<PAGE> 1
The following Items were the subject of a Form 12b-25 and are included herein:
Items 6,7 and 8 and certain exhibits.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
(Amendment No. 1)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the fiscal year ended December 31, 1997
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from ______________ to ______________
Commission file number: 1-12937
ALL COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
New Jersey 22-3124655
(State of incorporation) (I.R.S. employer identification number)
225 Long Avenue, Hillside, New Jersey 07205
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 282-2000
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<S> <C>
Common Stock, no par value per share Boston Stock Exchange
Class A Common Stock Purchase Warrants Boston Stock Exchange
Title of each class Name of each exchange on which registered
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes|X| No |_|
<PAGE> 2
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |_|
State issuer's revenues for its most recent fiscal year: $6,925,169
Aggregate market value of Common Stock held by nonaffiliates as of March 1,
1998: $2,107,031
Number of shares of Common Stock outstanding as of March 1, 1998: 4,910,000
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 1998
Annual Meeting of Stockholders are incorporated by reference to Part III of this
report.
<PAGE> 3
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
financial statements and the notes thereto. The discussion of results, causes
and trends should not be construed to imply any conclusion that such results or
trends will necessarily continue in the future.
The statements contained herein, other than historical information, are or may
be deemed to be forward-looking statements and involve factors, risks and
uncertainties that may cause the Company's actual results in future periods to
differ materially from such statements. These factors, risks and uncertainties
include the relatively short operating history of the Company; market acceptance
and availability of new products; the non-binding and nonexclusive nature of
reseller agreements with manufacturers; rapid technological change affecting
products sold by the Company; the impact of competitive products and pricing, as
well as competition from other resellers; possible delays in the shipment of new
products; and the availability of sufficient financial resources to enable the
Company to expand its operations.
Overview
Since 1995, the Company's revenues have consisted primarily of sales of
Panasonic digital telephone and voice processing systems, and Sony
videoconferencing products. The Panasonic systems are most suited for small to
medium-sized businesses, particularly professional offices. The Company's
videoconferencing revenues through fiscal 1997 have been derived principally
from the sale of the Sony Trinicom 5100 system and its predecessor, the 5000
model, which are targeted to the large commercial and institutional user.
During fiscal 1997, the Company entered into additional reseller agreements in
order to broaden its selection of voice communication and videoconferencing
products. In November 1997, the Company signed a reseller agreement with Lucent
to distribute Lucent telecommunications systems and software packages. Lucent
products are generally high capacity systems designed for the larger business
and institutional customer. The Company also entered into an agreement with
Polycom to distribute Polycom's line of audio, data and videoconferencing
products. A number of Polycom's products are recent introductions, including the
ViewStation(R), which offers state-of-the-art videoconferencing technology at
competitive price points. Delays in the availability of the ViewStation(R) or
any other significant new product could adversely affect the Company's revenues
and profitability in 1998. The Company will attempt to mitigate that possibility
by maintaining sufficient inventory to meet anticipated customer demand. Sales
of Polycom products commenced in 1998.
In 1997, the Company also established a structured cable division to provide
infrastructure cable systems within facilities for voice and high-speed data
transmission. This division will offer structured cabling systems manufactured
by NORDX/CDT and Lucent. Management believes that these products complement
other products and services that the Company offers, which may present
cross-marketing opportunities among both existing and new customers.
<PAGE> 4
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 ("FISCAL 1997") COMPARED TO YEAR ENDED DECEMBER 31,
1996 ("FISCAL 1996")
NET REVENUES. Operating revenues for fiscal 1997 totaled $6,925,000, a
record level for a twelve-month period, representing a 78% increase over the
revenues of $3,885,000 reported for fiscal 1996. Sales were higher in both the
voice communications and videoconferencing categories, with videoconferencing
showing the greatest gains.
Sales of voice communications products and services increased in fiscal 1997 by
$806,000 or 29% to $3,613,000 over comparable fiscal 1996 revenues of
$2,807,000. The increase was due in part to increased marketing efforts,
including the hiring of additional sales personnel. In addition, the Company
entered into an exclusive dealership arrangement with Coldwell Banker
Corporation ("CBC") in January 1996 to sell Panasonic telecommunications systems
to CBC's corporate-owned offices. In December 1996, this agreement was
superseded by the signing of a non-exclusive four-year Preferred Vendor
Agreement with HFS, the new owner of the Coldwell Banker Brand, to provide
Panasonic products to the HFS-owned brands: Century 21, ERA, and Coldwell Banker
real estate brokerage franchise systems. In December 1997, HFS merged into a new
entity, Cendant Corporation ("Cendant") and assigned the Preferred Vendor
Agreement to Cendant. Sales under these agreements, which include revenues from
corporate-owned offices as well as independently owned franchises, accounted for
15% and 26% of net revenues for fiscal 1997 and 1996.
Sales of videoconferencing systems increased in fiscal 1997 by $2,237,000 or
215% to $3,276,000 as compared to $1,039,000 for fiscal 1996. The increase is
due in part to an expansion of the Company's sales organization dedicated to
videoconferencing product sales. Greater marketing efforts by Sony worldwide
also helped to increase the Company's U. S. sales of Sony products. The Company
currently has videoconferencing demonstration facilities in New York City;
Washington, DC; West Newton, MA; Trumbull, Connecticut; Allentown and
Philadelphia, Pennsylvania; Pompano Beach, FL; Manassa, VA; Manchester, NH; and
Santa Clara, California, as well as at its headquarters in Hillside, New Jersey.
The Company also began to generate revenues from its MaxShare 2 distributorship
and the structured cable division in the fourth quarter, although such revenues
were not material in 1997.
COST OF REVENUES. Cost of revenues in fiscal 1997 was $4,897,000 or 71%
of net revenues, as compared to $2,501,000 or 65% of net revenues in fiscal
1996. Cost of revenues consists primarily of net product, installation labor,
and training costs. The 6% increase in 1997 cost of revenues over 1996 is
attributable to a combination of certain higher margin videoconferencing sales
in 1996, and increases in labor costs, insurance, and depreciation in 1997.
GROSS MARGINS. Gross margin dollars increased to $2,028,000, or 29% of
net revenues in fiscal 1997, as compared to $1,384,000, or 36% of net revenues
in fiscal 1996. Margins as a percentage of total revenue are expected to
fluctuate, depending on such factors as sales volume, the mix of product
revenues, and changes in fixed costs during a given period.
