U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended June 30, 2000 Commission file number: 0-18224
TOTALAXCESS.COM, INC.
(formerly Group V Corporation)
Delaware 95-4176781
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
201 Clay Street, Oakland, CA 94607
(Address of Principal Executive Offices)
(510) 286-8700
(Registrant's Telephone Number, including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.15 Par Value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K, is not contained herein and will not be contained, to the
best of 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.
The Registrant had operating revenues of $6,571,603 for the year ended June 30,
2000.
As of June 30, 2000, the aggregate market value of the voting stock (based upon
the average closing bid and asked prices in the over-the-counter market as
quoted on NASD-OTC Bulletin Board as of June 30, 2000) held by non-affiliates
was approximately $13,740,384.
Class Outstanding at June 30, 2000
Common Stock, $.15 par value 12,423,824 shares
Documents Incorporated by Reference:
None
<PAGE>
TABLE OF CONTENTS
Page
PART I
Item 1. .................................Description of Business 1
Item 2. ...............................Description of Properties 6
Item 3. .......................................Legal Proceedings 6
Item 4. .....Submission of Matters to a Vote of Security Holders 8
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 11
Item 6. ...................Management's Discussion and Analysis 11
Item 7. ....................................Financial Statements 13
Item 8. ........Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 13
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a)of the Exchange Act 14
Item 10....................................Executive Compensation 16
Item 11.Security Ownership of Certain Beneficial Owners and
Management 17
Item 12............Certain Relationships and Related Transactions 18
Item 13............Exhibits and Reports on Form 8-K 20
<PAGE>
1
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
General
TotalAxcess.com, Inc. (formerly, Group V Corporation) ("TotalAxcess", the
"Company", or the "Registrant") was originally incorporated in the State of
Delaware in 1987. TotalAxcess.com, Inc. began trading under the Company's new
name and ticker symbol, TXCI, in May 1999. Since the fiscal year ended June 30,
1997 and prior to May 1999, the Company's name was Group V Corporation. This
name change reflects the Company's continued progression into the Internet
Marketing, Telecommunications and E-Commerce business arenas.
The Registrant's core business is providing telecommunication services to a
wide-variety of consumers. These services take the form of one of the following
segments:
1) Non Switched One Plus long distance service 2) Non Switched wholesale
and retail pre-paid calling cards 3) Switched pre-paid calling cards 4)
Switched wholesale services 5) HitLotto program
Switched telecommunications traffic refers to the process of selecting
paths for the transmission of video, data and voice information to a specific
recipient utilizing the Company's switching equipment. This switching equipment
requires the use of dedicated T-1's, which are the trunks/lines that carry
telecommunications traffic. Tier 1 and Tier 2 carriers provide these
lines/circuits. Non-switched refers to utilizing a Tier 1 or Tier 2 carrier's
switching equipment to carry either the Company's one plus long distance
customers telephony traffic or pre-paid calling card traffic.
Company Strategy
The Company's ongoing plan is to continue expanding its switching
capabilities in Southern California where it has leased space conveniently
located near several Tier 1 carriers that can provide the necessary T-1
connections. The Company's is negotiating with several Tier 1 and Tier 2
carriers to provide the necessary circuits in order to carry up to 100,000,000
minutes of traffic per month. At the time of this filing, the Company was
carrying approximately 20,000,000 minutes per month in non-switched traffic and
2,250,000 minutes per month in switched telecommunications traffic.
The Company estimated that it would need to acquire 5 switches in order to
attain this level of switched traffic. It has acquired four of these switches as
of this filing. Each switch has the ability to connect to approximately 64 T1's
and carry approximately 20 million minutes per switch. The Company intends to
continue discussions with equipment vendors that specialize in switching
equipment that will allow the Company to expand its capacity and more
aggressively enter the switched wholesale service bureau arena.
The Company plans to aggressively market its One Plus long distance service
by providing competitive rates and simple plans to existing and new customers.
The marketing plan is to utilize TotalAxcess' existing wide spread distribution
network, presently in place, to market to wholesale pre-paid calling card
customers. The goal is to steadily increase Company revenues from a steady
source of business that can be found in the residential long distance arena.
TotalAxcess has also been negotiating to provide several overseas companies
with telephony services to the United States. The Company would provide
high-volume switching services to these companies for traffic terminating in the
United States.
The Company intends to continue actively and aggressively pursuing the
increase of revenues and cash flow through the wholesale distribution and sale
of pre-paid calling cards, increased switched wholesale telecommunications
traffic and its One Plus long distance service. TotalAxcess is negotiating with
several equipment suppliers to obtain the additional switching equipment and
that will allow the Company to meet its anticipated business growth. This growth
will allow the Company to obtain more competitive rates that will greatly
enhance the projected profitability of the Company. Management announced in
September 2000 a strategic alliance with Interoute Telecommunications U.S.A., a
subsidiary of Interoute UK. Interoute is one of the fastest growing suppliers of
telecommunications services in the world. The Company has been negotiating and
is prepared to move forward with additional strategic alliances or acquisitions
that will provide strategic satellite direct routing to some of the highest
demand countries for long-distance, including Mexico, Philippines and Panama,
with several other additions planned.
Significant Customers and Suppliers
During the year ended June 30, 2000, the Company's two largest customers,
Blackstone Calling Cards and RSL Primecall, accounted for approximately 97% of
the Company's total consolidated revenues.
During the year ended June 30, 2000, the Company's switching supplier
provided services through the following Tier 1 carriers: Qwest, MCI/WorldCom,
Network Enhanced Telecom and Edge2Net. This accounted for approximately 99% of
the Company's total consolidated cost of sales.
Competition
The telecommunications industry is highly competitive. Increased
consolidation and strategic alliances in the industry resulting from the
Telecommunications Act of 1996 have allowed significant new competitors to enter
the industry. Such consolidation could result in larger, better-capitalized
competitors. Many of the Company's existing and potential competitors compete
with significantly greater financial, personnel, marketing and other resources,
and have other competitive advantages. Furthermore, the telecommunications
industry is in a period of rapid technological evolution, marked by new
technologies and the introduction of new products and services. The
telecommunications industry is also subject to various degrees of federal,
state, local and international regulation.
The Business and History of National Pools Corporation
National Pools Corporation ("NPC") is a California corporation doing
business at 201 Clay Street, Oakland, California 94607. The Company believes
that NPC is the first company to have developed and marketed a pre-paid long
distance phone card with an innovative free method of group lottery play as a
value-added incentive to phone card purchase. The program developed by NPC is
named "HitLoTTo" and facilitates lottery club participation in a number of State
Lotteries throughout the United States. The HitLoTTo program uses a unique
pre-paid phone card promotion, telecommunications, and proprietary computer
software to organize and market electronic lottery clubs for lottery players to
participate in various State Lotteries. This program provides players the
opportunity to increase their chances of winning by 100 times by randomly
joining each club participant with 99 other club members. NPC offers its
proprietary HitLoTTo service to the public through the sale of a pre-paid phone
card, the "HitLoTTo Club Card." The HitLoTTo Club Card will be sold at approved
retail outlets in two denominations: $10 and $20. The Company's plans to debut
its virtual HitLoTTo Club Card on a number of established e-commerce websites.
Each denomination of the HitLoTTo Club Card features both competitively priced
long distance calling and corresponding free lottery club plays, which act as a
purchase incentive. The $10 HitLoTTo Club Card offers the purchaser one free
lottery club play and the $20 HitLoTTo Club Card offers three free lotteries
club plays. Special marketing opportunities have increased the available lottery
club plays to encourage participation in special market offers. To join a
HitLoTTo Club, callers will dial 1-888-HitLoTTo, enter their Personal
Identification Number ("PIN") found on the back of the card, and after selecting
the appropriate menu function are automatically entered into the next available
open lottery club of their choice; including Powerball, The Big Game, Florida
and California State Lotteries.
NPC will administer the Clubs and purchases 100 state lottery tickets on
behalf of the club members. HitLoTTo Club membership is allowed only after the
PIN, and appropriate account balance have been validated. Each club consists of
one hundred $1.00 corresponding State Lottery tickets, and each HitLoTTo Club is
completed after receipt of 100 successful HitLoTTo telephone calls. Each call
equates to one HitLoTTo lottery club plays, and is formed for the next available
caller designated Super Lotto jackpot. Depending on the denomination of pre-paid
phone card purchased, callers may make the corresponding value of long distance
calls by selecting the appropriate menu option.
NPC acts as an agent of the club member (callers) by coordinating the
formation of groups of purchasers of lottery tickets. Once any of the available
HitLoTTo Clubs has 100 members the club is closed, the computer starts a new
HitLoTTo Club, and NPC purchases the 100 state lottery tickets on behalf of the
just closed club. Tickets are official State Lottery machine generated "Quick
Picks" and are always purchased in sequence (to avoid any manipulation of
tickets). The HitLoTTo Club is then associated with the corresponding 100
tickets. The first and last sequence numbers are entered into NPC's database to
ensure the integrity of the club. Further, all tickets are endorsed and stamped
with the company name, the club number, date and time. The physical tickets are
placed in tamper proof storage until the validation process occurs the next
business day after the official drawing when the winning numbers are confirmed.
Winnings less than $599 are automatically credited to the player's HitLoTTo Club
Card and added to the available account balance the day after the lottery draw.
Winning clubs are also published on the Company's website- www. HitLoTTo.com.
When a player has depleted the value of the HitLoTTo Club Card to an
insufficient level to participate in another HitLoTTo Lottery Club, the
remaining card balance can be transferred to a new HitLoTTo Club Card. HitLoTTo
players are able to cash out their winnings at any time by calling the toll-free
number and speaking with a customer service representative.
NPC will process winning tickets and claim prize winnings with the
appropriate State Lottery on behalf of club members up to $599. When club
winnings are over $600, NPC will provide the names of the individual winning
club members to the state lottery by filling out the State Lottery Multiple
Ownership Claim form. In general, a State Lottery will pay winnings in amounts
between $600 and $1 million in a one-time payment directly to club members in
accordance with the State Lottery's established policies and procedures. The
State Lottery generally pays prize amounts of $1 million or more directly to
winners either over a 20 to 26 year period or in a single lump-sum payment. NPC
does not participate in any winnings or prizes.
The Company entered into a joint venture agreement with CPNM/Internet
Marketing Consortium in fiscal year 1999 to jointly promote and market the
Company's virtual HitLoTTo product through a network of 10 or more Internet
retail affiliates. Management believes that these established e-commerce
websites will drive more than 200 million hits in potential retail activity to
the HitLoTTo product. Through a series of cross-promotional multi-media
marketing efforts with CPNM/Internet Marketing, the Company's own e-commerce
website will attempt to expand the existing market channels for HitLoTTo and
open access to the growing millions of Internet users who sign on daily.
Although the electronic commerce/Internet portion of HitLoTTo sales is
expected to grow exponentially, the Company continues to work the traditional
retail channel, aggressively recruiting distributors and sales agents through
strategic placement of advertisements. The Company also successfully
participated in a leading pre-paid industry tradeshow and exposition, which
generated considerable editorial exposure for both the product and the Company.
NPC has introduced the HitLoTTo Club Card in selected areas in several states
within the United States using local distributors and retail sales networks.
Marketed as "The Phone Card That Can Make You Rich", NPC has created awareness
for the HitLoTTo Club Card through a number of "free play" direct mail campaigns
targeted to purchased lists of lottery enthusiasts, as well as other potential
customers. The Company's President has provided media coverage for the Company
with interviews in the "Wall Street Corporate Reporter", "MSNBC Business Video",
"Smart Money Magazine", "Stockbroker Magazine", "Intele-Card News" and other
significant news and media outlets. The Company has produced a variety of retail
Point of Sale (POS) materials to assist with the promotion and marketing of the
HitLoTTo Club Card. Additionally, the Company has provided its retail network
with a number of education/training materials designed to educate the retailer
and consumer on the benefits and features of this unique pre-paid phone card.
Through the fiscal year ended June 30, 1999 there have been 500 HitLoTTo Clubs
formed. No HitLoTTo Clubs were formed during the fiscal year ended June 30,
2000.
In May 1998, the Company obtained a legal opinion from James D. Cullen,
Esq., special counsel to TotalAxcess. After consideration and review of existing
pre-paid calling card and rules for promotion, the legal and factual matters
were found to be appropriate to distribute to all potential markets. The price
of the HitLoTTo Club Card does not include any consideration for the purchase
and/or administration associated with the purchase of lottery tickets by NPC for
any HitLoTTo Club. Mr. Cullen cites various recent findings, most notably The
Mississippi Gaming Commission v. Treasured Arts, Inc. 699 So. 2d 936, and the
offering of a similar service by the Illinois Lottery.
The Company's management is confident about the viability of the HitLoTTo
pre-paid phone card strategy for marketing the program and believes the
acquisition of NPC represents an excellent opportunity for the Company. Further
the HitLoTTo Club Card now represents the convergence of three dynamic
industries: pre-paid telecommunications, lottery play and the Internet. However,
the ultimate market acceptance of the HitLoTTo program cannot be guaranteed.
Although the HitLoTTo program is registered and the system is proprietary, the
Registrant expects competition from those who may have more personnel and
greater financial resources than the Registrant.
The Acquisition of National Pools Corporation
On June 13, 1996, NuOasis Resorts, Inc. (formerly, Nona Morelli's II,
Inc.), ("Nona"), ("NuOasis Resorts"), granted an option (the "Option") to Joseph
Monterosso, the current President of the Company, to acquire 250,000 Series B
Preferred Shares of TotalAxcess (the "Series B Shares") owned by NuOasis
Resorts. The Option is exercisable at a price of $13.00 per share, and each
Series B share is convertible into 5.2 shares of TotalAxcess' common stock.
On December 19, 1996, TotalAxcess entered into Stock Purchase Agreements
with each of the shareholders of National Pools Corporation ("NPC") pursuant to
which TotalAxcess agreed to issue a series of Secured Promissory Notes (the
"Notes") in the aggregate principal amount of $1,200,000 and 66,667 shares of
TotalAxces' restricted common stock to the NPC shareholders in exchange for all
of the issued and outstanding shares of capital stock of NPC. During the year
ended June 30, 2000, the notes were converted into an aggregate of 3,374,159
shares of the Company's restricted stock. As part of this acquisition, NuOasis
Resorts and TotalAxcess agreed to a debt assumption agreement whereby NuOasis
Resorts assumed all TotalAxcess debt in excess of $20,000 on December 24, 1996,
except for amounts owed to certain affiliates, which have been converted into
shares of TotalAxcess common stock. The NPC Stock Purchase Agreements closed on
December 24, 1996.
On June 13, 1997, Mr. Monterosso exercised the Option to purchase 128,041
Series B Shares, at $13.00 per share, by payment to NuOasis Resorts of
approximately $1,665,000. Additionally, on June 13, 1997, TotalAxcess sold its
wholly owned subsidiary, Casino Management of America, Inc., to NuOasis Resorts
for cash of $1,140,000, notes receivable from NPC aggregating $245,836 and a
credit against the NuOasis Resorts intercompany account of $95,000.
