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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
1-12571
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(COMMISSION FILE NO.)
FOCUS AFFILIATES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4467726
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(State of incorporation) (I.R.S. Employer Identification No.)
401 EAST CORPORATE DRIVE, SUITE 220
LEWISVILLE, TEXAS 75057
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(Address of principal executive offices including zip code)
Registrant's telephone number, including area code: (214) 222-7979
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF CLASS WHICH REGISTERED
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COMMON STOCK, $0.01 PAR VALUE BOSTON STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF CLASS
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WARRANTS TO PURCHASE COMMON STOCK
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 as 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-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the registrant's Common Stock held by
non-affiliates as of March 31, 2000 was approximately $19,517,225 (based on the
closing sales price of such stock as of such date on the Nasdaq SmallCap Market
on March 31, 2000).
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As of March 31, 2000 there were 10,746,040 shares of the registrant's
Common Stock outstanding.
PART I
ITEM 1. BUSINESS.
The statements which are not historical facts contained in this Annual
Report for Focus Affiliates, Inc. ("FocusWireless.com," "Focus" or the
"Company") are forward-looking statements that involve risks and uncertainties,
including but not limited to those discussed below under "Risk Factors." Any of
these and other risk factors could cause the Company's actual results to vary
materially from anticipated results or other expectations expressed in its
forward-looking statements.
GENERAL
The Company has been engaged since its formation in the wholesale
distribution of wireless communications products. The Company has begun to
transition its business to that of a business-to-business ("B2B") e-commerce
provider of wireless communications products and services. The Company has
adopted a new e-commerce strategy to exchange goods, services, and information
online. The emphasis will be on the elimination of supply chain friction and
reducing transaction costs while helping wireless service providers gain access
to a broader range of customers and generating new revenue opportunities through
emerging channels.
The Company anticipates that new distribution channels may represent
one of the faster growing segments of wireless subscriptions. Using its
proprietary Web application, the Company intends to provide these new and
emerging channels of wireless distribution with a turnkey, Internet-based
business solution. The Company has built an e-commerce system that should
provide meaningfully lower operational costs that may be shared with its
customers, while its on-line order entry system is designed to significantly
reduce errors associated with order taking. Focus' processes allow network
operators to align themselves with name brand marketing companies that utilize
Focus to completely manage this channel without conflicting with their current
methods of distribution.
Through its wholesale distribution activities and its October 1999
acquisition of Cellular Wholesalers, Inc. ("CWI"), the Company has developed a
customer base of more than 3,000 wholesalers, network operators, agents, dealers
and retailers in principally the domestic marketplace.
The Company's objective is to capitalize on wireless communications
opportunities in markets in which the Company believes it can achieve
significant growth. The Company intends to implement its business structure by
(i) strategically aligning with selected manufacturers and wireless service
providers to provide value-added services within the supply chain of the
wireless telecommunications industry and (ii) transitioning to a service-based
Company offering a broad selection of mission-critical services and solutions
related to distribution, including "just in time" delivery of wireless handsets
and accessories, purchasing, selling, warehousing, picking, packing and shipping
and value added services, including inventory management, marketing, kitting and
customized packaging, private labeling, light assembly, accounts receivable
management, end user support services and warranty servicing.
Strategic initiatives include B2B e-fulfillment programs targeting two
new fast-emerging wireless telecom distribution channels - mobile virtual
network operators ("MVNO's") and e-retailers. Additional initiatives include
operating a B2B wireless marketplace for the wireless telecom industry. Such
activities would be designed to facilitate e-commerce between trading partners
utilizing relationships and industry expertise.
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As part of its plan, the Company changed its name from Intellicell
Corp. to Focus Affiliates, Inc. on September 29, 1999. In addition, the Company
acquired Cellular Wholesalers, Inc. ("CWI") effective October 29, 1999 and The
Wireless Group, Inc. ("TWG" or "SourceWireless.com") effective December 30,
1999.
RECENT DEVELOPMENTS
RECENT FINANCIAL PERFORMANCE
The Company experienced an increase in net sales but incurred
substantial operating losses in 1999. The losses, which have continued during
the first quarter of 2000, are attributable to various factors, including an
insufficient level of sales while it re-establishes a customer base that
purchases wireless phones based on digital technology (as opposed to the former
analog technology), the decision by Motorola, in November 1999, to curtail
shipments to dealers, agents and retailers of wireless phones and related
products, expenses related to the development of a Web site capable of
e-commerce and to the legal, accounting, finance and other costs associated with
the acquisition of CWI. These losses have had a material adverse effect on the
Company's working capital and liquidity, and the Company will need to raise at
least $3,000,000 in additional capital by May 2000 in order to continue its
operations. The Company is seeking to raise capital in a private placement, but
does not yet have commitments for any of this financing and there can be no
assurance that it will be able to raise this capital on a timely basis or at
all. See "Risk Factors - The Company Has An Immediate Need for Additional
Capital" and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
CWI PURCHASE PRICE ADJUSTMENT
In March 2000, the Company entered into an agreement with the former
shareholders of CWI (the "CWI Shareholders") pursuant to which the Company and
the CWI Shareholders agreed that the total purchase price to be paid to the CWI
Shareholders in connection with the Company's acquisition of CWI in October 1999
would be limited to the 2,250,000 shares of the Company's common stock
previously delivered to the CWI Shareholders (the "Base Shares") and the
$4,500,000 cash payment previously made to the CWI Shareholders. Accordingly,
the $500,000 of potential additional consideration to be paid to the CWI
Shareholders by the Company that had been escrowed was returned to the Company
from the escrow. The Company and the CWI Shareholders further agreed that,
subject to the Company obtaining additional equity capital of at least
$3,900,000 on terms reasonably acceptable to the Company by April 22, 2000 (i)
certain of the CWI Shareholders will contribute an aggregate of 1,300,000 Base
Shares to the Company's capital for cancellation or retention as treasury stock,
(ii) the Company will indemnify the CWI Shareholders for any legal expenses they
incur should certain types of claims be brought against them by creditors of the
Company and (iii) the Company and the CWI Shareholders will enter into limited
mutual releases.
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BANK AGREEMENT
As a condition of the Merger, in October 1999, the Company entered into
a new revolving line of credit agreement ("Credit Agreement") that, in effect,
increased its existing revolving line of credit with Banc of America Commercial
Finance ("BancAmerica"). The Credit Agreement expires in October 2001, and
provides for borrowings of up to a maximum of $20,000,000 based on a maximum of
85% of eligible receivables and the lesser of $7,500,000 or of up to 60% of
eligible inventory, as defined. Borrowings under the agreement accrue interest
at the prime rate plus 2.50% per annum. The credit facility is collateralized by
substantially all of the assets of the Company. At April 11, 2000, $864,000 was
outstanding under this facility. The Company is currently in violation of
certain financial and other covenants of the facility and is negotiating with
BancAmerica in an effort to secure BancAmerica's agreement to forbear from
asserting any of its rights based on these violations. For further information
regarding the Credit Agreement, see "Risk Factors - The Company is Not Currently
in Compliance with the Covenants of its Senior and Subordinated Debt
Obligations."
WIRELESS COMMUNICATIONS INDUSTRY
The wireless communications industry provides voice and data
communications primarily through cellular telephone, personal communications
services ("PCS"), personal communications networks, satellite, enhanced
specialized mobile radio and paging services. Advances in system technology and
equipment, the proliferation of manufacturers and the increased number of
network operators have increased consumer acceptance and contributed to dramatic
increases in worldwide demand for wireless communications equipment and
services.
The Company believes that the wireless communications industry should
continue to grow due to economic growth, increased service availability and the
lower cost of wireless service compared to conventional wired telephone systems.
The Company also believes that the change from analog to digital technology
should increase overall market growth and encourage consumers to purchase the
next generation of wireless communications products.
The wireless communications industry has historically provided
telecommunications services primarily through analog technology. However,
starting in late 1997, wireless carriers began to provide services built around
digital technologies, which provide increased network capacity, more
functionality, better voice quality and greater security/privacy than analog
technologies. By the time digital technologies became commercially available,
cellular systems in the United States had already been built to full capacity
using analog technologies. Consequently, the first proponents of the new digital
technologies in the United States were the PCS network operators, as they had
not yet built costly infrastructures. These PCS providers now compete with
incumbent cellular network operators in the United States, who have started to
shift their subscribers toward digital coverage. As a result, the growth in the
industry today is overwhelmingly derived from digital-based services. According
to Dataquest, manufacturers of wireless handsets sold a record 162.9 million
units worldwide in 1998, up 51% from the prior year, and digital mobile phones
accounted for 84.6% of this total.
The number of network operators in each market has increased as a
result of deregulation within the wireless communications industry and the
introduction of new technological applications such as PCS and satellite-based
communications systems. Before the auctioning of the PCS spectrum in 1994, there
were only two network operators per market. Today, there are as many as seven
network operators in some metropolitan markets. In addition to the increased
number of network operators, the proliferation of resellers in the market has
intensified competition. The resulting price drop has caused network operators
to offer enhanced services such as voicemail, text messaging, and caller ID in
order to differentiate their services. In addition, the advent of single-rate
plans has also served to increase usage. These plans have been extremely
successful because they are easy for the consumer to understand and eliminate
high roaming and long-distance fees.
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To increase market reach, network operators are forming strategic
channel partnerships with MVNO's, national retailers, and e-retailers. As the
variety of handset models expands, including third generation capabilities, the
Company expects distribution flows to migrate from the agent/dealer network to
these new channel partners. As a result, network operators may switch from
in-house distribution to independent value-added distribution services to lower
overall costs. In order to maintain their resources for marketing, sales and
customer service, network operators are increasingly seeking to outsource their
fulfillment and inventory management functions. Since price erosion may continue
to threaten the profitability of network operators, it will become more and more
necessary to offer better voice and data solutions, and to ensure that their
networks and operations are efficiently managed. Quality outsourcing services
are essential to the management of their business, and an Internet-based
solution can offer unparalleled efficiency.
This paradigm has created an opportunity for new channels of
distribution, since one of the barriers to entry into reselling wireless
services was the cost of handsets. As distribution of handsets migrates from the
agent/dealer network, network operators need a solution for recruiting and
supporting this new distribution channel.
BUSINESS-TO-BUSINESS (B2B) e-COMMERCE AND ON-LINE AUCTION
Business-to-business usage of the Internet is growing at an astounding
pace as businesses realize the advantages of using e-commence and leveraging the
Internet's ability to reach highly targeted audiences. It is estimated that B2B
e-commerce will grow from $17.0 billion in 1998 to $327 billion in 2002. Of that
amount, Forrester Research forecasts that the value of goods and services
purchased through online business auctions will increase from $8.7 billion in
1998 to $52.6 billion in 2002.
The B2B economy presents several opportunities for creating new revenue
streams and reducing costs for participants. Vertical marketplaces (industry
specific) and horizontal marketplaces (multiple industries) provide diverse
revenue streams from advertising, auction-driven transactions, procurement for
supply chains, fulfillment, and e-commerce transaction fees. The auction format
has become increasingly popular as it enhances efficiency while maximizing the
return for both buyers and sellers. Auctions help businesses improve operating
efficiencies, reduce costs, and spur revenue by selling idle inventory and other
assets at market prices. It is anticipated that Internet auction popularity will
continue to increase due to the scale, reach, and real-time attributes afforded
by the Internet.
In addition to auctions, Internet marketplaces are providing single
source points of purchase for buyers to locate, price, and purchase inventory
requirements from multiple suppliers. Goldman Sachs Investment Research
estimates that these marketplaces can reduce overall product costs from between
2% and 39%, depending on the commodity-like nature of the industry segment. The
value proposition to distributors and manufacturers is reduced marketing costs,
low barrier of entry for e-commerce applications, and access to a larger
geographically dispersed customer base.
Focus has adopted this new e-commerce paradigm to exchange goods,
services, and information online with its trading partners. The emphasis is on
channel management, thus eliminating supply chain friction and reducing
transaction costs while helping wireless service providers gain access to a
broader range of customers and generating new revenue opportunities through
emerging channels. The benefits of B2B e-commerce to Focus may include:
o Opening the market and integrating partners, suppliers and
distribution channels.
o Connecting Focus' new, expanded enterprise through a
universal electronic medium, which in the wireless
communications vertical market will be the
SourceWireless.com marketplace.
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o Permitting the integration and alignment of technology,
processes, and human performance with a continuously
evolving strategic intent.
The Company believes the wireless telecom industry is well positioned
to utilize on-line auctions as auctions help to:
o Maintain existing distribution channels: Network operators
hold obsolete inventory of which they need to dispose. They
will have the ability to dispose of this inventory into the
marketplace without disrupting current distribution methods
or price points.
o Improve asset recovery value: Through dynamic pricing in a
controlled distribution environment, network operators,
manufacturers, distributors, and other suppliers can
maximize the value of distressed and obsolete inventory by
selling to the highest bidder.
o Diversify customers' product offerings: Network operators,
manufacturers and resellers can expand within the vertical
domain by providing auctions for other equipment such as
two-way radios, pagers, infrastructure components and test
equipment.
STRATEGY
Historically a wholesale distributor of wireless products, Focus is
transitioning its business to become a developer of B2B e-fulfillment and
e-marketplace solutions for the wireless telecommunications industry. Leveraging
its industry knowledge, distribution expertise, and customer base, the Company
is seeking to market Internet-enabled commerce and e-fulfillment solutions for
manufacturers, network operators, distributors, and other service providers
throughout the United States. The Company has formed two strategic initiatives
to capitalize on the opportunities presented by these emerging Internet trends.
The first initiative is the Company's B2B e-fulfillment program which
is designed to provide comprehensive, Internet-enabled facilitation programs for
network operators, manufacturers, and other service providers. These services
include end-to-end transaction management and the facilitation of product
procurement, inventory risk management, handset programming, kitting, shipping
and returned goods management. The Company is primarily focused on two new
fast-emerging wireless telecom distribution channels - MVNO's and e-retailers.
These new emerging distribution channels utilize their established customer
bases by leveraging their brands with new bundled communication products and
services such as long distance, local exchange service, Internet, home security,
cable and cellular phone services. These channels may have marketing and supply
agreements with Internet-service providers (ISP's), competitive local exchange
carriers (CLEC's), e-retailers, utility companies, multi-level marketing groups,
and Web portals. Focus intends to generate fee-based revenue by providing
facilitation services to these new distribution channels. Some leading network
operators are projecting these new channels to generate 10% to 25% of all new
wireless subscribers beginning in 2001.
The Company's second strategic initiative is to eventually operate one
of the leading B2B wireless marketplaces for the wireless telecom industry
through the Company's Web site, SourceWireless.com, acquired December 30,1999.
Goldman Sachs defines an e-marketplace as "a Web Site where buyers and sellers
come together to communicate, share ideas, advertise, bid in auctions, conduct
transactions, and coordinate inventory and fulfillment." SourceWireless.com
currently conducts online trading between buyers and sellers utilizing an
auction and fixed-price catalog format, facilitates basic transactions, and
provides an advertising medium for members - network operators, manufacturers,
distributors, dealers and service providers - to leverage the broad reach and
dynamic pricing benefits of SourceWireless.com to maximize value on excess and
obsolete inventory. Distributors and manufacturers can further increase their
visibility with a storefront solution to market their primary product lines.
These storefronts allow participants to promote company branding, highlight
product specials, and allow buyers to browse available product for purchase in
the SourceWireless.com catalog. Wireless carriers and other large
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sellers can establish private marketplaces to make product available only to a
targeted group of qualified buyers. This allows network operators to sell their
excess and high-demand product to their qualified distribution channel of agents
and resellers. Manufacturers can also limit buyers to only qualified
distributors by utilizing a private marketplace without compromising current
distribution channels. With B2B e-commerce spending forecasted at over $1.5
trillion by 2004 by Forresters Reseach, SourceWireless.com is positioned to be a
part of the exploding trend of B2B e-commerce marketplaces in the fast growing
wireless telecom sector. SourceWireless.com expects to earn revenue from auction
commissions, advertising fees and other e-commerce transaction fees.
Both of these strategic initiatives are expected to offer efficient
sourcing methods, consultative sales techniques, and unique ordering processes
not currently offered by existing competitors. Management feels the Company is
positioned to offer a competitive value-added proposition to the wireless
telecom industry and the specific customers it wishes to serve.
PRODUCTS/SERVICES
As a distributor, the Company currently offers a broad selection of
wireless products purchased indirectly and directly from leading manufacturers.
The Company's product offerings include a variety of hand-held and mobile
cellular telephones featuring prominent brand names such as Ericsson, Motorola,
Nokia, NEC, Audiovox and Samsung. The Company continually reviews and evaluates
wireless products in determining the mix of products purchased for resale to
customers and seeks to acquire distribution rights for products which the
Company believes have the potential for significant market penetration. For the
years ended December 31, 1997, 1998, and 1999, approximately, 92.0%, 92.3%, and
84.7%, respectively, of the Company's net sales were derived from sales of
wireless telephones. A significant portion of the Company's sales were of
Motorola, Ericsson and Nokia products. Motorola, Ericsson and Nokia handsets are
not available to the Company directly from these manufacturers. Since the
Company purchases these handsets from third parties, it does not obtain price
protection, cooperative advertising and marketing allowances on such products.
As part of its new strategic initiative, the Company's B2B
e-fulfillment programs are designed to provide comprehensive, Internet-enabled
facilitation programs for network operators, manufacturers, and other service
providers. These services will include end-to-end transaction management and the
facilitation of product procurement, inventory risk management, handset
programming, kitting, shipping and returned goods management. In return for such
services, the Company will seek to generate fees from the distribution channel
or end-user. The Company is primarily focused on two new fast-emerging wireless
telecom distribution channels: MVNO's and e-retailers.
The Company's B2B marketplace, SourceWireless.com, seeks to provide
prospective trading members with multiple ways to promote and sell their
products and branding. Such ways include:
Virtual StoreFronts are the cornerstone to the marketplace community
for SourrceWireless.com. By bringing together large content providers such as
manufacturers and distributors in one catalog marketplace, the Company offers
buyers a convenient one-stop shop for locating and pricing wireless equipment
from multiple suppliers. Much like shopping malls depend on anchor tenants to
attract shoppers, these storefronts help drive traffic to the Company's site.
The Company's storefront solutions allow manufacturers and distributors to
promote their branding and available merchandise to members.
The WirelessStore aggregates the available fixed-price merchandise from
participating storefronts and lists them by specific category, or catalogs. The
main page displays available product catalogs and featured sales items. Buyers
can browse and purchase the available inventory by selecting an appropriate
category and/or by searching for key words.
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The WirelessAuction provides an interactive on-line auction for
equipment sellers to list equipment for sale to the highest bidder. Using a
traditional auction method, bidders bid anonymously on listed items until the
expiration of the auction close date established by the seller. If bidding fails
to reach the reserve price, sellers do not sell the equipment.
The WirelessAds area provides members with a free classified
advertising section to post ads for equipment they wish to purchase or sell.
This area is designed to increase membership, site visitation and the amount of
time users spend on the site.
SourceWireless.com also offers private marketplaces for large volume
sellers whereby only select qualified buyers may bid on or purchase merchandise.
This option is targeted to large national wireless carriers such as AT&T
Wireless, PrimeCo, Arch Communications, and others who are concerned about the
redistribution of their equipment. By restricting the buying market for these
network operators, the Company can control the selling of this merchandise to a
carrier's reseller channel, international buyers, or qualified brokers.
Distributors can utilize private marketplaces to sell marked down inventory to
the highest bidder or to transact directly with their preferred customer base.
CUSTOMERS
The Company has developed a customer base of more than 3,000
redistributors, network operators, agents, dealers and retailers. The Company
believes that these categories of customers will continue to be important
purchasers of the Company's products. As it moves forward with its new strategy,
the Company intends to be a value-added service provider as it transitions to
the B2B e-commerce and on-line auction businesses. Prospectively, it is
anticipated that the Company's customer base may include a number of MVNOs,
network operators, reseller and e-retailers.
For the years ended December 31, 1997, 1998 and 1999, sales of cellular
products to the Company's five largest customers accounted for approximately
36.2%, 28.6% and 21.5%, respectively, of the Company's net sales. For the year
ended December 31, 1997, sales to Downtown Cellular and Brightpoint accounted
for approximately 11.7% and 11.4%, respectively, of the Company's net sales. For
the years ended December 31, 1998 and December 31, 1999, no single customer
accounted for more than 10% of the Company's net sales.
Brightpoint and CellStar are two of the Company's significant customers
and suppliers, as well as being the Company's largest competitors. Failure or
delay by these or other customers/suppliers in purchasing and/or supplying
competitive products on favorable terms, or at all, would materially adversely
affect the Company's sales, operating margins and ability to obtain and deliver
products on a timely and competitive basis. See "Competition."
The Company generally sells its products pursuant to customer purchase
orders and ships product orders received by 4:00 P.M. local time the same day.
Unless otherwise requested, substantially all of the Company's products are
delivered within two days of receipt of customer orders by common carrier.
Because orders are filled shortly after receipt, backlog is not material to the
Company's business.
The Company sells its products to customers in foreign markets,
including Israel, Paraguay, Mexico, Peru, Brazil and Canada and to United
States-based exporters of wireless products. For the years ended December 31,
1997, 1998 and 1999, sales of the Company's products to customers in foreign
markets accounted for 17.6%, 8.0% and 9.1%, respectively, of the Company's net
sales.
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SUPPLIERS
The Company has established certain relationships with leading
manufacturers and distributors of wireless products. The Company attempts to
obtain adequate inventories of popular brand name products on favorable pricing
terms. Inventory purchases are based on quality, price, service, customer
demand, product availability and brand name recognition. Product manufacturers
typically provide warranties, which the Company extends to its customers. The
Company's primary suppliers of product have been other wholesale distributors.
The supply of product from other wholesale distributors as compared to supplies
from manufacturers is inconsistent, of higher cost, on less favorable terms and
typically is without price protection and promotional allowances. The Company
will continue to seek to establish additional supplier relationships with
leading manufacturers of analog and digital cellular products. No assurance can
be given that the Company will be able to establish such relationships.
The Company has entered into non-exclusive arrangements with Audiovox,
Motorola and Nokia pursuant to which the Company distributes wireless telephones
and accessories to network operators, retailers and wholesalers. Such
arrangements are terminable on short notice. The Company purchases products
other than handsets from the above manufacturers and other distributors pursuant
to purchase orders placed from time to time in the ordinary course of business.
The Company believes that its relationships with its suppliers are satisfactory,
although it is seeking to establish additional supplier relationships with
selected manufacturers. The Company has recently experienced an inability to
meet obligations due vendors and suppliers on a timely basis. As a result, the
Company is presently on "credit hold" with many of its suppliers. For further
information, see "Risk Factors - The Company Has An Immediate Need for
Additional Capital" and "The Company Is Dependent On Its Principal Suppliers."
The Company generally places orders to its suppliers on a daily basis.
Purchase orders are typically filled within one to seven days and wireless
products are shipped to the Company's warehouses by common carrier.
For the years ended December 31, 1997, 1998 and 1999, the Company's
four largest suppliers accounted for approximately 43.9%, 41.0% and 46.0%,
respectively, of product purchases. For the year ended December 31, 1997,
Brightpoint, Progressive Concepts, Inc. and Audiovox, accounted for
approximately 11.9%, 11.8%, and 11.0%, respectively, of product purchases. For
the year ended December 31, 1998, Sony, Audiovox and Brightpoint accounted for
approximately 22.4%, 6.9%, and 6.5% respectively, of product purchases. For the
year ended December 31, 1999, Audiovox, CellStar and Motorola accounted for
approximately 16.8%, 13.4%, and 8.4% respectively, of product purchases. For
these periods, none of the Company's other suppliers accounted for more than 10%
of product purchases. Brightpoint and CellStar are two of the Company's primary
competitors. Failure or delay by these or other suppliers in supplying
competitive products on favorable terms, or at all, could materially adversely
affect the Company's operating margins and the Company's ability to obtain and
deliver products on a timely and competitive basis. See "Competition."
SALES, MARKETING AND DISTRIBUTION
The Company relies on direct mail catalog and its inside sales force to
market its wholesale equipment to the traditional dealer customer base. During
the first quarter of 2000, the Company implemented a beta version of a Web-based
ordering system, allowing customers to place orders on the Internet from online
catalogs. The Company anticipates a transition to online ordering by its
customer base during 2000.
The Company's e-fulfillment services have been developed by the
Company's senior management team who are actively engaged in business
development activities with leading network operators to jointly develop channel
management opportunities. Leveraging key industry contacts, business process
experience, and first-mover advantage, the Company has signed contracts with
leading marketing companies engaging in wireless services subscriber marketing.
These include Excel Communications, Encore Communications, and Wireless Assets.
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To promote the SourceWireless.com e-marketplace, the Company
incorporates a broad-based strategy to reach the specific target market. The
Company actively seeks content providers who wish to sell equipment, as well as
industry management and owners who make purchasing decisions. In addition to
leveraging relationships, the Company expects to utilize direct mail, telesales,
networking, Internet banner ads, email broadcasts to targeted users, and print
advertising in the industry's major magazines.
