**SECURITIES AND EXCHANGE COMMISSION**

 

**Washington, D.C. 20549**

 

**FORM 10-QSB**

 

**ý**    **QUARTERLYREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THEQUARTERLY PERIOD ENDED JUNE 30, 2002**

 

**or**

 

**o****    TRANSITION REPORTUNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT**

 

**COMMISSIONFILE NUMBER: 0-11933**

 

**AXCESS INC.**

(Exact name of small business issuer asspecified in its charter)

 

| **Delaware**                                                                         |   | **85-0294536**                       |
|--------------------------------------------------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction of incorporation or organization)                       |   | (I.R.S. Employer Identification No.) |
|                                                                                 |   |                                 |
| **3208 Commander DriveCarrollton, Texas 75006  (972) 407-6080**                      |
| (Address, including telephone number and area code, of principal  executive offices) |

 

Check whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) of the ExchangeAct during the past 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes ýNo o

 

Number of shares of commonstock outstanding on August 13, 2002: 15,960,671.

 

Transitional Small BusinessDisclosure Format: Yes oNo ý

 

 

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**AXCESS INC.INDEX**

 
| **PART I. FINANCIAL INFORMATION** |
|-----------------------------------|
|                              |   |   |
|                              | Item 1. Financial Statements: |
|                              |   |   |
|                              |   | Balance Sheets at June 30, 2002 and December 31, 2001 |
|                              |   |   |
|                              |   | Statements of Operations for the Three  Months ended June 30, 2002 and 2001 and for the Six Months ended June 30,  2002 and 2001 |
|                              |   |   |
|                              |   | Statements of Cash Flows for the Six Months  ended June 30, 2002 and 2001 |
|                              |   |   |
|                              |   | Notes to Financial Statements |
|                              |   |   |
|                              | Item 2. Management’s Discussion and  Analysis or Plan of Operation |
|                              |   |   |
| **PART II. OTHER INFORMATION**    |
|                              |   |   |
|                              | Item 1. Legal Proceedings |
|                              |   |   |
|                              | Item 2. Changes in Securities |
|                              |   |   |
|                              | Item 3. Defaults Upon Senior Securities |
|                              |   |   |
|                              | Item 4. Submission of Matters to a Vote of  Security Holders |
|                              |   |   |
|                              | Item 5. Other Information |
|                              |   |   |
|                              | Item 6. Exhibits and Reports on Form 8-K |
|                              |   |   |
| **SIGNATURES**                    |
|                                   |  |  |  |

 

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**PART 1. FINANCIAL INFORMATION**

**Item 1. Financial Statements**

**AXCESSINC.CONSOLIDATED BALANCE SHEETS(Unaudited)**

** **

 
|                                                                                                                                                                                                     |   | **June 30,  2002** |      | **December  31,  2001** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|-----------|-------------------------|--------|
| ASSETS                                                                                                                                                                                                   |   |               |      |                    |   |
|                                                                                                                                                                                                     |   |               |      |                    |   |
| Current assets:                                                                                                                                                                                          |   |               |      |                    |   |
| Cash and cash equivalents                                                                                                                                                                                |   | $                  | 112,848   |                    | $      | — |   |
| Accounts receivable - trade, net of  allowance for doubtful accounts                                                                                                                                     |   | 392,586            |      | 158,279                 |   |
| Inventory                                                                                                                                                                                                |   | 374,373            |      | 699,058                 |   |
| Prepaid expenses and other                                                                                                                                                                               |   | 271,768            |      | 623,224                 |   |
|                                                                                                                                                                                                     |   |               |      |                    |   |
| Total current assets                                                                                                                                                                                     |   | 1,151,575          |      | 1,480,561               |   |
|                                                                                                                                                                                                     |   |               |      |                    |   |
| Property, plant and equipment, net                                                                                                                                                                       |   | 353,419            |      | 519,049                 |   |
| Intellectual property, net                                                                                                                                                                               |   | 596,196            |      | 744,787                 |   |
| Other assets                                                                                                                                                                                             |   | 29,384             |      | 29,234                  |   |
|                                                                                                                                                                                                     |   |               |      |                    |   |
| Total assets                                                                                                                                                                                             |   | $                  | 2,130,574 |                    | $      | 2,773,631 |   |
|                                                                                                                                                                                                     |   |               |      |                    |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY  (DEFICIT)                                                                                                                                                     |   |               |      |                    |   |
|                                                                                                                                                                                                     |   |               |      |                    |   |
| Current liabiliites:                                                                                                                                                                                     |   |               |      |                    |   |
| Accounts payable                                                                                                                                                                                         |   | $                  | 1,633,580 |                    | $      | 1,850,596 |   |
| Other accrued liabilities                                                                                                                                                                                |   | 1,564,422          |      | 863,768                 |   |
| Notes payable:                                                                                                                                                                                           |   |               |      |                    |   |
| Stockholders                                                                                                                                                                                             |   | 10,000,227         |      | 7,912,378               |   |
| Other                                                                                                                                                                                                    |   | 30,129             |      | 47,105                  |   |
| Dividends payable                                                                                                                                                                                        |   | 50,453             |      | 25,282                  |   |
| Total current liabilities                                                                                                                                                                                |   | 13,278,811         |      | 10,699,129              |   |
|                                                                                                                                                                                                     |   |               |      |                    |   |
| Note payable to stockholder                                                                                                                                                                              |   | 400,000            |      |                    |   |
|                                                                                                                                                                                                     |   |               |      |                    |   |
| Total liabiliites                                                                                                                                                                                        |   | 13,678,811         |      | 10,699,129              |   |
|                                                                                                                                                                                                     |   |               |      |                    |   |
| Stockholders’ equity (deficit):                                                                                                                                                                     |   |               |      |                    |   |
| Convertible preferred stock, 7,000,000  shares authorized; 12,046 shares issued and outstanding in 2002 and 12,028 in  2001; $5,590,050 aggregate liquidation preference in 2002 and $5,392,847 in  2001 |   | 5,590,050          |      | 5,392,847               |   |
| Common stock, $.01 par value, 50,000,000  shares authorized in 2002 and 2001; 15,848,179 shares issued and outstanding  in 2002 and in 2001                                                              |   | 158,482            |      | 158,482                 |   |
| Non-voting convertible common stock, $.01  par value, 2,250,000 shares authorized; 112,492 shares issued and outstanding  in 2002 and 2001, convertible into common stock on a one for one share basis   |   | 1,125              |      | 1,125                   |   |
| Additional paid-in capital                                                                                                                                                                               |   | 121,456,262        |      | 121,447,062             |   |
| Shares of common stock issuable pursuant to  asset purchase agreement                                                                                                                                    |   | 592,000            |      | 592,000                 |   |
| Note receivable and accrued interest due  from stockholder                                                                                                                                               |   | (4,872,804         | )         | (4,711,915              | )      |
| Accumulated deficit                                                                                                                                                                                      |   | (134,473,352       | )         | (130,805,099            | )      |
|                                                                                                                                                                                                     |   |               |      |                    |   |
| Total stockholders’ equity (deficit)                                                                                                                                                                |   | (11,548,237        | )         | (7,925,498              | )      |
|                                                                                                                                                                                                     |   |               |      |                    |   |
| Total liabilities and stockholders’ equity  (deficit)                                                                                                                                               |   | $                  | 2,130,574 |                    | $      | 2,773,631 |   |

 

See accompanying notes to unaudited financial statements.

