UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[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, 1998
[ ] 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 Number
225 Long Avenue, P.O. Box 794, Hillside, New Jersey 07205
(Address of Principal Executive Offices)
973-282-2000
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act
Common Stock, no par value per share
Class A Common Stock Purchase Warrants See * below
- - -------------------------------------- ---------------------
Title of each class Name of each exchange
on which registered
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 or 15(d) of the Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers in response 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. [X]
State issuer's revenues for its most recent fiscal year: $13,217,083
Aggregate market value of Common Stock held by nonaffiliates as of March 1,
1999: $3,318,750
The number of shares outstanding of the registrant's Common Stock as of
March 1, 1999 was 4,910,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 1999 Annual
Meeting of Stockholders are incorporated by reference to Part III of this
report.
* Effective February 9, 1999, the SEC granted the Company's application to
withdraw its securities for listing and registration on the Boston Stock
Exchange. The securities continue to be listed on the OTC Electronic
Bulletin Board. See Item 5 herein.
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PART I
The statements contained in Part I and Part II herein, other than historical
information, are or may be deemed to be forward-looking statements within the
meaning of Section 17A of the Securities Act of 1933, as amended and Section 21E
of the Securities Exchange Act of 1934, as amended, and involve factors, risks
and uncertainties that may cause the actual results of All Communications
Corporation (the "Company") 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.
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
All Communications Corporation and its wholly owned subsidiary AllComm
Products Corporation ("APC") (collectively, the "Company") is engaged in the
business of selling, installing, and servicing voice (including computer
telephony integration ("CTI")), videoconferencing communications systems, and
structured wiring systems, concentrating in the commercial and industrial
marketplace. As a turnkey provider, the Company provides design, production,
network implementation, installation, training and post-installation support.
The Company's products and services are intended principally for use by all
business and governmental entities. In connection with the sale and service of
its products, the Company also markets other peripheral data and
telecommunications products.
The Company was organized as a New Jersey corporation in 1991. The
Company's headquarters are located at 225 Long Avenue, Hillside, New Jersey,
07205.
INDUSTRY OVERVIEW
VOICE COMMUNICATIONS. Advances in telecommunications technologies have
facilitated the development of increasingly sophisticated telephone systems and
applications. Telecommunications systems have evolved from simple analog
telephones to sophisticated digital systems and applications. Users increasingly
rely upon a variety of applications, including conference calling,
speakerphones, voice processing and automated attendant, to improve
communications within their organizations and with customers and vendors.
Digital technology has facilitated the integration of computing and
telecommunications technologies, which has made possible a number of new
applications that further enhance productivity. Examples of CTI applications
include caller I.D., where a caller's telephone number is displayed on the
telephone, call accounting, which permits accounting for telephone usage and
toll calls, electronic data interchange between customers and vendors and the
use of automatic number identification coupled with "database look-up," where
customer information is retrieved automatically from a computerized database
when the customer calls.
Historically, CTI technologies and applications were utilized in
conjunction with large telecommunications systems. However, small to medium size
businesses and other organizations, as well as small to medium size facilities
of larger organizations, are requiring and seeking out telecommunication systems
with advanced CTI features and applications at increasingly lower price points,
in order to improve efficiency and enhance competitiveness.
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As the telecommunications needs of businesses have become more advanced,
the integration of the different parts of a system has become increasingly
complex. The system integration, service and support capabilities of
telecommunications suppliers have become significant competitive factors. In
order to meet the needs of end users, suppliers such as the Company have been
increasingly required to develop close relationships with their customers.
VIDEOCONFERENCING. Videoconferencing communications entails the
transmission of video and audio signals and computerized data between two or
more locations through a digital telecommunication network. Videoconferencing
communications systems were first introduced in the late 1970's in the form of
specialized dedicated conference rooms outfitted with expensive electronic
equipment and requiring trained operators. Signals were transmitted over
dedicated transmission lines established between fixed locations. Market
acceptance of early systems was limited because of the low quality of the video
output, as well as the high hardware and transmission costs and limited
availability of transmission facilities.
Technological developments in the 1980's resulted in a dramatic increase in
the quality of video communications, as well as a substantial reduction in its
cost. The proliferation of switched digital networks, which transmit digital, as
opposed to analog signals, eliminated the requirement of dedicated transmission
lines. Advances in data compression and decompression technology, and the
introduction of devices for separating and distributing digital signals over
several channels simultaneously and recombining them after transmission,
resulted in products with substantially improved video and audio quality and
further reduced hardware costs. Competition among telecommunications carriers
during the past decade, together with the expanded use of fiber optic technology
and the development of integrated switched digital networks (`ISDN") have
further contributed to reduced transmission costs.
Further technological developments in the 1990's in videoconferencing
systems resulted in accepted industry standards, which now enables compatibility
among systems made by different manufacturers. These developments have increased
the quality and features available in videoconferencing systems while
significantly decreasing the costs to the customer.
STRUCTURED CABLING SYSTEMS. A cabling or wiring system is a long-term
infrastructure investment for voice and high-speed data transmission. Computer
systems requiring high speed or maximum bandwidth for connectivity options
require structured wiring systems to be in place. These systems can now be
certified to meet connectivity requirements for management information systems
as well as have assurance of handling future modifications. The Company believes
that the demand for structured wiring systems is increasing due to a growing
demand for computer systems and local area networks to run at continually higher
speeds.
PRODUCTS AND SERVICES
The Company provides turnkey integrated voice and videoconferencing
solutions to its customers. The Company is a reseller of voice communications
products manufactured by Lucent Technologies, Inc. ("Lucent"), the Business
Telephone System Division of Panasonic Communications and Systems Company
("Panasonic") and Active Voice Corporation ("Active Voice") and
videoconferencing products manufactured by Polycom, Inc. ("Polycom") and Sony
Electronics Inc. ("Sony"). The Company sells, installs and maintains the full
line of voice and videoconferencing products manufactured by these companies.
VOICE COMMUNICATIONS. The Company is a reseller of Lucent and Panasonic
digital key and hybrid telephone systems, PBX telephone systems, voice
processing systems and CTI solutions. Lucent and Panasonic manufacture digital
key and hybrid telephone systems which contain multi-featured fully electronic
digital telephones, common control units, central processing units, and
associated common equipment to provide service in the approximately 2,000 line
and under marketplace. The Company distributes Lucent manufactured PBX systems
under the name Definity which has a capacity expandable up to 25,000 ports. The
Company also distributes a Panasonic manufactured PBX system under the name DBS
576 with a maximum capacity of 576 ports. A key telephone system provides each
telephone with direct access to multiple outside trunk lines and internal
communications through intercom lines. A PBX (private branch exchange) system,
through a central switching system, permits the connection of internal and
external lines. A hybrid switching systems provides, in a single system, both
key telephone and PBX features. Key telephone equipment may be used with PBX
equipment.
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The Company sells fully integrated voice processing systems manufactured by
Lucent, Panasonic and Active Voice. The systems range from 2 to 64 voice ports
and up to 330 hours of message storage. The systems have automated attendant
features which allow for incoming calls to be answered electronically and
distributed to specific extensions without the use of a switchboard operator.
The systems can be interactive with display telephone sets. System users have
the ability to access stored messages from any touch-tone telephone. The systems
have the capability to automatically notify a user outside the system of urgent
messages. The systems have additional features which can be customized to the
needs of the end user.
Several of Lucent and Panasonic systems support open architecture
interfaces that allow external computers to interact and control the systems
through industry standard interfaces. The systems support an RS-232 system level
interface, an RS-232 Hayes based desktop interface and a Windows Dynamic Data
Exchanges (DDE) interface. The systems have Developer Toolkits available that
include the detailed interface specifications, applications notes and
development tools to assist third party software developers to develop vertical
market CTI applications for the products. Applications include database look-up
(which utilizes caller-ID information to retrieve customer information
automatically from a computerized database), automated attendant, interactive
voice response and call accounting (which permits the monitoring of telephone
usage and toll cost). Several of the systems support Microsoft Telephone
Application Programming Interface (TAPI) and Novell Telephony Services
Applications Programming Interface (TSAPI). There are Windows-based interfaces
available for personal computers to facilitate installation, system
configuration and programming.
The Company sells, installs and services Panasonic products throughout the
United States both through employees of the Company and subcontractors. The
Company currently sells Lucent products through its direct sales force, and
installs and services Lucent products both through employees of the Company and
nationwide through subcontracting arrangements with Lucent directly and with
other Lucent dealers.