The Company believes that product recognition by customers and
consumers is an important factor in the marketing of the products sold by the
Company. Accordingly, the Company promotes its product lines through advertising
in trade publications and attendance at national and regional trade shows. The
Company also solicits customers through direct mail, email, and telemarketing
activities. The Company's manufacturers and dealers use a variety of methods to
promote their products directly to consumers, including print and media
advertising, which benefits the Company.
ASSET MANAGEMENT
ACCOUNTS RECEIVABLE
For the years ended December 31, 1997, 1998 and 1999, approximately
93.6%, 86.5% and 90.3%, respectively, of the Company's sales were made on open
account. The Company generally offers 30-day open account terms to its
customers. As of December 31, 1997, 1998 and 1999, trade accounts receivable
averaged 31.5, 28.3 and 39.2 days for sales made on open account, respectively.
The Company experienced bad debt expense in 1999 of $351,000 (0.7% of 1999
sales), as compared to $108,000 in 1998 (0.4% of 1998 sales) and as compared to
$3,627,000 for 1997 (4.4% of 1997 sales). The Company engages credit rating
associations that provide credit rating information in connection with
individual customer accounts, attempts to monitor its customers'
creditworthiness and seeks to obtain advance payment or letters of credit from
its foreign customers. All foreign sales are made in United States dollars.
During 1999, due, in part, to nominal foreign sales, all credit insurance in
force was not renewed.
INVENTORY
On average, the Company has historically turned inventory approximately
15.5 times per year. The Company takes physical inventory on a quarterly basis.
On an annual basis, cumulative physical inventory adjustments have accounted for
less than 1% of total purchases during the years ended December 31, 1997, 1998
and 1999.
ACCOUNTS PAYABLE
As of December 31, 1997, 1998 and 1999, trade accounts payable averaged
16.1, 16.1 and 51.0 days for purchases made on open account, respectively. At
December 31, 1999 accounts payable totaled $12,298,000. The Company has recently
experienced an inability to meet obligations due vendors and suppliers on a
timely basis. As a result, the Company is presently on "credit hold" with many
of its suppliers. For further information, see "Risk Factors - The Company Has
An Immediate Need for Additional Capital" and "Risk Factors - The Company Is
Dependent On Its Principal Suppliers."
MANAGEMENT INFORMATION SYSTEMS
The Company believes that inventory control and other information
systems are important factors in providing customers with competitive prices and
rapid delivery of a variety of products. Accordingly, the Company currently
maintains financial, accounting and management controls for its operations
through the use of a centralized accounting system and management information
system. The Company has experienced and continues to experience reliability
concerns with its
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<PAGE> 11
accounting system as well as limitations with its proprietary order entry and
fulfillment system. In order to replace the accounting system with a more
reliable solution and expand the Web enabled services offered by the
e-fulfillment and e-marketplace initiatives, the Company anticipates expending
substantial capital on information technology requirements. Management is
currently exploring various information technology solutions ranging in cost
from $1,000,000 to $5,000,000 over the next twelve months. See below under "Risk
Factors - The Company Plans to Replace its Information Technology Systems and
Expand its Operations."
COMPETITION
The market for wireless communication products is characterized by
intense price competition and significant price erosion over the life of a
product. The Company's wholesale distribution business competes principally on
the basis of price and product availability. The Company competes with numerous
well-established wholesale distributors and manufacturers of wireless equipment,
including the Company's customers and suppliers, as well as with providers of
cellular services, most of which possess substantially greater financial,
marketing, personnel and other resources than the Company and have established
reputations for success in the distribution, sale and service of cellular
products. A number of these competitors have the financial resources necessary
to enable them to withstand substantial price competition and implement
extensive advertising and promotional campaigns, both generally and in response
to efforts by additional competitors to enter into new markets or introduce new
products.
The Company's e-fulfillment services compete mainly with established
internal operations of the Company's target customers as well as other large
wireless equipment distributors, including Brightpoint and CellStar. Both of
these competitors are dynamic global companies and very diverse in their product
and service offerings. Management believes that the ability for any one
competitor to dominate a specific distribution channel in any one country may
not be practical. Management believes that the Company's agility as a smaller
vertical supplier can provide a distinct competitive advantage.
The emergence of the B2B e-marketplace is relatively new, and
consequently, to management's knowledge, there is no forefront provider of
e-commerce marketplace services for the wireless industry. There are, however, a
number of established industry specific marketplace sites offering e-commerce
and auction solutions in other industries. VerticalNet.com, a publicly traded
operator of industry vertical market hubs, operates 56 portals in a variety of
industries including communications, environmental, foodservice/hospitality,
healthcare, and metals. VerticalNet.com currently has two portals related to the
wireless industry, WirelessDesignOnline.com, which is narrowly targeted to the
RF engineers of wireless companies, and WirelessNetworksOnline.com, targeted to
executives and buyers in wireless network operators. These sites are more
advertising and information intensive, and do not offer product features or
extensive e-commerce and auction services to their members. The Company also
competes with other Web sites offering either auctions or product listing
services.
The Company has experienced and expects to continue to experience
significant price competition in the sale of analog and digital wireless
products. The Company believes this price competition is reflective of the lack
of direct supplier relationships for high demand digital cellular product and
the advent and customer acceptance of digital products. The primary suppliers of
product and the primary customers of the Company have been other wholesale
distributors. The supply of product from other wholesale distributors as
compared to supplies from manufacturers is inconsistent, of higher cost, on less
favorable terms and typically is without price protection and promotional
allowances. The Company will continue to seek to establish additional supplier
relationships with leading manufacturers of analog and digital cellular
products. No assurance can be given that the Company will be able to establish
such relationships. The Company expects its competitors to offer new and
existing products and services at prices necessary to gain and retain market
share. Certain of the Company's competitors have substantial financial
resources, which enable them to withstand intense price competition or sustain a
market
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<PAGE> 12
downturn better than the Company. Furthermore, no assurance can be given that
competitors of the Company (many of which are the Company's suppliers) will not
develop enhanced services that the Company will not be able to match based on
its industry expertise and financial position.
Additionally, it is the Company's belief that the wide acceptance of
the digital format has had a negative impact on the demand for analog cellular
product. The Company has not secured a strategic relationship allowing it to
access digital PCS products directly. Manufacturers currently in the digital PCS
market have selected distributors and distribution channels other than the
Company. As other manufacturers present their products to the digital market,
they may compete directly with the Company, or enter into joint ventures or
strategic relationships with the Company's competitors, in which case the
Company's ability to access and sell such products could be reduced or
eliminated. The Company's results of operations, net sales, profitability and
financial condition have been and will continue to be adversely impacted until
access to a consistent supply of digital products at commercially competitive
rates is maintained at levels to sustain growth and profitability.
The wireless distribution industry is characterized by low barriers to
entry and the frequent introduction of new products. The industry is evolving,
with value-added services becoming of increased importance to the market. This
evolution is expected to increase entry barriers, as value added services
require increased human resources, management information systems and equipment.
The Company's ability to continue to compete successfully will be dependent on
its ability to anticipate and respond both strategically and financially to
various competitive factors affecting the industry, including new products and
services, changes in consumer preferences, demographic trends, international,
national, regional and local economic conditions particularly recessionary
conditions adversely affecting consumer spending and discount pricing strategies
and promotional activities by network operators.
The markets for wireless communications products are characterized by
rapidly changing technology and evolving industry standards, often resulting in
product obsolescence or short product life cycles. Accordingly, the Company's
success is dependent upon its ability to anticipate technological changes in the
industry and to continually identify, obtain and successfully market new
products that satisfy evolving industry and customer requirements. The use of
alternative wireless technologies, including digital and satellite
communications systems, will reduce demand for existing cellular products,
increasing risk associated with the granting of credit and inventory
obsolescence. Upon widespread commercial introduction, digital satellite
communications systems and other new wireless technologies could materially
change the types of products sold by the Company and its suppliers and result in
further significant price competition. There can be no assurance that the
Company will be able to continue to compete successfully, or will have the
financial capability to sustain its business particularly as domestic cellular
markets mature and the Company seeks to enter into new markets and market new
products and services.
The Company's current primary competitors include Brightpoint and
CellStar. For the year ended December 31, 1999, the Company secured from the
foregoing entities 18.2% of its product purchases. The occurrence of either
increased price competition and/or the lack of supply of such products would
have an adverse effect on the Company.
EMPLOYEES
At March 31, 2000, the Company had 69 employees, of which five are in
executive positions, 16 are engaged in sales and marketing, 13 are engaged in
warehouse operations and 35 engaged in accounting and administrative activities.
There are no employees covered by a collective bargaining agreement. The Company
believes that its relations with its employees are satisfactory.
12
<PAGE> 13
RISK FACTORS
All statements other than statements of historical facts included in
this report, including without limitation, statements under the captions
"Business," "Risk Factors" and "Management's Discussion and Analysis" regarding
the Company's financial position, business strategy and plans and objectives of
management of the Company for future operations, constitute forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to have been correct. Cautionary statements
describing important factors that could cause actual results to differ
materially from the Company's expectations are disclosed hereunder and elsewhere
in this report. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by such cautionary statements.
In addition to the other information in this Annual Report on Form
10-K, the following factors should be considered carefully in evaluating the
Company's business and prospects:
THE COMPANY HAS AN IMMEDIATE NEED FOR ADDITIONAL CAPITAL
The Company has an immediate need for additional capital in order to
continue its current operations and proceed with its business plan. The Company
anticipates that it will need to secure financing in the amount of approximately
$3,000,000 by May 2000 in order to prevent an immediate suspension of its
current operations. In addition, the Company expects to require significant
additional capital in order to develop its information technology capabilities
and take the other steps necessary to position the Company as a competitive B2B
e-fulfillment and e-marketplace solutions provider. If the Company is unable to
raise additional capital, it may be forced to discontinue its current operations
or delay the implementation of its business plan, either of which would have a
material adverse effect on the Company.
As described below under "The Company is Not Currently in Compliance
with the Covenants of its Senior and Subordinated Debt Obligations," the Company
is currently not able to draw down any further amounts under its $20,000,000
senior debt facility as a result of covenant noncompliance. The Company does not
at this time have any other commitment from any third party to provide
additional financing, and the Company may be unable to obtain financing on
reasonable terms or at all. Furthermore, if the Company raises additional
capital through the sale of equity, its shareholders will experience dilution.
THE COMPANY IS NOT CURRENTLY IN COMPLIANCE WITH THE COVENANTS OF ITS SENIOR AND
SUBORDINATED DEBT OBLIGATIONS
The Company is not currently in compliance with the covenants of its
$20,000,000 senior debt facility from BancAmerica, under which $864,000 was
outstanding as of April 11, 2000. As a result, the Company is currently not able
to draw down any further amounts under the facility. In addition, the Company is
not currently in compliance with the covenants of its outstanding $1,000,000
subordinated note payable to Critical Capital L.P. ("Critical Capital") or its
outstanding $1,200,000 subordinated note payable to American National Bank
("ANB").
The Company has obtained a one-time waiver of its noncompliance from
ANB. The Company is seeking a similar waiver from Critical Capital and is
negotiating with BancAmerica in an effort to secure BancAmerica's agreement to
forbear from asserting any of its rights based on the Company's covenant
violations. Critical Capital has indicated its intent to grant the Company a
limited waiver with respect to its covenant defaults. However, Critical Capital
has indicated that it will impose certain conditions with respect to this waiver
and will limit the time for which this waiver is applicable. If either lender
refuses to grant a waiver or forbearance, such lender could elect to declare all
of the Company's indebtedness owing to such lender immediately due and payable,
including accrued and unpaid interest, and, in the case of BancAmerica, could
terminate its commitments with respect to funding obligations under the
facility. In addition, such lender could proceed against the collateral securing
the Company's indebtedness, which includes substantially all of the Company's
assets. This would have a material adverse affect on the Company's current
operations and future prospects.
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<PAGE> 14
THE COMPANY IS HIGHLY LEVERAGED
At April 11, 2000, the Company had outstanding $864,000 under its
senior debt facility, approximately $2,200,000 in subordinated indebtedness and
approximately $10,500,000 in trade payables. As a result of its high leverage,
the Company is required to devote substantially all of its cash flow to debt
service, and therefore is prevented from devoting substantial cash flow to its
current operations or the development of the infrastructure necessary to proceed
with its business plan. Further, the Company is currently unable to pay trade
creditors in a timely fashion, which may damage the Company's relationships with
these creditors, and, as a result, further impair the Company's ability to
maintain its current operations or proceed with its business plan.
THE COMPANY HAS RECENT AND ANTICIPATED CONTINUING LOSSES
The Company has incurred operating losses for the years ended December
31, 1997, 1998 and 1999, and it anticipates that it will incur further losses
throughout 2000. The Company's initiative to position itself as a competitive
B2B e-fulfillment solutions provider will require the Company to make
substantial up-front expenditures to develop its information technology
capabilities and other infrastructure necessary to successfully compete in the
B2B market. The Company expects to incur significant operating and capital
expenditures and, as a result, will need to generate significant revenue to
achieve and maintain profitability. There can be no assurance that the Company
will generate sufficient revenue to achieve profitability. Even if the Company
does achieve profitability, there can be no assurance that it can sustain or
increase profitability in the future. If revenues grow slower than the Company
anticipates, or if operating expenses exceed expectations or cannot be adjusted
accordingly, the Company's business, results of operations and financial
condition will be materially and adversely affected.
THE COMPANY PLANS TO REPLACE ITS INFORMATION TECHNOLOGY SYSTEMS AND EXPAND
ITS OPERATIONS
The Company plans to achieve and maintain operating profitability by
redeveloping its information technology systems and expanding its operations.
The success of this plan will be largely dependent on the Company's ability to:
o secure additional capital
o execute its B2B e-fullfillment plan
o maintain operating and gross margins
o secure an adequate supply of competitive products
o hire and retain skilled technology, marketing and other
personnel
o successfully manage growth by monitoring operations,
controlling costs and maintaining effective management,
inventory and credit controls
o develop and maintain relationships with leading
manufacturers, dealers, agents, network operators and
sub-agents of wireless products
The Company does not at this time have vendor support for its
accounting system. In the unlikely event of a catastrophic failure of the main
server for this system, it is possible that the Company would not be able to
process accounting transactions on a timely basis. The Company believes that it
should be able to eliminate this risk by switching accounting systems.
Management estimates that it will need to invest from $1,000,000 to $5,000,000
in information technology infrastructure over the next 12 months to meet current
back-office system requirements and expand its Web-centric technology to meet
the needs of its planned business initiatives.
The Company has limited experience in expansion efforts and there can
be no assurance that its planned expansion will be successful. Further, if the
Company fails to redevelop its
14
<PAGE> 15
information technology systems in a timely fashion, the Company's
competitive position would be materially adversely affected.
THE COMPANY RECENTLY ACQUIRED CELLULAR WHOLESALERS, INC.
The Company recently acquired CWI, a privately owned wholesale
distributor of wireless communications products. In connection with this
acquisition:
o CWI has generated unanticipated operating losses since the
acquisition which have made it necessary for the Company to
restructure its operations
o the Company may be unable to successfully integrate CWI's
operations with the Company's current operations
o the conversion into common stock and warrants of the notes
the Company issued in its $5,152,400 convertible debt
financing has required the Company to issue a substantial
number of shares of its common stock and will require the
Company to issue a substantial number of additional shares
upon exercise of the warrants
o affiliates of CWI will continue to have significant
transactions with it after the acquisition
o due to the excess of the purchase price over the book value
of CWI, the Company will amortize significant goodwill for
accounting purposes against future reported earnings
As described above under "Business - Recent Developments," the Company
has entered into an agreement with the former shareholders of CWI (the "CWI
Shareholders") pursuant to which the Company and the CWI Shareholders agreed
that the total purchase price to be paid to the CWI Shareholders in connection
with the Company's acquisition of CWI in October 1999 would be limited to the
2,250,000 shares of the Company's common stock previously delivered to the CWI
Shareholders (the "Base Shares") and the $4,500,000 cash payment previously made
to the CWI Shareholders. The Company and the CWI Shareholders further agreed
that, subject to the Company obtaining additional equity capital of at least
$3,900,000 by April 22, 2000 on terms reasonably acceptable to the Company,
certain of the CWI Shareholders will contribute an aggregate of 1,300,000 Base
Shares to the Company's capital for cancellation or retention as treasury stock.
If the Company fails to obtain such additional equity capital within the
required time period, it may adversely impact on the Company's ability to secure
additional working capital in the future.
THE COMPANY RECENTLY ACQUIRED SOURCEWIRELESS.COM
The Company recently acquired SourceWireless.com, which operates an
auction Web site for wireless communications products inventory.
SourceWireless.com's limited operating history makes it difficult to evaluate
its current prospects or accurately predict its future revenue or results of
operations. Companies in early stages of development, particularly companies in
new and rapidly evolving Internet industry segments, are generally more
vulnerable to risks, uncertainties, expenses and difficulties than more
established companies. The Web site auction business is new and evolving, and it
is difficult to predict the size of the market, its future rate of growth, if
any, or the level of prices the market will pay for related services. If markets
develop more slowly than expected or become saturated with competitors, or the
Company's services do not achieve or sustain market acceptance, the Company will
be unlikely to be able to successfully operate this business. SourceWireless.com
has generated only nominal revenue to date, and the Company expects it to incur
operating losses for at least the next twelve months as the Company makes
expenditures to develop its business, and there can be no assurance that
SourceWireless.com will generate significant revenue in the future.
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<PAGE> 16
THE COMPANY IS DEPENDENT ON ITS PRINCIPAL SUPPLIERS
The Company is dependent on network operators, equipment manufacturers
and distributors for all of its supply of cellular telephones and accessories.
The Company relies on its suppliers to provide adequate inventories of popular
brand name products on a timely basis and on favorable pricing terms. The
Company generally does not maintain supply agreements. Instead, the Company
purchases products under purchase orders on an on-going basis. The Company's
suppliers may not continue to offer competitive products to the Company on
favorable terms when the Company needs them.
THE COMPANY FACES INTENSE COMPETITION FROM OTHER DISTRIBUTORS OF WIRELESS
PRODUCTS
The markets for wireless communications products are characterized by
intense price competition and significant price erosion over the life of a
product. The Company competes with numerous well-established wholesale
distributors and manufacturers of wireless equipment, including the Company's
customers and suppliers, as well as providers of wireless services. Many of the
Company's competitors possess greater financial, marketing, personnel and other
resources than the Company. Brightpoint and CellStar, historically two of the
Company's principal suppliers, are also two of the Company's primary
competitors. Some of the Company's competitors have the financial resources that
allow them to withstand substantial price competition and implement extensive
advertising and promotional programs. The wireless distribution industry is also
characterized by low barriers to entry and frequent introduction of new
products. The Company's ability to compete successfully will be largely
dependent on its ability to enhance its current vendor relationships and
anticipate and respond to various competitive factors affecting the industry,
including:
o new products
o changes in consumer preferences
o demographic trends
o economic conditions, including recessions that decrease
consumer spending
o discount pricing and promotional strategies by network
operators
o consolidating trends in the industry
o the challenges posed by new technologies
There can be no assurance that the Company will be able to compete effectively,
particularly as domestic wireless markets mature and it seeks to enter into new
markets and market new products and services.
THE COMPANY MAY HAVE LOSSES DUE TO BAD CREDIT
The Company makes most of its sales by extending credit to customers,
and the Company may be unable to collect payment from some of them. The Company
has been required to write off significant accounts receivable balances in the
past. The Company's accounts receivable, less an allowance for doubtful accounts
of $1,000,000, were approximately $9,659,000 at December 31, 1999. Delays in
collection or uncollectibility of accounts receivable could harm the Company's
liquidity and working capital position.
THE COMPANY MAY BE UNABLE TO ADJUST TO EVOLVING INDUSTRY STANDARDS AND RAPID
TECHNOLOGICAL CHANGE
The markets for wireless communications products are characterized by
rapidly changing technology and evolving industry standards, often resulting in
product obsolescence or short product life cycles. Accordingly, the Company's
marketing strategy and ultimate success is dependent upon its ability to
anticipate technological changes in the industry. Technology will probably play
an even greater role going forward, as the Company implements its plan to focus
on the B2B and Internet auction businesses.
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<PAGE> 17
THE COMPANY MAY HAVE EXCESS OR OBSOLETE INVENTORY
The Company acquires inventory in advance of product shipments. Because
forecasting the desirable level of inventory is difficult, the Company may
forecast incorrectly and stock excess inventory of particular products.
Furthermore, the value of the Company's inventory may decrease due to price
reductions by competitors, obsolescence due to technological change and product
quality problems. The Company has in the past incurred significant declines in
its inventory value and any future declines could have a material adverse effect
on the Company's business.
THERE ARE POSSIBLE MEDICAL RISKS ASSOCIATED WITH WIRELESS TELEPHONES
Lawsuits have been filed against manufacturers of wireless telephones
alleging possible medical risks, including brain cancer, associated with
electromagnetic fields emitted by cellular telephones. Scientific research has
not been conclusive on the effect of cellular telephones on humans. Future
studies confirming health risks associated with cellular telephones could harm
the Company's business. Furthermore, the perception of health risks could harm
the Company's ability to sell wireless telephone products. As a distributor of
wireless telephones, the Company could be subject to lawsuits filed by
plaintiffs alleging health risks. The Company does not carry product liability
insurance.
THE COMPANY'S BUSINESS IS DEPENDENT ON ITS NEW MANAGEMENT TEAM
The Company's future success depends to a significant extent on the
continued services of its senior management, who have only recently joined the
Company. Michael Hedge joined the Company as an executive vice president in
February 1999 and became the Company's president and chief executive officer as
well as a director in April 1999. John Swinehart, who had served as the
Company's chief executive officer and a director since November 1998, became
chairman of the board and chief operating officer in April 1999 and vice
president of finance in March 2000. Other key officers and employees include
Mark Fruehan, the Company's executive vice president of business development
since May 1999, and Jim Krohn, the Company's chief financial officer since
February 2000. The loss or interruption of the services of one or more of these
individuals could have a material adverse effect on the Company's business and
prospects.
ITEM 2. PROPERTIES
In October 1999, the Company moved its executive offices to Lewisville,
Texas. This facility provides 3,317 square feet of office space. The lease is
for a five-year term beginning October 1999, and provides for an initial monthly
rent of $5,805 with annual escalation based on the Consumer Price Index. At the
end of the initial lease term, the Company has an option to extend the lease for
a period of five years.
In November 1998, CWI entered into an agreement to lease a 60,854
square foot facility located in Lincolnshire, Illinois. The Company assumed this
lease in connection with its acquisition of CWI. The term of this lease is for a
period of 10 years and two months commencing November 3, 1998 and ending
December 31, 2008. The lease provides for the current monthly rent of $32,962.58
through December 31, 2001, with an increase in years four and seven (January 1,
2002 and January 1, 2005). At the end of the initial lease term, the Company may
extend the lease for two successive periods of five years each.
In September 1999, Focus entered into an agreement with Circle
International, Inc. whereby Circle will provide warehousing and services to
distribute cellular phones and accessories for Focus. This agreement is in
effect until September 2002. Either party has the right to terminate the
agreement upon at least ninety days written notice to the other party. Immediate
termination can occur if either party becomes insolvent.
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<PAGE> 18
Focus pays a monthly fee of $2,750.00 for 5,000 square feet of
warehouse space. In addition, a fee is charged for each shipment filled, and
Focus must pay for shipping supplies and transportation charges. By exceeding
certain shipment levels, the Company may earn credits against rent payments.
In February 1998, the Company leased a 33,000 square foot office and
warehouse facility in Chatsworth, California. This facility provides 23,000
square feet of warehouse and 10,000 square feet of operations and office space.
The lease is for a three-year term beginning February 1, 1998, and provides for
an initial monthly rent of $18,495, with annual escalation based on the Consumer
Price Index. In May 1998, the Company subleased approximately 11,000 square feet
of the facility for the same remaining lease term as the underlying lease. On
March 17, 2000, the Company substantially closed its operations within the
Chatsworth facility. The Company will seek to sublease the property through the
term of its lease obligation.
The Company leased a 12,800 square foot facility in Miami, Florida.
This facility was closed effective March 3, 2000 and the monthly rental
obligation of $8,065 through December 2002 will be borne by the Company until a
suitable sub-lease can be arranged.
The Company believes that its existing facilities are adequate for its
current and future requirements and that additional space will be available as
needed to accommodate future expansion of its operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 29, 1999, the Company held its Annual Meeting of
Stockholders. At the meeting, the stockholders elected as directors Michael
Hedge (with 6,854,453 affirmative votes and 35,400 withheld), Vinay Sharma (with
6,854,453 affirmative votes and 35,400 withheld), J. Sherman Henderson (with
6,854,453 affirmative votes and 35,400 withheld), John Swinehart (with 6,854,453
affirmative votes and 35,400 withheld), and Mark M. Laisure (with 6,854,435
affirmative votes and 35,400 withheld).
The stockholders also approved the issuance of common stock to the
stockholders of CWI (with 5,295,653 affirmative votes, 13,078 against, 5,935
abstaining and 1,575,187 broker non-votes).
The stockholders also approved the change in the name of the Company to
Focus Affiliates, Inc. (with 5,269,553 affirmative votes, 27,428 against, 21,035
abstaining and 1,571,837 broker non-votes).
