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U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000 COMMISSION FILE NUMBER: 000-30336
FUTUREONE, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
NEVADA 84-1383677
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION) IDENTIFICATION NUMBER)
1880 OFFICE CLUB POINTE, SUITE 2000
COLORADO SPRINGS, CO 80920-5002
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
719-272-8222
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(TITLE OF CLASS)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 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. [X]
State issuer's revenues for its most recent fiscal year: $12,936,045
The number of shares of Common Stock outstanding as of January 12, 2001,
was 16,454,301. The aggregate market value of the Common Stock of the registrant
held by non-affiliates as of January 12, 2001 was approximately $2,055,000 based
on the average bid and asked prices for such Common Stock as reported on the OTC
Bulletin Board.
DOCUMENTS INCORPORATED BY REFERENCE: ______
Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]
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TABLE OF CONTENTS
ITEM PAGE
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PART I
1. Description of Business............................................... 2
2. Description of Property............................................... 7
3. Legal Proceedings..................................................... 7
4. Submission of Matters to a Vote of Security Holders................... 7
PART II
5. Market for Common Equity and Related Stockholder Matters.............. 9
6. Management's Discussion and Analysis or Plan of Operation............. 12
7. Financial Statements.................................................. 19
8. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.............................................. 19
PART III
9. Directors, Executive Officers, Promotions and Control Persons;
Compliance With Section 16(a) of the Exchange Act..................... 19
10. Executive Compensation................................................ 21
11. Security Ownership of Certain Beneficial Owners and Management........ 27
12. Certain Relationships and Related Transactions........................ 28
13. Exhibits, List and Reports on Form 8-K................................ 31
Signatures............................................................ 37
Financial Statements................................................. F-1
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PART I
FUTURE ONE & DESIGN(R) IS A REGISTERED TRADEMARK AND TRADE NAME OF THE
COMPANY. SOME TRADEMARKS AND TRADE NAMES INCLUDED IN THIS REPORT ARE THE
PROPERTY OF THIRD PARTIES AND THE USE THEREOF DOES NOT IMPLY A DIRECT OR
INDIRECT ENDORSEMENT OF THE COMPANY BY SUCH THIRD PARTIES.
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
FutureOne, Inc. was incorporated in Nevada on March 22, 1994, as World's
Fare, Inc. World's Fare, Inc. acquired FUTUREONE, INC., an Arizona corporation,
which was incorporated December 26, 1996, pursuant to an Exchange Agreement
dated February 20, 1998, which became effective March 30, 1998. In July 1998,
World's Fare, Inc. changed its name to FutureOne, Inc. When used in this
registration statement, unless the context requires otherwise, the terms
"Company" and "FutureOne" refer to FutureOne, Inc., a Nevada corporation
(formerly World's Fare, Inc.), and all of FutureOne's subsidiaries. The
Company's principal offices are located at 1880 Office Club Pointe, Suite 2000,
Colorado Springs, CO 80920-5002, telephone 719-272-8222 and web site
www.futureone.com.
FutureOne, through its wholly owned subsidiary OPEC CORP. ("OPEC"), is a
provider of Telecommunications Infrastructure Deployment Services, formerly
referred to as "Broadband Engineering and Construction Services", to the
telecommunications and utilities industry. The Company provides design,
engineering, construction and maintenance service to telecommunications
companies, utility providers, and real estate developers in the western United
States. FutureOne designs, engineers, constructs and maintains aerial and
underground fiber-optic, coaxial and copper cable networks and other
infrastructure for companies such as AT&T, Qwest Communications, MCI WorldCom,
Adseta Communications, Inc. and other smaller customers. The Company's
telecommunication services also include copper and fiber splicing, horizontal
drilling and boring, commercial and residential installations, network repair
and maintenance, testing, line conditioning and utility construction management
services.
INDUSTRY
The telecommunications services industry is growing rapidly and demand for
qualified contractors is high. In response to end user demand for additional
high speed bandwidth, telecommunications companies and cable television system
operators are rushing to upgrade their existing systems, expand their systems,
and in many instances, replace their existing telecommunications infrastructure
to allow them to provide increased bandwidth capable of moving vast amounts of
digital data.
Major companies, including AT&T, Time Warner, Charter Cable, Inc., Level 3,
Williams Communications, and Cox Communications have all announced major capital
expenditure programs to upgrade their networks or convert their existing
networks to broadband, enhanced copper and fiber-optic systems.
HISTORY
FutureOne was formed as an Internet Service Provider ("ISP") in November
1995. The Company further entered into other lines of business, primarily
through telecommunications related acquisitions, in an effort to expand its
business, based on a plan to provide convergence technology direct to consumers,
under the trade name of "Neighborcomm". However, the Company found it difficult
to penetrate markets, fund growth and raise sufficient capital to adequately
compete with major providers. Consequently, in a focused restructuring,
FutureOne sold its original ISP business and divested all other business
segments, with the exception of OPEC, which was acquired in July of 1998.
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BUSINESS STRATEGY
FutureOne intends to grow its business internally and through strategic
acquisitions, with the goal of expanding its service offerings and geographic
footprint, while maintaining a total focus on improving operating efficiencies
to sustain profitable growth. The Company intends to increase the name
recognition of FutureOne and OPEC and to build a nationally recognized company.
INTERNAL GROWTH
The short-term goal is to immediately focus on generating internal growth
by:
* Increasing the volume of services provided to existing customers in
current markets;
* Broadening the customer base by adding new customers and;
* Geographically expanding service areas for new and existing customers.
LONG TERM GROWTH
Longer-term goals are to focus on generating additional growth by:
* Expanding resources and capabilities to serve new industry segments
such as wireless communications and the electric power industry.
* Expanding existing service offerings such as residential and
commercial installation and maintenance and giving consideration to
adding new services such as network monitoring and other services that
provide residual income after construction of a network is completed.
* Expansion into more geographic areas.
* Making strategic acquisitions that expand current capabilities or
allow OPEC to compliment its existing services and/or expand
geographic reach.
The Company plans to add additional products and services including the
following:
* Broadband wireless networks and antennae installation;
* Construction, engineering and maintenance of electrical power
networks;
* Fiber blowing, which involves using forced air to place fiber optic
cable through conduit.
CONTINUE TO EXPAND OPERATING EFFICIENCIES
FutureOne is dedicated to the effective utilization of its human resources,
capital equipment and finances. The Company intends to continue to improve
profitability by:
* Focusing on growth in more profitable services;
* Refinancing or retiring existing debt and equipment financing loans to
lower or eliminate interest costs;
* Implementing new management information software to facilitate
financial controls, asset allocation, and bid processing;
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* Strategically acquiring equipment to eliminate and/or reduce excess
short term equipment rental costs;
* Increasing purchasing power to gain volume discounts in areas such as
vehicles and equipment, materials, marketing and bonding.
ACQUISITION STRATEGY
FutureOne plans to pursue a targeted acquisition strategy to acquire
profitable companies with strong management teams and good reputations to
broaden its customer base, expand its geographic area and grow its portfolio of
services.
The Company also believes that as competition intensifies in its industry,
companies will be required to offer greater ranges of services more efficiently.
Therefore, smaller companies will seek to consolidate with companies such as
FutureOne.
PRODUCTS AND SERVICES
Currently the Company provides the following services to its customers:
DESIGN AND ENGINEERING -The Company designs and engineers networks and systems
for telecommunications companies, and designs and engineers distribution and
feeder telephony, and cable networks and systems, for small subdivisions and
full-scale developments.
CONSTRUCTION - The Company constructs and installs copper, coaxial and fiber
networks and systems by plowing, trenching or horizontal drilling and boring. In
addition the Company installs conduit systems, pulls cable through existing
conduit and provides aerial construction services.
The Company provides complete Land Developer Agreement ("L.D.A.") services
for real estate developments, whereby the Company provides complete turnkey
distribution facilities in subdivisions. These services include engineering,
installation, splicing and testing the systems.
The Company provides pre-provisioning services for a local carrier, whereby
the Company identifies potential customers for the carrier and then works with
the developer to install services and provide "soft" dial tone, which is a
direct connection to the local carrier, so that upon move in, the potential
customer can establish immediate service.
AUXILIARY SERVICES: - The Company also supplies the following services either in
connection with its construction activities or individually:
SPLICING - The Company splices both copper and fiber cable.
NETWORK REPAIR AND MAINTENANCE - The Company provides services to repair and
maintain networks and other infrastructure on a contract basis with fixed
prices. The Company provides whatever services are necessary to trouble shoot
and repair facilities, as requested on a work order basis from the
telecommunications companies.
RESIDENTIAL AND COMMERCIAL INSTALLATION - The Company provides full connection
services from providing the drop to the home or business to actually installing
the customer's connection. This service is provided for both Digital Subscriber
Lines ("DSL") and cable TV connections.
TESTING AND LINE CONDITIONING- The Company provides testing services to trouble
shoot existing networks and loops and to test newly installed facilities.
Services are also provided to condition lines so they are suitable to provide
DSL services.
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CUSTOMERS
The Company serves major customers such as Qwest (formerly US WEST), AT&T
and MCI/Worldcom and also provides services to small companies and developers.
During 1999, approximately 16% of the Company's revenues were derived from Santa
Fe Ranch POA, and in 2000 approximately 42% of the Company's revenues were
derived from Qwest Communications, 11% from Adesta Communications, Inc. and 11%
from Kiewit Western Co.
SUPPLIERS
The Company does not rely on any material third party suppliers in
connection with its business.
SALES AND MARKETING
Future sales and marketing efforts will consist of short term and long term
strategies.
OPEC has consistently marketed its services strictly through the efforts of
its executive management making direct contacts with customers and being added
to bid lists. To date these efforts have provided a maximum amount of business
that can be serviced with the Company's current financial, labor and equipment
resources.
SHORT TERM STRATEGIES - FutureOne plans to expand its relationship with Qwest,
AT&T and MCI WorldCom. The Company believes this can be effected immediately as
these companies have consistently requested that the Company take on more of
their work. In addition, FutureOne intends to expand into Nebraska and Iowa,
where it already has Qwest general construction and maintenance contracts, but
previously lacked the resources to provide services in these states. As an
approved general contractor for Qwest, the Company also intends to begin
competitive bidding for construction projects over $50,000, which are available
under its general maintenance contracts in five states. The Company has not
competitively bid for those projects in the past, because of limited resources.
Through the Company's executive and local management, it intends to solicit
the business of other telecommunications companies and cable providers, in the
geographic areas that it now services. This will allow FutureOne to diversify
its customer base and not be dependent on a few large companies.
LONG TERM STRATEGIES - The Company intends to build name recognition of
FutureOne and OPEC, with the objective of achieving nationwide name recognition
within its industry. The Company plans to become more active in industry trade
shows, events, and functions.
In addition, FutureOne's marketing plan is to position itself in the
telecommunications, cable TV ("CATV"), and Internet related marketplace as a
complete "turn key provider" that is able to service its customers needs from
design, engineering and construction through maintenance of their systems.
The Company intends to expand into other geographic target areas, such as
Albuquerque, Salt Lake City, Las Vegas and Tucson, either through establishing
its own presence or through strategic acquisitions. FutureOne plans to have each
local management group carry out local marketing efforts with the assistance and
support of the corporate staff and executive management. The Company's regional
based management will be expected to market their services to existing and
potential telecommunications customers, negotiate new contracts and seek to be
placed on lists of vendors invited to submit bids for master services agreements
and individual projects in their area. They will be responsible for developing
and maintaining productive, long-term relationships with their customers. The
Company believes that this local orientation, with support from its corporate
headquarters, will help to gain repeat business and enter new markets more
quickly.
SEASONALITY
The revenues of the Company are not seasonal to any significant extent, but
are subject to weather conditions and the timing of customers' purchasing
decisions.
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BACKLOG
The Company receives orders and contracts for services to be performed in
the future. As of September 30, 1999 and 2000, there were approximately $1.9
million and $4.5 million, respectively, of orders and contracts received from
various customers that are expected to be included in future revenues.
COMPETITION
The Company's industry and competition is categorized as the
"Telecommunications Services" sector. This industry is competitive, highly
fragmented and includes numerous small, owner-operated private companies and
several large regional and national companies, which have substantially greater
resources than the Company. There are few barriers to entry into the industry
and as a result, any organization that has adequate financial resources and
access to technical expertise may become a competitor.
Major competitors include:
Quanta Services, Inc. MasTec, Inc.
DyCom Industries, Inc. Arguss Holdings Inc.
International Fibercom, Inc. Henkels & McCoy, Inc.
Bechtel Corp The Fishel Company
In order to obtain contracts FutureOne must often engage in highly
competitive bidding, where the price of the contractor's bid historically is a
principal factor in determining whether the contractor is awarded the work.
Smaller competitors are sometimes able to win bids based on price alone due to
their lower overhead costs, while larger competitors can win bids on other
factors, such as reputation and proven ability to manage large jobs.
The Company also faces competition from the in-house service organizations
of its existing or prospective customers. Telecommunications, cable television
and electric power service providers usually employ personnel who perform some
of the same types of services as the Company. The Company cannot be certain that
its existing or prospective customers will continue to outsource services in the
future.
In order to be competitive, the Company must have access to a sufficiently
mobile labor force, adequate equipment and financial resources.
GOVERNMENT REGULATION
The Company is not subject to any industry specific federal or state laws
or regulations. The Company is subject to certain federal and state laws and
regulations, such as the rules and regulations of the Department of
Transportation ("DOT"), which apply to its heavy trucks, and the Occupational
Safety and Health Act ("OSHA"), which governs the Company's operating and safety
procedures and standards. The Company is also required to obtain operating
licenses and permits, such as contractors' licenses and business licenses, in
certain geographic locations in order to complete construction projects.
Changes in the laws or regulations affecting the telecommunications
industry may affect the Company's customers and affect their capital expenditure
plans, their operating plans and overall expansion of markets. Any potential
changes in telecommunications laws or regulations may have an indirect affect on
the Company.
TRADEMARKS
The Company has a registered trademark and trade name for FUTUREONE &
DESIGN. The Company does not own any patents.
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EMPLOYEES
As of December 31, 2000, the Company had 142 full-time employees, of whom
28 had executive or managerial responsibilities. None of the Company's employees
are represented by a union. The Company considers its relations with its
employees to be good.
The Company must continue to attract, retain and motivate qualified
personnel. While the Company, like other construction companies, has experienced
some difficulty in attracting and retaining qualified personnel, it has been
successful in attracting qualified personnel to date.
The Company has employment agreements with all three of its senior
managers, namely, Donald D. Cannella, Ralph R. Zanck and Daniel J. Romano.
However, the loss of their services, or the services of the Company's other
officers and key technical personnel, could have a material adverse effect on
the Company.
INSURANCE
The Company maintains general liability, automobile liability, workmens'
compensation, directors and officers liability insurance and umbrella coverage
insurance in amounts that it believes are customary for a company of its size
engaged in a comparable industry. However, there can be no assurance that the
Company will not be subject to future claims that its insurance may not cover or
as to which its coverage limits may be inadequate.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's principal administrative offices are located in approximately
3,300 square feet of space in Colorado Springs, Colorado. The Company occupies
these premises under a lease agreement expiring on September 30, 2001. As of
December 31, 2000, the Company also leases other facilities of approximately
1,100 square feet in Phoenix, Arizona, under a month to month lease, facilities
in Colorado Springs, Colorado aggregating approximately 8,500 square feet from a
related party, under a lease that expires January 1, 2002 and renews annually
unless terminated by either party, and facilities in Denver, Colorado of
approximately 1,900 square feet under a month to month lease. The Company is
also obligated under a lease for approximately 9,300 square feet in Phoenix,
Arizona until January 31, 2001. Approximately 50% of the space is subleased and
the Company does not intend to renew this lease when it expires. The Company
considers its facilities to be sufficient for its current operations, but the
Company may have to lease additional space to accommodate any of its expansion
plans.
ITEM 3. LEGAL PROCEEDINGS.
All legal proceedings and actions involving the Company are of an ordinary
and routine nature incidental to the operations of the Company. Management
believes that such proceedings should not, individually or in the aggregate,
have a material adverse effect on the Company's business or financial condition
or results of operations. None of the Company's officers, directors, or
beneficial owners of 5% or more of the Company's outstanding securities is a
party adverse to the Company nor do any of the foregoing individuals have a
material interest adverse to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
FutureOne conducted its regular 1999 Annual Meeting of Stockholders on
November 23, 1999. A quorum of 6,957,805 shareholders were represented at the
meeting in person or by proxy. Actions concluded at the meeting through
submission of matters to a vote by stockholders were conducted by ballot and
proxy and included the following:
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1. An election was conducted for four directors to hold office until the
Annual Meeting of Stockholders in 2000. The results were as follows:
DIRECTOR VOTES FOR VOTES AGAINST WITHHELD ABSTAINED
-------- --------- ------------- -------- ---------
Kendall Q. Northern 176,715 6,528,590 252,500 -0-
Earl J. Cook 6,705,305 -0- 252,500 -0-
Steven R. Green 6,705,305 -0- 252,500 -0-
Donald D. Cannella 6,705,305 -0- 252,500 -0-
2. Ratification of an amendment to the Articles of Incorporation of the
Company, which was filed May 7, 1997 with the Nevada Secretary of State, which
increased the authorized capital from 1,000 shares to 50,000,000 shares, was
unanimously approved by the stockholders of the Company by a vote of 6,957,805
to none.
3. The Amended and Restated Articles of Incorporation of the Company were
unanimously approved by the stockholders of the Company by a vote of 6,957,805
to none.
The Primary Amendments were as follows:
The total number of shares of all classes of stock, which the
Corporation shall have the authority to issue is 60,000,000 shares,
consisting of (i) 50,000,000 shares of Common Stock, par value $.001 per
share (the "Common Stock"), and (ii) 10,000,000 shares of Preferred Stock,
par value $.001 per share (the "Preferred Stock"). Such shares may be
issued by the Corporation from time to time for such consideration as may
be fixed by the Board of Directors.
As to the Preferred Stock of the Corporation, the power to issue any
shares of Preferred Stock of any class or any series of any class and
designations, voting powers, preferences, and relative participating,
optional or other rights, if any, or the qualifications, limitations, or
restrictions thereof, shall be determined by the Board of Directors.
To the fullest extent permitted by the laws of the State of Nevada, as
the same exist or may hereinafter be amended, no director or officer of the
Corporation shall be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a
director or officer; provided, however, that nothing contained herein shall
eliminate or limit the liability of a director or officer of the
Corporation to the extent provided by applicable laws (i) for acts or
omissions which involve intentional misconduct, fraud or knowing violation
of law or (ii) for authorizing the payment of dividends in violation of
Nevada Revised Statutes Section 78.300. The limitation of liability
provided herein shall continue after a director or officer has ceased to
occupy such position as to acts or omissions occurring during such
director's or officer's term or terms of office. No repeal, amendment or
modification of Section 78.300, whether direct or indirect, shall eliminate
or reduce its effort with respect to any act or omission of a director or
officer of the Corporation occurring prior to such repeal, amendment or
modification.
The Corporation shall indemnify, defend or hold harmless any person
who incurs expenses, claims, damages or liability by reason of the fact
that he or she is, or was, an officer or director of the Corporation, to
the fullest extent allowed pursuant to Nevada law.
Pursuant to Nevada Revised Statutes Section 78.378, the Corporation
elects not to be governed by the provisions of Nevada Revised Statutes
Section 78.378 to 78.3793, inclusive, as the same may be amended from time
to time.
4. The Company's 1999 Key Employee Stock Option Plan was unanimously
approved by the stockholders of the Company by a vote of 6,957,805 to none. See
1999 Key Employee Stock Option Plan.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
GENERAL
The Company's Common Stock has been quoted on the Over-the-Counter Bulletin
Board under the symbol FUTO since August 1998 and previously was quoted under
the symbol WRLF since October 14, 1997. The following sets forth the range of
high and low bid quotations for the periods indicated as reported by National
Quotation Bureau, Inc. Such quotations reflect prices between dealers, without
retail mark-up, markdown or commission and may not represent actual
transactions.
HIGH BID LOW BID
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July 1, 2000 through September 30, 2000............. $.4375 $.1875
April 1, 2000 through June 30, 2000................. $2.4375 $.3438
January 1, 2000 through March 31, 2000.............. $3.6875 $1.6250
October 1, 1999 through December 31, 1999........... $2.6250 $1.1875
July 1, 1999 through September 30, 1999............. $5.5000 $2.5000
April 1, 1999 through June 30, 1999................. $8.8750 $4.0000
January 1, 1999 through March 31, 1999.............. $10.1250 $2.8750
October 1, 1998 through December 31, 1998........... $3.7500 $1.8750
As of January 10, 2001, there were approximately 183 holders of record of
the Company's Common Stock. The 183 holders of record includes various brokerage
firms which hold shares for multiple clients that are not included in this
total. Based on mailings to shareholders last year by an independent clearning
house, the Company estimates that it has approximately 1,600 individual
shareholders.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its Common Stock
and does not intend to declare or pay any cash dividend in the foreseeable
future.
SHARES AVAILABLE FOR FUTURE SALE
Of the 16,454,301 shares of Common Stock outstanding as of January 12,
2001, approximately 4,450,000 shares of Common Stock are freely tradable without
restriction in the public market unless the shares are held by "affiliates," as
that term is defined in Rule 144(a) under the Securities Act. For purposes of
Rule 144 under Securities Act ("Rule 144"), an "affiliate" of an issuer is a
person that, directly or indirectly through one or more intermediaries,
controls, or is controlled by or is under common control with, the issuer. The
remaining shares of Common Stock outstanding are "restricted securities" under
the Securities Act and may be sold in the public market upon the expiration of
the holding periods under Rule 144, described below, subject to the volume,
manner of sale, and other limitations of Rule 144.