The Company also sells, installs, and maintains peripheral equipment and
components manufactured by other vendors. Such equipment and components are
readily available through multiple manufacturers and suppliers.
VIDEOCONFERENCING. The Company began selling videoconferencing products in
1994. The Company provides Sony and Polycom videoconferencing systems for United
States customers on a global basis, with a concentration in the Northeastern
United States. The Company's customers include business, education, health care
and government agencies. The Company: (i) provides its customers with systems
produced by both Sony and Polycom, worldwide manufacturers of room based
videoconferencing equipment, and ancillary equipment manufactured by others,
(ii) selects and integrates those systems and components into complete systems
designed to suit each customer's particular communications requirements, (iii)
develops custom software and hardware components when necessary and (iv)
provides training and other continuing services designed to insure that its
customers fully and efficiently utilize their systems. In 1998, the Company sold
and installed over 300 videoconferencing systems, as compared to approximately
100 systems in 1997.
In January 1999, the Company executed an agreement with Sprint
Communications Company LP to act as an authorized sales agent for Sprint's
advanced network and videoconferencing services in Sprint's Video Partners
Program. This agreement enables the Company to provide a telecommunications
network service component to its overall line of products and services. Under
the agreement, the Company receives a percentage of Sprint's monthly charges
billed to the Company's customers for usage of Sprint's telecommunications
network.
STRUCTURED CABLING SYSTEMS. The Company offers structured cabling systems
by NORDX/CDT and Lucent. Structured cabling systems offer state of the art, high
bandwidth, standards based wiring infrastructure with a long life cycle which
support current technologies, and also can support higher speeds for future
technologies. Structured cabling systems can be implemented for a few end users
or up to thousands of end users per installation depending on the needs of the
end user.
During the fiscal years ended December 31, 1998 and 1997, approximately 54% and
52%, respectively, of the Company's total sales were attributable to the sale of
voice communications equipment, and approximately 46% and 48%, respectively, of
the Company's total sales were attributable to the sale of videoconferencing
communications equipment.
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STRATEGY
The Company's objective is to increase revenue through the expansion of
sales to new customers and sales of additional products and services to existing
customers. The Company seeks to achieve this objective by: (i) strengthening
business relationships with customers by offering leading edge
telecommunications solutions, (ii) expanding sales and marketing efforts, and
(iii) training technical and sales staff to enable the Company to maintain its
high level of expertise.
The Company has aligned itself with industry-leading manufacturers and
service providers of multi-medium communications through reseller agreements,
distribution agreements and partnering alliances. These relationships position
the Company to offer its customers a wide range of technologically advanced
products and services. The Company uses its expertise to customize the products
and services as an integrated solution for its customers communications needs.
The Company is aggressively selling its products and services to new and
existing customers. During 1998, the Company opened two additional sales offices
and hired 13 additional sales people. Additionally, the Company increased the
amount of business it does with Cendant Corp. and established a significant
relationship with a new customer, Universal Health Services, Inc.
The Company conducts comprehensive training to seek to ensure expertise in
system design, product knowledge, installation and support. The Company believes
that customer satisfaction is what differentiates it from other resellers and is
essential in attracting new business, gaining repeat business from existing
customers and maintaining its alliances with the leading manufacturers and
service providers in the industry.
RESELLER AGREEMENTS
In November 1997, the Company entered into a two year nonexclusive
distribution agreement, with renewal options, with Polycom, Inc. ("Polycom") for
the Polycom ViewStation(R) group videoconferencing system and the Polycom
ShowStation(R) IP integrated conference projector. This agreement enables the
Company to market and sell a full range of Polycom manufactured
videoconferencing, audioconferencing and dataconferencing products.
In November 1997, the Company signed a one year nonexclusive distribution
agreement with Lucent to sell, install and maintain Lucent Partner, Legend and
Definity telephone systems, voice mail and CTI software as an authorized Lucent
dealer. The Company also has authority to resell, install and maintain Lucent
peripheral products. This agreement has been renewed through March 2001.
The Company has an agreement with Panasonic authorizing the Company to
serve as its nonexclusive reseller in the United States. The agreement is
automatically renewable for successive one-year terms unless terminated by
either party upon at least 30 days' prior notice, or immediately by Panasonic
upon written notice to the Company if the Company is in default in the
performance of its obligations under the agreement, or upon the bankruptcy or
insolvency of the Company
MAJOR CUSTOMERS
The Company continues to sell its telephone and voice processing systems to
the real estate brokerage Franchisees of Cendant Corp. (formerly HFS
Incorporated) pursuant to the Company's Preferred Vendor Agreement. Sales under
this agreement accounted for 12% and 15% of net revenues for fiscal 1998 and
1997, respectively.
In 1998, the Company established significant customer relationships with
Universal Health Services, Inc., for Lucent and Sony products. Universal Health
Services accounted for 11% of net revenues for fiscal 1998.
SALES AND MARKETING
The Company markets and sells its products and services directly to
customers through a sales and marketing organization supported by sales,
technical and training personnel versed in the specifications and features of
the voice communications and videoconferencing systems sold to customers. The
Company markets both voice communications and videoconferencing systems through
its direct sales force. The Company provides training to its sales force to
maintain the expertise necessary to effectively market and promote the systems.
The manufacturers, which the Company represents, furnish the Company with
sales, advertising and promotional materials, which the Company in turn
furnishes to its existing customers and prospective customers in conjunction
with sales promotion programs of the manufacturers. The Company maintains up to
date systems for demonstration and promotion to customers and potential
customers. Technical and training personnel attend installation and service
training sessions offered by its manufacturers from time to time to enhance
their knowledge and expertise in the installation and maintenance of the
systems.
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The Company hosts seminars for the purposes of demonstrating
videoconferencing systems to its prospective customers, and to provide
prospective customers the opportunity to learn more about the Company's products
and services.
The Company provides customers of both voice communication and
videoconferencing systems with a full complement of services to ensure customer
satisfaction and optimal utilization of the systems. As a preliminary component
of a sale to a customer or prospective customer, the Company provides consulting
services in order to assess the customer's needs and specifications and to
determine the most effective method to achieve those needs. Upon delivery of the
system, Company employees install and test the equipment to make sure the
systems are fully functional. In situations where a customer is located at a
great distance from the Company's offices, the Company, on an as-needed bases,
will engage the services of an installation subcontractor located in close
geographic proximity to the customer, for the installation and testing of
equipment sold by the Company to the customer. The retention of an installation
subcontractor located in close proximity to a customer benefits the customer
through quick and cost-effective installation of the system. After the equipment
is functional, the Company provides training to all levels of the customer's
organization. Training includes instruction in systems operation and, with
respect to videoconferencing systems, planning and administration of meetings.
The Company maintains a 24-hour toll-free technical support hotline that
customers may call. The Company provides 7 by 24 real-time support for its
global videoconferencing customers. The Company also provides onsite support and
maintenance which includes the repair and/or replacement of equipment.
In February 1999, the Company established a web site, located at
www.allcommunications.com. Through the site, users can access detailed
information on the products and services offered by the Company. During 1999,
the Company intends to sell products directly through the site.
EMPLOYEES, CONSULTANTS AND SUBCONTRACTORS
As of March 1, 1999, the Company had fifty-four (54) full-time employees,
as well as a network of fifty (50) consultants and installation subcontractors
who are available on an as-needed basis for marketing support and to provide
contract installation. Twenty (20) of the Company's employees are engaged in
marketing and sales, twenty (20) in installation service and customer support
and fourteen (14) in finance and administration. None of the Company's employees
are represented by a labor union. The Company believes that its employee
relations are good.
COMPETITION
The voice and videoconferencing communications industries have been
characterized by pricing pressures and business consolidations. The Company
competes with other resellers, as well as manufacturers of voice communications
and videoconferencing systems, many of which are larger, have greater
recognition in the industry, a longer operating history and greater financial
resources than the Company. The Company's competitors in the voice
communications sector include Lucent, Northern Telecom, Toshiba America, Inc.,
Siemens Corporation and NEC Corporation. The Company also competes with other
dealers of voice communication products. The Company's competitors in the
videoconferencing communications sector include Picturetel Corporation, Tandberg
Inc., VTEL Corporation, MCI Worldcomm and other dealers. Existing competitors
may continue to broaden their product lines and expand their retail operations,
and potential competitors may enter into or increase their focus on the voice
and/or videoconferencing communications market, resulting in greater competition
for the Company. In particular, management believes that as the demand for
videoconferencing communications systems continues to increase, additional
competitors, many of which also will have greater resources than the Company,
will enter the videoconferencing market.