<PAGE> 5
SELLING. Selling expenses, which include sales salaries, commissions,
sales overhead, and marketing costs, increased to $1,812,000, or 26% of net
revenues in fiscal 1997, as compared to $665,000 or 17% of net revenues in
fiscal 1996. The dollar increase was due in part to higher salaries resulting
from additions to sales personnel in 1997 and higher commission-based
videoconferencing sales. New employment agreements providing for increased
compensation for sales executives also commenced in 1997. The Company expects
selling costs to increase as it continues to expand its sales staff and invest
in product marketing to build its revenue base. The Company added a total of ten
sales personnel in the video and telephone divisions in 1997.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased to $936,000 or 14% of net revenues in fiscal 1997, as compared to
$600,000 or 15% of net revenues in fiscal 1996. The dollar increase is
attributable primarily to higher salaries and related costs associated with the
increase in administrative staff necessary to manage expanded operations, to
higher occupancy costs and other administrative overhead, as well as to higher
professional fees relating to the Company's new reporting responsibilities as a
public company.
OTHER (INCOME) EXPENSES. This category includes a non-recurring
accounting charge of $315,000, which represents financing costs relating to the
Bridge Note financing (See Notes to the Consolidated Financial Statements). The
Company also reported interest income of $118,000 in 1997, most of it generated
from the investment of proceeds from the initial public offering (IPO), which
was completed in May 1997. The Company does not expect investment earnings to be
material in 1998 due to the use of cash reserves for operations.
INCOME TAXES. The income tax provision in 1997 includes refundable
taxes of $47,000 from the carryback of the current year's federal net operating
loss. The Company has established a valuation allowance to offset additional tax
benefits from the carryforward of unused federal operating loss carryforwards of
$222,000 and other deferred tax assets, due to the uncertainty of their
realization. Management evaluates the recoverability of deferred tax assets and
the valuation allowance on a quarterly basis. At such time it is determined that
it is more likely than not that deferred tax assets are realizable, the
valuation allowance will be appropriately reduced.
NET LOSS. The Company reported a net loss in 1997 of $892,000, or $.21
per share as compared with net income of $52,000, or $.03 per share in 1996.
Revenue growth and profitability in the future will depend on continued
investment in the Company's sales and marketing infrastructure, particularly its
direct sales force, demonstration facilities, and customer support. The Company
introduced several new products and services in 1997, all of which require
skilled sales representatives as well as marketing lead time before sales are
booked. Consequently, the rate of growth in selling expenses is expected to run
ahead of revenue growth at least for the first two quarters of 1998. Revenue
growth will also depend on customer acceptance of new products offered by the
Company, including ViewStation(R)and the MaxShare 2 line-sharing device. The
Company may seek a distribution partner for MaxShare 2, which is currently sold
through an in-house sales force primarily to independent dealers. In some
instances, the Company may also be obligated to reduce gross margins on certain
products in response to competitive pressures, or in order to expand into new
markets. These uncertainties, as well as such factors as the Company's limited
operating history and limited resources, make the prediction of future operating
results difficult if not
<PAGE> 6
impossible. However, the Company does expect to report an operating loss for the
first quarter of 1998.
Liquidity and Capital Resources
At December 31, 1997, the Company had working capital of $4,265,000, including
$2,175,000 in cash. In May 1997, the Company completed its IPO, which consisted
of the sale of 805,000 Units of its Common Stock and Class A Common Stock
Purchase Warrants, and realized net proceeds of approximately $4,540,000 after
offering costs. To date, the Company has used the offering proceeds for the
relocation and expansion of its facilities, the hiring of new employees, the
purchase of new computer systems and other fixed assets, the purchase of
additional inventory, and other working capital needs.
Net cash used by operating activities in 1997 was $2,004,000. During the year,
accounts receivable levels rose by $1,360,000 due to record revenue growth. The
Company also increased inventory levels by $601,000 in order to maintain
favorable pricing on certain products. Management expects inventory levels to
increase in 1998 once stocking orders for Polycom and Lucent products are
filled. The Company also advanced $127,000 to MaxBase, Inc. ("MaxBase"), the
manufacturer of MaxShare 2, for the production of the Company's orders. (See
below for a more detailed discussion of the Company's agreement with MaxBase.)
These increases more than offset a $620,000 increase in accounts payable and
accrued expenses, as well as non-cash charges of $421,000, which includes
$315,000 of Bridge Note financing costs.
Investing activities for 1997 included purchases of $399,000 for building
improvements, office furniture, and equipment. In July 1997, the Company moved
to its expanded office and warehouse facility in Hillside, New Jersey. The
Company is occupying the facility under a five-year lease at a base annual rent
of $87,000. The lease provides for a five-year renewal option. Also in 1997, the
Company entered into a five-year lease for a sales office in Connecticut. Base
rent under this lease is $20,000 per year. Other facilities are occupied on a
month-to-month basis either for a monthly rental fee or in exchange for
providing occasional use of the Company's on-site demonstration equipment.
Cash flows from financing activities provided net cash of $3,903,000. Included
in this amount are the net proceeds from the public offering. During the second
quarter of 1997, the Company repaid $645,000 in outstanding borrowings to its
bank and terminated its $685,000 working capital and term loan credit facility.
In December 1996, the Company issued $750,000 principal amount of 12%
Convertible Subordinated Notes (the "Bridge Notes"). The Notes carried interest
at 12% per annum and were payable with accrued interest, to the extent not
converted, upon completion of the Company's IPO. A total of $600,000 of Bridge
Note principal was converted into 300,000 shares of Common Stock and 300,000 in
Common Stock Purchase Warrants. In May 1997, the Company repaid the $150,000
balance of Bridge Note principal that was not converted.
In September 1997, the Company entered into an exclusive distribution agreement
with MaxBase for the MaxShare 2 product. The Maxshare 2 distributorship is
operated by AllComm Products Corp., a wholly-owned subsidiary of the Company
formed in 1997. The Company has agreed to
<PAGE> 7
purchase a minimum of 10,000 units of MaxShare 2 over a two-year period, with a
2,500 unit commitment by the end of the first contract year. The agreement
further grants the Company a two-year option to purchase all of the assets of
MaxBase, excluding cash, for a cash price of $2,000,000, plus $70 for every unit
not purchased under the initial 10,000 unit minimum. As of December 31, 1997,
the Company was obligated to purchase 9,760 additional units at a maximum
aggregate cost of $2,050,000, or $210 per unit. Under terms of the agreement,
the Company is entitled to share in the production cost savings realized from
its purchase commitment. Based on current production costs, the Company's
minimum purchase requirements are expected to be approximately $463,000 and
$1,537,000 in fiscal 1998 and 1999, respectively. There can be no assurance that
the Company will have sufficient resources to fulfill its purchase commitment,
or that it will be successful in marketing the MaxShare 2 unit, which has only
recently been introduced to the commercial marketplace.