In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares for at least one year, including an "affiliate," is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of:
* 1% of the then outstanding shares of the Company's Common Stock
(approximately 164,540 shares); or
* the average weekly trading volume during the four calendar weeks
preceding filing of notice of the sale of shares of Common Stock.
Sales under Rule 144 are also subject to certain manner of sale provisions,
notice requirements and the availability of current public information about the
Company. A stockholder who is deemed not to have been an "affiliate" of the
Company at any time during the 90 days preceding a sale, and who has
beneficially owned restricted shares for at least two years, would be entitled
to sell shares under Rule 144(k) without regard to the volume limitations,
manner of sale provisions, or public information requirements.
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At January 12, 2001, there were outstanding warrants to purchase 12,132,072
shares of Common Stock, of which 7,253,739 were fully vested. In addition, as of
January 12, 2001, there were outstanding options to purchase 1,606,800 shares of
Common Stock, of which 335,567 were fully vested. As of January 12, 2001,
certain outstanding notes payable had conversion rights into 880,227 shares
depending upon amounts of accrued interest on such notes at the time of
conversion. Sales of substantial amounts of the Company's Common Stock
(including shares issued upon the exercise of outstanding warrants and options)
in the public market in the future could adversely effect the market price of
the Company's Common Stock. These sales may also make it more difficult for the
Company to sell equity or equity related securities in the future at a time and
price that the Company believes is appropriate.
RECENT SALES OF UNREGISTERED SECURITIES
The following provides information concerning all sales of securities
within the period covered by this report that were not registered under the
Securities Act.
On October 7, 1999, the Company issued a warrant to Richard B. McCulloch to
purchase 250,000 shares of Common Stock at $1.00 per share and a promissory note
in consideration for $250,000. On February 7, 2000 the note was extended to
August 7, 2000 and was made a convertible note, the principal and accrued
interest of which could be converted into Common Stock of the Company at $1.00
per share. The offering of such warrants, promissory note and underlying shares
of Common Stock was made pursuant to an exemption from registration under
Section 4(2) of the Securities Act as private transactions not involving a
public distribution.
Effective as of October 22, 1999, the Company issued a warrant to 12
Squared Partners, LLC, an Arizona limited liability company, to purchase 500,000
shares of Common Stock at $0.75 per share and a promissory note convertible into
500,000 shares of Common Stock in consideration for $500,000. The note was not
converted and was subsequently paid in March 2000. In addition the Company
issued warrants to purchase 100,000 shares of the Company's Common Stock at
$0.75 per share, to Joseph Charles & Assoc., Inc. and/or their designees as
payment of a partial commission. The offering of such warrants, promissory note
and underlying shares of Common Stock was made pursuant to an exemption from
registration under Section 4(2) of the Securities Act and Rule 506 of Regulation
D promulgated under the Securities Act as private transactions not involving a
public distribution.
Effective as of December 28, 1999, the Company issued a warrant to Hare &
Co., as Trustees for Financial Institutions Retirement Fund, to purchase 16,667
shares of Common Stock at $1.00 per share and a promissory note convertible into
50,000 shares of Common Stock in consideration for $50,000. The offering of such
warrants, promissory note and underlying shares of Common Stock was made
pursuant to an exemption from registration under Section 4(2) of the Securities
Act and Rule 506 of Regulation D promulgated under the Securities Act as private
transactions not involving a public distribution.
Effective January 1, 2000, the Company issued a warrant to purchase 70,000
shares of Common Stock, at $1.00 per share, to Alan P. Hald, a member of the
Company's Board of Directors, for his services to the Company. Subsequently the
Company issued 70,000 warrants in each of the months of February through May
2000 for services as a member of the Company's Board of Directors and 490,000
warrants in June 2000 to Mr. Hald as part of the consideration to terminate his
employment contract. Such warrants and the underlying shares of Common Stock
were issued without registration pursuant to an exemption from registration
under Section 4(2) of the Securities Act as a private transaction not involving
a public distribution. See: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In April 2000, the Company issued a warrant to purchase 100,000 shares of
the Company's Common Stock, at $3.00 per share, to a financial consulting firm
in settlement of a claim. The offering of such warrant and underlying shares of
Common Stock was made pursuant to an exemption from registration under Section
4(2) of the Securities Act as private transactions not involving a public
distribution.
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In June 2000, the Company issued 330,000 shares of Common Stock to
Blackwater Capital in exchange for a termination of the Stock Purchase Agreement
between Blackwater Capital and the Company and a new financial consulting
agreement with Blackwater Capital. In addition the Company agreed to vest
1,050,000 shares of the warrant previously issued to Blackwater Capital in 1998.
Such shares were issued without registration pursuant to an exemption from
registration under Section 4(2) of the Securities Act as private transactions
not involving a public distribution. See: CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS.
During the period of August through December 2000, the Company issued
warrants to purchase 360,000 shares of the Company's Common Stock at $1.00 per
share to holders of a secured note issued by the Company in exchange for the
Holders subordinating certain of their collateral to other financing obtained by
the Company. Mark E. Morley, a director of the Company and his sister-in-law are
10% participants in the loan, as tenants in common, and accordingly received
36,000 of the warrants issued by the Company in this transaction The offering of
such warrants and underlying shares of Common Stock was made pursuant to an
exemption from registration under Section 4(2) of the Securities Act as private
transactions not involving a public distribution. See: CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS.
In September 2000, the Company issued 2,500,000 shares of its Common Stock,
to Mark E. Morley, a director of the Company and his brother, in exchange for
$100,000 and a subscription for $150,000. The subscription was subsequently paid
in October and November 2000. The offering of such shares of Common Stock was
made pursuant to an exemption from registration under Section 4(2) of the
Securities Act and Rule 506 of Regulation D promulgated under the Securities Act
as private transactions not involving a public distribution.
During the year ended September 30, 2000, the Company issued a total of
134,500 shares of Common Stock to employees pursuant to employment contracts or
as employment bonuses. An award of 30,000 shares was made with vesting
restriction of three years and an award of 100,000 shares was made with a
partial vesting restriction of two years. In addition, the Company issued 27,500
shares as a commission on the sale of substantially all of the assets relating
to the Company's Internet access business. Such shares were issued without
registration pursuant to an exemption from registration under Section 4(2) of
the Securities Act as private transactions not involving a public distribution.
Effective October 1, 2000, the Company issued warrants to purchase up to
9,060,000 of the Company's Common Stock, at $0.20 per share, to senior
management of the Company. 5,060,000 of the warrants are subject to an equal
three year annual vesting schedule, which may be accelerated under certain
circumstances. 2,000,000 of the warrants issued to Steven R. Green, a former
director of the Company, were fully vested under a Severance Agreement entered
into with Mr. Green, on January 10, 2001. 2,000,000 of the warrants were
subsequently surrendered by Earl J. Cook, the former President and Chief
Executive Officer, pursuant to a Severance Agreement dated January 12, 2001.
Such warrants and the underlying shares of Common Stock were issued without
registration pursuant to an exemption from registration under Section 4(2) of
the Securities Act as a private transaction not involving a public distribution.
In December 2000, the Company issued 1,000,000 shares of its Common Stock
to William H. Peetz in exchange for $100,000. The offering of such shares of
Common Stock was made pursuant to an exemption from registration under Section
4(2) of the Securities Act and Rule 506 of Regulation D promulgated under the
Securities Act as private transactions not involving a public distribution.
On January 12, 2001, the Company issued warrants to purchase 1,000,000
shares of the Company's Common Stock, at $0.15 per share, to Earl J. Cook the
former President and Chief Executive Officer of the Company. This warrant was
issued as part of a Severance Agreement with Mr. Cook in exchange for Mr. Cook
agreeing to surrender the previous 2,205,406 warrants and 245,000 options
previously issued to him. Such warrants and the underlying shares of Common
Stock were issued without registration pursuant to an exemption from
registration under Section 4(2) of the Securities Act as a private transaction
not involving a public distribution.
In each of the private transactions above, the Company believes that each
purchaser (i) had access to or was provided information regarding the Company;
(ii) was aware that the securities had not been registered under federal
securities laws; (iii) acquired the securities for his/her/its own account for
investment purposes; (iv) understood that the securities would need to be
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indefinitely held unless registered or an exemption from registration applied to
a proposed disposition; and (v) was aware that the certificate representing the
securities would bear a legend restricting its transfer. The Company believes
that, in light of the foregoing, the sale of the Company's securities to the
respective acquirers did not constitute a sale of an unregistered security in
violation of the federal securities laws and regulations by reason of the
exemptions provided under Section 4(2) of the Securities Act, and the rules and
regulations promulgated thereunder.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
This Annual Report on Form 10-KSB contains express or implied
forward-looking statements. Additional written or oral forward-looking
statements may be made by the Company from time to time in filings with the
Securities and Exchange Commission, in its press releases, quarterly conference
calls or otherwise. The words "believes," "expects," "anticipates," "intends,"
"forecasts," "projects," "plans," "estimates" and similar expressions identify
forward-looking statements. Such statements reflect the Company's current views
with respect to future events and financial performance or operations and speak
only as of the date the statements are made. Such forward-looking statements
involve risks and uncertainties and readers are cautioned not to place undue
reliance on forward-looking statements. The Company's actual results may differ
materially from such statements. Factors that may cause or contribute to such
differences include, but are not limited to, the Company's limited operating
history, unpredictability of operating results, intense competition in various
aspects of its business, the risks of rapid growth, the Company's dependence on
key personnel, uncertainty of product acceptance, changes in laws and
regulations, changes in economic conditions and an inability to obtain
financing, as well as those discussed elsewhere in this Form 10-KSB. Although
the Company believes that the assumptions underlying its forward-looking
statements are reasonable, any of the assumptions could prove inaccurate and,
therefore, there can be no assurance that the results contemplated in such
forward-looking statements will be realized. The inclusion of such
forward-looking information should not be regarded as a representation by the
Company or any other person that the future events, plans or expectations
contemplated by the Company will be achieved. The Company undertakes no
obligation to publicly update, review or revise any forward-looking statements
to reflect any change in the Company's expectations with regard thereto or any
change in events, conditions or circumstances on which any such statements is
based.
OVERVIEW
The following discussion should be read in conjunction with FutureOne's
consolidated financial statements and associated notes appearing elsewhere in
this report.
The Company was incorporated in Nevada on March 22, 1994, as World's Fare,
Inc. World's Fare, Inc. commenced no operations prior to the acquisition of
FUTUREONE, INC., an Arizona corporation by World's Fare, Inc., which became
effective March 30, 1998. In July 1998, World's Fare, Inc. changed its name to
FutureOne, Inc.
FutureOne intended to become a full service communications provider by (i)
entering the convergence technology and telecommunications markets; (ii)
providing Internet access and related services; (iii) becoming a stocking
distributor of communications products; (iv) entering the retail computer
market; (v) entering the e-business solutions market; and (vi) providing
broadband engineering and construction services. Prior to being acquired by
World's Fare, FutureOne was formed as an ISP in November 1995 and began
providing Internet services, including personal and business dial up accounts,
high speed frame relay connections and web site design. After the World's Fare
acquisition and commencing in 1998, the Company began a series of acquisitions
designed to rapidly expand its above-described service offerings and its
geographic footprint.
Since the Company entered the retail computer market in 1997, intense
competition by large retail chains and manufacturers that sell direct to
customers lowered profit margins and captured a large portion of the computer
equipment market. As a result, the Company changed its focus and, in June 1999,
divested itself of its retail computer sales and service operations by selling
PRIORITY SYSTEMS, INC., a wholly owned subsidiary of the Company, back to the
original owner of PRIORITY SYSTEMS, INC. for $250,573 of the Company's Common
Stock, or 108,850 shares, and a three-year promissory note in the amount of
$50,000.
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In 1999, the Company's ISP operations began facing the traditional problems
of the industry, including intense competition for customers, which causes high
customer turnover rates, and the demand for higher speed services, which
requires additional capital expenditures in the face of lower prices. Most of
the Company's growth in personal ISP customers came through acquisitions, which
was determined to be the most economical way of obtaining additional customers.
On November 19, 1999, the Company sold substantially all of the assets
relating to its Internet access business, including equipment and all of its
approximately 7,300 personal and business Internet access customers in Phoenix,
Flagstaff, Tucson, Lake Havasu City, Prescott, Florence, Wickenburg and Payson,
Arizona to Internet Commerce & Communications, Inc. (formerly RMI.NET, Inc.), a
Delaware corporation ("ICCX") for approximately $2.75 million in ICCX Common
Stock.
On December 6, 1999, the Company sold substantially all of the assets
relating to its virtual telephone service business operations, including
equipment and approximately 110 customers, for $47,800. The Company decided to
divest itself of its virtual telephone service business operations after
determining that the switching equipment necessary for providing the virtual
telephone service may have required an additional investment in order to become
Year 2000 compliant.
In May 2000, the Company made a decision to close its communication
products division. Revenues for this division had failed to grow as originally
anticipated by the Company and intense competition required the Company to
accept gross profits of approximately 2% on most sales. The Company terminated
all of the employees of this division and returned approximately $2,400,000 of
inventory to the manufacturer.
Effective June 30, 2000, pursuant to a Stock Purchase Agreement, the
Company completed the sale of Abcon, Inc. back to one of its original owners.
Abcon was originally acquired to supplement the horizontal drilling and boring
operations of the broadband engineering and construction division, but it
operated on substantial negative cash flow, which the Company could no longer
support. Abcon was sold for $714,000, which was paid through assumption of debt
and a note to the Company for approximately $263,000.
In August 2000, the Company decided to abandon its telecommunications
division and the NeighborComm services that it was developing. This decision was
made after committed funding for expansion of the Company's telecommunications
services was withdrawn and the Company concluded that it, like other small
telecommunications companies, was unable to adequately compete with major
telecommunication companies and consequently unable to attract adequate capital
investment to carry out its plan. The Company, therefore, terminated or
reassigned all of the employees associated with this division and no longer
conducts telecommunication service operations. The Company is attempting to
dispose of its competitive local exchange carrier ("CLEC") and related licenses
and certain assets associated with this division, all of which have minimal
value.
In August 2000, the Company decided to concentrate solely on its
telecommunications services division, OPEC, which provided approximately 80% of
the Company's revenues. Therefore, the Company is now exclusively a
telecommunications services company. In conjunction with its decision to refocus
the Company's business, during the period of September through January 2001, the
Company implemented a plan to restructure the Company, reorganize and reduce
management, reduce personnel, combine facilities and relocate the Company
headquarters to Colorado Springs, Colorado.
Effective October 6, 2000, pursuant to an Asset Sale and Purchase
Agreement, the Company sold its e-commerce business division, Rocket Science
Creative, to one of its original owners, R. Tucker Woodbury, for $75,000 cash
and the assumption of approximately $68,000 in liabilities. The Company also
retained approximately $60,000 of account receivables. This division continued
to be a breakeven to unprofitable operation and was inconsistent with the
Company's new goal of expanding its telecommunications services business.
The Company has sustained a net loss of approximately $830,000 on the
disposal or abandonment of most of its subsidiaries and divisions described
above, and recorded a gain of approximately $1.2 million on the sale of its
Internet access business.
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The Company has taken steps to reduce its operating losses through
divestiture of the unprofitable business operations described above. In
addition, the Company has reduced its entire staff to a minimal number of
individuals that are involved in obtaining equity funding, accounting, corporate
finance and meeting public reporting requirements. The remaining corporate staff
is devoting over 50% of their efforts directly to OPEC, to help manage and
expand that operation. The Company has not renewed the lease on its Phoenix
headquarters, which expires January 31, 2001, and has moved personnel into
existing OPEC facilities in Colorado Springs and Phoenix. The Company has also
reduced other corporate operating expenses such as telephones, equipment leases
and professional fees.
In general the Company's revenues and results of operations are not subject
to seasonal fluctuations, but operations can be affected by adverse weather
conditions.
RESULTS OF OPERATIONS
See Footnote 3 to the "Financial Statements," which indicates the amounts
from all business segments that were reclassified to discontinued operations.
The prior year revenues and related items have been adjusted for the effects of
reclassifying the revenues and associated costs of the business segments that
have now been recorded as discontinued operations in 1999 and 2000.
The Company's operating loss from continuing operations was $2,524,000 and
$4,713,000 and its net loss was $5,275,000 and $4,753,000 for the years ended
September 30, 1999 and 2000, respectively.
YEAR ENDED SEPTEMBER 30, 2000 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1999
CONTRACT REVENUES
The Company's revenues, excluding revenues attributable to discontinued
operations, were $12,936,000 in the year ended September 30, 2000, as compared
to $8,663,000 for the year ended September 30, 1999. The Company believes that
the increase in revenue is primarily attributable to the Company obtaining
substantial construction and maintenance service contracts from a new customer,
the Company's expansion of its services into Denver and increased revenues from
Phoenix, where the Company commenced operations in 1999.
COSTS OF REVENUES
Cost of revenues, which includes materials, direct labor costs and
depreciation, was $11,851,000 during the year ended September 30, 2000, as
compared to $7,083,000 for the year ended September 30, 1999. The increase is
attributable to additional revenues being earned by the Company. Gross margins
have decreased to 8.4% for the year ended September 30, 2000, from 18.2% for the
year ended September 30, 1999. This decline is attributable to minimal gross
margins and losses on certain long haul contracts that the Company completed at
the beginning of the year. As a result, the Company changed its focus during the
year to concentrate its resources on smaller projects and reduce the amount of
long haul construction projects. Consequently gross margins have increased to
approximately 15% for quarters ended June 30, 2000 and September 30, 2000.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased $737,000, or 23.1%, from
$3,178,000 in the year ended September 30, 1999, to $3,915,000 in the year ended
September 30, 2000. General and administrative expenses increased to support the
49% increase in telecommunication service revenue. Expenses also increased in
preparation for growth in telecommunications and convergence technology and
Internet services during the first two quarters of fiscal 2000. While general
and administrative expenses averaged $1,173,000 per quarter in the first and
second quarters of fiscal 2000, general and administrative expenses were reduced
$ 483,000 to $690,000 in the fourth quarter. General and administrative expenses
increases were primarily: salaries - $273,000, rent - $39,000, insurance -
$190,000 and executive severance expense - $234,000.
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DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased from $730,000 in the year ended
September 30, 1999, to $839,000 in the year ended September 30, 2000. This
increase is attributable to additional amortization of debt issuance cost of
$86,000 and depreciation of $23,000 related to additional computer equipment and
software purchases.
INTEREST EXPENSE
Interest expense increased from $240,000 in the year ended September 30,
1999, to $789,000 in the year ended September 30, 2000. This increase is
attributable to higher levels of debt necessary to sustain operations and
includes $245,000 due to accretion of debt discount from working capital loans.
DISCONTINUED OPERATIONS AND UNUSUAL ITEMS
During the years ended September 30, 2000 and 1999, the Company divested
several of its unprofitable divisions and subsidiaries. The result of these
transactions was a non-recurring net loss to the Company from the operations and
sales of the business of $41,000 and $2,751,000 for the years ended September
30, 2000 and 1999, respectively.
INCOME TAXES
The lack of profitable operations have resulted in no income tax benefit,
given that the Company's deferred tax assets relating to its net operating
losses are fully reserved. Changes in ownership of the Company's Common Stock
are expected to limit the Company's ability to fully utilize its net operating
loss carryforward benefits in accordance with Section 382 of the Internal
Revenue Code. Accordingly, the amount of the Company's net loss carryforward for
income tax purposes may be significantly limited.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth comparative cash flows of the Company for
the periods indicated:
YEAR ENDED SEPTEMBER 30
--------------------------
1999 2000
---- ----
Net Cash Used in Operating Activities $(4,078,000) $(1,425,000)
Net Cash Provided by (Used in) Investing Activities (2,386,000) 1,967,000
Change in Net Assets of Discontinued Operations 828,000 (420,000)
Net Cash Provided by Financing Activities 5,224,000 14,000
Ending Cash Balance 160,000 296,000
Working Capital Deficit (2,051,000) (5,001,000)
The Company had net cash used in operating activities of $1,425,000 for the
year ended September 30, 2000, compared to $4,078,000 for the year ended
September 30, 1999. Net cash used in operating activities was less than the net
loss by $3,329,000 during the year ended September 30, 2000, primarily due to
$1,542,000 of non-cash charges for depreciation and amortization and favorable
working capital changes from increased accounts payable and lower accounts
receivable levels. The Company's investing activities provided $1,967,000 and
required $2,386,000 during 2000 and 1999, respectively. The primary reason for
the decrease in cash used for investing activities in 2000 was the proceeds for
the sale of the Internet access business which provided $1,699,000 and the sales
of equipment, which aggregated to $604,000. Financing activities provided
$14,000 in 2000, and $5,224,000 in 1999. Approximately $100,000 in 2000, and
$2,250,000 in 1999, related to the sale of the Company's Common Stock, and
$2,475,000 in 1999, was attributable to net debt proceeds.
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By closing its telecommunications division, the Company has eliminated all
of its commitments for equipment and expenses that existed at September 30,
1999, which totaled approximately $1,600,000. In addition by divesting and
closing other unprofitable subsidiaries and divisions and reducing overhead, the
Company has eliminated the annual need for approximately $1,000,000 in working
capital. The Company now believes that existing operations can provide
sufficient cash flow to be self-supporting.
The Company, however, has incurred substantial current debt, including
accounts payable, during the past two years, because of its substantial
unprofitable operations. A significant portion of the Company's accounts payable
and borrowings were incurred from the operation of businesses which have been
discontinued. The Company is now negotiating with lenders and vendors to accept
discounted and/or extended payment terms and expects to successfully defer or
eliminate a portion of this current debt. The Company is also seeking long term
loans and equity investment to retire these debts. If the Company is not
successful in obtaining such funding, the Company intends to pay these
liabilities over the next two years out of its cash flow from existing
operations. There is, however, no guarantee that the Company will be successful
in obtaining funding to pay these liabilities or that lenders and vendors will
accept deferred payment terms and, consequently, lenders and vendors may bring
claims against the Company seeking immediate payment of their liabilities.