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The Company believes that its technical expertise and commitment to
customer service and support allow it to compete favorably. The Company conducts
comprehensive sales and product training for all its sales and marketing
personnel. The Company believes that such training results in its employees
having a high level of product and industry knowledge which makes the Company
more attractive to end users. The Company also strives to provide prompt and
efficient installation, customer training and after sales service which the
Company believes results in repeat business as well as new referrals.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's headquarters are located at 225 Long Avenue, Hillside, New
Jersey, 07205. These premises consist of 7,180 square feet of office space, and
7,400 square feet of secured warehouse facilities. The term of this lease is for
a period of five years expiring on May 31, 2002. The base rental for the
premises during the term of the lease is $87,040 per annum. In addition, the
Company is also obligated to pay its share of the Landlord's operating expenses
(i.e., those costs or expenses incurred by the Landlord in connection with the
ownership, operation, management, maintenance, repair and replacement of the
premises, including, among other things, the cost of common area electricity,
operational services and real estate taxes). The Company has an option to renew
the lease for an additional term of five years, provided the Company is not in
default under the terms of the lease at the time of renewal. The Hillside
premises serve as the Company's headquarters and are utilized for executive,
administrative and sales functions, the demonstration of the Company's voice and
videoconferencing systems and the warehousing of the Company's inventory. At the
present time, there is additional adjoining space in both the office and
warehouse areas should the Company seek to expand this facility.
The Company maintains an office at 35 Nutmeg Drive, Trumbull, Connecticut,
16611 under a written lease for a five-year term expiring November 30, 2002.
This facility is used primarily as a sales and demonstration office. It consists
of approximately 1,820 square feet at an annual rental of $20,020. In addition
the Company is required to pay its share of lessor's operating expenses and
electricity.
During 1998, the Company opened an office on 116 John St., New York City,
New York 10038 and on 9257 Lee Avenue, Manassas, Virginia 20110. Both facilities
are used primarily as sales and demonstration offices. The New York City
facility consists of approximately 2,000 square feet at an annual rent of
$47,500. The term of the lease is five years. The Manassas facility consists of
approximately 1,000 square feet under a one-year lease term that continues on a
month-to-month basis. Monthly rent is $800.
The Company maintains various demonstration facilities throughout the
northeast, Atlantic coast and Pacific coast areas. It leases premises in
Washington, D.C. at 1130 Connecticut Avenue, NW Suite 425, 20036. The occupancy
is under an informal month to month lease for which the Company pays a monthly
rental of $2,500. There are several other locations not under lease which the
Company uses, from time to time, for demonstration purposes in exchange for
permitting the lessor to use the demonstration equipment and in some cases, the
Company reimburses the lessor for the use of ISDN lines. These sites are 2974
Scott Blvd., Santa Clara, CA 95054; 1301 West Copans Road, Suite F-1, Pompano
Beach, Florida; The Chamber of Commerce Building, 200 South Broad Street, Suite
700, Philadelphia, Pennsylvania, 19102 and 331 River Street, West Newton,
Massachusetts, 02165.
ITEM 3. LEGAL PROCEDINGS
On July 16, 1998, MaxBase, Inc. filed a Complaint against the Company and
APC in the Superior Court of New Jersey, Law Division, in Bergen County. The
Complaint alleges that the Company breached its agreement with MaxBase Inc., for
Maxshare 2 units by failing to meet the required minimum purchase obligations
thereunder. The Complaint further alleges misrepresentation and unfair trade
practices. The Complaint also seeks to enjoin the Company from enforcing any
rights the Company has under the agreement. Maxbase claims damages of $508,200
in lost profits for units not purchased and $945,300 in lost profits for units
sold to the Company below market price, as well as unspecified punitive and
treble damages. In March 1999, the plaintiff added claims for defamation and
tortious interference. A trial is expected to occur in late 1999. The Company
believes the claims by MaxBase are without merit and intends to fully defend the
suit and assert its rights under the agreement. The Company has filed a
counterclaim for alleged defects in the Maxshare 2 units.
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On November 24, 1997, Moutain Plaza Associates, the landlord of the
Company's former headquarters, filed a complaint against the Company in the
Superior Court of New Jersey, Law Division, in Essex County. 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. A trial is expected
to occur in May 1999. In the opinion of management, the ultimate outcome of the
lawsuit is not expected to have a material impact on the Company's financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock has been listed and traded on the OTC Electronic Bulletin
Board since April 28, 1997 under the symbol "ACUC". The following table sets
forth the high and low bid prices of a share of Common Stock for each quarter as
set forth below. Quotations may reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
1997 High Low
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2nd quarter (from April 28, 1997) 9-1/4 5-7/8
3rd quarter 10-1/4 3-1/2
4th quarter 4-3/8 1/2
1998 High Low
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1st quarter 1-7/16 3/8
2nd quarter 1-11/16 1-1/16
3rd quarter 1-1/8 1-1/16
4th quarter 1-1/16 1/2
The Common Stock also had been listed and traded on the Boston Stock
Exchange ("BSE") from April 28, 1997 through the close of business on February
8, 1999, under the symbol "CMN". Effective at the opening of business on
February 9, 1999, the Securities and Exchange Commission granted the Company's
application to withdraw the Common Stock and Redeemable Class A Common Stock
Purchase Warrants for listing and registration on the BSE. The overwhelming
percentage of trading in the Company's securities occurs on the OTC Electronic
Bulletin Board. In view of the costs and expenses attendant upon continuing such
listing, particularly in view of the paucity of trading of the Company's
securities on the BSE, the Company decided to withdraw its listing on the BSE.
The following table sets forth the high and low closing prices for a share of
Common Stock for each quarter as set forth below.
1997 High Low
----------------------------------------------------------------
2nd quarter (from April 28, 1997) 9 9
3rd quarter 5-1/16 4-5/8
4th quarter 4-5/8 1-27/32
1998 High Low
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1st quarter 4-5/8 1-27/32
2nd quarter 1-7/16 1-1/4
3rd quarter 1-5/32 1-5/32
4th quarter 1-5/32 1-5/32
The Company has not declared or paid any cash or stock dividends on the
Common Stock and is prohibited from doing so under its working capital credit
facility.
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As of March 18, 1999, there were 38 record holders of Common Stock.
Institutions, as holders of record, may hold Common Stock in nominees or street
name accounts on behalf of multiple beneficial owners.
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.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 ("FISCAL 1998") COMPARED TO YEAR ENDED DECEMBER 31,
1997 ("FISCAL 1997")
NET REVENUES. Net revenues increased in fiscal 1998 by $6,292,000, or 91%,
to $13,217,000, a record level for a twelve-month period, as compared to fiscal
1997 revenues of $6,925,000. Sales were higher in both the voice communications
and videoconferencing categories.
Voice communications-Sales of voice communications products and services
increased in fiscal 1998 by $3,497,000, or 97%, to $7,146,000 as compared to
fiscal 1997 revenues of $3,649,000. The increase was due in part to increased
marketing efforts, including the hiring of additional sales personnel in 1998
and 1997, as well as increased revenue generated by the sale of Lucent products
to a significant new customer, Universal Health Services, Inc. Revenues in
fiscal 1998 were derived primarily from the sale of Lucent and Panasonic
telecommunications systems and software packages. Revenues in fiscal 1997 were
derived primarily from the sale of Panasonic systems. Sales under the Company's
Preferred Vendor Agreement with Cendant accounted for 12% and 15% of net
revenues for fiscal 1998 and 1997, respectively.
In 1998, the Company established significant customer relationships with
Universal Health Services, Inc. for Lucent and Sony products. Universal Health
Services accounted for 11% of net revenues for fiscal 1998. The Company
anticipates continued growth in the voice communications division for the year
ending December 31, 1999 due in part to projected revenue increases in the
structured cable division and from the Company's relationships with Cendant and
Universal Health Services.
