership of Securities), or a Form
5 (Annual Statement of Beneficial Ownership of Securities).
Item 10. Executive Compensation
Any compensation received by our officers, directors, and management personnel
will be determined from time to time by our Board of Directors. Our officers,
directors, and management personnel will be reimbursed for any out-of-pocket
expenses incurred on our behalf.
Summary Compensation Table. The table set forth below summarizes the annual and
long-term compensation for services in all capacities to the Company payable to
our Chief Executive Officer and our other whose total annual salary and bonus is
anticipated to exceed $50,000 during the year ending December 31, 2000. We have
adopted an incentive stock option plan for our executive officers which would
result in additional compensation.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
===============================================================================================================================
Name and Principal Position Year Annual Salary ($) Bonus ($) Other Annual All Other Compensation
Compensation ($)
- -------------------------------------------------------------------------------------------------------------------------------
Cooper Lee, President 2000 $52,000 None None None
- -------------------------------------------------------------------------------------------------------------------------------
Crofton Cooper, Chief Executive
Officer, Secretary, Treasurer 2000 $52,000 None None None
- -------------------------------------------------------------------------------------------------------------------------------
Cecil Zeringue, Vice-President 2000 $52,000 None None None
- -------------------------------------------------------------------------------------------------------------------------------
Ray Taylor, Vice-President 2000 $13,000 None None None
===============================================================================================================================
</TABLE>
Compensation of Directors. Directors who are also employees of the Company
receive no extra compensation for their service on our Board of Directors.
14
<PAGE>
Employment Contracts. On April 12, 2000, we entered into employment contracts
with Cooper Lee, Crofton Cooper and Cecil Zeringue.
In October 1999, we entered into a three-year employment contract with Michael
Garone, which provides for successive automatic one-year renewals unless
terminated. We are obligated to pay a base salary of $5,000 per month through
December 1999, $10,000 per month from January 2000 through October 2000 and 10%
annual increases thereafter. Mr. Garone is also entitled to a sales commission
of 1.5% on all sales of debit calling cards. We are also obligated to issue
50,000 shares of our $.001 par value common stock upon execution of the
agreement. Mr. Garone may also be entitled to 960,000 shares of our $.001 par
value common stock during a period of three years to be issued in equal
quarterly installments of 80,000 shares, provided that Mr. Garone satisfies
minimum profit targets, specified in the employment contract.
Shares Issued as Compensation for Services. In 1999, our officers, director and
other employees, were issued 1,922,500 shares of our $.001 par value common
stock as compensation for their services to us; specifically, their continuing
efforts related to the development of certain technology which will be utilized
by us in our business operations. Those shares were valued at what we believe
was the fair market value at the time of issuance, which ranged from $0.60 to
$1.90 per share.
We believe that we will issue an indeterminable amount of shares of our $.001
par value common stock as compensation for the services of officers, director
and other employees in the year 2000.
Indemnification Agreements. On April 12, 2000, we entered into indemnification
agreements with Cooper Lee, Crofton Cooper and Cecil Zeringue pursuant to which
we agree to indemnify each such person for all expenses and liabilities,
including criminal monetary judgments, penalties and fines, incurred by such
person in connection with any criminal or civil action brought or threatened
against such person by reason of such person being or having been our executive
officer or director. In order to be entitled to indemnification by us, such
person must have acted in good faith and in a manner such person believed to be
in our best interests and, with respect to criminal actions, such person must
have had no reasonable cause to believe his or her conduct was unlawful.
DISCLOSURE OF POSITION OF COMMISSION REGARDING INDEMNIFICATION FOR SECURITIES
ACT LIABILITIES:
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES ACT OF
1933 MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING THE COMPANY
PURSUANT TO THE FOREGOING PROVISIONS, THE COMPANY HAS BEEN INFORMED THAT IN THE
OPINION OF THE SECURITIES AND EXCHANGE COMMISSION, SUCH INDEMNIFICATION IS
AGAINST PUBLIC POLICY AS EXPRESSED IN THE SECURITIES ACT OF 1933 AND IS,
THEREFORE, UNENFORCEABLE.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of December 31, 1999, by (i) each person or
entity known by us to be the beneficial owner of more than 5% of the outstanding
shares of our common stock, (ii) each of our directors and named executive
officers, and (iii) all of our directors and executive officers as a group.
15
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
===============================================================================================================================
Title of Class Name and Address of Beneficial Amount and Nature of Beneficial Percent of Class
Owner Owner
- -------------------------------------------------------------------------------------------------------------------------------
$.001 Par Value Common David Lohrey 850,000 shares 6.71%
Stock 6 Leeward Rd
Belvedere, CA 94920
- -------------------------------------------------------------------------------------------------------------------------------
$.001 Par Value Common Cooper Lee, 5031 Birch Street, 1,500,000 shares, President, 11.85%
Stock Suite G, Newport Beach, Director
California 92660
- -------------------------------------------------------------------------------------------------------------------------------
$.001 Par Value Common Crofton Cooper, 5031 Birch 2,400,000 shares, Chief Executive 18.96%
Stock Street, Suite G, Newport Beach, Officer, Secretary, Treasurer,
California 92660 Director
- -------------------------------------------------------------------------------------------------------------------------------
$.001 Par Value Common Cecil Zeringue, 5031 Birch 436,749 shares, Vice President, 3.45%
Stock Street, Suite G, Newport Beach, Director
California 92660
- -------------------------------------------------------------------------------------------------------------------------------
$.001 Par Value Common Ray Taylor, 5031 Birch Street, 400,000 shares, Vice President 3.16%
Stock Suite G, Newport Beach,
California 92660
- -------------------------------------------------------------------------------------------------------------------------------
$.001 Par Value Common All directors and named executive 37.42%
Stock officers as a group
===============================================================================================================================
</TABLE>
Beneficial ownership is determined in accordance with the rules of the SEC and
generally includes voting or investment power with respect to securities. In
accordance with SEC rules, shares of our common stock which may be acquired upon
exercise of stock options or warrants which are currently exercisable or which
become exercisable within 60 days of the date of the table are deemed
beneficially owned by the optionees. Subject to community property laws, where
applicable, the persons or entities named in the table above have sole voting
and investment power with respect to all shares of our common stock indicated as
beneficially owned by them.