The stockholders also approved an amendment to the Company's
certificate of incorporation to increase the number of shares of common stock
authorized from 15,000,000 to 25,000,000 (with 5,239,773 affirmative votes,
67,108 against, 11,135 abstaining and 1,571,837 broker non-votes).
The stockholders also approved an amendment the Company's 1998 Stock
Option Plan to increase the number of shares of common stock issuable upon the
exercise of options granted under the plan (with 5,178,713 affirmative votes,
122,218 against, 13,735 abstaining and 1,575,187 broker non-votes).
The stockholders also ratified the appointment of Hollander, Lumer &
Co. LLP as the independent auditors for the Company for the fiscal year ending
December 31, 1999 (with 6,865,708 affirmative votes, 13,600 against and 10,545
abstaining). Hollander, Lumer & Co. LLP was
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subsequently replaced by Arthur Andersen LLP, effective January 3, 2000. See
below under "ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure."
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has traded on the Nasdaq SmallCap Market
("Nasdaq") under the symbol "FONE" since the Company's initial public offering
on December 18, 1996. The following table sets forth, for the period indicated,
the high and low sales prices of the Company's Common Stock as reported by
Nasdaq.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
Year Ended December 31, 1998
First Quarter $ 5.50 $ 3.00
Second Quarter $ 3.25 $ 0.50
Third Quarter $ 1.88 $ 0.13
Fourth Quarter $ 6.88 $ 0.50
Year Ended December 31, 1999
First Quarter $ 5.00 $ 2.13
Second Quarter $ 6.63 $ 2.69
Third Quarter $ 7.75 $ 4.81
Fourth Quarter $ 6.81 $ 3.06
Year Ended December 31, 2000
First Quarter $ 6.50 $ 2.75
</TABLE>
Such quotations reflect inter-dealer bids, without retail mark-up,
mark-down or commissions, and may not reflect actual transactions.
On March 31, 2000, the closing price of the Common Stock on Nasdaq was
$2.8125. As of March 31, 2000, there were approximately 196 holders of record of
the Company's Common Stock. The Company believes that there are in excess of 500
beneficial owners of its Common Stock whose shares are held in "street name."
DIVIDEND POLICY
During the two most recent fiscal years, the Company has not paid any
cash dividends on its Common Stock. The payment of cash dividends, if any, in
the future is within the discretion of the Company's Board of Directors and will
depend upon the Company's earnings, its capital requirements and financial
condition and other relevant factors. The Board of Directors does not intend to
declare any cash dividends in the foreseeable future, but instead intends to
retain all earnings, if any, for use in the Company's business operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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RECENT SALES OF UNREGISTERED SECURITIES
The Company did not make any unregistered sales of securities during
the fourth quarter of the year ended December 31, 1999.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for each of the five years in the
period ended December 31, 1999 have been derived from the audited financial
statement of the Company. The financial statements for the year ended December
31, 1995 were audited by Richard A. Eisner, LLP. The financial statements for
the three years ended December 31, 1998 were audited by Hollander, Lumer & Co.
LLP. The financial statements for the year ended December 31, 1999 were audited
by Arthur Andersen LLP.
The financial data set forth below at December 31, 1999 and 1998, and
for each of the years in the three-year period ended December 31, 1999, have
been derived from the audited financial statements of the Company and should be
read in conjunction with the financial statements and notes there to commencing
on page F-1 and "Item 8. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The Company acquired CWI on October 29, 1999. The accompanying selected
financial data reflects the historical operating results of CWI, including the
results of operations of CWI since October 29, 1999. This acquisition affects
the comparability of the respective prior year data. For information on the pro
forma impact of the 1999 acquisition of CWI, see Note 4 to the Company's
financial statements commencing at page F-1 of this report.
STATEMENT OF OPERATIONS DATA:
(In Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Sales .............................. $ 46,498 $ 27,787 $ 81,401 $ 81,225 $ 69,850
Cost of Sales .......................... 43,992 26,152 77,862 77,555 67,485
-------- -------- -------- -------- --------
Gross Profit ........................... 2,506 1,635 3,539 3,670 2,365
Selling, General and
Administrative Expenses ................ 7,683 4,167 8,930 2,747 1,877
-------- -------- -------- -------- --------
Income (Loss) from Operations .......... (5,177) (2,532) (5,391) 923 488
Other Income (Expense) ................. (469) (237) (391) (392) (86)
-------- -------- -------- -------- --------
Income (Loss) Before Income ............ (5,646) (2,769) (5,782) 531 402
Income Tax Expense (Benefit) ........... -- -- 334 (308) --
-------- -------- -------- -------- --------
Net (Loss) Income ...................... (5,646) (2,769) (6,116) 839 402
Pro Forma Net Income (Loss)(1) ......... (5,646) (2,769) (6,116) 315 236
Net Income (Loss) Per Share
(Basic and Diluted) .................... (0.77) (0.63) (1.37) N/A N/A
Pro Forma Net Income (Loss)
Per Share (Basic and Diluted)(2) ....... N/A N/A N/A 0.15 0.12
Weighted Average Number of
Common Shares Outstanding .............. 7,365,143 4,420,012 4,451,182 2,113,674 2,030,000
Weighted Average Number of Common
Shares Outstanding
(Diluted) .............................. 7,365,143 4,420,012 4,451,182 2,114,641 2,030,000
</TABLE>
20
<PAGE> 21
BALANCE SHEET DATA:
(In Thousands)
<TABLE>
<CAPTION>
As of December 31,
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Working Capital (Deficiency) ..... $(5,101) $ 2,490 $ 3,596 $ 8,432 $ (243)
Total Assets ...................... 44,234 4,178 11,414 16,025 8,604
Total Debt ........................ 15,168 -- 3,402 -- 2,490
Total Liabilities ................. 30,364 1,329 7,381 7,216 8,590
Shareholders' Equity .............. 13,869 2,849 4,033 8,809 14
</TABLE>
- -----------------
(1) Includes pro forma adjustments for income taxes.
(2) Based on pro forma net income and the weighted average number of shares
of Common Stock outstanding.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following table sets forth, for the periods indicated, the
percentage of net sales represented by certain items reflected in the Company's
statement of operations. The statement of operations contained in the Company's
financial statements and the following table include pro forma adjustment for
income taxes.
PERCENTAGES OF NET SALES:
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net Sales ........................................ 100.0% 100.0% 100.0%
Cost of Sales .................................... 94.4 94.1 95.6
------- ------- -------
Gross Profit ..................................... 5.6 5.9 4.4
Selling, General and Administrative Expenses ..... 16.6 15.0 11.0
------- ------- -------
Loss from Operations ............................. (11.0) (9.1) (6.6)
Other Expense .................................... (1.0) (0.9) (0.5)
Income Tax Expense ............................... -- -- 0.4
------- ------- -------
Net Loss ......................................... (12.0) (10.0) (7.5)
</TABLE>
21
<PAGE> 22
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Net sales were $46,498,000 in 1999 compared to $27,787,000 in 1998. The
increase of $18,711,000 or 67.3% is a function of the inclusion of two months of
net sales attributable to CWI and an increase in the volume of products sold.
Volume gains were particularly strong during the third and fourth quarters of
the year as the Company was able to obtain certain in-demand product from
vendors which was not as readily available to the Company in 1998.
Gross profit was increased by $871,000 or 53.2% from $1,635,000 or 5.9%
of net sales in 1998 to $2,506,000 or 5.4% of net sales in 1999. The gross
profit increase was in line with the year over year sales increase.
Selling, general and administrative expenses increased by $3,516,000 or
84.4% from $4,167,000 or 15.0% of net sales in 1998 to $7,683,000 or 16.5% of
net sales in 1999. The increase in selling, general and administrative expenses
and the higher expense rate was attributable to non-capitalizable integration
costs associated with the merger of CWI, severance costs to former management,
and costs associated with the Company's effort to establish and develop its new
B2B strategy.
Interest expense increased from $204,000 in 1998 to $406,000 in 1999 as
a result of additional borrowing necessary to finance the increased working
capital requirement of the merger as well as the interest costs associated with
the subordinated debt utilized to finance a portion of the merger.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net sales decreased from $81,401,000 in 1997 to $27,787,000 in 1998, a
decrease of $53,614,000 or 65.9%. The primary reason for the decrease in sales
was the Company's lack of product from suppliers of the newest generation
digital products. The sales in 1997 were based on analog product which was more
readily available compared to 1998's paradigm where digital product replaced
analog's dominance and market share. In 1998, digital product was not readily
available on a consistent basis to the Company. Even though the Company was able
to obtain product from selected manufacturers and other distributors of digital
product on a non-exclusive basis, it was only available in limited quantities.
Gross profit decreased by $1,904,000, or 53.8%, from 1997 to 1998 and
as a percentage of net sales increased from approximately 4.5% to approximately
5.9%, respectively, during these periods. The decrease in gross profit from 1997
to 1998 is in line with the decrease in sales. The increase in gross profits as
percentage of sales is due to a somewhat more favorable mix of products offered
by the Company in 1998 versus 1997.
Selling, general and administrative expenses decreased by approximately
$3,463,000 or 45.4%, from 1997 to 1998, but increased from 9.4% to 15.0%, as a
percentage of net sales. The most significant items accounting for this decrease
are decrease in personnel of $473,000 and decrease in bad debt expense for
doubtful accounts receivable and doubtful notes receivable of $3,519,000. The
decrease in payroll and payroll related costs for 1998 as compared to 1997 was
primarily the result of having cost cutting measures initiated in 1998 by
reducing the size of the Company's workforce to compensate for waning sales and
lack of product.
In 1997, the Company incurred non-recurring expenses totaling
$1,300,000. Of this amount, $1,024,000 was incurred in connection with the audit
of the Company's financial statements for the year ended December 31, 1996,
consisting primarily of professional fees, including the fees of
22
<PAGE> 23
its prior auditor, fees of special counsel and a special auditor retained by the
Company's Audit Committee. In December 1997, the Company terminated acquisition
negotiations with Pacific Unplugged Communications, Inc. Such negotiations had
been ongoing since a non-binding letter of intent was signed by the parties in
August 1997. In connection with the proposed acquisition, the Company incurred
and expensed, as non-recurring, $276,000 of professional and legal fees.
Interest expense for 1997 and 1998 was $444,000 and $204,000,
respectively. Interest expense is primarily attributable to borrowings under the
Company's prior line-of-credit with Banc America, which during 1997, averaged
$3,016,000 at an average interest rate of 10.25% per annum. At December 31,
1997, there was $3,402,000 of borrowing under this credit line. During 1998, the
borrowings averaged $2,376,000 at an average interest rate of 7.1% per annum.
For most of 1998, the Company was not in compliance with covenants of the Banc
America line-of-credit, and several amendments to the line-of-credit agreement
reduced the Company's ability to borrow funds for most of 1998.
LIQUIDITY AND CAPITAL RESOURCES
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Losses incurred in 1999, particularly during the fourth quarter of
1999, and additional working capital requirements associated with the merger of
CWI have had a significant negative impact on working capital of the Company. As
of December 31, 1999, the Company's working capital position was a deficit of
$5,101,000. The Company's continuing losses in the first quarter of 2000
continue to severely restrict the Company's liquidity and have caused the
Company to operate on restricted terms with certain vendors.
Cash used in operating activities was $2,408,000 in 1999, as compared
to cash provided by operating activities of $2,930,00 in 1998. The primary cause
for the increase in cash used in operating activities for 1999 compared to 1998
was increased losses and additional working capital needs. In 1998, the Company
was able to generate cash flow by reducing inventory and receivable levels by
$4,510,000 and $2,467,000, respectively. In 1999, inventory levels (exclusive of
acquired CWI balances) increased by $3,130,000, whereas receivables remained
relatively flat between years.
Excluding the impact of the Company's acquisitions in 1999, cash used
in investing activities increased from $278,000 in 1998 to $976,000 in 1999. The
cash paid for the CWI and TWG acquisitions was $5,122,000.
Cash flows from financing activities increased to $10,639,000 in 1999
from a use of cash in financing activities of $2,290,000 in 1998. The increase
was due to the financing of the CWI acquisition and additional borrowings on the
revolving credit facility to finance increased working capital requirements as
discussed above.
During 1999 and the first quarter of 2000, the Company continued to
incur significant losses, the continuation of which could have a materially
adverse impact on its cash flow and liquidity. The Company is currently not in
compliance with the covenants of its debt facility with BancAmerica, which
restricts its ability to draw any further amounts under the facility. At April
11, 2000, there was $864,000 outstanding under this facility. In addition, the
Company is not currently in compliance with the covenants of its outstanding
$1,000,000 subordinated note payable to Critical Capital L.P. ("Critical
Capital") or its outstanding $1,200,000 subordinated note payable to American
National Bank ("ANB"). The Company has obtained a one-time waiver of its
noncompliance from ANB. The Company is seeking a similar waiver from Critical
Capital and is negotiating with BancAmerica in an effort to secure BancAmerica's
agreement to forbear from asserting any of its rights based on the Company's
covenant violations. Critical Capital has indicated its intent to grant the
Company a limited waiver with respect to its covenant defaults. However,
Critical Capital has indicated that it will impose certain conditions with
respect to this waiver and will limit the time for which this waiver is
applicable. If either lender refuses to grant a waiver or forbearance, such
lender could elect to declare all of the Company's indebtedness owing to such
lender immediately due and payable, including accrued and unpaid
23
<PAGE> 24
interest. See above under "Risk Factors - The Company is Not Currently in
Compliance with the Covenants of its Senior and Subordinated Debt Obligations."
Although the Company continues to have available credit through many of
its vendors, there is no assurance that credit available to the Company will be
sufficient to maintain the current level of its operations. In addition, the
lack of borrowing capability further inhibits the Company's ability to finance
new business initiatives including the relationships with network operators and
manufacturers that would require additional working capital. As described above
under "Risk Factors - The Company Has An Immediate Need for Additional Capital,"
the Company anticipates that it will need to secure approximately $3,000,000 in
financing by May 2000 to prevent an immediate suspension of its current
operations.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
At December 31, 1998, the Company had working capital of $2,490,000
compared to working capital of $3,596,000 at December 31, 1997. The decrease in
working capital was primarily attributable to decreased accounts receivables
from lower sales and lower inventory caused by a short supply of product offset
by lower borrowings under the Company's former credit line.
Net cash provided by (used in) operating activities was $2,930,000 in
1998, and ($5,374,000) in 1997. The increase in cash provided by operations for
1998 was primarily attributable to the reduced net loss, and decrease in
accounts receivable and inventory. Net cash used in investing activities was
$278,000 in 1998, versus cash provided by investing activities of $1,505,000 in
1997. The decrease in cash provided by investing activities was primarily
attributable to proceeds from the collection of notes receivable in 1997. Net
cash provided by (used in) financing activities was ($2,290,000) in 1998 and
$3,869,000 in 1997. The decrease was primarily attributable to advances under
the Company's line of credit in 1997 while in 1998, the Company repaid and
terminated this line of credit with a portion of the proceeds from its private
placement of convertible notes. In January 1997, the managing underwriter
exercised an over-allotment option (the "Over-allotment Option") to purchase an
additional 300,000 shares of common stock, resulting in net proceeds of
$1,341,000. In November 1998, the Company consummated a private placement of
convertible notes, resulting in net proceeds of $1,288,000 ($1,500,000 net of
$212,000 offering costs).
YEAR 2000
The Company completed its comprehensive review, testing, validation and
implementation of all information technology ("IT") and non-IT systems before
the end of 1999. This project included an evaluation of internally developed
software, third-party software, technology hardware, third-party interfaces and
assessments of third-party Year 2000 ("Y2K") compliance. During 1999, the
Company incurred project costs of less than $25,000 relating to its Y2K
remediation efforts. The majority of the cost incurred pertained to necessary
technological hardware and software which were appropriately capitalized. Based
on all system tests performed after January 1, 2000, the Company did not
experience any material Y2K problem. The Company believes that all of its IT and
non-IT systems are currently operating properly, and the Company does not
anticipate any material or significant problem to arise in the future.
SEASONALITY
Sales of the Company's products are seasonal and are a function of
consumer sales, with peak product shipments typically occurring in the third and
fourth quarters.
INFLATION
Inflation has historically not had a material effect on the Company's
operations.
24
<PAGE> 25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company believes that its exposure to market risk related to
changes in foreign exchange rates, interest rate fluctuations and trade accounts
receivable is immaterial.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements appear in a separate section of this report as
pages F-1 through F-21 following Part IV. The unaudited Quarterly Results of
Operations are as follows (in thousands except per share data):
<TABLE>
<CAPTION>
First Second Third Fourth
<S> <C> <C> <C> <C>
1999
Net sales $6,666 $7,553 $13,437 $18,842
Gross profit 465 357 804 880
Net loss (493) (1,681) (292) (3,205)
Net loss per share (0.08) (0.24) (0.04) (0.34)
1998
Net sales $9,931 $8,685 $4,142 $5,029
Gross profit 374 649 122 490
Net loss (1,175) (562) (840) (192)
Net loss per share (0.27) (0.13) (0.19) (0.04)
1997
Net sales $21,782 $19,211 $20,512 $19,896
Gross profit 1,292 1,180 622 445
Net loss (382) (48) (2,033) (3,653)
Net loss per share (0.08) (0.01) (0.46) (0.82)
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On May 10, 1998, BDO Seidman, LLP, the accounting firm that audited the
Company's financial statements at December 31, 1996 and 1997 and for the years
ended December 31, 1996 and 1997, resigned as the Company's independent auditor.
The report of BDO Seidman, LLP for the fiscal years ended December 31, 1996 and
1997 did not contain an adverse opinion or a disclaimer of opinion, nor was it
qualified or modified as to uncertainty, audit scope or accounting principles.
During the audit period for the fiscal years ended December 31, 1996 and 1997,
and during the interim period prior to BDO Seidman LLP's resignation, there were
no disagreements on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreements, if not
resolved to the satisfaction of BDO Seidman, LLP would have caused it to make a
reference to the subject matter of the disagreements in connection with its
reports.
The Company did not consult with BDO Seidman, LLP in relation to any
financial statements or filings subsequent to May 10, 1998, including the
Company's quarterly reports on Form 10-Q filed during 1998 and the Offering. BDO
Seidman, LLP has disclaimed any association with such filings and Offering.
Effective May 10, 1998, the Company engaged Hollander, Lumer & Co. LLP
as its independent auditors to audit the Company's annual financial statements
for the year ended December 31, 1998. During the Company's two most recent
fiscal years, and the subsequent interim period prior to the engagement of
Hollander, Lumer & Co. LLP, neither the Company nor any person acting on behalf
of the Company consulted Hollander, Lumer & Co. LLP regarding (i)
25
<PAGE> 26
the application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
the Company's financial statements or (ii) any matters that were either the
subject of a disagreement or a reportable event.
On January 3, 2000, the Company engaged the accounting firm of Arthur
Andersen LLP as the Company's independent accountants. The Company, on that same
date, also informed Hollander, Lumer & Co., LLP of their dismissal effective
January 3, 2000. The decision to change independent accountants was made upon
the recommendation of the Audit Committee of the Company's Board of Directors.
During the two most recent fiscal years ended December 31, 1998 and
1997, and interim periods subsequent to December 31, 1998, there were no
disagreements with Hollander, Lumer & Co., LLP on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure. Hollander, Lumer & Co., LLP's report on the Company's financial
statements for the past two fiscal years did not contain an adverse opinion or a
disclaimer of opinion and was not qualified or modified as to uncertainty, audit
scope or accounting principles. During the two most recent fiscal years and
interim periods subsequent to December 31, 1998, there were no reportable
events. The Company has requested that Hollander, Lumer & Co., LLP furnish it
with a letter addressed to the SEC stating whether it agrees with the above
statements. A copy of the letter, dated February 10, 2000, was filed as an
exhibit to the Company's filing with the SEC on Form 8-K/A on February 11, 2000.
During the two most recent fiscal years and interim periods subsequent
to December 31, 1998 and prior to employing Arthur Andersen LLP, neither the
Company nor anyone on its behalf consulted Arthur Andersen LLP regarding the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
the Company's financial statements or any matter that was either the subject of
a disagreement or a reportable event.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the
executive officers and directors of the Company as of April 11, 2000:
<TABLE>
<CAPTION>
Name Age Position
- ---------------------------------------- ------ ---------------------------------------------------------
Executive Officers and Directors:
<S> <C> <C>
Michael Hedge........................ 44 President, Chief Executive Officer and Director
John Swinehart....................... 43 Chairman of the Board, Chief Operating Officer and Vice
President of Finance
James E. Krohn....................... 43 Vice President and Chief Financial Officer
Mark Fruehan......................... 39 Executive Vice President of Business Development
Cary Maimon.......................... 44 Vice President-General Manager
Alan M. Bluestine.................... 36 Director
Ronald Goldberg...................... 52 Director
J. Sherman Henderson (1)(2).......... 55 Director
Mark M. Laisure (1)(2)............... 30 Director
David Segneri........................ 46 Director
Vinay Sharma......................... 52 Director
</TABLE>
- ----------------------
(1) Member of the Audit Committee
(2) Member of the committee administering grants to executive officers under
the Company's stock option plans.
26
<PAGE> 27
Michael Hedge has served as President, Chief Executive Officer and as a
director of the Company since April 1999. Prior to that, he served as the
Company's Executive Vice President between January 1999 and April 1999. From
1987 to January 1999, Mr. Hedge was employed by CellStar Corporation, a leader
in telecommunication products distribution ("CellStar"). He served in various
roles at CellStar, including Vice President of U.S. Sales and Marketing and as a
director.
John Swinehart has served as a director of the Company since November
1998 and as Chief Executive Officer between November 1998 and April 1999. Mr.
Swinehart assumed the role of Chairman of the Board and Chief Operating Officer
in April 1999 and of Vice President of Finance in March 2000. Mr. Swinehart has
also been serving as President and Chief Financial Officer of Biltmore Homes, a
midwestern homebuilder and developer, since March 1996. From 1986 to March 1996,
Mr. Swinehart served as Vice President of Allied Broadcast Equipment, an
international broadcast-equipment distribution company. In 1980, Mr. Swinehart
received his certified public accountant certificate.
Jim Krohn joined the Company as Chief Financial Officer in late
February 2000. Mr. Krohn's professional background includes more than 20 years
experience in corporate finance, consulting and international banking. Prior to
joining FocusWireless.com, Mr. Krohn was managing director of the Global
Corporate Finance Group for Arthur Andersen in Dallas. Previously he served as a
director of the Financial Advisory Services Group for Coopers & Lybrand; as a
vice president in the Corporate Finance Department for Salomon Brothers Inc.;
and a banking officer with RepublicBank Dallas N.A. Mr. Krohn is a Certified
Public Accountant and earned Master of Business Administration and Bachelor of
Business Administration degrees from the University of Texas at Austin.
Mark Fruehan has served as Executive Vice President of New Business
Development and Strategic Planning of the Company since May 1999. Prior to
joining the Company, Mr. Fruehan was CellStar's Vice President of Global Service
and U.S. Sales and Marketing from July 1996 to April 1999. From June 1991 to
June 1996, Mr. Fruehan was National Sales Manager-America Region of Fujitsu
Network Transmission Systems.
Cary Maimon has served as Vice President-General Manager since October
1999 and as a director of the Company from October 1999 to January 2000. Prior
to joining the Company, Mr. Maimon had served as Vice President-General Manager
of CWI since 1996. From 1986 to 1993, he was employed by Cellular
One-Chicago/Southwestern Bell Mobile Systems where he served in increasingly
senior positions, including Vice President of Sales & Marketing. From 1994 to
1996, Mr. Maimon was the General Sales Manager of Mobile Media Paging, a
national provider of paging services.
Ronald Goldberg has been a director of the Company since October 1999.
Mr. Goldberg was designated by the shareholders of CWI for appointment to the
Board following the closing of the Company's acquisition of CWI. Mr. Goldberg
was a founder of CWI and served as its president from 1987 until its acquisition
by the Company. Prior to 1987, Mr. Goldberg was co-founder of Continental Mobile
Telephone Company, a Chicago airtime reseller, and Continental Communications,
which owned and operated as many as 23 retail stores.
Alan M. Bluestine has been a director of the Company since February
2000. Mr. Bluestine is a Managing Director in the Investment Banking department
at Sands Brothers & Co., Ltd., where he has been employed since May 1992. Prior
to his employment at Sands Brothers, Mr. Bluestine worked in Arthur Andersen &
Co.'s Financial Consulting Services Group, where he specialized in bankruptcy,
troubled company consulting and litigation support. Mr. Bluestine holds a
Bachelor of Science in Finance from Lehigh University and a Master of Business
Administration degree from Columbia University's Graduate School of Business.
27
<PAGE> 28
J. Sherman Henderson has been a director of the Company since February
1998. Since 1993, Mr. Henderson has been President and CEO of UniDial
Communications, a long-distance phone service reseller and full service
distributor of telecommunications products and service founded by Mr. Henderson.
Mark M. Laisure has been a director of the Company since November 1998.