Videoconferencing-Sales of videoconferencing systems increased in fiscal
1998 by $2,795,000, or 85%, to $6,071,000 as compared to $3,276,000 for fiscal
1997. The company increased its videoconferencing customer base in fiscal 1998
through the introduction of lower cost videoconferencing systems manufactured by
Polycom. The reduction in the average selling price of videoconferencing systems
has been more than offset by the increase in units sold. The Company anticipates
the continued expansion of its customer base throughout 1999, as lower cost
systems become more affordable to a larger group of customers. Increased sales
of these lower cost systems, however, have started to lower the Company's gross
margins. The Company anticipates selling peripheral items at higher margins to
help maintain the Company's historical gross margin levels.
GROSS MARGINS. Gross margin dollars increased by $1,741,000, or 86%, to
$3,769,000 or 29% of net revenues in fiscal 1998, as compared to $2,028,000, or
29% of net revenues in fiscal 1997. 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. Cost of
revenues consists primarily of net product, direct labor, insurance, warranty,
and depreciation costs. The increase in gross margin dollars is the result of
increased revenue.
9
<PAGE>
SELLING. Selling expenses, which include sales salaries, commissions, sales
overhead, and marketing costs, increased by $1,402,000, or 77%, to $3,214,000,
or 24% of net revenues in fiscal 1998, as compared to $1,812,000 or 26% of net
revenues in fiscal 1997. The dollar increase was due in part to higher salary
expense resulting from additions to sales personnel in 1998, the costs of
maintaining a new sales office in New York City, establishing a structured cable
division, as well as higher commission-based videoconferencing sales. The
Company added 13 salespeople during 1998. The Company expects selling costs,
reflected in dollars, to increase in 1999 due to projected revenue growth and
investments in product marketing.
GENERAL AND ADMINSTRATIVE. General and administrative expenses increased by
$374,000, or 40%, to $1,310,000, or 10%, of net revenues in fiscal 1998, as
compared to $936,000, or 14%, of net revenues in fiscal 1997. The dollar
increase is attributable primarily to higher salary expense and related costs
associated with the increase in administrative staff necessary to manage
expanded operations, higher occupancy costs and other administrative overhead.
For the foreseeable future, the Company expects general and administrative costs
to decrease, as a percentage of revenues, as revenue growth continues.
OTHER (INCOME) EXPENSES. In 1998, this category includes $20,000 of
amortization of deferred financing costs related to the working capital credit
facility as compared with a non-recurring charge of $315,000 associated with
bridge financing in 1997 (See Notes to the Consolidated Financial Statements).
The Company also reported interest income of $56,000 and $118,000 in 1998 and
1997, respectively. The reduction in interest income is a result of the
Company's use of cash raised in 1997 to fund operations. The Company also
reported interest expense of $57,000 and $28,000 in 1998 and 1997, respectively.
The increase in interest expense is a result of the Company using its working
capital credit facility to fund growth. The Company expects interest expense, in
1999, to increase over 1998 levels due to expected increases in bank borrowings.
INCOME TAXES. The income tax provision in 1998 consists principally of
amounts due to various state taxing authorities. The 1997 provision 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 losses
of $829,000 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 fiscal 1998 of $777,000, or
$.16 per share as compared to $892,000 or $.21 per share in fiscal 1997.
Increased costs associated with expanded operations have more than offset
continued increases in net revenues.
Liquidity and Capital Resources
At December 31, 1998 the Company had working capital of $5,702,000,
including approximately $326,000 in cash.
Net cash used by operating activities in fiscal 1998 and fiscal 1997 was
$3,842,000 and $2,004,000, respectively. During the year, accounts receivable
levels rose by $2,277,000 due to a 91% increase in revenues. The Company also
increased inventory levels by $2,442,000. These increases more than offset a
$1,023,000 increase in accounts payable and accrued expenses. The Company funded
operating cash needs from cash reserves and through borrowings under its credit
facility. The Company believes that its credit facilities together with cash
generated from operations will be sufficient enough to provide adequate working
capital during 1999.
The Company continues to stock significant inventories of selected products
to maintain favorable vendor pricing and to ensure product availability to meet
sales projections. Inventories also include approximately $394,000 of MaxShare 2
Units. During 1998, the Company identified performance problems with the
MaxShare 2 product in certain applications and believes that MaxBase, Inc., the
supplier of MaxShare 2, has a contractual obligation to correct any technical
defects in the product. Pending resolution of this matter, the Company has
ceased ordering product under its purchase commitment, and has also limited
shipments to distribution partners. On July 16, 1998, MaxBase, Inc. filed a
Complaint against the Company and APC for breach of contract, misrepresentations
and unfair trade practices. The Company believes the claims by MaxBase are
without merit and intends to fully defend the suit and assert its rights under
the agreement. See "Legal Proceedings".
10
<PAGE>
Investing activities for 1998 included purchases of $330,000 for building
improvements, office furniture, and equipment. The more significant purchases
include computer systems necessary to upgrade the Company's information systems,
demonstration equipment used to sell both videoconferencing and voice
communications equipment, and loaner equipment used to satisfy warranty and
maintenance requirements. Investing activities used $399,000 of cash in 1997.
Cash flows from financing activities provided net cash of $2,330,000. In
May 1998, the Company closed on a $5,000,000 working capital credit facility
with an asset-based lender. Loan availability is 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 bear
interest at the lender's base rate plus 1% per annum (8.75% at December 31,
1998), payable monthly, and are collateralized by a lien on accounts receivable,
inventories, and intangible assets. The credit facility has an initial term of
two years, with annual renewals thereafter subject to the lender's review.
During the 1998 period, the Company borrowed $2,403,000 on its working capital
credit facility to help finance the increase in accounts receivable and
inventory. At December 31, 1998, the Company had $1,369,000 available for
borrowing under this facility.
The credit facility contains certain financial covenants. At December 31,
1998, the Company was in violation of both the net worth and net loss covenants.
On March 17, 1999, the Company received a waiver from the lender regarding these
requirements as of December 31, 1998 and has established new covenants as of
June 30, 1999. At December 31, 1998, the loan has been classified as non current
in the Company's balance sheet because, in the opinion of management, it is
probable that the new covenants will be satisfied.
At December 31, 1998, the Company had net operating loss carryforwards of
$829,000 and $1,037,000, for federal and state income tax purposes,
respectively. These net operating loss carryforwards are available to offset
future taxable income, if any through, 2013.
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 period presented.
Year 2000
In early 1998, Management initiated a company-wide program to prepare the
Company's computer systems and applications for the year 2000, as well as to
identify critical third parties which the Company relies upon to operate its
business to assess their readiness for the year 2000. The Company's primary
computer network includes a Novell operating system running on a Dell File
Server. The Company's main computer applications include MAS90 accounting
software and Top Of Mind customer service software. Individual desktop computers
are running on a Windows 95, 98 or NT operating system and include desktop
applications such as Microsoft Office 97. The Company uses Dell personal
computers on most desktops.
The Company has received confirmation from an independent outside
consultant that the Novell operating system that runs the Company's file server
is year 2000 compliant. Dell has indicated that all of the Company's Dell
computers are year 2000 compliant. The Company has also upgraded the MAS90
accounting system and the Top Of Mind customer service software to be year 2000
compliant. The software upgrades to the MAS90 accounting system and the Top Of
Mind customer service software were included as part of the Company's annual
maintenance contracts. The Company has not tested its systems for year 2000
readiness and, presently, does not intend to do so.
The Company recognizes, as critical third parties, major vendors, such as
Lucent, Panasonic, Sony, and Polycom; major customers, such as Cendant, and
Universal Health Services, Inc; and other parties such as Landlords and utility
companies.
The Company has received written notice from all of its key vendors, Lucent
Technologies, Sony, Panasonic, and Polycom that all of their products that the
Company sells are currently year 2000 compliant. The Company believes it has no
year 2000 warranty exposure for products already sold.
During the 4th quarter of 1998, the Company mailed a questionnaire to
critical third parties to assess their year 2000 readiness. The questionnaire
addressed issues such as where companies stand in their year 2000 compliance
programs and how their relationship with the Company would be affected by any
failure to address year 2000 issues. The responses received indicated that third
parties are addressing and implementing programs to address the year 2000 issue.
The Company does not feel that a contingency plan is necessary.
As of December 31, 1998, the Company had not incurred any expenditures
relating to the year 2000 issue. The Company does not expect any additional cost
to be material to the Company's operations or financial condition.
11
<PAGE>
Effect of Recently issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for all derivative instruments.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. The
adoption of SFAS No. 133 is not expected to have an impact on the Company's
financial position or results of operations.