OPEC had an existing bank line of credit that was in place prior to the
Company's acquisition of OPEC in July 1998. The amount available under the
initial line of credit was $480,000, however, on October 16, 2000, the credit
limit was reduced to $430,000. As of September 30, 2000, the outstanding balance
was $455,000 and at December 31, 2000, the balance was $40,000. The bank
terminated the original line of credit as of December 31, 2000.
In August 1999, OPEC obtained a loan for $1,000,000, which was evidenced by
a convertible note which provided that it could be converted into shares of the
Company's Common Stock at $2.25 per share. The note bears interest at the rate
of 15% per annum and is due September 1, 2001. In July 2000 the note was amended
to change the conversion provision to allow up to $444,444 to be converted into
shares of the Company's Common Stock at $1.00 per share. In addition the Company
agreed to issue 60,000 warrants per month, at $1.00 per share, for a maximum of
six months, to the lenders in exchange for their subordination of their
collateral under the note to allow the Company to factor invoices to a bank. The
subordination agreement ended December 31, 2000 and the Company is currently
negotiating with the noteholders to extend the due date of the note and
subordinate to additional bank factoring. Mark E. Morley, a director of the
Company and his sister-in-law are 10% participants in this loan, as tenants in
common. See "Certain Relationships And Related Transactions."
In October 1999, the Company obtained a loan in the amount of $250,000 from
Richard B. McCulloch. The loan bears interest at a rate of 15% per annum, is
convertible into Common Stock of the Company at $1.00 per share and the
principal and interest due thereunder was payable August 8, 2000. The Company is
currently negotiating with the lender to extend the payment terms.
The Company also obtained a loan in October 1999, in the amount of $500,000
from 12 Square Partners LLC. The loan included interest at a rate of 12% per
annum and the principal and interest were due and payable on April 19, 2000. The
Company paid this loan in full on March 28, 2000, by transferring shares of ICCX
stock that it had acquired from the sale of its ISP, which could not be sold
until May and November 2000, at a share value of approximately $10. Because the
loan was paid early the lender agreed to forgive all interest accrued on the
note.
On December 28, 1999, the Company obtained a loan of $50,000 from Hare &
Co. as Trustee for Financial Institutions Retirement Fund. The note bears
interest at 12% and is convertible into 50,000 shares of Common Stock at $1.00
per share. The Company did not pay this promissory note by the extended maturity
date of December 1, 2000, nor has it received from the holder any notice of
conversion to Common Stock.
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During the year ended September 30, 2000, the Company also sold all of the
registered shares of ICCX Common Stock received in consideration of
substantially all of the Company's assets relating to its Internet access
business. The Company sold all of the 176,000 shares available for approximately
$1,600,000, which was used for working capital and payment of accounts payable.
On September 1, 2000, the Company entered into a stock subscription
agreement with Mark E. Morley, a director of the Company and his brother. Under
the terms of the agreements they purchased shares of the Company's Common Stock
at $0.10 per share by funding $100,000 in September 2000, $100,000 in October
2000, and $50,000 in November 2000. In December 2000, the Company sold
additional shares to William H. Peetz, at $0.10 per share, to obtain funds in
the amount of $100,000.
The Company also was party to a stock purchase agreement with Blackwater
Capital Partners, L.P. Under the terms of this agreement, Blackwater was to
purchase shares of the Company's Common Stock in sufficient amounts to provide
funding to the Company in equal traunches of $2,500,000, as requested by the
Board of Directors of the Company. Blackwater did not provide any funding under
this agreement during the year ended September 30, 2000, and only $250,000
during the year ended September 30, 1999. The Agreement was terminated by mutual
consent in June 2000. See "Certain Relationships And Related Transactions."
The Company plans to continue to expand its business operations in fiscal
2001, which will require more resources than are currently available to the
Company. The Company is currently pursuing additional working capital loans,
debt restructuring of existing loans and a private equity placement. In the
event the Company is unable to obtain additional financing, the Company will not
be able to fully undertake its business expansion plan.
Although the Company had obtained additional funds from the sale of
substantially all of the assets of its internet access business, certain working
capital loans and equity investments, FutureOne is still dependent upon
additional capital resources to enable it to fully carry out its business plan.
The Company also needs to extend or replace certain debt facilities that are in
default at September 30, 2000. The lack of profitable operations and the need
for additional capital have resulted in the report of its independent auditors
for the years ended September 30, 1999 and 2000, containing an uncertainties
paragraph with respect to the ability of FutureOne to continue as a going
concern.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
THE COMPANY'S BUSINESS PLAN REQUIRES ADDITIONAL FUNDING, WHICH MAY NOT BE
OBTAINED.
Although the Company believes that it can maintain its current operating
levels based on its existing financing, the Company will require additional
funding to fully carry out its business plan and achieve growth and
profitability. There is no assurance that such funding will be obtained when
required, if at all.
In addition the Company has incurred substantial current debt, including
accounts payable, during the past two years, because of its substantial
unprofitable operations. The Company is now negotiating with lenders and vendors
to accept discounted and/or extended payment terms and seeking long term loans
and equity investment to retire these debts. If the Company is not successful in
obtaining such funding, there is no guarantee that the Company will be
successful in obtaining funding to pay these liabilities or that lenders and
vendors will accept deferred payment terms and, consequently, lenders and
vendors may bring claims against the Company seeking immediate payment of their
liabilities, which may also prevent the Company from fully carrying out its
business plan.
THE COMPANY HAS A HISTORY OF NET OPERATING LOSSES AND MAY INCUR ADDITIONAL NET
OPERATING LOSSES.
The Company has incurred substantial net operating losses and experienced
negative cash flow since its inception. The Company lost approximately
$4,753,000 in 2000, and $5,275,000 in 1999, which includes discontinued
operations. As of September 30, 2000, the Company had an accumulated deficit of
approximately $11.6 million. The Company intends to increase its capital
expenditures and operating expenses in order to expand its business to current
customers and to enter additional geographic regions. As a result, the Company
could incur additional net operating losses and negative cash flow during the
next year.
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THE COMPANY CANNOT PREDICT ITS SUCCESS BECAUSE ITS BUSINESS MODEL IS UNPROVEN.
The Company has just recently restructured and is focused on expanding its
telecommunications infrastructure services. The Company has prepared a new
business plan to expand this business segment, but has not yet validated its
business model and strategy in the market. The Company believes that the
combination of its unproven business model and the highly competitive and fast
changing market in which it competes makes it impossible to predict the extent
to which the Company's telecommunications services plan will achieve market
acceptance and be successful.
AMORTIZATION OF GOODWILL COULD SIGNIFICANTLY IMPACT EARNINGS FOR THE NEXT EIGHT
YEARS.
Because of the Company's acquisition of OPEC, goodwill associated with this
acquisition comprises 41% of the Company's total assets as of September 30,
2000. Goodwill is an intangible asset that represents the difference between the
aggregate purchase price for the net assets acquired and the amount of such
purchase price allocated to such net assets. The Company is required to amortize
the $6,939,000 in goodwill resulting from this acquisition, which was accounted
for as a purchase, for a period of ten years, with the amount amortized in a
particular period constituting an expense that reduces the Company's net income
for that period. The Company anticipates that amortization of this goodwill will
adversely impact earnings for the next eight years and possible writedowns or
adjustments in any period could significantly adversely impact earnings in such
period.
THE COMPANY'S BUSINESS MAY SUFFER IF IT DOES NOT EFFECTIVELY COMPETE IN THE
MARKET FOR TELECOMMUNICATIONS INFRASTRUCTURE SERVICES.
The telecommunications infrastructure services industry is highly
competitive, highly fragmented and includes numerous small, owner-operated
private companies and several large regional and national companies. There are
few barriers to entry into the industry and as a result, any organization that
has adequate financial resources and access to technical expertise may become
one of its competitors.
The Company must compete with companies such as Quanta Services, Inc.,
MasTec, Inc. and DyCom Industries, Inc., which have substantially greater
resources than the Company.
In order to obtain contracts, FutureOne must often engage in highly
competitive bidding, where the price of the contractor's bid historically is a
principal factor in determining whether the contractor is awarded the work.
Smaller competitors are sometimes able to win bids based on price alone due to
their lower overhead costs, while larger competitors can win bids on other
factors, such as reputation and proven ability to handle large jobs.
The Company also faces competition from the in-house service organizations
of its existing or prospective customers. Telecommunications, cable television
and electric power service providers usually employ personnel who perform some
of the same types of services as the Company. The Company cannot be certain that
its existing or prospective customers will continue to outsource services in the
future.
An increase in competition could result in price reductions and other
competitive factors that could cause the Company to lose market share. Such
competition could have a material adverse effect on the Company's business,
financial condition and results of operations.
THE COMPANY SERVES A LIMITED NUMBER OF CUSTOMERS IN A LIMITED INDUSTRY.
The Company derives, and anticipates that it will continue to derive, a
substantial portion of its revenue from customers in the telecommunications
industry. The telecommunications industry has been characterized by a high level
of consolidation that may result in the loss of one or more customers.
The Company currently depends upon a small group of key customers. The
Company believes that a substantial portion of its contract revenues and
operating income will continue to be derived from a concentrated group of key
customers. The loss of any key customer, if not replaced, could have a material
adverse effect on the Company's business.
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THE COMPANY'S CONTRACTS ARE OFTEN NON-RECURRING, SUBJECT TO RE-BID AT EXPIRATION
AND CANCELABLE ON SHORT NOTICE.
The Company provides a significant portion of its services on a
non-recurring, project by project basis and there is no assurance that the
Company will be able to continue obtaining additional jobs.
Many of the Company's contracts, including master service contracts, are
opened to public bid at the expiration of their term, and price is often an
important factor in the award of these agreements. The Company has no assurance
that it will be the successful bidder on these existing contracts as they come
up for bid.
Many customers have the right to cancel long-term contracts with the
Company on short notice, typically 90 to 180 days, even if the Company is not in
default under the contract. As a result, these contracts do not give the
assurances that long-term contracts typically provide.
The loss of any key contract, if not replaced, could have a material
adverse effect on the Company's business.
ITEM 7. FINANCIAL STATEMENTS.
Reference is made to the Consolidated Financial Statements, the Notes
thereto and Report of Independent Auditors thereon commencing at Page F-1 of
this Report, which Consolidated Financial Statements, Notes and Report are
incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Ernst & Young LLP has audited the Company's financial statements for the
years ended September 30, 1999, and 2000. There have been no disagreements with
the accountants on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure or any reportable events
regarding the Company's 1999, and 2000, fiscal years.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
The following table sets forth information concerning the Company's
executive officers and directors. Except as otherwise noted, none of the
executive officers are directors or officers of any publicly owned corporation
or entity.
NAME AGE POSITION
---- --- --------
Donald D. Cannella 31 Director, President and Chief Executive
Officer; Director, President - OPEC CORP.
Mark E. Morley 41 Director
Ralph R. Zanck 49 Treasurer, Chief Financial Officer; Acting
Chief Financial Officer - OPEC CORP.
Bruce A. Robson 44 Vice President, Secretary
Daniel J. Romano 37 Vice President, Secretary and Director - OPEC CORP.
The term of office of each director of the Company is for one year and
until his or her successor is elected at the annual shareholder's meeting and is
qualified, subject to removal by the shareholders. All officers serve at the
19
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pleasure of the Company's Board of Directors and until his or her successor is
elected at the annual meeting of the Board of Directors and is qualified.
DONALD D. CANNELLA has served as a Director of the Company since August
1998. He became Executive Vice President on September 1, 2000 and President and
Chief Executive Officer on January 12, 2001. Mr. Cannella also has been the
President of OPEC since October 1995. Prior to founding OPEC, Mr. Cannella
served as a Project Manager for Greenbar Corporation, where he managed Local
Area Networks and Wide Area Networks ("LAN/WAN") and fiber optic project
installations from 1993 until 1995. From 1992 until 1993, Mr. Cannella was a
technician for Tricom Communications where he was involved in the installation
of key systems, PBX and switching equipment. He also served as a foreman for
Silicon Mountain Communications, from 1988 until 1992, where he was responsible
for all applications of fiber optic, CATV, and Telecommunications underground
construction. He has attended AT&T key systems and fiber optic splicing schools.
MARK E. MORLEY was appointed as a Director of the Company on September 20,
2000. Mr. Morley is co-founder of Morley Companies, Inc., a leading real estate
developer in Colorado Springs, Colorado where he has been employed since 1993.
He is the founder and owner of Coconut Telegraph Communications, LLC, a company
involved in wireless telecommunications and antenna towers. Previously, Mr.
Morley co-founded the Senior Professional Baseball League and served as a
consultant for the development of the Denver International Airport. He also sits
on the Board of Directors for several private companies.
BRUCE A. ROBSON was appointed as Vice President of the Company in October
1999 and Corporate Secretary in September 2000. Since early 1999, he was the
Vice President in charge of Telecommunications Development, responsible for the
development of the Company's CLEC operations and the deployment of DSL and
convergence technology until the Company restructuring in 2000. Mr. Robson was
President of a wholesale distributor of data communications equipment, which he
acquired in 1995, until it was acquired by the Company in 1998. From 1983 until
1995, Mr. Robson was a National Director of Sales for Gabriel Ride Control
Products, Inc. Mr. Robson also served as Executive Vice President of TL
Industries, Inc., an automotive parts and repair company. Mr. Robson has over 20
years experience in positions of operations, sales and marketing management.
RALPH R. ZANCK has been the Vice President of Finance since December 1999,
and the Treasurer and Chief Financial Officer since September 2000. Mr. Zanck is
a Certified Public Accountant and a graduate of Augustana College with a Masters
degree in accounting. He was most recently a Division Controller at MicroAge,
Inc., a technology solutions provider based in Tempe, Arizona from 1996 to 1999.
Prior to that Mr. Zanck was promoted to positions of increasing financial
management responsibility with Caremark International, a healthcare provider,
and Baxter Healthcare Corporation, a major pharmaceutical and hospital supply
company headquartered in Deerfield, Illinois, where he was employed from 1980 to
1995 Mr. Zanck has over 20 years experience in positions of operations, finance
and management
DANIEL J. ROMANO is the Vice President and Secretary of OPEC, where he has
been employed since 1995. Mr. Romano has a degree in computer sciences from
Rutgers College. Mr. Romano has extensive experience in data communications
including supervising the installation of CATV for the cities of Longmont and
Thorton, Colorado, is certified in AT&T's Structured Cable Systems and now is in
charge of all OPEC field operations.
INVOLVEMENT IN LEGAL PROCEEDINGS
To the best of management's knowledge, during the past five years, none of
the following occurred with respect to a present or former director or executive
officer of the Company:
(1) Any bankruptcy petition filed by or against any business of which such
person was a general partner or executive officer either at the time of the
bankruptcy or within two years prior to that time;
(2) Any conviction in a criminal proceeding or being subject to a pending
criminal proceeding (excluding traffic violations and other minor offenses);
20
<PAGE>
(3) Being subject to any order, judgment or decree, not subsequently
reversed, suspended or vacated, of any court of any competent jurisdiction,
permanently or temporarily enjoining, barring, suspending or otherwise limiting
his involvement in any type of business, securities or banking activities; and
(4) Being found by a court of competent jurisdiction (in a civil action),
the commission or the Commodity Futures Trading Commission to have violated a
federal or state securities or commodities law, and the judgment has not been
reversed, suspended or vacated.
ITEM 10. EXECUTIVE COMPENSATION.
The following tables set forth the compensation received for services
rendered to the Company or its subsidiaries in all capacities during the fiscal
years ended September 30, 2000, 1999 and 1998 by the Company's Chief Executive
Officer and each of the Company's other executive officers who received
compensation in excess of $100,000 (the "Named Executive Officers"), which
includes salary and bonuses earned during the fiscal year ended September 30,
2000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS WARRANTS/OPTIONS (#)
--------------------------- ---- ---------- ----- --------------------
<S> <C> <C> <C> <C>
Donald D. Cannella (1) 2000 $146,928 -- 2,000,000(3)
President and Chief Executive Officer 1999 $129,043 $252,263(2) 217,000(4)
President OPEC CORP. 1998 $ 20,769 -- --
Earl J. Cook (5) 2000 $151,923 -- 2,000,000(3)
Former President and 1999 $ 83,078 -- 245,000(7)
Chief Executive Officer 1998 $ 12,308 --(6) --
Kendall Q. Northern (8) 2000 -- 304,000(9)
Former President and 1999 $ 98,461 -- --
Chief Executive Officer 1998 $ 40,615 --(6) --
Bruce A Robson (10) 2000 $ 92,789 $ 27,000 1,000,000(11)
Vice President and Secretary 1999 $ 53,653 -- 50,000(12)
1998 $ -0- -- --
Daniel J. Romano (13) 2000 $146,928 -- 1,000,000(11)
Vice President and Secretary 1999 $129,043 $198,638(2) 118,000(14)
OPEC CORP. 1998 $ 20,769 -- --
</TABLE>
----------
(1) Mr. Cannella is a Director and was elected as President and Chief Executive
Officer of the Company, on January 10, 2001, and is the President of OPEC,
which the Company acquired on July 29, 1998.
(2) Represents a one-time bonus for past performance paid in fiscal 1999 but
accrued for services provided prior to the Company's acquisition of OPEC on
July 29, 1998.
(3) Effective October 1, 2000, Mr. Cook and Mr. Cannella were each granted
warrants to purchase 2,000,000 shares of Common Stock at $0.20 per share,
as part of the Company's reorganization and restructuring. Under the terms
of a Severance Agreement, dated January 12, 2001, Mr. Cook agreed to
surrender this warrant and other warrants and options for a fully vested
warrant to purchase 1,000,000 shares of Common Stock at $0.15 per share.
21
<PAGE>
(4) Mr. Cannella was granted options to purchase 217,000 shares of Common Stock
for $4.95 per share under the Company's 1999 Key Employee Stock Option
Plan, which was approved on November 23, 1999, at the Company's 1999 Annual
Meeting of Stockholders.
(5) Mr. Cook was elected President and Chief Executive Officer of the Company
effective November 23, 1999 and resigned as President and Chief Executive
Officer effective January 12, 2001. Pursuant to the terms of his Severance
Agreement, Mr. Cook will receive a separation payment of $90,000 payable in
12 equal monthly payments of $5,000, and 12 equal monthly payments of
$2,500, and certain other consideration. See "Certain Relationships And
Related Transactions."
(6) On September 30, 1998, Mr. Northern and Mr. Cook were each granted warrants
to purchase 205,406 shares of Common Stock at $2.93 per share, as bonuses
under their employment agreements. As part of his Severance Agreement Mr.
Cook agreed to forfeit this and other warrants.
(7) Mr. Cook was granted options to purchase 245,000 shares of Common Stock for
$4.95 per share under the Company's 1999 Key Employee Stock Option Plan,
which was approved on November 23, 1999, at the Company's 1999 Annual
Meeting of Stockholders. As part of his Severance Agreement Mr. Cook agreed
to forfeit these options.
(8) Mr. Northern resigned as President and Chief Executive Officer of the
Company effective November 23, 1999. Pursuant to the terms of his Severance
Agreement, Mr. Northern received (i) a separation payment of $100,000
payable in 12 equal monthly payments, (ii) a lump sum payment of $50,000
and (iii) certain other consideration. See "Certain Relationships And
Related Transactions."
(9) Mr. Northern was granted options to purchase 304,000 shares of Common Stock
for $4.95 per share under the Company's 1999 Key Employee Stock Option
Plan, which was approved on November 23, 1999 at the Company's 1999 Annual
Meeting of Stockholders.
(10) Mr. Robson has been Vice President of the Company since October 15, 1999,
and was elected Secretary on September 1, 2000. On January 15, 2001, the
Company provided a 30 day written notice to Mr. Robson to terminate his
Employment Agreement.
(11) Effective October 1, 2000, Mr. Robson and Mr. Romano were each granted
warrants to purchase 1,000,000 shares of Common Stock at $.20 per share, as
part of the Company's reorganization and restructuring.
(12) Mr. Robson was granted options to purchase 50,000 shares of Common Stock
for $4.50 per share under the Company's 1999 Key Employee Stock Option
Plan, which was approved on November 23, 1999, at the Company's 1999 Annual
Meeting of Stockholders.
(13) Mr. Romano is Vice President and Secretary of OPEC since 1996, and is
considered a Named Executive Officer based on the Company's reorganization
as of September 1, 2000.
(14) Mr. Romano was granted options to purchase 118,000 shares of Common Stock
for $4.50 per share under the Company's 1999 Key Employee Stock Option
Plan, which was approved on November 23, 1999, at the Company's 1999 Annual
Meeting of Stockholders.
WARRANT GRANTS
The following warrant grants were awarded to Named Executive officers
during the year ended September 30, 2000.
22
<PAGE>
WARRANT GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF SECURITIES PERCENT OF TOTAL WARRANTS
UNDERLYING GRANTED TO EMPLOYEES IN EXERCISE
NAME WARRANTS GRANTED FISCAL YEAR PRICE EXPIRATION DATE
---- ---------------- ----------- ----- ---------------
<S> <C> <C> <C> <C>
Donald D. Cannella 2,000,000(1) 22.22% $0.20 September 30, 2007
Earl J. Cook 2,000,000(2) 22.22% $0.20 September 30, 2007
Bruce A. Robson 1,000,000(3) 11.11% $0.20 September 30, 2007
Daniel J Romano 1,000,000(4) 11.11% $0.20 September 30, 2007
</TABLE>
----------
(1) Mr. Cannella was granted warrants to purchase 2,000,000 shares of Common
Stock as part of the Company's executive incentive plan related to
restructuring of the Company, which was approved by the Board of Directors
in September 2000.