On August 22, 1997 and effective June 13, 1996, the Option was amended (the
"Amended Option") to increase the exercise price for 21,959 of the Series B
Shares from $13.00 per share to $72.20 per share, or approximately $1,585,000
for the 21,959 shares of Series B Preferred Stock. The option to purchase the
remaining 100,000 Series B Preferred shares was terminated. Concurrently,
NuOasis Resorts granted Mr. Monterosso a new option to purchase the remaining
100,000 Series B shares at an exercise price of $11.70 per share. Additionally,
as consideration for granting the new option, NuOasis Resorts acquired the right
to require Mr. Monterosso to purchase all or any remaining unexercised shares of
the 100,000 Series B shares in its entirety by September 1, 1998.
Closing on September 2, 1997, but effective June 30, 1997, Mr. Monterosso
exercised the Amended Option to purchase 21,959 Series B Shares, at $72.20 per
share, by payment to NuOasis Resorts of approximately $1,585,000. Concurrent
with the exercise of the Amended Option, TotalAxcess released NuOasis Resorts
from liability, if any, arising from any events while NuOasis Resorts controlled
TotalAxcess, in exchange for approximately $1,585,000 of marketable securities.
On September 2, 1997, NuOasis Resorts sold to Mr. Monterosso 400,000 New
Class D Warrants in consideration for a $1,800,000 promissory note secured by
the New Class D Warrants, due in September 1998 (the "Warrant Note"). Each New
Class D Warrant is exercisable at $15.00 per share and entitles Mr. Monterosso
to receive, upon exercise, two shares of common stock, or a total of 800,000
common shares if all New Class D Warrants have been exercised. The New Class D
Warrants expire on March 30, 2004, and to date, none of the New Class D Warrants
have been exercised.
On September 2, 1997, NuOasis Resorts granted to Mr. Monterosso an option
to purchase 520,000 common shares of the Company exercisable at $2.25 per share
after NuOasis Resorts' converted its remaining 100,000 shares of Series B
Preferred Stock into 520,000 common shares.
As a result of the acquisition of NPC and the sales and purchases of the
Series B Preferred Stock, as discussed above, a change in control of the
Registrant occurred and the Registrant is no longer a controlled subsidiary of
NuOasis Resorts.
Other Operating Subsidiaries and Businesses
(1) Lottery Publications Corporation
Lottery Publications Company ("LPC"), which published Lottery Insider
Magazine, was formed during the quarter ended March 31, 1998. Lottery Insider
Magazine was a monthly digest of player strategies, human-interest stories and
tips and statistics of interest to all Lottery players. A syndicated and award
winning editorial team headed the groundbreaking publication. Due to the
untimely death of its editor in chief, and the lack of any significant financial
contribution during the fiscal years ended June 30, 1999 and 1998, the Company
elected to cease operating LPC as a wholly owned subsidiary.
(2) Academy Network Services, Inc.
On May 15, 1998, and effective March 1, 1998, the Company, through its
newly formed wholly owned subsidiary, Academy Network Services, Inc. ("ANS"),
acquired certain capital leases related to telephone switching and platform
assets and office equipment (the "Ark-Tel Assets") of Ark-Tel, Inc., a wholly
owned subsidiary of Universal Network Services, Inc. ("UNSI"). Pursuant to the
related Asset Purchase Agreement, the Company acquired assets with an estimated
fair market value that approximated related lease obligations in exchange for
the forgiveness of amounts owed to the Company of approximately $300,000. The
excess of the total consideration paid over the estimated fair value of net
assets acquired approximated $300,000 and was charged to expense during the year
ended June 30, 1998. As a long distance carrier, ANS provided the full
telecommunications and support service needs of the Company's other
subsidiaries.
During the year ended June 30, 1999, the management determined that the
Ark-Tel Assets were not year 2000 compliant, and the Company ceased payment of
required rents, which resulted in an event of default per the related lease
terms. Accordingly, the Company recognized as asset impairment charge of
$651,450 during the year ended June 30, 1999. In December 1999, the lessor of
the related equipment repossessed the assets and the Company recognized a
related extraordinary gain for the extinguishment of debt under capital leases
aggregating $693,261 during the year ended June 30, 2000.
In June 1999, the Company elected to consolidate its operations in
California. As a result, all of the ANS assets have been relocated to California
and related assets and liabilities have been transferred to the books and
records of TotalAxcess. Accordingly, ANS has ceased to operate as a wholly owned
subsidiary.
(3) Premier Plus, Inc.
On April 7, 1998, the Company incorporated a new wholly owned subsidiary,
Premier Plus, Inc. ("PPI"), as a network marketing company which sells and
distributes the Company's various telecommunication products and services,
including custom pre-paid calling cards, pre-paid calling cards, One-Plus
residential and business long distance services, Lottery Insider Magazine and
NPC's HitLoTTo(R) program. PPI, at one time, had approximately 200 independent
sales representatives nationwide who were centrally managed by the Company's
operations in San Francisco, California. PPI did not have significant operations
during the fiscal years ended June 30, 2000 and 1999.
As a result of the above, TotalAxcess.com, Inc. conducts substantially all
of the Company's business and its subsidiaries are essentially inactive.
As of June 30, 2000, TotalAxcess employed a total of approximately 47
employees. None of the Company's employees are currently represented by a
collective bargaining agreement and the Company believes that its relations with
its employees are good.
ITEM 2. DESCRIPTION OF PROPERTIES.
(1) TotalAxcess.com, Inc.
TXCI leases office space in Oakland, California. The Oakland lease expires
July 2004. The monthly rent expense is $16,225.
ITEM 3. LEGAL PROCEEDINGS
On November 10, 1998, the Company filed legal action (TotalAxcess, Inc. v.
NuOasis Resorts, Inc; Nona Morelli's II, Inc.; NuOasis International, Inc.; Fred
Luke, Jr.; Rocci Howe; Steven H. Dong; John D. Desbrow; Archer & Weed; Richard
Weed) in San Francisco Superior Court, Case No. 999131. The suit alleges fraud
and misrepresentation in the sale of securities, which were not qualified for
sale and professional malpractice against legal counsel. On July 26, 1999,
NuOasis Resorts, Inc. and Nona Morelli's II, Inc., and Howe, Fred Luke, Jr. and
Dong filed a cross complaint against the Company alleging claims for, inter alia
breach of contract, fraud, material misrepresentation in the purchase of
securities and libel, rescission of certain contracts and the imposition of a
constructive trust over certain securities. The case was subsequently
transferred to the Superior Court for the County of Orange. The case is
currently in the discovery phase. The trial date is now set for March 2001; all
claims the Company has against Richard Weed are to be arbitrated after the
trial. Management plans to vigorously pursue its complaint and defend each cross
complaint, which it believes lack substantial merit.
On January 6, 1999, the Company filed a lawsuit (TotalAxcess.com, Inc. v.
Dennis Houston, Orange County Superior Court Case No. 809248). This complaint
alleges breach of fiduciary duty by Mr. Houston as one of the Company's
directors for failing to disclose material facts in the Ark-Tel Asset Purchase
Agreement that management believes resulted in the WorldCom suit against the
Company (since settled as per our June 30, 1999 10-KSB). On June 29, 1999, Mr.
Houston filed a cross complaint alleging claims for breach of contract, breach
of the implied covenant of good faith and fair dealing, misrepresentation, fraud
and embezzlement. The Company is vigorously pursuing the matter against Mr.
Houston and plans to vigorously defend the cross complaint. Trial is set for
October 2000.
On June 26, 1997, the Company filed a lawsuit (TotalAxcess.com, Inc. v.
Network Long Distance, Inc.) filed in the District Court, City and County of
Denver, Case No. 97 CV 4131, Division 7. The complaint was filed against Network
Long Distance, Inc. and their transfer agent to compel them to release shares of
Network Long Distance, Inc.'s common stock (the "Shares") that was received by
the Company in connection with a release of liability granted to NuOasis
Resorts, Inc. Once the Shares were properly transferred to the Company, the
Company dismissed its claims as moot. However, Network Long Distance, Inc.
(currently known as Eclipse Communications, Inc. or "Eclipse") continues to
pursue the Shares through its counterclaims. Eclipse is claiming that it owns
some or all of the Shares and is seeking damages and an injunction prohibiting
the transfer of the Shares. The Company took a judgment in the case; and Eclipse
has taken an appeal. Management believes that it is fairly likely the lower
court ruling will be upheld. A final disposition of the case is expected in late
2000 or early 2001.
M.H. Meyerson & Co. ("Meyerson") claimed that it was entitled to 717,898
warrants to purchase common stock of the Company pursuant to a December 12, 1997
Investment Banking Agreement. The Company contended that Meyerson is not
entitled to the warrants because it failed to fulfill its obligations under the
Investment Banking Agreement. In order to avoid the uncertainties of arbitration
and the inherent legal fees and costs attendant thereto, a settlement agreement
was reached whereby the Company caused a total of 20,000 restricted shares of
common stock to be issued to Meyerson in full and final settlement of all claims
arising from the Investment Banking Agreement.
On October 27, 1999 in the Superior Court in and for the County of Los
Angeles, California, Cross Communications ("CCI") filed and served a complaint
for Breach of Contract and several Common Counts against the Company. CCI claims
it entered into a valid oral agreement with the Company whereby it would provide
telecommunications services using its switch for routing the Company's pre-paid
calling cards. It claimed approximately $655,000 in damages on unpaid invoices
for its services. The Company filed a cross-complaint against CCI seeking
unspecified damages arising from the inability of CCI equipment to adequately
support and route the volume of traffic delivered by pre-paid calling cards. In
order to avoid the uncertainties of trial and the potential enforcement of a
judgment, as well as the inherent legal fees and costs attendant thereto, a
settlement agreement was reached whereby CCI and the Company entered into a
mutual release in full and final settlement of any and all claims that might
arise out of their relationship. No other consideration is involved in the
settlement agreement.
In November 1999, the Company was served with Summons and Complaint in an
action filed by Republic Leasing Co., Inc. Case No. 816455 in the Superior Court
in and for the County of Orange, California. The action arose out of facts
related to the ArkTel and Dennis Houston matter discussed above and concerned an
equipment lease. Plaintiff sought approximately $29,000 plus prejudgment
interest and attorney fees and costs. In order to avoid the uncertainties of
arbitration and the inherent legal fees and costs attendant thereto, a
settlement agreement was reached in May 2000 whereby the Company agreed to pay
the aggregate amount of $31,000 in two installments commencing June 1, 2000.
Upon its receipt of the final payment, Republic Leasing caused the action
against the Company to be dismissed. The settlement amount is an element of the
damages sought by the Company in its pending action against Dennis Houston in
the Orange County Superior court action discussed above.
On or about December 20, 1999 in the Superior Court in and for the County
of San Francisco, California, Comms People, Inc. ("CPI") filed and served a
complaint for Breach of Contract and several Common Counts against the Company,
alleging damages in the amount of $17,050. The claim arose out of a personal
services contract. The matter was referred by the court to non-binding judicial
arbitration to be heard in August 2000. In order to avoid the uncertainties of
arbitration and subsequent trial, and the inherent legal fees and costs
attendant thereto, a settlement agreement was reached whereby the Company agreed
to pay the aggregate amount of $14,000 to CPI, in three monthly installments
commencing September 1, 2000. In consideration thereof, CPI agreed to release
all claims it might have against the Company, which might arise out of the
personal service contract.
In February 2000, in the Superior Court in and for the County of Alameda,
Waterview Resolution Corporation filed and served a complaint against National
Pools Corporation for money owed in the amount of $59,673. The action arose out
of a guarantee on leased equipment assumed by the Company on behalf of Ark-Tel
Incorporated and Dennis Houston. In order to avoid the uncertainties of trial
and the inherent legal fees and costs attendant thereto, a settlement agreement
was reached in May 2000 whereby the Company agreed to pay the aggregate amount
of $40,000 to Waterview in four equal monthly installments commencing June 1,
2000. Upon its receipt of the fourth and final payment on or about October 1,
2000, Waterview dismissed the case in its entirety. The settlement amount is an
element of the damages sought by the Company in its pending action against
Dennis Houston in the Orange County Superior court action discussed above.
The Company is from time to time, involved in various lawsuits generally
incidental to its business operations, consisting primarily of collection
actions and vendor disputes. The Company does not believe that such claims and
lawsuits, either individually or in the aggregate, will have an adverse effect
on its operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 28, 2000, the Company held its Annual Meeting of Shareholders
for the following purposes:
To elect two directors, each to hold office until the next Annual Meeting
of Shareholders and until their successors are elected and qualified;
1. To approve an amendment to the Company's Certificate of Incorporation to
amend the voting rights granted to Stockholders of Series B Convertible
Preferred Stock to be consistent with the proposed share consolidation;
2. To approve an amendment to the Company's Certificate of Incorporation to
adopt a one-for-fifteen share consolidation of the outstanding Common Stock
and decrease the authorized number of shares of Commons Stock from
333,000,000 to 22,200,000; and
3. To adopt the TotalAxcess.com, Inc. 2000 Stock Option Plan; and
4. To transact such other business as may properly come before the meeting or
any adjournments thereof. The slate of nominees elected for director
consisted of the following individuals:
Joseph Monterosso, age 53
Russell F. McCann, age 44
Mr. Monterosso received 111,427,291 votes "for" his election to director; the
number of votes cast "against" was 1,376,860; and the total number of
"abstentions" was 4,206,543.
Mr. McCann received 112,948,874 votes "for" his election to director; the number
of votes cast "against" was 4,040,573; and the total number of "abstentions" was
21,247.
The total number of votes cast was 117,010,694. This represents 72.60% of the
outstanding number of shares, which were 161,171,448 at the time of the meeting
The second proposal to be acted upon pertained to the following:
Although the Certificate of Determination for Series B Convertible
Preferred Stock provides for the adjustment of the conversion ratio
to Common Stock in the event of a stock split or reverse stock split,
it inadvertently did not provide for the adjustment of the voting
rights. The Company has 1,200 shares of Series B Convertible
Preferred Stock issued and outstanding in January 2000. Under the
terms of the Series B Convertible Preferred Stock, the holders of
Series B Convertible Preferred stock shall have seventy-eight (78)
votes per share. Therefore, in the event of a one-for-fifteen share
consolidation as proposed in Proposal Three, the holders of Series B
Convertible Preferred Stock will still be entitled to seventy-eight
(78) votes per share after the effective date of a one-for-fifteen
share consolidation. That was not the intent of the Company or the
holders of Series B Preferred Stock.