 

1

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**AXCESSINC.CONSOLIDATED STATEMENTS OFOPERATIONS(Unaudited)**

 
|                                                 |   | **Three  Months Ended  June 30,** |       | **Six Months  Ended  June 30,** |   |
|------------------------------------------------------|--------|-----------------------------------|------------|---------------------------------|--------|
|                                                 |   | **2002**                          |       | **2001**                        |   | **2002** |   | **2001** |   |
|                                                 |   |                              |       |                            |   |   |   |   |   |
| Sales                                                |   | $                                 | 407,695    |                            | $      | 1,169,645 |   | $ | 784,652 |   | $ | 1,707,562 |   |
| Cost of sales                                        |   | 341,579                           |       | 819,774                         |   | 628,573 |   | 1,219,740 |   |
|                                                 |   |                              |       |                            |   |   |   |   |   |
| Gross profit                                         |   | 66,116                            |       | 349,871                         |   | 156,079 |   | 487,822 |   |
| Expenses:                                            |   |                              |       |                            |   |   |   |   |   |
| Research and development                             |   | 517,280                           |       | 600,691                         |   | 1,140,878 |   | 1,330,621 |   |
| General and administrative                           |   | 464,244                           |       | 517,579                         |   | 875,085 |   | 1,027,089 |   |
| Selling and marketing                                |   | 354,884                           |       | 743,282                         |   | 816,673 |   | 1,596,228 |   |
| Depreciation and amortization                        |   | 141,229                           |       | 389,872                         |   | 314,221 |   | 786,055 |   |
|                                                 |   |                              |       |                            |   |   |   |   |   |
| Operating expenses                                   |   | 1,477,637                         |       | 2,251,424                       |   | 3,146,857 |   | 4,739,993 |   |
|                                                 |   |                              |       |                            |   |   |   |   |   |
| Loss from operations                                 |   | (1,411,521                        | )          | (1,901,553                      | )      | (2,990,778 | ) | (4,252,171 | ) |
| Other income (expense):                              |   |                              |       |                            |   |   |   |   |   |
| Interest expense                                     |   | (286,640                          | )          | (352,800                        | )      | (614,994 | ) | (719,970 | ) |
| Interest income                                      |   | 80,889                            |       | 81,138                          |   | 160,889 |   | 164,372 |   |
| Other                                                |   | (998                              | )          | (126                            | )      | (998 | ) | 293 |   |
|                                                 |   |                              |       |                            |   |   |   |   |   |
| Other expense, net                                   |   | (206,749                          | )          | (271,788                        | )      | (455,103 | ) | (555,305 | ) |
|                                                 |   |                              |       |                            |   |   |   |   |   |
| Loss from operations                                 |   | (1,618,270                        | )          | (2,173,341                      | )      | (3,445,881 | ) | (4,807,476 | ) |
|                                                 |   |                              |       |                            |   |   |   |   |   |
| Preferred stock dividend requirements                |   | (112,777                          | )          | (1,630,892                      | )      | (222,374 | ) | (3,879,920 | ) |
|                                                 |   |                              |       |                            |   |   |   |   |   |
| Net loss applicable to common stock                  |   | $                                 | (1,731,047 | )                               | $      | (3,804,233 | ) | $ | (3,668,255 | ) | $ | (8,687,396 | ) |
|                                                 |   |                              |       |                            |   |   |   |   |   |
| Basic and diluted net loss per share                 |   | $                                 | (0.11      | )                               | $      | (1.09 | ) | $ | (0.23 | ) | $ | (2.49 | ) |
|                                                 |   |                              |       |                            |   |   |   |   |   |
| Weighted average shares of common stock  outstanding |   | 15,848,179                        |       | 3,493,404                       |   | 15,848,179 |   | 3,483,261 |   |

 

See accompanying notes to unaudited financialstatements.

 

2

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**AXCESS,INC.CONSOLIDATED STATEMENT OF CASH FLOWS(Unaudited)**

 

 
|                                                                          |   | **Six Months  Ended  June 30,** |       |
|-------------------------------------------------------------------------------|--------|---------------------------------|------------|
|                                                                          |   | **2002**                        |       | **2001** |   |
|                                                                          |   |                            |       |   |   |
| Cash flows from operating activities:                                         |   |                            |       |   |   |
| Net loss                                                                      |   | $                               | (3,445,881 | ) | $ | (4,807,476 | ) |
| Adjustments to reconcile net loss to net  cash used  by operating activities: |   |                            |       |   |   |
| Depreciation and amortization                                                 |   | 314,221                         |       | 786,055 |   |
| Amortization of financing discount and issuance  costs                        |   | 68,849                          |       | 176,244 |   |
| Changes in operating assets and  liabilities:                                 |   |                            |       |   |   |
| Accounts receivable                                                           |   | (234,307                        | )          | (796,923 | ) |
| Inventory                                                                     |   | 324,685                         |       | (34,381 | ) |
| Prepaid expenses and other                                                    |   | 245,922                         |       | 68,762 |   |
| Other assets                                                                  |   | (150                            | )          | (69,561 | ) |
| Accounts payable                                                              |   | (217,016                        | )          | 828,735 |   |
| Other liabilities                                                             |   | 700,655                         |       | 348,862 |   |
| Net cash used by operating activities                                         |   | (2,243,022                      | )          | (3,499,683 | ) |
|                                                                          |   |                            |       |   |   |
| Cash flow from investing activities:                                          |   |                            |       |   |   |
| Capital expenditures                                                          |   | —                          |       | (50,489 | ) |
| Net cash used by investing activities                                         |   | —                          |       | (50,489 | ) |
|                                                                          |   |                            |       |   |   |
| Cash flow from financing activities:                                          |   |                            |       |   |   |
| Borrowings under financing agreements                                         |   | 2,419,000                       |       | 2,995,000 |   |
| Principal payments on financing agreements                                    |   | (63,130                         | )          | — |   |
| Net proceeds from issuance of common and  preferred stock                     |   | —                          |       | 100,798 |   |
| Net cash provided by financing activities                                     |   | 2,355,870                       |       | 3,095,798 |   |
|                                                                          |   |                            |       |   |   |
| Net increase (decrease) in cash and cash  equivalents                         |   | 112,848                         |       | (454,374 | ) |
| Cash and cash equivalents, beginning of  period                               |   | —                          |       | 454,374 |   |
| Cash and cash equivalents, end of period                                      |   | 112,848                         |       | — |   |
|                                                                          |   |                            |       |   |   |
| Supplemental information:                                                     |   |                            |       |   |   |
| Cash paid during the year for interest                                        |   | $                               | —     |   | $ | 1,391 |   |

 

See accompanying notes to unaudited financialstatements.

 

3

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**AXCESSNOTES TO FINANCIAL STATEMENTS(Unaudited)**

** **

**(1) Summary of Significant AccountingPolicies**

 

**(a) Description ofBusiness**

 

AXCESS Inc. (“AXCESS” or the “Company”) provides advanced security andasset management systems which locate, identify, track, monitor and protectassets. The main applications of the Company’s systems are security videothrough closed circuit television (called CCTV), personnel and vehicle accesscontrol, and automatic asset tracking and protection. The Company providessolutions in the recently identified homeland security markets such as air andground transportation, water treatment facilities, oil and gas, power plants,as well as in the markets for data centers, retail / convenience stores,education, healthcare, and corporate offices. AXCESS utilizes two patented andintegrated technologies: network-based radio frequency identification (RFID)and tagging and streaming video.  Bothapplication and browser-based software options deliver critical real-timeinformation tailored to each end user via the enterprise network or Internet,also providing custom alerts in the form of streaming video, e-mail, ormessages delivered to wireless devices.

 

The Company’s business plan for 2002 ispredicated principally upon the successful marketing of its RFID and digitalvideo products. During 2001, operating activities utilized approximately $5.0million of cash.  On July 30, 2002 theCompany raised $1 million for additional working capital. However, the Companyanticipates that its existing working capital resources and revenues fromoperations will not be adequate to satisfy its funding requirements in 2002.

 

The future results of operations and financial condition of the Companywill be impacted by the following factors, among others: changes from anticipatedlevels of sales, access to capital, future national or regional economic andcompetitive conditions, changes in relationships with customers, difficultiesin developing and marketing new products, marketing existing products, customeracceptance of existing and new products, validity of patents, technologicalchange, dependence on key personnel, availability of key component parts,dependence on third party manufacturers, vendors, contractors, productliability, casualty to or other disruption of the production facilities, delaysand disruptions in the shipment of the Company’s products, and the ability ofthe Company to meet its stated business goals.