(2) Mr. Cook was granted warrants to purchase 2,000,000 shares of Common Stock
as part of the Company's executive incentive plan related to restructuring
of the Company, which was approved by the Board of Directors in September
2000. Under the terms of a Severance Agreement, dated January 12, 2001, Mr.
Cook agreed to surrender this warrant and other warrants and options for a
fully vested warrant to purchase 1,000,000 shares of Common Stock at $0.15
per share.
(3) Mr. Robson was granted warrants to purchase 1,000,000 shares of Common
Stock as part of the Company's executive incentive plan related to
restructuring of the Company, which was approved by the Board of Directors
in September 2000.
(4) Mr. Romano was granted warrants to purchase 1,000,000 shares of Common
Stock as part of the Company's executive incentive plan related to
restructuring of the Company, which was approved by the Board of Directors
in September 2000.
1999 KEY EMPLOYEE STOCK OPTION PLAN
The Company's 1999 Key Employee Stock Option Plan (the "1999 Stock Option
Plan") was approved by the Company's Board of Directors and became effective on
April 30, 1999. On July 18, 1999, the Company awarded options to purchase
1,039,050 shares to employees at an exercise price of $4.50 per share and
766,000 shares to executive officers at an exercise price of $4.95 per share.
All grants were made subject to the approval of the 1999 Stock Option Plan by
the Company's stockholders, which were received at the Company's 1999 Annual
Meeting of Stockholders held on November 23, 1999. During the year ended
September 30, 2000, the Company awarded options to employees to purchase 632,000
shares at prices ranging from $.20 to $2.6875 and 90,000 grants were awarded to
executive officers at $1.00 per share. As of January 12, 2001, 920,250 total
options have been canceled due to termination of the employee and 335,567
options are vested. The following is a summary of certain terms and provisions
of the 1999 Stock Option Plan. This summary does not purport to be a complete
description of the 1999 Stock Option Plan and is subject to the detailed
provisions of, and is qualified in its entirety by reference to, the 1999 Stock
Option Plan.
The Company's 1999 Stock Option Plan is administered by the Company's Board
of Directors, or a committee of the Board. The Board selects the employees to
whom stock options are granted ("Optionees") and determines the number of shares
subject to each option and the type of option to be granted. Shares of Common
Stock issued pursuant to options awarded under the 1999 Stock Option Plan shall
be made available from authorized but unissued or reacquired shares of the
Company's Common Stock. The aggregate number of shares of Common Stock that may
be issued under the 1999 Stock Option Plan is 2,500,000, provided, however, that
the number of shares reserved for issuance pursuant to the 1999 Stock Option
Plan shall be adjusted to reflect stock dividends, stock splits and other
changes in capitalization.
23
<PAGE>
Under the 1999 Stock Option Plan, the Company may grant options that are
intended to qualify as Incentive Stock Options ("Incentive Stock Options")
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), or options not intended to qualify as Incentive Stock
Options ("Non-Statutory Stock Options"). The Incentive Stock Options are not
transferable except by will or the laws of descent and distribution.
Non-Statutory Stock Options may be transferred pursuant to terms and conditions
established by the Board. In conjunction with the Company's Incentive Stock
Option Agreement ("Incentive Stock Option Plan"), Incentive Stock Options shall
not be exercisable after the expiration of ten years from the date of grant or
upon an earlier expiration date as a result of the retirement or the death of
the Optionee. Options held by an Optionee who ceases to be employed by the
Company for any reason other than retirement or death shall not be exercisable
after the date employment terminates. Also, in consideration of the Company
granting the option, an Optionee agrees that he will remain in the employ of the
Company for a period of not less than one year from the date of grant of the
option, unless his employment shall be terminated on the account of incapacity
or with the consent of the Company.
The exercise prices of options shall be set by the Board and, in the case
of Incentive Stock Options, shall not be less than the per share fair market
value of the outstanding shares of the Company on the date the option is
granted. If an Incentive Stock Option is granted to an employee who is, at the
time the option is granted, deemed for the purposes of Section 422 of the Code,
or any successor provisions, to own shares of the Company possessing more than
ten percent (10%) of the total combined voting power of all classes of shares of
the Company or of a parent or subsidiary of the Company, the Option Price shall
be at least one hundred and ten percent (110%) of the fair market value of the
Common Stock, and shall not be exercisable after the expiration of five years
from the date of grant. Options may be granted under the 1999 Stock Option Plan
at any time prior to ten years from adoption by the Board, on which date the
plan shall expire but without affecting any options then outstanding.
The Board may amend, modify or terminate at any time the 1999 Stock Option
Plan, except that the Board may not, without further shareholder approval,
increase the total number of shares as to which options may be granted under the
1999 Stock Option Plan, change the employees or class of employees eligible to
receive options or materially increase the benefits accruing to participants
under the 1999 Stock Option Plan. In addition, the Board may not take any action
that would impair the validity of any outstanding option or would prevent the
incentive stock options issued or to be issued under the 1999 Stock Option Plan
from being incentive stock options under Section 422 of the Code, or any
successor provision.
COMPENSATION OF DIRECTORS
All directors of the Company previously received a director's fee of $2,500
per month for serving on the Company's Board of Directors. Payment of these
director fees was terminated on June 1, 2000 by mutual agreement of the existing
directors. Directors are reimbursed for actual out-of-pocket travel expenses to
attend meetings of the Company's Board of Directors.
In addition to the standard director's fee paid to the Company's directors,
Alan P. Hald received additional consideration for his service to the Company as
Chairman of the Board of Directors pursuant to an agreement with the Company,
which was effective January 1, 2000, and extended to December 31, 2000. Such
consideration includes an additional $7,500 per month, a one-time bonus of
$10,000 and warrants to purchase 70,000 shares of the Company's Common Stock, at
$1.00 per share, for each of the first twelve months of Mr. Hald's service to
the Company. In addition, Mr. Hald could have received transaction bonuses upon
the occurrence of certain events. See: EMPLOYMENT CONTRACTS AND TERMINATION OF
EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
The Company entered into a Severance Agreement with Earl J. Cook dated
January 12, 2001 (the "Cook Severance Agreement"). Under the terms of the Cook
Severance Agreement, Mr. Cook agreed to resign as President and Chief Executive
Officer and a Director of the Company in exchange for (i) a separation payment
in the amount of $90,000 payable in 12 equal monthly installments of $5,000 and
12 equal monthly payments of $2,500, (ii) an immediate payment of unpaid
24
<PAGE>
directors fees in the amount of $10,000, prior out of pocket travel expenses and
(iii) certain other considerations including an exchange of a new, fully vested,
warrant to purchase 1,000,000 shares of the Company's Common Stock at $0.15 per
share. Under the Cook Severance Agreement, Mr. Cook agreed to (i) certain
restrictive covenants, including, without limitation, refraining from engaging
in business in Arizona or Colorado that is directly or indirectly competitive to
the Company until January 12, 2003, (ii) surrender of 2,205,406 warrants and
245,000 options previously issued to him and (iii) to provide services to the
Company on a limited basis for the next six months.
The Company entered into a Severance Agreement with Steven R. Green dated
January 10, 2001 (the "Green Severance Agreement"). Under the terms of the Green
Severance Agreement, Mr. Green agreed to resign as Chairman of the Board and a
Director of the Company in exchange for (i) an immediate payment of unpaid
directors fees in the amount of $10,000, (ii) $5,000 in compensation for
services to be performed during January 2001, and (iii) certain other
considerations including the immediate vesting of the 2,000,000 warrants issued
October 1, 2000. Under the Green Severance Agreement, Mr. Green agreed to (i)
certain restrictive covenants, including, without limitation, refraining from
engaging in business in Arizona or Colorado that is directly or indirectly
competitive to the Company until January 10, 2002 and (ii) to enter into a
non-exclusive agreement with the Company to act as financial advisor to the
Company.
Alan P. Hald, former Chairman of the Board of Directors of the Company,
resigned as an employee and member of the Board of Directors of the Company. The
resignation was pursuant to the terms of an Employment Separation Agreement by
and between the Company and Mr. Hald effective as of June 1, 2000. The
Separation Agreement provides for: (i) the lump sum payment of $70,000
representing Mr. Hald's base salary through the end of term of the Employment
Agreement to be made in accordance with the terms of a Convertible Promissory
Note; (ii) accrued benefits required to be provided by the terms of any Company
sponsored benefit plans or programs; (iii) warrants to purchase 490,000 shares
of Common Stock of the Company which equal the amount Mr. Hald would have
received through the full term of the Employment Agreement; and (iv) payment of
a transaction bonus in the cash amount of 1% of the transaction and an amount of
warrants, equal to the bonus amount divided by the strike price of $1.00 per
share of the warrant upon the occurrence of certain events, including, without
limitation the closing of a public offering, private placement, sale or merger
of the Company in an aggregate amount valued at least $10,000,000 before January
1, 2001.
The Company entered into a Severance Agreement with Kendall Q. Northern
effective as of November 23, 1999 (the "Northern Severance Agreement"). Under
the terms of the Northern Severance Agreement, Mr. Northern agreed to resign as
President and Chief Executive Officer and a Director of the Company in exchange
for (i) a separation payment in the amount of $100,000 payable in 12 equal
monthly installments, (ii) a lump sum cash payment in the amount of $50,000 and
(iii) certain other considerations. Under the Northern Severance Agreement, Mr.
Northern agreed to certain restrictive covenants, including, without limitation,
refraining from engaging in business in Arizona or Colorado that is directly or
indirectly competitive to the Company until November 23, 2000.
Donald D. Cannella is currently employed by OPEC, a wholly owned subsidiary
of the Company, under an employment agreement that became effective August 1,
1998. The employment agreement sets forth the basic terms of Mr. Cannella's
employment as President of OPEC, including salary, bonus, employment duties and
employee benefits. The agreement has a term of five years with automatic one
year renewal periods and is terminable by either party at the beginning of each
renewal period with 30 days prior notice to the other party.
Bruce A. Robson is currently employed by the Company under an employment
agreement that became effective January 1, 1999. The employment agreement sets
forth the basic terms of Mr. Robson's employment as Vice President of the
Company including salary, bonus, employment duties and employee benefits. The
agreement has a term of 3 years with automatic one year renewal periods and is
terminable with 30 days prior notice to the other party. On January 4, 2000, the
agreement was amended to add the following provision: If there is a substantial
change in ownership or control and Mr. Robson is thereafter terminated, without
cause, within 120 days of such change, Mr. Robson shall be paid an additional
severance amount equal to six months salary, based on Mr. Robson's salary at the
time of termination. On January 15, 2001, the Company provided a 30 day written
notice to Mr. Robson to terminate his Employment Agreement.
25
<PAGE>
Ralph R. Zanck is currently employed by the Company under an employment
agreement that became effective December 6, 1999. The employment agreement sets
forth the basic terms of Mr. Zanck's employment as Treasurer and CFO of the
Company, including salary, bonus, employment duties and employee benefits. The
agreement has a term of 3 years with automatic one year renewal periods and is
terminable with 30 days prior notice to the other party. On March 27, 2000, the
agreement was amended to add the following provision: If there is a substantial
change in ownership or management control and Mr. Zanck is thereafter
terminated, without cause, within 180 days of such change, Mr. Zanck shall be
paid: (i) an additional severance amount equal to six months salary, based on
Mr. Zanck's salary at the time of termination; (ii) the equity or debt funding
bonus for any such funding received within 12 months of termination; (iii) a
prorated performance bonus and (iv) all stock options granted, or to be granted,
under this contract shall be immediately earned and remain in full force and
effect under their contractual terms and not be subject to cancellation under
their termination of employment clauses.
Daniel J. Romano is currently employed by OPEC under an employment
agreement that became effective August 1, 1998. The employment agreement sets
forth the basic terms of Mr. Romano's employment as Vice President of OPEC,
including salary, bonus, employment duties and employee benefits. The agreement
has a term of five years with automatic one year renewal periods and is
terminable by either party at the beginning of each renewal period with 30 days
prior notice to the other party.
Pursuant to the terms of the Company's 1999 Key Employee Stock Option Plan
and the stock option agreements relating thereto, the Company has agreed, that
all outstanding options granted under the 1999 Key Employee Stock Option Plan
vest automatically in the event of a change of control of the Company. For
purposes of the Company's 1999 Key Employee Stock Option Plan, the term "change
in control" means the first to occur of the following events:
(i) The acquisition by any unrelated person of beneficial ownership (as
that term is used for purposes of the Securities Exchange Act of 1934
(the "Act") of 20% or more of the then outstanding shares of common
stock of the Company or the combined voting power of the then
outstanding voting securities of the Company entitled to vote
generally in the election of directors. The term "unrelated person"
means any person other than (x) the Company and any subsidiary, (y) an
employee benefit plan or trust of the Company or any subsidiary, and
(z) a person who acquires stock of the Company pursuant to an
agreement with the Company that is approved by the Board in advance of
the acquisition, unless the acquisition results in a Change of Control
pursuant to section (ii) below. For purposes of this subsection, a
"person" means an individual, entity, or group or any affiliated
persons, as that term is used for purposes of the Act, or
(ii) Any tender or exchange offer, merger or other business combination,
sale of assets or contested election, or any combination of the
foregoing transactions, if the result of such transaction is that the
persons who were directors of the Company before such transaction
shall cease to constitute a majority of the Board of the Company or
any successor to the Company.
Pursuant to the terms of warrants issued to executive management of the
Company on October 1, 2000, the Company has agreed, that all outstanding
warants, which are subject to a three year vesting schedule, may be accelerated
under certain conditions, including the event of a change of control of the
Company. For purposes of the warrants, the term "change in control" means the
first to occur of the following events:
(i) The acquisition by any unrelated person of beneficial ownership (as
that term is used for purposes of the Securities Exchange Act of 1934
(the "Act")) of 49% or more of the then outstanding shares of common
stock of the Company or the combined voting power of the then
outstanding voting securities of the Company entitled to vote
generally in the election of directors. The term "unrelated person"
means any person other than (a) the Company and any subsidiary, (b) an
employee benefit plan or trust of the Company or any subsidiary, and
(c) a person who acquires stock of the Company pursuant to an
agreement with the Company that is approved by the Board in advance of
the acquisition, unless the acquisition results in a Change of Control
pursuant to section (ii) below. For purposes of this subsection, a
"person" means an individual, entity, or group or any affiliated
persons, as that term is used for purposes of the Act, or
26
<PAGE>
(ii) Any tender or exchange offer, merger or other business combination,
sale of assets or contested election, or any combination of the
foregoing transactions, if the result of such transaction is that the
persons who were directors of the Company before such transaction
shall cease to constitute a majority of the Board of the Company or
any successor to the Company.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the numbers of shares and percentage of all
shares of the Company's Common Stock outstanding as of January 12, 2001, held by
(i) any person known to the Company to be the beneficial owner of 5% or more of
the Company's outstanding Common Stock, (ii) each director and executive officer
of the Company, and (iii) all directors and executive officers as a group.
NAME AND ADDRESS AMOUNT & NATURE OF PERCENT OF
OF BENEFICIAL OWNER (1) BENEFICIAL OWNER CLASS (2)
----------------------- ---------------- ---------
5% STOCKHOLDERS
Steven R. Green (3) 3,430,000(4) 17.54%
Earl J. Cook (5) 2,675,000(6) 15.33%
Muluha Limited (7) 1,275,000(8) 7.56%
William H. Peetz (9) 1,000,000 6.08%
DIRECTORS AND OFFICERS
Donald D. Cannella 1,734,255(10) 10.32%
Mark E. Morley 2,168,000(11) 13.16%
Ralph R. Zanck 10,000(12) *
Bruce A. Robson 158,973(13) *
Daniel J. Romano 701,882(14) 4.26%
All Executive Officers and Directors
as a Group (7 Persons) 4,773,110(15) 28.26%
----------
* Represents beneficial ownership of less than 1%.
(1) Except as otherwise indicated, each holder may be reached through the
Company at 1880 Office Club Pointe, Suite 2000, Colorado Springs, CO
80920-5002.
(2) The percentages shown are calculated based upon 16,454,301 shares of Common
Stock outstanding on January 12, 2001. The numbers and percentages shown
include the shares of Common Stock actually owned as of January 12 2001,
and the shares of Common Stock that the identified person or group had the
right to acquire within 60 days of such date. In calculating the percentage
of ownership, all shares of Common Stock that the identified person or
group had the right to acquire within 60 days of January 12, 2001, upon the
exercise of options or warrants are deemed to be outstanding for the
purpose of computing the percentage of the shares of Common Stock owned by
such person or group, but are not deemed to be outstanding for the purpose
of computing the percentage of the shares of Common Stock owned by any
other person.
(3) Mr. Green's address is 1800 Glenview Rd., Glenview, Illinois 60025
(4) Includes 330,000 shares of Common Stock held by Blackwater Capital
Partners, L.P. and 1,100,000 shares of Common Stock that Blackwater Capital
Partners, L.P., may acquire upon the exercise of warrants exercisable
within 60 days of January 12, 2001. As the managing partner of Blackwater
Capital Partners, L.P., Mr. Green has investment power with respect to such
shares. Also Includes 2,000,000 shares of Common Stock that Mr. Green may
acquire upon the exercise of warrants exercisable within 60 days of January
12, 2001
27
<PAGE>
(5) Mr. Cook's address is 7169 State Highway 2 W., DeFuniak Springs, Florida
32433
(6) Includes 1,000,000 shares of Common Stock that Mr. Cook may acquire upon
the exercise of warrants and vested stock options exercisable within 60
days of January 12, 2001
(7) Muluha Limited's address is Dean House, Anderson Centre, Spitfire Close,
Ermine Business Centre, Huntingdon, Cambs PE29 6XY. Peter Holmes and
Stephen Dean are directors of Muluha Limited, and have investment power
with respect to the shares held in the name of Muluha Limited.
(8) Includes 400,000 shares of Common Stock that Muluha Limited may acquire
upon the exercise of warrants exercisable within 60 days of January 12,
2001.
(9) Mr. Peetz address is 3925 Hill Cr., Colorado Springs, Colorado 80904.
(10) Includes 20,000 shares of Common Stock held by Mr. Cannella as custodian
for his minor children and 350,104 shares of Common Stock that may be
acquired upon the exercise of vested stock options and warrants exercisable
within 60 days of January 12, 2001.
(11) Includes 18,000 shares of Common Stock that Mr. Morley may acquire upon the
exercise of warrants exercisable within 60 days of January 12, 2001.
(12) Includes 10,000 shares of Common Stock that Mr. Zanck may acquire upon the
exercise of vested stock options exercisable within 60 days of January 12,
2001.
(13) Includes 50,000 shares that vested equally on January 1, 2000, and January
1, 2001, under an employment agreement and includes 16,665 shares of Common
Stock that may be acquired upon the exercise vested stock options
exercisable within 60 days of January 12, 2001. Under the employment
agreement an additional 25,000 shares have been issued, which may vest
January 1, 2002 and are not included herein.
(14) Includes 5,000 shares of Common Stock held by Mr. Romano as custodian for
his minor children and 39,329 shares of Common Stock that may acquired upon
the exercise of vested stock options exercisable within 60 days of January
12, 2001.
(15) Includes 434,099 shares of Common Stock that such executive officers and
directors may acquire upon the exercise of warrants and vested stock option
exercisable within 60 days of January 12, 2001.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In July 1998, the Company entered into a Stock Purchase Agreement with
Blackwater Capital Partners, L.P. and Blackwater Capital Group, L.L.C.
(collectively, "Blackwater"). Steven R. Green, a former director and Chairman of
the Board of the Company, is the managing partner of Blackwater Capital
Partners, L.P. Pursuant to the Stock Purchase Agreement, Blackwater Capital
agreed to immediately purchase for $375,000 certain securities of the Company
consisting of an aggregate of 300,000 shares of Common Stock for $1.25 per share
and warrants to purchase 150,000 shares of Common Stock with an exercise price
of $3.00 per share, which expired in May 1999, after the original expiration
date was extended for six months by the Company. In addition, Blackwater Capital
agreed to purchase, or cause to be purchased, up to 3,211,000 shares of Common
Stock from the Company and 100,000 shares of Common Stock from each of Kendall
Q. Northern and Earl J. Cook, former Executives of the Company, at a minimum
price of $2.93 per share for a total investment of approximately $10,000,000 and
a total sale of up to 3,411,000 shares of Common Stock. In connection with the
transactions contemplated by the Stock Purchase Agreement, Blackwater Capital
was issued warrants to purchase 1,700,000 shares of the Company's Common Stock
exercisable at any time after vesting at a price of $1.00 per share. The
warrants are non-callable and were to vest from time to time as Blackwater
Capital completed the purchase of shares of Common Stock under the Stock
Purchase Agreement. Blackwater Capital was granted certain registration rights
with respect to all shares of Common Stock and warrants held by Blackwater
Capital pursuant to the Stock Purchase Agreement.
28
<PAGE>
The Stock Purchase Agreement provided that Blackwater would purchase or
cause to be purchased by third party investors up to 3,411,000 shares of the
Company's Common Stock. After the first $2,500,000 was received from Blackwater,
the Company had the option to refuse further funding, in which case all of the
non-vested warrants would immediately vest. In addition, Blackwater had the
right to raise the remaining $7,500,000 through a public offering of the shares
of Common Stock that it was committed to buy.
Blackwater had purchased 177,605 shares from the Company for its own
account at a purchase price of $2.93 per share, which were subsequently sold to
third party investors with the Company's consent for less than $2.93 per share.
The Company engaged in the sale of 1,000,000 shares at $2.30 per share and
200,000 shares at $1.25 per share. In connection with the sale of the 1,000,000
shares, Blackwater also assigned 400,000 of their vested warrants to the
investor and 100,000 warrants to the broker.