On March 26, 1998, the Company received a letter of commitment from an
asset-based lender for a $5,000,000 working capital credit facility. Loan
availability will be based on 75% of eligible accounts receivable, as defined,
and 50% of eligible finished goods inventory, with a cap of $1,200,000 on
inventory financing. Outstanding borrowings will bear interest at the lender's
base rate plus 1% per annum, payable monthly, and will be collateralized by a
lien on accounts receivable, inventories, and intangible assets. The Company
will be subject to certain as yet unspecified financial covenants relating to
minimum net worth, maximum leverage and minimum profitability. The commitment
also provides for the payment of various closing costs and fees, including a
$30,000 closing fee as well as ongoing servicing and renewal fees. The credit
facility will have a initial term of two years, with annual renewals thereafter
subject to the lender's review. The loan closing is currently scheduled for no
later than April 25, 1998, and remains subject to the satisfaction of customary
closing conditions. The Company anticipates that this credit facility will be
used to satisfy the Company's cash requirements resulting from the expected
growth in its accounts receivable and product inventories.
The Company does not presently have any material commitments for capital
expenditures.
Inflation
Management does not believe inflation had a material adverse effect on the
financial statements for the periods presented.
Year 2000
Management has initiated a company-wide program to prepare the Company's
computer systems and applications for the year 2000, as well as identify
critical third parties which the Company relies upon to operate its business to
assess their readiness for the year 2000. The Company expects to incur internal
payroll costs as well as consulting costs and other expenses that it deems
necessary to prepare the Company's systems for the year 2000. Management cannot
presently estimate the cost of this program; however, such costs are not
currently expected to be material to the Company's operations or financial
condition. There can be no assurance that the systems of other companies which
the Company's systems rely upon will be timely converted, or that such failure
to convert by
<PAGE> 8
another company would not have a material adverse effect on the Company's
systems and results of operations.
Effect of Recently Issued Accounting Pronouncements
In June 1997, SFAS 130, "Reporting Comprehensive Income," and SFAS 131,
"Disclosures About Segments of an Enterprise and Related Information," were
issued. SFAS 130 addresses standards for reporting and display of comprehensive
income and its components, and SFAS 131 requires disclosure of reportable
operating segments. In February 1998, SFAS 132, "Employers' Disclosures About
Pensions and Other Post-retirement Plans" was issued. SFAS 132 standardizes
pension disclosures. These statements are effective in 1998. The Company will be
reviewing these pronouncements to determine their applicability to the Company,
if any.
<PAGE> 9
ITEM 7. FINANCIAL STATEMENTS
The following financial statements are filed in this Item 7:
Reports of Independent Accountants
Consolidated Balance Sheets at December 31, 1997 and 1996
Consolidated Statements of Operations for each of the two years in
the period ended December 31, 1997
Consolidated Statements of Stockholders' Equity for each of the two
years in the period ended December 31, 1997
Consolidated Statements of Cash Flows for each of the two years in
the period ended December 31, 1997
Notes to Consolidated Financial Statements
<PAGE> 10
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of All Communications Corporation
We have audited the accompanying consolidated balance sheet of All
Communications Corporation as of December 31, 1997, and the related
consolidated statements of income, cash flows, and stockholders' equity for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
Om our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of All Communications
Corporation as of December 31, 1997 and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
BDO Seidman, LLP
Woodbridge, New Jersey
March 12, 1998
<PAGE> 11
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of All Communications Corporation
We have audited the accompanying balance sheet of All
Communications Corporation as of December 31, 1996, and the related statements
of income, cash flows, and stockholders' equity for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, based on our audit, the financial statements
referred to above present fairly, in all material respects, the financial
position of All Communications Corporation as of December 31, 1996 and the
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
Schneider Ehrlich & Wengrover LLP
Woodbury, New York
January 21, 1997
<PAGE> 12
FINANCIAL STATEMENTS.
ALL COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
==================================================================================================================
December 31, 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents (Note 2) $2,175,226 $ 645,614
Accounts receivable (net of allowance for doubtful accounts of
$60,500 in 1997 and $25,000 in 1996) 2,041,350 681,411
Inventory (Note 2) 1,097,883 497,353
Deferred income taxes (Notes 2 and 9) - 9,119
Advances to Maxbase, Inc. (Notes 1 and 3) 127,080 -
Other current assets 96,218 11,595
- ------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 5,537,757 1,845,092
FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS-NET (NOTES 2 AND 4) 438,490 128,984
DEFERRED FINANCING COSTS (NOTE 2) - 390,406
DEFERRED STOCK OFFERING COSTS (NOTE 2) - 32,500
OTHER ASSETS 31,359 61,410
- ------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $6,007,606 $2,458,392
==================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT
Bank loan payable (Note 6) $ - $ 447,071
Current portion of long-term debt (Note 6) - 21,250
Accounts payable 909,785 505,319
Accrued expenses (Note 5) 323,892 108,259
Income taxes payable (Notes 2 and 9) 2,453
Customer deposits 37,052 14,943
- ------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,273,182 1,096,842
12% CONVERTIBLE SUBORDINATED NOTES PAYABLE (NOTE 6) - 750,000
LONG-TERM DEBT, LESS CURRENT PORTION (NOTE 6) - 51,354
DEFERRED INCOME TAXES (NOTES 2 AND 9) - 14,798
- ------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,273,182 1,912,994
- ------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTES 1, 3, AND 10)
STOCKHOLDERS' EQUITY (NOTES 7 AND 8)
Preferred stock, $.01 par value;
1,000,000 shares authorized, none issued or outstanding - -
Common Stock, no par value; 100,000,000 authorized;
4,910,000 and 3,000,000 shares issued and outstanding, respectively 5,229,740 90,000
Additional paid-in capital 316,611 375,000
Retained earnings (accumulated deficit) (811,927) 80,398
- ------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 4,734,424 545,398
- ------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $6,007,606 $2,458,392
==================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 13
ALL COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
================================================================================================================
Years ended December 31, 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET REVENUES (NOTE 2) $6,925,169 $3,884,700
COST OF REVENUES 4,897,176 2,501,073
- ----------------------------------------------------------------------------------------------------------------
GROSS MARGIN 2,027,993 1,383,627
OPERATING EXPENSES:
Selling 1,811,924 664,786
General and administrative 935,967 599,606
- ----------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 2,747,891 1,264,392
- ----------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) (719,898) 119,235
- ----------------------------------------------------------------------------------------------------------------
OTHER (INCOME) EXPENSES
Amortization of deferred financing costs 315,406 -
Interest income (118,354) -
Interest expense 27,779 29,026
- ----------------------------------------------------------------------------------------------------------------
TOTAL OTHER (INCOME) EXPENSES 224,831 29,026
- ----------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE TAXES (944,729) 90,209
TOTAL INCOME TAXES (BENEFIT) (NOTE 9) (52,404) 38,606
- ----------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (892,325) $ 51,603
================================================================================================================
Net income (loss) per common and common equivalent share:
Basic $ (.21) $ .03
================================================================================================================
Diluted $ (.21) $ .03
================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 14
ALL COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
============================================================================================================================
ADDITIONAL
COMMON STOCK PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 1,750,000 $ 52,500 $ - $ 28,795 $ 81,295