 

If the Company’s losses continue, the Companywill have to obtain funds to meet its cash requirements through businessalliances, such as strategic or financial transactions with third parties, thesale of securities or other financing arrangements, or the Company may berequired to curtail its operations, seek a merger partner, or seek protectionunder federal bankruptcy laws. Any of the foregoing may be on terms that areunfavorable to the Company or disadvantageous to existing stockholders. Inaddition, no assurance may be given that the Company will be successful inraising additional funds or entering into business alliances.

 

**(b) CompanyOrganization and Basis of Presentation**

 

The accompanying consolidated financial statements include the accountsof the Company and its majority-owned subsidiaries. All significantintercompany accounts and transactions have been eliminated in consolidation.Certain amounts from prior years have been reclassified to conform with the2001 presentation.

 

The Company has received working capital in various forms from AmphionVentures, L. P. and affiliates of Amphion Ventures, L. P. including AmphionPartners, Amphion Investments LLC, Antiope Partners, and VennWorks LLC(formerly incuVest LLC) (collectively, the “Amphion Group”). Following theconversion of preferred stock held by the Amphion Group into common stock in 2001,the Amphion Group owns approximately 83% of the outstanding voting stock of theCompany.  The Company has also receivedworking capital through a bridge financing from several accredited investors.

 

**(c) Inventory**

 

Inventory is valued at the lower of cost or market using the first-in,first-out method. Inventory was comprised of the following at June 30, 2002 andDecember 31, 2001:

 

|            |   | **June 30,  2002** |    | **December  31,  2001** |   |
|-----------------|--------|--------------------|---------|-------------------------|--------|
| Raw materials   |   | $                  | 190,973 |                    | $      | 300,133 |   |
| Work-in-process |   | 3,631              |    | 12,928                  |   |
| Finished goods  |   | 179,769            |    | 385,997                 |   |
|            |   | $                  | 374,373 |                    | $      | 699,058 |   |

 

4

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**(d) Recent AccountingPronouncements**

 

In June 2001, the Financial Accounting Standards Board (“FASB”) issuedStatements of Financial Accounting Standards No. 141, Business Combinations,and No. 142, Goodwill and Other Intangible Assets, (“FAS 142”), effective forfiscal years beginning after December 15, 2001. Under the new rules, goodwilland intangible assets deemed to have indefinite lives will no longer beamortized, but will be subject to annual impairment tests in accordance withthe Statements. Other intangible assets will continue to be amortized overtheir useful lives. The Company will apply the new rules on accounting forother intangible assets beginning in the first quarter of 2002. The Company’sintangible assets at December 31, 2001 will continue to be amortized afteradoption of FAS 142. Accordingly, adopting FAS 142 did not have a materialeffect on the Company’s financial condition or results of operation.

 

The following table reflects the components of intellectual property:

 

|                          |   | **June 30,  2002**          |      | **December  31, 2001**        |   |
|-------------------------------|--------|-----------------------------|-----------|-------------------------------|--------|
|                          |   | **Gross  Carrying  Amount** |      | **Accumulated  Amortization** |   | **Gross  Carrying  Amount** |   | **Accumulated  Amortization** |   |
| Purchased video technology    |   | $                           | 5,087,483 |                          | $      | 4,491,287 |   | $ | 5,087,483 |   | $ | 4,342,696 |   |
| Purchased RFID technology     |   | 1,714,449                   |      | 1,714,449                     |   | 1,714,449 |   | 1,714,449 |   |
| Internally developed software |   | 350,337                     |      | 350,337                       |   | 350,337 |   | 350,337 |   |
|                          |   | $                           | 7,152,269 |                          | $      | 6,556,073 |   | $ | 7,152,269 |   | $ | 6,407,482 |   |

 

Amortization expense on intellectual property was $148,591 and $332,459for the six months ended June 30, 2002 and 2001, respectively.  Amortization expense on intellectualproperty was $74,385 and $332,459 for the three months ended March 31,2002 and 2002, respectively.

 

The following table sets forth the estimated amortization expense onthe intellectual property for the fiscal years ended December 31:

 

| 2002  |   | $       | 371,925 |   |
|-------|--------|---------|---------|--------|
| 2003  |   | 297,540 |    |
| 2004  |   | 75,322  |    |
| Total |   | $       | 744,787 |   |

 

The FASB hasalso recently issued FAS No. 144, Accounting for the Impairment or Disposal ofLong-Lived Assets (“FAS 144”), which we did adopt January 1, 2002. The FASB’snew rules on asset impairment supersede FAS No. 121, Accounting for theImpairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of(“FAS 121”). FAS 144 retains the requirements of FAS 121 to (a) recognize animpairment loss only if the carrying amount of a long-lived asset is notrecoverable from its undiscounted cash flows and (b) measure an impairment lossas the difference between the carrying amount and fair value of the asset, butremoves goodwill from its scope. This aspect of FAS 144 will primarily impactthe accounting for intangible assets subject to amortization and property andequipment. The Company’s adoption of FAS 144 did not have a significant impacton its financial condition or results of operations.

 

**(2) Contingencies**

 

In Stephen L. Briggs v. AXCESS Inc., JAMS Arbitration filed on October2, 2001, Stephen Briggs, a former employee of the Company, asserted that he hadgood cause to terminate his employment under his employment agreement and isowed $300,000 in contractual severance pay. In Charles Martin v. AXCESS Inc.,JAMS Arbitration filed on or about October 2001, Charles Martin, a formeremployee of the Company, asserted that he had good cause to terminate hisemployment under his employment agreement and is owed $300,000 in contractualseverance pay. The Company believes these cases are without merit and intendsto contest these matters vigorously.

 

5

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Barth Technologies Incorporated (“BTI”), filed a lawsuit against theCompany in state district court in Tarrant County, Texas on October 18, 2001.BTI was a vendor to the Company and seeks damages of $263,655 for non-paymentfor services and supplies provided. The Company is attempting to settle thisclaim, but has limited resources to do. Other similar cases have been filedagainst the Company with claims aggregating $433,356. At June 30, 2002, theCompany has accrued the amounts expected to be paid to settle the claimsdescribed in this paragraph.

 

**(3) In Process Research and Development**

 

During the period ended June 30, 2002, the Company spent $182,578 tocomplete the products purchased in the IVEX transaction.  The IVEX transaction is explained in greaterdetail in Note 7 "Common Stock Issuable Pursuant to Asset PurchaseAgreement" below.  As of June 30,2002, these products are substantially complete.

 

**(4) Preferred Stock**

 

The Company has authorized 7,000,000 shares of convertible preferredstock, of which shares designated in four series have been issued. Informationwith respect to the series of preferred stock outstanding at each balance sheetdate is summarized below.

 
|                                                                    |   | **Series C**                         |   | **Series I**                         |   | **Series J**                         |   | **Series 1999**                      |   |
|-------------------------------------------------------------------------|--------|--------------------------------------|--------|--------------------------------------|--------|--------------------------------------|--------|--------------------------------------|--------|
| Number of shares authorized                                             |   | 1,500,000                            |   | 2,500                                |   | 2,500                                |   | 2,500                                |   |
|                                                                    |   |                                 |   |                                 |   |                                 |   |                                 |   |
| Stated value                                                            |   | $                                    | 30.20  |                                 | $      | 10,000                               |   | $                                    | 10,000 |   | $ | 10,000 |   |
|                                                                    |   |                                 |   |                                 |   |                                 |   |                                 |   |
| Number of shares issued and outstanding:                                |   |                                 |   |                                 |   |                                 |   |                                 |   |
| December 31, 2001                                                       |   | 11,522                               |   | 177                                  |   | 177                                  |   | 152                                  |   |
| June 30, 2002                                                           |   | 11,522                               |   | 183                                  |   | 183                                  |   | 158                                  |   |
|                                                                    |   |                                 |   |                                 |   |                                 |   |                                 |   |
| Conversion ratio (or conversion price) of  preferred shares into common |   | 1 to 1 into  voting common stock     |   | $ 4.00 into  voting common stock     |   | $ 4.00 into  non-voting common stock |   | $ 21.50 into  voting common stock    |   |
|                                                                    |   |                                 |   |                                 |   |                                 |   |                                 |   |
| Liquidation preference                                                  |   | Stated value  plus accrued dividends |   | Stated value  plus accrued dividends |   | Stated value  plus accrued dividends |   | Stated value  plus accrued dividends |   |
|                                                                    |   |                                 |   |                                 |   |                                 |   |                                 |   |
| Dividend rights                                                         |   | 10% per  annum, cumulative           |   | 8% per  annum, cumulative            |   | 8% per  annum, cumulative            |   | 8% per  annum, cumulative            |   |
|                                                                         |        |                                      |        |                                      |        |                                      |        |                                      |        |  |  |  |  |

 

The Company’s non-votingcommon stock may be converted to voting common stock at any time by the holderthereof, on a one-to-one basis.