ITEM 7. FINANCIAL STATEMENTS
The following financial statements are filed in this item 7:
Report of Independent Certified Public Accountants
Consolidated Balance sheets at December 31, 1998 and 1997
Consolidated Statements of Operations for each of the two years in the
period ended December 31, 1998.
Consolidated Statements of Stockholders' Equity for each of the two years
in the period ended December 31, 1998.
Consolidated Statements of Cash Flows for each of the two years in the
period ended December 31, 1998.
Notes to Consolidated Financial Statements
12
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and the
Stockholders of All Communications Corporation
We have audited the accompanying consolidated balance sheets of All
Communications Corporation and Subsidiary as of December 31, 1998 and 1997 and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of All Communications
Corporation and Subsidiary at December 31, 1998 and 1997, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
BDO Seidman, L.L.P.
Woodbridge, New Jersey
February 16, 1999 (except for
Note 6 which is as of
March 17, 1999)
13
<PAGE>
ALL COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------
Notes 1998 1997
----- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents 2 $ 325,915 $ 2,175,226
Accounts receivable (net of allowance for doubtful accounts of
$117,700 and $60,500 respectively) 4,317,853 2,041,350
Inventory 2 3,540,281 1,097,883
Advances to Maxbase, Inc. 3 -- 127,080
Other current assets 45,577 96,218
----------- -----------
Total current assets 8,229,626 5,537,757
----------- -----------
Furniture, equipment and leasehold improvements-net 2,4 611,518 438,490
Deferred financing costs 6 43,271 --
Other assets 38,214 31,359
----------- -----------
Total assets $ 8,922,629 $ 6,007,606
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of capital lease obligations 6 $ 17,365 $ --
Accounts payable 1,412,616 909,785
Accrued expenses 5 844,082 323,892
Income taxes payable 2,9 2,860 2,453
Deferred revenue 156,133 --
Customer deposits 94,721 37,052
----------- -----------
Total current liabilities 2,527,777 1,273,182
----------- -----------
Noncurrent liabilities
Bank loan payable 6 2,403,216 --
Capital lease obligations, less current portion 6 23,221 --
----------- -----------
Total noncurrent liabilities 2,426,437 --
----------- -----------
Total liabilities 4,954,214 1,273,182
----------- -----------
COMMITMENTS AND CONTINGENCIES 2,10
STOCKHOLDERS' EQUITY 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 shares issued and outstanding 5,229,740 5,229,740
Additional paid-in capital 327,943 316,611
Accumulated deficit (1,589,268) (811,927)
----------- -----------
Total stockholders' equity 3,968,415 4,734,424
----------- -----------
Total liabilities and stockholders' equity $ 8,922,629 $ 6,007,606
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
14
<PAGE>
ALL COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended
December 31,
----------------------------
Notes 1998 1997
----- ------------ ------------
<S> <C> <C> <C>
Net revenues 2 $ 13,217,083 $ 6,925,169
Cost of revenues 9,447,592 4,897,176
------------ ------------
Gross margin 3,769,491 2,027,993
Operating expenses:
Selling 3,213,965 1,811,924
General and administrative 1,309,577 935,967
------------ ------------
Total operating expenses 4,523,542 2,747,891
------------ ------------
Loss from operations (754,051) (719,898)
------------ ------------
Other (income) expenses
Amortization of deferred financing costs 6 19,669 315,406
Interest income 2 (56,446) (118,354)
Interest expense 6 57,167 27,779
------------ ------------
Total other expenses, net 20,390 224,831
------------
Loss before income taxes (774,441) (944,729)
Income tax provision (benefit) 2,9 2,900 (52,404)
------------ ------------
Net loss $ (777,341) $ (892,325)
============ ============
Net loss per share:
Basic and diluted 2 $ (.16) $ (.21)
============ ============
Weighted average shares outstanding 4,910,000 4,200,888
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
15
<PAGE>
ALL COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
Retained
Common Stock Additional Earnings
---------------------------- Paid-in (Accumulated)
Shares Amount Capital (Deficit) Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 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
Repayment of convertible note -- -- (75,000) -- (75,000)
Issuance of underwriter option -- -- 70 -- 70
Issuance of stock options for services -- -- 16,541 -- 16,541
Net loss for the year -- -- -- (892,325) (892,325)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 4,910,000 $ 5,229,740 $ 316,611 $ (811,927) $ 4,734,424
Issuance of stock options for services -- -- 11,332 -- 11,332
Net loss for the year -- -- -- (777,341) (777,341)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 4,910,000 $ 5,229,740 $ 327,943 $(1,589,268) $ 3,968,415
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
16
<PAGE>
ALL COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended
December 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (777,341) $ (892,325)
Adjustments to reconcile net loss
to net cash used by operating activities:
Depreciation and amortization 224,474 398,158
Loss on disposal of equipment 3,209 6,575
Non cash compensation 11,332 16,541
Increase (decrease) in cash attributable
to changes in assets and liabilities
Accounts receivable (2,276,503) (1,359,939)
Inventory (2,442,398) (600,530)
Advances to Maxbase, Inc. 127,080 (127,080)
Other current assets 50,641 (84,623)
Other assets (6,855) 30,051
Accounts payable 502,831 404,465
Accrued expenses 520,190 215,633
Income taxes payable 407 2,453
Deferred income taxes -- (5,679)
Deferred revenue 156,133 --
Customer deposits 57,669 22,109
----------- -----------
Net cash used by operating activities (3,849,131) (1,974,191)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of furniture, equipment and leasehold improvements (330,031) (398,834)
----------- -----------
Net cash used by investing activities (330,031) (398,834)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock -- 5,635,070
Stock offering costs -- (1,062,760)
Deferred financing costs (62,939) --
Repayment of convertible subordinated note -- (150,000)
Proceeds from bank loans 2,403,216 125,000
Payments on bank loans -- (644,673)
Payments on capital lease obligations (10,426) --
----------- -----------
Net cash provided by financing activities 2,329,851 3,902,637
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS (1,849,311) 1,529,612
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,175,226 645,614
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 325,915 $ 2,175,226
=========== ===========
Supplemental disclosures of cash flow information
Cash paid (received) during the period for:
Interest $ 45,404 $ 27,779
=========== ===========
Income taxes $ (52,183) $ 1,910
=========== ===========
Acquisition of equipment
Cost of equipment $ 58,844 $ --
Capital lease payable incurred 51,012 --
----------- -----------
Cash down payment $ 7,832 $ --
=========== ===========
Supplemental disclosures of non-cash financing activities
Conversion of subordinated promissory notes to capital $ -- $ 600,000
=========== ===========
Reclassification of deferred financing costs to paid-in capital $ -- $ 75,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
17
<PAGE>
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 videoconferencing 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
videoconferencing and distance learning products from Sony Electronics Inc.
under an informal reseller arrangement.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The consolidated financial statements include the accounts of All
Communications Corporation and its wholly owned subsidiary, AllComm
Products Corporation (APC). All material intercompany balances and
transactions have been eliminated in consolidation.
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 statement 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.
18
<PAGE>
Earnings per share
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share." Accordingly, basic earnings per
share is calculated by dividing net income (loss) by the weighted-average
number of common shares outstanding during the period (4,910,000 and
4,200,888 shares in 1998 and 1997, respectively).
Diluted earnings per share is calculated by dividing net income (loss) by
the weighted-average number of common shares outstanding, adjusted for net
shares that would be issued upon exercise of stock options and warrants
using the treasury stock method. Diluted loss per share has not been
presented because the effects of the computation were anti-dilutive.
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.
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 places its cash and
cash equivalents primarily in commercial checking 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 agreement accounted for 12% and 15% of net revenues for the years
ended December 31, 1998 and 1997, respectively. At December 31, 1998 and
1997, receivables from those sales represented approximately 6% and 15% of
net accounts receivable, respectively.
In 1998, the Company established customer relationships with Universal
Health Services, Inc. for Lucent and Sony products. Universal Health
Services accounted for 11% of net revenues for fiscal 1998.
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 the financial reporting and tax basis of
assets and liabilities, principally certain accrued expenses and allowance
for doubtful accounts, 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
19
<PAGE>
realized. The ultimate realization of the deferred tax asset depends on the
Company's ability to generate sufficient taxable income in the future.
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
Under SFAS No. 123, "Accounting for Stock-based Compensation", the Company
must 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.