Exercise of common stock options 1,250,000 37,500 - - 37,500
Value imputed to conversion feature of the
12% Convertible subordinated notes - - 375,000 - 375,000
Net income - - - 51,603 51,603
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 3,000,000 90,000 375,000 80,398 545,398
Issuance of common stock through
Initial Public Offering 1,610,000 4,539,740 - - 4,539,740
Conversion of subordinated notes 300,000 600,000 - - 600,000
Cancellation of certain conversion rights - - (75,000) - (75,000)
Issuance of underwriter option - - 70 - 70
Issuance of stock options - - 16,541 - 16,541
Net loss - - - (892,325) (892,325)
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 4,910,000 $5,229,740 $316,611 $(811,927) $4,734,424
============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 15
ALL COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
=========================================================================================================================
Years ended December 31, 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ (892,325) $ 51,603
Adjustments to reconcile net income (loss)
to net cash provided (used) by operating activities:
Amortization of deferred financing costs 315,406
Depreciation 82,752 30,120
Loss on disposal of equipment 6,575 -
Non cash compensation 16,541 -
Changes in assets and liabilities
Accounts receivable (1,359,939) (334,909)
Inventory (600,530) (352,306)
Advances to Maxbase, Inc. (127,080) -
Other current assets (84,623) (3,078)
Accounts payable 404,465 140,899
Accrued expenses 215,633 26,822
Income taxes payable 2,453 (4,421)
Deferred income taxes (5,679) (14,933)
Customer deposits 22,109 (1,084)
- ------------------------------------------------------------------------------------------------------------------------
NET CASH USED BY OPERATING ACTIVITIES (2,004,242) (461,287)
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture, equipment and leasehold improvements (398,834) (67,346)
Decrease (increase) in other assets 30,051 (52,500)
- ------------------------------------------------------------------------------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (368,783) (119,846)
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 5,635,070 37,500
Stock offering costs (1,062,760) (32,500)
Deferred financing costs - (15,406)
Repayment of convertible subordinated note (150,000) -
Proceeds from long-term debt - 85,000
Payments on long-term debt - (98,824)
Proceeds from bank loans 125,000 477,071
Payments on bank loans (644,673) (130,000)
Proceeds from stockholder loan payable - 55,000
Repayment of stockholder loan payable - (55,000)
Proceeds for issuance of convertible subordinated notes - 750,000
- ------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,902,637 1,072,841
- ------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,529,612 491,708
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 645,614 153,906
- ------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,175,226 $ 645,614
========================================================================================================================
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 27,779 $ 29,026
========================================================================================================================
Income taxes $ 1,910 $ 60,807
========================================================================================================================
Supplemental disclosures of non-cash financing activities
Conversion of subordinated promissory notes to capital $ 600,000 $ -
=========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 16
ALL COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS
All Communications Corporation (the "Company") is engaged in the
business of selling, installing and servicing voice, dataconferencing
and videoconferencing communications systems to commercial and
institutional customers located principally within the United States.
The Company is headquartered in Hillside, New Jersey.
Most of the products sold by the Company are purchased under
non-exclusive dealer agreements with various manufacturers, including
Panasonic Communications & Systems Company ("Panasonic") and Lucent
Technologies, Inc. for digital business telephone systems and related
products, and with Polycom, Inc. for dataconferencing and video-
conferencing equipment. The agreements typically specify, among other
things, sales territories, payment terms, purchase quotas and reseller
prices. All of the agreements provide for early termination on short
notice with or without cause. The termination of any of the Company's
dealer agreements, or their renewal on less favorable terms than
currently in effect, could have a material adverse impact on the
Company's business. The Company also purchases video conferencing and
distance learning products from SONY Electronics, Inc. under an
informal reseller arrangement.
In September 1997, the Company entered into an exclusive distribution
agreement (the "Agreement") with Maxbase, Inc., the manufacturer of
"MaxShare 2", a patented bandwidth- on-demand line sharing device. The
Company has agreed to purchase a minimum of 10,000 units of MaxShare 2
over a two-year period, with a 2,500 unit commitment by the end of the
first contract year. The Agreement further grants the Company a
two-year option to purchase all of the assets of Maxbase, Inc.,
excluding cash, for a cash price of $2,000,000, plus $70 for every unit
not purchased under the initial 10,000 unit minimum. The MaxShare 2
distributorship is operated by AllComm Products Corp. ("APC"), a
wholly-owned subsidiary of the Company formed in 1997. There can be no
assurance that the Company will have sufficient resources to fulfill
its purchase commitment, or that it will be successful in marketing the
MaxShare 2 unit, which has only recently been introduced to the
commercial marketplace.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of the
Company and APC. All material intercompany balances and transactions
have been eliminated in consolidation.
<PAGE> 17
ALL COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventory
Inventory is valued at the lower of cost (determined on a first in,
first out basis), or market.
Use of Estimates
Preparation of the consolidated 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. The more significant
estimates made by management include the provision for doubtful
accounts receivable, warranty reserves, and the valuation allowance for
deferred tax assets. Actual amounts could differ from the estimates
made. Management periodically evaluates estimates used in the
preparation of the financial statements for continued reasonableness.
Appropriate adjustments, if any, to the estimates used are made
prospectively based upon such periodic evaluation.
Revenue recognition
Product revenues are recognized at the time a product is shipped or, if
services such as installation and training are required to be
performed, at the time such services are provided, with reserves
established for the estimated future costs of parts-and-service
warranties. Customer prepayments are deferred until product systems are
shipped and the Company has no significant further obligations to the
customer. Revenues from services not covered by product warranties are
recognized at the time the services are rendered.
Income (loss) per share
Effective December 31, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share." Basic net income (loss) per share is calculated by dividing net
income by the weighted-average number of common shares outstanding
during the period (4,200,888 and 1,750,000 shares in 1997 and 1996,
respectively).
Diluted net income per share is calculated by dividing net income by
the weighted-average number of common shares outstanding plus the
weighted-average number of net shares that would be issued upon
exercise of stock options and warrants using the treasury stock method.
Common stock options and warrants issued in 1997 have not been included
in the 1997 loss per share computation because their inclusion would be
anti-dilutive. Net shares issuable upon the conversion of the
<PAGE> 18
ALL COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12% Subordinated Convertible Promissory Notes (160,714 in 1996) have
been included in the calculation of diluted income per share for 1996
using the treasury stock method. Earnings per share data for 1996 have
been restated to conform with the provisions of SFAS No. 128. The
impact of the change was immaterial.
Cash and cash equivalents
The Company considers all highly liquid debt instruments with a
maturity of three months or less when purchased to be cash equivalents.
Cash equivalents in the amount of $2,311,000 at December 31, 1997
consist of money market mutual funds.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash,
cash equivalents, and trade accounts receivable. The Company deposits
its cash balances in commercial bank accounts and money market funds.
Commercial bank balances may from time to time exceed federal insurance
limits; money market funds are uninsured.