The Company believes that adoption of Proposal Two, which will amend
the voting rights of the Series B Convertible Preferred Stock will
maintain the rights, preference, privileges, and rights as originally
intended by the Company and the holders of Series B Convertible
Preferred Stock. After discussions, the holders of the majority of
the outstanding shares of Series B Convertible Preferred Stock have
consented to the amendment and intend to vote for the amendment to
the Company's Certificate of Incorporation to amend the voting rights
granted to the Series B Convertible Preferred Stock.
The total number of votes cast "for" the proposal was 111,847,663; the
number of votes cast "against" was 4,841,763; and the total number of
"abstentions" was 321,268. The total number of votes cast was 117,010,694. This
represents 72.60% of the outstanding number of shares, which were 161,171,448 at
the time of the meeting.
The third proposal to be acted upon pertained to the following:
The Board of the Company adopted a resolution approving and
recommending to the holders of Common Stock, Series B Convertible
Preferred Stock, and 14% Preferred Stock that they approve an
amendment to the Company's Certificate of Amendment to
one-for-fifteen share and consolidation of outstanding Common Stock
and to decrease the authorized number of shares of Common Stock from
333,000,000 to 22,200,000, all of which shall be considered as one
proposal to be submitted to a vote of holders of Common Stock, Series
B Convertible Preferred Stock, and 14% Preferred Stock. The vote will
be taken "FOR" or "AGAINST" this Proposal Three so that all two
elements are considered in one vote. Proposal Three was adopted by
the Board of Directors and is subject to approval by a majority of
votes cast by the holders of the Common Stock, Series B Convertible
Preferred Stock, and 14% Preferred Stock, voting as a class, as
determined on the record date, represented in person or by proxy
constitute a quorum for the Meeting.
If approved by the stockholders and implemented by the Board of
Directors, other than (i) decreasing the authorized number of shares
of Common Stock from 333,000,000 to 22,200,000,(ii) adjusting the par
value of the Common Stock from $.01 to $.15, and (iii) adjusting the
total number of shares of Common Stock issued prior to the adoption
of the one-for-fifteen share consolidation will result in no other
material changes to ownership of the stock. Each stockholder will
hold the same percentage of Common Stock, Series B Convertible
Preferred Stock, and 14% Preferred Stock outstanding immediately
following the one-for-fifteen share consolidation as each stockholder
did immediately prior to the one-for-fifteen share consolidation,
except that the consolidation may result in an immaterial adjustment
due to the purchase of any fractional shares of Common Stock that
result from the consolidation.
If Proposal Three is approved by the stockholders of the Company, the
amendment will be filed unless the Board of Directors of the Company
determines that filing such amendment would not be in the best
interest of the Company and its stockholders. If the Board of
Directors makes such determination, it may elect not to file or elect
to delay the filing of the amendment to implement Proposal Three. The
actual timing of such filing (and whether such filing is made) will
be determined by the Board of Directors based upon their evaluation
as to when such action will be most advantageous to the Company and
its stockholders. In addition, the Board of Directors may make any
and all changes to the one-for-fifteen share consolidation amendment
that it deems necessary to give effect to the intent and purpose of
the one-for-fifteen share consolidation.
The following table illustrates the principal effects of the proposed
one-for-fifteen share consolidation on the authorized number of
shares:
Number of Shares Prior to After
of Common Stock Proposal Three Proposal Three
- --------------- --------------- ---------------
Authorized: 333,000,000 22,200,000
Outstanding: 159,161,506 10,610767(1)
Available for Future 173,838,494 11,589,233(1)
===================================================================
Number of Shares of Prior to After
Preferred Stock Proposal Three Proposal Three
--------------- -------------- --------------
Authorized: 1,000,000 1,000,000
Outstanding Series B 23,589 23,589
Outstanding 14% 170,000 170,000
===================================================================
(1) Subject to minor adjustment due to rounding of fractional shares.
The total number of votes cast "for" the proposal was 106,101,453; the
number of votes cast "against" was 10,606,963; and the total number of
"abstentions" was 68,642. The total number of votes cast was 117,010,694. This
represents 72.60% of the outstanding number of shares, which were 161,171,448 at
the time of the meeting.
The fourth proposal to be acted upon pertained to the following:
Effective January 31, 2000, and subject to stockholder approval, the
Board of Directors approved adoption of the Company's 2000 Stock
Option Plan (the "2000 Plan") to serve as a vehicle to attract and
retain the services of employees, officers, directors, and
consultants. The 2000 Plan is a "dual plan" which provides for the
grant of both Incentive Stock Options and Non-qualified Stock
Options.
The 2000 Plan covers 30,000,000 (pre-one-for-fifteen share
consolidation as discussed in Proposal Three) shares of the Company's
Common Stock, which shares will be reserved upon confirmation of the
2000 Plan. If Proposals Three and Four are approved, the 30,000,000
shares of Common Stock reserved for the 2000 Plan shall be adjusted
to 2,000,000 shares of Common Stock following the proposed
one-for-fifteen share consolidation.
The total number of votes cast "for" the proposal was 107,060161; the
number of votes cast "against" was 9,708,618; and the total number of
"abstentions" was 241,915. The total number of votes cast was 117,010,694. This
represents 72.60% of the outstanding number of shares, which were 161,171,448 at
the time of the meeting.
There was no other business conducted at the Annual Meeting of Shareholders.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Registrant's common stock is listed on the NASD-OTC Bulletin Board
where they currently trade under the symbol "TXCS". The Registrant's securities
are not publicly traded on any other market. Set forth below are the high and
low bid prices for the common stock of the Registrant for each quarterly period
commencing July 1, 1998:
Bid Price of Common Stock
Fiscal 1999 Low High
Quarter ended 09/30/98 $ .45 $ 1.35
Quarter ended 12/31/98 $ .30 $ .75
Quarter ended 03/31/99 $ .30 $ 3.45
Quarter ended 06/30/99 $ 1.35 $ 14.70
Bid Price of Common Stock
Fiscal 2000 Low High
Quarter ended 09/30/99 $ 2.34 $ 6.80
Quarter ended 12/31/99 $ 5.86 $ 13.36
Quarter ended 03/31/00 $ 2.50 $ 7.73
Quarter ended 06/30/00 $ 1.16 $ 3.00
Such quotations reflect inter-dealer prices, without retail mark-up,
markdown or commissions and may not necessarily represent actual transactions.
As of June 30, 2000, the Registrant had 4,880 shareholders of record and in
excess of 2,000 persons who were beneficial shareholders of its common stock.
The Registrant has never paid cash dividends on its common stock. At the
present time, the Registrant's anticipated capital requirements are such that it
intends to follow a policy of retaining earnings, if any, in order to finance
the development of its business. Dividends on common stock may not be paid
unless provision has been made for payment of preferred dividends.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's Discussion and Analysis
The Registrant has incurred net losses and negative cash flows from
operating activities since its inception in 1987. The Registrant had cash and
cash equivalents of approximately $395,511 and $572,951 as of June 30, 2000 and
1999, respectively, and a working capital deficit of $(4,638,281) and
$(3,860,552) as of June 30, 2000 and 1999, respectively.
The Company's revenues increased from $1,271,673 to $6,571,603 between the
years ended June 30, 1999 and June 30, 2000, respectively. This represents an
increase of 417% in revenue. This increase occurred primarily as the result of
new telecommunication services contracts secured by the Company with new and
existing customers in fiscal year 1999 and 2000. Further, the Company increased
its internal sales force and independent distributor network relative to fiscal
year 1999.
In fiscal year 2000, the Company recognized stock based compensation
charges aggregating $3,877,338. Such charges were generally recognized when the
estimated fair market value of restricted stock issued by the Company exceeded
the estimated fair value of consideration received by the Company in such
transactions. These charges are comprised of the following: $1,134,000 related
to an officer's conversion of accrued salaries and expenses into restricted
common stock, $863,347 related to a consultant's conversion of accrued fees and
expenses into restricted common stock, $1,100,000 related to shares of
restricted common stock issued to an officer for the pledging of his personal
assets and personal guarantee, and $581,850 related to the sale of restricted
common stock. In addition, an officer of the Company vested in 166,668 stock
options, and the Company recognized a related expense of $198,141. Selling,
general and administrative expenses increased from $2,036,957 in fiscal year
1999 to $2,238,527 in fiscal year 2000, or a 10% increase. This overall increase
was the result of several factors including increases in salaries, wages and
benefits, payroll taxes, contract and temporary labor, travel and occupancy
costs to support the Company's increased operations in fiscal year 2000.
Further, marketing, promotion, and selling expenses also increased in an effort
to develop and expand the Company's operating strategies. Professional services
decreased in fiscal year 2000 to $401,175 from $428,600 in fiscal year 1999
primarily as the result of lower legal fees. Such fees declined in fiscal year
2000 as the Company negotiated the settlement of several previously outstanding
litigious matters. Depreciation and amortization expenses increased to $32,700
in fiscal year 2000 from $32,656 in fiscal year 1999. The increase in net
interest expense from $333,250 in fiscal year 1999 to $8,084,799 in fiscal year
2000 related to the NPC notes payable conversion to common stock whereby, the
Company converted $1,100,717 of notes payable, and related accrued interest
thereon, into an aggregate of 3,374,159 shares of the Company's restricted
common stock. Because the estimated fair market value of the common stock issued
to the note holders exceeded the carrying amounts of the notes payable and
accrued interest, the Company recognized an effective interest charge of
$7,669,197. The Company also realized losses on the sale of marketable equity
securities that aggregated $130,321, and recognized litigation settlement
expenses aggregating $83,200 in fiscal year 2000. During fiscal year 2000, the
Company recognized extraordinary gains related to the extinguishment of debt
under capital lease agreements of $769,394, and the extinguishment of debt with
a vendor in the amount for $666,621 resulting from a lawsuit settlement. As a
result of the above, the Company's net loss for fiscal year 2000 increased to
$12,866,278 ($1.23 per share) from $4,826,505 in fiscal year 1999 ($1.05 per
share).
This Annual Report on Form 10-KSB for the year ended June 30, 2000 (the
"Form 10-KSB") contains certain "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Forward-looking statements are statements other than historical
information or statements of current condition and relate to future events or
the future financial performance of the Company. Some forward-looking statements
may be identified by use of such terms as "expects," "anticipates," "intends,"
"estimates," "believes" and words of similar import. These forward-looking
statements relate to plans, objectives and expectations for future operations.
In light of the risks and uncertainties inherent in all such projected operation
matters, the inclusion of forward-looking statements in this Form 10-KSB should
not be regarded as a representation by the Company or any other person that the
objectives or plans of the Company will be achieved or that any of the Company's
operating expectations will be realized. Revenues and results of operations are
difficult to forecast and could differ materially from those projected in the
forward-looking statements contained in this Form 10-KSB.
The Company expects to increase revenues and cash flow through the
wholesale distribution and sale of pre-paid calling cards by expanding its
in-house sales force and adding more independent distributors to its network.
The Company's One Plus long distance service, which the Company is revamping to
provide more competitive rates, and additional services will be included as a
product for this sales force to market.
TotalAxcess' negotiation to obtain additional switching equipment is
critical to the Company's overall business plan to expand all of its
telecommunications services. In order, to achieve its projected business growth
TotalAxcess will need to acquire several switching platforms that will support
this expansion. The ultimate goal is for TotalAxcess to negotiate more
competitive rates from Tier 1 carrier's that will greatly enhance the projected
profitability of the Company.
Additionally, management announced in August 1999 the strategic alliance
with licensed long distance carrier Comnet that which would have broadened their
international pre-paid network services into Mexico. This network did not
provide the quality or the capacity that the Company had desired to attain.
Therefore, the Company continued negotiating and prepared to move forward with
additional strategic alliances' in Mexico, Paraguay, India and Italy that
management believes will further increase revenues and cash flow. The Registrant
will also continue to search for additional sources of equity financing through
the private placement of its common stock.
The Registrant is also pursuing other joint venture, merger or acquisition
opportunities that may provide additional capital resources during fiscal 2001
and beyond.
Year 2000
During the year ended June 30, 1999, management determined that the
telephone switching and platform assets acquired from Ark-Tel, Inc. were not
year 2000 compliant and that significant upgrades were required to prepare the
equipment to properly function in the year 2000. As a result, the Company has
ceased payment of required rents. As a result of the cessation of required
rents, the Company is currently in default per the related lease terms. In
connection with the above, the Company has recognized a related asset impairment
charge of approximately $651,000 during the year ended June 30, 1999. The
Company does not believe that it will be required to significantly modify its
internal computer systems, or any equipment or products, other than the
equipment mentioned above. There can be no assurance that another entity's
failure to ensure year 2000 capability would not have an adverse effect on the
Company.
As of the date of this report, management is not aware of any other year
2000 related issues.
ITEM 7. FINANCIAL STATEMENTS
Financial statements are referred to in Item 13(a) and listed in the Index
to Consolidated Financial Statements filed as part of this Annual Report on Form
10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
(a) Identification of Directors and Executive Officers
The Registrant, pursuant to its bylaws, maintains a Board of Directors of
between one and twenty-five directors and officers, comprised of President,
Secretary and Chief Financial Officer. The same person may hold any two or more
officer positions. The directors and officers during fiscal year 2000 and fiscal
year 1999 are as follows:
Name Position Held Age Dates of Service
---- ------------- --- ----------------
Joseph Monterosso Director and President 51 November 25, 1996 to Present
Chairman of the Boark August 8, 1997 to Present
Russell F. McCann Director 44 September 23, 1998 to Present
Dennis Houston Director 55 August 8, 1997 to Jan.28.2000
COO July 1, 1997 to June 29, 1998
All directors of the Registrant hold office until the next annual meeting
of shareholders and until their successors have been elected and qualified.
Vacancies in the Board of Directors are filled by the remaining members of the
Board until the next annual meeting of shareholders. The same current Directors
stand for election at the Registrant's next annual meeting. The officers of the
Registrant are elected by the Board of Directors at its first meeting after each
annual meeting of the Registrant's shareholders and serve at the discretion of
the Board of Directors or until their earlier resignation or death.
Directors are elected by a favorable vote of a plurality of the shares of
voting stock present, entitled to vote, and actually voting, in person or by
proxy, at the Annual Meeting. Accordingly, abstentions or broker non-voters as
to the election of Directors do not affect the election of the candidates
receiving the plurality of votes. Properly executed, unrevoked proxies will be
voted FOR election of the above-named nominees unless the stockholders indicate
that the proxy shall not be voted for any one or all of the nominees.
(b) Business Experience
The following is a brief account of the business experience for at least
the past five years of each director, director nominee and executive officer of
the Registrant, including principal occupations and employment during that
period, and the name and principal business of any corporation or other
organization in which such occupation and employment were carried on.