In June 2000, the Company and Blackwater reached a mutual agreement to
terminate the Stock Purchase Agreement and enter into a consulting agreement
whereby Blackwater would provide financial consulting services to the Company
for the following six months. In exchange for the termination of the existing
agreement and services to be provided under the new agreement, the Company
issued 330,000 shares of its Common Stock to Blackwater and agreed to vest the
1,050,000 warrants previously issued to Blackwater, which originally vested
incrementally upon Blackwater funding the full amount of the Stock Purchase
Agreement or the Company refusing further funding from Blackwater under the
Agreement.
In connection with the Company's acquisition of OPEC, the Company assumed a
lease for office space that is owned by a partnership controlled by Donald D.
Cannella, the President, Chief Executive Officer and a Director of the Company
and President of OPEC. Payments under the lease are currently $5,500 per month.
Although the lease expires in January 2001, it automatically renews for
successive one-year periods unless terminated by one of the parties to the
lease.
In August 1999, OPEC obtained a two-year working capital loan from Norwest
Bank Colorado, National Association, Trustee of the James C. Berger Rollover
IRA, John M. Ventimiglia, and Robin L. Morley & Mark E. Morley for $1,000,000.
The loan is personally guaranteed by Donald D. Cannella, the President, Chief
Executive Officer and a Director of the Company. In July 2000, Mr. Cannella and
Daniel J. Romano, a Vice President of OPEC, voluntarily agreed to transfer
60,000 shares of Common Stock, owned by them, to the lenders, in order to induce
the lenders to subordinate their collateral to other financing that had been
obtained by OPEC. The Company also issued 360,000 warrants to purchase shares of
the Company's Common Stock, at $1.00 per share, in order to induce the lenders
to subordinate their collateral to other financing that had been obtained by
OPEC. Mark E. Morley, a director of the Company and his Sister-in-Law are 10%
participants in the loan, as tenants in common, and accordingly received 36,000
of the warrants issued by the Company in this transaction
On November 23, 1999, the Company entered into a Severance Agreement with
Kendall Q. Northern under which the Company's employment contract with Mr.
Northern was terminated by mutual consent and Mr. Northern resigned as an
officer and director of the Company, and all of its affiliates, and agreed not
to compete with the Company in Arizona and Colorado for a period of one year. In
consideration for execution of the Severance Agreement, the Company agreed to
immediately pay a one-time sum of $50,000 and a one year separation payment of
$100,000 to be paid in equal monthly installments. In addition, the Company is
further obligated to pay for Mr. Northern's auto rental, auto insurance and
medical insurance for one year. The Company also allowed Mr. Northern to (i)
retain certain Company property already in his possession valued at
approximately $17,500 and (ii) exchange 200,000 shares of the Company's Common
Stock owned by Mr. Northern for 47,031 shares of ICCX Common Stock obtained by
the Company from the sale of substantially all of its assets relating to its
Internet access business. Under a mutual agreement Mr. Northern exchanged
184,000 shares of the Company's Common Stock for 43,004 shares of ICCX stock.
The Company has not paid the last seven monthly separation installment payments,
totaling $58,331.
On or about May 10, 2000, the Company became aware of two Employment
Agreements and an amendment to an existing employment contract that were entered
into by the former President, Kendall Northern with three of the Company's
employees. The three employees are all related to Mr. Northern and included his
brother, Michael Northern, his sister-in-law, Gail Northern, who was the
director of human resources, and his nephew Bradley Black. Each of the
agreements include a clause stating the employee is to be paid $100,000 if
29
<PAGE>
terminated without cause. For unrelated reasons, two of the employees were
terminated and the Company received a formal demand for payment of $100,000 each
from their counsel. The Company has settled the claims of these two employees by
allowing their stock options for a total of 50,700 shares, that were granted
July 18, 1999, to remain in effect at a lowered exercise price of $.50 per
share. The remaining employee has voluntarily waived any claim for such payment
as part of a termination agreement entered into with the Company in September
2000.
Effective May 12, 2000, the Company entered into NeighborComm Service
Agreement, First Amendment to NeighborComm Service Agreement and Letters of
Understanding by and among the Company, Morley Family Investments, LLLP, a
Colorado limited liability partnership, ROCOLO VI, LLC, a Colorado limited
liability company, Ridgeview Devp., LLC, a Colorado limited liability company
and/or Ray O'Sullivan, an individual (collectively the "Ridgeview Group"),
ROCOLO VI, LLC is controlled by Mark E. Morley, a director of the Company and
Morley Family Investments, LLLP is controlled by Mr. Morley's brother.
Pursuant to the NeighborComm Agreements, the Company contracted to provide
bundled voice, video and data communications, a community Intranet and a virtual
community portal (together branded as the "NeighborComm System" or
"NeighborComm"), to purchase infrastructure from the Ridgeview Group with
Common Stock and warrants and to provide other Common Stock and warrant
incentives to the Ridgeview Group relating to the installation of the
NeighborComm System and the promotion of NeighborComm to builders and residents
in the development being serviced by the Company.
The NeighborComm Agreements also provide that the Ridgeview Group may, at
its option, terminate the Agreements if the Company had not raised $3,000,000 in
equity, debt or other financing within 90 calendar days after the effective date
of the Agreements which was August 10, 2000. Additionally, the Ridgeview Group
may, at its option, terminate the Agreements if the Company has not registered
up to 100,000 shares of Common Stock to be held by the Ridgeview Group, as
freely tradable stock, within 120 calendar days after the effective date of the
Agreements which was September 9, 2000.
The Company did not raise the $3,000,000 in capital or register the shares
as required by the Agreement in the time specified in the Agreement and the
Company has closed its telecommunications and convergence technology division
and cannot supply the services required under the Agreement. The Company has not
issued any Common Stock or warrants that could have been earned by the Ridgeview
Group under the Agreement and the Company and the Ridgeview Group are currently
negotiating a mutual cancellation of the Agreement. It is anticipated that under
the mutual cancellation agreement the Company will transfer ownership of a
telecommunications equipment vault, with an original cost to the Company of
$45,000, to the Ridgeview Group.
Alan P. Hald, former Chairman of the Board of Directors of the Company,
resigned as an employee and member of the Board of Directors of the Company
pursuant to an Employment Separation Agreement by and between the Company and
Mr. Hald effective as of June 1, 2000. The Separation Agreement provides for:
(i) the lump sum payment of $70,000 representing Mr. Hald's base salary through
the end of term of the Employment Agreement to be made in accordance with the
terms of a Convertible Promissory Note; (ii) accrued benefits required to be
provided by the terms of any Company sponsored benefit plans or programs; (iii)
warrants to purchase 490,000 shares of common stock of the Company which equal
the amount Mr. Hald would have received through the full term of the Employment
Agreement; and (iv) payment of a transaction bonus in the cash amount of 1% of
the transaction and an amount of warrants, equal to the bonus amount divided by
the strike price of $1.00 per share of the warrant upon the occurrence of
certain events, including, without limitation the closing of a public offering,
private placement, sale or merger of the Company in an aggregate amount valued
at $10,000,000 or more before January 1, 2001. The Company has not paid the
Promissory Note of $70,000, which was due September 1, 2000.
In September 2000, the Company issued 2,500,000 shares of its Common Stock,
to Mark E. Morley, a director of the Company and his brother, in exchange for
$100,000 and a subscription for $150,000. The subscription was subsequently paid
in October and November 2000.
The Company entered into a Severance Agreement with Earl J. Cook dated
January 12, 2001 (the "Cook Severance Agreement"). Under the terms of the Cook
Severance Agreement, Mr. Cook agreed to resign as President and Chief Executive
Officer and a Director of the Company in exchange for (i) a separation payment
in the amount of $90,000 payable in 12 equal monthly installments of $5,000 and
12 equal monthly payments of $2,500, (ii) an immediate payment of unpaid
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<PAGE>
directors fees of $10,000, out of pocket travel expenses and (iii) certain other
considerations including an exchange of a new, fully vested, warrant to purchase
1,000,000 shares of the Company's Common Stock at $0.15 per share. Under the
Cook Severance Agreement, Mr. Cook agreed to (i) certain restrictive covenants,
including, without limitation, refraining from engaging in business in Arizona
or Colorado that is directly or indirectly competitive to the Company until
January 12, 2003, (ii) surrender of 2,205,406 warrants and 245,000 options
previously issued to him and (iii) to provide services to the Company on a
limited basis for the next six months.
The Company entered into a Severance Agreement with Steven R. Green dated
January 10, 2001 (the "Green Severance Agreement"). Under the terms of the Green
Severance Agreement, Mr. Green agreed to resign as Chairman of the Board and a
Director of the Company in exchange for (i) an immediate payment of unpaid
directors fees of $10,000, and (ii) $5,000 for services to be rendered during
January 2001 and (iii) certain other considerations including the immediate
vesting of the 2,000,000 warrants issued October 1, 2000. Under the Green
Severance Agreement, Mr. Green agreed to (i) certain restrictive covenants,
including, without limitation, refraining from engaging in business in Arizona
or Colorado that is directly or indirectly competitive to the Company until
January 10, 2002 and (ii) to enter into an agreement with the Company to act as
financial advisor to the Company.
One or more equipment lease agreements entered into by the Company were
personally guaranteed by Earl J. Cook and Kendall Q. Northern, former Executive
Officers of the Company. In June 2000, management of the Company initially
became aware that claims may be made against the personal guarantees of Mr. Cook
and Mr. Northern because the Company was delinquent in payment of the leases.
Should this third party bring any claim against either one ,or both, Mr. Cook or
Mr. Northern as a result of their respective guarantees, the Company may have
indemnification and/or hold harmless obligations relative to any such claim or
liability and an obligation to advance expenses, including attorneys fees, to
each individual in accordance with the terms of Nevada law, the Company's
By-Laws, the previous employment agreements with or the severance agreements
with Mr. Cook and Mr. Northern. To the Company's knowledge, no claim has been
brought against the Company or either guarantor relating to any of the equipment
lease agreements and as of November 30, 2000, all of the leases have been paid
in full or are current as to their payment terms or amended payment terms.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit No. Description
----------- -----------
2.1 Articles of Exchange dated February 20, 1998, between FUTUREONE,
INC. and World's Fare, Inc. *
3.1(i)(a) Articles of Incorporation for World's Fare, Inc. dated March 22,
1994. *
3.1(i)(b) Certificate of Amendment of Articles of Incorporation of World's
Fare, Inc. dated May 7, 1997. *
3.1(i)(c) Certificate of Amendment of Articles of Incorporation of World's
Fare, Inc. dated July 14, 1998. *
3.1(i)(d) Articles of Incorporation of FUTUREONE, INC. dated December 26,
1996.
3.1(i)(e) Amended and Restated Articles of Incorporation of FutureOne, Inc.
dated December 14, 1999. **
3.1(i)(f) Articles of Incorporation of OPEC CORP. dated December 19,1995.
3.1(ii)(a) Bylaws of World's Fare, Inc. dated March 31, 1998. *
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<PAGE>
Exhibit No. Description
----------- -----------
3.1(ii)(b) Bylaws of FUTUREONE, INC. dated January 9, 1997.
3.1(ii)(c) First Amendment to the By-Laws of FutureOne, Inc. dated August 1,
1998. *
3.1(ii)(d) Second Amendment to the By-laws of FutureOne, Inc. dated July 15,
1999. *
3.1(ii)(e) Bylaws of OPEC CORP. dated December 31, 1995.
3.1(ii)(f) First Amended Bylaws of OPEC CORP. dated July 15, 1996.
4.1 FutureOne, Inc. 1999 Key Employee Stock Option Plan.*
4.2 Form of FutureOne, Inc. Incentive Stock option Agreement. *
4.3 Form of Warrant to Purchase 250,000 shares of Common Stock in the
name of Richard B. McCulloch. **
4.4 Warrant to Purchase 500,000 shares of Common Stock in the name of
12 Squared Partners, LLC. **
4.5 Security and Pledge Agreement by and between the Company, between
12 Squared Partners, LLC and FutureOne, Inc dated October 22,
1999. **
4.6 Warrant to Purchase 16,667 shares of Common Stock in the name of
Hare & Co., as Trustees for Financial Institutions Retirement
Fund. **
4.7 Promissory Note dated October 8, 1999, in the amount of $250,000
between FutureOne, Inc. and Richard B. McCulloch. **
4.8 12% Convertible Promissory Note dated December 28, 1999, in the
amount of $50,000 between FutureOne, Inc. and Hare & Co., as
Trustees for Financial Institutions Retirement Fund. **
4.9 15% Convertible Promissory Note dated February 9, 2000, in the
amount of $250,000 between FutureOne, Inc. and Richard B.
McCulloch. ****
4.10 Termination Agreement (with Consultant Services Agreement) by and
among the Company, Blackwater Capital Partners, L.P., and
Blackwater Capital Group, L.L.C. deffective as of June 1, 2000.
*****
4.11 Form of Replacement Warrant to Purchase 1,100,000 shares of
Common Stock in the name of Blackwater Capital Group, L.L.C.
*****
4.12 Form of warrant to Purchase 47,500 shares of Common Stock in the
name of Joseph Charles & Assoc., Inc. effective October 22, 1999.
4.13 Form of warrant to Purchase 20,900 shares of Common Stock in the
name of Mystical Dragon L.P. effective October 22, 1999.
4.14 Form of warrant to Purchase 5,320 shares of Common Stock in the
name of Bruce Jordon effective October 22, 1999.
32
<PAGE>
Exhibit No. Description
----------- -----------
4.15 Form of warrant to Purchase 5,000 shares of Common Stock in the
name of Andrew Saska effective October 22, 1999.
4.16 Form of warrant to Purchase 1,520 shares of Common Stock in the
name of Susan Trapani effective October 22, 1999.
4.17 Form of warrant to Purchase 9,500 shares of Common Stock in the
name of Joseph Charles & Assoc., Inc. (B Bonus Pool) effective
October 22, 1999.
4.18 Form of warrant to Purchase 10,260 shares of Common Stock in the
name of Anthony Pintsopoulos effective October 22, 1999.
4.19 Form of Warrant to Purchase 30,000 shares of Common Stock in the
name of Norwest Bank Colorado, National Association, Trustee of
the James C. Berger Rollover IRA dated August 15, 2000 .
4.20 Form of Warrant to Purchase 24,000 shares of Common Stock in the
name of John M. Ventimiglia dated August 15, 2000.
4.21 Form of Warrant to Purchase 6,000 shares of Common Stock in the
name of Robin L. Morley & Mark E. Morley, as Tenants in Common
dated August 15, 2000.
4.22 Form of Warrant to Purchase 30,000 shares of Common Stock in the
name of Norwest Bank Colorado, National Association, Trustee of
the James C. Berger Rollover IRA dated September 15, 2000.
4.23 Form of Warrant to Purchase 24,000 shares of Common Stock in the
name of John M. Ventimiglia dated September 15, 2000.
4.24 Form of Warrant to Purchase 6,000 shares of Common Stock in the
name of Robin L. Morley & Mark E. Morley, as Tenants in Common
dated September 15, 2000.
4.25 Form of Warrant to Purchase 2,000,000 shares of Common Stock in
the name of Earl J. Cook dated October 1, 2000.
4.26 Form of Warrant to Purchase 1,000,000 shares of Common Stock in
the name of Earl J. Cook dated October 1, 2000.
4.27 Form of Warrant to Purchase 2,000,000 shares of Common Stock in
the name of Steven R. Green dated October 1, 2000.
4.28 Form of Warrant to Purchase 2,000,000 shares of Common Stock in
the name of Donald D. Cannella dated October 1, 2000.
4.29 Form of Warrant to Purchase 1,000,000 shares of Common Stock in
the name of Ralph R. Zanck dated October 1, 2000.
4.30 Form of Warrant to Purchase 1,000,000 shares of Common Stock in
the name of Bruce A. Robson dated October 1, 2000.
4.31 Form of Warrant to Purchase 1,000,000 shares of Common Stock in
the name of Daniel J. Romano dated October 1, 2000.
33
<PAGE>
Exhibit No. Description
----------- -----------
4.32 Form of Warrant to Purchase 60,000 shares of Common Stock in the
name of John Hobbs dated October 1, 2000 .
4.33 Form of Warrant to Purchase 30,000 shares of Common Stock in the
name of Norwest Bank Colorado, National Association, Trustee of
the James C. Berger Rollover IRA dated October 15, 2000.
4.34 Form of Warrant to Purchase 24,000 shares of Common Stock in the
name of John M. Ventimiglia dated October 15, 2000.
4.35 Form of Warrant to Purchase 6,000 shares of Common Stock in the
name of Robin L. Morley & Mark E. Morley, as Tenants in Common
dated October 15, 2000.
4.36 Form of Warrant to Purchase 30,000 shares of Common Stock in the
name of Norwest Bank Colorado, National Association, Trustee of
the James C. Berger Rollover IRA dated November 15, 2000.
4.37 Form of Warrant to Purchase 24,000 shares of Common Stock in the
name of John M. Ventimiglia dated November 15, 2000.
4.38 Form of Warrant to Purchase 6,000 shares of Common Stock in the
name of Robin L. Morley & Mark E. Morley, as Tenants in Common
dated November 15, 2000.
4.39 Form of Warrant to Purchase 30,000 shares of Common Stock in the
name of Norwest Bank Colorado, National Association, Trustee of
the James C. Berger Rollover IRA dated December 15, 2000.
4.40 Form of Warrant to Purchase 24,000 shares of Common Stock in the
name of John M. Ventimiglia dated December 15, 2000.
4.41 Form of Warrant to Purchase 6,000 shares of Common Stock in the
name of Robin L. Morley & Mark E. Morley, as Tenants in Common .
dated December 15, 2000.
4.42 Form of Warrant to Purchase 30,000 shares of Common Stock in the
name of Norwest Bank Colorado, National Association, Trustee of
the James C. Berger Rollover IRA dated December 31, 2000.
4.43 Form of Warrant to Purchase 24,000 shares of Common Stock in the
name of John M. Ventimiglia dated December 31, 2000.
4.44 Form of Warrant to Purchase 6,000 shares of Common Stock in the
name of Robin L. Morley & Mark E. Morley, as Tenants in Common
dated December 31, 2000.
10.50 Employment Agreement between OPEC CORP and Daniel J. Romano dated
August 1, 1998.
10.51 First Amendment to the Employment Agreement between the Company
and Bruce A. Robson effective January 1, 1999.
34
<PAGE>
Exhibit No. Description
----------- -----------
10.52 Stock Purchase Agreement by and between Michael Mazick and
FutureOne, Inc. entered into as of the 15th day of June, 1999*
10.53 Collateralized Convertible Commercial Promissory Note by OPEC
Corp. to the order of Norwest Bank Colorado, National
Association, John Ventiniglia, and Robin L. Morley & Mark E.
Morley in the amount of $1,000,000 dated August 27, 1999*
10.54 Asset Purchase Agreement by and among RMI.NET, Inc. and
Networld.com Inc., and FutureOne, Inc., an Arizona corporation
and FutureOne, Inc., a Nevada corporation dated November 19,
1999. **
10.55 Severance Agreement dated November 23, 1999, between Kendall Q.
Northern and FutureOne, Inc. **
10.56 Agreement Not to Sell effective as of March 22, 2000, a Letter
Agreement effective as of March 28, 2000 and Letter Agreement
effective April 24, 2000, by and between the Company and 12
Squared Partners, LLC, an Arizona Limited Liability Company.
*****
10.57 Employment Separation Agreement by and between the Company and
Alan P. Hald effective as of June 1, 2000. *****
10.58 NeighborComm Service Agreement, First Amendment to NeighborComm
Service Agreement and Letters of Understanding by and among the
Company, Morley Family Investments, LLP, a Colorado limited
liability partnership, ROCOLO VI, LLC, a Colorado limited
liability company, Ridgeview Devp., LLC, a Colorado limited
liability company and/or Ray O'Sullivan, an individual, effective
as of May 12, 2000. *****
10.59 Stock Purchase Agreement by and among the Company, OPEC CORP, a
Colorado corporation, Abcon, Inc., an Arizona corporation and
Brian Smith effective as of June 30, 2000. *****
10.60 Promissory Note and Security Agreement payable to the order of
OPEC CORP, a Colorado corporation and the Company in the
principal amount of $263,329.14 dated June 30, 2000. *****
10.61 Modification to August, 27, 1999, Collateralized Convertible
Commercial Promissory Note by OPEC Corp. to the order of Norwest
Bank Colorado, National Association, John Ventiniglia, and Robin
L. Morley & Mark E. Morley in the amount of $1,000,000 dated July
27, 2000.
10.62 Asset Sale and Purchase Agreement between the Company and R.
Tucker Woodbury for the sale of Rocket Science Creative effective
October 6, 2000.
10.63 Third Amendment to Promissory Note between OPEC CORP. and US BANK
NATIONAL ASSOCIATION dated October 16, 2000.
10.64 Severance Agreement between the Company and Earl J. Cook dated
January 12, 2001
10.65 Severance Agreement between the Company and Steven R. Green dated
January 12, 2001
35
<PAGE>
Exhibit No. Description
----------- -----------
10.66 Financial Consulting Agreement between the Company and Steven R.
Green dated January 10, 2001.
21 Subsidiaries of the Registrant
(b) Reports on Form 8-K
None.
----------
* Previously filed with Form 10 on October 7, 1999.
** Previously filed with Amendment No. 1 to Form 10 on January 13, 2000.
*** Previously filed with Form 10QSB on February 14, 2000.
**** Previously filed with Form 10QSB on May 15, 2000.
***** Previously filed with Form 10QSB on August 14, 2000.
36
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FUTUREONE, INC.
Date: January 16, 2001 By: /s/ Donald D. Cannella
------------------------------------
Name: Donald D. Cannella
Title: President
In accordance with the Exchange Athis report has been signed below by
the following persons on behalf of the istrant and in the capacities and on
the dates indicated.