Since 1995, Mr. Laisure has been a Vice President of Shields & Company, an
investment brokerage firm. In addition, Mr. Laisure has acted as a consultant to
(a) Inktomi Corporation, a developer and marketer of network information and
infrastructure applications, since June 1996, (b) Milcom, a technology
development company which invests in new technology companies, since September
1997, (c) Stat Health Care, a provider of emergency room management services,
since June 1991, and (d) Starstruck Records since August 1995. From 1994 to
1995, Mr. Laisure was a senior investment manager at Paine Webber.
David Segneri has been a director of the Company since October 1999.
Mr. Segneri was designated by the shareholders of CWI for appointment to the
Board following the closing of the Company's acquisition of CWI. Mr. Segneri has
been the owner and president of TeleCourier Communications, in Bloomington,
Illinois since 1981. TeleCourier provides telecommunications services, such as
cellular, paging, two-way radio, business telephone systems, and computer
networks.
Vinay Sharma has been a director of the Company since October 1996. Mr.
Sharma has served as chief executive officer of Nu Auction.com since April 1999.
Prior to that, Mr. Sharma was executive vice president and then president of
Ravel Software Corp. ("Ravel") from 1998 to April 1999. Ravel filed for
protection under Chapter 11 of the Federal Bankruptcy Act in August 1999. From
1992 to 1998, Mr. Sharma was a partner with the law firm Sharma & Herron. Mr.
Sharma received his Masters in Business Administration in June 1974 and Juris
Doctor degree in May 1982 from the University of California at Berkeley.
Directors serve until the next annual meeting or until their successors
are elected and qualified, or appointed. Officers are elected by and serve at
the discretion of the Board of Directors. There are no family relationships
among the officers or directors of the Company.
ARRANGEMENTS AND UNDERSTANDINGS WITH DIRECTORS
The Company agreed in connection with its initial public offering,
until December 17, 1999, if so requested by Sands Brothers & Co., Ltd., the
representative of the underwriters of the Company's initial public offering and
the Company's financial advisor, to nominate and use its best efforts to elect a
designee of Sands Brothers as a director or, at Sands Brothers' option, as a
non-voting advisor to the Board. Sands Brothers exercised its right to designate
Alan M. Bluestine, a managing director of Sands Brothers, as a non-voting
advisor to the Company's Board of Directors on June 6, 1997. Sands Brothers
subsequently exercised its option to designate a director, and Sands Brothers'
designee, Mr. Bluestine, accepted his appointment to the Board in February 2000.
In connection with a private placement of notes in November 1998 (the
"Note Offering"), the Company agreed to appoint two persons designated by the
investors in the Note Offering to the Company's Board of Directors. In November
1998, the Company appointed John Swinehart and Mark M. Laisure (the persons
designated by the investors in the Note Offering) to the Board.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and certain of its officers, and persons who own more than
10% of a registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the
28
<PAGE> 29
Securities and Exchange Commission (the "Commission"). Officers, directors and
greater than 10% stockholders are required by the Commission's regulations to
furnish the Company with copies of all Section 16(a) forms they file. Based
solely upon a review of the copies of the forms furnished to the Company and the
representations made by the reporting persons to the Company with respect to any
required Form 5 filings, the Company believes that during the year ended
December 31, 1999, its directors, officers and 10% stockholders complied with
all filing requirements under Section 16(a) of the Exchange Act, with the
exception of the following: Ben Neman three late filings reporting 26
transactions, Michael Hedge failed to file both a Form 3 and a Form 5, John
Swinehart failed to file a Form 5, Mark Fruehan failed to file both a Form 3 and
a Form 5, Cary Maimon failed to file both a Form 3 and a Form 5, Ronald Goldberg
failed to file both a Form 3 and a Form 5, J. Sherman Henderson failed to file a
Form 5 and David Kane failed to file a Form 5.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth the compensation for the years ended
December 31, 1997, 1998 and 1999 paid by the Company to the two individuals who
served as its chief executive officer during the year ended December 31, 1999
and the individuals who served as its Executive vice president of business
development and chief financial officer, respectively, during the year ended
December 31, 1999 (the "named executive officers"). No other executive officers
received compensation exceeding $100,000 during the last fiscal year.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
Compensation All Other
Annual Compensation(1) Awards Compensation
----------------------------------------------------- ----------------- ----------------
Securities
Fiscal Salary Other Annual Underlying
Name and Principal Position Year ($) Bonus Compensation Options (#)
- -------------------------------- -------- ---------- --------- -------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Michael Hedge
Chief Executive Officer,
President and Director(2) 1999 124,881 -- -- 250,000(3) 36,000
John Swinehart
Chief Operating Officer,
Vice President of Finance 1998 5,210 -- -- 200,000(5) --
and Director(4) 1999 73,684 -- -- 50,000(6) --
Mark Fruehan
Executive Vice President of
Business
Development(7) 1999 82,999 -- -- 160,000(8) 25,000
David Kane 1998 30,084 -- -- -- --
Chief Financial Officer(9) 1999 102,280 -- -- 50,000(10) --
</TABLE>
- ----------------------
(1) The compensation described in this table does not include medical
insurance, retirement benefits and other benefits received by the executive
officers which are available generally to all employees of the Company and
perquisites and other personal benefits received by these executive
officers of the Company, the value of which does not exceed the lesser of
$50,000 or 10% of the executive officer's cash compensation in the table.
29
<PAGE> 30
(2) Mr. Hedge joined the Company in January 1999 and became Chief Executive
Officer in April 1999.
(3) 100,000 of these options were granted on January
29, 1999 with an exercise price of $3.00 per share. 150,000 of these
options were granted on November 18, 1999 with an exercise price of $4.125
per share. One-third of each group of these options vests at the end of
each 12 months after the date of grant for such group.
(4) Mr. Swinehart joined the Company in November 1998 and served in the
capacity of Chief Executive Officer through April 1999.
(5) The options have an exercise price of $1.00 per share. Of these options,
5/6 were immediately exercisable and 1/6 were to vest upon exercise of the
warrants issued upon the conversion of the notes offered in the November
1998 private placement. These warrants were exercised in full in March
1999, making all of these options currently exercisable.
(6) These options were granted on November 18, 1999, with an exercise price of
$4.125 per share. One-third of these options vests at the end of each 12
months after the date of grant.
(7) Mr. Fruehan joined the Company in May 1999.
(8) 110,000 of these options were granted on May 1, 1999, with an exercise
price of $3.00 per share. Of these 110,000 options, 10,000 vested on the
ninety-first day of Mr. Fruehan's employment, which began on May 1, 1999,
and the balance vest as to $100,000 of exercisable value (number of shares
multiplied by cash exercise price) on each of December 31, 1999, December
31, 2000 and December 31, 2001, with any remaining options vesting on
February 8, 2002. 50,000 of these options have an exercise price of $4.125
per share. Of these 50,000 options, one-third vest at the end of each 12
months after the date of grant, which was November 18, 1999.
(9) Mr. Kane joined the Company in August 1998 and resigned in February 2000.
(10) These options were granted on November 18, 1999, with an exercise price of
$4.125 per share. One-third of these options vests at the end of each 12
months after the date of grant for such group.
STOCK OPTION GRANTS AND EXERCISES IN 1999
The following table sets forth the grants of stock options to the named
executive officers during 1999.
<TABLE>
<CAPTION>
OPTION GRANTS DURING 1999
Number of Percentage
Securities of Total Exer- Potential Realizable Value at Assumed
Underly- Options cise Annual Rates of Stock Price Appreciation for
ing Granted to Price Expira- Option Term(1)
Options Employees Per tion --------------------------------------------
Name Granted During 1999 Share Date 0% 5% 10%
- ----------------- ---------- ------------ -------- --------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Michael Hedge 100,000(2) 13.24% $3.000 01/28/04 $0 $ 82,884 $ 183,153
150,000(3) 19.86 4.125 11/17/04 0 170,949 377,753
John Swinehart 50,000(4) 6.62 4.125 11/17/04 0 56,983 125,918
Mark Fruehan 110,000(5) 14.56 3.000 03/31/04 0 91,173 201,468
50,000(6) 6.62 4.125 11/17/04 0 56,983 125,918
David Kane 50,000(7) 6.62 4.125 11/17/04 0 56,983 125,918
</TABLE>
- ----------------------
(1) Potential realizable values are computed by multiplying the number of
shares of common stock subject to a given option by the closing market
price on the date of grant for a share of common stock, assuming that the
aggregate stock value derived from that calculation compounds at the annual
5% or 10% rate shown in the table for the entire five or ten-year term of
the option and subtracting from that result the aggregate option exercise
price. The 5% and 10% assumed annual rates of stock price appreciation are
mandated by the rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of future common stock
prices.
(2) One-third of these options vests at the end of each 12 months after the
date of grant.
(3) One-third of these options vests at the end of each 12 months after the
date of grant.
(4) One-third of these options vests at the end of each 12 months after the
date of grant.
(5) Of these options, 10,000 vested on the ninety-first day of Mr. Fruehan's
employment, which began on May 1, 1999, and the balance vest as to $100,000
of exercisable value (number of shares multiplied by cash exercise price)
on each of December 31, 1999, December 31, 2000 and December 31, 2001, with
any remaining options vesting on February 8, 2002.
30
<PAGE> 31
(6) One-third of these options vests at the end of each 12 months after the
date of grant.
(7) One-third of these options vests at the end of each 12 months after the
date of grant.
The following table sets forth information concerning the value of
unexercised stock options held by the named executive officers as of December
31, 1999:
<TABLE>
<CAPTION>
AGGREGRATED FISCAL YEAR-END OPTION VALUES
Number of Securities Underlying Value of Unexercised In-the-
Unexercised Options Held At Money Options At Fiscal Year-
Fiscal Year-End(#) End ($)(1)
-------------------------------------- -------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- --------------------- --------------- ------------------- --------------- ------------------
<S> <C> <C> <C> <C>
Michael Hedge 0 250,000 $0 $300,000
John Swinehart 200,000 50,000 775,000 37,500
Mark Fruehan 10,000 150,000 18,750 225,000
David Kane 16,667 33,333 75,002 149,999
</TABLE>
- ---------------------
(1) Based on the difference between the exercise price and the fair market
value (the closing price of $4.875 reported by the Nasdaq SmallCap Market
on December 31, 1999).
DIRECTOR COMPENSATION
Directors do not currently receive any cash compensation for serving on
the Board of Directors. Directors are eligible to participate in the Company's
stock option plans. During 1999, the Company did not grant options to any
director for services rendered in that capacity.
EMPLOYMENT AGREEMENTS WITH NAMED EXECUTIVE OFFICERS
The Company entered into a three-year employment agreement with Michael
Hedge, effective January 1999, for employment as Executive Vice
President-General Manager. Under the agreement, Mr. Hedge will receive a salary
of $150,000 per year. In addition, he received a $36,000 signing bonus and the
Company agreed to loan him up to $500,400 to assist him in the exercise of stock
options from his previous employer, with the loan to be repaid upon the earlier
of the sale of these shares acquired or February 28, 2000. The Company loaned
Mr. Hedge approximately $245,450 under this arrangement, and the entire amount
was repaid by Mr. Hedge on December 29, 1999. In April 1999, Mr. Hedge became
the President and Chief Executive Officer of the Company, with all of the other
provisions of his employment agreement continuing in effect.
The Company entered into a three-year employment agreement with Mark
Fruehan, effective May 1, 1999, for employment as Executive Vice President of
Strategic Planning and Business Development. Under the agreement, Mr. Fruehan
will receive a salary of $135,000 per year. In addition, he received a $25,000
signing bonus and the Company agreed to loan him up to $50,000 to assist him in
the exercise of stock options from his previous employer, with the loan to be
repaid upon the earlier of the first sale of these shares acquired or April 30,
2000. The
31
<PAGE> 32
Company loaned Mr. Fruehan $50,369 under this arrangement, all of which remained
outstanding as of April 11, 2000.
The Company also agreed, subject to Board approval, to grant to Mr.
Fruehan five-year incentive options to purchase 110,000 shares of the Company's
common stock, under the Company's 1998 or 1996 Stock Option Plans. The Company
agreed that the exercise price of these options would equal the fair market
value of the Company's common stock on the date of grant. Of these options,
10,000 vested on the ninety-first day of Mr. Fruehan's employment, which began
on May 1, 1999, and the balance vest as to $100,000 of exercisable value (number
of shares multiplied by cash exercise price) on each of December 31, 1999,
December 31, 2000 and December 31, 2001, with any remaining options vesting on
February 8, 2002. The Company granted these options to Mr. Fruehan on May 1,
1999.
The Company does not have any employment agreement with John Swinehart
and did not have any employment agreement with David Kane.
STOCK OPTION PLANS
In October 1996, the Company adopted the 1996 Stock Option Plan, as
amended (the "1996 Plan"), and in February 1998 the Company adopted the 1998
Stock Option Plan, as amended (the "1998 Plan"), pursuant to which 460,000 and
540,000 shares of common stock, respectively, were authorized for issuance upon
the exercise of options designated as either (1) options intended to constitute
incentive stock options under the Internal Revenue Code of 1986, as amended or
(2) non-qualified options. Under the 1996 Plan and the 1998 Plan, incentive
stock options may be granted to employees and officers of the Company.
Non-qualified options may be granted to consultants, directors (whether or not
they are employees), employees or officers of the Company. In July 1999, the
Board approved an amendment to the 1998 Plan, to increase the number of shares
of common stock which are authorized to be issued under the 1998 Plan from
540,000 to 1,040,000. The Company's shareholders subsequently approved this
amendment in September 1999.
REPRICING OF OPTIONS
The following table sets forth certain information concerning the
repricing of the options of any executive officer during the last ten fiscal
years:
<TABLE>
<CAPTION>
TEN-YEAR OPTION REPRICINGS
Length of Number of
Original Option Securities Market Price
Term Underlying of Stock at Exercise
Remaining at Options Time of Price at New
Date of Name Repriced Repricing Time of Exercise
Repricing Date (#) ($) Repricing Price
- --------------------- --------- --------------- --------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Stephen Jarrett 10/14/98 50,000 1.25 $4.375 $1.00
9.2 years
</TABLE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended December 31, 1999, the full Board of
Directors decided all matters related to compensation, with the exception of the
grant of options to executive officers under the Company's stock option plans.
J. Sherman Henderson and Mark M. Laisure are the members of the committee
administering these grants under the stock option plans. During 1999, two
directors participated in deliberations on executive compensation while they
also
32
<PAGE> 33
served as executive officers: Messrs. Swinehart and Hedge. There are no
interlocks between the Company and other entities involving the Company's
executive officers and directors who served as executive officers or board
members of other entities.
REPORT OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION
Nothwithstanding anything to the contrary set forth in any of the
Company's previous or future filings under the Securities Act of 1933 or the
Securities Exchange Act of 1934 that might incorporate this Annual Report on
Form 10-K or future filings with the Securities and Exchange Commission, in
whole or in part, the following report and the Performance Graph which follows
will not be deemed to be incorporated by reference into any such filing.
The following Report of the Board of Directors on Executive
Compensation describes the compensation policies and rationale applicable to the
Company's executive officers with respect to the compensation paid to such
executive officers for the year ended December 31, 1999.
The full Board of Directors decided all matters related to the
compensation of the executive officers of the Company, except for grants of
options to executive officers under the Company's stock option plans that were
made after formation of a committee to oversee such grants. The current Board of
Directors consists of Michael Hedge, John Swinehart, Alan M. Bluestine, Ronald
Goldberg, J. Sherman Henderson, Mark M. Laisure, David Segneri and Vinay Sharma.
Mr. Segneri became a director in October 1999 and Mr. Bluestine became a
director in February 2000. Mr. Hedge serves as President and Chief Executive
Officer of the Company. Mr. Swinehart serves as the Chief Operating Officer and
Vice President of Finance of the Company.
The Company entered into a three-year employment agreement with Michael
Hedge, effective January 1999, for employment as Executive Vice
President-General Manager for a period of three years. Under the agreement, Mr.
Hedge will receive a salary of $150,000 per year. The Company also granted Mr.
Hedge five year options to purchase 100,000 shares at an exercise price of $3.00
per share. In addition, he received a $36,000 signing bonus and the Company
agreed to loan him up to $500,400 to assist him in the exercise of stock options
from his previous employer, with the loan to be repaid upon the earlier of the
sale of these shares acquired or February 28, 2000. The Company loaned Mr. Hedge
approximately $245,450 under this arrangement, and the entire amount was repaid
by Mr. Hedge on December 29, 1999. In April 1999, Mr. Hedge became the President
and Chief Executive Officer of the Company, with all of the other provisions of
his employment agreement continuing in effect. In November 1999, the Company
granted Mr. Hedge five year options to purchase 150,000 shares at an exercise
price of $4.125 per share, in consideration of Mr. Hedge's efforts in connection
with the CWI acquisition.
In 1999, the Company paid Mr. Swinehart (who served as Chief Executive
Officer of the Company until April 1999) a salary of $73,684. In addition, the
Company granted Mr. Swinehart five year options to purchase 50,000 shares at an
exercise price of $4.125 per share, in consideration of Mr. Swinehart's efforts
in connection with the CWI acquisition.
Subject to existing contractual obligations, the base salaries of the
Company's executives are fixed based on job responsibilities and a limited
review of compensation practices for comparable positions at corporations which
compete with the Company in its business or are of comparable size and scope of
operations. The Board's decisions are based primarily on informal judgments
reasonably believed to be in the best interests of the Company.
Subject to existing contractual obligations, bonuses for the Company's
executives are not determined through the use of specific criteria. Rather, the
Board bases bonuses on the Company's overall performance, profitability, working
capital management and other qualitative and quantitative measurements. In
determining the amount of bonuses awarded, the Board considers the Company's net
sales and profitability for the applicable period and each executive's
contribution to the success of the Company.
33
<PAGE> 34
The Board believes that equity ownership by executive officers provides
incentive to build stockholder value and aligns the interests of executive
officers with the interests of stockholders. Upon the hiring of executive
officers and other key employees, the Board will typically recommend stock
option grants to those persons under the Company's stock option plans, subject
to applicable vesting periods. Thereafter, the Board will consider awarding
grants on a periodic basis. The Board of Directors believes that these
additional grants will provide an incentive for executive officers to remain
with the Company. Generally, options will be granted at the market price of the
common stock on the date of grant and, consequently, will have value only if the
price of the common stock increases over the exercise price. In determining the
size of the periodic grants, the Board of Directors will consider various
factors, including the amount of any prior option grants, the executive's or
employee's performance during the current fiscal year and his or her expected
contributions during the succeeding fiscal year.
Section 162(m) of the Code, enacted in 1993, generally disallows a tax
deduction to publicly held companies for compensation exceeding $1,000,000 paid
to certain of the corporation's executive officers. However, compensation which
qualifies as "performance-based" is excluded from the $1,000,000 limit if, among
other requirements, the compensation is payable upon attainment of
pre-established, objective performance goals under a plan approved by the
stockholders.
The compensation paid to the Company's executive officers for the year
ended December 31, 1999 fiscal year did not exceed the $1,000,000 limit per
officer, nor is it expected that the compensation to be paid to the Company's
executive officers for 2000 will exceed that limit. Because it is very unlikely
that the cash compensation payable to any of the Company's executive officers in
the foreseeable future will approach the $1,000,000 limit, the Board has decided
at this time not to take any action to limit or restructure the elements of cash
compensation payable to the Company's executive officers. The Board will
continue to monitor the compensation levels potentially payable under the
Company's cash compensation programs, but intends to retain the flexibility
necessary to provide total cash compensation in line with competitive practice,
the Company's compensation philosophy and the Company's best interests.
The foregoing report on executive compensation is provided by the Board
of Directors: Michael Hedge, John Swinehart, Alan M. Bluestine, Ronald Goldberg,
J. Sherman Henderson, Mark M. Laisure, David Segneri and Vinay Sharma.
PERFORMANCE GRAPH
The chart below sets forth a line graph comparing the performance of
the Company's common stock against Nasdaq Market Index and the Media General
Financial Service's Electronics Wholesale Index ("MG Group Index") for the
period from December 18, 1996 (the date on which the market price of the
Company's shares was first quoted by the Nasdaq SmallCap Market following the
Company's initial public offering) through December 31, 1999. The indices assume
that the value of an investment in the Company's common stock and each index was
100 on December 18, 1996 and that dividends, if any, were reinvested.
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
12/18/96 12/31/96 12/31/97 12/31/98 12/31/99
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Focus Affiliates, Inc. 100.00 111.32 75.47 45.28 73.58
MG Group Index 100.00 100.00 108.94 89.74 107.66
Nasdaq Market Index 100.00 100.00 122.32 172.52 304.29
</TABLE>
34
<PAGE> 35
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's common stock as of March 31, 2000, by (i)
each person who is known by the Company to own beneficially more than 5% of the
Company's outstanding common stock; (ii) each named executive officer who
continued to serve as an officer as of March 31, 2000; (iii) each of the
Company's directors; and (iv) all executive officers and directors of the
Company as a group.
<TABLE>
<CAPTION>
Amount and Nature
of Beneficial Percent of
Name and Address(1) Ownership Ownership(16)
- ------------------------------------------------- --------------------- -----------------
<S> <C> <C>
Ben Neman........................................ 1,243,200(2) 11.6%
Paul Skjodt...................................... 1,116,667(3) 10.2%
Carroll Edwards.................................. 957,600(4) 8.9%
Michael Hedge.................................... 33,333(5) *
John Swinehart................................... 200,000(6) 1.9%
Alan Bluestine................................... 90,000(7) *
Ronald Goldberg.................................. 707,448(8) 6.6%
J. Sherman Henderson............................. 120,000(9) 1.1%
Mark M. Laisure.................................. 200,000(10) 1.8%
David Segneri.................................... 0(11) 0%
Vinay Sharma..................................... 100,000(12) *
Phil Leavitt..................................... 707,448(13) 6.6%
Sherwin Geitner.................................. 707,448(14) 6.6%
All executive officers and directors as a
group (11 persons)............................ 1,544,981(15) 13.5%
</TABLE>
- ----------------------
* Less than one percent.
(1) Unless otherwise indicated, the address of each stockholder is c/o the
Company at 401 East Corporate Drive, Suite 220, Lewisville, Texas 75057.
(2) Includes 217,000 shares of outstanding common stock, which are transferable
to Meir Abramov (Vice President of the Company), upon the exercise of stock
options granted to Mr. Abramov by Mr. Neman. Includes 8,000 shares issuable
upon the exercise of currently exercisable stock options. Mr. Neman's
address is 2180 Stradella Road, Los Angeles, California 90077.
(3) Includes 200,000 shares issuable upon the exercise of currently exercisable
stock options. Mr. Skjodt's address is 25 West 9th Street, Indianapolis,
Indiana 96204.
(4) Includes 30,333 shares issuable upon the exercise of currently exercisable
warrants. Mr. Edwards' address is P.O. Box 219, Marshville, North Carolina
28103.
(5) Consists of shares issuable upon the exercise of currently exercisable
stock options.
(6) Consists of shares issuable upon the exercise of currently exercisable
stock options.
(7) Consists of shares issuable upon the exercise of currently exercisable
stock options. Mr. Bluestine's address is 90 Park Avenue, New York, New
York 10016.
(8) Pursuant to the terms of a Settlement Agreement dated as of March 8, 2000,
among the Company, Intellicell Merger Sub, Inc., Ronald Goldberg, Philip
Leavitt, Sherwin Geitner, Cary Maimon and Melvyn Cohen, Mr. Goldberg has
agreed that 500,000 of his shares shall be cancelled by the Company if the
Company raises $3,900,000 in equity funding by April 22, 2000. Mr.
Goldberg's address is 600 Knightsbridge Pkwy., Lincolnshire, IL 60069.
(9) Includes 100,000 shares issuable upon the exercise of currently exercisable
stock options. Mr. Henderson's address is 9931 Corporate Campus Drive,
Louisville, Kentucky 40223.
35
<PAGE> 36
(10) Consists of shares issuable upon the exercise of currently exercisable
stock options.
(11) Mr. Segneri's address is Tower Center, 520 N. Center, Bloomington, Illinois
61701.
(12) Consists of shares issuable upon the exercise of currently exercisable
stock options.
(13) Pursuant to the terms of a Settlement Agreement dated as of March 8, 2000,
among the Company, Intellicell Merger Sub, Inc., Ronald Goldberg, Philip
Leavitt, Sherwin Geitner, Cary Maimon and Melvyn Cohen, Mr. Leavitt has
agreed that 300,000 of his shares shall be cancelled by the Company if the
Company raises $3,900,000 in equity funding by April 22, 2000. Mr.
Leavitt's address is 600 Knightsbridge Pkwy., Lincolnshire, Illinois 60069.
(14) Pursuant to the terms of a Settlement Agreement dated as of March 8, 2000,
among the Company, Intellicell Merger Sub, Inc., Ronald Goldberg, Philip
Leavitt, Sherwin Geitner, Cary Maimon and Melvyn Cohen, Mr. Geitner has
agreed that 500,000 of his shares shall be cancelled by the Company if the
Company raises $3,900,000 in equity funding by April 22, 2000. Mr.
Geitner's address is 600 Knightsbridge Pkwy., Lincolnshire, Illinois 60069.
(15) Includes 723,333 shares issuable upon the exercise of currently exercisable
options and warrants.