 

The holders of the Company’s Series C Preferred Stock are entitled toreceive quarterly dividends on each such share held at the annual rate of 10%of the original issue price of each share payable in arrears, when, as and ifdeclared by the Company’s board of directors, in cash or additional shares ofpreferred stock at the option of the holder. There were no dividends in arrearson the Series C Convertible Preferred Stock at June 30, 2002. There were nodividends payable for Series C Preferred Stock at June 30, 2002.

 

The holders of Series I Preferred Stock, Series J Preferred Stock, andSeries 1999 Voting Preferred Stock are entitled to receive semi-annualdividends on each such share at the annual rate of 8% of the original issueprice of each share payable in arrears, when, as and if declared by theCompany’s board of directors, in cash or additional shares of preferredstock.   Shares of Series I PreferredStock and Series J Preferred Stock are convertible into shares of common stockat a conversion price of $4.00 per share. Shares of Series 1999 Preferred Stock are convertible into shares ofcommon stock at a conversion

 

6

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price of $2.51 per share.

 

On March 30, 2002, the Company issued (a) 3 shares of Series IPreferred Stock to holders thereof as payment in full for the $35,436 ofaccrued, but unpaid dividends of the Series I Preferred Stock as of such date,(b) 3 shares of Series J Preferred Stock to holders thereof as payment in fullfor the $31,334 of accrued, but unpaid dividends of the Series J PreferredStock as of such date,  and (c) 3 sharesof Series 1999 Voting Preferred Stock to holders thereof as payment in full forthe $30,310 of accrued, but unpaid dividends of the Series 1999 Voting PreferredStock as of such date.

 

On June 30, 2002, the Company issued (a) 3 shares of Series I PreferredStock to holders thereof as payment in full for the $36,548 of accrued, butunpaid dividends of the Series I Preferred Stock as of such date, (b) 3 sharesof Series J Preferred Stock to holders thereof as payment in full for the$32,315 of accrued, but unpaid dividends of the Series J Preferred Stock as ofsuch date,  and (c) 3 shares of Series1999 Voting Preferred Stock to holders thereof as payment in full for the$31,260 of accrued, but unpaid dividends of the Series 1999 Voting PreferredStock as of such date.

 

On July 25, 2002 the Company received notice from J.P. MorganInvestment Corporation, a current stockholder of the Company, to convert 52shares of Series I Preferred Stock into a 207,171 fully-paid and non-assessableshares of voting Common Stock of the Company. The 52 shares have a stated value of $10,000 per share and shall beconverted at $2.51 per share.

 

**(5) Notes Payable to Stockholders**

 

The Company entered into a 6.75% convertible note with AmphionInvestments LLC dated January 25, 2002. During the six months ended June 30,2002, the Company borrowed $350,000 under this note. The principal outstandingunder this note may be converted into securities of the Company at the optionof Amphion Investments. The borrowings are unsecured and are due and payable ondemand by Amphion Investments.

 

The Company entered into a 6.75% convertible note with VennWorks LLCdated February 14, 2002. During the six months ended June 30, 2002, the Companyborrowed $814,000 under this note. The principal outstanding under this notemay be converted into securities of the Company at the option of VennWorks. Theborrowings are unsecured and are due and payable on demand by VennWorks.

 

The Company entered into a 6.75% convertible note with Amphion VenturesL.P. (“Amphion Ventures”)  datedFebruary 28, 2002. During the six months ended June 30, 2002, the Companyborrowed $1,255,000 under this note. The principal outstanding under this notemay be converted into securities of the Company at the option of AmphionVentures. The borrowings are unsecured and are due and payable on demand byAmphion Ventures.

 

On June 27, 2002, J.P. Morgan Investment Corporation, a stockholder ofthe Company, agreed with the Company to extend the maturity of the $400,000balance remaining under a note purchase agreement originally due December 31,1999 until December 31, 2003.  TheCompany issued warrants to J.P. Morgan Investment Corporation to purchase10,000 shares of Common Stock for $3.00 per share in consideration forextending the term of this indebtedness. Using the Black Scholes option-pricing model calculation, the warrantsare valued at $9,200, which will be amortized to interest expense over the termof the loan.  The warrants areexercisable at any time on or prior to December 31, 2003.  The number of shares of Common Stock and theexercise price are subject to adjustment as provided in the warrants. J.P.Morgan Investment Corporation may transfer the warrants at its option.

 

On April 12, 2002, the Company issued a senior promissory note to J.P.Morgan Investment Corporation in the amount of $400,000, at an annual interestrate of 6.64%, with a maturity date of December 31, 2003.  This note was given to J.P. Morgan InvestmentCorporation in extension and partial renewal of the original note issuedpursuant to the note purchase agreement. The Company may prepay this note at any time at its option.  If the Company or any of its subsidiariescompletes (i) an equity or long-term debt financing, (ii) a sale of assetsoutside the ordinary course of business, (iii) a sale-leaseback or similarfinancing, or (iv) a joint venture or other strategic partnership, and suchtransaction results in cash proceeds to the Company in excess of $5 million,then a portion of the amount of such proceeds in excess of $5 million shall beapplied to prepay the note.

 

**(6) Note and Interest Receivable fromStockholder**

 

A note receivable and related interest is due from Amphion Ventures.Interest is due at 8% per annum, payable quarterly. The Company has assignedall payments of principal under this note receivable to Prism Video, Inc.(“Prism”) until the balance of the note receivable is paid in full or until thebalance due under the note payable to Prism is paid in full, whichever occursfirst. Amphion Ventures did not make its required payments under this noteduring 2001. Accordingly, the note receivable and accrued interest has beenreclassified in the accompanying balance sheets at December 31, 2001 and June30, 2002 as a reduction of stockholders’ equity due to the Amphion Group’scontrolling voting interest in the Company and the uncertainty as to the timingof repayment.  For the period ended June30, 2002, the Company recorded interest income related to this note of$160,889.

 

7

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**(7) Common Stock Issuable Pursuant To AssetPurchase Agreement**

 

EffectiveNovember 30, 2001 the Company acquired certain property and equipment and therights to certain digital video intellectual property rights from IVEX, Inc.,an investee of the Amphion Group, in exchange for 148,000 shares of theCompany’s common stock. The shares of common stock issuable pursuant to theasset purchase agreement are expected to be issued in 2002. The aggregatedpurchase price of $592,000 was allocated to the property and equipment acquiredand to in-process research and development.

 

**(8)Bridge Financing**

 

On July 30,2002, the Company entered into a bridge financing agreement with ten accreditedinvestors for the sale and issuance of 10 “units” to the investors for anaggregate purchase price of $1,000,000. Each unit consists of a convertible promissory note in the amount of$100,000 and 25,000 unregistered shares of the Company’s common stock.

 

Pursuant tothe bridge financing agreement, the Company is required to use reasonableefforts to register the shares of common stock comprising the units within 60days after the execution of the bridge financing agreement, or as soon aspracticable thereafter.  Uponregistration of the common stock, each investor may not sell more thanone-third of the common stock comprising the units during any calendar month.  The convertible promissory notes comprisingthe units bear interest at an annual rate of 7% and mature on July 30,2005.  On each of July 30, 2003, July30, 2004 and July 30, 2005, the investors have the option to convert one-thirdof the principal amount of the notes into common stock of the Company.  The conversion price of the notes isinitially 65% of the average closing price of a share of the Company's commonstock for the 20 trading days preceding the given anniversary date of thenotes.  The maximum conversion priceshall be $4.00 per share and the minimum conversion price shall be $1.00 pershare.  The conversion price will besubject to adjustment from time to time to reflect any reorganization,recapitalization, reclassification, stock dividend, stock split, reverse stocksplit or similar change in the Company's shares of common stock.  The notes may be prepaid in whole or in partby the Company without premium or penalty.