Current Directors and Officers
Joseph Monterosso: Mr. Monterosso has used his entrepreneurial skills to launch
a variety of companies over the past 25 years, culminating with National Pools
Corporation in 1992. Prior to NPC, Monterosso embarked upon fulfilling his
lifelong dream of producing his own automobile after attending the Geneva Auto
Show in 1986. After raising over $45 million for funding, Monterosso founded
Laforza Automobiles, Inc., which produced a four-wheel drive sport utility
vehicle for the luxury market and established a new mark in four-wheel drive
sport vehicles. Monterosso conceived the concept of a new kind of Sports Utility
Four Wheel Drive Vehicle when he discovered a unique Italian Sports Utility
Vehicle at the Geneva Auto Show in 1986. Monterosso negotiated the design,
licensing and purchase of the body stamps and dies from the manufacturer and
contracted Pininfarina in Turin to produce the automobile. Monterosso raised the
capital through U.S. investors and European partners. Monterosso negotiated all
vendor contracts in the U.S. and Italy, including the lengthy and delicate
negotiations with Ford to supply the power train and warranty. Monterosso headed
AutoItalia SpA, of Turin, the company that produced the automobile. Monterosso
supervised the redesign of the automobile to meet U.S. Department of
Transportation specifications and market expectations. Designing the interior
and the wheels himself, Monterosso resided in Turin at this time, commuting
monthly to his home in California, overseeing the production and delivery of the
automobile to the U.S.
Upon production of the finished body, interior and chassis in Turin, the LaForza
was flown to an after market assembler located in Detroit to receive the Ford
engine, drive train and electronics. A final fit and finish was done and the
LaForza was then delivered directly to the U.S. distributor, LaForza Automobiles
Inc., of Hayward, CA. LaForza Automobiles was independent of the Italian
production company, and was operated by a President and CPA. In late 1989,
LaForza Automobiles Inc., caught in the market downturn and resulting capital
crunch, could not finance their marketing operation and filed for bankruptcy
protection and ceased doing business, eventually being liquidated. Monterosso
tried to salvage the situation by seeking capital for the U.S. company, but was
unsuccessful as he was given only weeks notice of the impending financial
shortfall. Without a distribution network, Monterosso closed down the production
of the automobile, paid AutoItalia's creditors and shelved the designs for the
next generation of the automobile that were in process and returned to
California in Mid-1990.
AutoItalia produced 650 LaForza vehicles for the U.S. market, almost all are
still on the road today and are a highly sought after collector's item,
ironically selling for more today than their original price. In hindsight,
Monterosso believes that the market timing could have been better and
capitalization stronger, while the basic concept was sound. He believes that
this is shown by the fact that the rounded, aerodynamic LaForza body style, four
wheel-on-the-fly technology, elegant, luxurious yet Spartan design, has
subsequently been copied by every sports utility manufacturer currently
producing vehicles worldwide; and that the Sports Utility / Light Truck 4 x 4
market is now the strongest share of the U.S. auto market.
In June 1979, Monterosso was named Sales and Operating Vice President for Tony
Ward, Inc., an importer of forklifts from Japan. Monterosso left Tony Ward, Inc.
to found North American Forklift, Inc. in July 1980. While living in Australia
from 1970 - 1979, Monterosso founded three successful firms including a company
that manufactured custom wheels and imported accessories for off-road sport
vehicles, which was subsequently sold to Ford Motor Corporation in 1979.
Russell F. McCann, Jr.: Mr. McCann is President and CEO of Actio Software
Corporation and on the Board of Trustees for the Bigelow Laboratory for the
Ocean Sciences in Boothbay, Maine. Actio Software Corporation was co-founded in
1996 by Mr. McCann; Actio is a pioneer in providing MSDS subscription services
and chemical management services via the Internet. The company maintains a
sophisticated MSDS database supporting a variety of MSDS standards. The database
is the backbone of a chemical management and reporting system, which is used to
automatically comply with a wide range of local, state and federal regulations.
Previous to Actio, Mr. McCann was Co-founder, President and CEO of Ares Software
Corporation. Ares invented and patented a parametric font technology that used a
single font outline that could be manipulated into a wide range of typeface
designs. This compact means of representing typefaces enabled printer
manufacturers to increase the number of typefaces offered in their printers
while simultaneously reducing memory requirements. Ares also had a wide range of
award winning Microsoft Windows and Apple Macintosh shrink-wrap software
products that were widely distributed through mail order resellers and computer
retailers. Adobe Systems Incorporated acquired Ares Software Corporation in
1995.
Prior to Ares, Mr. McCann was Vice President of Marketing and Sales for Emerald
City Software. Emerald City Software produced software development tools for
Apple Macintosh and NeXT computer platforms and developed shrink-wrap software
products designed to produce special typographic and 3 dimensional effects using
an Adobe PostScript printer. Under Mr. McCann's marketing and sales leadership,
sales of Emerald City products increased 600% over a 1-year period. Adobe
Systems acquired Emerald City in March 1990.
Mr. McCann also previously worked for Letraset Graphics Design Software, a
subsidiary of Esselte Business Systems, and Boston Software Publishers. Boston
Software Publishers, which Mr. McCann co-founded, shipped the first commercial
software product for the Apple Macintosh. This product helped define the desktop
publishing industry. He has a Bachelor of Science with high honors in political
science and economics and an MBA in finance and marketing from Northeastern
University and specialized marketing studies from the Sloan School of Management
at MIT.
(c) Compliance with Section 16(a) of the Securities Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Registrant's officers and directors, and persons
who own more than ten percent of a registered class of the Registrant's equity
securities, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission. Officers, directors, and greater than
ten-percent shareholders are required by Securities and Exchange Commission
regulations to furnish the Registrant with copies of all Section 16(a) forms
they file.
Based solely on review of the copies of such forms furnished to the
Registrant, or representations that no Forms 5 were required or filed, the
Registrant believes that during the periods from July 1, 1997 through June 30,
1999, all Section 16(a) filing requirements applicable to its officers,
directors, and greater than ten-percent beneficial owners were complied with.
ITEM 10. EXECUTIVE COMPENSATION
(a) Summary Compensation Table
The following summary compensation table sets forth in summary form the
compensation received during each of the Registrant's last three completed
fiscal years by the Registrant's Chief Executive Officer. No other executive
earned in excess of $100,000.
LONG TERM COMPENSATION
--------------------------------------------------------------------------------
ANNUAL COMPENSATION Awards Payouts
--------------------------------------------------------------------------------
Salary Bonus Other Restricted All
Annual Stock LTIP Other
Comp Award(s) Options Pay- Comp
Outs
$ $ $ $ # $ $
--------------------------------------------------------------------------------
Joseph Monterosso 2000 $250000(1) - $1134000 - 166,668 - -
President &
Director 1999 $250000(1) - - - - - -
(11-25-96 through
12-31-99) 1998 $175000(1) - - - - - -
CEO & Director
(1-1-00 through
6-30-00)
--------------------------------------------------------------------------------
(1) Mr. Monterosso has not taken his salary compensation in the form of cash
for the past three years. Mr. Monterosso typically elects to converts his
accrued salary to restricted common stock. (2) Refer to Item 6.
(b) Option and Long Term Compensation
During fiscal year 1999, there were no options granted or exercised. During
fiscal year 2000, options were granted to the Chief Executive Officer that are
discussed in Item 10(d).
(c) Pension Plans and Other Benefit or Actuarial Plans
The Registrant has no annuity, pension or retirement plans or other plans
for which benefits are based on actuarial computations.
(d) Employment, Consulting and Advisory Management Contracts
On April 1, 1994, NPC entered into an employment agreement with Joseph
Monterosso to serve as the Company's Chief Executive Officer. In conjunction
with the acquisition of NPC, Mr. Monterosso became the Company's President and
Director on November 25, 1996, and Chairman on August 8, 1997. Subsequent to
June 30, 1997, the Board ratified the agreement with Mr. Monterosso. The
agreement initially compensates Mr. Monterosso $125,000 per annum and $250,000
per annum upon the first sale of the Company's HitLoTTo(R) Club Card, payable in
cash or in common stock of the Company. The first sale of the Company's
HitLoTTo(R) Club Card occurred in February 1998. Mr. Monterosso is also the
Company's Chief Financial Officer.
Effective January 1, 2000, the Company and Mr. Monterosso entered into an
Executive Employment Agreement for Mr. Monterosso to serve a three year term as
the Company's Chief Executive Officer. The agreement may be extended for two
additional years by mutual written consent of Mr. Monterosso and the Company.
The agreement provides for annual compensation of $250,000 with annual increased
of $25,000. Additionally, Mr. Monterosso will earn annual bonuses ranging from
$100,000 to $150,000 if the Company achieves certain pre-determined revenue
targets. During the first year of the agreement, Mr. Monterosso may convert
accrued salary to shares of the Company's common stock at a rate equal to 50% of
the stock's fair market value averaged over the preceding 15-day pay period. In
addition, Mr. Monterosso was granted stock options in the amount of 333,333
shares in the first year and 200,000 shares in each of the second and third
years. Such options are exercisable at $1.56 per share, vest in equal monthly
installments, and expire five years from the last day of Mr. Monterosso's
employment. As of June 30, 2000, 166,668 options have vested, and accordingly,
the Company recognized a stock based compensation charge of $198,141 during the
year ended June 30, 2000. None of the vested options have been exercised by Mr.
Monterosso.
(e) Director Compensation
The Registrant has no standard arrangements by which its directors are
compensated.
(f) Interlocking Relationships of Directors
As of the date of this Report, there are no interlocking relationships of
Directors.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth, as of June 30, 2000, the stock ownership of
each person known by the Registrant to be the beneficial owner of five percent
or more of the Registrant's voting securities and each officer, director,
director nominees, and all officers and directors as a group. Unless otherwise
indicated, each person has beneficial voting and investment power with respect
to the shares owned.
Shares of Common
Name of Beneficial Owners Number Percentage
Joseph Monterosso 2,151,668 17%
Russell F. McCann, Jr. 1,111,900 9%
Brad Hunt 632,106 5%
Dano Construction, Inc. 573,839 5%
Walter & Linda Gauger 451,537 4%
All directors and executive 3,263,568 26%
-------------------------------------------------
The following table sets forth, as of June 30, 2000, the 14% Preferred
Stock ownership of all holders of more than five percent of the 14% Preferred
Stock of the Registrant. No officers or directors own any shares of the 14%
Preferred Stock.
Shares of 14%
Name of Beneficial Owners Number Percentage
------------------------- ------ ----------
Raymond C. Kitely 30,000 17.6%
Eli Moshe 10,000 5.9%
Walter K. Theis, M.D. 20,000 11.8%
David Serer, 77,500 45.6%
Chapter 7 Trustee for the
Estate of David Paletz
Neil Miller 15,000 8.8%
David Sheetrit 10,000 5.9%
-------------------------------------------------------
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
a) Sale of Common Stock to Blackstone Calling Cards, Inc.
In September 1999, the Company sold 140,000 shares of restricted common
stock to Blackstone, a significant customer, for cash proceeds aggregating
$510,000. Because the estimated fair market value of the restricted common stock
sold to Blackstone exceeded the purchase price paid by Blackstone by the
aggregate amount of $327,120, the Company recognized a corresponding stock
compensation charge during the year ended June 30, 2000.
In November 1999, the Company sold 133,333 shares of restricted common
stock to Blackstone. In exchange, the Company received a receivable in the
aggregate amount of $250,000. Such receivable does not bear interest, has no
stated repayment terms and is collateralized by 66,667 shares of the Company's
common stock previously sold to Blackstone. Because the estimated fair market
value of the restricted common stock sold to Blackstone exceeded the purchase
paid by Blackstone by the aggregate amount of $254,730, the Company recognized a
corresponding stock compensation charge during the year ended June 30, 2000.
b) Transactions with the Chief Executive Officer and Chairman
In December 1999, the Company's Chief Executive Officer and Chairman
converted $383,463 of accrued salary owed to him pursuant to his employment
agreement, and $76,837 of accrued expenses owed to his wife, into 666,667 shares
of the Company's restricted common stock. In connection with this conversion,
the Company recognized compensation expenses of $1,134,000. Such expenses were
determined by multiplying the number of shares issued to the Chief Executive
Officer and Chairman by the closing price of the Company's common stock on the
date of the conversion, less a 15% discount factor based on the restricted
nature of the shares issued.
In December 1999, the Company's Chief Executive Officer and Chairman
deposited his personal shares of the Company's common stock as security for a
service agreement with a vendor. Additionally, the Chief Executive Officer and
Chairman executed a personal guarantee of the Company's obligations under the
related service agreement. As a result, the Company's Chief Executive Officer
and Chairman received 333,333 shares of the Company's restricted common stock,
and the Company recognized related compensation expenses of $1,100,000. Such
expenses were determined by multiplying the number of shares issued to the Chief
Executive Officer and Chairman by the closing price of the Company's common
stock on the date the issuance was approved by the Company's board of directors,
less a 15% discount factor based on the restricted nature of the shares issued.
c) Stock Transaction with a Director's Wife
In December 1999, the wife of a director of the Company converted accrued
compensation and expenses aggregating $284,586 into 379,448 shares of the
Company's restricted common stock. In connection with this conversion, the
Company recognized a related stock compensation charge aggregating $863,347
during the year ended June 30, 2000. Such charge was determined as the amount by
which the estimated fair market value of the restricted common stock issued
exceeded the aggregate carrying amount of the accrued compensation and expenses.
d) Related Party Note Payable Conversions
In connection with current year note payable conversions, the Company's
Chief Executive Officer and Chairman will receive an aggregate of 671,626
restricted shares of common stock, his wife will receive and aggregate of 94,647
restricted shares of common stock, and a relative will receive 10,062 restricted
shares of common stock. In addition, a director of the Company will receive an
aggregate of 106,911 restricted shares of common stock, his wife will receive
and aggregate of 76,506 shares of restricted common stock, and a relative will
receive 24,907 restricted shares of common stock.
e) Due to Officers and Related Party
As of June 30, 2000, the Company owes Mr. Monterosso, an officer, and his
wife a net aggregate amount of $235,474. Such amounts do not bear interest, are
not collateralized, and have no fixed repayment terms. During each of the years
ended June 30, 2000 and 1999, the Company recorded aggregate salaries and
consulting expenses to these two individuals of approximately $350,000, and such
amounts are included in the selling general, and administration expenses in the
accompanying consolidated statements of operations and comprehensive loss.
e) Due to Officers and Related Party
On April 1, 1994, NPC entered into an employment agreement with Joseph
Monterosso to serve as NPC's Chief Executive Officer. In conjunction with the
acquisition of NPC, Mr. Monterosso became the Company's President and Director
on November 25, 1996, and Chairman on August 8, 1997. The agreement provides for
annual compensation to Mr. Monterosso of $250,000.
f) Employment Agreement with Chief Executive Officer
Effective January 1, 2000, the Company and Mr. Monterosso entered into an
Executive Employment Agreement for Mr. Monterosso to serve a three year term as
the Company's Chief Executive Officer. The agreement may be extended for two
additional years by mutual written consent of Mr. Monterosso and the Company.