The Company performs ongoing credit evaluations of its customers and to
date has not experienced any material losses. Revenues generated from
the Cendant and Coldwell Banker agreements (see Note 11) accounted for
15% and 26% of total revenues for the years ended December 31, 1997 and
1996, respectively. At December 31, 1997 and 1996, receivables from
those sales represented approximately 15% and 25% of net accounts
receivable, respectively.
Depreciation and Amortization
Furniture, equipment and leasehold improvements are stated at cost.
Furniture and equipment are depreciated over the estimated useful lives
of the related assets, which range from three to five years. Leasehold
improvements are amortized over the shorter of either the asset's
useful life or the related lease term. Depreciation is computed on the
straight-line method for financial reporting purposes and on the
modified accelerated cost recovery system (MACRS) for income tax
purposes.
Income Taxes
The Company uses the liability method to determine its income tax
expense as required under Statement of Financial Accounting Standards
No. 109 (SFAS 109). Under SFAS 109, deferred tax assets and liabilities
are computed based on differences between financial reporting and tax
bases of assets and
<PAGE> 19
ALL COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
liabilities and are measured using the enacted tax rates and laws that
will be in effect when the differences are expected to reverse.
Deferred tax assets are reduced by a valuation allowance if, based on
the weight of available evidence, it is more likely than not that all
or some portion of the deferred tax assets will not be realized. The
ultimate realization of the deferred tax asset depends on the Company's
ability to generate sufficient taxable income in the future.
Deferred stock offering costs
Costs incurred in connection with the Company's public offering of
common stock and warrants were charged to capital upon completion of
the offering in May 1997.
Long-lived assets
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of", the
Company records impairment losses on long-lived assets used in
operations, including goodwill and intangible assets, when events and
circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are
less than the carrying amounts of those assets.
Stock options
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-based Compensation". SFAS No. 123
requires that the Company either recognize in its financial statements
costs related to its employee stock-based compensation plans, such as
stock option and stock purchase plans, using the fair value method, or
make pro forma disclosures of such costs in a footnote to the financial
statements. The Company has elected to continue to use the intrinsic
value-based method of APB Opinion No. 25, as allowed under SFAS No.
123, to account for its employee stock-based compensation plans, and to
include the required pro forma disclosures based on fair value
accounting. The adoption of SFAS No. 123 has not had a material effect
on the Company's financial position or results of operations.
<PAGE> 20
ALL COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recently Issued Accounting Pronouncements
In June 1997, SFAS 130, "Reporting Comprehensive Income," and SFAS 131,
"Disclosures About Segments of an Enterprise and Related Information,"
were issued. SFAS 130 addresses standards for reporting and display of
comprehensive income and its components, and SFAS 131 requires
disclosure of reportable operating segments. In February 1998, SFAS
132, "Employers' Disclosures About Pensions and Other Post-retirement
Plans" was issued. SFAS 132 standardizes pension disclosures. These
statements are effective in 1998. The Company will be reviewing these
pronouncements to determine their applicability to the Company, if any.
NOTE 3 - ADVANCES TO MAXBASE, INC.
This amount represents advances against purchase orders for MaxShare 2
units. Purchases of MaxShare 2 product in 1997 totaled $50,400. As of
December 31, 1997, the Company is obligated to purchase 9,760
additional units at a maximum aggregate cost of $2,049,600, or $210 per
unit. Under terms of the Agreement, the Company is entitled to share in
the production cost savings realized from its purchase commitment.
Based on current production costs, the Company's minimum purchase
requirements are expected to be approximately $463,000 and $1,537,000
in fiscal 1998 and 1999, respectively. (See also Note 1).
NOTE 4 - FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Furniture, equipment and leasehold improvements consist of the
following:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
---- ----
<S> <C> <C>
Leasehold improvements $ 69,216 $ 9,768
Office furniture 96,196 13,187
Computer equipment and software 86,310 25,024
Demonstration equipment 161,864 41,136
Vehicles 140,991 76,824
-------- --------
554,577 165,939
Less: Accumulated depreciation 116,087 36,955
-------- --------
$438,490 $128,984
======== ========
</TABLE>
Depreciation expense was $82,752 and $30,120 for the years ended
December 31, 1997 and 1996, respectively.
NOTE 5 - ACCRUED EXPENSES
<PAGE> 21
ALL COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996
---- ----
<S> <C> <C>
Sales taxes payable $ 35,217 $ 35,909
Accrued warranty costs 67,749 25,000
Other 220,926 47,350
------- -------
$323,892 $108,259
======= =======
</TABLE>
NOTE 6 - NOTES PAYABLE AND LONG-TERM DEBT
Term loans and lines of credit
In May 1996, the Company entered into a new credit facility with a bank
for a $600,000 working capital line of credit and an $85,000 term loan,
and repaid outstanding borrowings with its previous lender. Advances
under the line of credit provided for interest at the rate 1% above the
bank's "Alternate Base Rate" ("ABR") (9.25% at December 31, 1996). The
term loan provided for monthly principal payments of $1,771 plus
interest at the bank's ABR plus 1.25% (9.5% at December 31, 1996). The
Company terminated the credit facility and repaid all outstanding loans
upon completion of its initial public offering (IPO) in May 1997.
12% Convertible Subordinated Notes Payable
In December 1996, the Company realized net proceeds of $734,594 from a
private placement of $750,000 principal amount of 12% Convertible
Subordinated Notes (the "Bridge Notes"). The notes provided for
interest at the rate of 12% per annum and became due and payable
together with accrued interest, to the extent not converted, upon
completion of the Company's IPO. The notes were convertible, at the
holders' option, into an aggregate of 375,000 Bridge Units at the rate
of one Unit per $2.00 of note principal.
Each Bridge Unit consists of one share of the Company's Common Stock
and one warrant to purchase one share of Common Stock at a price of
$4.25 per share. In May 1997, a total of $600,000 of Bridge Note
principal was converted into 300,000 Bridge Units. The 300,000 shares
of Common Stock and the 300,000 Warrants comprising the Bridge Units
may not be sold until two years following the effective date of the IPO
(April 28, 1997), during the first year unconditionally, and during the
second year without the prior consent of the Underwriter. The second
year restriction was subsequently nullified due to the termination of
the Underwriter's business in December 1997. The conversion feature on
the remaining $150,000 Bridge Note was
<PAGE> 22
ALL COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
cancelled during the IPO registration process, and that note was
subsequently repaid with interest.
Costs incurred in connection with the Bridge Note private placement
totaling $315,406 were charged to operations during fiscal 1997. This
amount included an imputed value of $300,000, or $1.00 per Bridge Unit,
assigned to the conversion feature of the Bridge Notes. The $75,000
imputed value relating to the cancelled conversion feature discussed
above was reversed from deferred financing costs against paid-in
capital.
NOTE 7 - STOCK OPTIONS
Non-qualified options
In 1996, a total of 1,250,000 non-qualified stock options previously
issued to various employees and advisors, including 560,000 options to
the Company's president and 50,000 options to the Company's general
counsel who is also a board member, were exercised at $.03 per share.