(16) Based on 10,746,040 shares of common stock outstanding on March 31, 2000.
Shares issuable pursuant to currently exercisable stock options or warrants
are added to the number of outstanding shares for the purpose of
calculating each individual's percentage of ownership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January 1999, the Company agreed to loan Michael Hedge up to
$500,400 to assist him in the exercise of stock options from his previous
employer, with the loan to be repaid upon the earlier of the sale of these
shares acquired or February 28, 2000. The Company loaned Mr. Hedge approximately
$245,450 under this arrangement, and the entire amount was repaid by Mr. Hedge
on December 29, 1999. In May 1999, the Company agreed to loan Mark Fruehan up to
$50,000 to assist him in the exercise of stock options from his previous
employer, with the loan to be repaid upon the earlier of the first sale of these
shares acquired or April 30, 2000. The Company loaned Mr. Fruehan $50,369 under
this arrangement, all of which remained outstanding as of April 11, 2000.
In April 1999, in connection with his termination from employment, the
Company agreed to loan Stephen Jarrett, the Company's former Vice President of
Business Development, $20,000 to assist him with taxes, and the Company deferred
repayment of $10,000 that Mr. Jarrett owed the Company for expense advances.
These amounts remained outstanding as of April 11, 2000.
Digicell International Inc. ("Digicell"), a company controlled by two
of Mr. Neman's cousins, is a customer and a supplier to the Company. For the
year ended December 31, 1999, the Company sold to Digicell $1,454,000 and
purchased from Digicell $172,000 of cellular products on terms no less favorable
to the Company than could be obtained from an unaffiliated third party. As of
December 31, 1999, the Company was owed $277,000 by Digicell. On March 17, 2000,
the Company entered into a settlement agreement with Digicell pursuant to which,
in discharge of the $197,881 net outstanding balance due from Digicell to the
Company, Digicell paid the Company a lump sum payment of $60,000 and agreed to
make eight additional payments in the amount of $5,000 per week for the
following eight weeks. The Company forgave the remaining $97,881 owed by
Digicell.
On December 31, 1999, the Company was owed $300,000 by Continental
Communications ("CMT"), a company owned by major shareholders of the Company,
for product and services sold by CWI to CMT prior to the acquisition of CWI by
the Company. $200,000 of this balance was paid subsequent to year end. In
addition, the Company purchases product from CMT. For the year ended December
31, 1999, the Company purchased $40,000 of product from CMT.
On December 31, 1999, the Company was owed $155,000 by Leavitt
Communication ("Leavitt"), a company owned by a major shareholder, for product
and services sold by CWI to
36
<PAGE> 37
Leavitt prior to the acquisition of CWI by the company. In addition, the Company
purchases product from Leavitt. For the year ended December 31, 1999, the
Company purchased $633,000 of product from Leavitt. On December 31, 1999, the
Company owed $244,000 to Leavitt.
In November 1999, the Company entered into a lease with a partnership
that includes major shareholders. Rental expense was $66,000 in 1999. The lease
calls for a monthly payment of approximately $33,000 through the year 2008.
In November 1999, the Company subleased a portion of its Lincolnshire
facility to both CMT and Leavitt for a total monthly payment of $11,600. In
addition to the rent for the facility, the Company charges CMT and Leavitt a
monthly management fee of $30,000, covering shared services for technology
support, accounting and administrative activities. The total management fees
received by the Company for the period October 31, 1999 through December 31,
1999 was approximately $60,000.
The Company entered into a three-year employment agreement with Ben
Neman, the Company's then Chairman of the Board, Chief Executive Officer and
President, effective December 1996 (the "1996 Agreement"). Mr. Neman's
compensation for 1997 was governed by such agreement, which agreement was
superseded by a new three-year employment agreement in November 1998 (the "Neman
Agreement"). Under the 1996 Agreement, Mr. Neman received an annual salary of
$72,000 per year and such bonus as determined by the Board of Directors. In
determining the salary and bonus for the Chief Executive Officer, the Board of
Directors based its decisions upon the performance of the Company, as well as a
review of the performance of the Chief Executive Officer. During 1998, the
Company performed substantially below its performance during 1997, and the Board
of Directors did not award any bonus to Mr. Neman for 1998. Mr. Neman did not
participate in any decisions by the Board of Directors concerning his
compensation.
Pursuant to the Neman Agreement, Mr. Neman was to serve as the Chairman
of the Board and President of the Company, but no longer serve as its Chief
Executive Officer. Mr. Neman was to receive an annual salary of $72,000 and
bonuses as determined by the Board. The term of the Neman Agreement was to
expire in November 2001; provided, however, that the Neman Agreement could be
terminated by the Company under certain circumstances. Upon a termination
without cause as defined in the Neman Agreement, the Company would make a
severance payment to Mr. Neman of $500,000.
On April 21, 1999, the Company and Mr. Neman entered into an agreement
pursuant to which Mr. Neman resigned as Chairman of the Board and President, and
the parties terminated Mr. Neman's existing employment agreement. The Company
paid Mr. Neman $250,000 upon signing of the termination agreement and agreed to
pay him 24 monthly payments of $14,583.33 each, with the first payment
commencing on May 1, 1999. The termination agreement also provides for some
limitations on Mr. Neman's public sales of the balance of his shares of the
Company's common stock.
On October 2, 1999, the Company and Mr. Neman entered into a further
agreement under which, in full discharge of its payment obligations under the
April 21, 1999 agreement, the Company agreed to pay Mr. Neman 15 monthly
payments of $14,585.33 each, with the first payment commencing on November 1,
1999. The Company and Mr. Neman further agreed that the unpaid balance of
$109,320 owed to the Company by Cellular Specialists, a company controlled by
Ben Neman's brother, would be discharged and the obligation assigned in full to
Mr. Neman. Further, the Company and Mr. Neman agreed that Mr. Neman's options to
purchase 12,000 shares of the Company's common stock at $5.50 per share had
expired, and that Mr. Neman's brother's options to purchase 35,000 shares of the
Company's common stock at $5.00 per share would be cancelled. Also on October 2,
1999, the Company and Mr. Neman's brother entered into an agreement reflecting
the discharge of Cellular Specialist's unpaid balance and the cancellation of
Mr. Neman's brother's options, as described above.
37
<PAGE> 38
In January 2000, the Company received a $416,500 loan from Carroll
Edwards, a major shareholder. The loan bore simple interest at a rate of 8.0%.
On March 31, 2000, the Company and Mr. Edwards entered into an agreement
pursuant to which the entire loan (including all accrued and unpaid interest)
was converted into shares of the Company's common stock at a price of $2.50 per
share.
PART IV
ITEM. 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) The Financial Statements are filed as a part of this report as pages F-1
through F-21 following the signature page.
(a)(2) Financial Statement Schedules
Schedule II - Valuation and Qualifying accounts page F-21
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
(a)(3) Exhibits
The following Exhibits are filed herewith pursuant to Rule 601 of
Regulation of S-K and paragraph (c) of this Item 14.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
3.1 Certificate of Incorporation. (1)
3.2 Certificate of Merger and Plan and Agreement of Merger, between
Cellular Telecom Corporation, a California corporation, and the
Registrant. (1)
3.3 Bylaws. (1)
4.1 Specimen form of Common Stock Certificate. (2)
4.2 Form of Representative's Warrant Agreement. (2)
4.3 Form of Warrant issued as a dividend to Common Stockholders of
Registrant. (3)
4.4 Warrant Agreement, between the Company and Continental Stock
Transfer Trust Company, as Warrant Agent dated December 17, 1997.
(3)
4.5 Form of Warrant issued by the Company to Investors in Ben Neman
Sale of Common Stock. (7)
10.1 Form of 1996 Stock Option Plan of Registrant. (1)
10.2 Form of Employment Agreement between the Registrant and Ben
Neman, dated November 9, 1998. (1)
</TABLE>
38
<PAGE> 39
<TABLE>
<S> <C>
10.3 Form of Employment Agreement between the Registrant and James E.
Bunting. (1)
10.4 1998 Stock Option Plan. (5)
10.5 Credit Facility and Security Agreement, dated June 18, 1996, by
and between the Registrant and CIT Group/Credit Finance, Inc. and
related documents. (1)
10.6 Form of Employment Agreement between the Registrant and John C.
Snyder II, dated April 30, 1997. (4)
10.7 Lease Agreement between the Company and Northpark Industrial,
dated December 22, 1997. (4)
10.8 Lease Agreement between the Company and AMB Industrial Income
Fund, Inc., dated July 18, 1997. (4)
10.9 Loan and Security Agreement, dated January 12, 1998, by and
between the Registrant and BancAmerica Business Credit Inc. (4)
10.10 Form of Amendment to Loan and Security Agreement referred to in
Exhibit 10.9. (4)
10.11 Amendment No. 3. to Loan and Security Agreement referred to in
Exhibit 10.9. (5)
10.12 Amendment No.4 to Loan and Security Agreement referred to in
Exhibit 10.9. (5)
10.13 Amendment No. 5 to Loan and Security Agreement referred to in
Exhibit 10.9. (5)
10.14 Termination Agreement and Mutual General Release to Loan and
Security Agreement referred to in Exhibit 10.9. (5)
10.15 Redeemable Warrant to Purchase Common Stock dated November 19,
1998 between the Registrant and members of the Investor Group.
(5)
10.16 Employment Agreement between the Registrant and Ben Neman, dated
November 25, 1998. (5)
10.17 Assignment of lease to Cellular Wholesalers, Inc of Lease
Agreement referred to in Exhibit 10.8. (5)
10.18 Employment Agreement between the Registrant and Michael King,
dated January 8, 1999. (5)
10.19 Employment Agreement between the Registrant and Michael Hedge,
dated January 29, 1999. (5)
10.20 Registration Rights Agreement dated November 19, 1998 between the
Registrant and the Investor Group. (5)
</TABLE>
39
<PAGE> 40
<TABLE>
<S> <C>
10.21 Subordinated Convertible Note dated November 19, 1998 between the
Registrant and members of the Investor Group in the Company's
November 1998 private placement. (5)
10.22 Agreement Regarding Termination of Employment for Ben Neman dated
as of April 21, 1999. (6)
10.23 Amendment to Agreement Regarding Termination of Employment for
Ben Neman dated as of April 30, 1999. (6)
10.24 Agreement between the Company and NationsCredit dated as of May
19, 1999. (7)
10.25 Employment Agreement between Mark Fruehan and the Company dated
as of May 1, 1999. (7)
10.26 Agreement to Merge with Cellular Wholesalers, Inc. dated as of
July 23, 1999. (8)
10.27 Amended and Restated Agreement to Merge with Cellular
Wholesalers, Inc. dated as of July 23, 1999. (9)
*10.28 Agreement dated October 2, 1999 between the Company and Ben
Neman.
*10.29 Agreement dated October 2, 1999 among the Company, Cellular
Specialists and Bob Neman.
*10.30 Agreement dated March 8, 2000 among the Company, Intellicell
Merger Sub, Inc., Ronald Goldberg, Philip Leavitt, Sherwin
Geitner, Cary Maimon and Melvyn Cohen.
*23.1 Consent of Arthur Andersen LLP
*27. Financial Data Schedule.
</TABLE>
- ----------------------------
* Filed herewith.
(1) Incorporated by reference to Registrant's Form S-1 Registration Statement
filed with the Commission on November 4, 1996.
(2) Incorporated by reference to Registrants Amendment No. 1 to Form S-1
Registration Statement filed with the Commission on December 9, 1996.
(3) Incorporated by reference to Registrant's Form 8-A Registration Statement
filed with the Commission on December 5, 1997.
(4) Incorporated by reference to Registrant's Form 10-K filed with the
Commission on April 15, 1998.
(5) Incorporated by reference to Registrant's Form 10-K filed with the
Commission on March 30. 1999.
(6) Incorporated by reference to Registrant's Form 10-Q filed with the
Commission on May 17, 1999.
40
<PAGE> 41
(7) Incorporated by reference to Registrant's Form 10-Q filed with the
Commission on August 16, 1999.
(8) Incorporated by reference to Registrant's Form 8-K filed with the
Commission on August 6, 1999.
(9) Incorporated by reference to Registrant's Form 8-K filed with the
Commission on August 26, 1999.
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K on November 10, 1999, in order to
report the consummation of its acquisition of CWI. The report included audited
financial statements of CWI (incorporated by reference to Page 27 and Appendix C
of the definitive proxy statement filed with the SEC on August 26, 1999) and
unaudited pro forma combined financial information of the Company and CWI
(incorporated by reference to Appendix D of the definitive proxy statement filed
with the SEC on August 26, 1999).
41
<PAGE> 42
SIGNATURES
Pursuant to the requirements of 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.
FOCUS AFFILIATES, INC.
Dated: April 13, 2000
By: /s/ Michael Hedge
------------------------------------------
Michael Hedge
President and Chief Executive Officer
Pursuant to 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Michael Hedge President, Chief Executive Officer and April 13, 2000
- --------------------------------------- Director
Michael Hedge
/s/ John Swinehart Chairman of the Board, Vice President of April 13, 2000
- --------------------------------------- Finance and Principal Accounting Officer
John Swinehart
Director April 13, 2000
- ---------------------------------------
Alan M. Bluestine
/s/ Ronald Goldberg Director April 13, 2000
- ---------------------------------------
Ronald Goldberg
/s/ J. Sherman Henderson Director April 13, 2000
- ---------------------------------------
J. Sherman Henderson
/s/ Mark Laisure Director April 13, 2000
- ---------------------------------------
Mark Laisure
/s/ David Segneri Director April 13, 2000
- ---------------------------------------
David Segneri
Director April 13, 2000
- ---------------------------------------
Vinay Sharma
</TABLE>
42
<PAGE> 43
FOCUS AFFILIATES, INC.
Index to Financial Statements
<TABLE>
<S> <C>
Report of Independent Auditors ................................................. F-2
Balance Sheets as of December 31, 1999 and 1998 ................................ F-4
Statement of Operations for the Years Ended December 31, 1999, 1998 and 1997 ... F-5
Statement of Changes in Stockholders' Equity for the Years Ended December 31,
1998, 1998 and 1997 ............................................................ F-6
Statement of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997 ... F-7
Notes to Financial Statements .................................................. F-8
Schedule II: Valuation and Qualifying Accounts .............................. F-21
</TABLE>
F-1
<PAGE> 44
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of Focus Affiliates, Inc.:
We have audited the accompanying consolidated balance sheet of Focus Affiliates,
Inc. (a Delaware corporation) as of December 31, 1999, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. The
financial statements of Focus Affiliates, Inc. (formerly known as Intellicell
Corp.) as of December 31, 1998 and for each of the years in the two-year period
ended December 31, 1998, were audited by other auditors whose report dated May
14, 1999, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Focus Affiliates,
Inc. as of December 31, 1999, and the results of its operations and its cash
flows for the year then ended in conformity with accounting principles generally
accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and has negative working capital that raises substantial doubt
about the ability to continue as a going concern. Management's plan in regards
to these matters is also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Our audit was made for the purpose of forming an opinion on the consolidated
financial statements taken as a whole. The supplemental schedule listed in the
index to Item 14 is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not a required part of the basic financial
statements. This information for the year ended December 31, 1999, has been
subjected to the auditing procedures applied in our audit of the basic financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
April 12, 2000
F-2
<PAGE> 45
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
Intellicell Corp.,
Chatsworth, California:
We have audited the accompanying balance sheet of Intellicell Corp. as of
December 31, 1998 and the related statements of operations, changes in
stockholders' equity, and cash flows for each of the two years in the period
ended December 31, 1998. We have also audited the financial statement schedule
listed in the accompanying Index. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Intellicell Corp. at December
31, 1998, and the results of its operations and its cash flows for each of the
two years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles. Also, in our opinion, the financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects, the information set forth
therein.
HOLLANDER, LUMER & CO. LLP
Los Angeles, California
May 14, 1999
F-3
<PAGE> 46
FOCUS AFFILIATES, INC.
Consolidated Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Assets
Current Assets:
Cash and Cash Equivalents $ 2,495,000 $ 362,000
Accounts Receivable, Net 9,922,000 2,155,000
Inventories, Net 9,488,000 1,091,000
Due from Related Parties 732,000 139,000
Prepaid Expenses and Other Current Assets 657,000 72,000
------------ ------------
Total Current Assets 23,294,000 3,819,000
Property and Equipment, Net 4,443,000 359,000
Goodwill and Intangible Assets, Net 16,423,000 --
Other 74,000 --
------------ ------------
Total $ 44,234,000 $ 4,178,000
============ ============
Liabilities and Shareholders' Equity
Current Liabilities:
Current Maturities of Long-Term Debt $ 500,000 $ --
Revolving Credit Facility 12,699,000 --
Accounts Payable 13,190,000 1,150,000
Accrued Expenses 2,006,000 179,000
------------ ------------
Total Current Liabilities 28,395,000 1,329,000
Long-Term Liabilities:
Long-Term Debt 1,645,000 --
Other 324,000 --
------------ ------------
Total Long-Term Liabilities 1,969,000 --
Shareholders' Equity:
Preferred Stock - $.01 Par Value, 1,000,000 Shares Authorized, none issued -- --
Common Stock - $.01 Par Value, 15,000,000 Shares Authorized, 10,737,740 and
5,915,902 issued and outstanding in 1999 and 1998, respectively 108,000 59,000
Additional Paid-In Capital 27,997,000 11,379,000
Accumulated Deficit (14,235,000) (8,589,000)
------------ ------------
Total Shareholders' Equity 13,870,000 2,849,000
------------ ------------
Total Liabilities and Shareholders' Equity $ 44,234,000 $ 4,178,000
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-4
<PAGE> 47
FOCUS AFFILIATES, INC.
Consolidated Statements of Operations
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net Sales $ 46,498,000 $ 27,787,000 $ 81,401,000
Cost of Sales 43,992,000 26,152,000 77,862,000
------------ ------------ ------------
Gross Profit 2,506,000 1,635,000 3,539,000
Selling, General and Administrative Expenses 7,683,000 4,167,000 8,930,000
------------ ------------ ------------
Loss from Operations (5,177,000) (2,532,000) (5,391,000)
------------ ------------ ------------
Other Expense:
Interest Expense (406,000) (204,000) (444,000)
Other (63,000) (33,000) 53,000
------------ ------------ ------------
Total Other Expense (469,000) (237,000) (391,000)
------------ ------------ ------------
Loss Before Provision for Income Taxes (5,646,000) (2,769,000) (5,782,000)
Provision for Income Taxes -- -- 334,000
------------ ------------ ------------
Net Loss $ (5,646,000) $ (2,769,000) $ (6,116,000)
============ ============ ============
Net Loss Per Share:
Basic $ (0.77) $ (0.63) $ (1.37)
Diluted $ (0.77) $ (0.63) $ (1.37)
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 48
FOCUS AFFILIATES, INC.
Consolidated Statements of Shareholders' Equity
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Common Stock
------------------------------
Additional
Shares Amount Paid-in Capital
------------- ------------- ---------------
<S> <C> <C> <C>
Balance, December 31,1996 4,217,464 $ 42,000 $ 8,925,000
Net Loss -- -- --
Issuance--IPO Over-Allotment Provision 300,000 3,000 1,337,000
Common Stock Acquired from Officer as Settlement of Balance Due from
Officer and Retirement of Such Shares (101,562) (1,000) (453,000)
------------- ------------- -------------
Balance, December 31, 1997 4,415,902 44,000 9,809,000
Net Loss -- -- --
Noncash Compensation Expense -- -- 297,000
Common Stock Issued Pursuant to Conversion of Convertible Notes
Offered in Private Placement, Net of Expense 1,500,000 15,000 1,273,000
------------- ------------- -------------
Balance, December 31, 1998 5,915,902 59,000 11,379,000
Net Loss -- -- --
Exercise of Warrants 998,992 10,000 989,000
Exercise of Options 100,000 1,000 68,000
Issuance of Warrants on Convertible Debt -- -- 1,512,000
Issuance of Stock Relating to CWI Acquisition 2,250,000 23,000 8,977,000
Conversion of Convertible Debt 1,288,100 13,000 3,774,000
Issuance of Stock Relating to The Wireless Group Acquisition 184,746 2,000 748,000
Noncash Compensation Expense -- -- 550,000
------------- ------------- -------------
Balance, December 31, 1999 10,737,740 $ 108,000 $ 27,997,000
============= ============= =============
<CAPTION>
Retained
Retained Earnings Total
Earnings Due from Shareholders'
(Deficit) Officer Equity
------------- ------------- -------------
<S> <C> <C> <C>
Balance, December 31,1996 $ 296,000 $ (454,000) $ 8,809,000
Net Loss (6,116,000) -- (6,116,000)
Issuance--IPO Over-Allotment Provision -- -- 1,340,000
Common Stock Acquired from Officer as Settlement of Balance Due from
Officer and Retirement of Such Shares -- 454,000 --
------------- ------------- -------------
Balance, December 31, 1997 (5,820,000) -- 4,033,000
Net Loss (2,769,000) -- (2,769,000)
Noncash Compensation Expense -- -- 297,000
Common Stock Issued Pursuant to Conversion of Convertible Notes
Offered in Private Placement, Net of Expense -- -- 1,288,000
------------- ------------- -------------
Balance, December 31, 1998 (8,589,000) -- 2,849,000
Net Loss (5,646,000) -- (5,646,000)
Exercise of Warrants -- -- 999,000
Exercise of Options -- -- 69,000
Issuance of Warrants on Convertible Debt -- -- 1,512,000
Issuance of Stock Relating to CWI Acquisition -- -- 9,000,000
Conversion of Convertible Debt -- -- 3,787,000
Issuance of Stock Relating to The Wireless Group Acquisition -- -- 750,000
Noncash Compensation Expense -- -- 550,000
------------- ------------- -------------
Balance, December 31, 1999 $ (14,235,000) $ -- $ 13,870,000
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 49
FOCUS AFFILIATES, INC.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Loss $ (5,646,000) $ (2,769,000) $ (6,116,000)
Adjustments to Reconcile Net Loss to Net Cash Used in
Operating Activities-
Depreciation and Amortization 685,000 234,000 303,000
Loss on Disposal of Fixed Assets 39,000 48,000 --
Noncash Compensation Expense 550,000 297,000
Provision for Doubtful Accounts Receivable 351,000 162,000 3,627,000
Provision for Inventory Reserves 67,000 190,000 607,000
Change in Net Deferred Tax Asset -- -- 330,000
Changes in Operating Assets and Liabilities-
Accounts Receivable 108,000 4,456,000 (5,474,000)
Inventories (3,130,000) 2,484,000 3,508,000
Due from Related Parties 203,000 -- 500,000
Prepaid Expenses and Other Current Assets (20,000) 228,000 (206,000)
Accounts Payable and Accrued Expenses 4,385,000 (2,400,000) (2,453,000)
------------ ------------ ------------
Net Cash (Used in) Provided by Operating Activities (2,408,000) 2,930,000 (5,374,000)
Cash Flows from Investing Activities:
Acquisition of CWI and The Wireless Group, Net of Cash
Acquired (5,122,000) -- --
Collection of Notes Receivable -- -- 1,698,000
Acquisition of Property and Equipment (976,000) (318,000) (193,000)
Proceeds from the Sale of Property and Equipment -- 40,000 --
------------ ------------ ------------
Net Cash (Used in) Provided by Investing Activities (6,098,000) (278,000) 1,505,000
Cash Flows from Financing Activities:
Proceeds from Long-Term Debt 4,806,000 -- --
Payments of Long-Term Debt (425,000) -- --
Proceeds from Sale of Warrants 1,512,000 -- --
Bank Overdraft (Payments) -- (250,000) (762,000)
Deferred Financing Costs -- 74,000 (112,000)
Advances (Repayments) Under Credit Facility 3,678,000 (3,402,000) 3,402,000
Proceeds from the Exercise of Warrants 999,000 -- --
Proceeds from the Exercise of Options 69,000 1,288,000 1,341,000
------------ ------------ ------------
Net Cash Provided by (Used in) Financing Activities 10,639,000 (2,290,000) 3,869,000
Net Increase in Cash and Cash Equivalents 2,133,000 362,000 --
Cash and Cash Equivalents, Beginning of Year 362,000 -- --
------------ ------------ ------------
Cash and Cash Equivalents, End of Year $ 2,495,000 $ 362,000 $ --
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE> 50
FOCUS AFFILIATES, INC.
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1999, 1998 and 1997
(1) Nature of Operations-
Focus Affiliates, Inc. (the "Company") is engaged in the wholesale
distribution of wireless communications products.
The Company has developed a customer base of more than 3,000 wholesalers,
network operators, agents, dealers and retailers in principally the
domestic marketplace. The Company currently operates in one business
segment, the wholesale distribution of wireless products and accessories.
On September 29, 1999, the Company's shareholders approved the change of
the Company's name from Intellicell Corp. to Focus Affiliates, Inc.
In the last quarter of 1999, the Company acquired Cellular Wholesalers,
Inc. ("CWI") and The Wireless Group ("TWG"). (Note 4).
(2) Financial Results and Liquidity-
Ongoing losses of the past three years and certain recent developments
including costs associated with the integration of CWI, adverse industry
conditions and related expenses have had a material adverse effect on the
Company's short-term liquidity and its ability to service its debts and
fund current operations.