The agreement provides for annual compensation of $250,000 with annual increases
of $25,000. Additionally, Mr. Monterosso will earn annual bonuses ranging from
$100,000 to $150,000 if the Company achieves certain pre-determined revenue
targets. During the first year of the agreement, Mr. Monterosso may convert
accrued salary to shares of the Company's common stock at a rate of $3.75 per
share. During the second and third years, accrued salary may be converted to
shares of the Company's common stock at a rate equal to 50% of the stock's fair
market value averaged over the preceding 15-day pay period. In addition, Mr.
Monterosso was granted stock options in the amount of 333,333 shares in the
first year and 200,000 shares in each of the second and third years. Such
options are exercisable at $1.56 per share, vest in equal monthly installments,
and expire five years from the last day of Mr. Monterosso's employment. As of
June 30, 2000, 166,668 options have vested, and accordingly, the Company
recognized a stock based compensation charge of $198,141 during the year ended
June 30, 2000. Mr. Monterosso has exercised none of the vested options.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements
The financial statements listed in the accompanying index to consolidated
financial statements are filed as part of this Report.
2. Financial Statement Schedules
There were no financial statement schedules required to be filed as part of
this Annual Report.
3. Exhibits
Unless otherwise noted, Exhibits are filed herewith.
Exhibit
Number Description
24.1 Schedule of Subsidiaries.
27. Financial Data Schedule
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K for fiscal year 2000.
SIGNATURES
In accordance with Section 13 or 15 (d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
TOTALAXCESS.COM, INC.
(formerly Group V Corporation)
Date: October 23, 2000 By: //s// __
------------------------------------------
Joseph Monterosso, Chief Executive Officer
and Director
Date: October 23, 2000 By: //s//
Russell F. McCann, Jr., Director
In accordance with the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Date: October 23, 2000 By: //s//
Joseph Monterosso, Chief Executive Officer
and Director
Date: October 23, 2000 By: //s//
Russell F. McCann, Jr., Director
<PAGE>
TOTALAXCESS.COM, INC.
(formerly, Group V Corporation)
F-1
Table of Contents
Page
Independent Auditors' Report F-2
Financial Statements
Consolidated Balance Sheet F-3
Consolidated Statements of Operations and Comprehensive Loss F-5
Consolidated Statements of Stockholders' (Deficit) Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-9
<PAGE>
F-2
INDEPENDENT AUDITORS' REPORT
Board of Directors
TotalAxcess.com, Inc.
(formerly, Group V Corporation)
We have audited the accompanying consolidated balance sheet of TotalAxcess.com,
Inc. (formerly, Group V Corporation) (the "Company") as of June 30, 2000, and
the related consolidated statements of operations and comprehensive loss,
stockholders' (deficit) equity and cash flows for each of the years ended June
30, 2000 and 1999. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated 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 the
Company as of June 30, 2000, and the consolidated results of their operations
and their cash flows for each of the years ended June 30, 2000 and 1999, in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has experienced recurring losses
from operations, and has net working capital and stockholders' equity
deficiencies. These matters raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
HASKELL & WHITE LLP
October 18, 2000
Irvine, California
<PAGE>
TOTALAXCESS.COM, INC.
(formerly, Group V Corporation)
Consolidated Balance Sheet
As of June 30, 2000
Assets
Current assets
Cash and cash equivalents......................................$ 395,511
Accounts receivable............................................ 1,425,217
Inventories.................................................... 27,553
Prepaid expenses............................................... 13,735
Employee advances.............................................. 8,829
..Total current assets 1,870,845
Equipment and furniture, net (Note 3)............................. 271,562
Deposits and other assets......................................... 258,563
Total assets $ 2,400,970
Consolidated Balance Sheet (continued)
As of June 30, 2000
Liabilities and Stockholders' (Deficit) Equity
Current liabilities
Accounts payable $ 1,291,063
Accrued expenses 383,138
Due to officer and related party (Note 6) 235,474
Accrued litigation settlements (Note 8) 35,776
Capital lease obligations, current portion (Notes 3 and 8) 6,355
Common stock payable (Note 4) 4,557,320
Total current liabilities 6,509,126
Capital lease obligations, noncurrent portion (Notes 3 and 8)..... 536
....Total liabilities 6,509,662
Commitments and contingencies (Notes 4, 6, 8, and 11)
Stockholders' (deficit) equity (Note 5) Preferred stock - par value $.01;
authorized 1,000,000 shares; 14% cumulative convertible; redeemable; issued
and
outstanding 170,000 shares (aggregate liquidation of $170,000) 1,700
Preferred Stock Series B - par value $2.00; authorized 150,000 shares;
convertible; no shares issued and outstanding Common stock - par value $.15;
authorized 22,200,000 shares; 12,423,834 shares issued and outstanding
1,863,575
Additional paid-in capital 31,046,404
Common stock receivable (250,000)
Accumulated deficit (36,770,371)
... Total stockholders' (deficit) equity (4,108,692)
... Total liabilities and stockholders' (deficit) equity $ 2,400,970
<PAGE>
Consolidated Statements of Operations and Comprehensive Loss
For the Years Ended June 30, 2000 and 1999
2000 1999
Revenues $ 6,571,603 $ 1,271,673
Operating costs 6,021,005 1,193,225
Gross profit 550,598 78,448
Cost and expenses
Stock based compensation 3,877,338 -
Selling, general and administrative 2,238,527 2,036,957
Professional services 401,175 428,600
Interest expense, net 8,084,799 333,250
Realized loss on sale of marketable
equity securities 130,321 195,459
Litigation settlement expenses (Note 7) 83,200 876,789
Depreciation and amortization 32,700 32,656
Asset impairment charge (Note 3) - 651,450
Provision for stockholder and affiliate receivables
(Notes 2 and 5) - 515,967
Total costs and expenses (14,848,060) (5,071,137)
Loss before provision for income taxes and
extraordinary item (14,297,462) (4,992,689)
Provision for income taxes (Note 7) 4,831 1,345
Net loss before extraordinary items (14,302,293) (4,994,034)
Extraordinary items (Note 9) 1,436,015 167,529
Net loss (12,866,278) (4,826,505)
Other comprehensive (loss) income:
Unrealized holding loss arising
during the year - (31,051)
Reclassification adjustment for
losses included in net loss - 145,775
Other comprehensive income - 114,724
Comprehensive loss $(12,866,278) $ (4,771,781)
Net loss applicable to common stock $(12,890,078) $ (4,850,305)
Basic and diluted net loss per common share $ (1.23) $ (1.05)
Weighted average common shares outstanding 10,435,151 4,579,580
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TOTALAXCESS.COM, INC.
(formerly, Group V Corporation)
Consolidated Statements of Stockholders' (Deficit) Equity
For the Years Ended June 30, 2000 and 1999
------------------------------------------------------------------------------------------------------------------
Preferred Additional Common Accumulated Stockholders'
Preferred Series B Common Stock Paid-In Stock Other Comp. Accumulated (Deficit)
Shares Amount Share Amount Shares Amount Capital Receivable Loss Deficit Equity
------------------------------------------------------------------------------------------------------------------
Balances,
6/30/98 170000 $1700 150000 $300000 3322325 $498348 $16635791 $(515967) $(214869) $(19077588) $(2372585)
------------------------------------------------------------------------------------------------------------------
Conversion of Preferred Stock
Series B - - (114807)(229614) 596996 89550 140064 - - - -
------------------------------------------------------------------------------------------------------------------
Conversion of notes
payable - - - - 1867968 275695 399488 - - - 675183
------------------------------------------------------------------------------------------------------------------
Common stock
issuance - - - - 2553057 382959 1735550 - - - 2118509
------------------------------------------------------------------------------------------------------------------
Write-off of stockholder's
receivable - - - - - - - 515967 - - 515967
------------------------------------------------------------------------------------------------------------------
Other Comprehesive
income - - - - - - - - 114724 - 114724
------------------------------------------------------------------------------------------------------------------
Net loss - - - - - - - - - ( 4826505) (4826505)
------------------------------------------------------------------------------------------------------------------
Balances,
6/30/99 17000 $1700 35193 $ 70386 8310346 $1246552 $18910893 - (100,145) (23904093) (3774707)
------------------------------------------------------------------------------------------------------------------
Conversion of Preferred Stock
Series B - - (35193) (70386) 183004 27450 42936 - - - -
------------------------------------------------------------------------------------------------------------------
Conversion of notes payable
and accrued interest to
common stock - - - - 1740535 261080 4700364 - - - 4961444
------------------------------------------------------------------------------------------------------------------
Conversion of accrued expenses to
common stock - - - - 1046115 156917 2446757 - - - 2603674
------------------------------------------------------------------------------------------------------------------
Common stock in litigation
settlements - - - - 202314 30347 874323 - - - 904670
------------------------------------------------------------------------------------------------------------------
Common stock issuance for
cash - - - - 463521 69529 2506484 - - - 2576012
------------------------------------------------------------------------------------------------------------------
Common stock issuance for
receivable - - - - 133333 20000 484730 (250000) - - 254730
------------------------------------------------------------------------------------------------------------------
Common stock for personal
guarantee - - - - 333333 50000 1050000 - - - 1100000
------------------------------------------------------------------------------------------------------------------
Common stock issuance for
consulting svc - - - - 11333 1700 29917 - - - 31617
------------------------------------------------------------------------------------------------------------------
Other Comprehensive loss - - - - - - 100145 - 100145
------------------------------------------------------------------------------------------------------------------
Net loss - - - - - - - - - (12866278) (12866278)
------------------------------------------------------------------------------------------------------------------
Balances,
6/30/00 170000 $ 1700 - $ - 12423834 $1863575 $31046404 $(250000) $ - $(36770371) $(4108692)
==================================================================================================================
</TABLE>
Consolidated Statements of Cash Flows
For the Years Ended June 30, 2000 and 1999
Increase (Decrease) in Cash and Cash Equivalents
2000 1999
Cash flows from operating activities:
Net loss $(12,866,278) $ (4,826,505)
Adjustments to reconcile net loss to net
cash used in operating activities:
Interest expense 8,084,799 -
Stock based compensation 3,877,338 -
Depreciation and amortization 32,700 32,656
Extraordinary items (1,436,015) (167,529)
Realized loss on marketable securities 130,321 195,459
Asset impairment charge - 651,450
Provision for receivables - 515,967
Increase (decrease) from changes in:
Accounts receivable (876,668) (538,462)
Inventories (27,553) 41,368
Prepaid expenses and other current assets 39,802 (46,448)
Deposits and other assets (251,363) -
Accounts payable 834,354 740,071
Accrued expenses 27,273 241,849
Accrued interest - 60,820
Due to officer and related party 338,790 356,686
Deferred revenue and other liabilities - (7,068)
Accrued litigation settlements 35,776 876,798
Net cash used in operating activities (2,056,724) (1,872,888)
Cash flows from investing activities:
Proceeds from sale of marketable equity
securities 14,514 78,941
Acquisition of equipment and furniture (219,263) (13,442)
Net cash (used) provided by investing
activities (204,749) 65,499
Consolidated Statements of Cash Flows (continued)
For the Years Ended June 30, 2000 and 1999
Increase (Decrease) in Cash and Cash Equivalents
2000 1999
Cash flows from financing activities:
Proceeds from loans - 575,900
Proceeds related to the issuance of
common stock 2,088,327 1,763,870
Payments on capital lease obligations (4,294) (21,838)
Net cash provided by financing activities 2,084,033 2,317,932
Net (decrease) increase in cash (177,440) 510,543
Cash and cash equivalents, beginning of period 572,951 62,408
Cash and cash equivalents, end of period $ 395,511 $ 572,951
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Income taxes $ 4,831 $ 1,345
Interest $ - $ 20,417
Non-cash investing and financing activities:
Notes payable converted to common stock $ 1,100,717 $ 591,900
Extinguishment of capital lease obligations
and related amounts 769,394 -
Preferred Stock Series B converted to
common stock $ 70,386 $ 229,614
Acquisition of equipment and furniture and
assumption of capital leases $ - $ 14,888
<PAGE>
TOTALAXCESS.COM, INC.
(formerly, Group V Corporation)
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2000 and 1999
1. Business Activities and Summary of Significant Accounting Policies
Description of Business
TotalAxcess.com, Inc. (formerly, Group V Corporation) (the "Company") was
originally incorporated in the State of Delaware in 1987 as NuOasis Gaming, Inc.
During the fiscal year ended June 30, 1997, and through May 1999, the Company's
name was Group V Corporation. During the year ended June 30, 1998, the Company
entered the one-plus long distance and pre-paid telecommunications industry as
its main focus of operations.
Principles of Consolidation
The accompanying consolidated financial statements, include the accounts of
TotalAxcess.com, Inc., and its wholly owned subsidiaries, National Pools
Corporation ("NPC"), Lottery Publications Corporation, Academy Network Services,
Inc., Premier Plus, Inc., and Signature Communications Network, Inc. None of the
Company's subsidiaries had significant operations during the year ended June 30,
2000.
As used herein, the above is collectively referred to as the "Company," unless
the context indicates otherwise. All intercompany accounts and transactions have
been eliminated in consolidation.
Going Concern
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. However, the Company has
experienced recurring net losses, and has net working capital and stockholders'
equity deficiencies. These matters raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans are to increase its
distribution channels and service capacity through strategic business
acquisitions and alliances, focused marketing efforts, and other means.
Concurrently, management will attempt to operate with minimal fixed overhead and
will attempt to streamline and consolidate administrative functions where
appropriate. Management will continue to negotiate payment terms with vendors
and attempt to satisfy the Company's obligations with common stock. The ultimate
outcome of these plans is uncertain and the consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company's telecommunication services provide personal identification
numbers ("PIN's") for its customers, who are primarily distributors of pre-paid
phone cards. The PIN's are pre-numbered code combinations that are imprinted on
these cards by the customers. This allows for the proper routing and time
recording of minutes used on the calling cards. The Company contracts with a
provider of switching equipment that processes the phone card calls when they
are ultimately used by the end consumer. When cards are ready for distribution
to end consumers, customers authorize the Company to activate a specific
sequence of PIN's. The Company then immediately notifies its switching equipment
contractor to activate the related PIN's.
The Company recognizes revenue when the risks and rewards of the activated
PIN's are transferred to the customer, and when no right of return exists.
Typically, this occurs upon first use of the related pre-paid card. However, it
may occur earlier when the Company has a contractual right to bill the customer
within sixty days after PIN activation, regardless of when the related card is
used.
Cash Equivalents
Cash equivalents are highly liquid investments with maturities of three
months or less when acquired.
Marketable Equity Securities
As of June 30, 1999, marketable equity securities consisted of 650,292
shares of common stock of NuOasis Resorts, Inc. ("NuOasis") (Note 2). The
Company classified these equity securities as available-for-sale and,
accordingly, they were presented in the Company's consolidated balance sheet at
their estimated fair market value based on quoted market prices as of June 30,
1999. Additionally, unrealized losses on these securities were presented as a
component of other comprehensive loss in the related consolidated statements of
operations and comprehensive loss.