 

**(9)Significant Customers**

** **

**               **Duringthe three months ended June 30, 2002 the Company had two clients that accountedfor 41% of the Company's overall revenue and 55% of the digital video productsales. During that same period the Company had one customer account for 15% ofthe RFID product sales.

 

                During the six months ended June 30, 2002 theCompany had two clients that accounted for 32% of the Company's overall revenueand 40% of the digital video product sales. During that same period the Company had one customer account for 22% ofthe RFID product sales.

 

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**Item 2. Management’s Discussion and Analysisor Plan of Operation**.

 

**Forward-LookingStatements**

 

This quarterly report on Form 10-QSB includes “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of 1933, asamended (the “Securities Act”), and Section 21E of the Securities Exchange Actof 1934, as amended, which can be identified by the use of forward-lookingterminology such as, “may,” “expect,” “could,” “plan,” “seek,” “anticipate,”“estimate,” or “continue” or the negative thereof or other variations thereonor comparable terminology.

 

These forward-looking statements are subject to various risks anduncertainties that could cause actual results to differ materially from thosereferred to in the forward-looking statements and are made pursuant to the“safe-harbor” provisions of the Private Securites Litigation Reform Act of1995.  These statements are made basedon management’s current expectations or beliefs as well as assumptions made by,and information currently available to, management.

 

A variety of factors could cause actual results to differ materiallyfrom those anticipated in the Company’s forward-looking statements, includingthe following factors: changes fromanticipated levels of sales, access to capital, future national or regionaleconomic and competitive conditions, changes in relationships with customers,difficulties in developing and marketing new products, marketing existingproducts, customer acceptance of existing and new products, validity ofpatents, technological change, dependence on key personnel, availability of keycomponent parts, dependence on third party manufacturers, vendors, contractors,product liability, casualty to or other disruption of the productionfacilities, delays and disruptions in the shipment of the Company's product,and the ability of the Company to meet its stated business goals.  For a detailed discussion of theseand other cautionary statements and factors that could cause actual results todiffer from the Company’s forward-looking statements, please refer to theCompany’s filings with the Securities and Exchange Commission, especially  “Item 1. Description of Business” (includingthe “Risk Factors” section of Item 1) and “Item 6. Management’s Discussion andAnalysis or Plan of Operation” of the Company’s 2001 Annual Report on Form10-KSB.

 

Readers are cautioned not to place undue reliance on theseforward-looking statements, which reflect management’s analysis only as of thedate hereof. The Company does not undertake any obligation to publicly revisethese forward-looking statements to reflect events or circumstances that ariseafter the date hereof. Readers should carefully review the risk factorsdescribed in other documents the Company files from time to time with theSecurities and Exchange Commission.

 

**Results of Operations **

**Three Months Ended June 30, 2002 Compared toThree Months Ended June 30, 2001**

 

*Sales and GrossProfit*. Sales for the three months ended June 30, 2002were $407,695 and $1,169,645 for the three months ended June 30, 2001, on whicha gross profit of $66,116 and $349,871 was realized, respectively.  Sales and gross profit for the three monthsended June 30, 2001 reflect a large single video system sale in theretail/convenience store market that did not recur in 2002.  For the three months ended June 30, 2002 twocustomers accounted for 41% of the overall revenue.

 

Radio frequency identification (RFID) product sales were $141,959 forthe three months ended June 30, 2002 and $249,011 for the three months endedJune 30, 2001. Cost of sales were $129,208 for the three months ended June 30,2002 and $179,521 for the three months ended June 30, 2001. As a result, grossprofits from RFID products were $12,751 for the three months ended June 30,2002 and $69,490 for the three months ended June 30, 2001.  For the three months ended June 30, 2002 onecustomer accounted for 15% of the RFID product sales.

 

Digital video product sales were $265,736 for the three months endedJune 30, 2002 and $920,634 for the three months ended June 30, 2001. Digitalvideo product sales for the three months ended June 30, 2001 reflect alarge single video system sale in the retail/convenience store market that didnot recur in 2002.  Cost of sales were $212,372for the three months ended June 30, 2002 and $640,253 for the three monthsended June 30, 2001. As a result, gross profits from digital video productswere $53,364 for the three months ended June 30, 2002 and $280,381 for thethree months ended June 30, 2001.  Forthe three months ended June 30, 2002 two customers accounted for 55% of digitalvideo product sales.

* *

*Operating Expenses*.Operating expenses were $1,477,637 for the three months ended June 30, 2002 and$2,251,424 for the three months ended June 30, 2001.  The Company reduced staff, scaled back advertising and loweredresearch and development expenditures resulting in a 39% decrease in operatingexpenses.

 

Research and development expenses were $517,280 for the three monthsended June 30, 2002 and $600,691 for the three months ended June 30, 2001.  This decrease is a result of limited cashflow to finance new and existing research and development efforts.

 

Corporate general and administrative expenses were $464,244 for thethree months ended June 30, 2002 and $517,579 for the three months ended June30, 2001.  This decrease can beattributed to a reduction in headcount for the three months ended June 30, 2002compared to the three months ending June 30, 2001.

 

Selling and marketing expenses were $354,884 for the three months endedJune 30, 2002 and $743,282 for the three months ended June 30, 2001. TheCompany has altered its focus from direct selling to focus on the indirectsales channel and has drastically reduced its marketing budget.

 

Depreciation and amortization expenses were $141,229 for the threemonths ended June 30, 2002 compared to $389,872 for the three months ended June30, 2001.  The decrease is related tothe reduction in the intellectual property

 

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balance as a result of an assetimpairment charge of $2,797,063 taken in the three months ended December 31,2001.

* *

*Other expenses, net*.Other expenses, net, were $206,749 for the three months ended June 30, 2002compared to $271,788 for the three months ended June 30, 2001. Interest expensewas $66,160 lower in the three months ended June 30, 2002 compared to the threemonths ended June 30, 2001, reflecting a decrease in the average interest rateof notes payable in 2002 offset slighlty by the increased amount of the notespayable.

* *

*Loss from ContinuingOperations*. Loss from continuing operations was$1,586,770 for the three months ended June 30, 2002 compared to $2,173,341 forthe three months ended June 30, 2001, a reduction of $681,261 or 30%.

* *

*Preferred Stockdividend requirements. *PreferredStock dividend requirements were $112,777 for the three months ended June 30,2002 and $1,630,892 for the three months ended June 30, 2001.  The decrease was due to the conversion ofshares of preferred stock into common stock during the last quarter of 2001.

 

**Resultsof Operations**

**Six Months Ended June 30, 2002 Compared toSix Months Ended June 30, 2001**

* *

*Sales and GrossProfit*. Sales for the six months ended June 30, 2002were $784,652 and $1,707,562 for the six months ended June 30, 2001, on which agross profit of $156,079 and $487,822 were realized, respectively. Sales andGross profits for the six months ended June 30, 2001 reflect a largesingle video system sale in the retail/convenience store market that did notrecur in 2002.  For the six months endedJune 30, 2002 two customers accounted for 32% of the overall revenue.

 

Radio frequency identification (RFID) product sales were $338,848 forthe six months ended June 30, 2002 and $442,736 for the six months ended June30, 2001. Cost of sales were $280,855 for the six months ended June 30, 2002and $329,950 for the six months ended June 30, 2001. As a result, gross profitsfrom RFID products were $57,993 for the six months ended June 30, 2002 and$112,786 for the six months ended June 30, 2001.  For the six months ended June 30, 2002 one customer accounted for22% of the RFID product sales.