The Company's existing revolving credit facility is not sufficient to cover
the liquidity requirements of continuing its current operations and
proceeding with its strategic initiatives. The Company is facing the
prospect of not having adequate funds to operate its business without
obtaining incremental capital.
The Company is currently in discussions with potential investors to raise
incremental capital. The Company anticipates that it will need to secure
financing in the amount of approximately $3,000,000 by May 2000 to fund
current operations. In addition, the Company expects to require significant
additional capital in order to develop its information technology
capabilities and take the other steps necessary to execute its new
strategic initiatives. There can be no assurances that the Company will be
able to obtain the required capital necessary. If the Company is unable to
raise additional capital, it may be forced to discontinue its current
operations or delay the implementation of its business plan, either of
which would have a material adverse effect on the Company.
In addition to obtaining the additional capital discussed above, the
Company believes that it has implemented measures, including the reduction
of employee headcount through terminations, closure of certain facilities,
which, combined with the securing of revenue streams from its new strategic
initiatives, will stabilize operations and permit it to substantially
reduce or eliminate these losses. The Company has subsequently paid down
the credit facility to approximately $864,000 as of April 11, 2000. There
can be no assurances, however, that the measures the Company has
implemented will be sufficient to permit the Company to remain an ongoing
concern.
F-8
<PAGE> 51
(3) Summary of Accounting Policies-
(a) Financial Statement Presentation-
The accompanying financial statements reflect the consolidated results
of the Company. All significant intercompany accounts and transactions
have been eliminated.
(b) Use of 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.
(c) Cash and Cash Equivalents-
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
(d) Accounts Receivable-
Accounts receivable balances are net of allowances for doubtful
accounts amounting to $1,000,000 at December 31, 1999 and $251,000 at
December 31, 1998.
(e) Inventories-
Inventories, consisting primarily of wireless handsets and accessories,
are stated at the lower of cost or net realizable value. Cost is
determined by the first-in, first-out ("FIFO") method. Inventories are
net of reserves of $1,310,000 and $592,000 at December 31, 1999 and
1998, respectively.
(f) Property and Equipment-
Property and equipment are stated at cost. Depreciation is provided by
using the straight-line method over the estimated useful lives of the
related assets, generally ranging from three to seven years.
Maintenance and repairs that neither materially add to the value of the
property or equipment or prolong its life are expensed. Betterments or
renewals are capitalized when incurred. Leasehold improvements are
depreciated over the lesser of the remaining lease term or the
estimated useful lives.
(g) Goodwill and Intangible Assets-
Goodwill represents the excess of the purchase price over the fair
value of identifiable net assets relating to acquisitions. Goodwill is
being amortized on a straight-line basis over ten years; amortization
expense was $275,000, $77,000 and $10,000 for the years ended December
31, 1999, 1998 and 1997. The Company evaluates goodwill to assess
recoverability from future operations. Impairments will be recognized
in operating results to the extent that carrying value exceeds fair
value.
Intangible assets include capitalized loan fees. The costs relating to
the loan fees are amortized on a straight-line basis over the term of
the loan; amortization expense was $57,000, $230,000 and $161,000 for
the years ended December 31, 1999, 1998 and 1997, respectively.
F-9
<PAGE> 52
(h) Supplemental Disclosures of Cash Flow Information-
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Cash Paid for:
Interest $ 383,000 $ 204,000 $ 444,000
Income Taxes -- -- 223,000
Common stock acquired from officer as
settlement of balance due from Officer and
retirement of such shares -- -- 454,000
Conversion of trade receivable into notes
receivable -- 859,000 2,295,000
Noncash compensation expense for issuance of
stock options to nonemployees or directors 550,000 297,000 --
Conversion of convertible subordinated debt
to common stock 5,152,000 -- --
</TABLE>
(i) Revenue Recognition-
The Company recognizes product revenues upon shipment.
(j) Income Taxes-
The Company reports income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, Accounting for Income
Taxes. Deferred income taxes are recognized for the tax consequences of
temporary differences by applying the tax rate expected to be in effect
in future years to differences between the financial statement carrying
amounts and the tax basis of existing assets and liabilities.
(4) Acquisitions-
On October 29, 1999, the Company acquired Cellular Wholesalers, Inc.
("CWI"), a privately held wholesale distributor of wireless phone products.
The purchase price for the underlying CWI equity originally consisted of
$6,340,000 in cash and 2,250,000 shares of Company stock for a total
preliminary purchase price of approximately $15,340,000. In March 2000,
subsequent purchase price negotiations resulted in $500,000 in cash being
returned to the Company and the potential of 1,300,000 shares to be
returned by the former owners of CWI at a future date providing other
contingencies are met as defined by the shareholders agreement. The cash
returned subsequent to year end has been reflected as an adjustment to the
purchase price as of December 31, 1999, resulting in an adjusted total
purchase price of $14,840,000. Additional purchase price adjustments will
be reflected for the returned shares when, and if, the contingencies are
met and the shares are returned.
The Company funded the cash portion of the purchase price by selling
$5,152,000 of convertible subordinated notes convertible into 1,288,100
shares of common stock of the Company and warrants to purchase 644,050
shares of common stock of the Company at an exercise price of $4 per share.
In addition, the Company sold $1,000,000 of convertible subordinated notes
with attached warrants to purchase 150,000 shares at $5.55 per share to two
separate noteholders. In December 1999, $5,152,000 of the subordinated
notes were converted into 1,288,100 shares at $4 per share. The value of
the warrants, included in the above total purchase price, of $1,512,000.
The acquisition was accounted for as a purchase and, accordingly, the
accompanying consolidated financial statements include the results of
operations of CWI subsequent to the acquisition date. The total purchase
price of $14,840,000 was allocated to the assets and liabilities of CWI
based upon their respective fair value, with the remainder allocated to
goodwill. The purchase price paid plus the liabilities assumed exceeded the
fair value of the tangible assets purchased by $15,740,000, on a
F-10
<PAGE> 53
preliminary basis. The goodwill associated with the purchase is being
amortized on a straight-line basis over 10 years. The preliminary
allocation of purchase price was as follows:
<TABLE>
<S> <C>
Current Assets $ 16,055,000
Property and Equipment 3,532,000
Other Assets 259,000
Liabilities Assumed (20,746,000)
Goodwill 15,740,000
------------
$ 14,840,000
============
</TABLE>
The Company anticipates an additional adjustment will be made to goodwill
as additional liabilities are recorded for restructuring CWI's operations
as a result of the acquisition.
The Company has prepared the following unaudited pro forma statements of
operations to illustrate the estimated impact of the acquisition of CWI by
the Company as if this transaction had occurred at the beginning of the
periods presented. The pro forma data reflects the fair market value
adjustments to the CWI assets and liabilities acquired as well as
incremental interest expense related to the merger financing. These
adjustments are being amortized over the periods estimated to be benefited
and primarily include amortization of goodwill.
<TABLE>
<CAPTION>
Pro Forma
Consolidated
----------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Net Sales $ 109,261,000 $ 108,818,000
Net Loss (7,490,000) (3,284,000)
Loss Per Share-
Basic $ (1.02) $ (0.46)
Diluted $ (1.02) $ (0.46)
</TABLE>
The Company has presented this unaudited pro forma financial data for
illustrative purposes only. This pro forma data is based on an allocation
of the purchase price and is not necessarily indicative of (1) the results
of operations that would have occurred had the transaction been effective
as of the beginning of each of the years presented, or (2) the results of
operations that the Company will attain in the future. In addition, the pro
forma financial data does not reflect any synergies or cost savings that
may occur as a result of the acquisition.
On December 30, 1999, the Company acquired The Wireless Group, Inc.
("TWG"), a recently formed business-to-business internet web site at which
wireless industry participants can auction or otherwise purchase and sell
wireless communication products, for $50,000 and 184,746 shares of the
Company. The acquisition was accounted for as a purchase and accordingly,
the accompanying consolidated financial statements include the results of
TWG as of the acquisition date. The total purchase price of $800,000 was
allocated to the assets and liabilities of TWG based on their respective
fair values with the remainder allocated to goodwill, which resulted in
goodwill on the purchase of $800,000. The associated goodwill will be
amortized on a straight-line basis over ten years. The Company anticipates
an additional adjustment will be made to goodwill as the valuation for the
intangible assets is finalized.
F-11
<PAGE> 54
(5) Property and Equipment-
A summary of property and equipment as of December 31, 1999 and 1998, is as
follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Office Equipment, Furniture and Fixtures $ 682,000 $ 197,000
Computer Equipment 756,000 249,000
Computer Software 1,620,000 31,000
Website Design 452,000 --
Warehouse Equipment 187,000 --
Other Equipment 228,000 51,000
Leasehold Improvements 923,000 73,000
---------- ----------
4,848,000 601,000
---------- ----------
Less- Accumulated Depreciation and Amortization 405,000 242,000
---------- ----------
$4,443,000 $ 359,000
========== ==========
</TABLE>
(6) Credit Facility and Loan Payable-
In January 1998, the Company entered into a revolving line of credit
agreement with Bank America Business Credit, Inc. ("Bank of America")
which provided for borrowings of up to a maximum of $12,000,000 and
required the Company to maintain a tangible net worth of no less than
$5,500,000 at December 31, 1997. The Company was in violation of the
tangible net worth covenant at December 31, 1997. In April 1998, Bank of
America waived the December 31, 1997, default of the tangible net worth
covenant, and revised the January 1998 credit agreement. Under the revised
credit agreement the maximum borrowing was reduced from $12 million to $6
million. In August 1998, the Company executed another amendment to the
credit agreement which reduced the maximum borrowing permitted under the
agreement from $4 million to $1.2 million as of August 17, 1998 and to $1
million on September 1, 1998.
Bank of America waived the default of the tangible net worth covenant
through June 30, 1998 and revised the credit agreement. In this fourth
amendment, the Company and Bank of America agreed that either party may
terminate the credit agreement, as amended at any time after October 31,
1998. In October 1998, Bank of America and the Company further amended the
agreement, extending the term through November 30, 1998 and further
limiting the borrowings to $400,000.
On November 24, 1998, utilizing a portion of the funding of the Company's
convertible note private placement, the Company terminated its credit
agreement with Bank of America paying the remaining outstanding balance of
the borrowings.
On April 19, 1999 the Company entered into a revolving line of credit
agreement with NationsCredit Commercial Corporation which provided for
borrowings of up to $5 million, with such borrowings limited to the sum of
82% of eligible accounts receivable and the lessor of $1,000,000 or up to
50% of eligible inventory. This credit agreement was terminated prior to
October 1999.
In October 1999, in connection with the Company's acquisition of CWI, the
Company entered into a new revolving line of credit agreement with
BancAmerica which provides for borrowings of up to a maximum of $20
million, with such borrowings limited to the sum of 85% of eligible
accounts receivable and the lessor of $7,500,000 or up to 60% of eligible
inventory.
Borrowings under the revised credit agreement bear interest at the prime
rate plus one quarter percent (.25%) per annum. The revised credit
agreement requires the Company to meet a maximum cash loss level, as
defined by the agreement. The Company was in violation of the debt
covenants as of December 31, 1999 and as a result the interest rate was
raised to prime plus 2.5% per annum. Borrowings under the new revolving
line of credit as of December 31, 1999 were $12,699,000. Available
borrowings under the new revolving line of credit as of December 31, 1999
were $0. The Company is currently in violation of certain financial and
other covenants of the facility and is negotiating with BancAmerica in an
effort to secure BancAmerica's agreement to forbear from asserting any of
its rights based on these violations.
F-12
<PAGE> 55
(7) Long-Term Debt-
<TABLE>
<CAPTION>
1999
----------
<S> <C>
Note payable, due October 2004, 12% interest payable on a
monthly basis $ 853,000
Term loan, due March 2002, prime rate plus .5%, payable in
monthly installments of $41,667 1,292,000
----------
2,145,000
Less- Current Maturities 500,000
----------
Total Long-Term Debt $1,645,000
==========
</TABLE>
The Company had no long-term debt as of December 31, 1998.
The note payable and the term loan are collateralized by substantially all
of the assets of the Company. The term loan is guaranteed by the former CWI
shareholders.
In connection with the note payable due October 2004, the Company is
required to maintain a certain level of tangible net worth, debt service
coverage, and is prohibited from paying dividends or incurring additional
indebtedness. The Company was in violation of debt covenants as of December
31, 1999 and is seeking a waiver of these covenants for the period ending
December 31, 1999. The lender has indicated its intent to grant the Company
a limited waiver with respect to its covenant defaults. However, the lender
has indicated that it will impose certain conditions with respect to this
waiver and will limit the time for which this waiver is applicable.
The term loan requires that the Company maintain certain covenants which it
is in violation of as of December 31, 1999. The Company has received a
waiver of these covenants for the period ending December 31, 1999.
In connection with the acquisition of CWI on October 29, 1999, the Company
issued $5,152,000 of convertible subordinated notes to fund the
acquisition. These notes were converted to 1,288,100 shares of common stock
on December 31, 1999 (Note 4).
(8) Income Taxes-
Based on recurring net operating losses and certain other factors, a
valuation allowance has been recorded against the entire amount of the net
deferred tax assets. Any tax benefit that is realized in subsequent years
from the utilization of deferred tax assets will be recorded as a reduction
of future income tax provisions.
Components of the deferred income taxes are as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Current Deferred Tax Assets:
Inventory Reserves $ 581,000 $ 238,000
Bad Debt Reserves 710,000 705,000
Accrued Employee Costs 74,000 18,000
Other 2,000 7,000
----------- -----------
Total Current Deferred Tax Assets 1,367,000 968,000
Current Valuation Allowance (1,367,000) (968,000)
----------- -----------
Net Current Deferred Taxes $ -- $ --
=========== ===========
</TABLE>
F-13
<PAGE> 56
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Noncurrent Deferred Tax Assets (Liabilities):
Property and Equipment $ (66,000) $ (5,000)
Operating Loss Carryforwards 4,754,000 2,437,000
----------- -----------
Total Noncurrent Deferred Tax Assets 4,688,000 2,432,000
----------- -----------
Noncurrent Valuation Allowance (4,688,000) (2,432,000)
----------- -----------
Net Noncurrent Deferred Tax Assets $ -- $ --
=========== ===========
</TABLE>
The Company has net operating loss carryforwards of $11,446,000 for Federal
purposes and $8,144,000 for state purposes which expire at various dates
beginning in 2012. The Company has provided full valuation allowances on
these carryforwards due to the recurring, significant losses in recent
years.
The following summarizes the differences between the income tax (benefit)
expense and the amount computed by applying the Federal income tax rate of
34% to loss before income taxes:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Federal Income Tax at Statutory Rate $(1,920,000) $ (941,000) $(1,966,000)
State Income Tax, Net of Federal Tax Benefit (327,000) (50,000) (338,000)
Valuation Allowance 2,247,000 991,000 2,638,000
----------- ----------- -----------
Income Tax Expense $ -- $ -- $ 334,000
=========== =========== ===========
</TABLE>
(9) Preferred Stock-
The Company has 1,000,000 authorized shares of $0.01 par value preferred
stock. No preferred shares were outstanding as of December 31, 1999.
(10) Common Stock and Warrants-
On November 18, 1997, the Company declared the payment of a dividend to its
shareholders in the form of a warrant to purchase Common Stock of the
Company. Record owners of Common Stock as of December 10, 1997, received
one warrant for every two shares of Common Stock held. Each warrant
entitles the holder to purchase one share of Common Stock at $4.00 per
share for a three-year period, subject to adjustment in certain
circumstances. The warrants are redeemable by the Company, upon notice of
not less than 30 days at $.10 per warrant in the event the closing bid
quotation of the Common Stock on all 20 of the trading days ending on the
third day prior to the day on which the Company gives notice has been at
least $7.00 per share; provided however that no such right of redemption or
exercise shall exist prior to the time that such shares of Common Stock
underlying the warrants have been registered under the Securities Act of
1933, as amended. The former President of the Company has agreed to waive
his rights to receive 946,219 warrant dividends on the 1,892,438 shares of
Common Stock held by him. The warrants were valued at a total of $1,983,000
(based on the Black-Scholes Model), which had no impact on the Company's
results of operations for the year ended December 31, 1997. In December
1998, the shareholders agreed to the repricing of these warrants' exercise
price from $4.00 to $1.00.
In November 1998, the Company completed a $1,500,000 private placement
offering of unsecured, subordinated convertible notes bearing interest at
2% (the "Notes"). The Notes were convertible at the option of the Company
with shareholder approval, into 1,500,000 units. Each unit consisted of one
share of common stock plus one warrant to purchase two-thirds of a share of
common stock at an exercise price of $1 per share. The conversion of the
Notes was approved on December 30, 1998
F-14
<PAGE> 57
and the Company exercised its option to convert the Notes into 1,500,000
shares and warrants to purchase 1,000,000 shares. In March 1999, 998,992 of
these warrants were exercised.
In November 1998, the Company also declared the payment of a dividend to
its shareholders in the form of warrants to purchase common stock of the
Company. Existing shareholders of record as of February 16, 1999 (other
than the former President and Chairman and the investor group of the
November 1998 private placement offering) received an additional warrant to
purchase one share at $1 per share, for every two shares held. This new
warrant will be redeemable by the Company if its common stock trades for a
defined period above $2.00 per share. The repricing of the existing
warrants and issuance of the new warrants was ratified by the shareholders
on December 30, 1998. The warrants were valued at a total of $2,044,000
(based on the Black-Scholes Model), which had no impact on the Company's
results of operations for the year ended December 31, 1998.
In connection with the acquisition of CWI (Note 4) and the conversion of
the subordinated notes utilized to finance the cash portion of the
transaction, the Company granted 644,050 warrants to the holders of the
Notes. The Company also granted 150,000 warrants to the holders of
$1,000,000 in subordinated notes which were utilized to finance the
remaining cash portion of the CWI acquisition.
In October 1999, the Board of Directors approved the repricing of certain
warrants sold to the underwriter of the Company's initial public offering
in December 1996. These warrants to purchase 200,000 shares of common stock
at an exercise price of $5.50 per share were repriced to $3 per share.
The table below summarizes the transactions related to the Company's
warrants to purchase common stock:
<TABLE>
<CAPTION>
Weighted-Average
----------------------------
Number of Exercise
Warrants Price
------------ ------------
<S> <C> <C>
Warrants Declared at December 17, 1996 215,000 $ 3.14
------------ ------------
Balance at December 31, 1996 215,000 3.14
Warrants Declared at December 10, 1997 1,261,732 1.00
------------ ------------
Balance at December 31, 1997 1,476,732 1.31
Warrants Declared at November 30, 1998 2,453,570 1.00
------------ ------------
Balance at December 31, 1998 3,930,302 1.12
Warrants Exercised on March 15, 1999 (998,992) 1.00
Warrants Declared at April 1, 1999 146,764 1.50
Warrants Declared at May 19, 1999 20,000 4.14
Warrants Declared at October 29, 1999 150,000 5.55
Warrants Declared at December 31, 1999 644,050 4.00
------------ ------------
Balance at December 31, 1999 3,892,125 $ 1.81
============ ============
</TABLE>
All warrants are exercisable as of December 31, 1999.
(11) Stock Option Plans-
The Company has two stock option plans (the "1996 Plan" and the "1998
Plan", the "Plans"), pursuant to which as amended, options to purchase up
to 1,500,000 shares, cumulatively, of common stock may be granted as either
incentive stock options ("ISOs") under the Internal Revenue Code of 1986,
as amended, or nonqualified stock options. ISOs may be granted under the
Plans to employees and officers of the Company. Nonqualified stock options
may be granted to consultants, directors (whether or not they are
employees), employees or officers of the Company. The Plans are
administered by a committee of the Board of Directors which, within the
limitations of the Plans, determine the persons to whom options will be
granted, the number of shares to be covered by each option, whether the
options are intended to be ISOs, the duration and rate of exercise of each
option,
F-15
<PAGE> 58
the exercise price and manner of exercise, and the time, manner and form of
payment upon exercise of an option. Options granted under the Plans may not
be granted at a price less than the fair market value of the common stock
on the date of grant and will expire not more than ten years from the date
of grant.
The Company applies APB No. 25 and related interpretations in accounting
for its options. Under APB No. 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying
stock on the measurement date, no compensation cost is recorded.
The Company has adopted Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation ("SFAS No. 123"), which
established a fair value method of accounting for stock-based compensation
plans. In accordance with SFAS No. 123, the Company has chosen to continue
to account for stock-based compensation utilizing the intrinsic value
method prescribed in Accounting Principles Board ("APB") Opinion No. 25.
Accordingly, compensation cost for stock options is measured as the excess,
if any, of the fair market price of the Company's stock at the date of
grant over the amount an employee must pay to acquire the stock. Also, in
accordance with SFAS No. 123, the Company has provided footnote disclosure
with respect to stock-based employee compensation. The cost of stock-based
employee compensation is measured at the grant date based on the value of
the award and recognizes this cost over the service period. The value of
the stock-based award is determined using a pricing model whereby
compensation cost is the excess of the fair market value of the stock as
determined by the model at grant date or other measurement date over the
amount an employee must pay to acquire the stock.
In connection with the November 1998 private placement of Notes, the
Company agreed to cancel 100,000 options with an exercise price of $3.81
granted to an outside director in March 1998 and reissue 100,000 options to
the same director at an exercise price of $1.00 per share. In addition, the
Company agreed to reprice 100,000 options with an exercise price of $3.81
per share granted in March 1998 to an outside director from $3.81 per share
to $1.00 per share. Also, upon closing of the private placement, the
Company paid $50,000 and cancelled 100,000 options granted to a financial
advisor in March 1998 and replaced the cancelled options with 150,000
warrants with an exercise price of $1.00 per share.
In connection with the private placement, the Company granted 200,000
options each to (1) a new member of the executive management team, (2) a
new member of the Board of Directors, and (3) an individual as a finders
fee for identifying investors for the Notes offering. These options had an
exercise price of $1.00 per share and were issued outside of the Plans. The
Company recognized $135,000 of noncash compensation for the options granted
to the outside director which vested during 1998.
SFAS No. 123, requires the Company to provide pro forma information
regarding net income and earnings per share as if compensation cost for the
Company's stock option plans had been determined in accordance with the
fair value based method prescribed in SFAS No. 123. The Company estimates
the fair value of each stock option at the grant date by using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1999: dividend yield of 0 percent; expected
volatility of 174 percent; risk-free interest rate of 5.44 percent; and
expected lives of 2 years, and for grants in 1998: dividend yield of 0
percent; expected volatility of 180 percent; risk-free interest rate of 4.4
percent; and expected lives of 2 years and for grants in 1997: dividend
yield of 0 percent; expected volatility of 17 percent; risk-free interest
rate of 5.7 percent; and expected lives of 2 years.
F-16
<PAGE> 59
Had compensation cost for the Company's stock option grants to employees
been determined based on the fair value at the grant date consistent with
the method of SFAS No. 123. The Company's net loss and loss per share for
1999, 1998 and 1997 would have been increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net Loss
As Reported $ (5,646,000) $ (2,769,000) $ (6,116,000)
Pro Forma $ (6,450,000) $ (4,841,000) $ (6,348,413)
Basic Loss Per Share
As Reported $ (0.77) $ (0.63) $ (1.39)
Pro Forma $ (0.88) $ (1.09) $ (1.44)
Diluted Loss Per Share
As Reported $ (0.77) $ (0.63) $ (1.39)
Pro Forma $ (0.88) $ (1.09) $ (1.44)
</TABLE>
Due to the fact that the Company's stock option programs vest over many
years and additional awards are made each year, the above pro forma numbers
are not indicative of the financial impact had the disclosure provisions of
SFAS No. 123 been applicable to all years of previous option grants.
Option valuation models require the input of highly subjective assumptions.
Because the Company's stock options have characteristics significantly
different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing model does not necessarily provide a
reliable single measure of the fair value of its stock options.