During the year ended June 30, 2000, the Company sold all 650,292 shares of
common stock, and realized a loss on the sale of these securities in the
aggregate amount of $130,321. Prior to its disposition of these shares, the
Company received a stock dividend from NuOasis that consisted of common stock of
five entities that were previously wholly-owned subsidiaries of NuOasis. These
five entities currently have no significant operations, and no public market
currently exists for their common stock. As a result, management believes that
the common stock of these five entities has a nominal value as of June 30, 2000,
and accordingly, they have not been valued in the accompanying consolidated
financial statements.
Fair Value of Financial Instruments
Disclosure about fair value of financial instruments is based on pertinent
information available to management as of June 30, 2000 and considerable
judgment is necessary to interpret market data and develop estimated fair value.
The Company has determined that the fair value of all financial instruments,
which include accounts receivable and capital lease obligations, approximated
their carrying values as of June 30, 2000.
Credit Risk
Financial instruments that potentially subject the Company to credit risk
at June 30, 2000 are primarily comprised of accounts receivable. The Company
generally does not require collateral on its accounts receivable and informal
credit evaluations of its customers are regularly performed.
As of June 30, 2000, 81% of the Company's accounts receivable is due from
RSL Primecall USA, and 19% is due from Blackstone Calling Cards, Inc., which is
also a stockholder of the Company.
Credit Risk (continued)
The Company places its deposits with financial institutions which are
considered by management to be of high-credit quality. At times, balances in
these cash accounts may exceed the Federal Deposit Insurance Corporation (FDIC)
limit of $100,000. Uninsured balances at June 30, 2000 were approximately
$383,072.
Equipment and Furniture
Equipment and furniture are recorded at cost. Depreciation is provided
using the straight-line method over the estimated useful lives of the related
assets which is five to seven years. Maintenance and repairs are charged to
operations as incurred.
Long Lived Assets
Long-lived assets and certain identifiable intangibles to be held and used
by the Company are reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
For the purposes of evaluating potential impairment, the Company's assets are
grouped by the subsidiary to which they relate. Since adopting this statement,
the Company gives consideration to events or changes in circumstances for each
of its subsidiaries. Related asset impairment charges are presented on a
separate line item in the accompanying consolidated statement of operations and
comprehensive loss and are described in Note 3.
Income Taxes
The Company uses the "liability method" of accounting for income taxes.
Accordingly, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities, using enacted tax rates in effect for the year in which the
differences are expected to reverse. Current income taxes are based on the
year's taxable income for federal and state income tax reporting purposes.
Accounting for Employee Stock Options
In October 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123, "Accounting for Stock-Based Compensation." In conformity with the
provisions of SFAS No. 123, the Company has determined that it will not change
to the fair value method prescribed by SFAS No. 123 and will continue to follow
Accounting Principles Board Opinion No. 25 for measurement and recognition of
employee stock-based transactions.
Issuance of Stock for Services
Shares of the Company's common stock issued for services are recorded in
accordance with SFAS No. 123 at the fair market value of the stock issued or the
fair market value of the services provided, whichever value is more reliably
measurable.
Reverse Stock Split
In February 2000, the Company effected a 1-for-15 reverse split of its
common stock. Accordingly, the authorized number of shares was reduced from
333,000,000 to 22,200,000. Related common stock share and per share amounts have
been retroactively adjusted in the accompanying consolidated financial
statements for this reverse stock split.
Loss per Common Share
Loss per common share is computed based on the net loss for each period, as
adjusted for dividends required on preferred stock ($23,800 for each of the
years ended June 30, 2000 and 1999) and the weighted average number of common
shares outstanding. Common stock equivalents were not considered in the loss per
share calculations, as the effect would have been anti-dilutive. A schedule of
common shares reserved for issuance upon conversion, redemption or exercise of
various equity securities is included in Note 5.
Segments and Related Information
A public enterprise is required to report financial and descriptive
information about its reportable operating segments and establishes standards
for related disclosures about product and services, geographic areas, and major
customers.
Currently, management believes that the Company has only one reportable
operating segment, as the Company is organized in a single operating segment for
purposes of making operating decisions and assessing performance. The chief
executive officer (the chief operating decision maker), evaluates performance,
makes operating decisions, and allocates resources based on financial data
consistent with the presentation in the accompanying consolidated financial
statements.
During the years ended June 30, 2000 and 1999, Blackstone Calling Cards,
Inc. ("Blackstone"), accounted for approximately 49% and 41% of the Company's
revenues, respectively. Blackstone is a stockholder of the Company. During the
year ended June 30, 2000, RSL Primecall USA accounted for 48% of the Company's
revenues. The Company had no revenues attributed to geographic locations outside
the United States during each of the years ended June 30, 2000 and 1999.
2. Acquisition of National Pools Corporation and Change in Control of the
Company
On June 13, 1996, NuOasis Resorts, Inc. ("NuOasis"), the then controlling
parent of the Company, granted an option (the "Option") to Joseph Monterosso,
the current Chief Executive Officer and Chairman of the Company, to acquire
250,000 Series B Preferred Shares of the Company (the "Series B Shares") owned
by NuOasis at that time (Note 5). The Option is exercisable at a price of $13.00
per share and each Series B share is convertible into 5.2 shares of the
Company's common stock.
On December 19, 1996, the Company entered into Stock Purchase Agreements
with each of the shareholders of NPC pursuant to which the Company agreed to
issue a series of Secured Promissory Notes (the "Notes") in the aggregate
principal amount of $1,200,000 and 66,667 shares of the Company's restricted
common stock to the NPC shareholders in exchange for all of the issued and
outstanding shares of capital stock of NPC. The Notes are convertible into a
maximum of 16,126,667 shares of the Company's common stock. The conversion of
the Notes are contingent upon NPC's operations achieving certain financial goals
over the next several fiscal years. The terms of the conversion are, for every
$250,000 of net annual operating income achieved by NPC, $7,500 in principal
amount of the Notes may be converted into 100,792 shares of restricted common
stock. The Notes are non-recourse to the Company, secured by the assets of NPC,
bear interest at 8% per annum, and were due and payable on May 31, 1999 (Note
4). As part of this acquisition, NuOasis and the Company agreed to a debt
assumption agreement whereby all Company debt in excess of $20,000 on December
24, 1996, except for amounts owed to certain affiliates, which have been
converted into shares of the Company's common stock, was assumed by NuOasis. The
NPC Stock Purchase Agreements closed on December 24, 1996.
On June 13, 1997, Mr. Monterosso exercised the Option to purchase 128,041
Series B Shares, at $13.00 per share, by payment to NuOasis of approximately
$1,665,000. Additionally on June 13, 1997, the Company sold its wholly owned
subsidiary, Casino Management of America ("CMA"), to NuOasis for cash of
$1,140,000, notes receivable from NPC aggregating $245,836, and a credit against
the NuOasis intercompany account of $95,000.
On August 22, 1997 and effective June 13, 1996, the Option was amended (the
"Amended Option") to increase the exercise price for 21,959 of the Series B
Shares from $13.00 per share to $72.20 per share, or approximately $1,585,000
for the 21,959 shares of Series B Preferred Stock. The option to purchase the
remaining 100,000 shares of Series B Shares was terminated. Concurrently,
NuOasis granted Mr. Monterosso a new option to purchase the remaining 100,000
Series B Shares at an exercise price of $11.70 per share. Additionally, as
consideration for granting the new option, NuOasis acquired the right to require
Mr. Monterosso to purchase all or any remaining unexercised shares of the
100,000 Series B Shares in its entirety by September 1, 1998. In September 1997,
NuOasis converted the 100,000 Series B Shares into 520,000 common shares and
granted Mr. Monterosso an option to purchase 520,000 common shares at $2.25 per
share (the "Common Option").
Closing on September 2, 1997, but effective June 30, 1997, Mr. Monterosso
exercised the Amended Option to purchase 21,959 Series B Shares, at $72.20 per
share, by payment to NuOasis of approximately $1,585,000. Concurrent with the
exercise of the Amended Option, the Company released NuOasis from liability, if
any, arising from any events while NuOasis controlled the Company, in exchange
for approximately $1,585,000 of marketable securities (the "Securities").
On September 2, 1997, NuOasis sold to Mr. Monterosso 400,000 New Class D
Warrants in consideration for a $1,800,000 promissory note secured by the New
Class D Warrants, due in September 1998 (the "Warrant Note"). Each New Class D
Warrant is exercisable at $15.00 per share and entitles Mr. Monterosso to
receive, upon exercise, two shares of common stock, or a total of 800,000 common
shares if all the of the New Class D Warrants are exercised. The New Class D
Warrants expire on March 30, 2004, and to date, none of the New Class D Warrants
have been exercised.
In October 1997, the Company entered into an Exchange Agreement with
NuOasis in which the Company exchanged the Securities, having a net book value
of $1,585,000, for $700,000 in cash, a $500,000 6% secured promissory note
receivable and 3,600,000 shares of common stock of NuOasis. Upon the closing of
the Exchange Agreement, the Company received cash from NuOasis of $441,801 and
the remaining cash balance that was provided for in the Exchange Agreement of
$258,199 was applied against amounts Mr. Monterosso owed to NuOasis pursuant to
the Common Option and Warrant Note. In addition, the $500,000 6% secured
promissory note receivable was not ultimately received by the Company as such
amount was also applied against amounts Mr. Monterosso owed to NuOasis pursuant
to the Common Option and the Warrant Note. As a result of these transactions,
the Company recorded a charge against earnings in the amount of $758,199 during
the year ended June 30, 1998.
In November 1998, the Company filed suit against NuOasis and others
alleging fraud and misrepresentation in connection with the above transactions
(Note 8).
As a result of the Company's acquisition of NPC and the sales and purchases
of the Series B Preferred Stock, as discussed above, a change in control of the
Company occurred and the Company is no longer a controlled subsidiary of
NuOasis.
3. Equipment and Furniture
Equipment and furniture, net is comprised of the following at June 30,
2000:
Office equipment, furniture and fixtures $ 180,292
Telecommunications equipment 179,776
360,068
Less accumulated depreciation (88,506)
$ 271,562
Effective March 1998, the Company acquired the telephone switching and
platform assets and office equipment of Ark-Tel, Inc., a wholly owned subsidiary
of Universal Network Services, Inc. ("UNSI"). NPC's Chief Operating Officer at
that time, who was also a director of the Company through December 1999, was a
significant shareholder and officer of UNSI. Pursuant to the related Asset
Purchase Agreement, the Company acquired certain capital and operating leases
(Note 8) whose remaining outstanding principle balances approximated the
estimated fair value of the related leased equipment. In exchange, the Company
forgave approximately $300,000 that was owed to the Company by UNSI. The excess
of the total consideration paid over the estimated fair value of net assets
acquired of approximately $300,000 was charged to expense during the year ended
June 30, 1998.
During the year ended June 30, 1999, management determined that the
telephone switching and platform assets acquired from Ark-Tel, Inc., were not
year 2000 compliant and that significant equipment upgrades were required to
prepare the equipment to operate in the year 2000 and beyond. As a result, the
Company ceased payment of required rents, which resulted in an event of default
per the related equipment lease terms. Based on the above, the Company recorded
a related asset impairment charge aggregating $651,450 during the year ended
June 30, 1999.
In December 1999, the lessor repossessed the related assets and the Company
recognized an extraordinary gain of $769,394 related to the extinguishment of
the debt under the capital lease agreement (Note 9). Such amount represented all
amounts due to the related lessor on the date of repossession.
4. Convertible Notes Payable
In connection with the Stock Purchase Agreements with each of the
shareholders of NPC (Note 2), the Company issued Secured Promissory Notes (the
"Notes") in the aggregate principal amount of $1,200,000. The Notes are
convertible into a maximum of 241,900,000 shares of the Company's common stock.
The conversion of the Notes is contingent upon NPC's operations achieving
certain financial goals over the next several fiscal years. The terms of the
conversion are, for every $250,000 of net annual operating income achieved by
NPC, $7,500 in principal amount of the Notes may be converted into 1,511,875
shares of restricted common stock. The Notes are non-recourse, secured by the
assets of NPC, bear interest at 8% per annum, and were due and payable, with
related interest, on May 31, 1999. During the year ended June 30, 1999, $134,283
of notes payable was converted to 111,902 shares of the Company's common stock.
In September 1998, the Company issued $575,900 of 12% convertible,
subordinated notes payable, due in April 1999. Certain note holders converted
$540,900 of the notes payable into 1,830,508 shares of common stock during the
year ended June 30, 1999.
As a result of the above transactions, the Company's aggregate note payable
balance at June 30, 1999 was $1,100,717.
During the year ended June 30, 2000, the Company and each respective note
holder agreed to convert the outstanding principal balance of the notes payable,
and all accrued interest thereon, into an aggregate of 3,374,159 shares of the
Company's restricted common stock. An aggregate of 1,740,535 share were issued
in February 2000, and the remaining 1,633,624 shares are payable in February
2001. As a result, the Company has recorded a common stock payable aggregating
$4,557,320 as of June 30, 2000 for the portion of the stock to be released in
February 2001. In connection with this note payable conversion, the Company
recognized a related effective interest charge in the aggregate amount of
$7,669,197. Such charge was determined as the amount by which the estimated fair
market value of the restricted common stock issued exceeded the outstanding
amount of the notes payable and accrued interest.
5. Stockholders' (Deficit) Equity
Common Shares Reserved for Issuance
At June 30, 2000, shares of common stock were reserved for the exercise and
conversion of the following:
Preferred stock:
14% Preferred Stock issued and outstanding 11,333
Redeemable common stock purchase warrants:
New Class A (exercisable at $7.50 per share) 102,000
New Class B (exercisable at $11.25 per share) 205,333
New Class C (exercisable at $15.00 per share) 100,667
New Class D (exercisable at $7.50 per share) 800,000
Stock options:
Stock option grants outstanding 56,500
2000 Incentive and Non-qualified Stock Options -
available for grant 2,000,000
1993 Incentive and Non-qualified Stock Options -
available for grant 80,000
1991 Non-qualified Stock Options - available for grant 40,000
Note payable conversion to common stock 1,740,535
Total 5,136,368
Preferred Stock
During 1989, stockholders authorized the issuance of up to 1,000,000 shares
of preferred stock with a par value of $.01 per share.
During 1989, the Company sold 750,000 shares of preferred stock designated
as 14% cumulative convertible preferred stock (the "14% Preferred Stock"). The
14% Preferred Stock is redeemable, in whole or in part, at the option of the
Company at a redemption price of $100 per share plus any unpaid dividends
thereon to the redemption date. The 14% Preferred Stock has a liquidation value
of $1.00 per share, ranks, as to dividends and liquidation, prior to the common
stock and is convertible at the option of the holder upon 30 days notice into
one share of common stock, subject to adjustments in certain events. Each share
is entitled to one vote and an annual dividend of $.14 per share. Dividends are
cumulative and payable quarterly when declared. Dividends on common stock may
not be paid unless provision has been made for payment of preferred dividends.