Recently issued accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for all derivative
instruments. SFAS No. 133 is effective for fiscal years beginning after
June 15, 1999. The adoption of SFAS No. 133 is not expected to have an
impact on the Company's financial position or results of operations.
NOTE 3 - ADVANCES TO MAXBASE, INC
In September 1997, the Company entered into an exclusive distribution
agreement with Maxbase, Inc., the manufacturer of "MaxShare 2", a patented
bandwidth-on-demand line sharing device. Advances to Maxbase represent
advances against purchase orders for MaxShare 2 units. Purchases of
MaxShare 2 product amounted to $520,350 and $50,400 for the years ended
December 31, 1998 and 1997, respectively. The Company has identified
performance problems with the MaxShare 2 product in certain applications,
and believes that MaxBase, Inc. (MaxBase), the supplier of MaxShare 2, has
a contractual obligation to correct any technical defects in the product.
Pending resolution of this matter, the Company has ceased ordering product
under its purchase commitment, and has also limited shipments to
distribution partners. On July 16, 1998, MaxBase filed a Complaint against
the Company and APC for breach of contract, among other claims. (See Note
10)
20
<PAGE>
NOTE 4 - FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Furniture, equipment and leasehold improvements consist of the following:
December 31,
-------------------
1998 1997
-------- --------
Leasehold improvements $ 85,028 $ 69,216
Office furniture 119,683 96,196
Computer equipment and software 186,244 86,310
Demonstration equipment 301,487 161,864
Loaner/Warranty equipment 39,656 --
Vehicles 199,834 140,991
-------- --------
931,932 554,577
Less: Accumulated depreciation (320,414) (116,087)
-------- --------
$611,518 $438,490
======== ========
Depreciation expense was $204,805 and $82,752 for the years ended December
31, 1998 and 1997, respectively.
NOTE 5 - ACCRUED EXPENSES
Accrued expenses consist of the following:
December 31,
--------------------
1998 1997
-------- --------
Sales tax payable $ 92,098 $ 35,217
Accrued warranty costs 75,000 67,749
Accrued installation costs 300,764 36,466
Other 376,180 184,460
-------- --------
$844,042 $323,892
======== ========
NOTE 6 - NOTES PAYABLE AND LONG-TERM DEBT
Bank loan payable
In 1997, the Company had a $600,000 working capital line of credit. In May
1997, the Company terminated the credit facility and repaid all oustanding
loans upon completion of its initial public offering.
In May 1998, the Company closed on a $5,000,000 working capital credit
facility with an asset-based lender. Loan availability is 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 bear interest at the lender's base rate plus 1% per
annum (8.75% at December 31, 1998), payable monthly, and are collateralized
by a lien on accounts receivable, inventories, and intangible assets. The
credit facility will have an initial term of two years, with annual
renewals thereafter subject to the lender's review. The credit facility
contains certain financial covenants. At December 31, 1998 the Company was
in violation of both the net worth and net loss covenants. On March 17,
1999 the Company received a waiver from the lender regarding these
requirements as of December 31, 1998 and has established new covenants as
of June 30, 1999. At December 31, 1998, the loan has been classified as non
current in the accompanying balance sheet because, in the opinion of
management, it is probable that the new covenants will be satisfied.
21
<PAGE>
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 consisted 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 Note Units. The conversion feature on the
remaining $150,000 Bridge Note was 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
charged to paid-in capital.
NOTE 7 - STOCK OPTIONS
Non-qualified options
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. The Company
issued a total of 179,000 and 232,500 additional options during 1998 and
1997 respectively, to various employees, directors, and advisors, with
exercise prices ranging from $.50 to $4.00 per share.
Stock Option Plan
In December 1996, the Board of Directors adopted the Company's Stock Option
Plan (the "Plan") and reserved up to 500,000 shares of Common Stock for
issuance thereunder. In June 1998, the Company's shareholders approved an
amendment to the Company's Stock Option Plan increasing the amount of
shares available under the plan to 1,500,000. The Plan provides for the
granting of options to officers, directors, employees and advisors of the
Company. The exercise price 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 at the date of grant, with maximum terms of ten and five
years, respectively, for ISO's 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 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.
22
<PAGE>
A summary of Plan and other options outstanding as of December 31, 1998,
and changes during fiscal 1997 and 1998 are presented below:
<TABLE>
<CAPTION>
Range of
Fixed Exercise
Options Prices
--------- ----------
<S> <C> <C>
Options outstanding, January 1, 1997 -- --
Granted 1,250,000 $.875-5.00
--------- ----------
Options outstanding December 31, 1997 1,250,000 .875-5.00
Granted 396,500 .50-4.00
--------- ----------
Options outstanding December 31, 1998 1,646,500 .50-5.00
========= ==========
Shares of common stock available for future
grant under the plan 1,015,000
=========
</TABLE>
Additional information as of December 31, 1998 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 (in years) Price Exercisable Price
-------------------- ------------- ----------------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C>
$ 5.00 750,000 3.25 $ 5.00 750,000 $ 5.00
$ 3.85 - 4.00 50,974 3.61 $ 3.92 25,974 $ 3.85
$ 2.50 - 3.50 424,026 3.58 $ 3.44 281,026 $ 3.50
$ 1.063 - 1.50 266,500 4.40 $ 1.14 4,000 $ 1.09
$ .50 - .875 155,000 4.08 $ .74 155,000 $ .74
------------- ----------------- ----------- -------------- --------------
1,646,500 3.61 $ 3.54 1,216,000 $ 4.07
============= ================= =========== ============== =============
</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 options granted during 1998
and 1997 under the Black-Scholes option pricing model was $.37 and $2.51
per option, respectively.
23
<PAGE>
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 loss and net
loss per share as reported would have been increased to the pro forma
amounts indicated below:
Year ended Year ended
December 31, 1998 December 31, 1997
----------------------- ---------------------
Net loss:
As reported $(777,341) $ (892,325)
Adjusted pro forma (884,675) (3,819,968)
Net loss per share:
As reported $ (.16) $ (.21)
Adjusted pro forma (.18) (.89)
Compensation expense recognized in the Company's Statement of Operations
totaled $11,332 and $16,541 in 1998 and 1997, respectively.
The fair value of each option granted in 1998 and 1997 is estimated on the
date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions:
1998 1997
---------- ----------
Risk free interest rates 5.56% 6.14%
Expected option lives 3.46 years 4.76 years
Expected volatilities 46.5% 46.5%
Expected dividend yields None None
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 the underwriter of the public offering, for
nominal consideration, an option to purchase up to 70,000 Units. The Option
is exercisable for a four-year period 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.
24
<PAGE>
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 designated.
NOTE 9 - INCOME TAXES
The income tax provision (benefit) consists of the following:
Years ended
December 31,
----------------------
1998 1997
--------- ---------
Current:
Federal $ -- $ (46,905)
State 2,900 180
--------- ---------
Total current 2,900 (46,725)
--------- ---------
Deferred:
Federal (252,791) (97,724)
State (73,582) (49,152)
Valuation allowance 326,373 141,197
--------- ---------
Total deferred -- (5,679)
--------- ---------
Provision for income taxes (benefit) $ 2,900 $ (52,404)
========= =========
The current portion of the 1997 federal income tax benefit reflects
refundable taxes from the carryback of net operating losses.
The Company's effective tax rate differs from the statutory federal tax
rate as shown in the following table:
Years ended
December 31,
----------------------
1998 1997
---------- ---------
Computed "expected" tax benefit $ (263,310) $(321,208)
State tax benefit, net of
federal benefit (41,557) (32,298)
Non-deductible financing costs -- 102,000
Valuation allowance 326,373 141,197
Other (18,606) 57,905
---------- ---------
$ 2,900 $ (52,404)
========== =========
25
<PAGE>
The tax effects of the temporary differences that give rise to significant
portions of the deferred tax assets and liabilities as of 1998 and 1997 are
presented below:
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Reserves and allowances $ 126,640 $ 51,300
Tax benefit of net operating loss carryforwards 349,211 107,618
Other 12,073 6,615
--------- ---------
Total deferred tax assets 487,924 165,533
Deferred tax liabilities:
Depreciation 20,354 24,336
--------- ---------
Total deferred tax liabilities 20,354 24,336
--------- ---------
Subtotal 467,570 141,197
Valuation allowance (467,570) (141,197)
========= =========
Net deferred tax liabilities -- --
========= =========
</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, 1998 the Company had net
operating loss carryforwards of $829,007 and $1,036,888, for federal and
state income tax purposes, respectively. These net operating loss
carryforwards are available to offset future taxable income, if any through
2013.