 

Digital video product sales were $445,804 for the six months ended June30, 2002 and $1,264,826 for the six months ended June 30, 2001.  Digital video product sales for the sixmonths ended June 30, 2001 reflect a large single video system sale in theretail/convenience store market that did not recur in 2002.  Cost of sales were $347,719 for the sixmonths ended June 30, 2002 and $889,790 for the six months ended June 30, 2001.As a result, gross profits from digital video products were $98,085 for the sixmonths ended June 30, 2002 and $375,036 for the six months ended June 30,2001.  For the six months ended June 30,2002 two customers accounted for 40% of the digital video product sales.

* *

*Operating Expenses*.Operating expenses were $3,146,857 for the six months ended June 30, 2002 and$4,739,993 for the six months ended June 30, 2001. The Company further reducedstaff and scaled back advertising and marketing expenses in the three monthsended June 30, 2002.

 

Research and development expenses were $1,140,878 for the six monthsended June 30, 2002 and $1,330,621 for the six months ended June 30, 2001.  This decrease is a result of limited cashflow to finance new and existing research and development efforts.

 

Corporate general and administrative expenses were $875,085 for the sixmonths ended June 30, 2002 and $1,027,089 for the six months ended June 30,2001.  This decrease can be attributedto a reduction in head count for the three months ended June 30, 2002 comparedto three months ended June 30, 2001.

 

Selling and marketing expenses were $816,673 for the six months endedJune 30, 2002 and $1,596,228 for the six months ended June 30, 2001.  The Company has narrowed its advertisingfocus during 2002 to concentrate on the indirect sales channel and controlexpenses.

* *

Depreciation and amortization were $314,221for the six months ended June 30, 2002 compared to $786,055 for the six monthsended June 30, 2001. The decrease is related to the reduction in theintellectual property balance as a result of an asset impairment charge of$2,797,063 taken in the three months ended December 31, 2001.

 

*Other expenses, net*.Other expenses, net, was $455,103 for the six months ended June 30, 2002compared to $555,305 for the six months ended June 30, 2001.  Interest expense was $104,976 lower in thesix months ended June 30, 2002 compared to the six months ended June 30, 2001,reflecting the lower interest rate offset by the increased outstanding balanceof notes payable in 2001.

* *

*Loss from ContinuingOperations*. Loss from continuing operations was$3,414,381 for the six months ended June 30, 2001, compared to a loss of$4,807,476 for the same period in 2000.

 

*Preferred Stockdividend requirements. *PreferredStock dividend requirements were $222,374 for the six months ended June 30,2002 and $3,879,920 for the six months ended June 30, 2001. The decrease wasdue primarily to the conversion of shares of preferred stock into Common Stockduring the last quarter of 2001.

 

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**Liquidity and Capital Resources**

 

Since inception, the Company has utilized the proceeds from a number ofpublic and private sales of its equity securities, the exercise of options andwarrants and, more recently, convertible debt and demand notes fromstockholders to meet its working capital needs.

 

The Company entered into a 6.75% convertible note with AmphionInvestments LLC dated January 25, 2002. During the six months ended June 30,2002, the Company borrowed $350,000 under this note. The principal outstandingunder this note may be converted into securities of the Company at the optionof Amphion Investments. The borrowings are unsecured and are due and payable ondemand by Amphion Investments.

 

The Company entered into a 6.75% convertible note with VennWorks LLCdated February 14, 2002. During the six months ended June 30, 2002, the Companyborrowed $814,000 under this note. The principal outstanding under this notemay be converted into securities of the Company at the option of VennWorks. Theborrowings are unsecured and are due and payable on demand by VennWorks.

 

The Company entered into a 6.75% convertible note with Amphion Venturesdated February 28, 2002. During the six months ended June 30, 2002, the Companyborrowed $1,255,000 under this note. The principal outstanding under this notemay be converted into securities of the Company at the option of AmphionVentures. The borrowings are unsecured and are due and payable on demand byAmphion Ventures.

 

On June 27, 2002, J.P. Morgan Investment Corporation, a stockholder ofthe Company, agreed with the Company to extend the maturity of the $400,000balance remaining under a note purchase agreement originally due December 31,1999 until December 31, 2003.  TheCompany issued warrants to J.P. Morgan Investment Corporation to purchase10,000 shares of Common Stock for $3.00 per share in consideration forextending the term of this indebtedness. Using the Black Scholes option-pricing model calculation, the warrantsare valued at $9,200, which will be amortized to interest expense over the termof the loan.  The warrants areexercisable at any time on or prior to December 31, 2003.  The number of shares of Common Stock and theexercise price are subject to adjustment as provided in the warrants. J.P.Morgan Investment Corporation may transfer the warrants at its option.

 

On April 12, 2002, the Company issued a senior promissory note to J.P.Morgan Investment Corporation in the amount of $400,000, at an annual interestrate of 6.64%, with a maturity date of December 31, 2003.  This note was given to J.P. MorganInvestment Corporation in extension and partial renewal of the original noteissued pursuant to the note purchase agreement.  The Company may prepay this note at any time at its option.  If the Company or any of its subsidiariescompletes (i) an equity or long-term debt financing, (ii) a sale of assetsoutside the ordinary course of business, (iii) a sale-leaseback or similarfinancing, or (iv) a joint venture or other strategic partnership, and suchtransaction results in cash proceeds to the Company in excess of $5 million,then a portion of the amount of such proceeds in excess of $5 million shall be appliedto prepay the note.

 

On July 30, 2002, the Company entered into a bridge financing agreementwith ten accredited investors for the sale and issuance of 10 “units” to theinvestors for an aggregate purchase price of $1,000,000.  Each unit consists of a convertiblepromissory note in the amount of $100,000 and 25,000 unregistered shares of theCompany’s common stock.

 

Pursuant to the bridge financing agreement, the Company is required touse reasonable efforts to register the shares of common stock comprising theunits within 60 days after the execution of the bridge financing agreement, oras soon as practicable thereafter.  Uponregistration of the common stock, each investor may not sell more thanone-third of the common stock comprising the units during any calendarmonth.  The convertible promissory notescomprising the units bear interest at an annual rate of 7% and mature on July30, 2005.  On each of July 30, 2003, July30, 2004 and July 30, 2005, the investors have the option to convert one-thirdof the principal amount of the notes into common stock of the Company.  The conversion price of the notes isinitially 65% of the average closing price of a share of the Company's commonstock for the 20 trading days preceding the given anniversary date of thenotes.  The maximum conversion priceshall be $4.00 per share and the minimum conversion price shall be $1.00 pershare.  The conversion price will besubject to adjustment from time to time to reflect any reorganization,recapitalization, reclassification, stock dividend, stock split, reverse stocksplit or similar change in the Company's shares of common stock.  The notes may be prepaid in whole or in partby the Company without premium or penalty.

 

The Company’s business plan for 2002 is predicated principally upon thesuccessful marketing of its RFID and digital video products. During 2001,operating activities utilized approximately $5.0 million of cash. The Companyanticipates that its existing working capital resources and revenues from operationswill not be adequate to satisfy its funding requirements in 2002.

 

The Company’s working capital requirements will depend upon manyfactors, including the extent and timing of the Company’s product sales, theCompany’s operating results, the status of competitive products, and actualexpenditures and revenues compared to its business plan. The Company iscurrently experiencing declining liquidity, including negative working capitalbalances, losses from operations and negative cash flows, which makes itdifficult for the Company to meet its current cash requirements, includingpayments to vendors, and may jeopardize the Company’s ability to continue as agoing concern. The Company intends to address its liquidity problems bycontrolling costs, seeking additional funding (through capital raisingtransactions and business alliances) and maintaining focus on revenues andcollections.

 

If the Company’s losses continue, the Company will have to obtain fundsto meet its cash requirements through business alliances, such as strategic orfinancial transactions with third parties, the sale of securities or otherfinancing arrangements, or the Company may be required to curtail itsoperations, seek a merger partner, or seek protection under federal bankruptcylaws. Any of the foregoing may be on terms that are unfavorable to the Companyor disadvantageous to existing stockholders. In addition, no assurance may begiven that the Company will be successful in raising additional funds orentering into business alliances.

 

**Other**

 

*Inflation*.Inflation has not had, and is not expected to have, a material impact on theoperations and financial condition of the Company.