Date: January 16, 2001 By: /s/ Donald D. Cannella
------------------------------------
DONALD D. CANNELLA, PRESIDENT, CHIEF
EXECUTIVE OFFICER, DIRECTOR
(Principal Executive Officer)
Date: January 16, 2001 By: /s/ Ralph Zanck
------------------------------------
RALPH R. ZANCK, TREASURER, CHIEF
FINANCIAL OFFICER
(Principal Financial Officer)
Date: January 16, 2001 By: /s/ Mark E. Morley
------------------------------------
MARK E. MORLEY, DIRECTOR
37
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
FutureOne, Inc.
We have audited the accompanying consolidated balance sheets of FutureOne, Inc.
and subsidiaries (the Company) as of September 30, 2000 and 1999, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
FutureOne, Inc. and subsidiaries at September 30, 2000 and 1999, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States.
The accompanying financial statements have been prepared assuming FutureOne,
Inc. and subsidiaries will continue as a going concern. As more fully described
in Note 1, the Company has recurring losses, and negative working capital. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern (management's plans in regard to those matters are also described
in Note 1). The financial statements do not include any adjustments to reflect
the possible future effect on the recoverability and classification of assets or
the amounts and classifications of liabilities that may result from the outcome
of this uncertainty.
Ernst & Young LLP
Phoenix, Arizona
January 12, 2001
F-1
<PAGE>
FutureOne, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
SEPTEMBER 30
------------------------------
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 296,285 $ 160,032
Available for sale securities 46,552 --
Trade accounts receivable, net of allowance for doubtful accounts of approximately
$35,000 and $48,000 at September 30, 2000 and 1999, respectively 2,137,095 2,399,450
Costs and estimated earnings in excess of billings on
uncompleted contracts 599,497 717,548
Prepaid expenses and other assets 286,460 140,893
------------ ------------
Total current assets 3,365,889 3,417,923
Property and equipment, net 2,652,711 3,587,309
Notes receivable 44,866 62,906
Intangible assets, net 4,873,276 5,630,073
Other assets 66,058 --
Net long-term assets of discontinued operations 354,006 1,933,977
------------ ------------
$ 11,356,806 $ 14,632,188
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Credit lines payable $ 455,000 $ 480,000
Notes payable to stockholders 166,450 171,450
Trade accounts payable 2,997,270 2,389,175
Accrued expenses 685,938 313,436
Taxes payable 282,020 278,854
Billings in excess of costs and estimated earnings on uncompleted contracts 235,238 66,861
Debt in default and current portion of long term debt and capital leases 3,003,562 1,429,799
Other liabilities 206,794 24,321
Net current liabilities of discontinued operations 334,322 314,807
------------ ------------
Total current liabilities 8,366,594 5,468,703
Notes payable, less current portion 608,727 2,603,848
Capital lease payable, less current portion 352,830 67,786
Stockholders' equity:
Common stock, $.001 par value, 50,000,000 shares authorized and 15,747,151 and
12,891,028 shares issued at September 30, 2000 and 1999, respectively 15,748 12,891
Preferred stock, $.001 par value, 10,000,000 shares
authorized and none outstanding -- --
Additional paid-in capital 14,469,260 14,050,433
Subscription receivable (150,000) --
Unearned compensation (99,281) (481,367)
Treasury stock, 292,850 shares in 2000 and 108,850 shares in 1999 (434,573) (250,573)
Other comprehensive loss (179,515) --
Accumulated deficit (11,592,984) (6,839,533)
------------ ------------
Total stockholders' equity 2,028,655 6,491,851
------------ ------------
$ 11,356,806 $ 14,632,188
============ ============
</TABLE>
See accompanying notes.
F-2
<PAGE>
FutureOne, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
-----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Contract revenues $ 12,936,045 $ 8,663,101
Costs of revenues (including $703,440 and $448,976 of depreciation
and amortization in 2000 an 1999, respectively) 11,851,012 7,082,954
------------ ------------
Gross profit 1,085,033 1,580,147
Operating expenses:
General and administrative 3,914,577 3,177,955
Depreciation and amortization 838,595 730,049
------------ ------------
Loss from operations (3,668,139) (2,327,857)
Other income (expense):
Interest expense (789,088) (240,235)
Gain (loss) on disposal of assets (190,437) 2,812
Gain on sale of available for sale securities 5,101 14,337
Other (70,049) 26,999
------------ ------------
Net loss from continuing operations (4,712,612) (2,523,944)
Discontinued operations:
Loss from operations (523,612) (2,684,192)
Gain (loss) on disposal 482,773 (66,615)
------------ ------------
Net loss $ (4,753,451) $ (5,274,751)
============ ============
Basic and diluted net loss per common share:
Loss from continuing operations $ (.36) $ (.21)
Loss from discontinued operations -- (.23)
------------ ------------
Net loss per common share $ (.36) $ (.44)
============ ============
Basic and diluted weighted average shares: 13,147,749 12,031,412
============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
FutureOne, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
----------------------- PAID-IN SUBSCRIPTION UNEARNED
SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION
------ ------ ------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Balance - September 30, 1998 11,055,344 $ 11,055 $ 10,202,771 $ -- $(166,843)
Issuance of common stock:
Net loss -- -- -- -- --
Compensation to employees 244,999 245 616,062 -- (527,057)
Private Placements 1,160,000 1,160 2,458,840 -- --
Exercise of warrants from private placement 10,000 10 29,990 -- --
Conversion of promissory note 41,750 42 24,958 -- --
Consultants for services 2,500 3 5,753 -- --
Abcon, Inc. acquisition 94,118 94 216,566 -- --
AMCOM LLC acquisition 121,212 121 278,909 -- --
GlobalKey acquisition 50,000 50 146,450 -- --
Progressive Media LLC acquisition 67,605 68 155,560 -- --
Ubiquity Design LLC acquisition 100,000 100 230,100 -- --
Expenses of private placement -- -- (240,750) -- --
Amortization of unearned compensation -- -- -- -- 137,700
Cancellation of nonvested employee stock (56,500) (57) (74,776) -- 74,833
Treasury stock from sale of Priority Systems, Inc. -- -- -- -- --
----------- -------- ------------ --------- ---------
Balance - September 30, 1999 12,891,028 12,891 14,050,433 -- (481,367)
Net loss -- -- -- -- --
Unrealized loss on available for sale securities -- -- -- -- --
Comprehensive loss -- -- -- -- --
Issuance of common stock:
Compensation to employees 134,500 135 52,990 -- (53,125)
Private placements 2,500,000 2,500 247,500 (150,000) --
Consultants for services 357,500 358 92,142 -- --
Issuance of warrants:
Debt issuance -- -- 245,667 -- --
Consultants for services -- -- 39,000 -- --
Amortization of unearned compensation -- -- -- -- 176,603
Cancellation of non-vested employee stock (135,877) (136) (258,472) -- 258,608
Treasury stock purchased -- -- -- -- --
----------- -------- ------------ --------- ---------
Balance - September 30, 2000 15,747,151 $ 15,748 $ 14,469,260 $(150,000) $ (99,281)
=========== ======== ============ ========= =========
OTHER
TREASURY COMPREHENSIVE ACCUMULATED
STOCK LOSS DEFICIT TOTAL
----- ---- ------- -----
Balance - September 30, 1998 $ -- $ -- $ (1,564,782) $ 8,482,201
Issuance of common stock:
Net loss -- -- (5,274,751) (5,274,751)
Compensation to employees -- -- -- 89,250
Private Placements -- -- -- 2,460,000
Exercise of warrants from private placement -- -- -- 30,000
Conversion of promissory note -- -- -- 25,000
Consultants for services -- -- -- 5,756
Abcon, Inc. acquisition -- -- -- 216,660
AMCOM LLC acquisition -- -- -- 279,030
GlobalKey acquisition -- -- -- 146,500
Progressive Media LLC acquisition -- -- -- 155,628
Ubiquity Design LLC acquisition -- -- -- 230,200
Expenses of private placement -- -- -- (240,750)
Amortization of unearned compensation -- -- -- 137,700
Cancellation of nonvested employee stock -- -- -- --
Treasury stock from sale of Priority Systems, Inc. (250,573) -- -- (250,573)
--------- --------- ------------ -----------
Balance - September 30, 1999 (250,573) -- (6,839,533) 6,491,851
Net loss -- -- (4,753,451) (4,753,451)
Unrealized loss on available for sale securities -- (179,515) -- (179,515)
-----------
Comprehensive loss -- -- -- (4,932,966)
Issuance of common stock:
Compensation to employees -- -- -- --
Private placements -- -- -- 100,000
Consultants for services -- -- -- 92,500
Issuance of warrants:
Debt issuance -- -- -- 245,667
Consultants for services -- -- -- 39,000
Amortization of unearned compensation -- -- -- 176,603
Cancellation of non-vested employee stock -- -- -- --
Treasury stock purchased (184,000) -- -- (184,000)
--------- --------- ------------ -----------
Balance - September 30, 2000 $(434,573) $(179,515) $(11,592,984) $ 2,028,655
========= ========= ============ ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
FutureOne, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
-----------------------------
2000 1999
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(4,753,451) $(5,274,751)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,542,035 1,179,025
Provision (credit) for doubtful accounts (13,000) (17,000)
Amortization of unearned compensation 176,603 137,700
Accretion of debt discount 245,667 --
Stock compensation 92,500 95,006
Realized gain on investments (5,100) (14,337)
Loss (gain) on sale of assets 190,437 (2,812)
Loss on Global Key amortization write-off -- 120,175
(Gain) loss on disposal of discontinued operations (482,773) 66,615
Changes in operating assets and liabilities:
Investments -- 165,958
Trade accounts receivable 275,355 (1,032,332)
Costs and estimated earnings in excess of billings on uncompleted contracts 118,051 (305,671)
Prepaid expenses and other assets (145,567) (135,037)
Trade accounts payable 608,095 1,471,927
Accrued expenses 372,502 162,211
Accrued bonus -- (500,000)
Accrual for loss contract -- (100,000)
Taxes payable 3,166 (3,375)
Billings in excess of costs and estimated earnings on uncompleted contracts 168,377 (5,144)
Other liabilities 182,473 (86,271)
----------- -----------
Net cash used in operating activities (1,424,630) (4,078,113)
INVESTING ACTIVITIES
Purchases of property and equipment (288,270) (2,438,139)
Proceeds from sale of assets 603,670 64,458
Proceeds from sale of available-for-sale securities 1,699,371 --
Acquisitions of businesses, net of cash received -- 25,851
Purchase of trademark -- (1,856)
Change in notes receivable and other assets (48,018) (35,893)
----------- -----------
Net cash used in continuing operations investing activities 1,966,753 (2,385,579)
Change in net assets of discontinued operations (420,055) 828,253
----------- -----------
Net cash (used in) provided by investing activities 1,546,698 (1,557,326)
FINANCING ACTIVITIES
Net proceeds (repayments) under credit lines (25,000) 280,000
Repayments from notes payable to shareholders (5,000) --
Principal payments under capital lease obligations (119,457) (106,852)
Proceeds from issuance of common stock 100,000 2,249,250
Debt issuance costs (15,000) (75,000)
Proceeds from borrowings 1,527,896 4,166,441
Proceeds from notes payable, officers -- 164,000
Principle payments of notes payable (1,449,254) (1,453,772)
----------- -----------
Net cash provided by financing activities 14,185 5,224,067
----------- -----------
Increase (decrease) in cash and cash equivalents 136,253 (411,372)
Cash and cash equivalents at beginning of period 160,032 571,404
----------- -----------
Cash and cash equivalents at end of period $ 296,285 $ 160,032
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Assets acquired under capital lease obligation $ 404,501 $ 362,019
=========== ===========
Satisfaction of note payable with available-for-sale securities $ 500,000 --
=========== ===========
Purchase of treasury stock with available-for-sale securities . $ 184,000 --
=========== ===========
Conversion of debt into common stock -- $ 25,000
=========== ===========
Available-for-sale securities received from sale of discontinued operations $ 2,746,669 --
=========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2000
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND DESCRIPTION OF BUSINESS
FutureOne, Inc. (f/k/a World's Fare, Inc.) (the "Company") is a successor by
reverse merger to FUTUREONE, INC., an Arizona corporation ("FutureOne AZ").
World's Fare, Inc. was incorporated March 22, 1994, and 1,000 shares were issued
to the founders in exchange for services. In May 1997, World's Fare, Inc.
approved a 500:1 stock split, which increased the outstanding shares to 500,000
and the authorized shares to 50,000,000 with a par value of $.001. On March 30,
1998, World's Fare, Inc. issued 6,049,490 shares of its common stock for all of
the outstanding shares of FutureOne AZ to consummate the reverse merger. On
August 6, 1998, World's Fare, Inc. changed its name to FutureOne, Inc.
FutureOne AZ is a successor by reverse merger to Networld.com Inc. FutureOne AZ
was incorporated December 26, 1996, and 100,000 shares were purchased by some of
the Founders to establish the business. In January 1997, FutureOne AZ issued
7,800,000 shares of its common stock for all of the outstanding shares of
Networld.com Inc.. Networld.com Inc. was incorporated November 25, 1995.
Networld.com Inc. had $437,703 in debt and loans at the time of the reverse
merger that were converted into 2,779,990 common shares of FutureOne AZ common
stock. The financial statements present Networld.com as the predecessor business
and the financial statements include its operations beginning October 1, 1996.
During 1999 and part of 2000, the Company and its subsidiaries were primarily a
communications business in four related, but distinct, industry segments: i)
Internet services, including personal and business dial up accounts, high speed
frame relay connections and web site design; ii) communication equipment sales;
iii) broadband communications engineering and construction services; and iv)
telecommunications and convergence technology, which was to include local and
long distance phone service and the Company's networked community concept known
as "NeighborComm", which was to include a virtual community (Intranet) within a
community and provide voice, video and high-speed Internet through a single
source. Beginning in June of 1999, the Company began a series of divestitures
and closing of unprofitable operations. The Company sold its retail computer
sales and services effective in June 1999, sold its Internet access business in
November 1999, closed its communications products division in May 2000, sold its
specialized horizontal drilling and boring company in June 2000, closed its
telecommunications division, abandoned its NeighborComm product in July, 2000
and sold its e-business and web design division in October 2000. The Company now
operates only its broadband engineering and construction (now called
"telecommunications services") subsidiary, OPEC CORP., which it acquired in July
1998.
F-6
<PAGE>
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
BASIS OF PRESENTATION
The accompanying financial statements have been prepared on a going concern
basis, which assumes continuity of operations and realization of assets and
liquidation of liabilities in the ordinary course of business. As shown in the
accompanying statement of operations, the Company incurred an aggregate net loss
of $10.0 million over the past two years and has negative working capital of
$5.0 million at September 30, 2000. To meet its immediate cash needs, the
Company has sold certain of its accounts receivable under factoring arrangements
and sought debt extensions and additional borrowings. The Company has also sold
shares of its common stock for $350,000 in September through December 2000. The
Company is also seeking additional financial resources through additional loans
and private equity placements.
The Company's ability to improve its financial position will be influenced by,
among other things, operating results and customer response to the Company's new
business model. The Company's ability to continue operations as a going concern
is dependent upon its ability to generate sufficient cash flow and earnings to
meet its obligations on a timely basis and to obtain additional financial
resources as may be required in the future.
Management of the Company has plans to expand business operations during 2001,
which will require more capital resources than are currently available to the
Company. The Company's business plans include pursuing additional debt and/or
equity financing with financial institutions or strategic partner(s).
In the event the Company is unable to obtain additional financial resources, the
Company plans to scale back the scope of its planned expansions and reduce costs
to better align existing sources of capital to finance the operations of the
Company with its operating costs.
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries, all of which are wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
F-7
<PAGE>
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
REVENUE AND COST RECOGNITION
Revenue from firm-fixed-price contracts is recognized using the percentage of
completion method. Under this method, revenues recognized on firm-fixed-price
contracts are measured by the percentage of costs incurred to date to total
estimated costs for each contract. Provision for estimated losses on uncompleted
contracts are made in the period in which such losses are determined.
Contract costs include all direct material and labor costs and those indirect
costs related to contract performance, such as indirect labor, supplies, tools,
repairs and depreciation. Changes in job performance, job conditions, and
estimated profitability, including those arising from contract penalty
provisions, and final contract settlements may result in revisions in costs and
income and are recognized in the period in which the revisions are determined.
Costs and estimated earnings in excess of billings on uncompleted contracts
represent costs incurred plus estimated earnings using the percentage of
completion method under firm-fixed-price contracts, in excess of billings on
those contracts. Billings in excess of costs and estimated earnings on
uncompleted contracts represent the excess of billings over costs incurred plus
estimated earnings on those contracts. Company billing amounts to a customer on
firm-fixed-price contracts are usually specified in the contract terms and
conditions and usually consider passage of time, achievement of certain project
milestones or completion of the project.
CASH AND CASH EQUIVALENTS
The Company considers all money market funds with a maturity of three months or
less at the date acquired to be cash equivalents.
SIGNIFICANT CUSTOMERS
For the years ended September 30, 2000 and 1999, the Company had contract
revenues from significant customers as a percent of total contract revenues as
follows:
YEAR ENDED SEPTEMBER 30
-----------------------
2000 1999
---- ----
Customer A 42% --%
Customer B 11 --
Customer C 11 --
Customer D -- 16
F-8
<PAGE>
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INVESTMENTS
Available-for-sale securities are stated at fair value with unrealized gains and
losses, net of tax, reported in other comprehensive income (loss). Realized
gains and losses and declines in value judged to be other-than-temporary on
available-for-sale securities are included in investment income.
ACCOUNTS RECEIVABLE
Construction services provided by the Company are performed primarily for
telecommunications companies, utility companies and land developers in the
Western United States. Accounts receivable are typically unsecured. The Company
performs on going credit evaluations of its customers and maintains reserves for
potential credit losses.
PROPERTY AND EQUIPMENT
Property and equipment is stated on the basis of cost. Depreciation is computed
principally by the straight-line method over the estimated useful lives of the
assets, generally five to seven years.
INTANGIBLE ASSETS
Intangible assets consist principally of goodwill and are capitalized and
amortized on a straight-line basis over the expected useful life of ten years.
The Company continually evaluates whether later events and circumstances have
occurred that indicate the remaining estimated useful life of goodwill may
warrant revision or that the remaining balance of goodwill may not be
recoverable. When factors indicate that goodwill should be evaluated for
possible impairment, the Company uses an estimate of the related business'
undiscounted net income over the remaining life of the goodwill in measuring
whether the goodwill is recoverable. At December 31, 2000 goodwill related
solely to the continuing construction operations, which has become the primary
focus of the Company.
F-9
<PAGE>
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INCOME TAXES
Income taxes have been provided using the liability method in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes."
LOSS PER SHARE
The Company computes loss per share in accordance with SFAS No. 128, "Earnings
per Share." Basic loss per common share amounts are based on the weighted
average common shares outstanding during the respective periods. Dilutive loss
per common share amounts are based on the weighted average common and dilutive
common equivalent shares outstanding during the respective periods. As of
September 30, 2000, 2,013,300 options, of which 1,566,245 are nonvested options,
and 4,037,478 fully vested warrants are outstanding, which do not have a
dilutive effect on loss per share given that they would be antidilutive to such
loss and have been excluded from the loss per share computation. The Company
also has certain debt securities, which are convertible into 880,227 shares of
common stock.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense was
approximately $13,000 and $18,000 for the years ended September 30, 2000 and
1999, respectively.
STOCK-BASED COMPENSATION
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation," and
accordingly, recognizes no compensation expense for employee stock option grants
made at fair value. Stock option grants to nonemployees are charged to expense
based upon the fair value of the options granted.
F-10
<PAGE>
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the consolidated balance sheets for cash and
cash equivalents, accounts receivable, accounts payable and accrued liabilities
approximate fair value because of the immediate or short-term maturity of these
financial instruments. The fair value of long-term debt is determined using
current applicable interest rates as of the balance sheet date and approximates
the carrying value of such debt because the underlying instruments are at
variable rates, which are repriced frequently.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments. This standard is effective for fiscal
periods beginning after June 15, 2000 and will be adopted by the Company as of
October 2001. It is not expected that the adoption of this standard, as amended,
will have an impact on the consolidated financial statements, nor require
additional footnote disclosure since the Company does not currently utilize
derivative instruments or participate in structured hedging activities.
In December 1999, the SEC staff issued Staff Accounting Bulletin 101, "Revenue
Recognition in Financial Statements," which provides guidance on revenue
recognition issues. The Company will be required to implement SAB101 in fiscal
2001. The interpretation is not expected to have a material impact on the
Company's financial position, results of operations or cash flows.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1999 financial statements to
conform with the 2000 presentation.
F-11
<PAGE>
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. ACQUISITIONS
FISCAL YEAR 1999 ACQUISITIONS
On November 12, 1998, the Company acquired the Internet services business of
GlobalKey, Inc. in a purchase business combination for consideration of 50,000
shares of the Company's common stock with a fair value at date of issuance of
$2.93 per share for a total consideration of $146,500. In January 1999, the
Internet access supplier terminated service to the Company because of prior
payment disputes with GlobalKey. The small number of customers acquired from
GlobalKey have been lost and the value of the customers and associated goodwill
is included in discontinued operations as of September 30, 1999.
On March 31, 1999, the Company acquired Ubiquity Design LLC - dba Rocket Science
Creative (full service graphic design and advertising agency) in a purchase
business combination for consideration of 100,000 shares of the Company's common
stock with a fair value at date of issuance of $2.302 per share or $230,200 in
the aggregate. The acquisition was accounted for as a purchase transaction. This
business was sold back to an original owner in October 2000.
On April 19, 1999, the Company acquired Abcon, Inc. (horizontal drilling and
boring company) in a purchase business combination for consideration of 94,118
shares of the Company's common stock with a fair value at date of issuance of
$2.302 per share or $216,660 in the aggregate. The acquisition was accounted for
as a purchase transaction. This business was sold back to an original owner in
June 2000.