In March 1997, the Company issued to its president 750,000 five-year
non-qualified options with an exercise price of $5.00 per share in
conjunction with the amendment of his employment agreement. Also in
1997, the Company issued a total of 232,500 additional options to
various employees and directors, with exercise prices ranging from
$.875 to $3.50 per share.
Stock Option Plan
In December 1996, the Board of Directors adopted the Company's Stock
Option Plan (the "Plan") and has reserved up to 500,000 shares of
Common Stock for issuance thereunder. The Plan provides for the
granting of options to officers, directors, employees and advisors of
the Company. The exercise of incentive stock options ("ISOs") issued to
employees who are less than 10% stockholders shall not be less than the
fair market value of the underlying shares on the date of grant or not
less than 110% of the fair market value of the shares in the case of an
employee who is a 10% stockholder. The exercise price of restricted
stock options shall not be less than the par value of the shares to
which the option relates. Options are not exercisable for a period of
one year from the date of grant. Thereafter, options may be exercised
as determined by the Board of Directors, with maximum terms of ten and
five years, respectively, for ISOs issued to employees who are less
than 10% stockholders and employees who are 10% stockholders. In
addition, under the plan, no individual will be given the opportunity
to exercise ISO's valued in excess of $100,000, in any calendar year,
unless and to the extent the options have first become exercisable in
the
<PAGE> 23
ALL COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
preceding year. The maximum number of shares with respect to which
options may be granted to an individual during any twelve month period
is 100,000. The Plan will terminate in 2006.
A summary of Plan and other options outstanding as of December 31,
1997, and changes during fiscal 1996 and 1997 are presented below:
<TABLE>
<CAPTION>
Range of
Fixed Exercise
Options Prices
------- ------
<S> <C> <C>
Options outstanding, January 1, 1996 1,285,000 $ .03
Forfeited (35,000) .03
Exercised (1,250,000) .03
---------- ----------
Options outstanding, December 31, 1996 -- --
Granted 1,250,000 .875-5.00
---------- ----------
Options outstanding, December 31, 1997 1,250,000 $.875-5.00
========== ==========
Shares of common stock available for future
grant under the Plan 232,500
=======
</TABLE>
Additional information as of December 31, 1997 with respect to all
outstanding options is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- --------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of price Outstanding Life Price Exercisable Price
-------------- ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
$ .875 75,000 5.00 $.875 75,000 $.875
3.50 - 3.85 425,000 4.52 3.52 307,000 3.53
5.00 750,000 4.25 5.00 750,000 5.00
--------- ---- ---- --------- ----
1,250,000 4.39 $4.25 1,132,000 $4.33
========= ==== ==== ========= ====
</TABLE>
The Company has elected to use the intrinsic value-based method of APB
Opinion No. 25 to account for all of its employee stock-based
compensation plans. Accordingly, no compensation cost has been
recognized in the accompanying financial statements for stock options
issued to employees because the exercise price of each option equals or
exceeds the fair value of the underlying common stock as of the grant
date for each stock option. The weighted-average grant date fair value
of
<PAGE> 24
ALL COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
options granted during 1997 under the Black-Scholes option pricing
model was $2.51 per option.
The Company has adopted the pro forma disclosure provisions of SFAS No.
123. Had compensation cost for all of the Company's stock-based
compensation grants been determined in a manner consistent with the
fair value approach described in SFAS No. 123, the Company's net income
and net income per share as reported would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1997 December 31, 1996
----------------- -----------------
<S> <C> <C>
Net income (loss):
As reported $ (892,325) $51,603
Adjusted pro forma (3,819,968) 51,507
Net income (loss) per share:
As reported $(.21) $.03
Adjusted pro forma (.89) .03
</TABLE>
The fair value of each option granted in 1997 is estimated on the date
of grant using the Black-Scholes option pricing model with the
following weighted average assumptions: No dividends, an expected life
of 4.76 years, a risk-free interest rate of 6.14% and expected
volatility of 46.5%. There were no option grants in 1996.
NOTE 8 - STOCKHOLDERS' EQUITY
Initial Public Offering
In May 1997, the Company completed a public offering of 805,000 Units
for $7.00 per Unit. Each Unit consisted of two shares of Common Stock
and two Redeemable Class A Warrants. The Warrants are exercisable for
four years commencing one year from the effective date of the offering,
at a price of $4.25 per share. The Company may redeem the Warrants at a
price of $.10 per Warrant, commencing eighteen months from the
effective date of the offering and continuing for a four-year period,
provided the price of the Company's Common Stock is $10.63 for at least
20 consecutive trading days prior to issuing a notice of redemption.
The Company also issued to its Underwriter, for nominal consideration,
an option to purchase up to 70,000 Units. The option is exercisable for
a four-year period
<PAGE> 25
ALL COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
commencing one year from the effective date of the offering, at a per
Unit exercise price of $8.40 per Unit. The Units are similar to those
offered to the public.
The Company received proceeds from the offering of approximately
$4,540,000, net of related costs of registration.
Preferred Stock
On December 6, 1996, the Company's stockholders approved an amendment
to the Company's Certificate of Incorporation to authorize the issuance
of up to 1,000,000 shares of Preferred Stock. The rights and privileges
of the Preferred Stock have not yet been determined.
NOTE 9 - INCOME TAXES
The provision for income taxes (benefit) consists of the following:
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996
---- ----
<S> <C> <C>
Current:
Federal $(46,905) $ 39,320
State 180 14,219
-------- --------
Total current (46,725) 53,539
-------- --------
Deferred:
Federal (97,724) (13,589)
State (49,152) (1,344)
Valuation allowance 141,197 --
-------- --------
Total deferred (5,679) (14,933)
-------- --------
Provision for income taxes (benefit) $(52,404) $ 38,606
======== ========
</TABLE>
The current portion of the federal income tax benefit reflects
refundable taxes from the carryback of net operating losses.
<PAGE> 26
ALL COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's effective tax rate differs from the statutory federal tax
rate as shown in the following table:
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996
---- ----
<S> <C> <C>
Computed "expected" tax
expense (benefit) $(321,208) $18,944
State tax expenses (benefit),
net of federal benefit (32,298) 7,495
Non-deductible financing costs 102,000 --
Other non-deductible items 32,214 8,032
Valuation allowance 141,197
Other 25,691 4,135
--------- -------
$ (52,404) $38,606
========= =======
</TABLE>
The tax effects of the temporary differences that give rise to
significant portions of the deferred tax assets and liabilities as of
1997 and 1996 are presented below:
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Reserves and allowances $ 51,300 $ 7,950
Tax benefit of net operating
loss carryforwards 107,618 7,950
Other 6,615 --
-------- -------
Total deferred tax assets 165,533 15,900
-------- -------
Deferred tax liabilities:
Depreciation 24,336 14,799
Tax basis change in accounting method -- 6,780
-------- -------
Total deferred tax liabilities 24,336 21,579
-------- -------
Subtotal 141,197 5,679
Valuation allowance (141,197) --
-------- -------
Net deferred tax liabilities $ -- $ 5,679
======== =======
</TABLE>
Based on its review of available evidence, management has established a
valuation allowance to offset the benefits of the Company's net
deferred tax assets because their realization is uncertain.