Note 10 - Commitments and Contingencies
Employment Agreements
The Company's board of directors has approved 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, five, and six 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 each have a three-year term and 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. Effective January 11,
1999, both of these employment agreements were amended. In consideration
for extending the term of the agreements for an additional year, through
December 31, 2000, the Company granted additional options outside of the
Company's stock option plan to purchase up to 300,000 shares each of Common
Stock. The options vest over a twenty-three month period.
Each agreement may be terminated by the employee without cause upon written
notice to the Company.
26
<PAGE>
Operating Leases
In March 1997, the Company entered into a five-year non-cancelable lease
for the use of office and warehouse space in Hillside, New Jersey. 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.
In April 1998, the Company entered into a five-year non-cancelable lease
for the use of office space in New York City. The lease provides for annual
base rent of $47,500 plus a proportionate share of operating expenses. Also
in 1998, the company signed a one-year lease for a Virginia sales office.
Base rent under this lease is $800 per month and continues monthly after
expiration of the initial term. Future minimum rental commitments under all
non-cancelable leases are as follows:
Year ending
December 31,
---------------------
1999 $ 162,560
2000 154,560
2001 154,560
2002 109,372
2003 15,833
----------
$ 596,885
==========
Total rent expense for the years ended December 31, 1998 and 1997 was
$284,630 and $148,768, respectively.
Capital Lease Obligations
The Company leases certain vehicles under non-cancelable lease agreements.
These leases are accounted for as capital leases. As of December 31, 1998,
vehicle costs under the capital lease arrangements aggregated $58,844.
Accumulated depreciation and depreciation expenses related to this
equipment totaled $7,846 as of and for the year ended December 31, 1998.
Future minimum lease payments under capital lease obligations at December
31, 1998 are as follows:
1999 $ 21,528
2000 21,528
2001 5,382
---------
Total minimum payments 48,438
Less amount representing interest (7,852)
---------
Total principal 40,586
Less portion due within one year (17,365)
---------
Long-term portion $ 23,221
=========
Legal Matters
On July 16, 1998, MaxBase, a vendor, filed a Complaint against the Company
and APC alleging that the Company breached its agreement with MaxBase Inc.,
for Maxshare 2 units by failing to meet the required minimum purchase
obligations thereunder. The Complaint further alleges misrepresentation and
unfair trade practices. The Complaint also seeks to enjoin the Company from
enforcing any rights the
27
<PAGE>
Company has under the agreement. Maxbase claims damages of $508,200 in lost
profits for units not purchased and $945,300 in lost profits for units sold
to the Company below market price, as well as unspecified punitive and
treble damages. In 1999, the plaintiff added claims for defamation and
tortious interference. A trial is expected to occur in late 1999. The
Company believes the claims by MaxBase are without merit and intends to
fully defend the suit and assert its rights under the agreement. The
Company has filed a counterclaim for alleged defects in the Maxshare 2
units.
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. A trial is expected to occur in May
1999. In the opinion of management the ultimate outcome of the lawsuit is
not expected to have a material impact on the Company's financial condition
or results of operations.
NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments reported in the Company's balance sheet consist of
cash, accounts receivable and accounts payable, all of which approximate
fair value at December 31, 1998. 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.
28
<PAGE>
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 year ended December 31, 1997 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 year ended December 31, 1997, 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 year ended December 31, 1997, 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
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
statement covered by an audit report.
PART III
The Company intends to file with the Securities and Exchange Commission,
within 120 days after the end of the fiscal year covered by this report, a
definitive Proxy Statement (the "Proxy Statement") for use in connection with
the Company's 1999 Annual Meeting of Stockholders. In accordance with General
Instruction E (3) of Form 10-KSB the information required by Items 9, 10, 11,
and 12 below is incorporated herein by reference to the Proxy Statement.
29
<PAGE>
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16 (a) OF THE EXCHANGE ACT.
The information required by this Item 9 is incorporated herein by reference
to the sections entitled "Election of Directors", "Executive Officers" and
"Section 16 (a) Beneficial Ownership Reporting Compliance" in the Proxy
Statement.
ITEM 10. EXECUTIVE COMPENSATION.
The information required by this Item 10 is incorporated herein by
reference to the section entitled "Executive Compensation" and "Compensation of
Directors" in the Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item 11 is incorporated herein by
reference to the section entitled "Security Ownership of Certain Beneficial
Owners and Management."
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item 12 is incorporated herein by
reference to the section entitled "Certain Relationships and Related
Transactions" in the Proxy Statement.
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 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 Amendment No. 1 to the Employment Agreement between the
Registrant and Joseph Scotti, effective January 11, 1999.
(v) 10.7 Employment Agreement, effective January 1, 1997, between
the Registrant and Leo Flotron.
(vi) 10.8 Amendment No. 1 to the Employment Agreement betwee the
Registrant and Leo Flotron, effective January 11, 1999.
(vii) 10.12 Registrant's Stock Option Plan.
(viii) 10.13 Amendment No. 1 to Registrant's Stock Option Plan
(b) No reports on Form 8-K were filed by the Company during the fourth quarter
of 1998.
30
<PAGE>
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 report to
be signed on its behalf by the undersigned, thereunto duly authorized.
ALL COMMUNICATIONS CORPORATION
Dated: March 31, 1999 By: /S/ RICHARD REISS
----------------------------
Richard Reiss, Chairman,
Chief Executive Officer and
President
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.
SIGNATURE TITLE DATE
- - --------------------- -------------------------------------- --------------
/S/ RICHARD REISS Chairman of the Board of Directors March 31, 1999
- - --------------------- President (Principal Executive Officer)
RICHARD REISS
/S/ SCOTT TANSEY Vice President - Finance March 31, 1999
- - --------------------- (Principal Financial and
SCOTT TANSEY Accounting Officer)
/S/ ROBERT B. KRONER Director March 31, 1999
- - ---------------------
ROBERT B. KRONER
/S/ ERIC FRIEDMAN Director March 31, 1999
- - ---------------------
ERIC FRIEDMAN
/S/ PETER MALUSO Director March 31, 1999
- - ---------------------
PETER MALUSO
/S/ ANDREA GRASSO Director March 31, 1999
- - ---------------------
ANDREA GRASSO
31
<PAGE>
INDEX TO EXHIBITS
Exhibit No. DESCRIPTION OF DOCUMENT
- - ---------- -----------------------
3.1 Certificate of Incorporation of the Registrant, 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 between the Registrant and
Richard Reiss, effective March 21, 1997 (1)
10.5 Employment Agreement, effective January 1, 1997, between the
Registrant and Joseph Scotti. (1)
*10.6 Amendment No. 1 to the Employment Agreement between the Registrant
and Joseph Scotti, effective January 11, 1999
10.7 Employment Agreement, effective January 1, 1997, between the
Registrant and Leo Flotron. (Incorporated herein by reference to
Exhibit No. 10.6 to the Registrant's Registration Statement on Form
SB-2, Registration No. 333-21069).
*10.8 Amendment No. 1 to the Employment Agreement between the Registrant
and Leo Flotron, effective January 11, 1999.
10.9 Lease Agreement for premises located at 1450 Route 22, Mountainside,
New Jersey, dated April 13, 1995, between the Registrant and
Mountain Plaza Associates. (Incorporated herein by reference to
Exhibit 10.7 to the Registrant's Registration Statement on Form
SB-2, Registration No. 333-21069).
10.10 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. (Incorporated herein by
reference to Exhibit 10.8 to the Registrant's Registration Statement
on Form SB-2, Registration No. 333-21069).
10.11 Sublease Agreement for premises located at 1130 Connecticut Avenue,
NW, Washington D.C., dated July 1, 1996, between the Registrant and
Charles L. Fishman, P.C. (Incorporated herein by reference to
Exhibit 10.9 to the Registrant's Registration Statement on Form
SB-2, Registration No. 333-21069).
10.12 Registrant's Stock Option Plan. (Incorporated herein by reference to
Exhibit 10.10 to the Registrant's Registration Statement on Form
SB-2, Registration No. 333-21069).
*10.13 Amendment No. 1 to Registrant's Stock Option Plan.