Changes in Control. We are not aware of any arrangements which may result in
"changes in control" as that term is defined by the provisions of Item 403 of
Regulation S-B.
Item 12. Certain Relationships and Related Transactions.
Transactions with Promoters.
Not applicable.
Related Party Transactions. There have been no related party transactions which
would be required to be disclosed pursuant to Item 404 of Regulation S-B, except
for the following:
As of December 31, 1999, a trade payable of $59,798 for cash used for operations
was due to Myles Reid Services, a Delaware corporation owned by Crofton Cooper,
who is the Chief Executive Officer, a director and a major stockholder of the
Company.
On December 21, 1999, we issued a promissory note for $125,000 payable to Jeryl
Rochelle, a shareholder of the Company, for cash used for operations. The
promissory note is unsecured, non-interest bearing and is convertible into
16
<PAGE>
restricted shares of our $.001 par value common stock at a conversion rate of
$1.25 per share. The promissory note is payable or convertible on demand any
time after March 15, 2000.
Item 13. Exhibits and Reports on Form 8-K
3.1 Articles of Incorporation*
(Charter Document)
3.2 Certificate of Amendment to Articles of Incorporation*
(Charter Document)
3.3 Bylaws*
10.1 Employment Agreement with Crofton Cooper*
(material contract)
10.2 Employment Agreement with Cooper Lee*
(material contract)
10.3 Employment Agreement with Cecil Zeringue*
(material contract)
10.4 Employment Agreement with Michael Garone*
(material contract)
10.5 Indemnification Agreement with Crofton Cooper*
(material contract)
10.6 Indemnification Agreement with Cooper Lee*
(material contract)
10.7 Indemnification Agreement with Cecil Zeringue*
(material contract)
10.8 Stock Option Plan*
27. Financial Data Schedule
99 Correspondence from former accountants
* Previously filed as exhibits to Registration Statement on Form 8-A filed
concurrently herewith.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned in the City of Newport Beach, California, on April 12, 2000.
TMEX USA, Inc.,
a Nevada corporation
By: /s/ Cooper Lee
----------------------
Cooper Lee
Its: President
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
TMEX USA, Inc.
/s/ Crofton Cooper April 12, 2000
- -------------------------------------------
Crofton Cooper, Chief Executive
Officer, Secretary, Treasurer, Director
/s/ Cecil Zerinque April 12, 2000
- -------------------------------------------
Cecil Zeringue, Vice President, Director
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 375,387 248,515
<SECURITIES> 0 0
<RECEIVABLES> 291,350 21,104
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 704,445 292,380
<PP&E> 1,194,703 747,635
<DEPRECIATION> 371,513 208,069
<TOTAL-ASSETS> 1,543,635 854,989
<CURRENT-LIABILITIES> 819,479 145,807
<BONDS> 0 0
0 0
0 0
<COMMON> 12,688 9,225
<OTHER-SE> 541,402 399,866
<TOTAL-LIABILITY-AND-EQUITY> 1,543,635 854,898
<SALES> 413,999 80,145
<TOTAL-REVENUES> 413,999 80,145
<CGS> 542,566 10,259
<TOTAL-COSTS> 2,586,195 892,039
<OTHER-EXPENSES> (319) 285,810
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 4,436 222,760
<INCOME-PRETAX> (2,713,643) (1,107,163)
<INCOME-TAX> 800 800
<INCOME-CONTINUING> (2,714,443) (1,107,963)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,714,443) (1,107,963)
<EPS-BASIC> (0.25) (.15)
<EPS-DILUTED> (0.25) (.15)
</TABLE>
[LOGO] Haynie & Company
(a professional corporation)
Certerfied Public Accountants and Management Consultants
4910 Campus Drive Newport Beach, California 92660-2118 (949) 724-1880
FAX (949) 724-1889
April 12, 2000
Office of Small Business
Securities and Exchange Commission
450 5th Street N.W.
Washington, D.C. 20549
Mailstop: 4-6, SEC
RE: TMEX USA, Inc.
Dear Sir or Madam:
We are the former accountant for TMEX USA, Inc., a Nevada corporation
("Company"). We have reviewed the Company's Form 10-KSB. We agree with the
Company's disclosures in "Item 8. Changes in and Disagreements with Accountants"
of Form 10-KSB regarding the change in certifying accountants.
HAYNIE & COMPANY, CPAS
/s/ David T. Shomaker
David T. Shomaker, CPA, CVA
DTS:sig