 

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**PARTII. OTHER INFORMATION**

 

**Item1. Legal Proceedings.**

 

In Stephen L. Briggs v. AXCESS Inc., JAMS Arbitration filed on October2, 2001, Stephen Briggs, a former employee of the Company, asserted that he hadgood cause to terminate his employment under his employment agreement and isowed $300,000 in contractual severance pay. In Charles Martin v. AXCESS Inc.,JAMS Arbitration filed on or about October 2001, Charles Martin, a formeremployee of the Company, asserted that he had good cause to terminate hisemployment under his employment agreement and is owed $300,000 in contractualseverance pay. The Company believes these cases are without merit and intendsto contest these matters vigorously.

 

Barth Technologies Incorporated (“BTI”), filed a lawsuit against theCompany in state district court in Tarrant County, Texas on October 18, 2001.BTI was a vendor to the Company and seeks damages of $263,655 for non-paymentfor services and supplies provided. The Company is attempting to settle thisclaim, but has limited resources to do. Other similar cases have been filedagainst the Company with claims aggregating $433,356. At June 30, 2002, theCompany has accrued the amounts expected to be paid to settle the claimsdescribed in this paragraph.

 

Both of these matters were previously reported on the Company’s Form 10-QSBfor the quarterly period ended March 31, 2002.

 

**Item 2. Changes in Securities**.

 

During the three months ended June 30, 2002, the Company issuedunregistered securities in connection with the transactions described below.The issuance of stock was exempt from the registration requirements of theSecurities Act, as amended by virtue of Section 4(2) thereof, as transactionsnot involving a public offering and an appropriate restrictive legend wasaffixed to the stock certificates.

 

***Dividends***

 

The holders of the Company’s Series C Preferred Stock are entitled toreceived quarterly dividends on each such share held at the annual rate of 10%of the original issue price of each share payable in arrears, when, as and ifdeclared by the Company’s board of directors, in cash or additional shares ofpreferred stock at the option of the holder. There were no dividends in arrearson the Series C Convertible Preferred Stock at June 30, 2002. There were nodividends payable for Series C Preferred Stock at June 30, 2002.

 

The holders of Series I Preferred Stock, Series J Preferred Stock, andSeries 1999 Voting Preferred Stock are entitled to receive semi-annualdividends on each such share at the annual rate of 8% of the original issueprice of each share payable in arrears, when, as and if declared by theCompany’s board of directors, in cash or additional shares of preferredstock.  On June 30, 2002, the Companyissued (a) 3 shares of Series I Preferred Stock to holders thereof as paymentin full for the $36,548 of accrued, but unpaid dividends of the Series IPreferred Stock as of such date, (b) 3 shares of Series J Preferred Stock toholders thereof as payment in full for the $32,315 of accrued, but unpaiddividends of the Series J Preferred Stock as of such date, and (c) 3 shares ofSeries 1999 Voting Preferred Stock to holders thereof as payment in full forthe $31,260 of accrued, but unpaid dividends of the Series 1999 VotingPreferred Stock as of such date.

 

***PreferredStock Conversion Terms***

 

Each share of Series C Convertible Preferred Stock is convertible atthe option of the holders into voting common stock on a share-for-share basis.The Company may redeem the Series C Convertible Preferred Stock at any time atthe $30.20 stated value, plus accrued dividends, subject to the stock holder’sright to convert to voting common stock for 10 business days following receiptof the Company’s notice of redemption.

 

Each share of Series I Preferred Stock andSeries J Preferred Stock is convertible in whole or in part at any time at theoption of the holder into shares of voting or non-voting common stock of theCompany, respectively, equal to the quotient of (a) the aggregate originalissue price of $10,000 per share divided by (b) the conversion price of $4.00per share. The Series I Preferred Stock and the Series J Preferred Stock areboth subject to the optional redemption at any time by the Company, in whole orin part, at a redemption price per share equal to the $10,000 stated value,plus any accrued, but unpaid dividends thereon. The Company’s optional right ofredemption is subject to each Series I Preferred Stock or Series J PreferredStock holder’s right to convert such preferred stock into voting or non-votingcommon stock, as the case may be, within 10 business days after the Company’snotice of redemption.  The Series IPreferred Stock and the Series J Preferred Stock are also subject to themandatory conversion by the Company into shares of the Company’s voting ornon-voting common stock, as the case may be, if the closing bid price of theCompany’s common stock on the NASDAQ SmallCap Market is at least $10.00 per

 

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sharefor a period of at least 90 consecutive trading days.

 

Each share of Series 1999 is convertible inwhole or in part at any time at the option of the holder into a number ofshares of non-voting common stock of the Company, as the case may be, equal tothe quotient of (a) the aggregate original issue price of $10,000 per sharedivided by (b) the conversion price of $2.50. The Series 1999 Preferred Stock is subject to the optional redemption atany time by the Company, in whole or in part, at a redemption price per shareequal to the $10,000 stated value, plus any accrued, but unpaid dividendsthereon. The Company’s optional right of redemption is subject to each Series1999 Preferred Stock holder’s right to convert such preferred stock intonon-voting common stock, as the case may be, within 10 business days after theCompany’s notice of redemption.

 

The Series 1999 Preferred Stock is alsosubject to the mandatory conversion by the Company into shares of the Company’snon-voting common stock, as the case may be, if (a) the closing bid price ofthe Company’s common stock on the NASDAQ SmallCap Market is at least $7.50 pershare for a period of at least 20 consecutive trading days and (b) the tradingvolume of the common stock on the NASDAQ SmallCap Market is at least 50,000shares per day as measured by NASDAQ during each of such 20 consecutive tradingdays.

 

***CommonStock Issuable Pursuant To Asset Purchase Agreement***

 

Pursuant to an asset purchase agreement, effective November 30, 2001the Company acquired certain property and equipment and the rights to certaindigital video intellectual property rights from IVEX, Inc., an investee of theAmphion Group, in exchange for 148,000 shares of the Company’s common stock.The Company expects to issue these shares of common stock by September 30,2002. The aggregated purchase price of $592,000 was allocated to the propertyand equipment acquired and to in-process research and development.

 

***NoteBorrowings***

 

The Company entered into a 6.75% convertible note with AmphionInvestments LLC dated January 25, 2002. During the six months ended June 30,2002, the Company borrowed $350,000 under this note. The principal outstandingunder this note may be converted into securities of the Company at the optionof Amphion Investments. The borrowings are unsecured and are due and payable ondemand by Amphion Investments.

 

The Company entered into a 6.75% convertible note with VennWorks LLCdated February 14, 2002. During the six months ended June 30, 2002, the Companyborrowed $814,000 under this note. The principal outstanding under this notemay be converted into securities of the Company at the option of VennWorks. Theborrowings are unsecured and are due and payable on demand by VennWorks.

 

The Company entered into a 6.75% convertible note with Amphion VenturesL.P. (“Amphion Ventures”)  datedFebruary 28, 2002. During the six months ended June 30, 2002, the Companyborrowed $1,255,000 under this note. The principal outstanding under this notemay be converted into securities of the Company at the option of AmphionVentures. The borrowings are unsecured and are due and payable on demand byAmphion Ventures.

 

On June 27, 2002, J.P. Morgan Investment Corporation, a stockholder ofthe Company, agreed with the Company to extend the maturity of the $400,000balance remaining under a note purchase agreement originally due December 31,1999 until December 31, 2003.  TheCompany issued warrants to J.P. Morgan Investment Corporation to purchase10,000 shares of Common Stock for $3.00 per share in consideration forextending the term of this indebtedness. Using the Black Scholes option-pricing model calculation, the warrantsare valued at $9,200, which will be amortized to interest expense over the termof the loan.  The warrants areexercisable at any time on or prior to December 31, 2003.  The number of shares of Common Stock and theexercise price are subject to adjustment as provided in the warrants. J.P.Morgan Investment Corporation may transfer the warrants at its option.