10.14 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. (Incorporated herein by reference to
Exhibit 10.13 to the Registrant's Registration Statement on Form
SB-2, Registration No. 333-21069).
32
<PAGE>
10.15 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).
10.16 Reseller Agreement dated November 21, 1997, between Polycom, Inc.
and the Registrant. (Incorporated herein by reference to Exhibit No.
10.15 to the Registrant's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1997, Commission File No. 1-12937).
10.17 Dealer Agreement, dated November 26, 1997, between Lucent
Technologies, Inc. and the Registrant. (Incorporated herein by
reference to Exhibit No. 10.16 to the Registrant's Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1997, Commission
File No. 1-12937).
16.1 Letter re Change in Certifying Accountant. (Incorporated herein by
reference to the Registrant's Current Report on Form 8-K filed
February 20, 1998, Commission File No. 1-12937).
21.1 Subsidiaries of the Registrant. (Incorporated herein by reference to
Exhibit No, 21.1 to the Registrant's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1997, Commission File No.
1-12937).
*27.1 Financial Data Schedule.
- - -------------
* 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.
33
Exhibit 10.6
Amendment No.1 to the Employment Agreement between the Registrant and Joseph
Scotti, effective January 11, 1999.
EMPLOYMENT CONTRACT EXTENSION
This Agreement dated as of January 11, 1999, by and between All
Communications Corporation having its principal office at 225 Long Avenue,
Hillside, New Jersey, 07205, hereinafter referred to as "Employer" and Joseph
Scotti, residing at 14 Rice Lane, Long Valley, New Jersey, 07853, hereinafter
referred to as the "Employee"
Whereas, Employer and Employee entered into an Employment Agreement dated
January 2, 1997 for a term of three years ending December 31, 1999, (the
"Agreement"); and,
Whereas, Employer and Employee desire to extend the term of the Employment
Agreement for an additional one year period to and including December 31, 2000;
and,
Whereas the terms of the Agreement shall remain in full force and effect,
except that Employee's term shall be extended to December 31, 2000 with all
references extended to that date and Employee shall be granted additional
options to purchase 300,000 shares of the Employer's common stock and an
increase in automobile expense reimbursement;
Now Therefore, in consideration of the mutual promises set forth herein and
for other good and valuable consideration the parties agree as follows:
1. The provisions of Paragraph 1 of the Agreement are modified to provide that
the term of Employee's employment is extended to December 31, 2000.
2. The salary compensation provided in Paragraph 3A for the year 1999 in the
amount of $124,000.00 shall continue for the extended term.
3. The provision of Paragraph 4 C is amended to increase automobile expense
reimbursement to $500.00 per month.
4. The provisions of Paragraph 9 referring to the Non Compete covenant of the
Agreement are extended to December 31, 2000.
5. The provision of Paragraph 10 A referring to Notice to Employer is amended
to correct the address of Employer to 225 Long Avenue, Hillside, New
Jersey, and to eliminate notice to Robert B. Kroner.
6. Employer grants to Employee the option to purchase 300,000 shares of the
Employer's common stock. The option is not part of the Employer's Stock
Option Plan and was approved by the Board of Directors on January 11, 1999.
The option is for a five-year term at the closing price on that date. The
option price at the date of grant was $.937. The option vests in two
installments, providing the Employee is still employed by Employer on the
date of vesting: 150,000 shares on December 31, 1999 and 150,000 shares on
December 1, 2000. The option is terminable by the Employer even if vested;
in the event Employee resigns or is terminated for cause as provided in the
Agreement. All options shall immediately vest upon the sale of Employer or
acquisition of Employer by a third party.
7. In all other respects the Agreement is hereby ratified and approved by the
parties.
In Witness Whereof the Employer and Employee have executed this Extension
Agreement as of the year and date above set forth.
ALL COMMUNICATIONS CORPORATION
By: /s/ RICHARD REISS
-------------------------------------
RICHARD REISS, President
/s/ JOSEPH SCOTTI
-------------------------------------
JOSEPH SCOTTI
Exhibit 10.8
Amendment No. 1 to the Employment Agreement between the Registrant and Leo
Flotron, Effective January 11, 1999.
EMPLOYMENT CONTRACT EXTENSION
This Agreement dated as of January 11, 1999, by and between All
Communications Corporation having its principal office at 225 Long Avenue,
Hillside, New Jersey, 07205, hereinafter referred to as "Employer" and Leo
Flotron, residing at 30 Happy Valley Road, Westerly, Rhode Island, 02891,
hereinafter referred to as the "Employee"
Whereas, Employer and Employee entered into an Employment Agreement dated
January 2, 1997 for a term of three years ending December 31, 1999, (the
"Agreement"); and,
Whereas, Employer and Employee desire to extend the term of the Employment
Agreement for an additional one year period to and including December 31, 2000;
and,
Whereas the terms of the Agreement shall remain in full force and effect,
except that Employee's term shall be extended to December 31, 2000 with all
references extended to that date and Employee shall be granted additional
options to purchase 300,000 shares of the Employer's common stock and an
increase in automobile expense reimbursement;
Now Therefore, in consideration of the mutual promises set forth herein and
for other good and valuable consideration the parties agree as follows:
1. The provisions of Paragraph 1 of the Agreement are modified to provide that
the term of Employee's employment is extended to December 31, 2000.
2. The salary compensation provided in Paragraph 3A for the year 1999 in the
amount of $124,000.00 shall continue for the extended term.
3. The provision of Paragraph 4 C is amended to increase automobile expense
reimbursement to $500.00 per month.
4. The provisions of Paragraph 9 referring to the Non Compete covenant of the
Agreement are extended to December 31, 2000.
5. The provision of Paragraph 10 A referring to Notice to Employer is amended
to correct the address of Employer to 225 Long Avenue, Hillside, New
Jersey, and to eliminate notice to Robert B. Kroner.
6. Employer grants to Employee the option to purchase 300,000 shares of the
Employer's common stock. The option is not part of the Employer's Stock
Option Plan and was approved by the Board of Directors on January 11, 1999.
The option is for a five-year term at the closing price on that date. The
option price at the date of grant was $.937. The option vests in two
installments, providing the Employee is still employed by Employer on the
date of vesting: 150,000 shares on December 31, 1999 and 150,000 shares on
December 1, 2000. The option is terminable by the Employer even if vested;
in the event Employee resigns or is terminated for cause as provided in the
Agreement. All options shall immediately vest upon the sale of Employer or
acquisition of Employer by a third party.
7. In all other respects the Agreement is hereby ratified and approved by the
parties.
In Witness Whereof the Employer and Employee have executed this Extension
Agreement as of the year and date above set forth.
ALL COMMUNICATIONS CORPORATION
By: /s/ RICHARD REISS
-----------------------------------
RICHARD REISS, President
/s/ LEO FLOTRON
-----------------------------------
LEO FLOTRON
Exhibit 10.13
Amendment No. 1 to All Communications Corporation Stock Option Plan
The first sentence of Section 8.01 of the All Communications Corporation
Stock Option Plan is hereby deleted in its entirety and the following
substituted therefor:
"The Company hereby reserves one million five hundred thousand (1,500,000)
shares of its common stock for issuance pursuant to the exercise of Incentive
Stock Options or Non-Statutory Stock Options as the Board shall determine."
Approval by Board of Directors:
April 23, 1998
Approval by stockholders:
June 19, 1998
<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-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Dec-31-1998
<CASH> 325,915
<SECURITIES> 0
<RECEIVABLES> 4,435,553
<ALLOWANCES> 117,700
<INVENTORY> 3,540,281
<CURRENT-ASSETS> 8,229,626
<PP&E> 931,932
<DEPRECIATION> 320,414
<TOTAL-ASSETS> 8,922,629
<CURRENT-LIABILITIES> 2,527,777
<BONDS> 0
0
0
<COMMON> 5,229,740
<OTHER-SE> (1,261,325)
<TOTAL-LIABILITY-AND-EQUITY> 8,922,629
<SALES> 13,217,083
<TOTAL-REVENUES> 13,217,083
<CGS> 9,447,592
<TOTAL-COSTS> 13,971,134
<OTHER-EXPENSES> 20,390
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 57,167
<INCOME-PRETAX> (774,441)
<INCOME-TAX> 2,900
<INCOME-CONTINUING> (777,341)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (777,341)
<EPS-PRIMARY> (.16)
<EPS-DILUTED> (.16)
</TABLE>