On July 16, 1999, the Company acquired Progressive Media LLC (which provides
web-based animation interactive CD-ROM design, digital video production and
postproduction, music and sound production, and commercial photography) in a
purchase business combination for consideration of 67,605 shares of the
Company's common stock with a fair value at date of issuance of $2.302 per share
or $155,628 in the aggregate. The acquisition was accounted for as a purchase
transaction. This business was sold as part of the sale of the Company's
e-business and web site development division in October 2000.
On August 11, 1999, the Company acquired AMCOM LLC (Competitive Local Exchange
Carrier or "CLEC") in a purchase business combination for consideration of
121,212 shares of the Company's common stock with a fair value at date of
issuance of $2.302 per share or $279,030 in the aggregate. The acquisition was
accounted for as a purchase transaction. This business operation was
discontinued in August 2000.
For all acquisitions discussed above, the acquired tangible and identified
intangible assets were recorded at their estimated fair values at the date of
acquisition with any excess purchase price reflected as goodwill. Fair values
F-12
<PAGE>
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. ACQUISITIONS (CONTINUED)
were determined based upon the consideration paid, which consists typically of
common stock and/or cash. The fair value of the Company's common stock is
typically based upon recent third party transaction sales for cash. Purchase
accounting values for all acquisitions are assigned on a preliminary basis and
are subject to adjustment when final information as to the fair values of the
net assets acquired is available. All of the unamortized goodwill associated
with these, and prior, acquisitions has been included as a loss on discontinued
operations or a cost of assets sold when the operation was closed, sold or
determined to be a discontinued operation.
A summary of the purchase price allocations for these acquisitions is as
follows:
<TABLE>
<CAPTION>
TANGIBLE LESS: LESS: NET CASH
ASSETS CUSTOMER CLEC LIABILITIES COMMON PAID
ACQUIRED GOODWILL LISTS CERTIFICATION ASSUMED STOCK ISSUED (RECEIVED)
-------- -------- ----- ------------- ------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
FISCAL YEAR 1999
ACQUISITIONS
GlobalKey $ 20,000 $126,500 $ -- $ -- $ -- $ (146,500) $ --
Ubiquity 3,000 227,698 -- -- -- (230,200) 498
Abcon 723,931 101,140 -- -- (634,311) (216,660) (25,900)
Progressive Media 42,247 146,561 -- -- (33,629) (155,628) (449)
AMCOM -- -- -- 279,030 -- (279,030) --
-------- -------- ----- --------- --------- ----------- --------
$789,178 $601,899 $ -- $ 279,030 $(667,940) $(1,028,018) $(25,851)
======== ======== ===== ========= ========= =========== ========
</TABLE>
The pro forma operating results for 1999, assuming the 1999 acquisitions had
taken place at the beginning of the year, would be the same as the operating
results reflected in the 1999 statement of operations given that each of the
acquired businesses became discontinued operations during 2000. There were no
acquisitions in 2000.
F-13
<PAGE>
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. DISCONTINUED OPERATIONS
PRIORITY SYSTEMS, INC. - RETAIL COMPUTER SALES
In June of 1999, management of the Company determined that it was no longer
economically feasible to remain in the retail computer equipment sales and
service industry. Therefore, effective June 15, 1999 the Company sold PRIORITY
SYSTEMS, INC. back to the former owner of the company in exchange for the return
of 108,850 shares of the Company's common stock with a fair value of $250,573
and a note for $50,000. The Company no longer sells computer equipment.
Accordingly, the retail computer sales business has been accounted for as a
discontinued operation in the accompanying consolidated financial statements for
all periods presented. The Company realized a loss on the sale of approximately
$317,000.
NEIGHBORCOMM, INC. - PRIMESERV VIRTUAL TELEPHONE SERVICE
On August 10, 1999, the Company adopted a plan to sell and signed a letter of
intent to sell the assets and customer list of its PrimeServ operating division.
On December 6, 1999, the Company closed the sale for consideration of $17,800
cash and a $30,000 note receivable. Accordingly, the PrimeServ business has been
accounted for as a discontinued operation in the accompanying consolidated
financial statements for all periods presented. The Company realized a loss on
the sale of approximately $66,600.
NEIGHBORCOMM, INC. - INTERNET ACCESS BUSINESS
On November 12, 1998, the Company acquired the Internet services business of
GlobalKey, Inc. (GlobalKey") in a purchase business combination for
consideration of 50,000 shares of the Company's common stock with a fair value
at date of issuance of $2.93 per share for a total consideration of $146,500.
The business was then transferred to the Company's NeighborComm, Inc.
subsidiary. In January 1999, the Internet access supplier terminated service to
the Company because of prior payment disputes with GlobalKey. The customers
acquired from GlobalKey have been lost and the unamortized value of the customer
list and goodwill acquired from GlobalKey has been charged as an expense
totaling $120,175, which is included in discontinued operations as of September
30, 1999.
On November 19, 1999, the Company sold its Internet access business, including
all of its Internet access customers in Phoenix, Flagstaff, Tucson, Lake Havasu
City, Prescott, Florence, and Payson, Arizona and all of the equipment related
to providing Internet access to the Company's current Internet subscribers to
Internet Commerce & Communications, Inc. (formerly RMI.NET, Inc.) ("ICCX") for
ICCX common stock valued at approximately $2.75 million on the closing date of
the transaction. Under terms of the Asset Purchase Agreement (the "ICCX
Agreement"), 50 percent of the stock was immediately available for sale, 20
percent was to be available for sale six months after the transaction, 20
percent was to be available for sale one year after the transaction and 10
F-14
<PAGE>
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. DISCONTINUED OPERATIONS (CONTINUED)
percent is being held in escrow until May 19, 2001 to cover any adverse claim
that may be made against the acquired assets. The Company has sold approximately
50 percent of the ICCX common stock for approximately $1.6 million.
Additionally, 63,052, shares of ICCX common stock have been exchanged for full
satisfaction of a $500,000 convertible note and 43,004 shares have been
exchanged for 184,000 shares of the Company's Common Stock under the severance
agreement described in Note 14 regarding Kendall Q. Northern.
Under terms of the ICCX Agreement, the Company agreed to fully satisfy
outstanding amounts due on certain equipment leases related to the acquired
assets by January 18, 2000. At September 30, 2000, the Company had not fully
satisfied the outstanding amounts due on these equipment leases. As of November
30, 2000, one of the leases has been paid in full, one additional lease is
current and two other leases are current under a revised payment schedule agreed
to by the lessor. The remaining unpaid balance at November 30, 2000 was
approximately $292,000.
Pursuant to the terms of the ICCX Agreement, ICCX is under no obligation to
deliver 10 percent of the total shares, which are held in escrow if the Company
does not satisfy such outstanding liabilities in a timely manner. In addition,
if ICCX must assume such equipment leases related to the acquired assets, then
the Company is obligated to return an additional number of shares of ICCX common
stock so that the total of such shares and the final disbursement shares and
escrow shares withheld by ICCX as set forth above equals two times the total
amount due on such liabilities. The Company has made payments to partially
satisfy the equipment leases but continues to owe additional amounts as of
December 31, 2000.
Accordingly, the Internet access business is accounted for as a discontinued
operation in the accompanying consolidated financial statements for all periods
presented. The Company realized a gain on the sale of $1,246,000 in fiscal 2000.
FUTUREONE AZ - COMMUNICATIONS EQUIPMENT SALES
In May 2000 the Company closed its Communication Products Division. The Company
terminated all of the employees of this division and returned its inventory to
the manufacturer. The Company will no longer be a stocking distributor of
communication products. Accordingly, the communications equipment sales business
has been accounted for as a discontinued operation in the accompanying
consolidated financial statements for all periods presented. The Company
realized a loss on the discontinuance of approximately $245,000 in fiscal 2000.
F-15
<PAGE>
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. DISCONTINUED OPERATIONS (CONTINUED)
NEIGHBORCOMM, INC. - CONVERGENCE TECHNOLOGY & COMMUNICATIONS
In August 2000, the Company abandoned its telecommunications division and the
NeighborComm services that it was developing. The Company no longer conducts
telecommunication and convergence technology operations. Accordingly, the
telecommunications and convergence technology segment has been accounted for as
a discontinued operation in the accompanying consolidated financial statements
for all periods presented. All of the costs associated with this division
including development costs, telecommunications infrastructure and licenses have
been expensed and the Company realized a loss on the discontinuance of
approximately $305,000.
ROCKET SCIENCE - E-COMMERCE
On October 6, 2000, the Company sold its e-commerce business division back to
one of its original owners for $75,000 cash and the assumption of approximately
$68,000 in liabilities. The Company has also retained approximately $60,000 in
accounts receivable. The accrued loss of $284,000 on the transaction has been
included as an accrued loss on disposal under discontinued operations as of
September 30, 2000.
The following represents the combined results of operations of the Company's
discontinued operations:
YEAR ENDED SEPTEMBER 30
----------------------------
2000 1999
----------- -----------
Revenues $ 2,199,880 $ 4,069,074
Cost of sales (1,577,939) (4,184,401)
General and administrative expense (861,864) (1,581,699)
Depreciation and amortization expense (198,016) (520,000)
Interest expense (7,440) (30,271)
Loss/on disposal of assets (78,233) --
Unusual item -- (436,895)
----------- -----------
Net loss $ (523,612) $(2,684,192)
=========== ===========
Costs and expenses, including interest, have been allocated to discontinued
operations for all applicable periods based on management's estimates of those
costs directly related to the discontinued operations.
F-16
<PAGE>
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. ACCOUNTS RECEIVABLE - PURCHASE AGREEMENT
On March 24, 2000, the Company entered into an Account Purchase Agreement with a
commercial bank. The Agreement allows for acceptable accounts receivable to be
sold and assigned to the Bank. The Bank then may hold back payment of an amount
equal to 20 percent of the gross face amount sold. The Company has included
$133,000 in its September 30, 2000 accounts receivable balance representing the
hold back of accounts receivable sold for which payment has not been received.
Under the arrangement, the Company pays a fee for the sale in the form of a
discount on the sale proceeds, which approximates a 24 percent annual interest
rate. The Company sells only a portion of its accounts receivable and collects
the remainder in the ordinary course of business. At September 30, 2000,
uncollected receivables, which have been sold subject to this agreement, would
have represented approximately 25 percent of accounts receivable had they not
been sold.
5. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings on uncompleted contracts consists of the following:
SEPTEMBER 30
----------------------------
2000 1999
----------- -----------
Costs incurred on uncompleted contracts $ 2,070,472 $ 2,897,337
Estimated earnings 306,456 547,758
----------- -----------
2,376,928 3,445,095
Less billings to date (2,012,669) (2,794,408)
----------- -----------
$ 364,259 $ 650,687
=========== ===========
Included in the accompanying balance sheet under the following captions:
SEPTEMBER 30
----------------------------
2000 1999
----------- -----------
Costs and estimated earnings in excess
of billings on uncompleted contracts $ 599,497 $ 717,548
Billings in excess of costs and estimated
earnings on uncompleted contracts (235,238) (66,861)
----------- -----------
$ 364,259 $ 650,687
=========== ===========
F-17
<PAGE>
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
SEPTEMBER 30
-----------------------------
2000 1999
----------- -----------
Furniture and fixtures $ 88,506 $ 138,492
Computers and other equipment 116,367 130,717
Construction equipment 1,992,742 2,708,842
Software 40,175 117,022
Vehicles 1,345,237 1,046,432
Leasehold improvements 26,942 59,092
----------- -----------
3,609,969 4,200,597
Less accumulated depreciation
and amortization (957,258) (613,288)
----------- -----------
$ 2,652,711 $ 3,587,309
=========== ===========
7. INTANGIBLE ASSETS
Intangible assets consist of the following:
SEPTEMBER 30
-----------------------------
2000 1999
----------- -----------
Goodwill $ 6,139,123 $ 6,240,314
Debt issuance costs 211,500 158,333
----------- -----------
6,350,623 6,398,647
Less amortization (1,477,347) (768,574)
----------- -----------
$ 4,873,276 $ 5,630,073
=========== ===========
F-18
<PAGE>
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. NOTES PAYABLE AND LONG TERM DEBT
<TABLE>
<CAPTION>
SEPTEMBER 30
--------------------------
2000 1999
---------- ----------
<S> <C> <C>
15 percent, note payable, collateralized by accounts receivable, with interest only
payable monthly until September 2001, when principal and unpaid interest are due.
Principal and accrued interest is convertible to a maximum of 444,444 shares of
Common Stock of the Company, at the option of the holder at $1.00 per share $1,000,000 $1,000,000
Various notes payable to an auto manufacturer's credit corporation bearing interest
at rates ranging from 8.25 percent to 9.99 percent and having maturities ranging
from 18 to 56 months. Each note is collateralized by a specific vehicle 474,479 410,667
8.73 percent note payable to a bank, collateralized by a specific list of equipment,
principal and interest payable monthly until August 2002 when all principal and
interest is due and payable 440,811 848,185
Various notes payable to an equipment manufacturer's credit corporation bearing
interest at rates ranging from 8.9 percent to 10.54 percent and having maturities
ranging from 3 to 25 months. Each note is collateralized by specific equipment 286,784 679,807
15 percent note payable, unsecured all due and payable October 9, 2000. Principal and
accrued interest is convertible to shares of Common Stock of the Company, at the
option of the holder at rate of $1.00 per share 250,000 --
Note payable from an equipment manufacturer, non-interest bearing and due November
2000 200,000 --
Various notes payable to a finance company bearing interest at rates ranging from
7.88 percent to 9.0 percent and having maturities ranging from 32 to 57 months.
Each loan is collateralized by specific pieces of vehicles and equipment 131,911 212,918
8.9 percent note payable to an equipment manufacturer's credit corporation,
collateralized by a specific piece of equipment, principal and interest payable
monthly until February 2003 when all remaining principal and interest is due and
payable 87,327 --
</TABLE>
F-19
<PAGE>
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. NOTES PAYABLE AND LONG TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30
---------------------------
2000 1999
----------- -----------
<S> <C> <C>
14 percent note payable, unsecured, all due and payable September 1, 2000 and
currently past due. Principal and accrued interest is convertible to shares of
Common Stock of the Company, at the option of the holder at a rate of $1.00 per
share $ 70,000 $ --
21.0 percent, note payable to a finance company, collateralized by a specific piece
of equipment, principal and interest payable monthly until October 2003 when all
remaining principal and interest is due and payable 66,104 --
8 percent note payable, collateralized by accounts receivable of the Company's
e-Business Division, all due and payable July 31, 2001 Principal and accrued
interest is payable at the rate of $5,000 per month 64,800 --
15 percent note payable, unsecured, all due and payable June 28, 2000 and currently
past due. Principal and accrued interest is convertible to shares of Common Stock
of the Company, at the option of the holder at a rate of $1.00 per share 50,000 --
Notes payable to an equipment manufacturer's credit corporation bearing interest at
rates ranging from 20.75 to 23.18 percent and having maturities ranging from 2 to 9
months. Each note is collateralized by a specific piece of equipment 38,192 52,000
Notes payable to an equipment manufacturer's credit corporation and others assumed
by ABCON in 2000 with the sale of the related business -- 326,384
Note payable, unsecured, noninterest-bearing note, due on demand -- 150,000
Other 141,671 84,503
----------- -----------
3,302,079 3,764,464
Less current portion (2,693,352) (1,160,616)
----------- -----------
$ 608,727 $ 2,603,848
=========== ===========
</TABLE>
F-20
<PAGE>
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. NOTES PAYABLE AND LONG TERM DEBT (CONTINUED)
Annual maturities of notes payable and long-term debt for the five years
succeeding September 30, 2000 are $2,693,352 in 2001, $326,898 in 2002, $175,731
in 2003, $89,931 in 2004 and $16,167 in 2005. Interest payments were $794,469
and $240,235 for the years ended September 30, 2000 and 1999, respectively.
The Company has not paid certain promissory notes, totaling $434,800 by the
stated maturity dates nor has it received from the holder any notice of
conversion to Common Stock. However, the Company is in the process of
negotiating extended terms on these notes. The Company is also in default on
certain of its other loan agreements and has classified such amounts as current.
The Company had a $480,000 revolving line of credit agreement with a financial
institution dated August 3, 1998, and expiring on an extended due date of
December 31, 2000. Interest is payable monthly and accrues at 1.25 percent over
prime per annum, 10.75 percent at September 30, 2000. The line is collateralized
by all business assets of the Company's OPEC CORP. subsidiary including, but not
limited to, cash, accounts receivable, property and equipment, and general
intangibles. At September 30, 2000, assets collateralized under the line of
credit included cash of $406,689, accounts receivable of $2,069,333, and
property and equipment of $2,503,959. The terms of the note require that the
Company pay regular monthly payments of accrued interest, with payment of all
outstanding principal plus all unpaid accrued interest due at maturity. The
balance on the line-of-credit was $455,000 as of September 30, 2000. Subsequent
to year-end the balance was paid down to $40,000 by December 31, 2000.
9. LEASES
The Company has equipment under capital leases. The Company also leases office
facilities and equipment under noncancelable operating leases that expire in
various years through June 2003.
Total rental expense for all operating leases was approximately $334,000 and
$158,000 for the years ended September 30, 2000 and 1999, respectively.
Property and equipment includes the following amounts for leases that have been
capitalized:
SEPTEMBER 30
------------------------
2000 1999
--------- ---------
Equipment $ 576,147 $ 141,196
Less accumulated amortization (52,435) (15,422)
--------- ---------
$ 523,712 $ 125,774
========= =========
F-21
<PAGE>
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. LEASES (CONTINUED)
Amortization of leased assets is included in depreciation and amortization
expense.
Future minimum payments under capital leases (principal portion) and
noncancelable operating leases with initial terms of one year or more consisted
of the following at September 30, 2000:
<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING LEASES
-------------------------- -------------------------
CONTINUING DISCONTINUED CONTINUING DISCONTINUED
OPERATIONS OPERATIONS OPERATIONS OPERATIONS
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
2001 $ 310,210 $ 7,503 $419,725 $27,635
2002 211,054 5,187 51,133 --
2003 141,776 -- 4,320 --
Thereafter -- -- -- --
--------- ------- -------- -------
Total minimum lease payments 663,040 12,690 $475,178 $27,635
======== =======
Less current portion (310,210) (7,503)
--------- -------
$ 352,830 $ 5,187
========= =======
</TABLE>
In connection with the sale of NeighborComm, Inc.'s Internet access business and
the related ICCX Agreement, the Company agreed to fully satisfy outstanding
amounts due on certain equipment leases related to the acquired assets by
January 18, 2000. To date, the Company has not fully satisfied the outstanding
amounts due on these equipment leases. As of November 30, 2000, one of the
leases has been paid in full, one additional operating lease is current and two
other capital leases are current under a revised payment schedule agreed to by
the lessor, but they have not been paid in full as required by the Agreement.
The related payment obligations, which total $48,654 and $103,168, respectively,
are reflected in the lease payment schedule above.
In June 1997, the Company entered into the first of three leasing arrangements
with El Camino Resources, Ltd. Under the terms of the first lease, El Camino
provided $150,000 of available credit. This lease for the equipment requires
payments of $5,690 per month, for a term of 30 months, and includes a buyout
provision equal to the fair market value of the leased equipment at the end of
the lease, but not to exceed 20 percent of original cost. In conjunction with
F-22
<PAGE>
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. LEASES (CONTINUED)
the lease arrangement, the Company issued 250,000 shares of the Company's common
stock to El Camino. This lease agreement was closed and paid in full in December
2000.
During the year ended September 30, 1999, the Company entered into two
additional leases with El Camino. The first lease for $150,000 requires payments
of $5,406 per month for a term of 30 months, and includes a buyout provision
equal to the fair market value of the leased equipment at the end of the lease,
but not to exceed 20 percent of the original cost. The second lease with El
Camino for $163,000 requires payments of $6,179 per month for a term of 30
months, and includes a buyout provision equal to the fair market value of the
leased equipment at the end of the lease, but not to exceed 20 percent of
original cost.
One or more of the equipment lease agreements with El Camino were also
personally guaranteed by former executives of the Company, Earl J. Cook and
Kendall Q. Northern. Should the lessor bring any claim against either one or
both Mr. Cook or Mr. Northern as a result of their respective guarantees, the
Company may have indemnification and/or hold harmless obligations relative to
any such claim or liability and an obligation to advance expenses, including
attorneys fees, to each individual in accordance with the terms of Nevada law,
the Company's By-Laws, the employment agreements and/or severance agreements
with Mr. Cook and Mr. Northern. As of December 31, 2000, the Company is current
in its payments to the lessor and, to the Company's knowledge, no claim has been
brought against the Company or either guarantor relating to any of the equipment
lease agreements.
F-23
<PAGE>
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. INCOME TAXES
Deferred tax assets reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax asset and liabilities are as follows:
SEPTEMBER 30
----------------------------
2000 1999
----------- -----------
DEFERRED TAX ASSETS:
Accrued expenses $ -- $ 32,900
Fixed asset basis differences 20,000 20,000
Allowance for doubtful accounts 14,000 56,000
Inventory allowance -- 121,600
Costs in excess of billings 17,000 16,700
Startup costs -- 4,500
Unrealized loss on investment 71,800 --
Net operating loss carryforwards 3,590,000 1,774,900
Deductible goodwill amortization 136,000 72,300
Other 53,000 38,400
----------- -----------
Deferred tax assets 3,901,800 2,137,300
Valuation allowance (3,872,800) (2,104,600)
----------- -----------
Net deferred tax assets 29,000 32,700
Deferred tax liabilities:
Customer lists -- (12,000)
Other (29,000) (20,700)
----------- -----------
Net deferred tax asset/(liability) $ -- $ --
=========== ===========
At September 30, 2000, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $8.8 million that expire
in the years 2011 through 2019 for federal taxes purposes and will begin to
expire in 2001 for state tax purposes. As a result of common stock issued in
connection with private placements and prior year acquisitions, the utilization
of the net operating loss carryforwards is subject to annual limitations in
accordance with Internal Revenue Code Section 382. The ultimate utilization of
the net operating loss carryforwards is also subject to future profitability of
the Company.