 

On April 12, 2002, the Company issued a senior promissory note to J.P.Morgan Investment Corporation in the amount of $400,000, at an annual interestrate of 6.64%, with a maturity date of December 31, 2003.  This note was given to J.P. MorganInvestment Corporation in extension and partial renewal of the original noteissued pursuant to the note purchase agreement.  The Company may prepay this note at any time at its option.  If the Company or any of its subsidiariescompletes (i) an equity or long-term debt financing, (ii) a sale of assetsoutside the ordinary course of business, (iii) a sale-leaseback or similar financing,or (iv) a joint venture or other strategic partnership, and such transactionresults in cash proceeds to the Company in excess of $5 million, then a portionof the amount of such proceeds in excess of $5 million shall be applied toprepay the note.

 

*Subsequent Events*

 

On July 25, 2002 the Company received notice from J.P. MorganInvestment Corporation to convert its 112,492 shares of non-voting common stockto 112,492 shares of voting common stock. Pursuant to the Company’s certificate of incorporation, as amended, eachshare of the Company’s non-voting common stock may be converted into one shareof voting common stock at any time by the holder thereof.  The Company plans to issue these shares ofvoting common stock during 2002.

 

On July 25, 2002 the Company received notice from J.P. MorganInvestment Corporation to convert 52 shares of Series I preferred stock into207,171 fully-paid and non-assessable shares of voting common stock of theCompany, pursuant to the terms of the Series I preferred stock.

 

On July 30, 2002, the Company entered into a bridge financing agreementwith ten accredited investors for the sale and issuance of 10 “units” to theinvestors for an aggregate purchase price of $1,000,000.  Each unit consists of a convertiblepromissory note in the amount of $100,000 and 25,000 unregistered shares of theCompany’s common stock.

 

Pursuant to the bridge financing agreement, the Company is required touse reasonable efforts to register the shares of common stock comprising theunits within 60 days after the execution of the bridge financing agreement, oras soon as practicable thereafter.  Uponregistration of the common stock, each investor may not sell more thanone-third of the common stock comprising the units during any calendar month.  The convertible promissory notes comprisingthe units bear interest at an annual rate of 7% and mature on July 30,2005.  On each of July 30, 2003, July30, 2004 and July 30, 2005, the investors have the option to convert one-thirdof the principal amount of the notes into common stock of the Company.  The conversion price of the notes isinitially 65% of the average closing price of a share of the Company's commonstock for the 20 trading days preceding the given anniversary date of thenotes.  The maximum conversion priceshall be $4.00 per share and the minimum conversion price shall be $1.00 pershare.  The conversion price will besubject to adjustment from time to time to reflect any reorganization,recapitalization, reclassification, stock dividend, stock split, reverse stocksplit or similar change in the Company's shares of common stock.  The notes may be prepaid in whole or in partby the Company without premium or penalty.

 

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**Item 3. Defaults Upon Senior Securities**.

 

On June 27, 2002, J.P. Morgan Investment Corporation, a stockholder ofthe Company, agreed with the Company to extend the maturity of the $400,000balance remaining under a note purchase agreement originally due December 31,1999 until December 31, 2003.  TheCompany issued warrants to J.P. Morgan Investment Corporation to purchase10,000 shares of Common Stock for $3.00 per share in consideration forextending the term of this indebtedness. Using the Black Scholes option-pricing model calculation, the warrantsare valued at $9,200, which will be amortized to interest expense over the termof the loan.  The warrants areexercisable at any time on or prior to December 31, 2003.  The number of shares of Common Stock and theexercise price are subject to adjustment as provided in the warrants. J.P.Morgan Investment Corporation may transfer the warrants at its option.

 

On April 12, 2002, the Company issued a senior promissory note to J.P.Morgan Investment Corporation in the amount of $400,000, at an annual interestrate of 6.64%, with a maturity date of December 31, 2003.  This note was given to J.P. MorganInvestment Corporation in extension and partial renewal of the original noteissued pursuant to the note purchase agreement.  The Company may prepay this note at any time at its option.  If the Company or any of its subsidiariescompletes (i) an equity or long-term debt financing, (ii) a sale of assetsoutside the ordinary course of business, (iii) a sale-leaseback or similarfinancing, or (iv) a joint venture or other strategic partnership, and suchtransaction results in cash proceeds to the Company in excess of $5 million,then a portion of the amount of such proceeds in excess of $5 million shall beapplied to prepay the note.

 

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**Item 4. Submission of Matters to a Vote ofSecurity Holders**.

 

None.

 

**Item5. Other Information**.

 

The Company received notice from NASDAQ that it does not comply withthe minimum $35 million market capitalization rule for  continued listing on the NASDAQ SmallCapMarket, based on the current share price of the Company's common stock.

 

   The Company appealed thedetermination to NASDAQ as provided for in NASDAQ's Marketplace rules.  The Company appeared at a hearing beforeNASDAQ on August 8, 2002 to discuss the listing requirements and expects toreceive NASDAQ's final determination regarding delisting by August 22,2002.  The Company's common stock willcontinue to be listed during this appeal process.

 

   If the Company's commonstock is delisted from the NASDAQ SmallCap Market, the Company believes thatits common stock would qualify for listing on the Over-the-Counter, or OTC,Bulletin Board.  However, the result ofdelisting from the NASDAQ SmallCap Market could be a reduction in the liquidityof the Company's common stock, even if the Company's shares are thereaftertraded on the OTC Bulletin Board. Further, delisting could reduce the ability of holders of the Company's commonstock to purchase or sell shares as quickly and as inexpensively as they havedone historically.

 

   On August 9, 2002, GregoryW. Haskell resigned from the Company's board of directors to pursue otherinterests.  The Company is currentlysearching for a replacement.

 

**Item 6. Exhibits and Reports on Form 8-K**.

 

(a) Exhibits:

 
|   | **Exhibit No.** |   | **Description**                                                                                                                                                                                                        |
|--------|-----------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 10.1            |   | Demand Note  dated as of January 25, 2002, executed by the Company payable to Amphion  Investments, LLC in the principal amount of $200,000 (plus additional amounts  shown on the schedule of advances to the note).* |
|   |            |   |                                                                                                                                                                                                                   |
|   | 10.2            |   | Demand Note  dated as of February 14, 2002, executed by the Company payable to VennWorks,  LLC in the principal amount of $150,000 (plus additional amounts shown on the  schedule of advances to the note).*          |
|   |            |   |                                                                                                                                                                                                                   |
|   | 10.3            |   | Demand Note  dated as of February 28, 2002, executed by the Company payable to Amphion  Ventures, LP in the principal amount of $150,000 (plus additional amounts  shown on the schedule of advances to the note).*    |
|   |            |   |                                                                                                                                                                                                                   |
|   | 10.4            |   | Form of  Bridge Financing Agreement, dated as of July 30, 2002, between the Company  and certain investors.*                                                                                                           |
|   |            |   |                                                                                                                                                                                                                   |
|   | 10.5            |   | Voting  Common Stock Purchase Warrant, dated July 5, 2002, issued to J.P. Morgan  Investment Corporation, for the purchase of 10,000 Shares of voting common  stock.*                                                  |
|   |            |   |                                                                                                                                                                                                                   |
|   | 10.6            |   | Senior  Promisorry Note, dated April 12, 2002, executed by the Company payable to  J.P. Morgan Investment Corporation in the principal amount of $400,000.*                                                            |

 

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*Filedherewith.

 

(b) Reports onForm 8-K:

 

On April 4,2002, the Company filed a Current Report on Form 8-K (Item 5) to report theappointment of Allan L. Frank as Chief Financial Officer of the Company.

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|             | AXCESS INC.,  Registrant                               |
|------------------|--------------------------------------------------------|
|             |                                                   |
|             | /s/ ALLAN  GRIEBENOW                                   |
|             | Allan  Griebenow Director, President and               |
|             | Chief  Executive Officer (Principal Executive Officer) |
|             |                                                   |
|             | /s/ ALLAN L.  FRANK                                    |
|             | Allan L.  Frank                                        |
|             | Chief  Financial Officer and Secretary                 |
|             | (Principal  Accounting and Financial Officer)          |
|             |                                                   |
| August 14,  2002 |                                                   |

 

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