The Company and APC file federal returns on a consolidated basis and
separate state tax returns. At December 31, 1997, the Company had net
operating losses of
<PAGE> 27
ALL COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$222,163 and $430,524, for federal and state income tax purposes,
respectively. The federal net operating loss is available to offset
future taxable income, if any, through 2012.
NOTE 10- COMMITMENTS AND CONTINGENCIES
Employment agreements
The Company's board of directors has approved new employment agreements
for three of its officers, effective January 1, 1997. The agreement
with the Company's president, as amended in March 1997, has a six-year
term and provides for an annual salary of $133,000 in the first year,
increasing to $170,000 and $205,000 in the second and third years,
respectively. In years four and five, the president's base salary will
be $205,000, but can be increased at the discretion of the board of
director's compensation committee. Under the agreement, the Company
will secure and pay the premiums on a $1,000,000 life insurance policy
payable to the president's designated beneficiary or his estate. The
agreement further provides for medical benefits, the use of an
automobile, and grants of 750,000 non-qualified stock options, as well
as 25,974 incentive stock options and 74,026 non-qualified stock
options issuable under the Company's Stock Option Plan.
The other two agreements have a three-year term and replaced three-year
contracts previously in effect. Those contracts, which were initiated
in 1995, each provided for salaries of $62,400 per year with 10% annual
increases, plus the grant of 200,000 immediately vested options to
purchase shares of the Company's common stock at $.03 per share. The
new agreements each provide for annual salaries of $104,000 in the
first year increasing by $10,000 each year thereafter. The agreements
further provide for an incentive bonus equal to 1/2 of 1% of net sales
payable twice yearly to both officers. Each employee is also entitled
to a monthly automobile allowance.
Each of the three agreements may be terminated without cause by the
respective employee upon ninety days written notice to the Company.
Operating Leases
In March 1997, the Company entered into a five-year non-cancelable
lease for the use of office and warehouse space. The lease provides for
annual base rent of $87,040 plus a proportionate share of operating
expenses, and includes a five-year renewal option. The facility is
owned by an entity in which a member of the Company's board of
directors is a part owner. The Company believes that the lease reflects
a fair rental value for the property. Also in 1997, the Company signed
a five-year lease for a Connecticut sales office. Base rent under this
lease is $20,020 per year. Future
<PAGE> 28
ALL COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
minimum rental commitments under all non-cancelable leases with
remaining terms in excess of one year are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
-------------
<S> <C> <C>
1998 $107,060
1999 107,060
2000 107,060
2001 107,060
2002 61,872
--------
$490,112
========
</TABLE>
The Company also leases demonstration facilities at two other locations
on a month-to-month basis. Total rent expense for the years ended
December 31, 1997 and 1996 was $148,768 and $73,957, respectively.
Legal matters
The Company is the subject of a civil action filed by the landlord of
its former headquarters. The landlord alleges that the Company
defaulted on and breached its lease by vacating the premises during the
lease term, and seeks compensatory damages of $233,720 and recovery of
legal costs. The Company believes it has meritorious defenses to the
claims and has asserted counterclaims against the plaintiff. The
Company has not established a loss provision for this claim inasmuch as
the outcome of the matter is not presently determinable. In the opinion
of management, however, the ultimate outcome of the lawsuit is not
expected to have a material impact on the Company's financial condition
or results of operations.
An unrelated civil suit initiated against the Company and other parties
in 1996 was settled in 1997 at no cost to the Company.
NOTE 11- SALES AGREEMENTS
In December 1996, the Company signed a non-exclusive four-year
Preferred Vendor Agreement with HFS Incorporated ("HFS") to provide
Panasonic telephone and voice processing systems to its Century 21,
ERA, and Coldwell Banker brand real estate brokerage franchise systems.
The Company has paid a $50,000 access fee for marketing rights and will
pay HFS commissions ranging from 2% to 13% of gross sales, depending on
the products and services sold. The Company incurred commissions of
$64,921 under this agreement in 1997. The agreement requires the
Company to establish toll-free telephone service for HFS franchises, to
commit personnel to the handling of franchisee accounts and to defray
the cost of certain
<PAGE> 29
ALL COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
marketing activities. The Company has also agreed to a fixed price
schedule over the term of the agreement.
The HFS contract supersedes a four-year agreement signed in January
1996 with Coldwell Banker Corporation ("CBC"), the previous owner of
the Coldwell Banker brand, in which the Company provided trade
discounts and favorable terms for an exclusive dealership to sell
Panasonic telecommunications systems to CBC's corporate-owned brokerage
offices. In December 1997, HFS merged with another entity to form the
Cendant Corporation ("Cendant"), whereupon the HFS agreement was
assigned to Cendant.
NOTE 12- FAIR VALUE OF FINANCIAL INSTRUMENTS
Effective December 31, 1995, the Company adopted SFAS 107, which
requires disclosing fair value to the extent practicable for financial
instruments which are recognized or unrecognized in the balance sheet.
The fair value of the financial instruments disclosed therein are not
necessarily representative of the amount that could be realized or
settled, nor does the fair value amount consider the tax consequences
of realization or settlement. Financial instruments consist of cash,
accounts receivable and accounts payable, all of which approximate fair
value at December 31, 1997.
NOTE 13- SUBSEQUENT EVENT
On March 26, 1998, the Company received a letter of commitment from an
asset-based lender for a $5,000,000 working capital credit facility.
Loan availability will be based on 75% of eligible accounts receivable,
as defined, and 50% of eligible finished goods inventory, with a cap of
$1,200,000 on inventory financing. Outstanding borrowings will bear
interest at the lender's base rate plus 1% per annum, payable monthly,
and will be collateralized by a lien on accounts receivable,
inventories, and intangible assets. The Company will be subject to
certain as yet unspecified financial covenants relating to minimum net
worth, maximum leverage and minimum profitability. The commitment also
provides for the payment of various fees, including a $30,000 closing
fee as well as ongoing servicing and renewal fees. The credit facility
will have a initial term of two years, with annual renewals thereafter
subject to the lender's review. The loan closing is scheduled for no
later than April 25, 1998, and remains subject to the satisfaction of
customary closing conditions.
<PAGE> 30
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
On February 16, 1998, the certified public accounting firm of
Schneider, Ehrlich & Wengrover, LLP ("Schneider") resigned as independent
accountants of the Company by mutual agreement with the Company.