The valuation allowance increased $1.8 million for the year ended September 30,
2000. The increase is principally due to increases in deferred tax assets
related to net operating loss carryforwards.
F-24
<PAGE>
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. STOCKHOLDERS' EQUITY
During the year ended September 30, 1998, the Company issued 410,812 warrants to
purchase common stock at $2.93 per share to two of its officers for past
services. The warrants expire in September of 2005 and were immediately vested.
On November 12, 1998, the Company issued a total of 50,000 shares of common
stock in connection with the Company's acquisition of certain assets of Global
Key, Inc. The shares were determined to have a fair value of $2.93 per share at
the date of issuance and an aggregate value of $146,500.
On January 15, 1999, the Company sold 960,000 shares of the Company's common
stock in a private placement transaction to an accredited investor at $2.302 per
share, which resulted in gross proceeds of $2,210,000. The Company incurred
$240,750 of offering expenses relating to commissions and expenses. The
transaction was consummated as part of the Blackwater Stock Purchase Agreement
(entered into in July 1998 with Blackwater Capital Partners, L.P. and Blackwater
Capital Group, L.L.C. to assist the company in raising equity). Prior to and in
conjunction with the transaction, Blackwater Capital received 650,000 warrants
to purchase common stock of which they assigned 400,000 of their warrants earned
under the Agreement to the Investor and 100,000 warrants to the Broker. The
warrants are at $1.00 per share and expire July 2005.
On February 28, 1999 the holder of a convertible promissory note for $25,000
elected to convert the note to 41,750 shares of common stock.
On March 31, 1999, the Company issued a total of 100,000 shares of common stock
in connection with the Company's acquisition of Ubiquity Design LLC (dba Rocket
Science Creative). The shares were determined to have a fair value of $2.302 per
share at the date of issuance and an aggregate value of $230,200.
On April 19, 1999, the Company issued a total of 94,118 shares of common stock
in connection with the Company's acquisition of Abcon, Inc. The shares were
determined to have a fair value of $2.302 per share at the date of issuance and
an aggregate value of $216,660.
In May 1999, two individuals exercised warrants that were granted under the
Company's Private Placement Memorandum of November 26, 1997 and purchased a
total of 10,000 shares of common stock at $3 per share.
Effective June 15, 1999 the Company sold PRIORITY SYSTEMS, INC., which was
acquired by the Company on September 29, 1998, back to the original owner. The
consideration paid was to return 108,850 shares of the Company's common stock
valued at $ 2.302 per share and a note for $50,000. The Company considers the
returned stock to be treasury stock and has recorded a loss on the transaction.
F-25
<PAGE>
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. STOCKHOLDERS' EQUITY (CONTINUED)
On July 16, 1999, the Company issued a total of 67,605 shares of common stock in
connection with the Company's acquisition of Progressive Media LLC. The shares
were determined to have a fair value of $2.302 per share at the date of issuance
and an aggregate value of $155,628.
On August 11, 1999, the Company issued a total of 121,212 shares of common stock
in connection with the Company's acquisition of AMCOM LLC. The shares were
determined to have a fair value of $2.302 per share at the date of issuance and
an aggregate value of $279,030.
On August 23, 1999, the Company sold 200,000 shares of the Company's common
stock in a private placement transaction to an accredited investor at $1.25 per
share, which resulted in net proceeds of $250,000. The transaction was
consummated as part of the Blackwater Stock Purchase Agreement.
During the year ended September 30, 1999, the Company issued 244,999 shares of
common stock to employees pursuant to employment contracts or as employment
bonuses. Share values at dates of issuance ranged from $1.25 to $2.93 and had a
total value of $616,307. Compensation expense is being recognized based on the
vesting periods of the stock issued. During the period, 56,500 non-vested
shares, previously issued to employees, were canceled when they terminated.
Share value at the date of issuance ranged from $1.25 to $2.302 and the canceled
shares had an unamortized value of $74,833.
During the year ended September 30, 1999, the Company issued 2,500 shares of the
Company's common stock to an employment agency for services. Share value at
dates of issuance was $2.302, a total value of $5,756. Amounts were recorded as
consulting expense as service was performed.
In October 1999, the Company issued a warrant to purchase 250,000 shares of
common stock at $1.00 per share and a promissory note in consideration for
$250,000. The note had an original maturity of February 1, 1999 and it was
extended until August 7, 2000 by amending the terms to make it a convertible
note, at the sole option of the holder, to convert principal and accrued
interest into common stock of the Company at $1.00 per share.
Effective as of October 22, 1999, the Company issued a warrant to purchase
500,000 shares of common stock at $0.75 per share and a promissory note
convertible into 500,000 shares of common stock in consideration for $500,000.
The note was not converted and was subsequently paid in March 2000. In addition
the Company issued a warrant to purchase 100,000 shares of the Company's common
stock at $0.75 per share, as a partial commission, to the firm that facilitated
the loan. Debt issuance costs were recorded for the fair value of the equity
instruments associated with the borrowing for this transaction as well as
similar subsequent debt transactions with warrants.
F-26
<PAGE>
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. STOCKHOLDERS' EQUITY (CONTINUED)
On December 1, 1999, the Company issued 20,000 shares of common stock with a
value of $25,000 to a consultant as compensation for assisting in the Company's
sale of its Internet access business
Effective as of December 28, 1999, the Company issued a warrant to purchase
16,666 shares of common stock at $1.00 per share and a promissory note
convertible into 50,000 shares of common stock, at $1.00 per share in
consideration for $50,000.
Effective January 1, 2000, the Company issued a warrant to purchase 70,000
shares of common stock at $1.00 per share to a member of the Company's Board of
Directors for such director's service to the Company. Subsequently, the Company
issued 70,000 identical warrants in each of the months of February through May
2000 to that employee/board member for services. The Company also issued 490,000
identical warrants and a $70,000 convertible note to the same individual, which
can be converted to shares of the Company's common stock at $1.00 per share in
June 2000 as part of the consideration for services rendered pursuant to a
severance agreement.
In March 2000 the Company purchased 184,000 shares of its common stock from
Kendall Q. Northern, the Company's former chief executive officer, pursuant to
the terms of the Severance Agreement with Mr. Northern. The Company has recorded
the amount as treasury stock given that the repurchase amount was not in excess
of estimated fair value at that date.
In April 2000 the Company issued a warrant to purchase 100,000 shares of the
Company's common stock, at $3.00 per share, to settle a claim from a financial
consulting firm. Based upon the fair value of the common stock at that time, the
value of the warrant was minimal.
In June 2000 the Company issued 330,000 shares of common stock with a value of
$66,000 to Blackwater Capital in exchange for a termination of the Stock
Purchase Agreement between Blackwater Capital and the Company and a new
financial consulting agreement with Blackwater Capital. In addition, the Company
agreed to immediately vest 1,050,000 shares of the warrant previously issued to
Blackwater Capital in 1998. The accelerated vesting resulted in no expense as of
September 30, 2000 given that the exercise price was significantly in excess of
the fair value of the common stock thereby resulting in a minimal value to the
warrants.
During August and September 2000, the Company issued warrants to purchase
120,000 shares of the Company's common stock at $1.00 per share to holders of a
secured note issued by the Company in exchange for the Holders subordinating
certain of their collateral to other financing obtained by the Company. The fair
value of the warrants was minimal.
On September 1, 2000, the Company entered a subscription agreement to sell
2,500,000 shares of common stock for an aggregate amount of $250,000. As of
September 30, 2000, the Company has received $100,000 and had recorded a
subscription receivable of $150,000.
F-27
<PAGE>
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. STOCKHOLDERS' EQUITY (CONTINUED)
During the fiscal year ended September 30, 2000, the Company has issued a total
of 134,500 shares of common stock with a fair value of $53,125 to employees
pursuant to employment contracts or as employment bonuses. These awards were
made with specific vesting restrictions of up to three years. Compensation
expense is being recognized based on the vesting periods of the stock issued.
During the period, 135,877 non-vested shares with a remaining balance of
$258,608, previously issued to employees, were canceled when they terminated. In
addition, the Company issued a total of 7,500 shares in May 2000 with a fair
value of $1,500 as a final commission payment on the sale of substantially all
of the assets relating to the Company's Internet access business.
As of September 30, 2000 none of the warrants previously issued by the Company
have been exercised.
12. STOCK OPTION PLAN
On April 30, 1999, the Board of Directors of the Company adopted the FutureOne,
Inc. 1999 Key Employee Stock Option Plan ("the Plan"), which authorizes options,
which may be issued to employees to purchase up to 2,500,000 shares of the
Company's Common Stock. Options granted under the Plan may be incentive stock
options or nonstatutory stock options. Options vest over a three-year period
with one-third becoming vested annually one year from the date of the grant,
except for certain options granted in 2000, which vest at annual rates of 20
percent, 30 percent and 50 percent. All options expire ten years after the date
of grant. Under the terms of the Plan, Incentive Stock Options granted to
executives owning more than 10 percent of the Company's stock shall not be
exercisable after the expiration of five years from the date of grant and must
be issued at 110 percent of the price granted to other employees.
Under the 1999 Stock Option Plan, the Company may grant options that are
intended to qualify as Incentive Stock Options within the meaning of Section 422
of the Internal Revenue Code of 1986, as amended, or options not intended to
qualify as Incentive Stock Options. The Incentive Stock Options are not
transferable except by will or the laws of descent and distribution.
Non-Statutory Stock Options may be transferred pursuant to terms and conditions
established by the Board.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25) and related Interpretations in
accounting for its employee stock options. As discussed below, the alternative
fair value accounting provided for under SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, SFAS No. 123 requires use of option valuation models
that were not developed for use in valuing employee stock options. Under APB 25,
no compensation expense is recognized for options issued with an exercise price
which equal the market price of the underlying stock on the date of grant.
F-28
<PAGE>
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. STOCK OPTION PLAN (CONTINUED)
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of that Statement. The fair value
for those options was estimated at the date of grant using a minimum value
pricing model with the following weighted-average assumptions for the periods
ending September 30, 2000 and 1999:
Expected life of the award 2 - 3 years
Dividend yield 0 percent
Risk-free interest rate 6 percent
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The pro forma effect
of SFAS No. 123 was to increase the loss from operations for the years ended
September 30, 2000 and 1999 by $327,000 and $85,000, respectively.
Option activity under the 1999 Plan during the years ended September 30, 2000
and 1999 is as follows:
OUTSTANDING OPTIONS
SHARES -----------------------------
AVAILABLE PRICE
UNDER OPTION SHARES RANGE
Available at April 30, 1999 2,500,000 -- $ --
Granted (1,805,050) 1,805,050 4.50 - 4.95
Forfeited 191,500 (191,500) 4.50
---------- ---------- -------------
Balance at September 30, 1999 886,450 1,613,550 4.50 - 4.95
Granted (722,000) 722,000 0.20 - 2.6875
Forfeited 322,250 (322,250) 1.00 - 4.50
---------- ---------- -------------
Balance at September 30, 2000 486,700 2,013,300 $0.20 - 4.95
========== ========== =============
Exercisable at September 30, 2000 447,055 $0.50 - 4.95
========== =============
The weighted-average fair value of options granted during the year ended
September 30, 2000 and 1999 was $0.58 and $0.06, respectively.
F-29
<PAGE>
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. STOCK OPTION PLAN (CONTINUED)
The following table summarizes information about stock options under the 1999
Plan outstanding at September 30, 2000:
OPTIONS OUTSTANDING
-------------------------------------
OPTIONS EXERCISABLE
REMAINING NUMBER OUTSTANDING
NUMBER OUTSTANDING AT CONTRACTUAL AT SEPTEMBER
EXERCISE PRICE SEPTEMBER 30, 2000 LIFE (YEARS) 30, 2000
-------------- ------------------ ------------ --------
$4.95 766,000 3.83 255,308
$4.50 524,600 8.83 174,849
$2.6875 10,000 9.50 --
$2.0625 2,000 9.58 --
$1.00 60,000 9.20 --
$0.50 50,700 8.83 16,898
$0.20 600,000 9.92 --
--------- -------
2,013,300 447,055
========= =======
13. COMMITMENTS AND CONTINGENCIES
The Company is subject to legal proceedings, which arise out of the ordinary
course of business. Based upon advice from outside legal counsel, management is
of the opinion that these matters will have no material effect on the Company's
consolidated financial statements taken as a whole.
The Company has incurred substantial current debt, including accounts payable,
during the past two years, because of its substantial unprofitable operations.
The Company is now negotiating with lenders and vendors to accept discounted
and/or extended payment terms. The Company is also seeking long-term loans and
equity investment to retire these debts. If the Company is not successful in
obtaining such funding, the Company intends to pay these liabilities over the
next two years out of its cash flow from existing operations. There is, however,
no guarantee that the Company will be successful in obtaining funding to pay
these liabilities or that lenders and vendors will accept deferred payment terms
and, consequently, lenders and vendors may bring claims against the Company
seeking immediate payment of their liabilities.
F-30
<PAGE>
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. RELATED PARTY TRANSACTIONS
As of September 30, 2000 and 1999, the stockholders of the Company have made
loans to the Company as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30
-----------------------
2000 1999
-------- --------
<S> <C> <C>
Notes payable that bear no interest $ 2,450 $ 7,450
Two notes payable that bear interest at the rate of
8 percent with interest payable annually and principal
payable based on payments received by the Company on a
stockholder loan to OPEC CORP., due March 12, 2001 164,000 164,000
-------- --------
$166,450 $171,450
======== ========
</TABLE>
As of September 30, 2000 and 1999, interest in the amount of $20,385 and $7,265
respectively, was accrued and unpaid. Interest expense for the years ended
September 30, 2000 and 1999 was $13,120 and $7,265, respectively.
The Company assumed a lease for office space and a construction yard from a
partnership controlled by an individual, who became a major stockholder in the
Company when the Company acquired his corporation. The lease currently requires
payments of $5,500 per month and expires January 1, 2001, but automatically
renews for annual periods unless terminated by either party. As of September 30,
2000 and 1999, $46,500 and $36,000, respectively, of rental expense is included
in the consolidated statement of operations from this lease.
On November 23, 1999, the Company entered into a Severance Agreement with
Kendall Q. Northern under which the Company's employment contract with Mr.
Northern was terminated by mutual consent, and Mr. Northern resigned as an
officer and director of the Company, and all of its affiliates, and agreed not
to compete with the Company in Arizona and Colorado for a period of one year. In
consideration for execution of the Severance Agreement, the Company agreed to
immediately pay a one-time sum of $50,000 and a one-year separation payment of
$100,000 to be paid in equal monthly installments over approximately one year.
In addition, the Company is further obligated to pay for Mr. Northern's auto
rental, auto insurance and medical insurance for one year totaling $18,500. The
Company also allowed Mr. Northern to (i) retain certain Company property already
in his possession valued at approximately $17,500 and (ii) exchange 200,000
shares of the Company's Common Stock owned by Mr. Northern for 47,031 shares of
ICCX common stock obtained by the Company from the sale of substantially all of
its assets relating to its Internet access business. Upon mutual agreement, the
Company acquired 184,000 of the Company's Common Stock from Mr. Northern for
43,004 shares of ICCX common stock. The Company has not yet paid the last seven
monthly installments, totaling $58,331, which was to be paid in May through
November of 2000.
F-31
<PAGE>
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. RELATED PARTY TRANSACTIONS (CONTINUED)
On or about May 10, 2000 the Company became aware of two Employment Agreements
and an amendment to an existing employment contract that were entered into by
the former President, Kendall Northern, with three of the Company's employees.
The three employees are all related to Mr. Northern and included his brother and
sister-in-law, who was the director of human resources. Each of the agreements
includes a clause stating the employee is to be paid $100,000 if terminated
without cause. For unrelated reasons, two of the employees have been terminated
and the Company has received a formal demand for payment of $100,000 each from
their counsel. The Company has settled the claims of these two employees by
allowing their stock options for a total of 50,700 shares, that were granted
July 18, 1999, to remain in effect at a lowered exercise price of $.50 per
share. To date, no expense has been recorded as the adjusted exercise price has
remained well above the underlying fair value of the Company stock so the fair
value of the shares subject to the modification was minimal. The remaining
employee has voluntarily waived any claim for such payment as part of a
termination agreement entered into with the Company in September 2000.
Alan P. Hald, former Chairman of the Board of Directors of the Company, resigned
as an employee and member of the Board of Directors of the Company. The
resignation was pursuant to the terms of an Employment Separation Agreement by
and between the Company and Mr. Hald effective as of June 1, 2000. The
Separation Agreement provides for: (i) the lump sum payment of $70,000
representing Mr. Hald's base salary through the end of the term of the
Employment Agreement to be made in accordance with the terms of a Convertible
Promissory Note (convertible in part or in total); (ii) accrued benefits
required to be provided by the terms of any Company sponsored benefit plans or
programs; (iii) warrants to purchase 490,000 shares of common stock at $1.00 per
share of the Company, which equal the amount Mr. Hald would have received
through the full term of the Employment Agreement and expire in 2007; and (iv)
payment of a transaction bonus in the cash amount of 1 percent of the
transaction and an amount of warrants equal to the bonus amount divided by the
strike price of $1.00 per share of the warrant upon the occurrence of certain
events, including, without limitation the closing of a public offering, private
placement, sale or merger of the Company in an aggregate value of at least
$10,000,000 before January 1, 2001. The Company has not yet paid the Convertible
Promissory Note of $70,000, which was due September 1, 2000.
In July 1998, the Company entered into a Stock Purchase Agreement with
Blackwater Capital Partners, L.P. and Blackwater Capital Group, L.L.C.
(collectively, "Blackwater"). Steven R. Green, a director and Chairman of the
Board of the Company, is the managing partner of Blackwater Capital Partners,
L.P. In June, 2000 the Company and Blackwater reached a mutual agreement to
terminate the Stock Purchase Agreement and enter into a consulting agreement
whereby Blackwater would provide financial consulting services to the Company
for the following six months. In exchange for the termination of the existing
agreement and services to be provided under the new agreement, the Company
issued 330,000 shares of its Common Stock to Blackwater and agreed to vest the
1,050,000 warrants with an exercise price of $1.00 per share
F-32
<PAGE>
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. RELATED PARTY TRANSACTIONS (CONTINUED)
Previously issued to Blackwater, which originally were to be vested
incrementally upon Blackwater funding the full amount of the Stock Purchase
Agreement or the Company refusing further funding from Blackwater under the
Agreement. The warrants expire July 2005. The Company recorded expense for the
fair value of the equity instruments provided to Blackwater under the agreement.
During 2000 Mark E. Morley was appointed to the board of directors of the
Company. At September 30, 2000 he and a personal relative were 10% participants
in the $1,000,000 convertible note payable described in Note 8, and he and
another personal relative were the subscribers to purchase 2,500,000 common
shares of the Company for $250,000 described in Note 11.
15. 401(k) PLAN
On January 1, 1999, the Company adopted the FutureOne, Inc. 401(k) Plan ("the
Plan"). All employees of the Company are eligible to participate in the Plan
when they have met certain eligibility requirements. Employees are eligible to
participate in the Plan after one year of service and after having attained the
age of 21. After the initial enrollment date, all subsequent enrollments for
eligible employees will occur on January 1 and July 1 of each year. Employees
may defer up to 15 percent of their annual salary up to a maximum of $10,500 or
an amount as determined from time to time by the Internal Revenue Service. The
Company's matching percentage is equal to 20 percent of the employees
contribution on employee contributions of up to 5 percent. For the year ended
September 30, 2000 and 1999, the Company's matching contribution is $6,619 and
$8,677 respectively.
16. SEGMENT INFORMATION
The Company operates its business under a single segment, Telecommunication
Services (formerly called Broadband communications and engineering construction
services). The Company's previous other business segments, Internet services
(which was sold October 6, 2000), telecommunication and convergence technology
and communication equipment sales, are now included under discontinued
operations. The Companies sales are primarily in the Western United States with
no international sales.
F-33
<PAGE>
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
17. SUBSEQUENT EVENTS
During the period of October through December 2000, the Company issued warrants
to purchase 240,000 shares of the Company's Common Stock at $1.00 per share to
Holders of a secured note, issued by the Company, in exchange for the Holders
subordinating certain of their collateral to other financing obtained by the
Company.
17. SUBSEQUENT EVENTS (CONTINUED)
Effective October 1, 2000 the Company issued warrants to purchase up to
9,060,000 of the Company's Common Stock at $.20 per share to senior management
of the Company. The warrants are subject to an equal three-year vesting
schedule, which may be accelerated under certain circumstances.
In December 2000 the Company issued 1,000,000 shares of its Common Stock to an
accredited investor in exchange for $100,000.
In January 2001 the Company entered into a severance agreement with Earl J.
Cook, its then President and Chief Executive Officer. Under the terms of the
agreement he resigned as an officer and board member of the Company, and agreed
to provide services to the Company on a limited basis and receive $90,000 in
payments over the following 24 months. The agreement also provides for him to be
issued fully vested warrants to purchase 1,000,000 shares of common stock at
$0.15 per share, and to surrender warrants to purchase 2,000,000 shares of
common stock granted effective October 1, 2000 and warrants and options to
purchase 205,406 and 245,000 shares of common stock, respectively, which were
granted prior to September 30, 2000.
In January 2001 the Company entered into a severance agreement with Steven R.
Green who was chairman of the board of directors at the time. Under the terms of
the agreement warrants to purchase 2,000,000 shares of common stock, originally
granted effective October 1, 2000, were immediately vested.
F-34