Preferred Stock (continued)
The 14% Preferred Stock has a liquidation preference of the original
purchase price ($1.00 per share) plus unpaid dividends on each share thereof.
The balance of proceeds of liquidation, if any, is to be paid to the common
stockholders of the Company. A merger or reorganization or other transaction in
which control is transferred will be treated similar to liquidation.
Subject to anti-dilution adjustments, each fifteen shares of 14% Preferred
Stock is convertible at any time into one share of the Company's common stock.
Each share of the 14% Preferred Stock votes on a 1:1 converted-to-common stock
basis, and the holders of 14% Preferred Stock and the holders of common stock
shall vote together as one class on all matters submitted to a vote of the
Company's stockholders. The conversion ratio of the 14% Preferred Stock to
common stock will be proportionally adjusted in the event of dilution, i.e.
proportional adjustments for stock splits and stock dividends will be made.
No 14% Preferred Stock was converted and no dividends were declared or paid
on the 14% Preferred Stock during each of the years ended June 30, 2000 and
1999. Dividends in arrears aggregated $229,625 at June 30, 2000.
In March 1994, the Company issued 250,000 shares of Series B Preferred
Stock to NuOasis. The Series B Preferred Stock has no redemption rights and is
not entitled to any dividends. It has a liquidation value of $2 per share in
preference to any payment on common stock, subject only to rights of the holders
of the 14% Preferred Stock. Each share is entitled to 5.2 votes and shall be
convertible into 5.2 fully paid and nonassessable shares of common stock, or a
total of 1,300,000 shares of common stock if all of the shares of Series B
Preferred Stock are converted. All shares of the Company's Series B Preferred
Stock have been converted into common stock as of June 30, 2000.
Private Sale of Common Stock and New Warrants
During June 1993, the Company undertook a private placement of 25 units for
an aggregate sales price of $250,000 ("Private Placement I"), with each unit
consisting of 2,667 shares of common stock, 2,667 New Class A redeemable common
stock purchase warrants ("New Class A Warrants") and 2,667 New Class B
redeemable common stock purchase warrants ("New Class B Warrants"). Each New
Class A Warrant entitles the holder to purchase one share of common stock at the
price of $7.50 per share for the period from August 1, 1993 to the effective
date of a registration statement registering the common stock and the common
stock underlying the New Class A Warrants offered and issuable under the related
private placement memorandum. Each New Class B Warrant entitles the holder to
purchase one share of common stock at the price of $11.25 per share for the
period from August 1, 1993 to the effective date of a registration statement
registering the common stock and the common stock underlying the New Class B
Warrants offered and issuable under the related private placement memorandum.
During July 1993, the Company undertook a private placement of an
additional 25 units for an aggregate sales price of $250,000 ("Private Placement
II"), with each unit consisting of 2,667 shares of common stock, 2,667 New Class
A Warrants, and 2,667 New Class B Warrants.
During August 1993, the Company undertook a private placement of an
additional 20 units for an aggregate sales price of $200,000 ("Private Placement
III"), with each unit consisting of 2,667 shares of common stock, 2,667 New
Class A Warrants, and 2,667 New Class B Warrants.
In connection with Private Placements I, II and III, the Company received
aggregate proceeds of $559,000 (net of sales agent and other direct costs which
aggregated $141,000) from the sale of 70 units and issued 186,667 shares of
common stock, 186,667 New Class A Warrants and 186,667 New Class B Warrants
during fiscal year 1993.
In September 1993, in an effort to encourage early exercise, the Company
offered one New Class C redeemable common stock purchase warrant ("New Class C
Warrants") for each New Class A Warrant exercised on or before September 30,
1993. In connection with that offer, 103,333 New Class A Warrants were exercised
resulting in the issuance of an additional 103,333 shares of common stock for
$775,000 and 103,333 New Class C Warrants. Each New Class C Warrant entitles the
holder to purchase one share of common stock at the price of $15.00 per share.
Private Sale of Common Stock and New Warrants (continued)
All New Class A, B and C Warrants are exercisable up to one year after the
effective date of the registration of the underlying stock. As of the date of
this report, the registration of the underlying stock has not been completed and
therefore is not yet effective.
In March 1994, the Company issued 400,000 New Class D Warrants to NuOasis.
Each New Class D Warrant is exercisable at $15.00 per share and will entitle the
holder to receive upon exercise two (2) shares of common stock, or a total of
800,000 shares if all of the New Class D Warrants are exercised. The New Class D
Warrants expire on March 30, 2004, and to date, none of the New Class D Warrants
have been exercised. In September 1997, NuOasis sold the New Class D Warrants to
Mr. Monterosso for a $1,800,000 promissory note secured by the New Class D
Warrants (Note 2).
2000 Incentive and Non-qualified Stock Option Plans
Effective January 31, 2000, the Company's Board of Directors approved the
Company's 2000 Stock Option Plan (the "2000 Plan"), which provides for the
granting of both incentive stock options and non-qualified stock options. The
2000 Plan covers 2,000,000 shares of the Company's common stock. Options granted
pursuant to the 2000 Plan will generally have terms no longer than 10 years, and
the related option exercise price will be determined by the Company's Board of
Directors. No options have yet been granted under the 2000 Plan.
1993 Incentive and Non-qualified Stock Option Plans
Under stock option plans adopted on January 22, 1993, the Company's Board
of Directors may grant "incentive stock options" and "non-qualified stock
options" whereby option holders may purchase up to 80,000 shares of common stock
prior to the termination of the plan on January 22, 2003. Incentive stock
options may only be granted to officers and other employees; non-qualified stock
options may be granted to employees, advisors, consultants and members of the
Board of Directors of the Company. Incentive stock options may not be granted at
a price less than 100% of fair market value as of the date of grant to officers
and employees who own less than 10% of the Company's common stock and 110% of
fair market value to those officers and employees who own more than 10%.
Non-qualified stock options may be granted at a price to be determined by the
compensation committee of the Board of Directors on the date such non-qualified
stock options are granted. Options are exercisable from the date of grant and
expire no later than ten years from the date of grant or such earlier date as
determined by the compensation committee at the date of grant. However, the term
of an incentive stock option granted to an officer or other employee who at the
time of grant owns at least 10% of the Company's common stock, shall not exceed
five years. No options have been granted under the 1993 incentive and
non-qualified stock options plans.
1991 Non-qualified Stock Options
Under a stock option plan adopted on February 1, 1991, the Company's Board
of Directors may grant "non-qualified stock options" whereby employees may
purchase up to 40,000 shares of common stock prior to the termination of the
plan on February 1, 2001. Options must be granted at no less than 85% of fair
market value as of the date of grant. Options are exercisable from the date of
grant and expire no later than five years from the date of grant. No options
were issued or exercised during each of the years ended June 30, 2000 and 1999
and 40,000 options remain available for grant as of June 30, 2000.
1989 Incentive Stock Option and Non-qualified Stock Option Plans
In July 1999, the 1989 incentive stock option and non-qualified stock
option plans were terminated.
The NuOasis Option
In March 1994, the Company granted to NuOasis a nontransferable option for
the purchase of up to 410,667 shares of the Company's common stock. The exercise
price and total number of shares that can be purchased upon exercise of the
option is equal to the exercise price and number of shares of common stock
subject to New Class A, New Class B and New Class C Warrants outstanding at the
Closing Date that eventually expired unexercised. The Warrant Agreements extend
the expiration dates of the respective warrants to one year after the effective
date of a registration statement, at which time NuOasis may exercise its option
provided all the New Class A, B and C Warrants have not been exercised. NuOasis
does not hold any of the New Class A, B or C Warrants, nor is it currently
entitled to exercise its Option. In conjunction with the sale of the New Class D
Warrants (Note 2), NuOasis also sold its rights to exercise any remaining
unexercised New Class A, New Class B and New Class C Warrants.
Other Stock Options
A summary of other stock option transactions is as follows:
Year Ended Year Ended
June 30, 2000 June 30, 1999
Outstanding at beginning of year 56,500 56,500
Granted 166,668 -
Exercised - -
Cancelled - -
Outstanding at end of year 223,168 56,500
Stock options granted during the year ended June 30, 2000 are described in
Note 6.
Stock Options Exercised
During the year ended June 30, 1997, certain affiliates of the Company
exercised stock options and the Company received notes in the aggregate amount
of $584,167 and aggregate cash payments of $67,874 as consideration for the
exercise of these options. The notes were originally due in May 1998 and earn
interest at 10% per annum. The Company recorded a provision against related
receivables of $515,967 during the year ended June 30, 1999.
6. Related Party Transactions
Due to Officers and Related Party
As of June 30, 2000, the Company owes Mr. Monterosso, an officer, and his
wife a net aggregate amount of $235,474. Such amounts do not bear interest, are
not collateralized, and have no fixed repayment terms. During each of the years
ended June 30, 2000 and 1999, the Company recorded aggregate salaries and
consulting expenses to these two individuals of approximately $350,000, and such
amounts are included in selling, general, and administration expenses in the
accompanying consolidated statements of operations and comprehensive loss.
Transactions with the Chief Executive Officer and Chairman
On April 1, 1994, NPC entered into an employment agreement with Joseph
Monterosso to serve as NPC's Chief Executive Officer. In conjunction with the
acquisition of NPC, Mr. Monterosso became the Company's President and Director
on November 25, 1996, and Chairman on August 8, 1997. The agreement provides for
annual compensation to Mr. Monterosso of $250,000.
Effective January 1, 2000, the Company and Mr. Monterosso entered into an
Executive Employment Agreement for Mr. Monterosso to serve a three year term as
the Company's Chief Executive Officer. The agreement may be extended for two
additional years by mutual written consent of Mr. Monterosso and the Company.
The agreement provides for annual compensation of $250,000 with annual increases
of $25,000. Additionally, Mr. Monterosso will earn annual bonuses ranging from
$100,000 to $150,000 if the Company achieves certain pre-determined revenue
targets. During the first year of the agreement, Mr. Monterosso may convert
accrued salary to shares of the Company's common stock at a rate of $3.75 per
share. During the second and third years, accrued salary may be converted to
shares of the Company's common stock at a rate equal to 50% of the stock's fair
market value averaged over the preceding 15 day pay period. In addition, Mr.
Monterosso was granted stock options in the amount of 333,333 shares in the
first year and 200,000 shares in each of the second and third years. Such
options are exercisable at $1.56 per share, vest in equal monthly installments,
and expire five years from the last day of Mr. Monterosso's employment. As of
June 30, 2000, 166,668 options have vested, and accordingly, the Company
recognized a stock based compensation charge of $198,141 during the year ended
June 30, 2000. None of the vested options have been exercised by Mr. Monterosso.
Transactions with the Chief Executive Officer and Chairman (continued)
In December 1999, the Company's Chief Executive Officer and Chairman
converted $383,463 of accrued salary owed to him pursuant to his employment
agreement, and $76,837 of accrued expenses owed to his wife, into 666,667 shares
of the Company's restricted common stock. In connection with this conversion,
the Company recognized compensation expenses of $1,134,000. Such expenses were
determined by multiplying the number of shares issued to the Chief Executive
Officer and Chairman by the closing price of the Company's common stock on the
date of conversion, less a 15% discount factor based on the restricted nature of
the shares issued.
In December 1999, the Company's Chief Executive Officer and Chairman
deposited his personal shares of the Company's common stock as security for a
service agreement with a vendor. Additionally, the Chief Executive Officer and
Chairman executed a personal guarantee of the Company's obligations under the
related service agreement. As a result, the Company's Chief Executive Officer
and Chairman received 333,333 shares of the Company's restricted common stock,
and the Company recognized related compensation expenses of $1,100,000. Such
expenses were determined by multiplying the number of shares issued to the Chief
Executive Officer and Chairman by the closing price of the Company's common
stock on the date the issuance was approved by the Company's board of directors,
less a 15% discount factor based on the restricted nature of the shares issued.
Stock Transaction with Director's Wife
In December 1999, the wife of a director of the Company converted accrued
compensation and expenses aggregating $284,586 into 379,448 shares of the
Company's restricted common stock. In connection with this conversion, the
Company recognized a related stock compensation charge aggregating $863,347
during the year ended June 30, 2000. Such charge was determined as the amount by
which the estimated fair market value of the restricted common stock issued
exceeded the aggregate carrying amount of accrued compensation and expenses.
Related Party Note Payable Conversions
In connection with the note payable conversions described in Note 4, the
Company's Chief Executive Officer and Chairman will receive an aggregate of
671,626 restricted shares of common stock, his wife will receive an aggregate of
94,647 restricted shares of common stock, and a relative will receive 10,062
restricted shares of common stock. In addition, a director of the Company will
receive an aggregate of 106,911 restricted shares of common stock, his wife will
receive an aggregate of 76,506 shares of restricted common stock, and a relative
will receive 24,907 restricted shares of common stock.
Stock Transactions with Blackstone Calling Cards, Inc.
In September 1999, the Company sold 140,000 shares of restricted common
stock to Blackstone, a significant customer, for cash proceeds aggregating
$510,000. Because the estimated fair market value of the restricted common stock
sold to Blackstone exceeded the purchase price paid by Blackstone by the
aggregate amount of $327,120, the Company recognized a corresponding stock
compensation charge during the year ended June 30, 2000.
In November 1999, the Company sold 133,333 shares of restricted common
stock to Blackstone. In exchange, the Company received a receivable in the
aggregate amount of $250,000. Such receivable does not bear interest, has no
stated repayment terms and is collateralized by 66,667 shares of the Company's
common stock previously sold to Blackstone. Because the estimated fair market
value of the restricted common stock sold to Blackstone exceeded the purchase
paid by Blackstone by the aggregate amount of $254,730, the Company recognized a
corresponding stock compensation charge during the year ended June 30, 2000.
7. Income Taxes
The income tax effects of significant items comprising the Company's net
deferred income tax assets and liabilities are as follows as of June 30:
2000 1999
Stock based compensation $ 1,807,000 $ 259,501
Interest expense 3,569,800 349,328
Accrued expenses 81,000 68,844
Valuation allowance (5,457,800) (677,673)
Current portion of deferred tax
assets $ - $ -
Net operating loss carryforwards $ 6,551,110 6,230,800
Valuation allowance (6,551,110) (6,230,800)
Long-term portion of deferred
tax assets $ - $ -
The reconciliation of income taxes computed at the federal statutory tax
rate to income tax expense at the effective income rate is as follows:
2000 1999
Federal statutory income tax rate (34.0)% (34.0)%
Increases (decreases) resulting from:
State tax effect (8.5) (10.5)
Net change in valuation allowance 42.5 44.5
Effective income tax rate -% -%
The Company has federal and state net operating losses ("NOL's")
approximating $16,801,000 and $14,805,000, respectively, as of June 30, 2000. A
significant portion of the NOL's resulted from the acquisition of NPC and are
likely to be subject to ownership change limitations. The federal NOL's
carryforwards begin to expire in fiscal year 2005. The state NOL's carryforwards
began expiring in fiscal year 1999. In addition, utilization of the NOL's may be
limited on Section 382 of the Internal Revenue Code due to additional ownership
changes.