On February 16, 1998, the Audit Committee of the Company's Board of
Directors approved the engagement of BDO Seidman, LLP as the Company's
principal accountant to audit the Company's financial statements.
During the Company's fiscal years ended December 31, 1997 and 1996
and the period from January 1, 1998 to February 16, 1998, there were no
disagreements between the Company and Schneider on any matter of accounting
principles or practices, financial statements disclosure or auditing scope or
procedure.
For the Company's fiscal years ended December 31, 1997 and 1996, the
principal accountant's report on the financial statements of the Company 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.
For the Company's fiscal years ended December 31, 1997 and 1996, and
the period from January 1, 1998 to February 16, 1998, Schneider did not advise
the Company of any of the following:
(i) Internal controls necessary for the Company to develop reliable
financial statements did not exist;
(ii) Information had come to Schneider's attention that led it to no
longer be able to rely on management's representations, or that had made it
unwilling to be associated with the financial statements prepared by management;
(iii) The need to expand significantly the scope of its audit or that
information had come to its attention that if further investigated may: (1)
materially impact the fairness or reliability of either a previously issued
audit report or the underlying financial statements, or the financial statements
issued or to be issued covering the fiscal period(s) subsequent to the date of
the most recent financial statements covered by an audit report or (2) cause it
to be unwilling to rely on management's representations or be associated with
the Company's financial statements, or
<PAGE> 31
(iv) Information had come to its attention that it had concluded
materially impacted the fairness or reliability of either (1) previously issued
audit report or the underlying financial statements or (2) the financial
statements issued to or to be issued covering the fiscal period(s) subsequent to
the date of the most recent financial statements covered by an audit report.
<PAGE> 32
PART III
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this
report:
(1) A list of the financial statements filed as
a part of this report is set forth in Item 7
and is incorporated herein by reference.
(2) Exhibits:
The information required by this Item
13(a)(2) is set forth in the Index to
Exhibits and is incorporated herein by
reference. Included in the Index to Exhibits
are the following management contracts,
compensatory plans and arrangements:
(i) 10.3 Employment Agreement, effective
January 1, 1997, between the
Registrant and Richard Reiss.
(ii) 10.4 Amendment to the Employment
Agreement in Exhibit 10.3 above,
effective March 21, 1997.
(iii) 10.5 Employment Agreement, effective
January 1, 1997, between the
Registrant and Joseph Scotti.
(iv) 10.6 Employment Agreement, effective
January 1, 1997, between the
Registrant and Leo Flotron.
(v) 10.10 Registrant's Stock Option
Plan.
(b) No reports on Form 8-K were filed by the
Company during the fourth quarter of 1997.
<PAGE> 33
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the registrant has duly caused this
amendment to be signed on its behalf by the undersigned, thereunto duly
authorized.
ALL COMMUNICATIONS CORPORATION
Dated: April 6, 1998 By: /S/ RICHARD REISS
------------------------
Richard Reiss, Chairman,
Chief Executive Officer and
President
<PAGE> 34
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
3.1 Certificate of Incorporation of the Registrant dated August 16, 1991, as amended. (1)
3.2 By-Laws, as amended. (1)
4.1 Form of Amended Warrant Agreement among the Registrant and American Stock Transfer &
Trust Company, as Warrant Agent. (1)
4.2 Specimen Common Stock Certificate of Registrant. (1)
4.3 Specimen Class A Warrant Certificate of Registrant. (1)
10.1 Agreement, dated December 9, 1996, between the Registrant and HFS Incorporated. (1)
10.2 Dealer Agreement, dated May 20, 1992, between the Registrant and Panasonic
Communications & Systems Company. (1)
10.3 Employment Agreement, effective January 1, 1997, between the Registrant and Richard
Reiss. (1)
10.4 Amendment to the Employment Agreement in Exhibit 10.3 above, effective March 21, 1997.
(1)
10.5 Employment Agreement, effective January 1, 1997, between the Registrant and Joseph
Scotti. (1)
10.6 Employment Agreement, effective January 1, 1997, between the Registrant and Leo
Flotron. (1)
10.7 Lease Agreement for premises located at 1450 Route 22, Mountainside, New Jersey, dated April 13, 1995,
between the Registrant and Mountain Plaza Associates. (1)
10.8 First Amendment to Lease Agreement for premises located at 1450 Route 22, Mountainside, New Jersey,
dated June 27, 1996, between the Registrant and Mountain Plaza Associates. (1)
10.9 Sublease Agreement for premises located at 1130 Connecticut Avenue, N.W., Washington D.C., dated July
1, 1996, between the Registrant and Charles L. Fishman, P.C. (1)
10.10 Registrant's Stock Option Plan. (1)
10.11 Agreement, dated February 21, 1997, between the Registrant and Sprint North Supply. (1)
10.12 Dealer Sales Agreement, dated March 10, 1997, between the Registrant and Sprint North
Supply. (1)
10.13 Lease Agreement for premises located at 225 Long Avenue, Hillside, New Jersey, dated March 20, 1997,
between the Registrant and Vitamin Realty Associates, L.L.C. (1)
</TABLE>
<PAGE> 35
<TABLE>
<S> <C>
10.14 Agreement, dated September 10, 1997, between the Company and Maxbase, Inc.
(incorporated herein by reference to the Registrant's Current Report on Form 8-K filed
September 18, 1997, Commission File No. 1-12937).
10.15 Reseller Agreement, dated November 21, 1997, between Polycom, Inc. and the Registrant.(2)
10.16 Dealer Agreement, dated November 26, 1997, between Lucent Technologies, Inc. and the
Registrant.(2)
21.1 Subsidiaries of the Registrant.(2)
*27.1 Financial Data Schedule.
</TABLE>
- ----------
*Filed herewith
(1) Incorporated herein by reference to the corresponding exhibit number to
the Registrant's Registration Statement on Form SB-2, Registration No.
333-21069.
(2) Incorporated herein by reference to the corresponding exhibit number to
the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997, Commission File No. 1-12937.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements accompanying the filings of Form 10-KSB and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,175,226
<SECURITIES> 0
<RECEIVABLES> 2,101,850
<ALLOWANCES> 60,500
<INVENTORY> 1,097,883
<CURRENT-ASSETS> 5,537,757
<PP&E> 554,577
<DEPRECIATION> 116,087
<TOTAL-ASSETS> 6,007,606
<CURRENT-LIABILITIES> 1,273,182
<BONDS> 0
0
0
<COMMON> 5,229,740
<OTHER-SE> (495,316)
<TOTAL-LIABILITY-AND-EQUITY> 6,007,606
<SALES> 6,925,169
<TOTAL-REVENUES> 6,925,169
<CGS> 4,897,176
<TOTAL-COSTS> 7,645,067
<OTHER-EXPENSES> 197,052
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,779
<INCOME-PRETAX> (944,729)
<INCOME-TAX> (52,404)
<INCOME-CONTINUING> (892,325)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (892,325)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.21)
</TABLE>