During the last three years, changes in shares subject to issuance under
stock options were as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- ---------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Stock Options with Exercise Price
Less Than $3:
Outstanding at Beginning of Year 1,000,000 $ 0.93 -- $ -- -- $ --
Granted -- -- 1,000,000 -- -- --
Exercised (100,000) 0.69 -- -- -- --
Forfeited or Cancelled -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Outstanding at End of Year 900,000 $ 0.95 1,000,000 $ 1.00 -- $ --
------------ ------------ ------------ ------------ ------------ ------------
Exercisable at End of Year 794,053 $ 0.98 700,000 $ 1.00 -- $ --
------------ ------------ ------------ ------------ ------------ ------------
Stock Options with Exercise Price
Equal to or Greater Than $3:
Outstanding at Beginning of Year 156,750 $ 5.04 344,750 $ 5.74 345,750 $ 5.02
Granted 755,000 4.13 200,000 3.81 102,000 7.45
Exercised -- -- -- -- -- --
Forfeited Or Cancelled (68,500) 5.01 (388,000) 5.03 (103,000) 5.00
------------ ------------ ------------ ------------ ------------ ------------
Outstanding at End of Year 843,250 $ 4.05 156,750 $ 5.04 344,750 $ 5.74
------------ ------------ ------------ ------------ ------------ ------------
Exercisable at End of Year 123,250 $ 4.82 104,500 $ 5.03 138,583 $ 5.01
------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
F-17
<PAGE> 60
At December 31, 1999, 1998 and 1997 there were 365,250, 508,250 and 115,250
options to purchase common stock of the Company available for grant under
the plans, respectively.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------- -----------------------------
Number Weighted Weighted Number Weighted
Outstanding at Average Average Outstanding at Average
December 31, Remaining Exercise December 31, Exercise
1999 Life Price 1999 Price
----------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
$0.38 to $1.00 900,000 7.3 $ 0.95 794,053 $ 0.98
$1.01 to $3.50 275,000 4.1 3.00 15,000 3.00
$3.51 to $5.00 398,250 4.2 4.31 88,250 5.00
$5.01 to $6.00 170,000 4.8 5.10 20,000 5.41
----------- ------------- ------------- ------------- -------------
1,743,250 5.9 $ 2.45 917,303 $ 1.50
----------- ------------- ------------- ------------- -------------
</TABLE>
(12) Leases-
Certain office, warehouse facilities, and computer equipment are leased
under noncancelable operating leases expiring on various dates through the
year 2008. Rental expense was $219,000, $202,000 and $124,000 in 1999, 1998
and 1997, respectively.
Minimum lease obligations under noncancelable operating leases are as
follows:
<TABLE>
<S> <C>
2000 $962,000
2001 719,000
2002 516,000
2003 396,000
2004 396,000
</TABLE>
The Company subleased approximately one-third of one of the aforementioned
leases for $6,700 per month through January 31, 2001 to a third party.
(13) Major Customers-
For the year ended December 31, 1997, one customer accounted for
approximately 12% of net sales. For the years ended December 31, 1999 and
1998, the Company did not have a single customer account for more than 10%
of net sales.
(14) Earnings Per Share-
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"). The standard requires the disclosure of two earnings per share
amounts--"basic earnings per share of common stock" and "diluted earnings
per share of common stock." The computation of diluted earnings per share
is similar to the Company's previous computation of "earnings per share of
common stock."
Basic earnings per share of common stock is computed by dividing net
earnings from operations by the weighted average number of common shares
outstanding during the period. Diluted earnings per share of common stock
is computed by dividing the net earnings from operations by the average
number of common shares and common share equivalents related to the assumed
exercise of stock options and warrants.
F-18
<PAGE> 61
The following shares were used to calculate basic and diluted earnings per
share:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Average Shares of Common Stock Outstanding 7,365,143 4,420,012 4,451,182
Incremental Shares Applicable to Common Stock Options and
Warrants -- -- --
--------- --------- ---------
Average Common Shares Adjusted 7,365,143 4,420,012 4,451,182
========= ========= =========
</TABLE>
The shares outstanding used to compute diluted earnings per share for 1999,
1998 and 1997 excluded outstanding options and warrants to purchase
5,635,375, 5,087,052, 1,821,482 shares of common stock, respectively, at a
weighted average exercise price of $2.01, $1.21, and $2.15, respectively.
The options and warrants were excluded because their inclusion in the
computation would have been antidilutive due to the operating losses
incurred in each of the respective years.
(15) Related Party Transactions-
During the years ended December 31, 1999, 1998 and 1997, the Company sold
$0, $317,000 and $254,000, respectively, of products to Cellular
Specialists, a company controlled by the brother of the largest shareholder
and former President and Chairman.
During the years ended December 31, 1999, 1998 and 1997, the Company sold
$1,454,000, $1,577,000, and $1,455,000, respectively, of products to
Digicell, a company controlled by two cousins of the largest shareholder
and former President and Chairman. On December 31, 1999, the Company was
owed $277,000 by Digicell. In addition, the Company purchased product from
Digicell. For the years ended December 31, 1999, 1998 and 1997, the Company
purchased $172,000, $817,000 and $299,000, respectively, from Digicell.
On December 31, 1999, the Company was owed $300,000 by Continental
Communications ("CMT"), a company owned by major shareholders of the
Company, for product and services sold by CWI to CMT prior to the
acquisition of CWI by the Company. Two hundred thousand dollars of this
balance was paid subsequent to year end. In addition, the Company purchases
product from CMT. For the year ended December 31, 1999, the Company
purchased $40,000 of product from CMT.
On December 31, 1999, the Company was owed $155,000 by Leavitt
Communication, a company owned by a major shareholder, for product and
services sold by CWI to Leavitt prior to the acquisition of CWI by the
Company. In addition, the Company purchases product from Leavitt. For the
year ended December 31, 1999, the Company purchased $633,000 of product
from Leavitt. On December 31, 1999, the Company owed $244,000 to Leavitt.
In November 1999, the Company entered into a lease with a partnership that
includes major shareholders. Rental expense was $66,000 in 1999. The lease
calls for a monthly payment of approximately $33,000 through the year 2008.
In November 1999, the Company subleased a portion of its Lincolnshire
facility to both CMT and Leavitt for a total monthly payment of $11,600. In
addition to the rent for the facility, the Company charges CMT and Leavitt
a monthly management fee, covering shared services for technology support,
accounting and administrative activities, of approximately $30,000. The
total management fees received by the Company for the period October 31,
1999 through December 31, 1999 was approximately $60,000.
F-19
<PAGE> 62
(16) Supplier/Customer Transactions-
Due to the limited supply of merchandise and the nature of the competitive
environment, the Company may purchase and sell inventory from/to the same
supplier/customer. These types of same supplier/customer transactions are
often at low gross profit margins. Such transactions are included in sales
and amounted to approximately $8,543,000, $8,957,000 and $1,900,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.
(17) Concentration of Suppliers-
The Company is dependent on third-party equipment manufacturers and
distributors for all of its supply of cellular telephones and accessories.
For the years ended December 31, 1999, 1998 and 1997, the Company's four
largest suppliers accounted for approximately 46%, 41% and 44% of
purchases, respectively. Such manufacturers and distributors may at any
time impose price increases or otherwise determine not to continue to sell
product to the Company on commercially reasonable terms, or at all. A
change in suppliers could cause a delay in the supply of product and a
possible loss of sales, which may adversely affect the Company's operating
results. Although there are a limited number of suppliers, management
believes other suppliers could provide sufficient quantities of products on
commercially reasonable terms.
(18) Termination Agreement-
On April 21, 1999, the Company entered into an agreement with the then
Chairman and President of the Company in which he resigned and terminated
his employment agreement with the Company. The agreement as amended
specified that the Company pay a lump sum of $250,000 to him and make 15
monthly payments of $14,583. In addition, the Company agreed to privately
sell 146,764 shares of common stock held by him. The total expense for the
termination was approximately $1,020,000 and recorded as a component of
selling, general and administrative expense.
The Chairman and President agreed to certain limitations on public sales of
the balance of his shares of the Company stock.
F-20
<PAGE> 63
Schedule II--Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Additions
-----------------------------
Balance at
the Charged to Charged to Balance at
Beginning Cost and Other the End of
Description of Period Expenses Accounts Deductions the Period
----------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
For the year ended December 31, 1999:
Allowance for doubtful accounts
receivable $ 251,000 $ 351,000 $ 398,000 (a) $ -- $ 1,000,000
Allowance for doubtful notes
receivables 1,521,000 -- -- 717,000 804,000
Reserve for inventory
obsolescence 592,000 67,000 651,000 (a) -- 1,310,000
For the year ended December 31, 1998:
Allowance for doubtful accounts
receivable 2,697,000 162,000 (859,000)(b) 1,749,000(c) 251,000
Allowance for doubtful notes
receivables 739,000 -- 859,000 (b) 77,000(d) 1,521,000
Reserve for inventory
obsolescence 550,000 190,000 -- 148,000(e) 592,000
For the year ended December 31, 1997:
Allowance for doubtful accounts
receivable 428,000 2,888,000 -- 619,000(c) 2,697,000
Allowance for doubtful notes
receivable -- 739,000 -- -- 739,000
Reserve for inventory
obsolescence 442,000 607,000 -- 499,000(e) 550,000
</TABLE>
(a) Represents acquired reserves recorded on CWI Balance Sheet as of the
acquisition date on October 29, 1999.
(b) Reclassification of reserve
(c) Accounts written off
(d) Includes accounts collected of $54,000 and accounts written off of
$23,000
(e) Inventory written off
F-21
<PAGE> 64
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
3.1 Certificate of Incorporation. (1)
3.2 Certificate of Merger and Plan and Agreement of Merger, between
Cellular Telecom Corporation, a California corporation, and the
Registrant. (1)
3.3 Bylaws. (1)
4.1 Specimen form of Common Stock Certificate. (2)
4.2 Form of Representative's Warrant Agreement. (2)
4.3 Form of Warrant issued as a dividend to Common Stockholders of
Registrant. (3)
4.4 Warrant Agreement, between the Company and Continental Stock
Transfer Trust Company, as Warrant Agent dated December 17, 1997.
(3)
4.5 Form of Warrant issued by the Company to Investors in Ben Neman
Sale of Common Stock. (7)
10.1 Form of 1996 Stock Option Plan of Registrant. (1)
10.2 Form of Employment Agreement between the Registrant and Ben
Neman, dated November 9, 1998. (1)
10.3 Form of Employment Agreement between the Registrant and James E.
Bunting. (1)
10.4 1998 Stock Option Plan. (5)
10.5 Credit Facility and Security Agreement, dated June 18, 1996, by
and between the Registrant and CIT Group/Credit Finance, Inc. and
related documents. (1)
10.6 Form of Employment Agreement between the Registrant and John C.
Snyder II, dated April 30, 1997. (4)
10.7 Lease Agreement between the Company and Northpark Industrial,
dated December 22, 1997. (4)
10.8 Lease Agreement between the Company and AMB Industrial Income
Fund, Inc., dated July 18, 1997. (4)
10.9 Loan and Security Agreement, dated January 12, 1998, by and
between the Registrant and BancAmerica Business Credit Inc. (4)
10.10 Form of Amendment to Loan and Security Agreement referred to in
Exhibit 10.9. (4)
10.11 Amendment No. 3. to Loan and Security Agreement referred to in
Exhibit 10.9. (5)
10.12 Amendment No.4 to Loan and Security Agreement referred to in
Exhibit 10.9. (5)
10.13 Amendment No. 5 to Loan and Security Agreement referred to in
Exhibit 10.9. (5)
10.14 Termination Agreement and Mutual General Release to Loan and
Security Agreement referred to in Exhibit 10.9. (5)
10.15 Redeemable Warrant to Purchase Common Stock dated November 19,
1998 between the Registrant and members of the Investor Group.
(5)
10.16 Employment Agreement between the Registrant and Ben Neman, dated
November 25, 1998. (5)
10.17 Assignment of lease to Cellular Wholesalers, Inc of Lease
Agreement referred to in Exhibit 10.8. (5)
10.18 Employment Agreement between the Registrant and Michael King,
dated January 8, 1999. (5)
10.19 Employment Agreement between the Registrant and Michael Hedge,
dated January 29, 1999. (5)
10.20 Registration Rights Agreement dated November 19, 1998 between the
Registrant and the Investor Group. (5)
</TABLE>
<PAGE> 65
<TABLE>
<S> <C>
10.21 Subordinated Convertible Note dated November 19, 1998 between the
Registrant and members of the Investor Group in the Company's
November 1998 private placement. (5)
10.22 Agreement Regarding Termination of Employment for Ben Neman dated
as of April 21, 1999. (6)
10.23 Amendment to Agreement Regarding Termination of Employment for
Ben Neman dated as of April 30, 1999. (6)
10.24 Agreement between the Company and NationsCredit dated as of May
19, 1999. (7)
10.25 Employment Agreement between Mark Fruehan and the Company dated
as of May 1, 1999. (7)
10.26 Agreement to Merge with Cellular Wholesalers, Inc. dated as of
July 23, 1999. (8)
10.27 Amended and Restated Agreement to Merge with Cellular
Wholesalers, Inc. dated as of July 23, 1999. (9)
*10.28 Agreement dated October 2, 1999 between the Company and Ben
Neman.
*10.29 Agreement dated October 2, 1999 among the Company, Cellular
Specialists and Bob Neman.
*10.30 Agreement dated March 8, 2000 among the Company, Intellicell
Merger Sub, Inc., Ronald Goldberg, Philip Leavitt, Sherwin
Geitner, Cary Maimon and Melvyn Cohen.
*23.1 Consent of Arthur Andersen LLP
*27. Financial Data Schedule.
</TABLE>
- ----------------------------
* File herewith.
(1) Incorporated by reference to Registrant's Form S-1 Registration Statement
filed with the Commission on November 4, 1996.
(2) Incorporated by reference to Registrants Amendment No. 1 to Form S-1
Registration Statement filed with the Commission on December 9, 1996.
(3) Incorporated by reference to Registrant's Form 8-A Registration Statement
filed with the Commission on December 5, 1997.
(4) Incorporated by reference to Registrant's Form 10-K filed with the
Commission on April 15, 1998.
(5) Incorporated by reference to Registrant's Form 10-K filed with the
Commission on March 30. 1999.
(6) Incorporated by reference to Registrant's Form 10-Q filed with the
Commission on May 17, 1999.
(7) Incorporated by reference to Registrant's Form 10-Q filed with the
Commission on August 16, 1999.
(8) Incorporated by reference to Registrant's Form 8-K filed with the
Commission on August 6, 1999.
(9) Incorporated by reference to Registrant's Form 8-K filed with the
Commission on August 26, 1999.
<PAGE> 1
EXHIBIT 10.28
AGREEMENT
This Agreement, dated as of October 2, 1999 is made by and between
Focus Affiliates, which was formerly known as Intellicell Corp. ("Focus"), and
Ben Neman, with reference to the following facts:
A. Ben Neman and Focus entered into an Agreement, dated as of April 21,
1999, which was amended by Ben Neman and Focus as of April 30, 1999 (the
"Settlement Agreement").
B. Focus has sold merchandise to Cellular Specialists ("CS") for which
Focus asserts that there is an unpaid balance owing to Focus of $109,320 (the
"CS Unpaid Balance") and that CS is delinquent in paying the CS Unpaid Balance.
C. As of April 21, 1999 Ben Neman held options to purchase 12,000
shares of Focus common stock at $5.50 per share (the "Ben Neman Options").
D. On October 31, 1996, Focus granted Bob Neman an option to purchase
35,000 shares of Focus common stock at $5.00 per share (the "Bob Neman Options")
pursuant to a NonQualified Stock Option Agreement dated as of October 31, 1996,
and none of the Bob Neman Options have been exercised to date.
E. Ben Neman has informally asserted certain claims (the "Reputational
Claims") against Focus and certain of its officers in connection with a
newspaper article that appeared in The Daily News on May 5, 1999 and various
alleged oral representations concerning Mr. Neman's performance as an officer
and director of Focus made by Focus through these officers to third parties.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, the parties to this Agreement hereby agree as follows:
1. Payment to Neman.
Focus will make 15 monthly payments to Ben Neman of $14,583.33, each
commencing on November 1, 1999. These payments will discharge in full Focus's
obligation to make any further payments to Ben Neman under paragraph 3(b) of the
Settlement Agreement. All other provisions of the Settlement Agreement will
remain in full force and effect. Focus shall issue Ben Neman a Form 1099 at the
end of each year for the dollar amounts actually received by him from Focus in
that year.
2. Discharge of CS Unpaid Balance. Pursuant to a separate agreement
between CS and Bob Neman, on the one hand, and Focus, on the other hand, CS and
Bob Neman shall have no further obligation to pay any amounts to Focus for the
CS Unpaid Balance, which will be assigned in full to Ben Neman pursuant to this
Agreement. Bob
1
<PAGE> 2
Neman hereby releases and discharges Focus and its officers, directors,
shareholders, attorneys and other representatives from and against any claims or
damages that they may have in connection with their purchase of merchandise from
or sale of merchandise to Focus.
3. Stock Options. Ben Neman and Focus hereby acknowledge and agree that
the Ben Neman Options have expired. Bob Neman hereby acknowledges and agrees
that the Bob Neman Options are hereby cancelled.
4. Release of Reputational Claims. Ben Neman hereby agrees to waive and
release and discharge Focus and all of its officers, directors, shareholders,
attorneys and other representatives from and against any and all of the
Reputational Claims and to not assert any of these claims against Focus or any
of its officers, directors, shareholders, attorneys or other representatives.
5. Written Consent. Ben Neman hereby waives any appraisal rights he may
have in connection with Focus's acquisition of CWI, which was approved by
Focus's stockholders at its September 29, 1999 Annual Meeting of Stockholders.
Upon signing this Agreement, Ben Neman will sign a Written Consent of
Stockholders in the form attached hereto as Exhibit A.
6. Representations and Warranties.
(a) Independent Legal Advice. Each party to this Agreement
represents, warrants and agrees that he or it has received independent legal
advice from his or its attorneys with respect to the advisability of executing
this Agreement.
(b) No Other Representation. Each party to this Agreement
represents, warrants and agrees that, in executing this Agreement, he or it has
relied solely on the statements expressly set forth within this Agreement. Each
party to this Agreement further represents, warrants and agrees that, in
executing this Agreement, he or it has placed no reliance whatsoever on any
statement, representation or promise of any other party, or any other person or
entity, that is not expressly set forth within this Agreement, or upon the
failure of any other party, or any other person or entity, to make any
statement, representation or disclosure of anything whatsoever.
(c) Authority. Each party to this Agreement represents, warrants and
agrees that he or it has the full right, power and authority to execute this
Agreement and that the person executing this Agreement on his or its behalf has
the full right, power and authority to commit and to bind that party fully to
the terms of this Agreement.
7. General.
(a) California Law Governs. This Agreement shall be construed and
enforced in accordance with, and governed by, the internal, substantive laws of
the State of California. Any lawsuits filed to enforce any provision of this
Agreement by any party hereto shall be filed in the Superior Court for the State
of California, County of Los Angeles.
2
<PAGE> 3
(b) Litigation Fees. The prevailing party in any litigation with
respect to this Agreement will be entitled to recover his or its reasonable
attorneys fees and costs.
(c) No Presumption From Drafting. This Agreement has been negotiated
at arm's-length between persons knowledgeable in the matters set forth within
this Agreement. Accordingly, given that all parties have had the opportunity to
draft, review and/or edit the language of this Agreement, no presumption for or
against any party arising out of drafting all or any part of this Agreement will
be applied in any action relating to, connected with or involving this
Agreement. In particular, any rule of law, including, but not limited to,
Section 1654 of the California Civil Code Section, or any other statutes, legal
decisions, or common law principles of similar effect, that would require
interpretation of any ambiguities in this Agreement against the party that has
drafted it, is of no application and is hereby expressly waived. The provisions
of this Agreement shall be interpreted in a reasonable manner to effect the
intentions of the parties.
IN WITNESS WHEREOF, the parties to this Agreement have approved and
executed this Agreement as of the date set forth above.
/s/ Ben Neman
----------------------------------------
Ben Neman
Focus Affiliates, Inc.
By: /s/ David Kane
-------------------------------------
Its: Chief Financial Officer
------------------------------------
3
<PAGE> 4
EXHIBIT A
ACTION BY WRITTEN CONSENT OF STOCKHOLDERS
OF A MAJORITY OF OUTSTANDING SHARES
OF FOCUS CORP.
November 3, 1999
Pursuant to the applicable provisions of the Delaware Corporation Law
and the Bylaws of Focus Corp. (the "Corporation"), the undersigned stockholders
(the "Majority Stockholders"), hereby take the following action and adopt the
following preambles and resolutions as if said actions and resolutions were
adopted at a duly constituted meeting of stockholders held on this date:
WHEREAS, the Majority Stockholders hold in the aggregate in excess of
50% of the outstanding shares of the Corporation; and
WHEREAS, the Majority Stockholders desire to approve (a) the
Corporation's offering (the "Offering") of $5,000,000 principal amount
of convertible subordinated notes (the "Notes") and the conversion of
the Notes into shares of the Company's common stock and warrants to
purchase common stock, with the terms of the Offering (including the
terms for conversion of the Notes) to be substantially as set forth in
Exhibit A hereto, with such modifications to such terms as shall be
approved by the Corporation's Board of Directors and which are not, in
the aggregate, materially less favorable to the Corporation than those
set forth in Exhibit A hereto; and (b) the Corporation's financing (the
"Financing") through its issuance to Critical Capital Growth Fund, L.P.
of $1,000,000 principal amount of senior subordinated notes and
warrants to purchase 150,000 shares of the Corporation's common stock,
with the terms of the financing to be substantially as set forth in
Exhibit B hereto, together with such modifications to such terms as
shall be approved by the Corporation's Board of Directors and which are
not, in the aggregate, materially less favorable to the Corporation
than those set forth in Exhibit B hereto;
NOW THEREFORE BE IT RESOLVED, that the Offering (including the terms
for conversion of the Notes) and the Financing and the transactions
contemplated thereunder be and hereby are approved; and
FURTHER RESOLVED, that any officer of the Corporation is hereby
authorized and empowered to prepare, execute and deliver all such
documents and instruments and to take all such actions as he deems
necessary or advisable in order to carry out and perform any or all of
the matters authorized in the foregoing resolutions; and
1
<PAGE> 5
FURTHER RESOLVED, that any and all lawful acts that any officer of the
Corporation has taken, and any and all agreements or other instruments
that any officer of the Corporation has executed on behalf of the
Corporation, up to and including the date hereof, with regard to any of
the transactions or matters authorized by any or all of the foregoing
resolutions, are hereby ratified, confirmed, adopted and approved.
This Action by Written Consent of Majority Stockholders may be signed
in one or more counterparts. The Secretary of the Corporation is hereby
instructed to place the original of this Action by Witness Consent of Majority
Stockholders in the minutes of this Corporation.
Executed as of the 3rd day of November, 1999.
MAJORITY STOCKHOLDERS:
- ---------------------------------- -------------------------------------
Ben Neman Carroll Edwards
- ---------------------------------- -------------------------------------
Meir Abramov Christopher Williams
- ---------------------------------- -------------------------------------
Paul Skjodt Chandler Williams
- ---------------------------------- -------------------------------------
Edward Kowlowitz Cooper Williams
2
<PAGE> 1
EXHIBIT 10.29
AGREEMENT
This Agreement, dated as of October 2, 1999 is made by and between
Focus Affiliates, Inc., which was formerly known as Intellicell Corp. ("Focus"),
Cellular Specialists ("CS") and Bob Neman with reference to the following facts:
A. Focus has sold merchandise to Cellular Specialists ("CS") for which
Focus asserts that there is an unpaid balance owing to Focus of $109,320 (the
"CS Unpaid Balance") and that CS is delinquent in paying the CS Unpaid Balance.
B. On October 31, 1996, Focus granted Bob Neman an option to purchase
35,000 shares of Focus common stock at $5.00 per share (the "Bob Neman Options")
pursuant to a Non-Qualified Stock Option Agreement dated as of October 31, 1996,
and none of the Bob Neman Options have been exercised to date.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, the parties to this Agreement hereby agree as follows:
1. Discharge of CS Unpaid Balance. CS and Bob Neman shall have no
obligation to pay any amounts to Focus for the CS Unpaid Balance, which will be
assigned in full to Ben Neman pursuant to this Agreement. Bob Neman and CS
hereby release and discharge Focus and its officers, directors, shareholders,
attorneys and other representatives from and against any claims or damages that
they may have in connection with their purchase of merchandise from or sale of
merchandise to Intellicell.
2. Stock Options. Bob Neman and Focus hereby acknowledge and agree that
the Bob Neman Options are being cancelled.
3. Representations and Warranties.
(a) Independent Legal Advice. Each party to this Agreement
represents, warrants and agrees that he or it has received independent legal
advice from his or its attorneys with respect to the advisability of executing
this Agreement.
(b) No Other Representation. Each party to this Agreement
represents, warrants and agrees that, in executing this Agreement, he or it has
relied solely on the statements expressly set forth within this Agreement. Each
party to this Agreement further represents, warrants and agrees that, in
executing this Agreement, he or it has placed no reliance whatsoever on any
statement, representation or promise of any other party, or any other person or
entity, that is not expressly set forth within this Agreement, or upon the
failure of any other party, or any other person or entity, to make any
statement, representation or disclosure of anything whatsoever.
(c) Authority. Each party to this Agreement represents, warrants and
agrees that he or it has the full right, power and authority to execute this
Agreement and that the person
<PAGE> 2
executing this Agreement on his or its behalf has the full right, power and
authority to commit and to bind that party fully to the terms of this Agreement.
4. General.
(a) California Law Governs. This Agreement shall be constructed and
enforced in accordance with, and governed by, the internal, substantive laws of
the State of California. Any lawsuits filed to enforce any provisions of this
Agreement by any party hereto shall be filed in the Superior Court for the State
of California, County of Los Angeles.
(b) Litigation Fees. The prevailing party in any litigation with
respect to this Agreement will be entitled to recover his or its reasonable
attorneys fees and costs.