At June 30, 2000 and 1999, a 100% valuation allowance has been provided to
reduce the Company's net deferred tax assets for the amount by which the
deferred tax asset exceeded the net deferred tax liability resulting from all
temporary differences. The Company has provided the allowance since management
could not determine that is was "more likely than not" that the benefits of the
deferred tax assets would be realized.
8. Commitments and Contingencies
Legal Proceedings
On August 28, 1998, the Company was named in a lawsuit filed by Worldcom
Network Services, Inc. ("Worldcom") to recover the sum of $2,208,362 allegedly
due and owing as a result of a debt that the Company allegedly guaranteed on
behalf of UNSI. Although the Company denies liability on the guarantee, the
Company reached a settlement with Worldcom in which the Company transferred
177,778 shares of its restricted common stock to Worldcom. In exchange, Worldcom
agreed to release the Company from any and all liability, known and unknown up
to the date of the related settlement agreement, which is November 3, 1999. As a
result of the settlement, the Company recorded a litigation settlement expense
of $712,560 during the year ended June 30, 1999. The expense was determined by
multiplying the number of shares issued upon settlement by the closing price of
the Company's common stock on the date of settlement, less a 10% discount factor
based on the restricted nature of shares issued.
On October 2, 1998, Pickett Communications, Inc. ("Pickett") filed a
complaint for monetary damages and challenged the Company's rights to use the
HitLoTTo logo. In July 1999, a settlement agreement was executed that required
the Company to release 14,536 shares of its restricted common stock to Pickett.
This stock had previously been issued to Pickett pursuant to a contract dated
October 14, 1997 in which the Company agreed to pay Pickett for services it
provided to NPC. The Company had previously refused to release the common stock,
as NPC disputed certain charges which it believed were unauthorized. As a result
of the settlement, the Company recorded a litigation settlement expense of
$141,287 during the year ended June 30, 1999. The expense was determined by
multiplying the number of shares issued upon settlement by the closing price of
the Company's common stock on the date of settlement, less a 10% discount factor
based on the restricted nature of shares issued.
On February 19, 1999, Accountempts and RHI Management Resources filed a
complaint for breach of contract to recover approximately $26,000 allegedly due
and owing for temporary employment services. In July 1999, a settlement
agreement was executed in which the Company agreed to pay an aggregate amount of
$24,000 at the rate of $2,000 per month. As the Company previously accrued
$35,475 to these parties, the Company recorded a reduction of litigation
settlement expenses of $11,475 during the year ended June 30, 1999.
On August 30, 1999, the California Labor Commissioner awarded Joseph Arton
$34,426 in wages, interest and penalties based on claims that this individual
was an employee of the Company. As a result of the Company's appeal filed on
September 20, 1999, Joseph Arton filed a related complaint. Although the Company
contends that Joseph Arton was not an employee of the Company, but was an
independent contractor, the Company recognized a $34,426 litigation expense with
respect to this matter during the year ended June 30, 1999. In December 1999,
the Company settled this matter and issued 10,000 shares of restricted common
stock. As a result of this settlement and related stock issuance, the Company
recognized an additional expense of $16,424 during the year ended June 30, 2000.
The expense was determined by multiplying the number of shares issued upon
settlement by the closing price of the Company's common stock on the date of
settlement, less a 15% discount factor based on the restricted nature of shares
issued.
On November 10, 1998, the Company filed legal action (TotalAxcess, Inc. v.
NuOasis Resorts, Inc; Nona Morelli's II, Inc.; NuOasis International, Inc.; Fred
Luke, Jr.; Rocci Howe; Steven H. Dong; John D. Desbrow; Archer & Weed; Richard
Weed) in San Francisco Superior Court. The suit alleges fraud and
misrepresentation in the sale of securities, which were not qualified for sale
and professional malpractice against legal counsel. On July 26, 1999, NuOasis
Resorts, Inc. and Nona Morelli's II, Inc. filed a cross complaint against the
Company alleging claims for breach of contract, fraud, material
misrepresentation in the purchase of securities and libel, and seeks rescission
of certain contracts and the imposition of a constructive trust over certain
securities. Also on July 26, 1999, Rocci Howe, Fred Luke, Jr. and Steven Dong
filed cross complaints against the Company alleging claims for breach of
contract, indemnity and libel. All counsel have stipulated to a change in venue
from San Francisco to Orange County Superior Court, and the San Francisco Court
has transferred the file to the Orange County Court. The trial date is set for
March 2001. The Court ordered that all claims the Company has against Richard
Weed are to be arbitrated subsequent to the completion of the trial against the
other defendants. Management plans to vigorously pursue its complaint and defend
each cross complaint, which it believes lack substantial merit. Based on
information presently available, management is unable to determine the amount of
the potential loss contingency, if any.
On January 6, 1999, the Company filed a lawsuit against Dennis Houston, a
former officer of NPC and a Director of the Company through December 1999. This
complaint alleges breach of fiduciary duty by Mr. Houston as one of the
Company's directors for failing to disclose material facts in the Ark-Tel Asset
Purchase Agreement which management believes resulted in the Company's being
sued by Worldcom Network Services, Inc. (see above). On June 29, 1999, Mr.
Houston filed a cross complaint alleging claims for breach of contract, breach
of the implied covenant of good faith and fair dealing, misrepresentation, fraud
and embezzlement. The Company is vigorously pursuing the matter against Mr.
Houston and plans to vigorously defend the cross complaint. This action is
presently being tried. Based on information presently available, management is
unable to determine the amount of the potential loss contingency, if any.
On June 26, 1997, the Company filed a lawsuit against Network Long
Distance, Inc. and their stock transfer agent to compel them to release shares
of Network Long Distance, Inc.'s common stock (the "Shares") that was received
by the Company in connection with a release of liability granted to NuOasis
Resorts, Inc. (Note 2). Once the Shares were properly transferred to the
Company, the Company dismissed its claims as moot. However, Network Long
Distance, Inc. (currently known as Eclipse Communications, Inc. or "Eclipse")
continues to pursue the Shares through its counterclaims. Eclipse is claiming
that it owns some or all of the Shares and is seeking damages and an injunction
prohibiting the transfer of the Shares. In response to Eclipse's allegations,
management is vigorously contesting the litigation, as it believes the case to
be groundless and without merit. In February 2000, Eclipse's case was dismissed
with prejudice. However, in March 2000, Eclipse filed a Notice of Appeal, and in
August 2000, filed its opening brief. The Company is preparing an answer brief,
and thereafter, Eclipse will have an opportunity to presently file a reply
brief. In the event the case is returned to the trial court, management is
unable to predict the ultimate outcome of the matter. If Eclipse ultimately
prevails, it may be able to recover a significant portion of the Shares, or the
value thereof. Additionally, Eclipse may be entitled to statutory interest from
1997 through the trial.
In August 2000, the Company settled a lawsuit with Comms Peoples, Inc. that
requires the Company to make payments aggregating $14,000. Such amounts have
been fully accrued in accounts payable as of June 30, 2000.
In September 2000, the Company settled a lawsuit with Cross Communications,
Inc. ("Cross") whereby Cross agreed to dismiss its claims against the Company
for nonpayment of $666,621 of services provided by Cross and accrued by the
Company. In exchange, the Company agreed to dismiss its counter-claims against
Cross, which related primarily to the quality of the services provided to the
Company by Cross. As a result of this settlement and debt forgiveness, the
Company recognized an extraordinary gain in the amount of $666,621 during the
year ended June 30, 2000 (Note 10).
In September, 2000, the Company settled a matter with M.H. Meyerson & Co.
("Meyerson") who claimed that it was entitled to 47,860 warrants to purchase
common stock of the Company pursuant to a December 12, 1997 Investment Banking
Agreement. In connection with the settlement, the Company issued 20,000 shares
of restricted common stock and recorded a litigation settlement expense and an
accrued litigation settlement liability of $23,375 during the year ended June
30, 2000. The expense was determined by multiplying the number of shares issued
upon settlement by the closing price of the Company's common stock on the date
of settlement, less a 15% discount factor based on the restricted nature of the
shares issued.
In November 1999, the Company was served with Summons and Complaint in an
action filed by Republic Leasing Co., Inc. The action arose out of facts related
to the Ark-Tel and Dennis Houston matter discussed above and concerned an
equipment lease. Plaintiff sought approximately $29,000 plus prejudgment
interest and attorney fees and costs. A settlement agreement was reached in May
2000 whereby the Company paid the aggregate amount of $31,000. Upon its receipt
of the final payment, the plaintiff caused the action against the Company to be
dismissed. The settlement amount is an element of the damages sought by the
Company in its pending action against Dennis Houston discussed above.
In February 2000, Waterview Resolution Corporation filed and served a
complaint against National Pools Corporation for money owed in the amount of
$59,673. The action arose out of a guarantee on leased equipment assumed by the
Company on behalf of Ark-Tel and Dennis Houston. A settlement agreement was
reached in May 2000 whereby the Company agreed to pay the aggregate amount of
$40,000 to the plaintiff in four equal monthly installments commencing June 1,
2000. Upon its receipt of the fourth and final payment on or about October 1,
2000, the plaintiff dismissed the case in its entirety. The settlement amount is
an element of the damages sought by the Company in its pending action against
Dennis Houston discussed above. During the year ended June 30, 2000, the Company
recorded a litigation settlement expense and an accrued litigation settlement
liability in the amount of $12,401. Such represents the amount by which the
settlement exceeded previously accrued amounts.
The Company is, from time to time, involved in various lawsuits generally
incidental to its business operations, consisting primarily of collection
actions and vendor disputes. The Company does not believe that such claims and
lawsuits, either individually or in the aggregate, will have a material adverse
effect on its consolidated operations or consolidated financial condition.
Corporate Financing Program
During the year ended June 30, 1999, the Company implemented a program in
which current stockholders were invited to exchange their free trading shares of
common stock for a larger number of restricted common shares. Pursuant to the
Company's "Corporate Financing Program," each free trading share surrendered to
the Company entitled the contributing stockholder to 1.1333 shares of restricted
common stock. The shares of restricted common stock are issuable upon the
Company liquidating the free trading shares surrendered. As of June 30, 1999,
there were 69,867 shares of free trading common stock that were held in escrow.
During the year ended June 30, 2000, the Company received an additional 167,695
free trading shares and issued, in the aggregate, 190,049 restricted shares
pursuant to this program. As of June 30, 2000, there were 444,744 shares of free
trading common stock held in escrow that will require the issuance of 504,028
shares of restricted common stock.
Capital and Operating Leases
The Company sublet office space in San Francisco, California from a
stockholder on a month to month basis, which ended in July 1999. In June 1999,
the Company entered into a five year operating lease for office space in
Oakland, California commencing August 1999. Monthly lease payments under the
lease are $12,542. The Company also leased office space in Naples, Florida, and
Springdale, Arkansas through April 1999. In addition, the Company acquired
certain leases from Ark-Tel, Inc. (Note 3).
Minimum annual payments related to all noncancelable operating leases are
as follows for the years ending June 30:
2001 $ 150,503
2002 150,503
2003 150,503
2004 150,503
2005 12,542
Total $ 614,554
Rent expense aggregated $258,735 and $182,961 in fiscal years 2000 and
1999, respectively.
As described in Note 3, certain of the Company's equipment under capital
leases was repossessed during the year ended June 30, 2000. The Company's
remaining obligations under capital leases are not significant as of June 30,
2000.
Security Interest in Company Assets
During the year ended June 30, 2000, the Company and Worldcom Network
Services, Inc. entered into certain service agreements, and other instruments
related thereto, that required the Company to assign and grant to this vendor a
lien and security interest in substantially all of the Company's assets. The
Company's Chief Executive Officer and Chairman was also required by the vendor
to personally guarantee the obligations of the Company pursuant to the service
agreements (Note 6).
Year 2000
Other than the matter described in Note 3, the Company does not believe
that the impact of the year 2000 computer issue has had or will have a
significant impact on its consolidated operations or consolidated financial
position. Also, the Company does not believe that it will be required to further
modify its internal computer systems, equipment or products. However, if
internal systems do not correctly recognize date information in the year 2000
and beyond, there could be adverse impact on the Company's consolidated
operations. There can be no assurance that another entity's failure to ensure
year 2000 capability would not have an adverse effect on the Company.
9. Extraordinary Items
During the year ended June 30, 2000, certain of the Company's equipment
under capital leases was repossessed by the related lessor. As a result, the
Company recognized an extraordinary gain of $769,394 related to the
extinguishment of the debt under the capital lease agreement (Note 3). In
addition, the Company settled a lawsuit with a vendor that resulted in debt
forgiveness of $666,621 (Note 8). Such amounts have been recorded as
extraordinary items in the accompanying statements of operations and
comprehensive loss. The items have not been presented net of tax due to the
Company's current year net loss and existing net operating loss carryforwards.
During the year ended June 30, 1999, the Company satisfied certain accounts
payable and accrued liabilities for amounts that were less than the carrying
values of the related liabilities. The resulting $167,529 of debt forgiveness
has been recorded as an extraordinary item in the accompanying consolidated
statements of operations and comprehensive loss. The item has not been presented
net of tax due to the Company's current year net loss and existing net operating
loss carryforwards.
10. Fourth Quarter Adjustments
The Company recorded certain adjustments in the fourth quarter that related
to transactions in earlier quarters in the current fiscal year. The nature and
amounts of significant adjustments are as follows:
Reversal of revenues and accounts receivable $ 15,458,568
Reversal of operating costs and accrued expenses (16,842,392)
Interest expenses 7,715,675
Stock based compensation charges 3,877,338
Extraordinary items for debt forgiveness (769,394)
Conversion of notes payable 1,100,717
Settlement of accrued litigation (876,798)
The Company has restated its unaudited quarterly financial statements and
filed amendments to its quarterly reports on Form 10-QSB.
11. Subsequent Events
Acquisition of Justice Telecom Corporation (Unaudited)
Pursuant to a stock purchase agreement dated August 30, 2000, the Company
acquired all of the outstanding common stock of Justice Telecom Corporation
("Justice") in exchange for promissory notes aggregating $1,300,000. The Company
has accounted for this business combination as a purchase, and management is
presently in the process of evaluating the estimated fair value of the assets
and liabilities acquired. The operating results of Justice will be included with
the results of the Company from the closing date of the acquisition, which is on
or around September 19, 2000. Assuming the business combination had occurred on
July 1, 1999, the Company's revenues, net loss, and basic and diluted loss per
share would have been $69,300,000, $(24,400,000), and $(2.34), respectively.