(c) No Presumption From Drafting. This Agreement has been negotiated
at arm's length between persons knowledgeable in the matters set forth within
this Agreement. Accordingly, given that all parties have had the opportunity to
draft, review and or edit the language of this Agreement, no presumption for or
against any party arising out of drafting all or any part of this Agreement will
be applied in any action relating to, connected with or involving this
Agreement. In particular, any rule of law, including, but not limited to,
Section 1654 of the California Civil Code Section, or any other statutes, legal
decisions, or common law principles of similar effect, that would require
interpretation of any ambiguities in this Agreement against the party that has
drafted it, is of no application and is hereby expressly waived. The provisions
of this Agreement shall be interpreted in a reasonable manner to effect the
intentions of the parties.
IN WITNESS WHEREOF, the parties to this Agreement have approved and
executed this Agreement as of the date set forth above.
FOCUS AFFILIATES, INC.
By: /s/ David Kane
-----------------------------------
Its: Chief Financial Officer
----------------------------------
CELLULAR SPECIALISTS
By: /s/ Bob Neman
-----------------------------------
Its: CEO, PRS
----------------------------------
/s/ Bob Neman
--------------------------------------
Bob Neman
<PAGE> 1
EXHIBIT 10.30
AGREEMENT
THIS AGREEMENT ("Agreement"), made this 8th day of March, 2000 by and among
FOCUS AFFILIATES, INC. (formerly known as Intellicell Corp.), a Delaware
corporation ("Focus"), INTELLICELL MERGER SUB, INC., a Delaware corporation
("Merger Sub") (Focus and Merger Sub sometimes individually a "Focus Party" and
collectively referred to herein as the "Focus Parties"), RONALD GOLDBERG
("Goldberg"), PHILIP LEAVITT ("Leavitt"), SHERWIN GEITNER ("Geitner"), CARY
MAIMON ("Maimon") and MELVYN COHEN ("Cohen") (Goldberg, Leavitt, Geitner, Maimon
and Cohen individually a "CWI Stockholder" and collectively referred to herein
as the "CWI Stockholders"):
WITNESSETH:
WHEREAS, Goldberg, Leavitt, Geitner and Maimon were the principal
shareholders of Cellular Wholesalers, Inc. ("CWI") and, along with CWI, entered
into that certain Amended and Restated Agreement and Plan of Merger dated as of
July 23, 1999 with Focus and Merger Sub (the "Merger Agreement")(capitalized
terms not otherwise defined herein shall have the same meaning as in the Merger
Agreement); and
WHEREAS, the parties to this Agreement desire to provide for the
contribution from Goldberg, Leavitt and Geitner (collectively, the "Contributing
CWI Stockholders") of certain Base Shares to the capital of Focus and to provide
for the closing of the escrow that was established pursuant to Section 1.8 of
the Merger Agreement (the "Escrow").
NOW, THEREFORE, for good and valuable consideration as set forth herein,
the parties do hereby agree as follows:
1. ESCROW INSTRUCTIONS. No later than three (3) business days from the date
hereof, Goldberg, Leavitt, Geitner, Cohen and Focus shall (if they have not
already done so) jointly execute and deliver to the Escrow Agent a joint
direction authorizing the release by the Escrow Agent of the $500,000 in
escrowed funds to Focus together with any interest accrued thereon (the
"Escrowed Funds"). The Principal CWI Stockholders shall have no obligation to
pay Focus any other amounts based on the Closing Date Equity pursuant to Section
1.8 of the Merger Agreement, and the Principal CWI Stockholders shall not
receive any Additional Consideration pursuant to Section 1.7 of the Merger
Agreement, irrespective of the Closing Date Equity and the $500,000 reduction in
the Base Consideration effected by this paragraph.
<PAGE> 2
2. CONTRIBUTION OF BASE SHARES. At the Closing (as defined in Section 4 of
this Agreement), each of the Contributing CWI Stockholders shall deliver to
Focus as a contribution to the capital of Focus the number of shares of Focus
stock set forth next to his name (the "Contribution Shares") (to be canceled by
Focus or retained as treasury stock as Focus determines in its discretion):
<TABLE>
<CAPTION>
Contributing
CWI Stockholder Number of Shares
-------------------------- ---------------------------
<S> <C>
Ronald Goldberg 500,000
Philip Leavitt 300,000
Sherwin Geitner 500,000
</TABLE>
3. RIGHT OF TERMINATION. The Agreement may be terminated: (a) at any time
by the mutual written consent of the Focus Parties and the CWI Stockholders; or
(b) by either the Focus Parties upon written notice to the CWI Stockholders or
by the CWI Stockholders upon written notice to Focus, in the event that the
Closing has not occurred within forty-five (45) days from the date of this
Agreement.
4. EQUITY FINANCING. As a condition precedent to the obligations of the CWI
Stockholders and the Focus Parties under this Agreement, Focus shall have
obtained additional equity financing on terms reasonably acceptable to Focus for
at least $3,900,000 (net of costs and commissions) (the "Equity Financing").
Focus shall use its best efforts in obtaining the Equity Financing as soon as
possible subsequent to the date hereof. Concurrently with the completion of the
Equity Financing, the Contributing CWI Stockholders will contribute the
Contribution Shares to the capital of Focus as provided by Section 2 and the
release of claims, covenant not to sue and indemnification provisions set forth
in Sections 5, 6 and 7 shall become effective (the "Closing"). The provisions of
Sections 5, 6 and 7 shall be void and of no effect in the event the Closing does
not occur.
5. RELEASE OF CLAIMS.
5.1 RELEASE BY THE FOCUS PARTIES OF THE CWI STOCKHOLDERS. Effective as
of the Closing, the Focus Parties hereby irrevocably and unconditionally
release, acquit, and forever discharge each of the CWI Stockholders and each of
their heirs, legatees, assigns, agents, representatives and attorneys
(collectively, the "CWI Releasees"), from any and all claims, liabilities,
obligations, promises, agreements, controversies, damages, costs, losses, debts
and expenses (including, but not necessarily limited to, reasonable attorney's
fees and costs actually incurred), of any nature
-2-
<PAGE> 3
whatsoever, known or unknown ("Focus Claim" or "Focus Claims"), which Focus or
Merger Sub now has, owns or holds, or may claim to have, own or hold, against
each or any of the CWI Releasees with respect to (i) the fairness of the
purchase price paid for CWI's assets under the Merger Agreement or this
Agreement and (ii) any of the representations or warranties made by CWI or any
of the CWI Stockholders in Sections 4.1(f) or 4.1(h) of the Merger Agreement or
any other provisions of the Merger Agreement that specifically relate to CWI's
stockholders equity, liquidity, profitability or financial condition or
prospects as of the Closing Date; provided, however, that such release shall not
extend to any other representations, warranties or covenants made by CWI or any
of the CWI Stockholders under the Merger Agreement (including, without
limitation, representations and warranties as to title to CWI's assets and the
absence of litigation and contingent liabilities).
5.2 RELEASE BY THE CWI STOCKHOLDERS OF THE FOCUS PARTIES. Effective as of
the Closing, each of the CWI Stockholders hereby irrevocably and unconditionally
releases, acquits, and forever discharges Focus and Merger Sub, and each of
their predecessors, successors, assigns, agents, directors, officers,
shareholders, employees, representatives, attorneys, subsidiaries and affiliates
(collectively, the "Focus Releasees"), and each of them, from any and all
claims, liabilities, obligations, promises, agreements, controversies, damages,
costs, losses, debts and expenses (including, but not necessarily limited to,
reasonable attorney's fees and costs actually incurred), of any nature
whatsoever, known or unknown ("CWI Claim" or "CWI Claims"), which any of the CWI
Stockholders now has, owns, or holds, or may claim to have, own or hold, against
each or any of the Focus Releasees with respect to (i) the value of the common
stock of Focus or (ii) any of the representations or warranties made by Focus
and Merger Sub in Sections 4.3(g) or 4.3(i) of the Merger Agreement or any other
provision of the Merger Agreement that relate specifically to the stockholders
equity, liquidity, profitability or financial condition or prospects of Focus as
of the Closing Date; provided, however, that such release shall not extend to
any other representations, warranties or covenants made by Focus or Merger Sub
under the Merger Agreement (including without limitation, representations and
warranties as to title to Focus' assets and the absence of litigation and
contingent liabilities).
5.3 EFFECT OF RELEASE. Each of the parties to this Agreement acknowledges
that such party may hereafter discover claims or facts in addition to or
different from those which such party now knows or believes to be true with
respect to the matters released herein, but that it is the intention of each of
the parties to this Agreement to fully, finally, and forever settle and release
all such matters and all claims relative thereto which do exist, may exist, or
have existed. In furtherance of such intention, the releases set forth in this
Agreement shall be and remain in effect as full and
-3-
<PAGE> 4
complete releases regardless of the existence or discovery of any such
additional or different claims or facts.
5.4 NO ASSIGNMENT OF CLAIMS. Each of the parties to this Agreement
represents that such party has not heretofore assigned or transferred, or
purported to assign or transfer, to any person or entity, any CWI Claim or Focus
Claim, as applicable, or any portion thereof or interest therein.
6. COVENANT NOT TO SUE BY THE FOCUS PARTIES. Each of the Focus Parties
hereby agrees not to sue any CWI Releasee(s) relating to any causes of action
that might be alleged to exist at the present time under California Civil Code
Sections 3439 through 3439.12, inclusive, or any state laws similar thereto. All
parties to this Agreement agree that the following facts are true, and that the
provisions of this Section 6 shall permanently survive the Closing, and, to the
extent allowed by law, be binding upon all of the parties and their successors
in interest:
(a) No transfer at any time under the Merger Agreement or any other
agreement to any of the CWI Stockholders by any of the Focus Parties of any
assets, including, but without limitation, money or tangible or intangible
personal property, was made by the transferor without the transferor having
received full or reasonably equivalent value in exchange or in consideration for
said transfer.
(b) Any and all transfers to any of the CWI Stockholders by any of the
Focus Parties of any assets, including, but without limitation, money or
tangible or intangible personal property, were received by the transferees
thereof, including any of the CWI Releasees, in good faith and for a reasonably
equivalent value.
The covenant not to sue and agreed statement of facts contained in this
Section 6 shall in no way limit the rights of the Focus Parties to seek or
obtain indemnification pursuant to Article VIII of the Merger Agreement for the
breach by CWI or any of the CWI Stockholders of any representation, warranty or
covenant contained in the Merger Agreement (except as otherwise specifically
limited by Section 5.1 of this Agreement).
7. INDEMNIFICATION OF THE CWI RELEASEES BY THE FOCUS PARTIES. The Focus
Parties hereby agree to indemnify, save, defend and hold harmless each of the
CWI Releasees from and against any cost or expense (including reasonable
attorneys fees and costs) in defending against any suit or other claim brought
by any creditor of Focus or Merger Sub that alleges that the transactions
consummated pursuant to the Merger Agreement and/or this Agreement constituted a
fraudulent conveyance as against such creditor; provided, however, that the
foregoing indemnification shall not extend to any settlements of the foregoing
claims or judgments entered against any of the CWI
-4-
<PAGE> 5
Releasees based on the foregoing claims, which shall be the sole responsibility
of the CWI Releasees. A claim for indemnification hereunder (an "Indemnification
Claim") shall be made by the CWI Releasees by delivery of a written notice to
the Focus Parties requesting indemnification and specifying the basis on which
indemnification is sought in reasonable detail (and shall include relevant
documentation related to the Indemnification Claim), and such other information
as the CWI Releasees shall have concerning such claim.
Should any claim be made or any suit or proceeding instituted by a third
party against any of the CWI Releasees which would be a matter for which the CWI
Releasees would be entitled to indemnification under this Section 7 (a "Third
Party Claim"), the obligations and liabilities of the parties hereunder with
respect to such Third Party Claim shall be subject to the following terms and
conditions:
7.1 The CWI Releasees shall give the Focus Parties written notice of
any Third Party Claim promptly (and in no event later than 10 days) after
receipt by the CWI Releasees of notice thereof, and the Focus Parties will
undertake control of the defense thereof at the Focus Parties' cost and expense
by counsel of their own choosing reasonably acceptable to the CWI Releasees. The
CWI Releasees may participate in the defense through their own counsel at their
own expense. If the Focus Parties fail or refuse to undertake the defense of
such Third Party Claim within 15 days after written notice of such claim has
been delivered to the Focus Parties by the CWI Releasees, the CWI Releasees
shall have the right to undertake the defense of such Third Party Claim with
counsel of their own choosing. Failure of the CWI Releasees to furnish written
notice to the Focus Parties of a Third Party Claim shall not release Focus
Parties from the Focus Parties's obligations hereunder, except to the extent the
Focus Parties are prejudiced by such failure.
7.2 The CWI Releasees and the Focus Parties shall cooperate with each
other in all reasonable respects in connection with the defense of any Third
Party Claim, including making available records relating to such claim and
furnishing employees of the CWI Releasees as may be reasonably necessary for the
preparation of the defense of any such Third Party Claim or for testimony as
witnesses in any proceeding relating to such claim. The CWI Releasees may settle
any Third Party Claim without the consent of Focus Parties, provided that such
settlement does not require any payment by or impose any obligation upon the
Focus Parties. The Focus Parties shall not settle any Third Party Claim without
the consent of the CWI Releasees unless they undertake payment responsibility
for such claim.
-5-
<PAGE> 6
8. REPRESENTATIONS AND WARRANTIES OF THE FOCUS PARTIES. Each Focus Party
hereby represents, warrants and covenants to each CWI Stockholder that:
8.1 Neither the execution nor the delivery of this Agreement, the
incurrence of the obligations herein set forth, the consummation of the
transactions herein contemplated, nor the compliance with the terms of this
Agreement will conflict with, or result in a breach of, any of the terms,
conditions, or provisions of, or constitute a default under, any bond, note, or
other evidence of indebtedness or any contract, indenture, mortgage, deed of
trust, loan agreement, lease, or other agreement or instrument to which Focus
and/or Merger Sub is a party or by which Focus and/or Merger Sub may be bound.
8.2 Each Focus Party has the full and complete right, power, legal
capacity, and authority to execute and enter into this Agreement and to execute
all other documents and perform all other acts as may be necessary in connection
with the performance of this Agreement. In particular, and not by way of
limitation, the Focus Parties represent and warrant that all necessary corporate
actions and proceedings of their respective Boards of Directors to approve and
adopt this Agreement and to authorize the execution and delivery of this
Agreement have been duly and validly taken and that Michael Hedge is authorized
to execute this Agreement on behalf of Focus, as its Chief Executive Officer,
and on behalf of Merger Sub, as its Chief Executive Officer, and John Swinehart
is authorized to execute this Agreement on behalf of Focus, as its Chairman of
the Board, and on behalf of Merger Sub, as its Chairman of the Board.
8.3 No approval or consent not heretofore obtained by any person or
entity is necessary in connection with the execution of this Agreement by either
Focus Party or the performance of such party's obligations under this Agreement.
8.4 Each Focus Party has received independent tax and legal advice
from accountants, attorneys or other advisors of its choice with respect to the
advisability of executing this Agreement.
8.5 Each Focus Party has made such investigation of the facts
pertaining to this Agreement, and all of the matters pertaining thereto, as it
deems necessary.
8.6 Except as expressly provided herein, no person has made any
statement or representation to a Focus Party regarding any fact relied upon by
such Focus Party in entering into this Agreement and each Focus Party
specifically does not rely upon any statement, representation, or promise of any
other person in executing this Agreement.
-6-
<PAGE> 7
8.7 Each Focus Party relies on the finality of this Agreement as a
material factor inducing its execution of this Agreement, and the obligations
under this Agreement.
8.8 Neither Focus Party will take any action which would interfere
with the performance of this Agreement by any other party or which would
adversely affect any of the rights provided for herein.
9. REPRESENTATIONS AND WARRANTIES OF THE CWI STOCKHOLDERS. Each CWI
Stockholder hereby represents, warrants and covenants to each Focus Party that:
9.1 Neither the execution nor the delivery of this Agreement, the
incurrence of the obligations herein set forth, the consummation of the
transactions herein contemplated, nor the compliance with the terms of this
Agreement will conflict with, or result in a breach of, any of the terms,
conditions, or provisions of, or constitute a default under, any bond, note, or
other evidence of indebtedness or any contract, indenture, mortgage, deed of
trust, loan agreement, lease, or other agreement or instrument to which such CWI
Stockholder is a party or by which such CWI Stockholder may be bound.
9.2 The CWI Stockholder has the full and complete right, power, legal
capacity, and authority to execute and enter into this Agreement and to execute
all other documents and perform all other acts as may be necessary in connection
with the performance of this Agreement.
9.3 No approval or consent not heretofore obtained by any person or
entity is necessary in connection with the execution of this Agreement by the
CWI Stockholder or the performance of such CWI Stockholder's obligations under
this Agreement.
9.4 The CWI Stockholder has received independent tax and legal advice
from accountants, attorneys or other advisors of his choice with respect to the
advisability of executing this Agreement.
9.5 The CWI Stockholder has made such investigation of the facts
pertaining to this Agreement, and all of the matters pertaining thereto, as he
deems necessary.
9.6 Except as expressly provided herein, no person has made any
statement or representation to the CWI Stockholder regarding any fact relied
upon by such CWI Stockholder in entering into this Agreement and such CWI
Stockholder
-7-
<PAGE> 8
specifically does not rely upon any statement, representation, or promise of any
other person in executing this Agreement.
9.7 The CWI Stockholder relies on the finality of this Agreement as a
material factor inducing its execution of this Agreement, and the obligations
under this Agreement.
9.8 The CWI Stockholder will not take any action which would interfere
with the performance of this Agreement by any other party or which would
adversely affect any of the rights provided for herein.
10. GENERAL.
10.1 CONTROLLING LAW. This Agreement and all questions relation to its
validity, interpretation, performance and enforcement, shall be governed by and
construed in accordance with the laws of the State of Delaware, notwithstanding
any Delaware or other conflict-of-law provisions to the contrary.
10.2 NOTICES. All notices, requests, demands and other communications
required or permitted under this Agreement shall be in writing and shall be
deemed to have been duly given, made an received when delivered against receipt,
upon receipt of a facsimile transmission or three days following deposit in the
United States mails, first class postage prepaid, addressed as set forth below:
If to Focus or Merger Sub:
FocusWireless.com
401 East Corporate Drive
Suite 220
Lewisville, TX 75057
Attention: Chief Executive Officer
with a copy given in the manner prescribed above, to:
Troy & Gould Professional Corporation
1801 Century Park East
Suite 1600
Los Angeles, California 90067
Facsimile: (310) 201-4746
Attention: Sanford J. Hillsberg, Esq.
-8-
<PAGE> 9
If to the CWI Stockholders:
Ronald Goldberg
11 Lakewood
Bannockburn, Illinois 60015
Facsimile: (847) 735-9977
Philip Leavitt
65 South Deere Park
Highland Park, Illinois 60035
Facsimile: (847) 955-2422
Sherwin Geitner
3239 Maple Leaf Drive
Glenview, Illinois 60025
Facsimile: (847) 676-8866
Cary Maimon
1819 Brandywyn
Buffalo Grove, Illinois 60089
Facsimile: (847) 955-2428
Melvyn Cohen
4016 Yorkshire Ct.
Northbrook, Illinois 60062
in every case, with a copy given in the manner prescribed above, to:
Kamensky & Rubinstein
7250 North Cicero Avenue
Suite 200
Lincolnwood, Illinois 60712-1693
Facsimile: (847) 982-1676
Attention: Sherwin Rubinstein, Esq. and
John B. Waters, Esq.
Any party may alter the address to which communications or copies are to be
sent by giving notice to the other parties of such change of address in
conformity with the provisions of this paragraph for the giving of notice.
-9-
<PAGE> 10
10.3 BINDING NATURE OF AGREEMENT; NO ASSIGNMENT. This Agreement shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns, except that no party may assign or transfer
its rights or obligations under this Agreement without the prior written consent
of the other parties hereto.
10.4 ENTIRE AGREEMENT. This Agreement contains the entire
understanding between the parties hereto with respect to the subject matter
hereof, and supersedes all prior and contemporaneous agreements and
understandings, inducements or conditions, express or implied, oral or written,
except as herein contained. The express terms hereof control and supersede any
course of performance and/or usage of the trade inconsistent with any of the
terms hereof. Except as otherwise specifically modified by this Agreement, the
provisions of the Merger Agreement shall continue in full force and effect.
10.5 SECTION HEADINGS. The section headings in this Agreement are for
convenience only; they form no part of this Agreement and shall not affect its
interpretation.
10.6 PUBLIC ANNOUNCEMENTS. Except as contemplated by this Agreement or
as may be required, in the opinion of counsel for Focus, by applicable law or
the rules and regulations or the SEC or the National Association of Securities
Dealers, Inc., none of the parties hereto shall make any press release or other
public announcement or filings with respect to this Agreement or the
transactions contemplated hereby without the prior approval of all of the
parties, which approvals shall not be reasonably withheld or delayed.
10.7 CONSTRUCTION OF AGREEMENT. Each party and counsel for each party
has reviewed and cooperated in the drafting and preparation of this Agreement.
As a jointly produced document, this Agreement and its language shall in all
cases be simply construed according to its fair meaning and not strictly for or
against any party or the drafter hereof.
10.8 INDULGENCES NOT WAIVERS. Neither the failure nor any delay on the
part of a party to exercise any right, remedy, power or privilege under this
Agreement shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, remedy, power or privilege preclude any other or further
exercise of the same or any other right, remedy, power, or privilege with
respect to any occurrence be construed as a waiver of such right, remedy, power
or privilege with respect to any other occurrence. No waiver shall be effective
unless it is in writing and is signed by the party asserted to have granted such
waiver.
-10-
<PAGE> 11
10.9 EXECUTION IN COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original as
against any party whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Agreement shall become
binding when one or more counterparts hereof, individually or taken together,
shall bear the signatures of all of the parties reflected hereon as the
signatories. Any photographic or xerographic copy of this Agreement, with all
signatures reproduced on one or more sets of signature pages, shall be
considered for all purposes as if it were an executed counterpart of this
Agreement.
10.10 PROVISIONS SEPARABLE. The provisions of this Agreement are
independent and separable from each other, and no provision shall be affected or
rendered invalid or unenforceable by virtue of the fact that for any reason any
other or others of them may be invalid or unenforceable in whole or in part;
provided, however, that the provisions of this Agreement are not separable tot
he extent that doing so would materially deprive any part of the benefit of its
bargain as provided for by this Agreement.
10.11 DISPUTE RESOLUTION. In the event of any dispute under the terms
of this Agreement, such dispute shall be resolved by binding arbitration under
the rules of the American Arbitration Association in Los Angeles, California.
The prevailing party in any arbitration shall be entitled to recover its
reasonable attorneys fees and costs.
10.12 NO ADMISSION OF FAULT. This Agreement is entered into solely for
the purposes set forth herein, and in executing this Agreement none of the
parties to this Agreement admits any liability or fault with respect to any of
the matters which are the subject of any release or indemnification under this
Agreement.
-11-
<PAGE> 12
IN WITNESS WHEREOF, the parties have set their hands as of the date first
above written.
/s/ Ronald Goldberg
--------------------------------
RONALD GOLDBERG
/s/ Philip Leavitt
--------------------------------
PHILIP LEAVITT
/s/ Sherwin Geitner
--------------------------------
SHERWIN GEITNER
/s/ Cary Maimon
--------------------------------
CARY MAIMON
/s/ Melvyn Cohen
--------------------------------
MELVYN COHEN
FOCUS AFFILIATES, INC.
ATTEST:
By: /s/ Michael Hedge
----------------------------
- ------------------------- Michael Hedge, Chief Executive Officer,
President
and By: /s/ John Swinehart
----------------------------
John Swinehart, Chairman of the Board
INTELLICELL MERGER SUB, INC.
ATTEST:
By: /s/ Michael Hedge
----------------------------
- ------------------------- Michael Hedge, Chief Executive Officer,
President
and By: /s/ John Swinehart
----------------------------
John Swinehart, Chairman of the Board
-12-
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included and incorporated by reference in this Form 10-K, into the
Company's previously filed Form S-3 Registration Statement, File No. 333-85507.
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
April 12, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S
FINANCIAL STATEMENTS INCLUDED IN THIS ANNUAL REPORT ON FORM 10-K, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> DEC-31-1998
<PERIOD-END> DEC-31-1999
<CASH> 2,495,000
<SECURITIES> 0
<RECEIVABLES> 10,922,000
<ALLOWANCES> 1,000,000
<INVENTORY> 9,488,000
<CURRENT-ASSETS> 23,294,000
<PP&E> 4,848,000
<DEPRECIATION> 405,000
<TOTAL-ASSETS> 44,234,000
<CURRENT-LIABILITIES> 28,395,000
<BONDS> 0
0
0
<COMMON> 108,000
<OTHER-SE> 29,997,000
<TOTAL-LIABILITY-AND-EQUITY> 44,234,000
<SALES> 46,498,000
<TOTAL-REVENUES> 46,498,000
<CGS> 43,992,000
<TOTAL-COSTS> 43,992,000
<OTHER-EXPENSES> 7,683,000
<LOSS-PROVISION> (5,177,000)
<INTEREST-EXPENSE> 406,000
<INCOME-PRETAX> (5,646,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,646,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,646,000)
<EPS-BASIC> 0.77
<EPS-DILUTED> 0.77
</TABLE>
